U.S. Markets close in 6 hrs 9 mins

Edited Transcript of SRT earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Startek Inc Earnings Call

DENVER May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Wednesday, May 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lance E. Rosenzweig

StarTek, Inc. - President, Global CEO & Director

* Ramesh Kamath

StarTek, Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Omar Samalot

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Startek's financial results for the quarter ended March 31, 2019.

Joining us today is Startek's President and Global CEO Lance Rosenzweig, and the company's CFO Ramesh Kamath. Following their remarks, we will open the call for your questions.

Before we continue, we would like to remind all participants that the discussion today may contain certain statements, which are forward-looking in nature pursuant to the safe harbor provisions of the federal security laws. These statements are subject to various risks and uncertainties and actual results may differ materially from these projections. Startek advises all those listening to this call to review the latest 10-Q and 10-K posted on their website for a summary of these risks and uncertainties. Startek does not undertake the responsibility to update these projections.

Further, the discussion today may include some non-GAAP measures. In accordance with Regulation G, the company has reconciled these amounts back to the closest GAAP-based measurements. The reconciliations can be found in the earnings release on the Investors section of their website.

I would now like to remind everyone that the webcast replay of today's call will be available via the Investors section of the company's website at www.startek.com.

Now I would like to turn the call over to Startek's President and Global CEO Lance Rosenzweig. Sir, please proceed.

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Amanda. Good afternoon, everyone, and thank you all for joining the Startek 2019 First Quarter Earnings Call. 2019 is off to a strong start for Startek as the momentum from last year has carried into the first quarter. In our industry, it is common to see the first and second quarters take a step back from Q4 seasonal highs. However, we were able to grow revenue sequentially despite this typical seasonality due to the continued ramp of client programs across multiple geographies.

Our global telecom vertical has stabilized in the U.S., and we are continuing to experience outsized growth in our non-telecom verticals, such as technology, next-gen retail, financial services, health care and travel. For perspective, our non-telecom verticals accounted for 51% of total revenue in 2018 and grew to 59% of revenue in the first quarter of 2019.

As we continue to meet client demand and optimize capacity utilization globally, we are making 3 important changes in Startek's global footprint. First, we are building out a new campus in Jamaica that will double our capacity in that country. We expect this site to go live in the second half of this year.

Second, to optimize our capacity utilization in Argentina. In March, we made the decision to close our Bahía Blanca facility and reallocate resources to our more profitable campuses in Argentina.

And third, we are adding a second location to our campus in Sri Lanka. We employ over 1,000 people in Sri Lanka, and we are incredibly grateful that none of our people or their families were injured in the horrific bombings that hit this beautiful country. We are extremely proud of our Sri Lankan team and our local clients who managed the crisis there extraordinarily well. We are thrilled to announce that we're proceeding full speed ahead with our plans for our second location there, which we expect to be fully operational this quarter.

During the first quarter, Startek generated a strong sequential improvement in gross margin, reinforced by our new client-centric management model and continued focus on serving high-growth verticals. We have now consistently increased gross margin on a sequential basis every quarter since the business combination, reflecting our continuous commitment to being a premium provider in our industry.

As we've stated in the past, Startek is keenly focused on providing high-value, technology-driven solutions for our clients that go beyond typical call center support. This was further reflected last month when we received multiple accolades for our digital transformation efforts and CX management.

In early April, Startek received the Top 50 Digital Edge Award from CIO Executive Council and IDG for our innovative proprietary IT helpdesk chatbot. And shortly thereafter, we were named to the 2019 Best of the Global Outsourcing 100 list by IAOP for our performance across several categories, including leadership and top innovation. Receiving these awards and being recognized as a leader in digital transformation is a major accomplishment for our team and further solidifies our position as an industry-leading CX services provider.

I would now like to turn the call over to our CFO Ramesh Kamath to take you through Startek's financial results. Ramesh?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Lance, and good afternoon, everyone. The quarterly results we are reporting today includes Startek and Aegis financials from 1st January to March 31, 2019. Due to certain limitations in regards to publicly available financial information, we are unable to provide the combined company financials for the year ago period. As a result, we will not discuss year-on-year comparisons, as we would be comparing the financials of 2 companies against 1. Instead, we believe it would be more effective to highlight the quarter-over-quarter results with qualitative commentary about the general trends and drivers for each major item.

