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Edited Transcript of SYKE.OQ earnings conference call or presentation 24-Feb-21 3:00pm GMT

·34 min read

Q4 2020 Sykes Enterprises Inc Earnings Call TAMPA Feb 24, 2021 (Thomson StreetEvents) -- Edited Transcript of Sykes Enterprises Inc earnings conference call or presentation Wednesday, February 24, 2021 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles E. Sykes Sykes Enterprises, Incorporated - President, CEO & Executive Director * John Chapman Sykes Enterprises, Incorporated - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * David John Koning Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst * Joshua David Vogel Sidoti & Company, LLC - Analyst * Vincent Alexander Colicchio Barrington Research Associates, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Sykes Enterprises Fourth Quarter 2020 Earnings Call. (Operator Instructions) On the call today is SYKE's management team, including CEO Chuck Sykes; CFO John Chapman; and IR Head Subhaash Kumar. (Operator Instructions) Please note this event is being recorded. Management has asked me to relate to you 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 are based on the beliefs of management as well as the 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 like now to turn the call over to Chuck Sykes, President and CEO. Please go ahead. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises fourth quarter and 2020 financial results. On today's call, I will provide a high-level overview of our results, and John will walk you through the numbers. And then we'll turn the call over for Q&A. I want to begin by thanking our dedicated employees worldwide for their hard work in the phase of COVID-19. We are doing everything we can in our capacity to continue to minimize disruption to them and to their families that financially depend on them. The good news is that the recently approved vaccines and other therapeutics against COVID-19 have proved effective, and they are being rolled out. In the meantime, we are employing the latest safeguards that adhere to the highest operational safety standards for all the employees in our facilities. While we are happy to see 2020 in the rearview mirror, the truly historic year did highlight our strength as a company, in particular, our resilience. But just as important, it highlighted our strategic capabilities around our global work-from-home platform as well as our capabilities around full life cycle customer experience management, which spans marketing, sales, service and digital transformation. Whether it's about leveraging our portfolio of digital media properties to help consumers make informed purchase decisions or helping enterprises grow their business with our turnkey marketing and sales solutions or even helping enterprises serve, retain and grow their existing customers by leveraging our digitally enabled workforce. The strength of our strategic capabilities were foundational to our success against the challenges of the pandemic. The strategic evolution, coupled with the strength of our people, our culture and our agility, played a pivotal role in helping our clients proactively adapt to shifting consumer trends around digital and through stay-at-home demand that is reshaping various sectors of the global economy. And as our financial results underscore that dynamic, for we have now delivered back-to-back record revenues to close out full year 2020 with constant currency organic revenue growth of 5.7%. Those revenue performance is at the top end of our 4% to 6% range. It is also worth noting that we have delivered these results despite the fact that we had at least 200 basis points of annual drag from the transportation vertical and more than 300 basis points of drag from the communications vertical, in addition to some pockets of softness in clients with exposure to the small medium business marketplace. The good news is that the communications vertical reached an inflection point of sort in the third quarter, and the rate of declines in the transportation vertical are probably close to bottoming out, which means that the drag from this vertical should likely begin to moderate by the second half of 2021. Additionally, we are seeing sustained opportunities with traditional and new economy market segment. Within the traditional segment, it is support opportunities for banks and credit cardholders as well as providers in the wireless, broadband, health care and technology verticals. We are leveraging our success across our vertical market base to target known global brands and also brands that are national in scope, that are either outsourcing for the first time or entering new markets or accelerating their existing outsourcing. At the same time, we continue the program ramps across the new economies segment. Categories such as FinTech, e-retail, e-commerce, online food delivery and self-installed security systems are all seeing solid growth. Turning to our margin profile. We are especially proud of our achievement here. Although our non-GAAP operating margins increased to 8.4% in 2020, they really hit a decade high if you adjust for the 20 basis point impact of a stock market-driven EDC expense. This solid margin performance is on the back of revenue growth that was more than 3x the level of 2015 when adjusted operating margins hit 8.5%. Better yet, our 2020 operating margins have further room for expansion as clients make commitments to work from home. And we are able to strip out the