Sykes Enterprises, Incorporated
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good day and welcome to the Sykes Enterprises Fourth Quarter 2020 Earnings Call. On the call today is Sykes management team, including CEO, Chuck Sykes; CFO, John Chapman; and IR Head, Subhaash Kumar. Please note this event is being recorded. Management has asked me to relate to you certain statements made during the course of this call as they relate to the company’s future business and financial performance are forward-looking. Such statements contain information that are based on the beliefs of management as well as the assumptions made by and information currently available to management. Phrases such as our goal, we anticipate, we expect and similar expressions as they relate to the company are intended to identify forward-looking statements. It is important to note that the company’s actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday’s press release and the company’s Form 10-K and other filings with the SEC from time to time.

[Chuck Sykes:]

Thank you, operator. Good morning, everyone and thank you for joining us today to discuss Sykes Enterprises fourth quarter and 2020 financial results. On today’s call, I will provide a high level overview of our results, and John will walk you through the numbers. And then we will turn the call over for Q&A. I want to begin by thanking our dedicated employees worldwide for their hard work in the phase of COVID-19. We are doing everything we can in our capacity to continue to minimize disruption to them and to their families that financially depend on them. The good news is that the recently approved vaccines and other therapeutics against COVID-19 have proved effective, and they are being rolled out. In the meantime, we are employing the latest safeguards that adhere to the highest operational safety standards for all the employees in our facilities. While we are happy to see 2020 in the rearview mirror, the truly historic year did highlight our strength as a company, in particular, our resilience. But just as important, it highlighted our strategic capabilities around our global work-from-home platform as well as our capabilities around full life cycle customer experience management, which spans marketing, sales, service and digital transformation. Whether it’s about leveraging our portfolio of digital media properties to help consumers make informed purchase decisions or helping enterprises grow their business with our turnkey marketing and sales solutions or even helping enterprises serve, retain and grow their existing customers by leveraging our digitally enabled workforce. The strength of our strategic capabilities were foundational to our success against the challenges of the pandemic. The strategic evolution, coupled with the strength of our people, our culture and our agility, played a pivotal role in helping our clients proactively adapt to shifting consumer trends around digital and through stay-at-home demand that is reshaping various sectors of the global economy. And as our financial results underscore that dynamic, for we have now delivered back-to-back record revenues to close out full year 2020 with constant currency organic revenue growth of 5.7%. Those revenue performance is at the top end of our 4% to 6% range. It is also worth noting that we have delivered these results despite the fact that we had at least 200 basis points of annual drag from the transportation vertical and more than 300 basis points of drag from the communications vertical, in addition to some pockets of softness in clients with exposure to the small medium business marketplace. The good news is that the communications vertical reached an inflection point of sort in the third quarter, and the rate of declines in the transportation vertical are probably close to bottoming out, which means that the drag from this vertical should likely begin to moderate by the second half of 2021.

[John Chapman:]

Thank you, Chuck. I would now like to discuss our quarterly financial results, particularly key P&L, cash flow and balance sheet highlights. As Chuck mentioned, we continued our record financial performance in the quarter. We reported record revenues of $450.5 million versus $425.3 million last year, a growth of 5.9% in the quarter. Fourth quarter 2020 revenues also exceeded the top end of our revenue outlook range of $439 million to $444 million by $6.5 million. More than half of the outperformance was broad-based volume increase with the remaining due to foreign exchange benefit. On a year-over-year comparable basis, fourth quarter 2020 revenues included a $6.2 million foreign exchange benefit. Excluding the foreign exchange benefit, fourth quarter revenues, were up approximately $19 million or 4.5% constant currency organic revenue growth, thanks to our agility and our diverse business mix. By vertical markets and on a constant currency basis, technology was up around 19%, health care up 16%; financial services up 5%; other, which includes retail, up 3%; communications was flattish. All of which was more than offset the 31% decline in the travel and transportation vertical. Fourth quarter 2020 operating income was $32.3 million versus $33.1 million in the same period last year, with an operating margin of 7.2% versus 7.8% for the comparable period. Fourth quarter 2020 operating income reflects various costs such as impairment, merger and integration, et cetera, totaling $9.1 million versus $6 million in the prior year period or 200 basis points versus 140 basis points impact correspondingly. Excluding the impact of amortization of acquisition-related intangibles, impairment, merger and integration as well as other costs, fourth quarter 2020 operating margin remained unchanged at 9.2% in both comparable periods due to higher accrual for long-term and annual performance-based compensation in the fourth quarter of 2020, driven by financial outperformance relative to planned operating results.

[Operator:]

Our first question comes from Josh Vogel with Sidoti & Company. Please go ahead.

