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Edited Transcript of SRT earnings conference call or presentation 8-Nov-18 10:00pm GMT

Q3 2018 Startek Inc Earnings Call

DENVER Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Thursday, November 8, 2018 at 10:00:00pm 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 September 30, 2018. Joining us today is Startek's President and Global CEO, Lance Rosenzweig; and the company's CFO, Ramesh Kamath. Following their remarks, we'll open the call for your questions.

Before we continue, we would like to remind all participants that 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 discussions today may include some non-GAAP measures. In accordance with 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 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 the Startek's President and Global CEO, Lance Rosenzweig. Sir, please go ahead.

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

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Thank you, operator. Good afternoon, everyone, and thank you all for joining. We are 1 quarter in from the strategic combination of Startek and Aegis, and I am extremely pleased with our progress to date.

During the quarter, our clients began to experience the benefit of our global reach, access to new markets and multilingual offerings, resulting from the Startek and Aegis combination. We are ahead of plan from an integration perspective, we are making good progress on realizing various revenue and cost synergies, and we have fully established our new global executive team.

From a sales perspective, although, we continue to face headwinds in the telecom vertical, we are experiencing strong momentum in our non-telecom verticals. In fact, excluding telco, we grew revenue with every one of our top 10 clients sequentially during the quarter. We also closed several new logos in our targeted growth verticals.

To name a few. We signed a major global retailer for a customer care engagement out of our Tegucigalpa, Honduras delivery campus. This new client is affiliated with another client that has been engaged with Aegis out of one of our Indian delivery campuses. We also signed a new health care client being launched in Colorado, a rapidly growing global app-based company being launched out of our Sri Lanka campus, and a global automotive manufacturer that we'll be launching out of one of our Argentinian campuses. These new wins are a small sample of the momentum we are generating across our business and reflect the truly unique global platform we have created that can create value for clients across a broad set of industries and geographies.

Our strong sales momentum has been further enabled by a reorganization of our global sales team, which is now being led by our recently appointed Chief Revenue Officer, Joe Duryea. In addition to Joe, we have established our global executive team by appointing leaders from both organizations, including a new Chief Information Officer, Chief Legal Officer, Chief People Officer and 2 Regional Chief Operating Officers. Each of the department heads has already put in place an integrated organizational structure to manage the global business and implement best practices across the group.

Touching on our footprint. We recently announced the closure of a site in Colorado, which we expect to exit in Q1 2019. However, we recently opened 2 new delivery campuses in the fourth quarter, 1 in San Antonio, Texas and the other in Tegucigalpa, Honduras. Our San Antonio campus is the home of a new bilingual program for one of our top 10 clients. And with the launch of our second campus in Tegucigalpa, Honduras, we believe we are the largest customer care outsourcer in that city. The opening of these new campuses is a direct result of the strong momentum we are seeing outside of telecom and the demand for our high value-added services in the respective regions.

As I mentioned earlier, we are currently ahead of plan from an integration perspective. Our post-merger integration team has implemented several cost optimization initiatives that we believe will result in $12.5 million of annualized cost savings. This includes driving operational efficiencies and leveraging our scale and purchasing power with our major vendors, all of which was accomplished in less than 4 months as a combined company. We are now moving into the next phase of integration, as we prepare ourselves for improvement in process excellence, while preparing the organization for further growth and profitability.

Our finance team has taken a zero-based budgeting approach, coming through every expense line item to uncover opportunities for cost savings. Overall, we are very pleased with the progress our team has made to combine these 2 organizations and leverage our respective infrastructure and service offerings to begin providing a truly global solution for our clients.

Change is difficult, and we recognize it can create challenging circumstances for employees. I am deeply appreciative of the hard work and highly effective efforts of our team, as we collaborate and grow as a new organization.

Looking ahead, we plan to continue our cost synergy initiatives into next year and will sharpen our focus to accelerate revenue growth across the globe, particularly in high-growth verticals, such as financial services, retail, health care and travel.

