Q2 2020 Sykes Enterprises Inc Earnings Call

Good day, and welcome to Sykes Enterprises second quarter Twentytwenty earnings call.

All participants will be in listen only mode.

Should you need assistance.

I will call, especially especially in the Starkey followed by zero.

On the call say, our Sykes management team, including CEO truck Sykes CFO, John Chapman, our heads to wash Kumar.

After today's presentation, there will be an opportune to ask questions.

Twice your question to me Press Star then one I've touched on phone.

Let's try your question. Please press star that's true.

Please note this event is being recorded.

Magic That's me really to you that certain statements made during the course this call may relate to the company's future business and financial performance are forward looking.

Such statements contain information that are based on all the at least some management as well assumptions made by and that information currently available to management.

Phrases such as our goal we anticipate we expect and similar expressions is really took a company are intended to identify forward looking statements.

It's important to note that the company's actual results could differ materially from those projected in such forward looking statements.

I just don't cause actual results to differ materially from those in such forward looking statements identified in yesterday's press release on the company's form 10-K other filings with the school Cc may start design.

Now, let's turn the conference over to CEO trucks hikes. Please go ahead Sir.

Thank you operator, good morning, everyone.

This does like so.

Second quarter 2020 bodily injuries old.

On today's call will provide insight into our business is doing operationally.

John will walk you through the numbers and during the call over for Q1 day.

Yes, I think it all of our employees worldwide for their dedication.

Response to the ongoing hardship.

Then it goes on at least they were doing absolutely all they can do alleviate what's within their control.

Oh well recognized.

Leadership teams or doing across the world.

There remain what was in the phase [laughter] <unk>, our clients and our shareholders.

And then it continues at pace, we remain ever vigilant about maintaining operational see what the latest stayed garth while minimizing disruption due likelihood or where do you use it in her family's [laughter] dependent on that.

<unk> operating performance is now under our belt since the Golden like team locked Evans began second quarter 2020 results were truly exceptional same store strong market positioning.

Our differentiated automation platform, India, Now's proprietary technologies and processes that underpin it we were able to achieve and even break records across many coupon it's all metrics.

Absolute revenue levels constant currency organic revenue growth.

Operating margins earnings operating cash flows.

It's culminated no further strengthening our already robust balance sheet.

John will discuss all of this important you don't later.

The result in the second quarter were driven by broad based demand and share gains along with strong fundamental operational performance.

I'm not only we continued to targeting and achieve lower age and absent the instrument attrition levels, which drove agent utilization and productivity.

Customer satisfaction scores in key performance indicators remain robust on balance.

We had roughly 70% of our former brick and mortar agents working from home more than 25% working to brick and mortar facilities.

And was down 5% evil, we maintain discipline on our discretionary spend but some of those savings were redeployed <unk> agent safety getting home agent experience.

Particularly offshore with a focus around basic ergonomics. Meanwhile, we continue working through somebody infrastructure constraints offshore.

Well, it's limited bandwidth capacity and reliable electricity connection Oh, sorry, a major metro areas. It all despite a very fluid environment. We're extremely proud of our outstanding quarterly financial results and the job our teams did in the quarter.

As we looked ordinarily main really year, we remain cautiously optimistic where youre seeing healthy levels of activity across our existing client base.

Gross bad or vertical market complex exploiting the travel industry.

Specifically, we are seeing opportunities with traditional and are we gonna be market segments within the traditional segment. It is support opportunities for banks and credit card holders. In addition to solve collections were [noise].

And programs related to the carriers that.

The same time, we continue the program ramps of gross wireless healthcare and technology vertical.

In the new when economy segment categories such as.

Your retail E commerce online delivery.

And do it yourself security systems, or all seeing solid growth.

This growth is in driven as a result, these disruptor scaling their business models within their existing footprint.

During or geographic markets, and adding new strategic partnerships.

In terms of new logo wins, we have seen an extension of ourselves I go away.

Moreover, it is still difficult.

Well I don't demand for each of the clients are cool all vertical segments will hold up.

Event and unpredictable nature.

Economic openings worldwide.

Meanwhile, we continue to look at what used to replace our structural cost permanently, including our entire operational value chain.

Works on this front not been fast track and we have made some headway.

Until clients give us from commitments on what are mixed delivery strategy, it's between home agent.

