Q1 2021 Sykes Enterprises Inc Earnings Call
[music].
Hello on box of the Sykes enterprises first quarter 2021 earnings call all participants will be on listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
I had a question. Please press Star then two please note today's event is being recorded on the call today is our Sykes management team, including CEO, Chuck Sykes CFO, John Chapman I, our heads to Bash Kumar management has asked me to relay to you that certain statements made during the course of this call as it relate to the company's future business and financial performances are.
Forward looking such statements contain information that are based on our beliefs of management as well as assumptions made by information currently available to management phrases such as our goal. We anticipate we expect and similar expressions as it relate to the company are intended to be forward looking statements.
It is important to note to 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.
On a fight in yesterday's press release and on the company's form 10-K, and other filings with the SEC from time to time I would now like turn on accounts over to Chuck Sykes. Mr. Sykes. Please go ahead.
Thank you operator, and good morning, everyone and thank you for joining us today to discuss like center rugs on his first quarter 2021 financial result.
On today's call I'll provide a high level overview of our operating results and John will walk you through the numbers and then we'll turn the call over for Q&A.
Our first quarter 2021 operating results were solid on a year over year basis, and I'm happy to say that our full year 2021 business outlook is now tracking above our initial guidance provided back in February.
As we continue to deliver for our clients.
One year after the pandemic on the Lockdowns began globally, we are prudent and continue to improve our operational resilience, while highlighting our strategic capabilities.
These highly differentiated full lifecycle capabilities span marketing sales service and digital transformation.
Of course, none of the growing success, we were delivering in the face of COVID-19 would be possible were it not for the hard work and dedication of our employees worldwide.
And we are not letting our guard down and we remain undeterred in our approach due to pandemic would.
Would you still employ the latest safeguards for our employees, while minimizing disruption to them and to their families at financially dependent on them.
Turning to the quarter from a revenue standpoint.
This was the highest first quarter in the history of the company, even after excluding but any order acquisition.
From a growth perspective first quarter 2021 revenues were up five 2% on an organic constant currency basis.
A healthy demand mix between traditional and new economy market segments.
As well as existing and new clients split roughly 50 50 per.
Propelled our growth in the quarter.
As we continue to help our clients proactively adapt the secular trends driven by digital.
Would you have been accelerated by the pandemic.
It is driving a redesign of the customer journeys across virtually every product and service category within enterprises.
All of this change is boosting demand for our value proposition.
And we see the fruits of that in our financial performance.
Our deep domain expertise and work from home for instance, which we acquired back in 2012 and is a core part of our strategic capabilities.
It's just one of the key differentiations that is resonating with our clients and helping us to grow our share.
Within the traditional client segment, we are seeing in the support opportunities from a broad spectrum of health care financial services technology and retail providers.
We are leveraging our success across our vertical market base to target known global brands and also brands international in scope.
That are either outsourcing for the first time or entering new markets or accelerating their outsourcing.
At the same time, we continue the program ramps that grows the new economy segment.
Categories, such as Fintech.
E retail e-commerce and online food delivery.
Similarly, <unk> seen solid growth in their existing markets and expanding into new geographic markets.
On the operating margin front, we are equally proud of our achievement here.
Total expansion in our year over year, non-GAAP operating margins to 8% from seven 2% in the prior year period.
If you strip out some of the noise in the quarter.
Our first quarter 2021, non-GAAP operating margins were even better reaching a decade high.
As we have said, we believe our operating margins have room for further expansion as clients gradually transition from a business continuity mode.
To a more steady state one even as good that lingers in the background.
Based on our growing client and geographic mix. It is our belief that most clients will have on.
30% of their delivery in the aggregate from home with the remaining 70% from brick and mortar facilities.
Currently that delivery makes us roughly inverse of those percentages.
Even if with incremental it investments and the potential for pricing tradeoffs due to a changing delivery mix.
We believe the resulting facility rationalization along with initiatives are underway to overhaul our operational value chain will provide a further boost the margins in the coming years.
