An Outsourcing Juggernaut

10/18/2012 10:11 am EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Certainly, outsourcing gets a bad rap, but it doesn't mean companies aren't going to take advantage of the efficiencies it brings to businesses that are scrapping for every dime on the income statement these days, notes Taesik Yoon of Forbes Investor.

Sykes Enterprises (SYKE) provides business process outsourcing (BPO) to clients in communications, consumer, financial services, technology, transportation, leisure, health care, and other industries.

Its solutions consist of flexible outsourced customer contact management (CCM) services, such as customer assistance, health-care and roadside assistance, technical support, and product sales to client customers.

SYKE provides its solutions via an integrated onshore/offshore global delivery model with a total capacity of 65,100 seats that utilize multiple communication channels, including phone, e-mail, Internet, text messaging, and chat. About 55% of this capacity resides in the Americas, which includes the US, Canada, Latin America, India, and the Asia-Pacific Rim.

Roughly 9% of its seats are located in Europe, the Middle East, and Africa (EMEA). The remaining 36% are in lower-cost offshore regions. The Americas produced 83.1% of revenues through the first half of 2012, while EMEA generated 16.9%.

In the US, SYKE also offers various enterprise support services, including handling a company’s internal support operations, such as technical staffing and help desk services. In Europe, it also provides fulfillment services, including multilingual sales order and payment processing, product delivery, and product returns handling. With the acquisition of privately held Alpine Access in August, SYKE expanded its delivery model to include at-home agents that provide CCM services through a proprietary virtual call center environment.

The second-quarter results did little to break the stock’s downward trend, which began after the company reduced its 2012 guidance at the end of July. Specifically, SYKE expects full-year revenues of $1.070 to $1.085 billion (versus a prior range of $1.100 to $1.115 billion) and lowered its adjusted earnings forecast by a nickel to $1.10 to $1.20 per share.

The company primarily blamed uneven demand and an elongated sales cycle expected in the second half of the year due to macroeconomic uncertainty.

Yet we believe the sell-off in the stock was overdone. Even with the cautious outlook, SYKE’s revised guidance implies improving profitability on a sequential basis for both Q3 and Q4.

Specifically, the mid-point of the company’s Q3 guidance indicates a 12.5% sequential rise in earnings on just a 0.6% climb in revenues. Its guidance also implies sequential earnings growth of 18.5% on just a 0.8% rise in revenues, as well as a return to year-over-year profit growth, in Q4.

The improving profit forecast reflects the expected benefits of SYKE’s ongoing capacity rationalization and profit enhancing efforts. However, this guidance was provided prior to the Alpine Access acquisition. Because costs associated with acquisitions tend to initially depress margins, it could jeopardize the company’s ability to deliver on its current guidance.

Nevertheless, we view the acquisition as a smart move by SYKE. Total revenues for Alpine in the 12-month period ending June 30 were $105.7 million, suggesting it will likely boost annual revenues by roughly 10%. Due to the rapid adoption of the at-home agent model, Alpine’s revenues grew at a compounded annual rate of 34% from 2008 to 2011, versus 14.3% for SYKE during the same period.

Thus, the acquisition should boost the company’s overall growth profile in future periods. Additionally, the acquisition increases SYKE’s competitive position by strengthening its current service portfolio and go-to-market offerings, while also expanding opportunities within existing and new markets.

Since Alpine’s operations have been profitable since 2009, the acquisition should begin contributing fairly quickly to the bottom line. Coupled with the company’s recent efforts to improve profitability, we believe SYKE will enjoy meaningful earnings growth in the coming year.

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