In brick and mortar.

Our efforts are going to be limited in the short run.

That said, we believe our differentiated breadth and depth of capabilities combined with Howard solid balance sheet.

Cancers, our long term positioning through overcoming the challenges and capitalize on the opportunities.

What is certainly an unprecedented situation and with that I'd like to during the call over to John John John.

Thank you Chuck.

I'd now like to discuss a quarterly financial results, particularly acute PNM cost for and balance sheet highlights.

Hi, Chuck mentioned, our second quarter results, where I stand by almost every measure.

In the quarter will be reported record revenues of 416.8 billion. That's it seems that need to 9 million last year, a growth of 7.2% quota.

Second quarter Twentytwenty revenues included a 4 million negative foreign exchange impact.

Excluding the FX impact second quarter revenues were up approximately 32 million.

<unk>, 8.2% constant currency organic revenue growth, which is the highest in a decade.

Chuck alluded to in his prepared remarks.

Joe It in responding to our clients needs, coupled with our diverse business mix.

As well as existing you pull down the door enabled broke ground broad based good.

That's good market on a constant come to be says technology growing 24%.

Now onto SAP systems up 14%.

Health care up 12% all of which more than offset 7% decline in the travel and transportation topical and roughly 3% decline in both communications and other back to go.

Second quarter Twentytwenty operating margin increased to 6.5% from 3.9% for the comparable period last year.

On a non-GAAP basis second quarter Twentytwenty offering to margin was a decade high.

8.5%, especially 6% in the same period last year.

Increasing their compatible operating margins was due to solid demand execution combined with Hyatt agent productivity increased depace capacity utilization and expense discipline.

Second quarter Twentytwenty operating margin reflects the expense of approximately 1.8 million or approximately 40 basis points related to a market mark to market adjustment of stock based defense program.

Second quarter 2022 cents per share up 106%.

85 cents versus 27 sentiment CPT last year.

Non-GAAP basis second quarter Twentytwenty diluted earnings per share were 71 cents versus 41 cents on a comparable basis.

Oh, sorry, 30 cents per diluted share and portable increase roughly 24 cents, who is driven by operations with the remainder split between four cents positive swing in interest and other mail type.

And approximately two cents benefit from lower share count.

Turning to acquire makes for a moment on a consolidated basis, a top 10 clients represented approximately 46% towards revenues during the second quarter.

From 43% immutable quarter.

Took 10 claims in the second quarter Twentytwenty can pick the top 10 clients in the same period last year to roughly at almost 15%.

Written by existing and new program wins as well as share shift from competitors.

We had no 10% client in both compatible quarters.

Now, let me turn to select high school and balance sheet items during the quarter cash flow from operations more than tripled to 58.1 million from 17 million with increased due to strong earnings on working capital swing factors capital expenditures decreased slightly to 2.7% revenues from two.

0.8% in music repeated treat dsos nonconsolidated basis for the second quarter were 80 days.

Up five days can possibly but unchanged sequentially.

The increase in Dsos compared to last year's Kramer juice had dropped in clients that were mandating receivables factory.

Did you sold the split between 80 days for the Americas, reaching 79 days for the media.

We collected roughly 14 days with a D.S. so in a couple of weeks from quarter that.

As we've stated before we expect some clients continue to stretch I payment terms, even far better demand is liquidity needs more aggressively.

Our balance sheet that fit into the June twentytwenty remains strong with caution cash equivalents of 129.1 million <unk>.

Approximately oh switch, 81.9% for 105.6 million was held in international operations.

During the quarter, we repurchased half a million shares at an average price $26 from one cents per share for a total $13 million used to deal with parts. It's around 1.4 million shares at an average price of $26 41.

We have roughly 2.2 million shares remaining is remaining under 10 million share repurchase program.

With that ice in August 2011, and amended in March 2016.

At quarter end, we had 49 million in Bombay spending 10, 26 million sequentially under a 500 million credit facility. We continue to had some of the foreign exchange exposure for the third quarter, two years or hedged approximately 40% in 50% a weighted average rates a 51.72.

52.15, Filipino piece of P.S. dollar.

In addition to Costa Rica Cowen exposure for the third quarter.

To your 20 to 20 years had supposed to be 54% and 44% respectively at weighted average rates of 580.7 to 580.46 corn to the U.S. dollar.

