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Edited Transcript of SRT earnings conference call or presentation 13-Mar-19 9:00pm GMT

Q4 2018 Startek Inc Earnings Call

DENVER Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Wednesday, March 13, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lance E. Rosenzweig

StarTek, Inc. - President & Global CEO

* Ramesh Kamath

StarTek, Inc. - CFO

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Conference Call Participants

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* David John Koning

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

* Omar Samalot

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Startek's financial results for the quarter ended December 31, 2018. Joining us today is Startek's President and Global CEO, Lance Rosenzweig; and the company's CFO, Ramesh Kumar (sic) [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 securities laws. These statements are subject to various risks and uncertainties, and actual results may vary 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 the Regulation G, the company has reconciled these amounts back to the closest GAAP-based measurement. The reconciliations can be found in the earnings release on the Investors section of their website.

I would now like to remind everyone that a 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.

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

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Thank you, Sonia. Good afternoon, everyone, and thank you all for joining. The Startek and Aegis integration is largely complete and led to a very strong quarter of operational performance and business development. Our post-merger integration team also continued to identify and implement both revenue and cost synergies across the organization. Operationally, Startek grew revenue and adjusted EBITDA sequentially due to improved client diversification and strong growth from our non-telecom verticals.

For the second quarter in a row, excluding telco, we grew revenue with every one of our top 10 clients, with some clients even accelerating growth from last quarter. Further, we experienced some of the strongest holiday volumes ever seen by the company as we now have a greater mix of next gen retail clients.

A good portion of our growth in Q4 was driven by a shift in operational structure. During the quarter, we implemented a new client-centric model in the Americas to replace our previous geographic model. To summarize, historically Startek followed the old fashion call center industry geographic-based organization, where center heads report to regional heads, who report to country heads, et cetera.

In this model, if a client was utilizing our services in multiple geographies, each operating team would report to a different regional leader. This resulted in inconsistent performance with no single point of responsibility. Now in our next generation client-centric model, client teams in all campuses report to a single client leader that manages that client relationship. Under this new model, we are able to better understand and address client needs consistently and globally, while deploying services in the most appropriate geographies to enhance performance and utilization.

After implementing this new structure, the benefits to both our clients and to Startek was immediately evidenced. Our performance was up, our clients were happier, and we were rewarded with more business and an increasing number of campuses delivering services. Given the strong reception from our clients in the Americas, we have recently begun to roll out this new model with the rest of our global client base, which we expect will benefit both revenue and margins going forward.

From a businesses' development perspective, we continue to see accelerating demand for our new geographic footprint and service capabilities. Due to this growing demand and strong client growth, during the fourth quarter, Startek added to our capacity with the opening of a new campus in Tegucigalpa, Honduras. This is now our third delivery campus in Honduras, and the grand opening was quite the event. We were greeted by Honduras' President, Juan Orlando Hernández, senior government officials and many community partners during a celebration that included presentations and a ceremonial ribbon-cutting to mark the opening of the new facility.

In 2011, Startek became one of the first BPO companies to launch a delivery campus in Honduras. And today, we are one of the largest outsourced customer care providers in the entire country with more than 2,200 customer experience experts.

Touching a bit further on our global presence. I believe an important aspect of our company that is often overlooked is the unique culture and support we can bring to other countries around the world. For example, in Saudi Arabia, our 51% owned joint venture is currently the largest employer of women in the entire country. I recently visited our team in Riyadh and was extremely impressed with the passion, leadership and excellent performance of the team for clients in the region.

Globally, Startek is exhibiting strong leadership in diversity and inclusion, in particular employing and supporting persons with disabilities. We were proud to be recognized by the Society for Human Resource Management for excellence in diversity and inclusion. It was a great honor to meet with some of our award-winning disabled team members in Gurgaon, India, who are delivering excellence for our clients every day and whose accomplishments in the face of adversity serve as an inspiration to our entire company. I'm proud of the opportunities and benefits we are bringing to the individuals and countries in which we operate.

I'm also happy to report that subsequent to year-end, we strengthened our Board of Directors with the appointments of Julie Schoenfeld and Albert Aboody. Each of these new directors brings unique and relevant skill sets to our board, and we look forward to leveraging their experience and knowledge as we capitalize on the many growth opportunities ahead. I would like to thank Ben Rosenzweig and Robert Sheft for their contributions to the board over the last several years. We wish them the best going forward. Before wrapping up with my closing remarks, I'd like to turn the call over to our Chief Financial Officer, Ramesh Kamath, to take you through Startek's financial results. Ramesh?

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

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Thank you, Lance. The quarterly results we are reporting today includes Startek and Aegis financials from 1st October to December 31, our first time reporting of full quarter. As mentioned on our last quarterly call, the business combination resulted in a change in fiscal year-end from December 31 to March 31, which is the fiscal year-end for Aegis. However, in October, the Startek Board of Directors voted to change the fiscal year-end back to December 31.