As noted in our press release today, the comparative results for the quarter ended December 31, 2018, included both Startek and Aegis result. Having said that, total revenue for the quarter increased 2% to $161.1 million compared to $158.6 million in the quarter ending December 31, 2018.

The sequential growth was primarily driven by the continued ramp of both new and existing client programs across multiple geographies. This was impressive as quarter 1 typically takes a step back from quarter 4 due to seasonality, but the fact we are still able to generate top line growth speaks to the momentum in our business and the benefit of our expanded footprint as we continue to ramp programs with both new and existing clients across the globe. This has been further aided by our mantra of serving local clients in local geographies, which has created a truly diversified revenue stream.

Gross profit for the quarter increased 9% to $27.2 million compared to $25.1 million, with a gross margin percentage of 16.9% compared to 15.8% in the quarter ending December 31, 2018. Margins have once again improved sequentially, primarily due to the rollout of our new client-centric management model and the continued focus on serving high-growth verticals, such as technology, financial services, next-gen retail, health care and travel.

SG&A for the quarter was $24.1 million compared to $21.9 million in the quarter ending December 31, 2018. As a percentage of revenue, SG&A was 14.9% compared to 13.8% with the increase driven by investments and sales, technology and additional rent costs as we are in the process of building our new facilities in Jamaica and Sri Lanka.

Net loss for the quarter was $3.3 million or a negative $0.09 per share compared to a loss of $9.7 million that is a negative $0.26 per share in the quarter ending December 31, 2018. Although this loss is lower than the previous quarter, it is higher than what we would expect on a normalized basis as we continue to incur restructuring and merger-related costs from the business combination.

Adjusted EBITDA for the quarter was $10.9 million compared to $11.4 million in the quarter ending December 31, 2018. As a percentage of revenue, adjusted EBITDA was 6.7% compared to 7.2% in the quarter before.

This concludes my prepared remarks. I'll now turn the call over back to Lance. Lance?

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [4]

--------------------------------------------------------------------------------

Thank you, Ramesh. As we look ahead, Startek will continue to focus on delivering best-in-class omni-channel solutions and implementing transformative technologies to help our clients better engage with their customers. We will also continue to reinvest in our business from a sales, marketing and technology perspective to bolster our growing pipeline, ensure we are continuously driving innovation to better serve our clients.

With strong momentum at our back, we remain committed to delivering revenue growth and margin expansion in 2019.

Operator, Ramesh and I will now open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of David Koning of Baird.

--------------------------------------------------------------------------------

David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [2]

--------------------------------------------------------------------------------

Congrats on the momentum.

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, David.

--------------------------------------------------------------------------------

David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [4]

--------------------------------------------------------------------------------

Yes. I guess, I was wondering I know last quarter, and you kind of mentioned it this quarter too that typically, you would expect a decline sequentially in Q1 and Q2 but just with the new signings and everything, it's helping out. And I guess, I'm just wondering, you kind expect to buck that trend again in Q2? And maybe, I don't know, if you can talk a little about maybe Amazon is driving it? Or if you have a couple of client examples that are kind of healthy right now?

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [5]

--------------------------------------------------------------------------------

Sure, yes. Thank you, David. What I would say is that our growth in Q1 was very broad based. It was broad based across our client base and across our geographies. Typically, the seasonality is affected in our retail vertical. And we're fortunate that despite that seasonal decline or the seasonal peak in Q4, our retail vertical is continuing to grow for us, and it's also being benefited by our growth across the globe. We also are growing our non-retail verticals -- sorry, our non-telecom verticals more rapidly, which again is helping to smooth out what one would expect to see in terms of seasonality. We are not giving forward-looking guidance in terms of Q2. And in Q2, you would see kind of an industry expectation of slower revenues. But again, Startek is performing nicely and consistently on a global basis.

--------------------------------------------------------------------------------

David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. Great. Thank you. And then I guess, the second thing is, I think, last quarter you mentioned something about the synergies. I know you originally gave kind of a $30 million, if I remember right, $30 million long-term target that you might have went through $16 million-or-so of annualized synergies. Do you have any update on that through Q1?