Now, let's review some she turned capacity utilization metrics on a consolidated basis, we ended second quarter with approximately 40600 seats up approximately 1200 she's comparable.

Thanks for all of this deposits into this capacity is demand driven I'm is contracted stock India. The C expansions, but split roughly two thirds Americas and one third media.

Second quarter see Kung Fu Panda broken down to 40400, pneumatic I'd say 8200 in EMEA.

Capacity utilization rates at the end at the end of the second quarter, Twentytwenty, where 70% of the Americas and 69% to me is region versus 70% for the medical and 74% in EMEA and India, you had a good quarter.

The increase in America America's utilization is driven by hired them on well induction EMEA was due to timing capacity additions contracted that stopped yes.

The capacity utilization rate on a combined basis was 73% bashes, 71% end user group period with the increased mainly due to hide them on coupled with an ability is rapidly mobilized brick and mortar agents to the ARPU to whom to sell the stop them on.

[noise] before closing.

I would like to stay at this point, we believe it's prudent to hold off providing quote further quarterly and annual guidance.

What is giving us pause is a frequent changes in our clients forecast due to limited visibility the home and into the final demand for their products and services.

This is stemming from the uneven nature of economic openings under weighted touching go restrictions in place due to the unpredictable path of Depuy den pandemic, which is also resulting in record high levels of unemployment.

That said getting a record second quarter, coupled with our highly differentiated business model. We believe we are well positioned long term to capitalize on a large and highly fragmented marketplace.

Well as the potential dislocation among competitors in our industry with thought I'd like to open up the call for questions operator.

Yes. Thank you well now begin the question answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you're James Speakerphone, please pick up your handset before pressing the keys anytime your questions about addressing would you like to withdraw. Please press star then to win new assets courtesy other she limit yourself to three questions. At this time power I'll pause momentarily to assemble the roster.

And the first question comes from Josh Vogel with Sidoti.

Thank you good morning, Chuck and John Thanks for taking my questions.

Pretty impressive results in light of the environment out there.

My first question is when when looking at the performance in Q2.

You know what percent of revenue if any came from a temporary programs in the quarter and also any sense of how much of this 8% constant currency growth was from share the share gains you referenced.

And it sounds a temporary programs and they're spread out across the globe Motors.

One in Europe, and the U.S., it's about 1% Josh. So if you looked at Red you should see okay. We've got 1% benefit from those temporary programs. They may or may not continue beyond Q3 back as you can imagine we also gone all say Gee Kobe switches way to the troubled weakness but.

But all kinds of programs 1%.

Okay, and then the part about it.

In terms of them, where we are winning the business from its really hard to tell.

As Mike said and one of the reasons why remote given guidance is clients have been adjusted their forecast.

Uh huh.

Week by week, not daily, but certainly we see it moving more.

More than normal.

So exactly where we're taking share from whether it's really increase in volume or plan to unlike.

I would achievements either clients internally have struggled to get their supply chain productive or maybe our competitors.

It's hard for us to tell all we know that for him to look at the volume that we'd be not to deliver.

Okay. It was much higher than what we anticipated and it's obviously significant increase year over year, but we really don't know how much you guys because we're just delivering.

Reduce just in a bad joke, either compared to clients and Kendall Center compare.

Orders are real increase in volume.

And so that's what makes it.

A little bit I know on but what we are really really pleased well our company, it's been able to get our employees productive.

The core munis and unprecedented and.

Conditions really super pleased about high we've executed.

Kept our employees safe to execute our clients to de lever for US is a record Q2.

No.

Yes. Thank you.

So it's our understanding that your refraining from giving any guidance can you share the monthly revenue trends in Q2 and also what you saw through July.

I would say I'm not ready to give you wouldn't talk about July but if we talk about Q2.

I remember when we did the conference call. We explained we have kind of justification really into places El Salvador Manila at the start of the core well wed see is April with little but May and June June were pretty much on car with each other april or simply because we're ramping park in every region.

And I and I know you really asking in terms of the trends going into Q3, and the only thing I would see Josh in terms of QC is if you look historically weak and some things get three or 4% seasonal increase and the only thing I would say or not because of the Tam programming, probably because as well I suspect.