As a result, we will be filing a transitional report on Form 10-KT for the 9 months ending December 31, 2018. Due to certain limitations in regards to publicly available financial information, we are unable to provide the combined company financials from the year-ago period. As a result, we will not disclose -- discuss year-on-year comparisons, and we would be comparing the financials of 2 companies against 1.

Instead, we believe it will be more effective to highlight the quarter-over-quarter results with qualitative commentary about the general trends and drivers for each major line item. As noted in our press release today, the comparative results for the quarter ending September 30, included Startek results from July 20 to September 30, combined with Aegis results for the full quarter, July 1 to September 30, 2018.

Now having said that, total revenue for the fourth quarter of 2018 increased 5% to $158.6 million compared to $151.5 million in the quarter ended September 30. We continue to face headwinds in our telecom vertical, however, it is having less enough of an impact on our overall business due to strong growth from a non-telecom client. Our non-telecom growth has been driven by excellent client expansion programs and new client wins, including the signing of a large retail client during the quarter.

As Lance mentioned, we also experienced higher volumes related to holiday seasonality, which reflects the ongoing diversification of our client base as we now have a greater mix of next gen retail clients. Gross profit for the quarter increased 10% to $25.1 million compared to $22.8 million with gross margins of 15.8% compared to 15% in the quarter ending September. Margins continue to improve, primarily due to the cost savings associated with synergies from the business combination, along with higher volumes related to the holiday season.

SG&A for the quarter was $21.9 million as compared to $22.8 million in the quarter ended September. As a percentage of revenue, SG&A was 13.8% as compared to 15.1%. Net loss for the quarter was $9.7 million or a negative $0.26 per share compared to a loss of $10.9 million or $0.32 per share negative in the quarter ending September 30. Note that although this loss is lower than the previous quarter, it's higher than what we would expect on a normalized basis due to transaction related and restructuring costs incurred in the quarter. In addition, we were not able to recognize a tax benefit for losses in certain benefits, which led to a higher tax provision for this quarter.

Adjusted EBITDA for the quarter increased 40% to $11.4 million compared to $8.1 million in the quarter ending September 30. As a percentage of revenue, adjusted EBITDA was 7.2% compared to 5.4%. From a cost synergy perspective, we completed additional actions during the quarter to bring our total reduction in annualized costs to over $16 million since completing the merger. We are well on track to deliver on our previously stated goal of realizing $30 million in adjusted EBITDA from synergies, revenue growth and operating efficiencies by mid-2021.

From a balance sheet perspective as at December 31, we had approximately $24.6 million of cash and approximately $185.7 million of gross debt. This compares with $20.5 million of cash and $178.3 million of gross debt at September 30. In 2019, we expect to reduce our net debt position and strengthen the balance sheet, whilst also utilizing our free cash to deploy across various investments to our technology, infrastructure.

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

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

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Thank you, Ramesh. Overall, I am very proud of the progress our team has made to return Startek to higher growth and margin expansion. We are truly gaining momentum with our new global footprint and capabilities as we implement best practices and operational excellence throughout the company. Looking ahead, we will continue to identify opportunities for revenue growth and operating efficiencies, while focusing our business development efforts in high-growth verticals such as technology, financial services, next-gen retail, health care and travel. We are well positioned to execute on our growth initiatives and look forward to carrying this momentum through 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Dave Koning of Baird.

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

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Congrats on the retail clients. It sounds like good momentum there. And I guess, my first question. So the $158 million kind of base, it's the first quarter where you have kind of a clean combined company base. So is that a good place to kind of as a starting point think of next year, just using that $158 million as kind of your baseline quarterly result? And from there, maybe how was the seasonality going to work? Like, is Q1 a little lower than that and the rest of the quarters are a little above to kind of -- and maybe average the $158 million for the year, how should we think of that?

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

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Yes. So we're not, as we've mentioned in the past, providing forward-looking guidance, but I would say that this is our first full and clean quarter. There is a bit of seasonality in it as is typical in our industry where -- with companies who have some seasonal clients. And so you're likely to see that, that seasonal trend will continue to the extent that we have this kind of retail business going forward.

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

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Okay, okay. And I guess, secondly, you called out that the loss should be less going forward just simply because you had the restructuring type stuff in Q4. Are the other line items more normalized? There was nothing kind of one-off in some of the other line items while there, like the gross margin and the SG&A?

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Ramesh Kamath, StarTek, Inc. - CFO [5]

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David, this is Ramesh here. No, there were no other one-off items anywhere else, and it's all part for the course.