carrying costs associated with underutilized capacity. Even if we have to make some incremental IT investment and pricing trade-offs because of changing mix between brick-and-mortar and home agent delivery, we believe the initiatives that are underway with the overhaul of our operational value chain will provide a further boost to margins in the coming years. And finally, we delivered solid non-GAAP earnings growth for the quarter and year, up 28%. Cash flow from operations in 2020 was a record, giving us the dry powder to continue reinvesting in the business as we did with the acquisition of the company, The Penny Hoarder, and to return capital to shareholders, as we did when we repurchased 1.9 million shares during the year. So as we enter 2021, we continue to have momentum in our business. And with the gradual easing of lockdowns amid the COVID-19 vaccine rollout worldwide, and even with the virus mutations we're hearing about, we are cautiously optimistic given the knock-on benefits of these actions on consumer confidence and economic growth. Through our ongoing investments to strengthen our differentiated full life cycle capabilities around digital marketing, sales and service as well as our investments in self-service, artificial intelligence and robotic process automation, we believe that our market position is strong and that it places us on the path of progress, just as our investment in our work-from-home platform almost a decade ago placed us on the path of progress in the midst of the pandemic. And as our clients across various geographies begin to transition from their business continuity phase to one that is more steady state, they will be looking for seasoned operators and thought leaders with the work-from-home platform, which we believe will help us take shares from competitors. While we can't predict the pace of economic recovery during this uncertain time, our solid balance sheet, along with our unparalleled portfolio of capabilities, solidly positions us to deliver success to our clients and unlock value for our shareholders. With that, I'd like to turn the call over to John Chapman. John? -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Chuck. I would now like to discuss our quarterly financial results, particularly key P&L, cash flow and balance sheet highlights. As Chuck mentioned, we continued our record financial performance in the quarter. We reported record revenues of $450.5 million versus $425.3 million last year, a growth of 5.9% in the quarter. Fourth quarter 2020 revenues also exceeded the top end of our revenue outlook range of $439 million to $444 million by $6.5 million. More than half of the outperformance was broad-based volume increase with the remaining due to foreign exchange benefit. On a year-over-year comparable basis, fourth quarter 2020 revenues included a $6.2 million foreign exchange benefit. Excluding the foreign exchange benefit, fourth quarter revenues were up approximately $19 million or 4.5% constant currency organic revenue growth, thanks to our agility and our diverse business mix. By vertical markets and on a constant currency basis, technology was up around 19%, health care up 16%; financial services up 5%; other, which includes retail, up 3%; communications was flattish. All of which was offset -- more than offset the 31% decline in the travel and transportation vertical. Fourth quarter 2020 operating income was $32.3 million versus $33.1 million in the same period last year, with an operating margin of 7.2% versus 7.8% for the comparable period. Fourth quarter 2020 operating income reflects various costs such as impairment, merger and integration, et cetera, totaling $9.1 million versus $6 million in the prior year period or 200 basis points versus 140 basis points impact correspondingly. Excluding the impact of amortization of acquisition-related intangibles, impairment, merger and integration as well as other costs, fourth quarter 2020 operating margin remained unchanged at 9.2% in both comparable periods due to higher accrual for long-term and annual performance-based compensation in the fourth quarter of 2020, driven by financial outperformance relative to planned operating results. Fourth quarter 2020 non-GAAP operating income still reflects an expense of approximately $1.7 million or approximately 40 basis points, up from $700,000 or approximately 20 basis points in the year ago quarter related to the mark-to-market adjustment of stock-based deferred comp, driven by an increase in global financial markets in the fourth quarter. Fourth quarter 2020 earnings per share was $0.64 versus $0.56 in the same period last year, with fourth quarter 2020 driven by a swing in other expenses, a lower tax rate and a lower share count more than offsetting the aforementioned impairment of right-of-use assets and other assets. On a non-GAAP basis, fourth quarter 2020 diluted earnings per share were a record $0.81 versus $0.69 on a comparable basis. Of the $0.12 per share increase, approximately $0.04 is driven by operations, another $0.04 due to positive swing in total other expenses, $0.03 due to a lower share count and $0.01 from a lower tax rate. Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 39% of total revenues during the fourth quarter, down from 41% from the year ago period due to broad-based growth outside of our top 10 clients. In fact, we had no 10% client in both comparable quarters. Now let's turn to slide cash flow and balance sheet items. During the quarter, cash flow from operations jumped to $32.8 million from $3.7 million due to a combination of strong earnings and working capital swing factors. Capital expenditures increased to 3.8% of revenues from 3.3% of revenues in the year ago period. The increase was driven by a combination of timing, PC refresh and a sheer number of PCs purchased for home agents, along with targeted capacity expansion at existing sites to support growth. Trade DSOs on a consolidated basis for the fourth quarter were 81 days, up 2 days comparably and unchanged sequentially. The increase in DSOs compared to last year is primarily due to drop-off in clients that were mandating receivables factoring. The DSO was 81 days for both Americas and EMEA region. And as we have stated before, we expect some client to continue to stretch out payment terms as they manage liquidity needs more aggressively. Our balance sheet at December 31, 2020, remains strong with cash and cash equivalents of $103.1 million, of which approximately 84.1% or $86.7 million was held in international operations. During the year, we purchased around 1.9 million shares with prices ranging from $23.33 to $33.21 per share. We have roughly 1.7 million shares remaining under our $10 million share repurchase program authorized in August 2011 and amended in March 2016. At the year-end, we had $63 million in borrowings outstanding, down from $73 million at the end of 2019 under our $500 million credit agreement. We continue to hedge some of our foreign exchange exposure. For the first quarter and full year 2021, we are hedged approximately 12% and 6% at a weighted average rate of PHP 48.58 and PHP 48.57 to the U.S. dollar, respectively. In addition, our Costa Rica colón exposure for the first quarter and full year is hedged at approximately 38% and 28% at weighted average rates of CRC 574.87 and CRC 586.43 to U.S. dollar, respectively. Now let's review some seat count and capacity utilization metrics. On a consolidated basis, we ended the fourth quarter with approximately 45,600 seats, down approximately 2,600 seats comparably. The reduction in capacity reflects decisions made by certain clients to permanently alter the delivery mix away from brick-and-mortar to a home agent solution due to COVID-19. The fourth quarter seat count was further broken down to 38,000 in the Americas and 7,600 in EMEA from 40,200 and 8,000, respectively, in the year ago quarter. Capacity utilization rates at the end of the fourth quarter of 2020 were 74% for the Americas and 75% for EMEA versus 76% for Americas and 72% for EMEA in the year ago quarter. The capacity utilization rate on a combined basis -- on a comparable basis were unchanged at 75%, including home agent in the comparable utilization calculation, however, would have shown utilization would have increased comparably. Now turning to our business outlook. Our first quarter and full year 2021 business outlook reflects healthy levels of demand stemming from existing and new clients as well as new lines of business across our vertical markets, consistent with the pattern that has driven those verticals to date. We expect our first quarter through full year outlook to largely remain -- maintain, sorry, its historical pattern as we ramp client programs and step up levels of information and IT-related investments to reinforce our infrastructure and agility in the marketplace. Our first quarter 2021 outlook also reflects the revenue and diluted earnings per share contribution of $15 million or $0.02, respectively, from The Penny Hoarder acquisition. For 2021, we expect the acquisition to contribute approximately $60 million in revenues and approximately $0.08 in diluted earnings per share. We remain well positioned strategically to address opportunities in the market, just as we have throughout the pandemic. Secondly, we continue to work with clients in determining the future view of their delivery strategy between home agent and brick-and-mortar facility, driven by COVID-19. And as such, we continue to adjust our capacity footprint, similar to actions taken in facility leases in 2020, as we get greater clarity around those decisions. Third, our revenues and earnings per share assumptions for the first quarter and full year are based on the foreign exchange rates of January 2021. Therefore, continued volatility in the exchange rates between U.S. dollar and the functional currencies of the markets we operate could impact both -- both positive and negative, our revenues on both GAAP and non-GAAP earnings per share relative to the business outlook for the first quarter and full year. Fourth, we anticipate total other interest expense net of approximately $1.4 million and $5.6 million for the first quarter and full year, respectively. In the first quarter, roughly $1 million of the $1.4 million reflects the impact of the company's stake in XSELL Technologies, which is poised to accelerate its 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. For the year, roughly $4 million is due to XSELL, and the remaining $1.6 million interest expense due to The Penny Hoarder. The amounts in the other interest income expense, however, exclude any potential impact of foreign exchange gains or losses. Finally, we expect our full year 2021 effective tax rate to be below prior year levels because prior year was impacted largely by nondeductibility of goodwill impairment. We expect full year 2021 non-GAAP tax rate to be roughly in line with the prior year. Considering the above factors, we anticipate the following financial results for