Before wrapping up with my closing remarks, I'd like to turn the call over to our CFO, 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. As noted in our finance release today, due to reverse acquisition accounting for the business combination completed on July 20, the quarterly results we are reporting includes Startek financials from July 20 to September 30, 2018, combined with Aegis financials from July 1 to September 30, 2018. Also please note that the business combination resulted in a change of fiscal year-end from December 31 to March 31, which is the fiscal year-end for Aegis. However, on October 5, 2018, the Startek Board of Directors voted to change the fiscal year-end back to December 31. As a result, we'll now be filing a transitional report on Form 10-KT for the 9 months ended December 31, 2018.

Due to certain limitations in regard to publicly available financial information, we are unable to provide the combined company financials for the year ago period nor are we able to provide the combined company financials for the second quarter of 2018. As a result, we will not discuss year-on-year or sequential quarterly comparisons, as we would be comparing financials of 2 companies against 1. Instead, we believe it would be more effective to highlight the quarterly results with qualitative commentary about the general trend and drivers for each major line item.

Having said that, total revenues for the 2018 reported quarter was $151.5 million. As Lance mentioned earlier, we continue to face headwinds in the telecom vertical. Most of the BPO industry has faced similar challenges with their telecom clients, which is why we are emphasizing growth outside of telecom to reduce Startek's historical reliance on this vertical.

To this end, we are seeing strong growth in our non-telecom verticals, driven by existing client program expansions and new wins. In fact, we recently started ramping for both existing and new non-telecom engagements, which we expect to drive an additional 1,000-plus seats across the globe over the next 4 to 6 months.

Overall, the revenues were negatively impacted during the quarter, due to the increased strength of the US dollar, particularly against the Argentinian peso and the Indian rupee. After adjusting for these currency exchange losses, revenues have remained flat despite telecom headwinds.

Gross profits for the quarter came in at $22.8 million, leading to a gross margin percentage of 15%. Despite the loss due to currency volatility, our margins are generally improving as we have worked diligently to enhance employee productivity and capacity utilization, as we now serve these clients across various geographic time zones.

SG&A for the quarter was $22.8 million. As a percentage of revenue, SG&A was 15.1%. The impact of our optimization actions will be seen as we move into 2019, whilst we plan to invest more into strengthening our sales and solutions organization.

Net loss for the quarter was $10.9 million or rather a loss of $0.32 per share. Please note that this loss is higher than you would expect on a normalized basis, given various transaction-related costs, increased amortization of intangible, impairment and restructuring charges resulting from the Aegis combination.

Adjusted EBITDA for the quarter was $8.1 million, and as a percentage of revenue, it was 5.4%. Note that the FX dynamics referenced earlier negatively impacted our adjusted EBITDA for the quarter. Nevertheless, we are well on track to deliver on our previously stated goal of realizing an additional $30 million of adjusted EBITDA from synergies, revenue growth and operating efficiencies by 2020. From a balance sheet perspective, at September 30, 2018, we had approximately $20.5 million of cash and approximately $178.3 million of debt. This concludes my prepared remarks.

I will now turn the call back over to Lance. Lance?

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

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Thank you, Ramesh. While we remain very encouraged by the early integration synergies and new business momentum, we recognize that we are still in the midst of a multi-quarter turnaround process. However, the foundation for our success is nearly set with a new executive team in place and most of our new technology and operational best practices rolled out across the organization. We remain highly confident that Startek will emerge as a stronger company with more diversified clients and markets, higher growth and higher margins in 2019 and beyond.

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) And our first question comes from the line of Dave Koning with 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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Yes. Congrats on completing the acquisition.

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

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Thank you, David.

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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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Yes. And so I guess, my first question, when I look back to Q2, the legacy Aegis business was doing about $110 million of revenue and Startek was about $60 million. So you add them together, Q2 was about $170 million, Q3 was $151 million. And I'm just wondering, the sequential fall off, I know the Argentina peso had to part of it, but may be you can kind of walk through what were some of the main things that happened from Q2 to Q3?

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

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Ramesh, why don't you take that one?