And finally, we delivered solid non-GAAP earnings growth for the quarter up 65, 9%.
Cash flow from operations was also a first quarter record at $42 million.
We closed the quarter with a net cash position, which was even higher than the same period a year ago.
Even as we continue reinvesting in the business as we did with the acquisition of the Penny water.
And returned capital to shareholders through share repurchases.
So in closing we are already off to a strong start with the first quarter results on the heels on both solid 2020.
And the upward revision in our 2021 outlook further underscores the business momentum we are capitalizing on.
While the pandemic is still with us and some countries are experiencing second waves.
The vaccines, coupled with the lifting of the Lockdown leaves us cautiously optimistic as we forge ahead.
While 2020 highlighted our resilience. It also gave us further conviction.
And the potential of our differentiated full lifecycle value proposition and delivering results for our clients.
And unlocking value for our shareholders.
With that I would like to turn the call over to John Chapman John.
Thank you Chuck I would now like to discuss our quarterly financial results, particularly key P&L cash flow and balance sheet highlights.
Chuck mentioned, we continued our record financial performance in the quarter, we reported record revenues of $457 9 million versus $411 2 million last year, a growth of 11, 4% from quarter.
First quarter 'twenty from 'twenty, one revenues were close to the top end of our revenue range of $454 million to $459 million.
On a year over year comparable basis first quarter 2021 revenues included a $17 9 million revenue contribution from the Penny Hoarder acquisition, and an 11 5 million foreign exchange benefit <unk>.
Excluding the acquisition and foreign exchange benefit first quarter revenues were up approximately $21 3 million or five 2% constant currency organic revenue growth.
Two on our agility on the diverse business mix.
<unk> co market and on on <unk>.
Constant currency basis.
Health care was up from 51% other which includes retail up 22% technology upper on 10% financial services up approximately 6% all of which more than offset 33% decline in traveling transportation on 7% decline in communications vertical the tougher comps in <unk>.
Communications vertical expected to launch in the third quarter of 2021.
First quarter true since one operating income increased 29, 3% to $31 5 million with operating margins increasing to six 9% from five 9% from the comparable period last year on a non-GAAP basis, which excludes the impact from impairment of a few sources and other fixed assets actually.
COVID-19, driven facility exits acquisition related intangible amortization.
Merger and integration costs and other costs related facility access first quarter 'twenty to 'twenty, one operating margin was 8% versus seven 2% and same period last year. The increasingly comparable operating margin was due to strong overall demand higher capacity utilization on cost benefit of COVID-19 relate to fulfill it.
Rationalization, partially moderated by approximately 60 basis points of impact from a true up in the long term incentive comp as well as client ramp costs, and <unk> and Ikea weighted investments to reinforce the company's infrastructure and agility in the marketplace.
Utica the Utica operating margin was also modest change it by approximately net net 70 basis points impact from COVID-19 relief. It looked items include thing government mandated wage payments to unavailable obstinate employees decided the corresponding revenues cost of temporary workspace accommodations employee.
On facility Sanitizing <unk> cost.
First quarter 'twenty two into one diluted earnings per share increase.
Increased 85, 3% to 63 sales, especially start to force from the same period last year on a non-GAAP basis, the first quarter 'twenty to 'twenty one diluted earnings per share was <unk> 73 cents versus <unk> 44 cents up 65, 9% on a comparable basis. The increase was driven by a combination of <unk>.
Including strong operating performance lower other expenses contributions from the pending order acquisition lower effective tax rate on lower share count.
First quarter 2021, non-GAAP diluted earnings per share exceeded the midpoint of the 67 to 70 cents guidance range by force cent per share, which was driven by a lower than projected tax rate.
Turning to our client mix on a consolidated basis, our top 10 clients represented approximately 40% of total revenues during the first quarter of 2021 down from 45% in the year ago period. The decline a function of both broad based growth outside of our top 10 clients on the contribution of the Penny Hoarder acquisition.
In fact, we had no 10% client in both comparable quarters.
