Do you have an idea of how much of their 2021/22 pipeline they have to win to achieve 2022 Rev/EBITDA target & how that compares to historical win rate? Also, what has been their historical recurring revenue rates? TIA.
Don’t have granular disclosures around pipeline, but if you review the quarterly cadence and mgmt. commentary, hard not to be excited imo. I think the strength you saw in 2Q will be replicated (or even better hopefully!) in 3Q and 4Q
Revenue retention is good - ranges from mid to high 90s% from the disclosure given in the filings.
Sales cycles are 6-9 months so they have good visibility on near term guidance. With respect to margins, they are adding new multi sector business at 18-20% margins, transitioning existing agent based (low margin) to performance based contracts (high margin) and dropping TEF biz at 2-3%/year which is 30% of revenue and has only 9-10% margins.
I find it really hard to model margins not lifting Yoy with every quarter they report while absorbing costs from implementing the turnaround.
1) Who are the natural strategic acquirers for this asset? Doesn't Bain's decision to borrow against their shares in 2014 imply a dearth of good exit options? A clean sale would have been preferable, no? (I understand this may be a very different company now, just trying to understand how a sale process might go.)
2) Any chance of a take-under or de-listing? I was involved in one company where Elliott held an PIK preferred stock, they then converted it to equity via a rights offering, got 90% of the equity and then de-listed the company. I recognize these guys probably want an exit, but to what extent would going dark help them?
Replied too quick. I’m not sure about Bain angle… I could try to reach out but I’d doubt they be willing to go open kimono given it’s a sore spot as a bad investment. I guess they just thought the div recap was a good trade to get their basis out while retaining upside
I think a chance of take-under would be extremely low, esp. at current prices. I doubt HPS/GIC/Farallon would be willing to leave that much money on the table, when there is a strong mgmt. team executing. It seems way too desperate and they are deep pocketed, highly sophisticated firms. Not to mention the headache from minority holders litigating, seeking appraisal rights, etc.
It is increasingly becoming a competitive advantage to have global coverage/footprint for CRM/BPO operators. ATTO would be a great addition for many of the public players. Many investors consider Concentrix as the most obvious acquiror given their public commentary about wanting to invest in EM regions and doing strategic acquisitions.
Also, there are several potential PE buyers who have a CRM biz in their portfolio which could be merged with ATTO. Those are the most obvious buyers in my mind. Pure financial buyers would be interested too, but their ability to pay a high price will be limited as they won’t be able to underwrite cost synergies
I'm no expert but...they appear to have a lot of debt denominated in $$, while their revenue is in EM currencies. Pretty big risk, or quite costly if they hedge it. What gets you comfortable?
Need to recheck notes but they got a lot of the coupon payments hedged. FX is a serious risk but it cuts both ways - think of the upside if EM currencies rally.
Having said that you can hedge yourself - short EM vs USD in your brokerage account to offset this risk, and it is something I have considered doing (but have not done as of today)
Plum is correct that coupons are hedged and so is a decent amount of the principal on the USD debt. Plus hard currency EBITDA is growing quickly as the US business expands.
Great post. I used to work for IBM sales. I covered one of the big 4 banks, the global one:) IBM has since divested a lot of their BPO business. All I can add is that the margins in this business are razor thin and its cut throat. It's definitely not easy to just swap BPO providers in and out, but nonetheless, these contracts keep getting re-negotiated lower and lower as competitors under cut one another. It's brutal.
IBM sold their BPO business to CNXC in 2014. In fact, Bill Payne, ATTO’s Chairman (since March) ran the process for IBM and worked for CNXC for a year.
I think your views on BPO are fresh in many value investors minds and based on the last cycle when the industry was much more commodified. The addition of technology is expanding revenues and margins pretty quickly. Just look at the growth in revenues and margins for CNXC, TTEC, TASK, TIXT etc… which demonstrate a very different environment vs what you experienced.
Great post, thank you for sharing and really appreciate all the in-depth work here. Looks like a really interesting situation with multiple ways to win here. A couple of quick questions / comments:
1) What's driving the wide margin ranges between comps? Could be reporting (e.g. EBITDA vs. EBITDAR), but want to ultimately understand if there are any structural differences / service mix.
2) Customer concentration here is a real risk - despite the 106 individual contracts. Unless the customer is truly run on a business unit level basis (e.g. pharma companies with brand managers for specific drugs), it's likely a corporate-wide decision. Let me know if there's anything else that got you comfortable with that risk.
3) The take-out thesis is a big part of the overall thesis - is there anything incremental that makes you think it's likely (e.g. specific acquirers, why now?, etc.). Normally I would view high insider ownership by private guys as an overhang given the supply dynamics when they register for secondaries. A sale would solve this, but would need to feel strongly that it's the ultimate outcome. Otherwise once the stock runs, it'll get sold off.
1) margin differential is that Atento is simply a worse company with an inefficient cost structure (for now) but they are rapidly closing the gap by executing. I think this could be a 16-17% EBITDA margin company by 2023/2024, and mgmt. has identified many revenue/cost opportunities to get there, imo.