[Josh Vogel:]

Thank you. Good morning, Chuck and John. And Chuck, I got to say you are sounding much better. Luckily, the Super Bowl was just too fast, you didn’t have to scream much at the TV, but great to hear you.

[Chuck Sykes:]

I appreciate it. Thanks.

[Josh Vogel:]

Yes. So my first question, when we think about client commitments between home agent and brick-and-mortar, do you still feel comfortable that it would be like a 30-70 split post-pandemic?

[Chuck Sykes:]

Josh, I think in general that number is pretty safe. Right now, like in the European market, we are talking to our clients and we are actually thinking it could be anywhere from 35% to 50% would remain work from home. In the U.S., we are probably closer to about the same range, I would think, it depends. Because in the U.S., we support a lot of financial services and the financial services companies want to get back into the centers. So, that affects that a little bit there. Offshore, what’s interesting is that our clients, for the most part, want to come back into the centers. But when we survey our employees, and this is pretty much around the world, it’s 85% want to stay working from home. So we’re going to – in 2021, I think it’s going to really be the year that we get clarity, because you’ve got employees who want to do one thing, clients wanting to do another. And then we’ve got to look at the government policies that are being put in place. So if governments are saying we can only utilize buildings 50%, but clients want to go back in and employees want to stay out, we are trying to figure out exactly how all that’s going to shake out in the end. So I think 2021, in general, for commercial real estate, I think we’re going to have a lot more clarity, but I bet it’s going to take until the fall because we’re going to have to wait and see what happens with the virus. I mean do these mutations and things created to where people stay at home more and everything. But in the end, with everything that I’m saying, absolutely, we believe on a long-term basis, we will have at a minimum 30% of our workforce working from home at a minimum. But I’m just trying to give you a little more color as to what we are having to kind of wait and see when it unfolds here.

[Josh Vogel:]

Yes, of course. I appreciate all that color there. What’s the usual pricing concession that you give up for at-home? But then again, also the accretion you could see on the margin line or net incremental benefit as at-home usage goes up. So, let’s say, the split ultimately does become 35-65 or even 40-60, what should – where is the incremental benefit there?

[Chuck Sykes:]

Well, right now, I will say that, for a client that wants to be 100% at-home and are willing to commit to that, pricing, it can be around 8% to 9% less than brick-and-mortar. However, as a company, with that kind of pricing, we will make the same absolute dollar amount of profit. So it doesn’t translate into reduction in that case. For us, it would be a better situation. And clients that are wanting right now to have what we call somewhat of a hybrid situation, there is no price reduction. I mean we really – because it’s not affording us the opportunity to really be able to maximize our facility utilization in that sense, so – but...

[John Chapman:]

Yes, I mean, the way I look at this, Josh, is if we look at in the worst-case scenario, it’s neutral to margin. And if you look at the other side, at best, I mean, what you’re talking about is it reduces – the more at-home reduces the long-term capital intensity in the business. And also, as we’ve spoken about before is when you get swings in demand, you don’t have G&A sitting around. It’s idle, and that improves that – I mean that’s accretive. And Chuck has also spoken in the past about at-home in terms of your ability to grab opportunities. If you’re not boxed in by a physical facility, you’ve also got better growth opportunities. So I don’t think there is any downside to how it goes. The question is how good is the upside. And I think that’s what Chuck’s saying there. In the perfect world, we could give some of the price decrease. It would be great if we could keep some of it, but we could keep the absolute dollars the same. So we’re no worse off. All we’ve got is a business that’s less capital-intensive and more flexible.

[Chuck Sykes:]

Yes, yes.

[Josh Vogel:]

Yes, that makes complete sense. And just one more on this vein. You made a comment about it a bit. What level of investment are you planning making this year in building out or maintaining the remote infrastructure considering that the delivery model continues to make up a bigger piece of the pie?

[John Chapman:]

There is not really any one item. I mean if you look at our operating margins, Josh, I mean you look at it and think we’re being conservative in our overall margin expectations. Yes, we’ve got double-digit earnings per share growth, but the margin percentage is a little bit higher than what it was in 2020. I think what you’re seeing in there is a combination of things, one of which is investment in our agent end points, but also in there is also investing – probably accelerated investing and moving to the cloud and being more nimble in our IT infrastructure. So those two things are kind of embedded in our guidance plus the fact, and as Chuck’s mentioned there, where we’ve still got clients making final decisions, and we’ve got this difference between what employees want, what governments demand and what clients want just now. And so in our guidance, we’ve kind of assumed that the facilities we’ve bought today will have the rest of the year. Now when we get to those further-out quarters, that may not be the case, and we will make those changes that will help the margin profile. But at this moment in time, until we get clarity, we’ve kept that in our assessment of costs. So maybe that helps you a little.