Now, let me turn to select cash flow on balance sheet items during the quarter cash flow from operations jumped 41, 1% to $40 2 million from $28 5 million due to a combination of strong earnings and working capital swing factors capital expenditures decreased to $2 seven to sorry, a two 1% of red.
Muse from two 9% of debt needs in a year ago period. The decrease was largely timing driven the company continues to invest in PC refresh it security on targeted capacity expansions.
Trade Dsos on a consolidated basis for the first quarter were 80 days unchanged comparably and down one day sequentially. The DSO was 80 days for Americas 82 days for EMEA.
Volunteered on.
That's first of March remained strong with constant cash equivalent of 112 point.
$8 million of which approximately $87 two or $98 $3 million was held in international operations at the quarter end, we had $48 million in borrowings outstanding down from $63 million at the year end under our 500 million credit facility, we continue to hedge some of our foreign exchange exposure.
For the second quarter, and full year with hedged approximately 35% and 6% at a weighted average rate of $48 78, and $48 nine eight Filipino peso to the U S. Dollar. In addition, our Costa Rica colon exposure for the second quarter on few years Brooks is hedged at approximately 37% and 28%.
Our weighted average rates of 584 seven to $586 four three colon to U S dollar.
Now, let's turn to some seat count and capacity utilization metrics on a consolidated basis. We ended first quarter with approximately 45100 seats down approximately three and a half thousand seats comparably the reduction in capacity reflects decisions made by certain clients to permanently alter the delivery mix away from brick and <unk>.
Water to a home agent solution due to COVID-19, coupled with consolidation of underutilized facilities. The first quarter seat count can be further broken down to 37600 in Americas, and seven and a half days in EMEA region.
From 40000 608000, respectively in the year.
Quarter.
Capacity utilization rates at the end of the Corp. First quarter of 2021 were 74% per day, medica, and 71% from EMEA region versus 74% for Americas, and 69% from year on year ago quarter.
Bacci utilization rate on a combined into potable basis increased to 74% from 73% year ago period, including permanent home agent in the comparable utilization calculation would have increased the compatible capacity utilization even further.
Now, let's turn to business outlook, we are increasing our full year 2020 revenue and diluted earnings per share outlook relative to the initial guidance provided back in February 2021, the increase in the revenue outlook is driven by a broad base of existing clients across the company's vertical market now the increase in diluted earnings per share is primarily due.
On a lower than projected tax rate.
Second we continue to work with clients in determining future view of the deliberate strategy between home agent on brick and mortar facilities driven by COVID-19, as such we continue to adjusted capacity footprint similar to actions taken on facility leases in 2020 is we get greater clarity around those decisions.
Third our revenues and earnings per share assumptions for the second quarter on full year are based on foreign exchange rates as of April 2021. Therefore, the continued volatility in foreign exchange rates between the U S. Dollar on the functional currencies of the markets we serve.
Further impact positive or negative on revenues on both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter on the full year.
We anticipate total other interest income expense net of approximately one 4 million on $4 8 million for the second quarter and full year, respectively. In the second quarter roughly $1 million of the $1 4 million reflect reflects the previously discussed impact of the company's stake in XL technologies, which is poised to act.
Salary, it's growth investments in its business and is accounted for under the equity method.
The remainder reflects the interest expense related to the acquisition of the Penny hoarder events on the other interest income expense net however, exclude the potential impact of any foreign exchange gains or losses. Finally, we expect our full year 2021 on effective tax rate to be lower than previously projected due to the.
Discrete benefit relating to the Philippines tax reform as well as stock compensation, considering the above factors, we anticipate the following financial results for the three months ending.
June 30 of 2021 revenues in the range of 440 feet $448 million.
Effective tax rate of approximately 23% on both GAAP and non-GAAP basis fully diluted share count of approximately $39 9 million.
Diluted earnings per share of approximately 46 to 50 cents.
Non-GAAP diluted earnings per share in the range of 56 to 60 cents.
And capital expenditures capital expenditures in the range of $15 million to $20 million.