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

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Got you. Okay. And then a couple of just little housekeeping ones. I know Argentina, the peso has been weak. Is there any way to think about how that impacted Q4? And maybe even how that impacts 2019?

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Ramesh Kamath, StarTek, Inc. - CFO [7]

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Well, everybody asked me about the Argentina peso, and the good news is, it has remained completely stable all over the last quarter for us. The previous quarter to that, it had depreciated about 50% in just one quarter, but quarter 4 has remained completely stable. And as on today also, for most of the first quarter, it remained stable. So we are remaining reasonably hopeful that the worst is behind them. And like I said, there are elections in May, we will know after that.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [8]

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Got you. Okay. And one last quick one. Free cash flow for '19, I would imagine your CapEx spending is going to probably be semi-low relative to D&A. Do you expect that you have a free cash flow positive year in '19?

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Ramesh Kamath, StarTek, Inc. - CFO [9]

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As Lance keeps telling me all the time, we do not provide forward-looking guidance. So you will have to excuse us, but we had mentioned in our prepared speech that we are looking at investing in our retail -- technology and infrastructure assets.

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Operator [10]

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And our next question comes from analyst, Omar Samalot.

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Omar Samalot, [11]

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I was pleased to see an improvement quarter-over-quarter and EBITDA improvement, despite the lighter revenue. I guess it must mean

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business continues to increase. How do you see the revenue picture evolving?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [12]

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The -- as we mentioned in our remarks, we are continuing to see good growth from our client mix outside of telecom and moderating headwinds on the client mix within telecom, and that varies globally depending on the region of the world in which we are operating. And so we feel good about that. We are very happy with the -- both the existing client performance and growth as well as the building pipeline by our sales team. So we're feeling good.

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Omar Samalot, [13]

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Okay. Are you guys in a position yet to disclose utilization rates by segment for example, or you're touting business wins, but we have no real idea in terms of concrete numbers. So I was wondering if you're at a point where you can disclose some of that?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [14]

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Yes. We at this stage have not disclosed utilization rates in any kind of segmented way, but we are highly focused on it. And we see opportunities in certain parts of the world to better grow into our capacity. And in other parts of the world, like Honduras, we needed new capacity, and we launched it. And so new capacity is clearly only a function of growth and outside of that, better capacity utilization does drive better margins in a particular region.

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Omar Samalot, [15]

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Okay. And what in terms of new business wins?

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

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So we are not commenting on specific new business wins, but I would say that the global sales reorganization that we've done, which enables us to focus on global clients as opposed to just in-region clients, is generating a strengthening pipeline by a very strong and active sales team. So I -- actually quite excited about the opportunities ahead in sales and client development.

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Omar Samalot, [17]

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Okay. All right. And I'm assuming that given Ramesh's last answer, you're not providing a CapEx budget at this point yet for 2019?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [18]

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Correct. Yes, we are not providing forward-looking guidance. That's both in operating performance as well as CapEx.

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Omar Samalot, [19]

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Okay. I see a pretty nice drop in the accounts receivable, the trade accounts receivable quarter-over-quarter. I was wondering, Ramesh, if you can comment on your DSOs for the quarter?

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Ramesh Kamath, StarTek, Inc. - CFO [20]

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Okay. My DSOs for the quarter should be in the range of about, let me give you a number, close to between 66 and 68 on billed receivables. Okay? And the last time, Omar, we spoke, I must correct something. When I told you the DSO, I included unbilled also, which truly -- it looked higher, but was not giving a good picture. So if you were to do that comparison, then you could, say, knockoff about 13 to 15 days from what I told last time, and that will give you a proper comparator. While DSOs have come down, I think, please remember it's a holiday season in the U.S. and collections in the last 2 weeks of the December generally tends to be slow, and it's picked up in the first week of Jan. It's routine in this industry.

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Omar Samalot, [21]

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Okay. Got it. Okay. And I also noticed that the provision for doubtful accounts increased to $2.2 million from $1.7 million quarter-over-quarter. Can you explain what's going on there?

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Ramesh Kamath, StarTek, Inc. - CFO [22]

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Yes. What we have done is, we have -- like we mentioned last time on a policy basis, we have been reviewing each of our accounts. And during this account, we have done this provision to clean up our financials. We don't expect such large numbers going forward. This has been a full-scope audit done, and we made sure that it's all cleaned up. Again, Omar, like I mentioned last time, this -- in our case, the provision is on a conservative basis. From the previous quarter provisions, we actually collected $300,000 already. So I'm hoping that next quarter will be a good quarter.

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Omar Samalot, [23]

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Got it. Okay. And I guess, whatever collections you would be able to make, that would be -- that would go straight to the bottom line since you've already took the provision?

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Ramesh Kamath, StarTek, Inc. - CFO [24]

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Correct. Correct.