2) This was a carve-out from Telefonica at the beginning. They are so entrenched that a wholesale replacement is almost impossible. The switching costs and the headache will simply be too much for Telefonica. Also, ATTO is trying to slowly decrease customer concentration by focusing on other higher margin customers and growing that book of business. They did a good job so far, and every year the concentration is dropping rapidly.
3) Secondary is definitely possible but these are pretty sophisticated holders and they are unlikely to do that unless the stock really rallies to a healthy level (and we can make a lot of money until then!). Remember their fully PIK'ed cost basis is over $55 now... doing a secondary at a lower price crystalizes a bad outcome for them, when a clean sale is so much easier for them conceptually, with a full return and hopefully with some gravy as well, if the premium is high enough.
Makes sense. On another note (I'm totally being lazy here), but have you backed into the implied price per share for the PIK consortium at cost? Figured it's not as simple as reversing current equity value at ~13/14% given a partial realization historically.
My quick math gets me to a ~$200mm investment at cost in 2014 or breakeven at ~$21/share or ~$34/share based on an 8% IRR (hurdle).
Focusing on downside here, but I'd make the case that when they underwrote the deal, they were targeting a ~15% all-in IRR (PIK + OID, etc.) in a "best case" credit scenario. Their investment has obviously gone south and underperformed - I would think they'd be more than glad to make some money. When I was on the PE side, we'd be totally okay moving on from a bad investment (didn't happen a lot) at above cost vs. getting it back to base case given (i) absolute brain damage, (ii) resource constraints, (iii) rather focus on bigger $ investments in bigger fund (vintage).
Long winded answer, but I guess my point is they may be okay with an outcome in the $21 / $34 / $50 range (if my quick math is right). Either way, these are good risk / reward outcomes.
I hear you and it’s a fair rebuttal but my feelings is that this company will generate a lot of strategic interest once it’s on the block. And I think the big 3 are pretty excited about the underlying progress so they likely won’t fire sale this to get a mediocre outcome
I haven’t done the full math as you envisioned. All the facts are known so I think you can certainly back into it but I’d need a drink or two first before I attempt it haha. Get your interns and first year analysts on it and let me know? ;)
I don’t think it’s fair to claim “their investment has obviously gone south and underperformed” although I’m guessing the Big 3 would agree with you.
I think the intrinsic value of their stake has always been above the value of the PIK note but the market price was well below for plenty of good and some not so good reasons. With the turnaround well under way, there are almost no good reasons left for the huge valuation discount, in my view.
Any update on this?
Do you have an idea of how much of their 2021/22 pipeline they have to win to achieve 2022 Rev/EBITDA target & how that compares to historical win rate? Also, what has been their historical recurring revenue rates? TIA.
Don’t have granular disclosures around pipeline, but if you review the quarterly cadence and mgmt. commentary, hard not to be excited imo. I think the strength you saw in 2Q will be replicated (or even better hopefully!) in 3Q and 4Q
Revenue retention is good - ranges from mid to high 90s% from the disclosure given in the filings.
Sales cycles are 6-9 months so they have good visibility on near term guidance. With respect to margins, they are adding new multi sector business at 18-20% margins, transitioning existing agent based (low margin) to performance based contracts (high margin) and dropping TEF biz at 2-3%/year which is 30% of revenue and has only 9-10% margins.
I find it really hard to model margins not lifting Yoy with every quarter they report while absorbing costs from implementing the turnaround.
Interesting post. Thanks.
Two questions:
1) Who are the natural strategic acquirers for this asset? Doesn't Bain's decision to borrow against their shares in 2014 imply a dearth of good exit options? A clean sale would have been preferable, no? (I understand this may be a very different company now, just trying to understand how a sale process might go.)
2) Any chance of a take-under or de-listing? I was involved in one company where Elliott held an PIK preferred stock, they then converted it to equity via a rights offering, got 90% of the equity and then de-listed the company. I recognize these guys probably want an exit, but to what extent would going dark help them?
Thanks!
Replied too quick. I’m not sure about Bain angle… I could try to reach out but I’d doubt they be willing to go open kimono given it’s a sore spot as a bad investment. I guess they just thought the div recap was a good trade to get their basis out while retaining upside
I think a chance of take-under would be extremely low, esp. at current prices. I doubt HPS/GIC/Farallon would be willing to leave that much money on the table, when there is a strong mgmt. team executing. It seems way too desperate and they are deep pocketed, highly sophisticated firms. Not to mention the headache from minority holders litigating, seeking appraisal rights, etc.
It is increasingly becoming a competitive advantage to have global coverage/footprint for CRM/BPO operators. ATTO would be a great addition for many of the public players. Many investors consider Concentrix as the most obvious acquiror given their public commentary about wanting to invest in EM regions and doing strategic acquisitions.
Also, there are several potential PE buyers who have a CRM biz in their portfolio which could be merged with ATTO. Those are the most obvious buyers in my mind. Pure financial buyers would be interested too, but their ability to pay a high price will be limited as they won’t be able to underwrite cost synergies
I'm no expert but...they appear to have a lot of debt denominated in $$, while their revenue is in EM currencies. Pretty big risk, or quite costly if they hedge it. What gets you comfortable?