the 3 months ending March 31: revenues in the range of $454 million to $459 million, an effective tax rate of approximately 24% on both a GAAP and non-GAAP basis, fully diluted share count of approximately 40 million, diluted earnings per share of approximately $0.58 to $0.61, non-GAAP diluted earnings per share in the range of $0.67 to $0.70, capital expenditures in the range of $14 million to $16 million. For the 12 months ending December 31, 2021, we anticipate the following financial results: revenues in the range of $1.833 billion to $1.853 billion, effective tax rate of approximately 24% both GAAP and non-GAAP, fully diluted share count of approximately 40.1 million, diluted earnings per share of approximately $2.60 to $2.73, non-GAAP diluted earnings per share in the range of $2.94 to $3.07 and capital expenditures in the range of $47 million to $53 million. One final note on the outlook. Non-GAAP diluted earnings per share for the first quarter and full year exclude the impact of XSELL Technologies, while GAAP diluted earnings per share does include the impact of XSELL Technologies. With that, I'd like to open the call up for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Josh Vogel with Sidoti & Company. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [2] -------------------------------------------------------------------------------- Chuck, I got to say you're sounding much better. Luckily, the Super Bowl was just too fast. You didn't have to scream much at the TV. But great to hear you. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [3] -------------------------------------------------------------------------------- I appreciate it. Thanks. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [4] -------------------------------------------------------------------------------- Yes. So my first question, when we think about client commitments between home agent and brick-and-mortar, do you still feel comfortable that it would be like a 30-70 split post pandemic? -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [5] -------------------------------------------------------------------------------- Josh, I think, in general, that number is pretty safe. Right now, like in the European market, we're talking to our clients, and we're actually thinking it could be anywhere from 35% to 50% would remain work from home. In the U.S., we're probably closer to about the same range, I would think. It depends. Because in the U.S., we support a lot of financial services, and -- the financial services companies want to get back into the centers. So that affects that a little bit there. Offshore, what's interesting is that our clients, for the most part, want to come back into the centers. But when we survey our employees, and this is pretty much around the world, it's 85% want to stay working from home. So we're going to -- in 2021, I think it's going to really be the year that we get clarity, because you've got employees who want to do one thing, clients wanting to do another. And then we've got to look at the government policies that are being put in place. So if governments are saying we can only utilize buildings 50%, but clients want to go back in and employees want to stay out, we're trying to figure out exactly how all that's going to shake out in the end. So I think 2021, in general, for commercial real estate, I think we're going to have a lot more clarity, but I bet it's going to take until the fall because we're going to have to wait and see what happens with the virus. I mean do these mutations and things created to where people stay at home more and everything? But in the end, with everything that I'm saying, absolutely, we believe on a long-term basis, we'll have at a minimum 30% of our workforce working from home at a minimum. But I'm just trying to give you a little more color as to what we're having to kind of wait and see when it unfolds here. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [6] -------------------------------------------------------------------------------- Yes, of course. I appreciate all that color there. When -- what's the usual pricing concession that you give up for at-home? But then again, also the accretion you could see on the margin line or net incremental benefit as at-home usage goes up. So let's say, the split ultimately does become 35-65 or even 40-60. What should -- where is the incremental benefit there? -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [7] -------------------------------------------------------------------------------- Well, right now, I will say that, for a client that wants to be 100% at-home and are willing to commit to that, pricing, it can be around 8% to 9% less than brick-and-mortar. However, as a company, with that kind of pricing, we will make the same absolute dollar amount of profit. So it doesn't translate into reduction in that case. For us, it would be a better situation. And clients that are wanting right now to have what we call somewhat of a hybrid situation, there is no price reduction. I mean we really -- because it's not affording us the opportunity to really be able to maximize our facility utilization in that sense. So -- but... -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [8] -------------------------------------------------------------------------------- Yes, I mean, the way I look at this, Josh, is if we look at in the worst-case scenario, it's neutral to margin. And if you look at the other side, at best, I mean, what you're talking about is