[Josh Vogel:]

No, it definitely does. And just one last one for me, kind of building off of that. You’ve had a long-term operating margin target of 8% to 10% range. If we see greater traction in the digital portfolio and the pared-down reliance on brick-and-mortar, that footprint there, do you think this could be a long-term 10% to 12% margin business? Or have you thought about what it would look like then?

[John Chapman:]

We’re still focused on 8% to 10%, Josh. I mean we are clearly got a record quarter performance, and we’ve had a record year for Sykes. And we do want to be at the upper end of the 8% to 10%. So it’s about – for me, it’s not about getting outside 8% to 10%. It’s been at the higher end of that and being consistent. Because when you look at our company in the past, that’s where we need to think about, not about growth being greater than 3% to 5%, but being consistently 3% to 5%. And then once we’re consistently 3% to 5%, then yes, let’s talk about what we think can be achieved, but we don’t want to talk about something that we think in terms of the market is definitely doable. But guide that’s a kind of thing that we think we can do. And it’s the same with the operating margin profile. We’d like to be getting in the 9%. So we were always in the – we were sometimes in a few years back in 5% and 6%. We don’t want to ever be back there. We’re now operating solidly in the 8%. We want to get to the upper end of the 8% to 10%. And then if you look at some of our compares, some of them actually can’t get to that 10% margin. So even somebody like a TP, when you strip out their specialty services, they are really just over the 10 number. So it does get to the point where it’s difficult to get to the kind of – especially the 12 number that you mentioned. That’s a real challenge. And even some of the best operators in the business that have delivered consistent growth have found that can be a challenge. But we are still focused on the 8% to 10%. We just want to be in the upper echelons of that first before we start talking about what we think we can do outside that.

[Josh Vogel:]

Totally understand. If I could just sneak in one more, thank you. I just – what was the revenue split in Q4 of traditional versus new economy clients? And how did that differ from the year prior? Thank you.

[John Chapman:]

I don’t have that because we really look at verticals. What I would say is I could get – we could try and find that, Josh. But it’s really hard to define what you describe as new economy versus old economy. What I would say is, those high-growth clients are a disproportionate reason why we’ve been growing versus what you describe as traditional clients. I don’t specifically have that number of exactly what that is because I think defining those clients is in the eye of the beholder. Is Google a new economy client? They have been around for a long time. So I think they are high-growth clients that help you grow, but they are really embedded within – in our financial services sector, we’ve got lots of new fin-techs that are helping us grow that vertical, but we’ve also got some traditional money banks helping us grow that vertical. So we more look at it as a vertical, of which I would say a disproportionate number of new logos are in that space – in the new economy space, but I need to ask Subhaash to circle back with you on the exact number.

[Josh Vogel:]

Sounds good. Well, thanks for taking my questions. Stay safe guys.

[Chuck Sykes:]

Alright. Thanks.

[Operator:]

Our next question comes from Dave Koning with Baird. Please go ahead.

[Dave Koning:]

Yes. Hey, guys. Congrats on – was a really good 2020.

[Chuck Sykes:]

Thanks, David.

[Dave Koning:]

Yes. So maybe to kick it off, Q1 guidance is quite good in terms of growth. And normally, your Q1 is kind of the low part of the year for revenue. But the way this year, it looks like you’re guiding is for revenue to be pretty similar all the quarters or at least similar to the Q1 number kind of as an average for the whole year. And I am just wondering what might be different this year that would kind of just allow the normal sequential ramp pattern through the year?

[John Chapman:]

Well, Q2 usually is our lowest quarter, David. What I would say to you in general is we did talk about this, and we spoke about whether we wanted to just give a Q1 number of how we would guide for the full year, and we decided we wanted to guide for the full year. But what I would say is clients are still struggling on forecast. I think we’re much more confident in our Q1 forecast. And if you look at the full year, clearly, there is more variability. But I would still say today, in COVID world, there is much more variability than it existed in previous years. And so we’ve obviously taken that into account. We obviously work with our clients to produce forecasts. What I would say to you is, if we simply used what clients say, we would have vastly under-forecast our 2020 numbers and I think the same is true in the out-quarters of 2021. So as what we are guiding, but what I would say is there is more uncertainty than normal in the Q2 through Q4 numbers, but we wanted to give a number out there because we felt it helped everyone understand what we are currently seeing, even if we think that might be a little bit on the conservative side. But traditionally, Q1 is always – I think it’s about 2%. We have…

[Chuck Sykes:]

Q2 is lower.

[John Chapman:]

Q2 is usually about 2% lower, David. And I think we might see that this year. But overall, I think Q1 is strong. And we’re focused on that, and we’re continuing to work with clients to try and make the forecast more accurate. And we are hopeful we can exceed our guidance, but our guidance is our guidance at this point.