Travel, although it was weak in Q2, maybe a little bit we kinda gannetts you see that maybe that seasonal to force a little bit.

Again, I don't want Guy I see that would be it might be a little aggressive.

See us trending died insider, 46% year over year on your revenue growth target Kinda, Ryan Daws line, but as I said.

Client for costs and volumes, but just so much more uncertain times, there and then there's been a path, but in terms of revenue trends and looking out and me in June and possibly in July that that's kind of commentary I would give you have to try and help you understand where we think as.

That's helpful. Thank you and and just one more but it's basically a three part question I guess it when we think about couldn't new normal be maybe like a 50 50 split between at home agents and brick and mortar sectors or even greater than that I think Chuck reference said it was 70% at home last quarter and if.

So could this change your long term margin profile targets of 8% to 10% and then just lastly does that give you an opportunity maybe scale down that real state footprint and what could that Intel. Thank you.

Hey, Josh.

Oh.

Oh, yeah right.

Oh thanks.

<unk> percent Oh work from home.

And we've been talking to our clients and everything trying to get.

Oh understanding about where their business and so I would say that based on those conversations we don't believe work Oh, well really go boat.

35%.

But good it remained at 15.

I think that's possible, but right now.

Thank you know what broadly.

I do about 35% [noise].

No it's for a long term margins.

The 10%.

[laughter] person goes higher.

[laughter] go up so the ranged from quarter to quarter.

The tighter which wouldn't make the company overall on an annual basis that slightly better margins.

The bigger issue about worked at home.

Not as much about superior margins.

It's about speed to growth.

We're able to capture opportunities.

Well, it's easier because we're not limited by where we have physical inventory, which is critical [laughter].

Lumpiness from our.

Our business and everything and [noise].

Yes.

First our current workforce.

Oh to earn staying at home.

My prior to go then it was only 5% so it isn't done again should we definitely up.

Turning to eliminate goals.

Without a doubt.

Well, that's really helpful always great to hear your voice Chuck. Thank you guys for taking my questions all right. Thanks, Josh.

Thank you and then especially for some bill Warmington with Wells Fargo.

Doug Good morning, everyone, Phil so it yeah.

So it's a bhatia with the stock up almost 20% definitely take about and I.

I think on Wall Street recall that the the Kumar effect.

[laughter] [noise].

Also this Uh huh.

This eliminating the three questions I, you know brings to mind, a a the saying that you can always tell us outside analysts you does you just can't tell him much. So [laughter] they are [noise].

You know the it looked like the.

The attrition levels and the high utilization of working from home.

Really helped you guys a lot and I wanted to ask about what the attrition levels were.

And and and the.

Great and levels were in home agent pre.

Coated and whether you consider these improvements sustainable.

Yeah, I mean, bill it it's really hard to can create any two programs whether their work at home and brick and more really really need to compare well program was like in brick and mortar I'm, probably not same program. Neither is working well not really probably sit back and products.

And what we see is is if you look at programs that effect really got same management see me Gen. Two we've seen on annualized attrition and again it varies it's no. It's not a one size fits all but and in terms of an annualized number we've seen it go in some places Diane 50 P 50%.

Some some 20% reduction on your electrician it varies by Geo and it varies by program and so that's what I would say in terms of the MPOG again, we're dealing in different times, so saying all are not simply because we've moved to work from home. It is difficult to say EM Intel.

As of Absenteeism, we've also seen improvements and when look at the same pool of agents in terms of going by from going from the office environment to work at home and in terms of annualize in terms of absenteeism rate.

And some places it's only a one is 3% and change, but others <unk> absenteeism that maybe it was on a 10% before starting at 5% doesn't seem like they're not makes a big difference or numbers no. We're not naive we understand that some of that benefit both an attrition on dobson t. as.

Simply because of the.

The situation we are in employment levels, but we also do believe that some of that's a result and expertise we hop in terms of monitoring.

As a gen and those agents and I move to work from home, we've kinda hot the knowledge as to how you do that Todd tools in place how you do though.

We think some of it is because it was to have helped us transform not just the agents to work from home because transform managers, who use the monitor in line of sight to monetize a distributor workforces ICANN see so yeah, we've seen nice improvements.

Mm competing the same brick and mortar programs to work at home and working to make sure that goes though is that it was improvements are not short term that they're actually a longer term and improvements deck.