it reduces -- the more at-home reduces the long-term capital intensity in the business. And also, as we've spoken about before is when you get swings in demand, you don't have G&A sitting around. It's idle, and that improves that -- I mean that's accretive. And Chuck has also spoken in the past about at-home in terms of your ability to grab opportunities. If you're not boxed in by a physical facility, you've also got better growth opportunities. So I don't think there's any downside to how it goes. The question is how good is the upside. And I think that's what Chuck's saying there. In the perfect world, we could give some of the price decrease. It would be great if we could keep some of it, but we could keep the absolute dollars the same. So we're no worse off. All we've got is a business that's less capital-intensive and more flexible. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [9] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [10] -------------------------------------------------------------------------------- Yes, that makes complete sense. And just one more on this vein. You made a comment about it a bit. What level of investment are you planning making this year in building out or maintaining the remote infrastructure considering that the delivery model continues to make up a bigger piece of the pie? -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [11] -------------------------------------------------------------------------------- There's not really any one item. I mean if you look at our operating margins, Josh, I mean you look at it and think we're being conservative in our overall margin expectations. Yes, we've got double-digit earnings per share growth, but the margin percentage is a little bit higher than what it was in 2020. I think what you're seeing in there is a combination of things, one of which is investment in our agent end points, but also in there is also investing -- probably accelerated investing and moving to the cloud and being more nimble in our IT infrastructure. So those 2 things are kind of embedded in our guidance plus the fact, and as Chuck's mentioned there, where we've still got clients making final decisions, and we've got this difference between what employees want, what governments demand and what clients want just now. And so in our guidance, we've kind of assumed that the facilities we've bought today will have the rest of the year. Now when we get to those further-out quarters, that may not be the case, and we will make those changes that will help the margin profile. But at this moment in time, until we get clarity, we've kept that in our assessment of costs. So maybe that helps you a little. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [12] -------------------------------------------------------------------------------- No, it definitely does. And just one last one for me, kind of building off of that. You've had a long-term operating margin target of 8% to 10% range. If we see greater traction in the digital portfolio and the pared-down reliance on brick-and-mortar, that footprint there, do you think this could be a long-term 10% to 12% margin business? Or have you thought about what it would look like then? -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [13] -------------------------------------------------------------------------------- We're still focused on 8% to 10%, Josh. I mean we clearly got a record quarter performance, and we've had a record year for Sykes. And we do want to be at the upper end of the 8% to 10%. So it's about -- for me, it's not about getting outside 8% to 10%. It's been at the higher end of that and being consistent. Because when you look at our company in the past, that's where we need to think about, not about growth being greater than 3% to 5%, but being consistently 3% to 5%. And then once we're consistently 3% to 5%, then yes, let's talk about what we think can be achieved, but we don't want to talk about something that we think in terms of the market is definitely doable. But guide that's a kind of thing that we think we can do. And it's the same with the operating margin profile. We'd like to be getting in the 9s. So we were always in the -- we were sometimes in a few years back in 5s and 6s. We don't want to ever be back there. We're now operating solidly in the 8%. We want to get to the upper end of the 8% to 10%. And then if you look at some of our compares, some of them actually can't get to that 10% margin. So even somebody like a TP, when you strip out their specialty services, they're really just over the 10 number. So it does get to the point where it's difficult to get to the kind of -- especially the 12 number that you mentioned. That's a real challenge. And even some of the best operators in the business that have delivered consistent growth have found that can be a challenge. But we are still focused on the 8% to 10%. We just want to be in the upper echelons of that first before we start talking about what we think we can do outside that. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [14] -------------------------------------------------------------------------------- Totally understand. If I could just sneak in one more, I just -- what was the revenue split in Q4 of traditional versus new economy clients? And how did that differ from the year prior? -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [15] -------------------------------------------------------------------------------- I don't have that because we really look at verticals. What I would say is I could get -- we could try and find that, Josh. But it's really hard to define what you describe as new economy versus old economy. What I would say is, those high-growth clients are a disproportionate reason why we've been growing versus what you describe as traditional clients. I don't specifically have that number of exactly what that is because I think defining those clients is in the eye of the beholder. Is Google a new economy client? They've been around for a long time. So I think they are high-growth clients that help you grow, but they're really embedded within -- in our financial services sector, we've got lots of new FinTechs that are helping us grow that vertical, but we've also got some traditional money banks helping us grow that vertical. So we more look at it as a vertical, of which I would say a disproportionate number of new logos are in that space -- in the new economy space. But I need to ask Subhaash to circle back with you on the exact number. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [16] -------------------------------------------------------------------------------- Sounds good. Stay safe guys. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from Dave Koning with Baird. -------------------------------------------------------------------------------- David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [18] -------------------------------------------------------------------------------- Congrats on what was a really good 2020. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [19] -------------------------------------------------------------------------------- Thanks, David. -------------------------------------------------------------------------------- David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [20] -------------------------------------------------------------------------------- Yes. So maybe to kick it off, Q1 guidance is quite good in terms of growth. And normally, your Q1 is kind of the low part of the year for revenue. But the way this year, it looks like you're guiding is for revenue to be pretty similar all the quarters or at least similar to the Q1 number kind of as an average for the whole year. And I'm just wondering what might be different this year that would kind of just allow the normal sequential ramp pattern through the year. -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [21] -------------------------------------------------------------------------------- Well, Q2 usually is our lowest quarter, David. What I would say to you in general is we did talk about this, and we spoke about whether we wanted to just give a Q1 number of how we would guide for the full year, and we decided we wanted to guide for the full year. But what I would say is clients are still struggling on forecast. I think we're much more confident in our Q1 forecast. And if you look at the full year, clearly, there's more variability. But I would still say today, in COVID world, there's much more variability than it existed in previous years. And so we've obviously taken that into account. We obviously work with our clients to produce forecasts. What I would say to you is, if we simply used what clients say, we would have vastly under-forecast our 2020 numbers. And I think the same is true in the out-quarters of 2021. So as what we are guiding, but what I would say is there's more uncertainty than normal in the Q2 through Q4 numbers, but we wanted to give a number out there because we felt it helped everyone understand what we are currently seeing, even if we think that might be a little bit on the conservative side. But traditionally, Q1 is always -- I think it's about 2%. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [22] -------------------------------------------------------------------------------- Q2 is lower. -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [23] -------------------------------------------------------------------------------- Q2 is usually about 2% lower, David. And I think we might see that this year. But overall, I think Q1 is strong. And we're focused on that, and we're continuing to work with clients to try and make the forecast more accurate. And we are hopeful we can exceed our guidance, but our guidance is our guidance at this point. -------------------------------------------------------------------------------- David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [24] -------------------------------------------------------------------------------- Yes. Okay. That makes sense. And then secondly, on margins, and Josh was asking some of this type of stuff, too. But it looks like the way you're guiding is for incremental margins to be somewhere in the 10% ballpark, give or take. But it would seem like this might be one of the best incremental margin years you've ever had just simply because you'll get the core revenue growth, which will drive some, but then I know you've cut capacity somewhat. I mean it showed up in your last 10-Q. That could add -- I don't know if it was $10 million or whatever. That would seem to go on top of that. So yes, I guess I'm just wondering why we won't get a little more margin flow-through in guidance this year. -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [25] -------------------------------------------------------------------------------- Yes. I mean we do have -- and again, we did touch on with Josh, you're right. I mean we do have -- there's a number of little things, David, that's kind