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Edited Transcript of SRT earnings conference call or presentation 10-May-17 8:30pm GMT

Q1 2017 StarTek Inc Earnings Call

DENVER Jun 14, 2019 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Wednesday, May 10, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad A. Carlson

StarTek, Inc. - Former Chief Innovation Officer

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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

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

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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 first quarter ended March 31, 2017.

Joining us today are StarTek's President and CEO, Chad Carlson; and the company's CFO, Don Norsworthy. Following their remarks, we'll open the call for your questions.

Before we continue, we'd like to remind all participants that the discussions today may contain certain statements, which are forward-looking in the 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 2016 Form 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 measurement. The reconciliations can be found in the earnings release on the Investors page 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 StarTek's President and CEO, Chad Carlson. Sir, please proceed.

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [2]

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Thank you, Nicole. Good afternoon, and thank you all for joining.

Earlier today, we issued a press release announcing StarTek's financial results for the first quarter ended March 31, 2017. Our first quarter was highlighted by a strong improvement in our bottom line as we build sustainable profitable growth.

Our focus is on operating efficiencies, winning new business, high-grading revenue and improving capacity utilization to generate increases in margins, net income, adjusted EBITDA and free cash flow.

In fact, the first quarter marked our sixth consecutive quarter of generating year-over-year gross margin expansion. We also made progress in paying down debt while posting one of the highest new bookings numbers of any quarter during my tenure.

I'll remind investors that it can often take a few quarters to see our bookings flow through to revenue, which is why we expect to return to some growth in Q2 before seeing the revenue strengthen later this year and beyond. This, of course, may be impacted somewhat by our high-grading efforts, which will ultimately improve the quality of revenues.

Central to our strategic plan is improving profitability. On the last call, I introduced the term high-grading, meaning to remove or repair programs with less than acceptable margins. And this certainly contributes to more total profit.

Another facet of our strategic plan is to focus on customer-centric clients, who value the STARTEK Advantage System. This system is a differentiated customer engagement methodology that is guided by insights and analytics.

Our growth in the health care vertical is also part of our strategy to increase profitability.

I've been asked recently by some investors if we have any pricing power in this industry. The answer is yes, by going into new verticals where we have more pricing power. We can also create pricing power by differentiating ourselves with added value customer engagement solutions, out-executing our competitors on client metrics and getting capacity utilization up, while maintaining a robust pipeline and strong sales momentum.

The last couple of quarters reflect some revenue growth headwind as a result of these high-grading efforts, but the bottom line results are stronger.

I'm happy with our continued sales momentum from both new and existing clients. This quarter, we have reported bookings of $30 million in annual contract value, of which almost 30% came from the health care vertical, including 3 new clients.

The pipeline continues to build and is roughly double what it was this time last year.

Looking at margins more closely, our domestic segment margin was lower than desired. However, this segment incurred the vast majority of high-grading transition impact as well as start-up costs from new business ramps.

Our objectives for the domestic segment have not changed and are trending toward more acceptable margin levels. As a reminder, our objective is to strike the right balance of capacity utilization and healthy revenue to obtain a domestic gross margin in the mid-teens, near to our gross margin over the 20% threshold and offshore gross margins over 30%. These profit margin objectives, combined with tight SG&A cost management and increasing revenue, should produce double-digit EBITDA margins and solid earnings growth.

We continue to work on achieving our objectives of generating double-digit sales growth, while increasing adjusted EBITDA by 25% on an annualized basis over the next couple of years.

If not at these levels, we will make whatever change is necessary to get us there. Our bottom line remains the top priority.

From a balance sheet perspective, we reduced debt by more than 20% to $20.1 million. As we shared on the last call, our CapEx plan for the year continues to be in the $8 million to $11 million range.

We are pleased with the success in generating free cash flow and paying down debt. However, as we ramp the new business wins in the second half of this year, there may be a pause in debt reduction.