Yes.

Well no.

I mean remember that revenue attrition typically runs about 2% to 3% and.

Back in the last recession, I think it got as bad as 8%, Yeah, and I wanted to ask.

Your your thoughts on revenue attrition going forward.

Oh.

I'll be honest bill even even with.

8% growth I read your attrition is what we call because of our once largest client is actually over 5% just not.

So even shows more impressively high well, we've grown existing and you add new logos as well as expand and deepen existing logos and so I suspect this year.

[music].

Our actual.

Attrition as you call. It is probably going to be the Hyatt ended the C 5% range.

No. We don't think that's what it's going to go are we do believe that's really the result of last year's auctions remember from our once largest client Intel cool as well as another telco clients were exiting and but that number would be this year about the 5%, but we don't see the long term trend change but.

This year it won't be huh.

No.

Yeah, I know one thing I want to put back on to with your first question about Oh Oh.

Yes.

I would focus on two things one in.

For coated.

Type of employee that really wanted to work at all on in Barb.

Well lifestyle.

So on that.

Yes the war.

[laughter] clients or no.

Sure.

Particular type of called type [laughter], typically a lot of seasonality and stuff and so.

Here, we have to higher all bunch of people and then the volume goes away.

Hey.

Alright, well create a higher attrition.

But if we were truly [laughter] call new world of work.

Amazing quarter call tight.

Oh.

So I don't work at all [laughter].

Now I'm not Oh, I, just thought worked or.

You know well getting to fill the career.

I think you're gonna see a more stable type of environment to where the margins that we have today are sustainable [laughter] and.

It's got a change what that work environment looks like quite a bit.

For the better I actually so.

Anyway.

Yeah.

That's out there for the third question.

The DNA leverage this quarter is impressive and it looks like you're basically grew revenue 8% ended up with flat DNA. So you don't see that that often so I wanted to ask about maybe a little little color on that and how much of that you think is really.

Sustainable going forward.

Yeah, I mean, I think if you look a year over year, you said, it's relatively flat, we don't see much changing G and H this year compared to the first two quarters levels.

Well I would say bill is if we look there's clearly a benefit from no I mean, no business is traveling and so there's there's a law for you just called discretionary in some ways travel seminars and those kind of even utilities and our buildings that go lets people in number we're saving cost.

However, before I would say is overall, that's not really yeah, I mean, it might look great in terms of the GE anyway, but we probably got an equal and opposite costs that sitting inside gross margin. So work on margins and the core it looks like yeah, you may be saved on Genie back above the line, we're obviously I'm happy to to get agents.

And corn activity, we obviously, having to pay especially north shore to get agent to work, we have to pay for significant amount of money to keep agents in hotels near sites to allow them to be productive. So although you're looking to answer your genie. It looks like I would tell you that was an equal and opposite and thought more than in the end.

G.P. line, so yes, once where I was asked there won't be some element of that GE any comes back.

Over once we understand as Chuck spoken about clients expectations in terms of how much of work at home is going is that we will then be able to also look to reduce DNA permanently in terms of adjusting our footprint.

And that's where I think as Chuck said, we can do the 'em, we can get on significant proportion staying work at home and will allow us to grow and and more unrestricted way, but do you think about always the dragan our margins in the last couple of years.

I've been hopping DNA sites that were set and less than 70% Phil.

Obviously, the more work at home that we can get the last the but the last the silly cost wheel hub as a company in the last the potential impact of lower utilization will have an operating margins and again not goes back to Chuck's point off if you think of the 8% to 10% maybe it maybe it doesn't move to attain.

But it may be can try moves to eat towards nine so that we've got less variable and our operating results.

Got it alright.

Thank you very much for the insight you guys.

Thanks.

Thank you and once again please press Star then one if you'd like you're asking question.

Excuse me. The next question comes from Vincent Colicchio with Barrington Research.

Oh, Yeah, Chuck or John what I, what with communications ticking up a and the mix as well, we nearing a bottom here.

Yeah, Ben Yeah, We've always said I mean I think.

We'd hoped of is gonna be Q2 games gain much closer, but again or once largest client kinda still contract is a little bit more than we saw.

We definitely see Q4 girls and why there whether we see in Q3, we're not sure but I suspect you see a 10 minute I'm definitely that.

