Handling more than 250 million customer contacts annually, SYKES Enterprises (NSDQ: SYKE) provides outsourced customer service support via telephone, email and web chat for a variety of industries, including hardware and software companies, health care and roadside assistance, and banking and cardholder services. One of the smaller players in the industry, it sports a market capitalization of just under $800 million; what it lacks in weight it more than makes up for in flexibility.

Upon entering the customer support business in 1992, the company focused primarily on servicing the information technology industry. In 2001, the technology sector generated 70 percent of the company’s revenues, and a single client accounted for 17 percent of overall sales. That led to some hard times after the dot com bubble burst, but that lesson precipitated an important strategic shift; in 2008, technology accounted for just 34 percent of revenues and no single client represented more than 7 percent of its business.

That diversification has helped to protect revenues in the current recession; earnings per share came in at $1.48 last year, up from 98 cents in 2007. Over the past three years, revenues have grown more than 18 percent, making it one of the more predictably profitable players in the industry.

SYKES has also worked to develop its international presence, currently serving 18 global markets after a series of strategic international acquisitions over the past 12 years. Last year international clients contributed 57 percent of the company’s revenue, a fairly typical split over the past five years.

The company’s size has also been a major asset. One of its primary business strategies is to establish a relationship with a client by assuming a portion of its internal customer service operations. From there, clients often shift larger loads to SYKES as they realize the cost efficiencies afforded by outsourcing customer service functions.

That wouldn’t be a cost-effective strategy for most of SYKES’ competitors, which usually structure deals for at least 1,000 seats versus the 250 to 400 seats that SYKES typically provides an initial contract. That approach gives SYKES the flexibility to scale into relationships and provide services to smaller companies, exponentially expanding the company’s potential client base.

In anticipation of solid growth, SYKES is adding seat capacity to two of its US service centers, one of the industry’s few operations positioning for growth in coming years.

The company’s balance sheet is also one of the most secure in the industry, with no debt and more than $219 million in cash and equivalents on hand.

Relative to prior years, some weakness in earnings is to be expected in 2009. Although services are provided on a contract basis, SYKES is paid based on the number and duration of contacts.  In a weakened economic environment, contract volumes have declined across the industry, though SYKES’ volumes have proved much more stable given its global client base.

Earnings have also been helped by the company’s two other business lines. In Europe SYKES offers fulfillment services including order and payment processing, inventory control and product delivery through three centers in the region. It also offers technical staffing and outsourced help desk support through two centers here in the US.

Given the scope of its international operations, the company’s earnings are susceptible to currency shifts. But the current environment presents an excellent opportunity to buy into a rapidly growing company on the cheap.

WHY TO BUY

SYKES ENTERPRISES (NSDQ: SYKE, $17.92)
– Companies seeking to cut costs without sacrificing service
– Diversified client base
– Strong balance sheet