For the 12 months ending December 31, 2021, we anticipate the following financial results revenues in the range of 1.843 billion to $1 858 billion.
Effective tax rate of approximately 21% on 22% on a non-GAAP basis fully diluted share count of approximately $40 1 million diluted earnings per share of approximately $2 67 to $2 77, non-GAAP diluted earnings per share in the range of $3 from two to $3 from 12.
Capital expenditures in the range of $47 million to $50 million with that I'd like to open the call up for questions operator.
Yes. Thank you we will now begin the question and answer session. Brassica question here, if I start on one on your touch John found.
Jana Speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Dave Koning with Baird.
Oh, Yeah, Hey, guys. Congrats on another good quarter. Thanks, Dan Thanks, David.
Yeah, and I guess, maybe first of all it it seems like the selling environment is pretty good and I think Q2, I think you're guiding to something like flat organically. It seems like just given more than anything the comp in the year ago. Maybe you can talk a little bit about that just I think you had some extra COVID-19 related type items and a year ago, but then really is the <unk>.
Sales pipeline now that strong.
It's driving accelerating growth in the second half, but is it really 2022 that you're setting up the kind of return back.
Back to our full year, a pretty normalized revenue growth or maybe even better than that like how maybe how do we translate the sales the sales momentum into kind of when that really hits the revenue.
Yes, you're right David in terms of Q2.
We do have some year over year headwinds, we did have I mean, it when we speak about the travel and back to Colin If you remember last year, we spoke about high travel really held up last Q2, but this year, we've really got a headwind and so if you look our guidance.
You're right, we are organic and constant currency growth. This year is going to be below.
46 target and how well it's done two things its the headwind from the travel and we're not really forecasting that that is going to come back I think if you look at Q4 reported about some year over year and growth there starting in the travel and we still got the telco.
Hello about a headwind until Q3 there.
So I think you are.
The numbers you've got there in terms of organic constant currency for the year.
It's probably spot on and on.
Think as we get into Q2, Q3, and especially Q4 with the travel we start to see that will be end up 4% to 6% range again.
And that's still on target for for for future years, and yes, we are where we're kind of where we.
I Love. The fact that we have no longer this large client over us we love. The fact that we have no client over 10%, we've got broad price growth.
So yeah, so other than those kind of headwinds.
Still really positive about the sales pipeline, we've got nice and high growth companies that are giving us nice volume increases and so yeah, I mean, I mean pretty much the same as we spoke to you two months ago, David I think we're pretty much on the same position as we thought we'd be and two months ago. So.
Yeah. Thank you and Chuck made some comments just about facility rationalization.
Some other types of cost reductions, maybe and you talked about a further boost the margin you know maybe putting some numbers around that is is that just to kind of get you to the range that you've talked about on the path towards whatever I can't remember at eight and a half to 10 on a percent or whatever or is that when you say a further boost you mean theres ways that it potentially it could even go above that over.
Over a period of time.
Yeah, I mean, our guidance this year pretty much still assumes like I think we said loss last quarter, we spoke about how we forecast pretty much said, what we're going to keep the same facilities that we've got today and that's still the case I mean, we're not projecting that we will have the decisions that we need to then make permanent.
<unk> two <unk>.
<unk> cost to help boost our margins and again, we've always said and NCD and yes, it should improve the bomb.
Total margins were.
Where we really like it is obviously the more that goes at home the last facilities costs less fixed cost ship go we do believe that instead of simply thinking about increasing the top end of our eight to 10 range. We definitely think it limits the bolt on and off the eight to 10 range and but we're still we're still way.
In on permanent decisions from clients to take action on those facilities, but it's not just about the cost aspect.
Labor market aspect, we are clearly if we are more channel, especially in the domestic markets. Then we fundamentally believe that access to labor is also going to be a tailwind for us either way and we get clients, making those decisions.
Paul.
Sitting here today, we're probably on the same position as two months ago, where the forecast really reflects the facilities. We've got today, even though when you look at our utilization because we got most of our people still a whole there are only 25% to 30% utilized so yeah, I mean, I think youre right David.
