Description

Sitel


In the old days, call centers conjured up telemarketing machines
that called during dinner and relentlessly thereafter to catch your ear. Growing better than a 20% clip, they were one of wall streets’ favorite industries, with their stocks awarded 20 plus price-earnings multiples. But alas under the barrage of an enraged citizenry tiring of interrupted
meals, new government and “do not call” regulations broke the back of the outbound telemarketing business. And the stocks went South.


Fast forward the time machine and we have an industry that has reinvented itself. Inbound calling, the help desk, repair center, warranty work, order taking now have become the new call center raison d’etre. And the industry appears to be coming on again. It is estimated that only 15% of all inbound calling are outsourced, with far and away most calls handled in house by American and foreign corporations. Obviously a
great deal of growth is out there to be potentially won. IDC , a respected industry group estimates that worldwide outsourcing will grow from $45 billion in 2004 to $83 billion in 2009 for an average increase of 13% per year. Corporations are increasingly shifting key business from internal operations to outsourced partners.


Sitel (sww) listed on the NYSE is one of the industries largest call center organizations operating in 26 countries with about one-half of its revenues coming from outside the US. Sales of almost $ 1 billion cover a wide range of services. Customer acquisition includes in and outbound calls, order taking and fulfillment, leads, subscription renewals,
and product information requests. In the customer care area , sww handles complaints, billing information, reservations, investor information, dealer location, government info and insurance claims processing. Technical support covers troubleshooting and software issues, internet and computer problems and warranty info among others. Other services
include credit card activation, fraud detection, disaster prevention and recovery. In addition, back office functions such as data entry, insurance claims, payroll and personnel record keeping as well as record storage and shipping and tracking are handled. Now that was a mouthful.


Sitel’s sales to the technology industry accounts for about 25%, with financial and and consumer area each accounting for about 15%, and the auto industry another 12%. The balance of revenues come from insurance, utilities, travel, healthcare among others. Over 250 clients include Hewlett Packard, XM Satellite Radio among many others.


Sales after having declined for past few years, appear to be turning on the back of a better economy, more corporate outsourcing to the call center industry and a more a aggressive management. Revenues for the second quarter showed a 5% increase to $252 million up from 2 qtr/2004 of $240 million. Earnings over the same period increased to 4 cents from 3 cents. In their second quarter conference call, management
guided to a 3 qtr loss of $0.02-$0.05 on revenues of $242-$247 million versus a $0.02 loss on $229.5 million last year. While they mentioned they were taking about $20 million out of costs, they were excited about the upcoming 4th quarter and said they expected sales to increase “substantially to a record high to help us achieve our
profitability goals. We are experiencing growth across a majority of our business units”.


Management believes that an appropriate operating margin is 4-6% of sales. They opined that the fourth quarter would set a record of $275-$290 million with earnings of $0.11-0.15. Backlog was the strongest in several quarters with work stations the best in three years. A back of the envelope calculation using a 2006 revenue of $1 billion, margins of 5% and interest costs of $12 million results in a $0.25-$0.30
estimate on 75 million shares.


Early gleanings from the industry appear good. Sykes recently announced that it was increasing third quarter guidance to $.15-$.16 up from past guidance of for the third quarter of $.05-$.07, certainly a nice uptick. Teltec also appears optimistic and expects “to report a meaningful increase in its operating margin percentage from that reported for the second quarter 2005”. It would appear that the three year
industry restructuring which included closing call centers and downsizing rather than committing to profitless sales may finally be clicking. And with the industry hopefully at the bottom of the cycle turning north, profits should expand nicely.


An interesting added spur for management to execute, if one is needed, was the recent purchase of Sitel stock by Jana Partners. Jana, now a 14% owner is the pro active hedge fund that we may remember joined with billionaire corporate raider Carl Icahn in pressuring management at Kerr-McGee to buyback company stock. The move worked and KMG shares have risen more than 50% as a result. 13d filings by activist investors usually deserve our attention.

Catalyst

1.industry turn
2.profit upturn
3.Jana pressure