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Ramesh Kamath, StarTek, Inc. - CFO [6]

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David, Ramesh here. The main reason for the drop in revenue has been we combined Startek and Aegis and you know that Startek legacy revenues have dropped a bit. Apart from that, we had an impact of over $7.5 million in balance on account of the FX loss. If you were to remove the 2, then revenues have by and large been remained stable. So there has been some more downs, but it's matched by non-telecom growth.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [7]

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And then -- okay, that, that's helpful. That's good. Would it then be fair to say, so if we take the $151 million run rate now, is that a good base? It sounds like, Lance was mentioning a lot of wins and it sounds like, are we at a place where we're kind of basing now in, kind of, on a good pathway for growth into 2019 from this level?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [8]

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David, a couple of points. First is that note that the Q3 reported numbers are missing 20 days of Startek results. So it's a full quarter of Aegis, but it's a full quarter less 20 days of Startek. And in terms of going forward expectations, we are not at this point giving forward-looking guidance. But per the comments that we made today, we are seeing nice growth in our non-telco verticals and most of the decline in the telco verticals, particularly in the U.S. side of the equation, has already happened through the system.

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

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Got you. Yes. And I was missing, that, that's a good point on the 20 days of Startek, the $151 million is, yes, that, that's a great point. And then, I guess, the -- just to make sure I understand to the EBITDA line today, the $8 million-or-so, you're still expecting $30 million of annual benefit. It sounds like between revenue and cost synergies to drive, kind of, I guess, an extra $30 million by 2020?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [10]

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That's correct.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [11]

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Okay. Okay, good. And how soon -- like is this quarter kind of the bottom of margins -- like was the heavy lifting done in this quarter and then we start to slowly ramp from here? Or should we expect another couple of quarters where the margins can move around a little bit just based on the investments?

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

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Well, again, we are not providing forward-looking guidance. But the numbers for this quarter reflect just a small amount of the cost savings that we've implemented. The majority of which are going to be seen in Q4 and going forward.

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Operator [13]

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And our next question comes from the line of Omar Samalot.

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Omar Samalot, [14]

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Go ahead, okay. Okay. So going back to the missing of the first 20 days of July for Startek, I was wondering if by any chance you have the combined revenue number and EBITDA number handy as if the merger had happened on September 1. I'm pretty sure that would probably be on the 10-Q, but I wanted to check if you had it handy?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [15]

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Ramesh, why don't you describe the situation with that stop period?

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Ramesh Kamath, StarTek, Inc. - CFO [16]

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Omar, the stop period is from the 1 to 19 of July, so it's about 19 days. Now given the limitations of SEC filing on the adjusted EBITDA, when you see our 10-Q, you will see our revenues being included for the full period of whatever is missing, but we will not be able to provide you the adjusted EBITDA line there because that's not what will be covered in the 10-Q. And we are working with SEC and other staff to try and see if we can provide a more detailed quarterly information, but that will take some more time before we are able to place all that in the public domain.

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Omar Samalot, [17]

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Okay. Understood. Okay. And then by any chance do you have the total share outstanding as of the end of the quarter?

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Ramesh Kamath, StarTek, Inc. - CFO [18]

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37.060 million shares are outstanding end of the quarter.

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Omar Samalot, [19]

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Perfect. Okay. So on a non-GAAP basis, we're looking at, more or less at $0.12 loss per share and we're still missing some information for those 20 days so, okay. In terms of the $12.5 million in annualized cost savings, you mentioned that, I guess, we would start seeing the effect of that now -- starting this Q4. Would that show up in the SG&A line? Or would that be more in the cost of service line?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [20]

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Go ahead, Ramesh.

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

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This is clearly, as we mentioned, the cost synergy -- yes, this is what we had mentioned with the cost synergies we have taken out in the call. So that's where it will show. And you are quite correct in saying, it start showing from quarter 4 onwards. Not necessarily all of it will start, but most of it should have started in quarter 4.

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Omar Samalot, [22]

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Okay. And then -- but you can't say at this point, if it's more on the SG&A or is it a combination of both SG&A and cost of service?

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

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It is a combination. It's a combination of cost that we look at. The exact split, of course, will not appear when you see.

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Omar Samalot, [24]

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Fair enough. Okay. I also see that the net debt ended about $23 million lower than initially expected pre-merger. So nicely done there. In terms of the wireless weakness in the U.S., and it has been pretty widely reported and we're seeing the impact. But given that on the Aegis side, you guys also serve telco clients outside of the U.S. Could you contrast for us the dynamics of the telecom business in the non-U. S. world? Does it somewhat offset each other at this point?