We will benefit from the exactly when and how it's still unclear and I would say that our guidance for the year really assumes where we're not really going to benefit on from now until 2022.
Yeah, Okay. Thanks, and just one real quick one just the Penny hoarder, how fast is that just growing on its own on its own organic growth in Q1, and you know how are you thinking of that longer term.
Oh, I don't actually have the on but I mean pretty much what we saw in Q1, David I know I know, we gave a $15 million number on that came in closer to 14, but that was just a number to help you guys understand the impact on the organic for the year. They are still going to be in the range there.
On your guidance hasn't changed in year over year.
It's about 20% to 25% growth they've had if I looked at their numbers before they came on a number so it's the the probably going into 2025% number.
Okay, great well, thank you guys.
Right.
Thank you and last question comes from Vincent Colicchio with Barrington.
Yeah.
Yes, nice quarter guys.
Chuck.
John I'm curious what portion of revenue guidance includes short term revenue related to the pandemic.
And in terms of programs that we've got simply because of the pandemic it basically nothing.
Clearly there's clients are doing bad because of the pandemic something that didn't worst but overall Vince we don't have any temporary specific COVID-19 programs of any note to tell you, but I'm afraid.
And that would be the same for the quarter I assume right Yep Yep Yep.
And.
Given all the money coming out of Washington.
How difficult is it to hire people on how concerned are you to hire people on the U S.
Yeah.
I would say.
For the U S.
Our single biggest headwind.
Is it right now and I mean.
Just to put it in perspective last year. This time, Inc.
You too.
The biggest drop in attrition and absenteeism.
Unemployment benefits kicked in at all reverse right back to normal.
So right now I'm on a dairy talked on it in the U S.
But we do anticipate that.
Unemployment benefits stock the day.
We think thats going to help us tremendously.
And it's pretty specific in the U S.
Thank you guys.
Thanks.
Thank you and then last question comes from Charles from Iowa.
Operating company.
Thank you good morning, Chuck and John.
Hey, good morning.
Hi, My first question and I may have missed it in your early prepared remarks, Chuck but when one of your peers is noting that they're seeing a tremendous market opportunity.
Merging is a lot of large enterprises are taking their captive operation and looking to outsource because they don't have the capability of personnel in place to redesign those customer journey functions in house anymore. So can you just talk a little bit about what youre seeing in the marketplace and amongst your clients.
Yeah.
He gives an accurate statement.
I don't know so much.
Because.
Customer journey redesign.
What I'm, saying.
But to use or really wanting to build.
Remodel.
Uh huh.
Sourcing is.
It has definitely given them that flexibility.
The same time I think it's safe to say.
Many of them are looking at how they implement soaps.
And so the logic as to why would you invest in.
Brick and mortar facilities.
Same time, you were trying to digitize your offerings you know.
So right now.
Sales in general.
People are embracing outsourcing.
That's a good way.
So I mean, so yes, I would agree with the comments that we're seeing a lot of companies wanting to Luca facilities.
On Outsourcer.
Great. Thank you Michael.
Our resiliency.
I got you. Thank you.
And just thinking about the marketplace and your pipeline today and your guidance what does that what does that assume is coming from new client wins versus expansion within the existing base.
It's no different from historic I mean, the vast majority of our growth comes from us expanding and developing our existing client base.
And there's really not been a change in not Josh.
We've got I think we've spoken about this from the past, where we retooled our sales team to go out and win brand new logos and that's still the same we've seen a lot of really nice logos, but if you look at their contribution to the overall revenue number it really is unchanged in the short term, but well.
But if I look at why we've been growing solidly in the last well really getting close to 18 months now and when you take out a lot of the previous largest client is really because of the success of those eventually those clients have got significant growth that helps us in the top line, but for this year.
Solid pipeline, but vast majority is about executing for your existing clients and getting growth in non space, especially when those clients are looking to outsource more so again, we all know that most of our clients got multiple outsourcers and so if you're executing on the top of the the later on in terms of performance you got the opportunity to win more of that.
