Business: Sykes stung by dim view of its future

Sykes stung by dim view of its future

The company's stock is slammed down 23 percent, but analysts say they do not plan to downgrade its rating.

SCOTT BARANCIK
Published August 4, 2004

TAMPA - Investors pummeled Sykes Enterprises' stock Tuesday, a day after founder and CEO John Sykes announced his retirement.

But it was the Tampa company's disappointing forecast for the rest of 2004, not its long-anticipated decision to anoint son Chuck Sykes as successor, that spooked investors and drove Sykes' stock down 23 percent to $5.14, a one-year low.

In a news release Monday afternoon and a conference call with analysts Tuesday morning, Sykes made several disclosures, including:

The company expects to lose 7 to 10 cents per share in the third quarter, even after counting the gain from a U.S. call center it sold last month. Analysts had expected Sykes, which handles customer service for clients such as SBC Communications and Microsoft Corp., to earn about 5 cents a share.

Sykes plans to cancel underperforming contracts with a number of travel and leisure industry clients, such as a Delta Air Lines deal it canceled by mutual agreement last week.

The company expects to be hurt by a recent federal decision that is driving AT&T and several other communications companies out of the long-distance business.

The migration of SBC and some other clients from Sykes' U.S. call centers to its offshore ones is dragging. The short-term impacts are higher costs and a delayed return on investment.

On the bright side, the company said, Sykes' cash reserves are strong, it has no debt, and the company is making a lot of money selling call centers it has closed in the rural United States. Four call centers are currently for sale.

The company remains optimistic about 2005, by which time most of its clients will have moved to offshore centers. Though behind schedule on its ramp-up, the company has 9,700 seats in "offshore" locations such as the Philippines and India, versus only 4,100 in the United States and North America.

As of Tuesday evening, none of the analysts that monitor Sykes had lowered his rating on the company.

"We are disappointed by the lowered outlook," Sidoti & Co. analyst Michael Coady wrote. "However, with $1.77 per share in cash and no debt, we see (Sykes) as an attractive opportunity for risk-tolerant investors."

Several lowered their target price for Sykes stock, however. Company officials were placed on the defensive a number of times during the morning conference call, on subjects such as the real reasons behind the cancellation of its Delta contract and Sykes' policy of using cash to repurchase stock rather than issue dividends.

Analysts said they were less concerned with CEO John Sykes' earlier-than-promised retirement, or the board's long-rumored decision to replace him with son Chuck, a 17-year veteran of the company. Last year, the company revealed the elder Sykes' plan to retire within two years as well as the younger Sykes' promotion to chief operating officer in a single news release.

Spokesman Jeff Tucker said he did not believe Sykes considered any other candidates for the CEO slot.

Still, the company appeared to be walking a fine line as to the elder Sykes' future role, avoiding both the impression that he couldn't let go or that the company he nurtured and guided for 27 years would be swiftly orphaned.

Sykes will not remain on the company's board but was named honorary chairman emeritus, a non-salaried role that entitles him to join board meetings if invited. He will remain available to consult with company officials about clients, lenders or other issues, but only for a transitional period.

Rather than pass the chairmanship to son Chuck, the board of directors named fellow director Paul Whiting. Putting a non-employee in that role may help the company further distance itself from earlier complaints that its board was too insular and beholden to the elder Sykes.

As a show of confidence in his son, Sykes vowed not to sell any of his 35 percent stake in the company, with the exception of 1.5-million shares he set up last year to be sold over a three-year period. The move also promises he will remain a force to be reckoned with among shareholders.

Though his honorary position is unpaid, the retiring CEO will continue to draw a salary for the remainder of his five-year contract, which ends Oct. 1, 2006. He earned a salary of $816,000 in 2003 and was scheduled for a raise next year.

At times during Tuesday's conference call, it seemed as if the elder Sykes might be having a tough time letting go after all.

In addition to offering the opening and closing remarks, Sykes twice elaborated on his son's responses to analyst questions. He did, however, say this was his last conference call.

"He is unplugging," spokesman Tucker assured.

Scott Barancik can be reached at 727 893-8751 or barancik@sptimes.com

HORSE TRADER

John Sykes isn't wasting any time enjoying his retirement. According to published reports, the part-time horse breeder has decided to sell I'll Get Along, the dam of 2004 Kentucky Derby and Preakness Stakes winner Smarty Jones, at auction in November. Though the horse would be more valuable had Smarty Jones won the Belmont Stakes, completing a rare Triple Crown, I'll Get Along is still expected to fetch millions of dollars. It doesn't hurt that she's pregnant with a full brother or sister of Smarty Jones, who just retired to stud. Sykes owns Cloverleaf Farms II, outside Ocala.