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [7]

--------------------------------------------------------------------------------

Yes. Our progress towards synergies is proceeding very nicely. And we're very happy both on the cost as well as revenue side of the synergy equation on our progress. We have made the internal decision to not kind of categorize it and quantify it on a quarterly basis going forward because as time goes by, it becomes more difficult to put a, for example, a new client win, whether it's a synergy box or a non-synergy box. But what I would say, and Ramesh, you could feel free to comment as well, is that on both fronts we are performing along or ahead of our origination expectations.

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [8]

--------------------------------------------------------------------------------

Lance, I agree with you that we are moving much better than what we expected. David, if you remember, we did a cost savings of almost $16 million plus till last quarter. There are couple of initiatives from last quarter which are continuing now. Beyond that, internally, we kept saying that we should not be classifying any such further initiatives only as a part of synergy because we're going to keep doing this all the while. So our focus is on the revenue synergy. And as Lance mentioned, sometimes, it gets a little difficult -- a little tempting to put everything under the synergy bucket just to show that we've done $30 million. But having said that, even on a conservative basis, when we looked at it, I think to use Lance's word, we are proceeding quite nicely. And we are -- I think, we'll meet on our targets.

--------------------------------------------------------------------------------

David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [9]

--------------------------------------------------------------------------------

Okay. Great. And my last question just on kind of cash flow and interest expense. It looked like Q1 cash flow was mildly negative. I think that's pretty normal in the industry in Q1. Do you expect cash flow for the rest of the year to be positive? And is the $4.8 million or so of interest expense, is that a pretty normalized number? Now was there anything in there that would have hurt you a lot kind of as we go forward?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [10]

--------------------------------------------------------------------------------

It is not a normalized interest charge, so it should come down as our cash flows improve. So yes, you have spotted it right compared to the previous quarter, it has gone up. I expect it to normalize and come down in the quarters ahead, number one. Number two, yes, my net debt has gone up by about $1.3 million roughly. And that's as you correctly pointed out, it's pretty normal for our industry. As our business picks up, as our cash flow picks up, I think, we should be quite comfortable in moving ahead.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Omar Samalot, a private investor.

--------------------------------------------------------------------------------

Omar Samalot, [12]

--------------------------------------------------------------------------------

Very nice to see some growth and continued margin improvement I think that probably puts you guys on the -- on a non-GAAP basis a little bit lower EPS loss versus last quarter. So that's a good job. Congratulations on that.

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [13]

--------------------------------------------------------------------------------

Thank you very much.

--------------------------------------------------------------------------------

Omar Samalot, [14]

--------------------------------------------------------------------------------

I also wanted to know a little bit more about the SG&A increase. It went up 2.7% quarter-over-quarter. I was wondering if you could give us a little bit more color to why and if there's any amount in there that are like one-timers?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [15]

--------------------------------------------------------------------------------

Omar...

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [16]

--------------------------------------------------------------------------------

Yes. Let me give sort of a general comment and then Ramesh can dig into some details. So generally with our business growing and with new client wins, that comes along with increased in -- increases in expenses. So we are reinvesting in our technology and our sales, for example. And we're seeing the fruits of that. We also as we grow, we build out new facilities and accommodate our growing clients. So we are happy to make those kinds of investments. And let me turn it over to Ramesh for more color.

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [17]

--------------------------------------------------------------------------------

Yes, So apart from what Lance has mentioned, Omar, there are a couple of one-offs happening. One of them if you see in the cash flow, there is a provision for doubtful debts of $630,000 that we made. Because if you remember the first quarter onwards, we have taken an extremely hard look at every receivables. We are very conservative in the way we are going about it. Again, I will repeat the same thing that I said that time also. We made the provision but I'm quite hopeful that I should have some collections against that. And having said that, I think, a large part of our AR review is more or less complete. So I'm not truly expecting too much happening, but you never know in the future. So this is a one-off. There is another one-off there, which I may say it's one-off, but in our business these things will keep coming. So I can't predict that.

--------------------------------------------------------------------------------

Omar Samalot, [18]

--------------------------------------------------------------------------------

Okay. Okay, fair enough. So I guess -- so my take from what you guys just said is that part of it is due to just investment and growth. And then another part of it is continued with the AR review. So I guess, we weren't successful in the collection progress of those doubtful accounts this quarter. Is that a fair assumption?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [19]

--------------------------------------------------------------------------------

Yes. What we have provisioned much earlier, some of that we collected the following quarter in December. There has been not much progress. But having said that, a small amount actually has got collected in April. So I mean, obviously, I can't account for it that much.