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Omar Samalot, [25]

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In terms of the income taxes, they came in a bit higher than what I expected. I don't know if you can offer some color there and how you see that going forward? And was that a large -- was a large part of that cash or noncash?

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Ramesh Kamath, StarTek, Inc. - CFO [26]

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Almost -- most of the increase is noncash. It's a deferred tax liability created. This arose from a discussion from our auditors, where we took a very conservative stand. In one case, where I had a deferred tax asset, we said that the probability of the entire recovery in the near future may not be good. Personally, I'm optimistic it will be, but auditors said, let's take it safe. And in other case, where accounting standards have changed, we decided to make a deferred tax provision for the first time, a liability actually. So yes, this is noncash, and you are not likely to see this lumpiness going forward.

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Omar Samalot, [27]

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Perfect. Okay. That's very helpful. All right. Some of your competitors have mentioned their ability to reprice North American-based programs, given the tight labor market. How are you guys

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [28]

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It varies on a program-by-program basis and on a region-by-region basis. And I -- overall, you did see margin expansion over the quarter in terms of gross margins. So we're not seeing, for example, that rising labor rates is having a negative impact on our gross margins.

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Omar Samalot, [29]

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Okay. [I thought] the Aegis side brought pretty important AI capabilities to the merger. I was wondering if you can talk about how those capabilities fit into your overall strategy?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [30]

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Yes. I mean, long term, we're very excited about the opportunities that our digital offerings will have in the marketplace. It takes a while for these to productize, for clients to test them, for them to actually have a material impact on the financials, but we've just got a great team of developers that are working on these products. We also are looking at partners who have excellent third-party products and then looking to kind of create integrated offerings for our clients. I would say that where we've also seeing great success is in our Ideal Dialogue offering. Ideal Dialogue is a proprietary product that we have here at Startek, and we are rolling out that offering globally across our other operations, and there is quite a bit of interest outside of the U.S. And I think that we're going to see some nice opportunities for Ideal Dialogue going forward.

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Omar Samalot, [31]

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Okay, cool. Right. In the past, you mentioned how Australia presents a great opportunity given your Philippines and Malaysian footprints, allowing for almost round the clock utilization for those seats, given their different time zones. I know that you guys have been working to build that sales pipeline and recently I saw that you attended that Global Business Week in Sydney, I think it was last month. I was wondering if you could

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if there are any thoughts at all in that initiative?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [32]

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I don't know how you're getting my plane records, but yes, but I was in Australia a few weeks ago, and our operations are actually in Melbourne. And I'm quite upbeat about our opportunities there. I think we've got a great team, we've got some great clients with whom I met. And I'm enthusiastic about our opportunities in Australia. I will say that in our industry, there is a sales cycle and it does take time. And so as we talk about and look at new clients' opportunities, the sales cycle takes a bit of time. There's a lot of diligence that clients do, right? So there is no immediate impact, but I think longer term, I'm feeling good about that part of the world.

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Omar Samalot, [33]

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Okay, good, excellent. All right. And finally

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I think it's a great confidence signal. I was wondering if there's anything you can comment in terms of their thinking behind the transaction?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [34]

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Your question was a bit garbled, Omar. Are you talking about the CSP investment?

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Omar Samalot, [35]

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I saw that the largest shareholder in December bought some stock in -- through a transaction -- private transaction. So I took that as a confidence signal. So I was wondering if there was any comments that you could make on their thinking behind that transaction?

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Ramesh Kamath, StarTek, Inc. - CFO [36]

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I don't think we really have a comment around anyone buying our shares. On a very personal note, as long as they keep buying and not selling, I'm always a happy person.

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Operator [37]

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(Operator Instructions) And our next question comes from of [Ben Mather] of [Finley Capital]. Our next question comes from Dave Koning of Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [38]

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Just a couple quick ones on the financials. What would -- I guess, one is just, what would the share count have been if profitable? I know you had 37.2 million shares, and you don't have the options like into the share count, but what would the diluted share count be, if you're profitable?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [39]

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Yes, we don't really -- we don't have that number. We can try to get back to you on that one, David.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [40]

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Yes. No problem at all. And the only other one is the interest expense that was close to $4 million. Is that a normalized number, nothing in there that's kind of one-off, just so we know if there's some to take out in future quarters?

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Ramesh Kamath, StarTek, Inc. - CFO [41]

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No. This is a normalized number now.

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Operator [42]

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Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Rosenzweig. Please proceed.

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [43]

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Thank you, Sonia, and thank you all for joining us this afternoon and for your continued support of Startek. We're always happy to make ourselves available to our shareholders and prospective investors by phone, and I encourage you to reach out. And we look forward to speaking with you next quarter when we report our results in May. Thank you very much.

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Operator [44]

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Thank you. Ladies and gentlemen, you may now disconnect.