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Sykes Reports Lower Profits But Higher Revenues, Higher Operating Margins

August 05, 2009

A strong U.S. dollar drove profit down by 19 percent for business process outsourcing firm Sykes Enterprises. Yet beneath the currency matter it reported better than expected results in the second quarter 2009 (2Q 09). Among the highlights:
 
*          2Q 09 net income dropped to $14,348 million compared with $ 17,729 in 2Q 08. Earning per share (EPS) dropped to $0.35 versus $0.43 in the comparable quarter last year.
 
 *         2Q 09 revenues increased by $1.2 million or 0.6 percent to $208.8 million over 2Q 08 even after taking into account a strong U.S. dollar negatively impacting revenues by $19.3 million. On a constant currency basis comparable revenues were up 9.9 percent
 
*          Compared to a revenue range of $201 million to $203 million provided in the firm’s 2Q 09 business outlook, revenues included $5.3 million of currency benefit resulting from strengthening foreign currencies against the U.S. dollar relative to its forecast
 
*          Operating margins increased in 2Q 09 to 8.2 percent from 8 percent on a comparable basis. These include $1.6 million (0.8 percent of revenues) impairment loss on goodwill and intangibles related to the March 2005 acquisition of Kelly, Luttmer & Associates Limited (KLA). Excluding this, the 100 basis points comparable operating margin increase was aided by revenue growth coupled with a rising capacity utilization rate related to on-going client ramp-ups, lower roadside assistance tow claims costs in Canada and lower general and administrative expenses
 
Underlying these figures is increased revenues generated from Sykes’ (News - Alert) Americas segment, including North American and offshore (Latin America and the Asia Pacific region) operations that increased 8.3 percent to $148.9 million, or 71.3 percent of total revenues in 2Q 09. Revenues for 2Q 08 in contrast totaled $137.5 million, or 66.2 percent.
 
Meanwhile an $11.4 million comparable revenue increase that included a $19.5 million increase in customer care demand offset a negative decline of $8.1 million caused by weaker currencies relative to the U.S. dollar. Excluding the currency impact, revenues rose 14.2 percent thanks to increased customer care demand from a combination of new programs wins with existing clients, expansion of existing programs and some new client wins across the communications, financial services, and technology verticals.
 
The Americas income from operations in 2Q 09 jumped 13.2 percent to $25 million, with an operating margin of 16.8 percent versus 16.1 percent in the comparable quarter last year. The Americas second quarter 2009 operating margin reflects the impact of an impairment loss on goodwill and intangibles related to KLA of approximately 1.1 percent. Excluding the impairment loss, a 180 basis points comparable increase in the Americas operating margin came as a result of revenue growth from a rising capacity utilization rate, favorable translation of certain non-dollar denominated expenses, lower roadside assistance tow claims costs in Canada and depreciation expenses.
 
The gains in Sykes America’s operation were partially offset by a 14.5 percent decrease in revenues from its Europe, Middle East and Africa (EMEA) region to $59.9 million, representing 28.7 percent of total revenues for 2Q 09 compared to $70.1 million, or 33.8 percent in 2Q 08. The comparable revenue decrease of $10.2 million included an $11.2 million negative impact from the weaker Euro relative to the U.S. dollar, more than offsetting a $1 million increase in customer care demand. Excluding the currency impact, the 1.5 percent comparable increase in customer care gains came from expansion of existing client programs and some new client wins across the financial services and communications verticals.
 
The EMEA income from operations in 2Q 09 decreased 56.9 percent to $1.8 million, with an operating margin of 2.9 percent versus 5.8 percent in 2Q 08. The 290 basis point comparable decrease in the EMEA operating margin came about from negative operating leverage owing to a reduction in customer care demand due to the downturn without a commensurate drop in labor costs.
 
Sykes anticipates an overall positive third-quarter (3Q 09) and full-year 2009 business outlook including:
 
*          Net new capacity additions of approximately 400 to 500 seats in 3Q 09 in addition to the net 1,050 seats added year-to-date through June 30, 2009. Thanks to demand within the Americas region, the firm plans to increase its net seat additions in 2009 on a consolidated basis to between 1,700 and 1,900 from its original forecast of 1,200 to 1,400. Accordingly, some ramp-up related expenses associated with the seat additions are expected to continue and are anticipated to be spread throughout the second-half of 2009
 
*          Within the Americas region, the firm continues to experience sustained growth in customer care demand from new programs with some existing clients within the communications and financial services verticals. This will offset lower demand with certain existing clients due to macroeconomic weakness and certain client programs that are expiring. The EMEA region continues to experience softness in volumes coupled with some pricing pressure with certain embedded client programs primarily within the technology vertical
 
*          Sykes continues to be hurt by the strength in the U.S. dollar, which is expected to negatively impact third quarter and full-year 2009 revenues by approximately $10 million and $50 million, respectively, over the comparable periods last year
 
*          Approximately $0.01 earnings per share impact anticipated from the closure of a KLA administrative facility and the associated severance costs
 
Sykes is anticipating for 3Q 09 revenues between $210 million-$213 million, tax rates between 20 percent-22 percent, EPS from $0.31 to $0.34 per diluted share, and capital expenditures between $7 and $9 million. It is projecting for the whole of 2009 revenues ranging from $833 million to $837 million, tax rates from 18 percent to 20 percent and EPS in the range of $1.33 to $1.39 per diluted share.

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Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Stefania Viscusi

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