Sykes tumbles despite sale, forecast

Analysts, mostly pleased by the Tampa company's moves, discover anticipated earnings this year may fall well below earlier estimates.

By SCOTT BARANCIK

© St. Petersburg Times, published June 14, 2000

TAMPA -- Sykes Enterprises Inc. said Tuesday it is selling its employee-benefits arm for a hefty profit, but the Tampa company's battered stock was hit hard again when investors did some math and realized its earnings may fall well below analysts' estimates.

In a deal expected to close by June 30, Sykes will sell its SHPS Inc. subsidiary to investment firm Welsh, Carson, Anderson and Stowe of New York for $165.5-million in cash. Sykes, which provides customer support for computer hardware and software companies, will keep a 6.5 percent stake in Louisville, Ky.-based SHPS. The deal was long in coming for Sykes, which will use part of the proceeds to write down virtually all of its debt.

In a morning conference call with Wall Street analysts, chairman and chief executive John H. Sykes delivered a list of new initiatives he portrayed as good news: The company is building three new customer-support centers, including two in the Florida towns of Marianna and Palatka, and expanding two existing ones. It is calling for cutbacks in overhead -- but no job cuts -- at its corporate headquarters in Tampa. And it is consolidating and streamlining its order-fulfillment and information-technology staffing operations.

"It's good to have a projected earnings per share of $2.23 for the year 2000," he said. "It's good to be out of debt. It's good to have a nice bundle of cash in today's market. It's great to see our company continuing to grow."

But investors looked at the bottom line and grimaced.

They figured out that Sykes' revised earnings-per-share estimate of $2.23 for this year whittled down to only 90 cents for continuing operations after onetime revenues and expenses. That's 20 cents less per share than the $1.10 prediction Sykes made in February and 12 cents less than the consensus estimate of Wall Street analysts. And it follows several difficult quarters for the firm.

In heavy trading, Sykes closed at $16.63, down $3.75, or 18.4 percent. Nearly two-thirds of the decline occurred during the first hour of trading, shortly after the company issued a press release trumpeting its sale of SHPS Inc. The stock has traded as high as $52.25 and as low as $13.38 during the past year.

Immediately after the conference call, Prudential Securities analyst Kevin J. Dyches reduced his own 2000 earnings-per-share estimate for Sykes from $1.03 to 88 cents. Perhaps more telling, he lowered his 2001 estimate from $1.35 to $1.13.

"We've gotten dinged in the market, and I can't explain it," David L. Grimes, Sykes' president and chief operating officer, said later in the day.

In an interview, chief financial officer Mike Kipphut said about 4 cents of the per-share reduction in expected earnings was the result of devaluation of the euro since February, and about 12 cents was due to revenue SHPS would have otherwise earned for Sykes. Only 7 cents was due to reduced expectations for existing operations. (The company also regained some interest payments on debt it is now erasing.)

Sykes alienated investors earlier this year when its fourth-quarter earnings came in well below analysts' estimates, causing the stock to plunge more than 50 percent in one day. The stock fell further when the company was compelled to restate its second- and third-quarter results. Sykes' first-quarter earnings this year actually exceeded Wall Street's expectations.

On balance, analysts said, Tuesday's news from Sykes was mostly positive.

Dyches of Prudential Securities called Sykes' return on its 2 1/2-year SHPS investment "huge" and disagreed with the market's reaction to its stock. "It's not an expensive stock if they hit these earnings," he said.

Fran Blechman Bernstein, an analyst with Merrill Lynch Global Securities, said she would continue to recommend that investors accumulate Sykes stock for the medium term and buy for the long term. "They can refocus on their core businesses now that SHPS is gone," she said. "And having no debt and some cash is always in a good position to be."

Sykes co-founded the Sykes HealthPlan Services Corp., or SHPS, in late 1997 with Tampa-based HealthPlan Services Corp. Their goal was to merge Sykes' expertise in telephone-based technical support with HealthPlan's experience administering employee benefits such as health insurance and pensions. Both plunked down an initial $17-million in the 50-50 venture.

Within months, SHPS acquired three companies and began prepping for an IPO. But plans to take the company public fell through when the stock market tanked. After HealthPlan began to complain about financial problems, Sykes bought out its share for $30.6-million.

SHPS continued to earn modest profits. But Sykes soon decided the margins weren't high enough. It began shopping the company around.

Included in the $165.5-million sale price for SHPS is $7.5-million in stock options paid out to its management team, which remains intact, and $47-million to pay off debt that Sykes incurred to grow SHPS.

As part of the deal, SHPS president and chief executive David E. Garner will acquire a nearly 3 percent interest in the company, whose customers include AT&T, IBM, Coca-Cola Co. and Bank of America. He said it will be a relief to run a privately held company and not have to worry about investor reaction to quarterly earnings projections.

"It's a big load off our minds," he said.

© St. Petersburg Times. All rights reserved.