[Dave Koning:]

Yes. Okay, that makes sense. And then secondly, on margins, and Josh was asking some of this type of stuff, too. But it looks like the way you’re guiding is for incremental margins to be somewhere in the 10% ballpark, give or take. But it would seem like this might be one of the best incremental margin years you’ve ever had just simply because you’ll get the core revenue growth, which will drive some, but then I know you’ve cut capacity somewhat. I mean it showed up in your last 10-Q. That could add – I don’t know if it was $10 million or whatever. That would seem to go on top of that. So yes, I guess I’m just wondering why we won’t get a little more margin flow-through in guidance this year.

[John Chapman:]

Yes. I mean we do have – and again, we did touch on with Josh, you’re right. I mean we do have – there is a number of little things, David, that’s kind of making the EPS or the margin growth a little bit more muted. We do assume that we will have additional stock comp. So forget EDC, we will have additional stock comp in the year, a little bit year-over-year. And as we said with Josh, we are going to accelerate some of our IT transformation at cloud this year, which does give us what I’ve described as a little bit of a bubble where we’ve got both in-premise and cloud sitting in the business this year. We have accelerated some of our agent endpoint refresh to be able to run layer security and handle our at-home platform. And as I also said, we’re still working to try to understand the work-from-home permanent volume so that we can then take further action on facilities. So these are all, I guess, been a little bit of a headwind to the margin growth that you’d see year-over-year. However, if you actually look at the EPS growth, it’s – clearly, it’s 10%. If you actually look at 2019 versus midpoint of 2021, I think we’re talking about over 40% EPS growth. So you are right to kind of question if we’re being cautious on our margin expectation. But there is some reasons for the muted number in 2021, and a few of which are transitional and a few of them which are just headwinds. But again, going back to Josh’s question about 8% to 10%, we are still focused on can we get into the 9s because that’s where our next point of call is in terms of clearly operating above the 8.5 percentage points now. Can we get towards the 9%? So yes, those are – that’s kind of some of the color as to why we are not guiding in the 9% versus the high 8s this year just now.

[Dave Koning:]

Got it. Great. Well, thanks, guys. Nice job.

[Chuck Sykes:]

Thank you.

[Operator:]

Our next question comes from Vincent Colicchio with Barrington Research. Please go ahead.

[Vincent Colicchio:]

Yes, Chuck or John, should we be concerned that the financial services growth has slowed somewhat in the past two quarters? Is that just lumpiness of business or is this maturing there?

[Chuck Sykes:]

No. I – Vince, I would just say that it’s more kind of the lumpiness in the business, the way the sales cycles kind of ebb and flow. Financial services is still a very strong sector for us. And in fact, John had alluded to it. We are winning. If you want to use the new economy definition, we are winning a lot of fin-tech companies in that space. Now the fin-tech companies today that we’re winning are – they are smaller in revenue size. But these are kind of companies that in year 2, 3, 4 will typically generate – they can be 2.5 to 4x the revenue that we’re doing initially. So even though they may not be moving the needle a lot right now for us, we definitely think they are going to offer us better growth in the years ahead for it. So I wouldn’t worry too much about that on financial services.

[Vincent Colicchio:]

And I’m sorry if I missed this, but are clients asking for price decreases for at-home work as of yet?

[Chuck Sykes:]

In general, they are not. And that’s because they have not made, in general, a definitive statement or decision to completely stay work-from-home. So as of now, we are not really dealing with that in a major way, no.

[Vincent Colicchio:]

And what does the pipeline look like at Symphony? And how much is in your guidance for the year?

[John Chapman:]

Well, again, Symphony – Symphony back in 2019 did about $30 million of external revenues, Vincent. And last – and that was a growth of over 100% that we saw in that year. Last year, they were down at $14 million. Now we’ve got growth coming back in, in the second half of this year, but they will still be operating below the 2019 number. So we believe in the market long-term. I think we’ve spoken about how we’ve turned their automation skills inside the company to help re-imagine a lot of our operational value chain, which we think will eventually come through and improve margins. So we’re not wasting the time that we’ve got. So we expect them to be somewhere between $20 million and $30 million of revenues in 2021. But we still believe the skill set inside the company, and we’re actually still – we’re doing a lot more on Symphony work related to Sykes’ existing clients. So we’re encouraged by some of those changes. But sadly, we’re still going to be operating below 2019 levels in 2021.

[Vincent Colicchio:]

Okay, thank you.

[Chuck Sykes:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Sykes for any closing remarks.

[Chuck Sykes:]

No. No additional remarks. Just as always, we appreciate everyone’s participation and look forward to catching up next quarter. Everybody, have a good week. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.