Need to recheck notes but they got a lot of the coupon payments hedged. FX is a serious risk but it cuts both ways - think of the upside if EM currencies rally.
Having said that you can hedge yourself - short EM vs USD in your brokerage account to offset this risk, and it is something I have considered doing (but have not done as of today)
Plum is correct that coupons are hedged and so is a decent amount of the principal on the USD debt. Plus hard currency EBITDA is growing quickly as the US business expands.
Great post. I used to work for IBM sales. I covered one of the big 4 banks, the global one:) IBM has since divested a lot of their BPO business. All I can add is that the margins in this business are razor thin and its cut throat. It's definitely not easy to just swap BPO providers in and out, but nonetheless, these contracts keep getting re-negotiated lower and lower as competitors under cut one another. It's brutal.
IBM sold their BPO business to CNXC in 2014. In fact, Bill Payne, ATTO’s Chairman (since March) ran the process for IBM and worked for CNXC for a year.
I think your views on BPO are fresh in many value investors minds and based on the last cycle when the industry was much more commodified. The addition of technology is expanding revenues and margins pretty quickly. Just look at the growth in revenues and margins for CNXC, TTEC, TASK, TIXT etc… which demonstrate a very different environment vs what you experienced.
Great post, thank you for sharing and really appreciate all the in-depth work here. Looks like a really interesting situation with multiple ways to win here. A couple of quick questions / comments:
1) What's driving the wide margin ranges between comps? Could be reporting (e.g. EBITDA vs. EBITDAR), but want to ultimately understand if there are any structural differences / service mix.
2) Customer concentration here is a real risk - despite the 106 individual contracts. Unless the customer is truly run on a business unit level basis (e.g. pharma companies with brand managers for specific drugs), it's likely a corporate-wide decision. Let me know if there's anything else that got you comfortable with that risk.
3) The take-out thesis is a big part of the overall thesis - is there anything incremental that makes you think it's likely (e.g. specific acquirers, why now?, etc.). Normally I would view high insider ownership by private guys as an overhang given the supply dynamics when they register for secondaries. A sale would solve this, but would need to feel strongly that it's the ultimate outcome. Otherwise once the stock runs, it'll get sold off.
Thanks for sharing the thorough work!
Thanks for the thoughtful comment, ArbSensi.
1) margin differential is that Atento is simply a worse company with an inefficient cost structure (for now) but they are rapidly closing the gap by executing. I think this could be a 16-17% EBITDA margin company by 2023/2024, and mgmt. has identified many revenue/cost opportunities to get there, imo.
2) This was a carve-out from Telefonica at the beginning. They are so entrenched that a wholesale replacement is almost impossible. The switching costs and the headache will simply be too much for Telefonica. Also, ATTO is trying to slowly decrease customer concentration by focusing on other higher margin customers and growing that book of business. They did a good job so far, and every year the concentration is dropping rapidly.
3) Secondary is definitely possible but these are pretty sophisticated holders and they are unlikely to do that unless the stock really rallies to a healthy level (and we can make a lot of money until then!). Remember their fully PIK'ed cost basis is over $55 now... doing a secondary at a lower price crystalizes a bad outcome for them, when a clean sale is so much easier for them conceptually, with a full return and hopefully with some gravy as well, if the premium is high enough.
Makes sense. On another note (I'm totally being lazy here), but have you backed into the implied price per share for the PIK consortium at cost? Figured it's not as simple as reversing current equity value at ~13/14% given a partial realization historically.
My quick math gets me to a ~$200mm investment at cost in 2014 or breakeven at ~$21/share or ~$34/share based on an 8% IRR (hurdle).
Focusing on downside here, but I'd make the case that when they underwrote the deal, they were targeting a ~15% all-in IRR (PIK + OID, etc.) in a "best case" credit scenario. Their investment has obviously gone south and underperformed - I would think they'd be more than glad to make some money. When I was on the PE side, we'd be totally okay moving on from a bad investment (didn't happen a lot) at above cost vs. getting it back to base case given (i) absolute brain damage, (ii) resource constraints, (iii) rather focus on bigger $ investments in bigger fund (vintage).
Long winded answer, but I guess my point is they may be okay with an outcome in the $21 / $34 / $50 range (if my quick math is right). Either way, these are good risk / reward outcomes.
I hear you and it’s a fair rebuttal but my feelings is that this company will generate a lot of strategic interest once it’s on the block. And I think the big 3 are pretty excited about the underlying progress so they likely won’t fire sale this to get a mediocre outcome
I haven’t done the full math as you envisioned. All the facts are known so I think you can certainly back into it but I’d need a drink or two first before I attempt it haha. Get your interns and first year analysts on it and let me know? ;)
I don’t think it’s fair to claim “their investment has obviously gone south and underperformed” although I’m guessing the Big 3 would agree with you.
I think the intrinsic value of their stake has always been above the value of the PIK note but the market price was well below for plenty of good and some not so good reasons. With the turnaround well under way, there are almost no good reasons left for the huge valuation discount, in my view.