And Thats, where we wanted to be.
That's the profit progress we see.
Yes, Josh.
When do you think about it I mean these companies are these large fortune 500 companies.
It's not difficult for them.
Thousands of seats.
And yet on the other range.
The new economy clients that we're winning I mean.
On average, we're probably looking at 100 seats when they get started so it takes time.
One day and I think that's why the fortune 500.
So it would be a large percentage of our growth from the standpoint of revenue.
However, the thing that we love is that these new economy clients typically.
At year net revenue was about two and half times, what the first year is the third year, it's typically four to five times.
Net revenues so.
So we know we keep bringing on debt ratio I mean, it sustains our growth in the future.
And you really wanted to keep it as I don't want to be growing your business around one or two clients we've experienced that in our past before it feels good when you are growing but the debt returns I mean, it's not it's not doable.
So.
Yes. Thank you.
Just shifting gears.
Really strong performance in EMEA, certainly the last two quarters.
I was just curious whats driving that is there a structural shift in demand there.
That can drive outsized longer term growth or is it a different approach to.
To the way you are selling over there can you just give some thoughts on that.
I would say in Europe.
Probably the biggest thing that we're benefiting from right now is a work from home platform.
So when you think about it.
In the past.
Wanted to have.
Like you can't really offshore a lot of the Scandinavian languages.
Germany is not too easy to offshore but now.
With our work from them on location weekend week on iron ore sourced from all over the continent.
It's really how open those to be able to capture the growth that we're winning.
And we are right.
Right now in Europe, 77%.
Our workforce is working from home.
So.
Like that.
Health net and a pretty big way.
Okay, Great and just one last one from me.
Just thoughts on how you feel about your digital portfolio today, and whether you have the capabilities and offerings in place.
To address.
Potential clients needs that you see in the pipeline today.
Yeah.
I would say we're on a real good about that.
One thing about these smaller companies that I think our value proposition resonates with them.
They're not just looking to us.
Serve their customers. They also can look to us.
Our business.
So with our digital marketing our self service capability.
Where we're really in a position.
I'm on a critical time in our company to grow and capture and serve that demand.
So it's on.
And candidly on made up until probably the last.
Three years.
I would say, we weren't putting as much focus on that sector.
We were we were mainly kind of unfortunate in one hour.
So I feel very good about the success, we're having right now.
Sounds great well. Thank you for all the insights and certainly impressive results and good luck over the balance of the year. Thanks, John Thanks, Josh.
Okay.
Thank you and we have a follow up from Dave Koning with Baird.
Oh, Yeah, Hey, guys. Thanks.
Yeah, just one one follow up I noticed you guys have had really good gross margin progression for I think it's something like 10 quarters in a row, where gross margins are up year over year.
So this is the first time.
Not down that much I think they're down 50 bps year over year.
Operating margins, obviously continues to be really really good but your gross margin was down a little year over year.
For the first time in a while just wondering what what's driving that and will that kind of inflect back yeah. I mean, I think there's a couple of things to watch David because we always say, we don't like to guide gross margin because if you look at the difference in Europe, and the U S nearshore and offshore you get.
There is a bit of that.
And there David but I think the rest of it it's really about the challenges that Chuck spoke about in the U S.
If I look across the board.
Year over year really biggest impact is.
While on the stimulus checks and the challenges we had in Q1 in the U S. They are built into those numbers and they were the main reasons why if you look year over year, you saw a little dip in the gross margin plus remember as Europe gets slightly bigger as a proportion of our business that also can adjust the number but yeah. I mean, if I look in terms of where we are.
I think we've got opportunity as the U S and we think we'll get on these.
The stimulus and the unemployment starts to unwind that we'll get those people back to work and get the attrition on the absenteeism day and again.
Got you great. Thank you.
Thank you.
That concludes both the question and answer session as well as a call. Thank you. So much for attending today's presentation. You may now disconnect your lines.
Yeah.