Tuesday, August 14, 2007

eTelecare Global (NASDAQ ADS:ETEL): Bounce candidate

Couple of firms comment on eTelecare Global (NASDAQ ADS:ETEL) after the provider of outsourced customer care services surprised the investment community just two days after its earnings call with news that it has lost the Dell consumer technical support program, one of two programs that it provides for Dell.

- JMP Securities reits their Outperform rating saying blamed on Dell's volume cutbacks, the
program was to contribute approximately $32 million of revenue in 2007. Operations managers learned of the development on August 7th and failed to notify the company's CEO until late Friday.

A consumer technical support program for the XPS line was being cancelled due to Dell's reduction to its forecasted volumes. eTelecare commented that Dell said it was entirely volume and demand related and not attributable to any quality issues with eTelecare. The company's other program with Dell is for business client technical support and is in an entirely different corner of Dell. According to JMP the company's CEO was extremely forthcoming about the sequence of events, the consequences, and what actions have been taken to ensure it doesn't happen again.

Firm's price target is reduced from $19 to $16, which corresponds to about 9x Enterprise Value to 2008 EBITDA. The price target reduction not only reflects a 10% lower estimate next year but also multiple contraction more in line with peer group averages as the company's strong growth is likely to be discounted in the wake of an operational and controls mishap.

- Baird also maintains their Outperform rating saying that as majority of the work was US-based, margins for the tech support program were lower than the company's overall corporate margins. Importantly, they note that the reduced guidance does not include any redeployment of reps from this program. Firm is reducing their 2007E EPS to $0.67 from $0.79, and 2008E EPS to $0.75 from $0.96. They assume 2008E revenue of $266 million (+9%); management considers $300 million+ possible.

Barid is reducing their price target to $14 from $19, which reflects 16X prospective 2009 EPS and 8X prospective 2009 EBITDA. They consider the stock good value for higher-risk investors around $11-12 (about 15X 2008E EPS), given expectation of underlying revenue growth (ex-Dell loss) of 15%+ over the next few years.

Notablecalls: Oh man, what a mess. This must have been one of the more ebarrassing conf calls I've heard for quite a while. Yet, as JMP notes the company's CEO was extremely forthcoming in explaining the turn of events, which is good.

Looking at the thing I strongly feel ETEL may be a bounce candidate here. Here are the reasons:

- The offshore Business Process Outsourcing (BPO) industry is growing at an impressive rate and ETEL represents one of the best players out there. ETEL is a niche provider of complex voice-based services via an onshore/offshore delivery model. Most of their call-centers are located in the Philippines with the rest in the US. Business in the Philippines is growing at a healthy 30-40% clip and has better margins than in the US.

- The loss of the Dell program was not due to ETEL's lack of performance but due to Dell's reduction to its forecasted volumes.

- Assuming the stock will open around $11, it's trading around 15x 2008 EPS, which is not much considering the growth and potential. Just take a look at the ratesat which ETEL has been growing at over the past years. Losing the Dell program is a bump in the road, in my opinion.

- There will be new contract wins given its strong pipeline of new clients.

So, at around $11 I find ETEL actionable for a bounce.

Risks include: Upcoming IPO lock-up mid-Sept & expected margin pressure from the reps needed to be redeployed.

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