I'd like to remind investors of some of the items we have added to the STARTEK Advantage System, which is enabling this momentum: an operating platform providing for efficiencies for our clients across multiple sites, geographies and verticals, now 9 served; a unique customer engagement platform providing insights and analytics powered by the science of dialogue; a cloud-based variable cost IT platform allowing for lower maintenance and CapEx, greater economies of scale as well as flexible and targeted solutions for our clients; a health care offering than spans payers, providers and med tech as well as clinicians supporting the exciting area of telehealth; we also offer clients a receivables management solution now licensed in all 50 states; and finally, an electronic processing capability that is now being enhanced by robotic process automation. These added capabilities are all being facilitated and trained via an enterprise process library, with inherent process improvement for clients and all functions across the company. And all of this is being fulfilled by a team of great people, whom we call grand warriors. Nicole, Don and I will now open 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 the line of the 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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I guess, a couple of things, both on kind of Q1 revenue and even Q2 revenue now. One is, historically, you've been down a little bit in Q1 sequentially. This Q1, you're actually up sequentially, which is encouraging. Maybe you can talk a little bit about that. And then historically, Q2 was seasonally weaker. I'm just wondering if that's kind of the typical kind of expectation this year.

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [3]

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Yes. As you know, we don't think about the business a whole lot from a sequential standpoint just because of its seasonal nature and lumpiness. We've been going through so much with the turnaround, but I think your call-out is a good one, and that first quarter actually did sequentially step up from where we were fourth quarter. And from a second quarter perspective, we believe we will show some growth on a year-over-year basis in second quarter, as a lot of the strong bookings over the last few quarters, we began to realize some of that, understanding there is some headwind from some of the high-grading efforts we've been working through.

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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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Got you. And any call-outs from kind of your top 4 clients? You give that data usually in the 10-Q filing, but anything -- any of those accelerating, decelerating more meaningfully than others?

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [5]

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A couple are soft, and our largest client is very strong.

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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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Okay, great. And then, I guess, the other thing, just how should we think about -- is this kind of a new good level of SG&A going forward? I mean, it was 10.2% in the quarter. You go back pretty much every year now. For a few years in a row, you've been continuously kind of cutting that down a little bit. I mean, are we in the low 10s now this year?

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [7]

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Yes. I think that's actually a pretty aggressive number. We've been managing pretty tight with the significant pipeline we have and expected further growth. I think any time we're operating in the 10% to 11.5% range, it's pretty healthy for a service business, David. And then it'll just depend a little bit on how we step up to handle growth and try to balance that. As you know us, we'll manage that as tightly as we can.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Mark Argento, Lake Street Capital.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [9]

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Just a quick question in terms of mixture in the quarter in terms of segments served. Any major changes in terms of segment mix, and kind of any margin profile shifts as well?

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [10]

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Mark, thank you. I think you'll see a jump in wireless, but some reduction in telecom and cable and media versus prior year, and then good growth in retail. And health care bookings are solid and should prove well, but health care's kind of flattish from where we were last year.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [11]

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Got it. And the retail piece, are you guys doing -- is that e-commerce related? Or what kind of retail business are you guys doing?

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [12]

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It is. We really think the etail side of things is the best place to play right now.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [13]

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Great. And then, obviously, you got a little bit of tailwind here. Is the objective just to continue to generate cash and pay down the debt? Or I know we've talked before about M&A opportunities. Is it still premature in terms of looking at M&A? Or what's your thoughts there?

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [14]

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No, we're opportunistic. And the board's always looking at opportunities with Don and I on ways to maximize shareholder value. But as I mentioned, we might have a pause in debt reductions second half as we handle some of these -- some of the ramps and new bookings we've been announcing. But we'll continue to -- we've been able to delever quite a bit, and we'll continue to look at things as they come across our desk.

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Operator [15]

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At this time, this does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

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Chad A. Carlson, StarTek, Inc. - Former Chief Innovation Officer [16]

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Thank you, everyone. Appreciate your continued interest, and we'll get back to work. Talk to you next quarter.

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Operator [17]

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Ladies and gentlemen, thank you for your participation on today's call. You may now disconnect. Everyone, have a great day.