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

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No, Omar, it won't offset each other. The rest of the world impact on telco very much varies by country. And we will be providing detail on a region-by-region basis in the 10-Q. But essentially, in India, which is one of our largest country geographies, there is a net negative in terms of the telco vertical and call volumes, partly because of a similar to the U.S. increase in technology and simplification of offerings and partially because of competitive dynamics in the Indian telco market. In other countries, it's varied. And some countries, it's actually showing growth, and in other countries, it's still declining as well.

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Omar Samalot, [26]

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Got you. Okay. And on the wireless weakness works itself out over the next couple of quarters, is the view still of coming out of the transition with better margins and in verticals that have better gross margins?

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

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Again, so while we are not providing guidance, we are saying that our focus is on several verticals that we find more attractive for the company. There verticals that are less competitive, that have better pricing dynamics, that in some cases are regulated and many of our competitors are unable to compete in those articles. And in some cases, there are companies in the verticals that are naturally themselves growing quite rapidly. And so we're quite excited about the new verticals, both in terms of our recent closes as well as our pipeline and sales focus.

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Omar Samalot, [28]

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Okay, that help -- that's helpful. And then on touching a little bit on that. Last quarter and this quarter, we haven't heard much about new business wins in terms of quantifiable numbers. Could you give us an idea about new business wins for the combined entity year-to-date? Or -- and with that may be some color around the sales culture philosophy that you're trying to instill throughout the organization to get us back to revenue growth?

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

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Yes, absolutely. We touched on a few examples of new closes to illustrate both the breadth of types of clients as well as the breadth of geographies. In terms of our sales approach, we are reorganizing the company to be a very sales-centric organization. We are rebuilding our sales team and have brought in a real outstanding new Chief Revenue Officer. We're bringing in other new sales resources. We are reorganizing and changing the comp plans that are focused both on growth and increasingly on margin. And what we've seen in our historical backgrounds is leading companies that are very strong in sales growth and it's a personal passion of mine and it's something that we're quite excited about.

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Omar Samalot, [30]

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Okay. All right. Going forward, will you be reporting by segment or by country? How is that going to be put out?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [31]

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Right. So you'll see in this 10-Q, information both by segment as well as by geographic region. And so we're trying to, as a philosophy, be very transparent, and we want to provide as much information as we can that's useful as you assess the company.

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Omar Samalot, [32]

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Good. Okay. And then you think that you will be able to provide maybe in the future gross margin targets for -- on a segment basis, on a country basis going forward?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [33]

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Yes. At this stage, we are not providing that type of go-forward guidance.

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Omar Samalot, [34]

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Okay. All right. And are you able to talk about capacity utilization rates overall as you exited the quarter to give us an idea of how things are improving? Before you guys took over, the idea was that the second half of this year, we will start seeing some higher utilization rates and specifically in the domestic segment.

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [35]

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Ramesh, do you want to comment on that or shall I give it a go?

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

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I can start. Omar, as you heard when we spoke, we're adding about a 1,000-plus jobs there. Now we are just 2 months into the system and we are ramping up. We do have the capacity to add more. And Lance was just mentioning the sales organization going more focused. One of the things we will be doing is focusing on lifting existing utilization capacity. Lance, would you like to add?

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [37]

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So what you'll see -- yes, so what you'll see, Omar, is that while we are better utilizing our existing capacity, we've also added some new capacity. We mentioned a new center in Tegucigalpa, Honduras, and another new campus in San Antonio. And so some locations are seeing better utilization. And then in others, we are actually expanding based on strong client demand.

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Omar Samalot, [38]

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Okay. Very good. My final question, any decision at all regarding the headquarters of the company now given that you're truly global?

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

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Yes. At this stage, there is no plans to change the headquarters.

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Operator [40]

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And that concludes today's question-and-answer session. So with that, I'd like to turn the call back over to management for closing remarks.

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Lance E. Rosenzweig, StarTek, Inc. - President & Global CEO [41]

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Thank you very much, operator. Thank you all for listening in today. We remain open to dialogue with shareholders, so please reach out, and we look forward to updating everyone, again, for the year-end quarter, which we'll probably do in the month of March.

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Operator [42]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.