Because again, if you look I exclude not largest client we had growth and not enough adequate excluding non.

And the financial services vertical out what is driving the strength there did I hear a credit card companies I'm not sure.

Yeah, I mean, I think I mean are financial services vertical is relatively varied.

We've got major money center banks Weve got regional banks, you got credit card and we've got self collections, we've got fantastic.

I would say and across the board we've seen strength.

And all of that was Pcs and so we're really pleased both and yeah, we got some big clients and their.

She is understandable, but in terms of the.

Spread across the different talks about ferronickel.

Pretty good about.

Yeah. So financial success is you're right. It's it's been a nice growth for us in the last 12 month.

And as part of your <unk> is part of your share gain.

Coming from benefiting from competitors it financial distress and also related to that are you seeing any opportunities to invest in.

Actually distressed situations.

No I don't see.

One thing, we think it's coming from financially distressed competitors.

Again.

I think he said is we're really not sure. We can only tell you how well we're doing in terms of our supply lines in terms of their ability to get reagents productive around the world, It's hard for us to understand whether.

Oscar and more volume than than our clients expected in asking us to do more isn't by potentially damn hopping on volume increase VAM hobbing supply chain issues, and where those supply chain issues or with other vendors or with internal centers.

It's really hard for us.

Can I understand that and but I wouldn't say, we're winning it because we call compared.

In financial trouble, and <unk>, well, which says I guess I mean, if you look there. If you look our competitors who have already reported whether it be T. P R or concentrix and I think out industry is proving to be very robust and an essential savvis. Indeed for many many of our clients and many many consumer.

Hi, there.

And so we feel really pleased the in an industry that it's prudent to be very adaptable and flexible and there in terms of our performance seems to be market leader. So so we're really pleased and fall I I don't got sands, there's a lot competitors out there.

And are struggling.

There won't be if you're over indexed and travel say all your maybe in one geography, you will be disproportionately impacted but again, we've always said this about having to distribute it delivery channel as well is distributed clients and distribute in fabric calls and again, that's when I think we benefit from right now as well as.

Topping obviously the.

Intellectual understanding what kind of monetize these diverse workforce is when we moved all of our 70% of their employees to work from home.

Okay. Thank you have congrats on the shrunk quarter. Thanks. Thanks.

Thank you and then I suppose in constant probably bamberger with Baird.

Yeah. Thanks for taking my questions. So first just an overall question on contact center trends have you seen accelerated shift to more outsourcing over the past few months you know as in the in house operations struggle in the current cobot environment.

I wouldn't say we've seen.

No I wouldn't say that trend Robby.

Again, I mean, I think it's very difficult for us to know quickly exactly what's happening in terms of whether there's a longer term mood.

We have benefited from clients asking us to ramp new programs with Hobaugh from new lines of business. We have benefited from getting more volume the clients expect to get to us.

We just don't quite know yet.

Sure.

Is coming from real growth passes.

[laughter] share because of our performance really hard for us to say.

So time will tell as to whether that's makes people I suspect we believe that that the quality. We've shown in high well, we've responded and our flexibility clients will sit back and think that maybe maybe this is something that should better sourcing a greater percentage off but it's yeah.

I don't think which did not come through the numbers.

Okay, Great and just a question on costs our margins were good in Q2, but were there any sort of onetime kobin costs in Q2 that will go away and can margins actually be higher the next couple of quarters.

And I wouldn't say if you look at the next couple of quarters.

I think I've already said I suspect GE enable not excluding FX, because I can always move I don't see junior levels being materially different but what we would see as I until we get back to normal and we will continue how.

Core federally it costs similar to Q2, so I'm not sure I would model anything dramatic and their by settlement thing that the cost about making sure we get our keep an employee see gathered employ safely to the workplace.

Make sure they've got adequate broadband to support our client I don't see those kind of train changing really much in 2021, I guess, it's more of the same more than a significant change in terms of up or down.

Great. Thank you.

Thank you and once again. Please press Star then one feels like to ask your question.

[noise] [noise] [noise] organisers nothing else that their presence hot weather, we're trying to fund a management find any closing comments.

Oh no just.

Thank you for your participation and we look forward to catch up with you next quarter everybody have a good day. Thanks.

Thank you the conference.

Good. Thank you for attending today's presentation may now disconnect your lines.