Sykes Enterprises, Incorporated (SYKE)

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Sykes Enterprises, Incorporated (SYKE)

Q2 2009 Earnings Call Transcript

August 4, 2009 10:00 am ET


Chuck Sykes – President and CEO

Mike Kipphut – Group Executive, SVP and CFO


Josh Vogel – Sidoti & Company

Bob Evans – Craig-Hallum Capital

Matt McCormack – Brigantine Advisors

David Koning – Robert W. Baird

Brandon Dobell – William Blair

Shlomo Rosenbaum – Stifel Nicolaus

Kevin McVeigh – Credit Suisse

Eric Boyer – Wells Fargo Securities



Good day, ladies and gentlemen. Management has asked me to relay to you that 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 is based on the beliefs of management, as well as 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.

I would now like to turn the call over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

Chuck Sykes

Thank you, Glenn. And then good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises' second quarter 2009 financial results. Joining me on the call today is Mike Kipphut, our Chief Financial Officer, and Subhaash Kumar, our Vice President of Investor Relations.

In keeping with the format of previous earnings calls, I'll make some brief opening remarks and then turn it over to Mike Kipphut, who will then discuss the financials for the quarter in more detail, after which I'll wrap up the call with my closing remarks and then open the call up for Q&A.

By now, most of you probably had a chance to go through our press release. And simply put, our underlying financial performance in the second quarter was quite strong given the state of the global economy. We posted close to double-digit constant currency revenue growth while exceeding operating margins and earnings expectations. In light of that performance, we are revising upwardly our full-year 2009 outlook. In what continues to be an extremely challenging macroeconomic backdrop, our teams executed exceptionally.

Revenue from our top 50 clients, which represent close to 90% of total revenues, grew an impressive 14% on a constant currency basis. Significantly, roughly 96% of that growth was from new programs with existing clients and expansion of existing programs, which underscores a strong recognition of our service excellence by our clients.

That’s not say there weren’t some challenges along the way, but at the same time, there are also some partial offsets, including the more favorable wage inflation and agent attrition picture. Still, softness in EMEA coupled with mixed pricing and currency trends remain. So nothing we haven’t already discussed in past quarters. And despite that, as our results demonstrate, we are managing through them.

As the case in point, we have kept our cost structure in check, particularly the more discretionary elements of our SG&A spend, to offset some of the drag from softer lines of business. And we are capitalizing on the growth in telecommunications and financial services verticals, which are serving as our growth engines and offsetting the drag from other verticals. At the same time, we are moving ahead with our geographic expansion strategy, including the ramp-up of our newly launched Brazilian operation, which is progressing well.

Moreover, as economic conditions rebound worldwide, the previously discussed EMEA headwind should serve as a further catalyst to our financial performance.

And with that, I’d like to hand the call over to Mike Kipphut. Mike?

Mike Kipphut

Thank you, Chuck, and good morning, everyone. On today's call, I'll focus my remarks on key P&L, cash flow and balance sheet highlights for the second quarter, after which I will share our business outlook for the third quarter and full year of 2009.

Let’s start with revenues. Second quarter 2009 revenues were $208.8 million, up 0.6% over the comparable period last year. On a constant currency basis, revenues were up 9.9%, led by the communications vertical, which was up 28%, followed by the financial services vertical up 8%. The growth in these verticals was mostly offset by declines across the technology, transportation, healthcare and other verticals.

These declines were largely due to unfavorable currency in the form of a strong US dollar, coupled with some declines in volumes, although we are starting to see some encouraging signs with respect to our transportation vertical outside the normal seasonality. We should have more visibility into this as the year progresses.

Operating margins during the second quarter of 2009 were 8.2% versus 8% in the year-ago quarter. Excluding the KLA impairment, operating margins were 9% in the second quarter of 2009, driven by revenue growth coupled with the rising capacity utilization rate related to ongoing client ramp-ups, lower roadside assistance tow claims costs in Canada and lower general and administrative expenses, due partly to favorable translation of certain non-dollar denominated expenses resulting from a strong US dollar.

Earnings per share for the second quarter of 2009 were $0.35 versus $0.43 over the same quarter last year. The $0.08 comparable decline in earnings per share was due to higher interest and other income, partially offset by a higher tax rate in the year-ago quarter. Relative to our second quarter 2009 earnings per share outlook range of $0.27 to $0.30 per share, with a midpoint, say, at the $0.29 per share, the $0.06 earnings per diluted share outperformance versus the midpoint range was chiefly from operations, including better-than-expected revenue growth, coupled with lower general and administrative expenses and efficiencies.

Turning to our client mix for a moment, our top ten clients represented 44% of total revenues during the second quarter of 2009 versus 40% in the year-ago quarter. Our largest client, AT&T, which represents multiple distinct contracts spread across multiple lines of businesses, represented 12% of revenues during the quarter versus 6.4% in the year-ago quarter. Client concentration dropped off sharply, as our second largest client, which is in a different vertical, represented 5% of revenues in the second quarter.

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