Growth in the English-speaking market & Asia-Pacific SBU was led by new contracts in North America, and China where Teleperformance has won business to support multi-nationals’ expansion in China, also domestic and locally based foreign government agencies in China. Teleperformance has been rapidly expanding operations in China, including through its acquisition of TLS Contact in January last year.

Ibero-LATAM was hard hit by negative exchange rates, turning moderate constant currency growth to a 6.4% negative growth as reported. The Brazilian real lost 20% of its value against the Euro while the Argentine Peso lost a staggering 40% compared with Q1 2013. Colombia, Mexico and Portugal reported the highest growth while the Brazilian business continues to experience reducing volumes, a reflection of Brazil’s economically challenging periods in Q1 and Q3 last year. Brazil is an important market to Teleperformance: all the delivery is domestic, and it has ~13,000 agents in the country, its fourth largest country operation, with nearly 10% of the global agent headcount.  The Brazilian economy is once again growing relatively strongly this year, 0.7% in Q1 2014 and expected growth of 1.62% in Q2 2014. However, much of this growth is due to the temporary GDP injection from the football World Cup starting in June; whether this will transfer into growth in the domestic CMS BPO market, other than temporary contract expansions during the tournament, remains to be seen.

Within the Continental Europe & MEA SBU, there is a return to growth in several Continental European countries including Italy, and three countries - the Netherlands, Greece and Turkey - which have benefited from a refresh of the sales force. The telecoms vertical in France continues to be a challenging market.

Teleperformance has reiterated its desire to acquire during 2014. It is looking to enhance its higher margin capabilities in developed regions such as the U.K. and U.S, probably including capabilities in automated services and e-commerce, with a possible foray into the paid-for tech support market.

Teleperformance’s 2014 EBIT guidance of between 9.5% and 9.7% is a major improvement from the 8.1% margin achieved in 2013. The firm is looking to exit some unprofitable contracts and focus on higher margin activities although recent contract activity does not indicate a big take up by clients as yet. Acquisitions undertaken from this point on in the year would be highly unlikely to dramatically shift margins in the time available. Topline like-for-like guidance for 2014 is more conservative then the company’s margin aspirations with growth of between 5% and 7% expected for the full year; this is a softening of what the company has achieved since Q1 2012 and indicates a shift towards margin expansions over out and out topline growth. 

• Revenue £4,288.1m up +5.6%, up +6.7% at constant currency (CC)
• Operating profit was £143.8m, a margin of 3.4%, down 330 bps

The decline in profits was anticipated with a warning given by the company to this effect only a few weeks ago. In this period, Serco reported a net exceptional charge of £90.5m, reflecting principally the Electronic Monitoring settlement and one-off costs, together with an estimated £21.0m of other indirect costs in relation to the UK Government reviews.

As forecast by the company in its H1 announcements, growth slowed down, in H2 2013. In fact it halved.

Contract wins in H2 2013 included an ITO contract extension for the EU and an FM contract with the Canadian defense. But BPO contract wins completely dried up in H2 2013. This perhaps reflects the problems of Serco’s Global Services division which was most impacted by the electronic monitoring debacle, reporting -350bps decline in operating margin.

Serco admits that clients did not want to talk to it until the issues had been resolved. New contracts have started to come in once again (such as the Lincolnshire Council contract) since Serco settled the matter with the U.K. government.

Apart from the MoJ expenses, divisional margin came under pressure from upfront expenditure on existing contracts. These included:

• A ~£15m working capital investment in transformation for Shop Direct in 2013 and further anticipated but smaller outflow in 2014. Returns are expected to begin from the contract in year 3 (FY15).
• Suffolk Community Healthcare redundancy cash costs of c£5m; no effect expected in 2014.  

It has not been an easy year for Serco in some of its international businesses either. In Australia, a change of government and policy has resulted in revenue attrition in its contract with the Department of Immigration and Citizenship for which Serco runs a number of detention centers.

In America, the outlook remains uncertain due to Federal funding challenges around programmes and contracts, but Serco has won a number of new contracts in the region, including the $1.25bn 5-year federal Eligibility Support (ES) contract by the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (CMS) but this is likely to be at relatively low margin.

Serco has done well to achieve topline growth despite its annus horribilis. 2014 will be a year of repair and rebuild for Serco. The new CEO, Rupert Soames, and a number of new non-executive board appointees, are likely to go to start with a major review of the business. Serco's strategy of diversification should help with this activity, providing it with a broad set of options for rebuilding the business.

Serco has updated its guidance for 2013 and 2014 following its clearance by the U.K. government to bid for new contracts.  Serco expects a mid-single digit percentage organic decline on 2013 revenue due to:

• Lower levels of incremental work won across the group to date
• Attrition from contracts lost such as electronic monitoring
• Volume reductions in its Australian immigration detention services contract
• Assumptions as to the extent to which it will be successful in securing further rebids and extensions as well as new bid opportunities during the year
• Adverse currency movements in 2013.  The impact of this has reduced revenues in 2013 by ~£50m and profits by £8m.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2013 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal programme.