of making the EPS or the margin growth a little bit more muted. We do assume that we will have additional stock comp. So forget EDC. We will have additional stock comp in the year, a little bit year-over-year. And as we said with Josh, we are going to accelerate some of our IT transformation at cloud this year, which does give us what I've described as a little bit of a bubble where we've got both in-premise and cloud sitting in the business this year. We've accelerated some of our agent endpoint refresh to be able to run layer security and handle our at-home platform. And as I also said, we're still working to try to understand the work-from-home permanent volume so that we can then take further action on facilities. So these are all, I guess, been a little bit of a headwind to the margin growth that you'd see year-over-year. However, if you actually look at the EPS growth, it's -- clearly, it's 10%. If you actually look at 2019 versus midpoint of 2021, I think we're talking about over 40% EPS growth. So you're right to kind of question if we're being cautious on our margin expectation. But there is some reasons for the muted number in 2021, and a few of which are transitional and a few of them which are just headwinds. But again, going back to Josh's question about 8% to 10%, we are still focused on can we get into the 9s because that's where our next point of call is in terms of clearly operating above the 8.5 percentage points now. Can we get towards the 9%? So yes, those are -- that's kind of some of the color as to why we're not guiding in the 9% versus the high 8s this year just now. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Vincent Colicchio with Barrington Research. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [27] -------------------------------------------------------------------------------- Yes, Chuck or John, should we be concerned that the financial services growth has slowed somewhat in the past 2 quarters? Is that just lumpiness of business? Or is this maturing there? -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [28] -------------------------------------------------------------------------------- No. Vince, I would just say that it's more kind of the lumpiness in the business, the way the sales cycles kind of ebb and flow. Financial services is still a very strong sector for us. And in fact, John had alluded to it. We are winning. If you want to use the new economy definition, we are winning a lot of FinTech companies in that space. Now the FinTech companies today that we're winning are -- they're smaller in revenue size. But these are kind of companies that in year 2, 3, 4 will typically generate -- they can be 2.5 to 4x the revenue that we're doing initially. So even though they may not be moving the needle a lot right now for us, we definitely think they're going to offer us better growth in the years ahead for it. So I wouldn't worry too much about that on financial services. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [29] -------------------------------------------------------------------------------- And I'm sorry if I missed this, but are clients asking for price decreases for at-home work as of yet? -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [30] -------------------------------------------------------------------------------- In general, they are not. And that's because they have not made, in general, a definitive statement or decision to completely stay work-from-home. So as of now, we are not really dealing with that in a major way, no. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [31] -------------------------------------------------------------------------------- And what does the pipeline look like at Symphony? And how much is in your guidance for the year? -------------------------------------------------------------------------------- John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [32] -------------------------------------------------------------------------------- Well, again, Symphony -- Symphony back in 2019 did about $30 million of external revenues, Vincent. And last -- and that was a growth of over 100% that we saw in that year. Last year, they were down at $14 million. Now we've got growth coming back in, in the second half of this year, but they will still be operating below the 2019 number. So we believe in the market long term. I think we've spoken about how we've turned their automation skills inside the company to help reimagine a lot of our operational value chain, which we think will eventually come through and improve margins. So we're not wasting the time that we've got. So we expect them to be somewhere between $20 million and $30 million of revenues in 2021. But we still believe the skill set inside the company, and we're actually still -- we're doing a lot more on Symphony work related to Sykes' existing clients. So we're encouraged by some of those changes. But sadly, we're still going to be operating below 2019 levels in 2021. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Sykes for any closing remarks. -------------------------------------------------------------------------------- Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [34] -------------------------------------------------------------------------------- No. No additional remarks. Just as always, we appreciate everyone's participation and look forward to catching up next quarter. Everybody, have a good week. Thank you. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.