--------------------------------------------------------------------------------

Omar Samalot, [20]

--------------------------------------------------------------------------------

Okay. And since we're in the AR subject, how about DSOs, how are they running so far?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [21]

--------------------------------------------------------------------------------

If you see that AR has actually improved. DSO, if you were to calculate, our formula and your formula may differ. But in our formula, we've actually improved our DSO by 1 day. So that's not a bad thing.

--------------------------------------------------------------------------------

Omar Samalot, [22]

--------------------------------------------------------------------------------

Okay. Very good, very good. On the interest expense, interest and other expenses jump, it was kind of significant about 21%. I was wondering if it's all related to interest expense, or there's other stuff going on there that, that caused that. And if so, can we also consider somewhat of a one-time thing?

--------------------------------------------------------------------------------

Ramesh Kamath, StarTek, Inc. - CFO [23]

--------------------------------------------------------------------------------

Yes. So small amount is one time. It's not too much on that. And the other one is a regular interest because some of our interest is also linked to, I think, variable interest rates. And if they go up, our interest costs goes on accordingly, and that's what is not helping. So once we see more -- I think, the interest rates start coming down, our interest costs will come down just because of that. And there is, as I mentioned, a small one-off, not much.

--------------------------------------------------------------------------------

Omar Samalot, [24]

--------------------------------------------------------------------------------

Okay, got it. That's fair enough. How do you guys see the telecom-related declines that you have been experiencing in the non-U. S. markets? How do see that progressing? I think that previously, you had mentioned that it would probably work itself out through by early 2019. I was wondering if you had a view on that, that you can share.

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [25]

--------------------------------------------------------------------------------

Yes, we are very happy that our U.S. telco vertical has stabilized. Outside the U.S., it's varied by country. There are some countries where we're seeing strong growth in their telecom vertical and others that are seeing sort of secular decline. One, I'll call out is India, where we are seeing decline in the commodity sector of that market. Our team is very focused on winning and very successful in winning more of the upmarket business, the non-commodity business, that would be corporate services, advanced communication, multimedia communication, et cetera, which is stable or growing. And so we are shifting our focus from that more commoditized end of the market to the higher margin and more growing parts of that market.

--------------------------------------------------------------------------------

Omar Samalot, [26]

--------------------------------------------------------------------------------

Perfect, awesome. And then my last question, I recently found an article that mentioned, your proprietary customer experience platform called LISA. I wonder if you could take a few minutes to talk us through what that is. And also what I really found interesting was how you're trying to combine the Ideal Dialogue approach without chatbot, for example, respond to customers sort of humanizing the chatbot, if that makes any sense?

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [27]

--------------------------------------------------------------------------------

Yes, it's a really exciting part of our business, both our LISA platform as well as our Ideal Dialogue platform. LISA is an integrated omni-channel platform. For example, in corporate social media together with our traditional phone, e-mail and chat communication channels, and so our clients are able to utilize our platform so that our agents can help clients through any way in which a customer communicates with them, including all the various social media channels. And we can do that on an integrated basis, so that we have good information on customers and how they're communicating and what their issues are and what their issue resolution is.

Ideal Dialogue is our platform that is at the front-end of the communication process, all the way through the entire process. So it begins at the recruiting end where we're able to recruit people who are uniquely good at working for that particular kind of client, runs through for our training, for our management process, et cetera. And as we add bots in automation to Ideal Dialogue, we're able to both help clients directly as well as help our agents to become more effective. So it's all part of our integrated push toward using digital technologies and transformation to both better support our team members and also to give customers the opportunity to solve their problems without needing to escalate to a person.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And this does conclude our question-and-answer session for today. I'd like to turn the conference back over to Mr. Lance Rosenzweig for the closing remarks.

--------------------------------------------------------------------------------

Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [29]

--------------------------------------------------------------------------------

Thank you again, Amanda, and thank you all for joining us this afternoon and for your continued support of Startek. We'll be in New York later this month to meet with investors, and we're always happy to make ourselves available by phone. If we don't speak then, we look forward to speaking with you next, when we report our quarterly results in August.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.