Serco's ongoing portfolio management resulted in further non-core disposals in 2013. These businesses contributed £43m of revenue and £7m of profit up to the point of disposal last year and will not contribute to revenue and profits in 2014.

In 2014, Serco expects:

• Continuing additional costs of £10m a year related to the corporate renewal programme within its adjusted operating profit
• One-off costs incurred in 2014 of ~ £15m for external advisers and other directly-related costs of programme implementation, including initial training and systems set-up
• A further restructuring charge estimated at £10-£15m will be incurred in 2014 to implement reductions in headcount and related costs.

Market consensus for 2014 Adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

The profit warning came on the same day that Serco announced clearance by the U.K. government to bid for new contracts. Serco announced that it expects a mid-single digit percentage organic decline on 2013 revenue due to a number of factros including:

•     Lower levels of incremental work won across the group to date
•     Attrition from contracts lost such as electronic monitoring
•     Volume reductions in its Australian immigration detention services contract.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2012 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal program.

In 2014, Serco expects continuing additional costs of  up to £40m related to the corporate renewal programme, external advisers and further restructuring.

Market consensus for 2014 adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

Serco's financial woes have been compounded by a change of Government in Australia, its second largest market. Tony Abbott, the new prime minister, has pledged to stop the flow of boat people into the country by shifting the work to overseas centers. This has resulted in a decline in volumes in the detention centers that Serco manages under contract for the Department of Immigration and Citizenship.

On another front, in January, Serco's health provision in Suffolk was criticized after a four-month NHS review found services were being provided safely but improvements were needed. The areas for improvement were reported to include staff morale, recruitment and retention, communication with GPs and commissioners, equipment stores and procedures at the Ipswich care co-ordination centre.

Serco has been implementing a major corporate renewal plan as part of its negotiations with the Cabinet Office. As well as extensive management changes, and a renewed and refreshed code of conduct and governance, Serco has committed to creating a  separate division for its U.K. Central Government work to increase focus and openness for Government as a collective customer.

Other key measures include:

• Enhancing transparency and access, with reporting of operational and financial contract KPIs, and greater engagement of customers at contract and departmental level.
• Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of its whistle-blowing process to the highest international standards
• Measuring the progress of attitudinal change throughout the organization with ongoing independent culture and ethics reviews.

Much of the growth from this region is fuelled by demand from the domestic Brazilian market, as well as the continued high uptake of near shore support to the U.S. from the likes of Argentina, Mexico, Colombia and to a lesser degree Peru. Currently there is a degree of domestic support from Latin American countries outside Brazil although this is vastly overshadowed by support to the U.S. Teleperformance alone has opened six centers in Latin America during 2013, expanding current capabilities in Brazil, Colombia (2), Mexico and the Dominican Republic. Other major players such as Transcom, Atento and Convergys have also opened new centers in the region over in 2013.

How does support to the U.S. from Latin America differ from offshore U.S. support from the Philippines? The Latin American market is unable to compete with the Philippines for price but where Latin America does come up trumps is in Hispanic support, the ease of management of the region, due to close time zone matching and shorter flights, and the ability of agents to engage in a non-scripted environment.

The vast majority of support to the U.S. from Latin America is for customer care services distantly followed by sales and then lastly technical support.

Recent contract activity has highlighted the push for higher complexity, multi-channel contracts in support of the domestic Brazilian market and the near shore Hispanic U.S. market. In addition to the opening of further centers in the region, Teleperformance has established a social media center in Brazil. Aegis is another vendor with established social media presence in Latin America; although current uptake of social media outsourcing in the domestic Latin American is limited, NelsonHall does expect growth in this sector approaching that of EMEA and North America.

Most nearshoring to the U.S. market has been in support of the telecoms sector, Teleperformance has invested $22m in the construction of the two centers in Colombia. These centers are providing multi-channel customer management services to a large U.S. telco.

According to NelsonHall’s recent CMS market analysis, the top three major players in the Latin American CMS BPO sector, and market share are Atento (24%) then Teleperformance (11%), distantly followed by Teletech (2%).

Atento continues to be the dominant player in Latin America with a 40% market share in Brazil. Atento currently employs ~126,000 agents across Latin America with ~84,000 of these providing domestic support to the Brazilian market. Atento is currently providing a small degree of offshore support to Brazil out of Portugal representing a clear divergence from the standard flow of services between the two nations.

Teleperformance’s continued investment in the region is indicative of what can be expected in terms of growth and level of service delivery from Latin America. Investments have focused on the development of higher-end support capabilities such as social media, multi-channel interaction as well as R&D facilities.

As the region continues to mature, nearshored support to the U.S. and domestic support in Brazil will begin to replicate that of Europe with the emphasis placed on higher end delivery models increasingly driven by the need for improved customer experience as opposed to just cost reduction. The domestic market in the region outside of Brazil will continue to be driven by more commodity based services in the near term.

With Brazil’s growing population (currently ~199m) and increasing purchasing power (GNI per capita grew by 8.7% between 2011 and 2012) the domestic Brazilian CMS BPO market should continue to grow at a faster rate than the rest of Latin America.