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Edited Transcript of SRT earnings conference call or presentation 7-Aug-18 8:30pm GMT

Q2 2018 StarTek Inc Earnings Call

DENVER Jan 16, 2019 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Tuesday, August 7, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lance E. Rosenzweig

Aegis Limited - Global CEO

* Ramesh Kamath

StarTek, Inc. - CFO

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Conference Call Participants

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* Patrick A. Schulz

Robert W. Baird & Co. Incorporated, Research Division - 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 second quarter ended June 30, 2018. Joining us today from Startek is President and Global CEO, Lance Rosenzweig; and the company's Chief Financial Officer, Ramesh Kamath. Following their remarks, we'll 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 those projections. Startek advise all those listening to the call today to review the latest 10-Q 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's earnings release on the Investors section of their website along with supplemental slide presentation for today's call. 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 present and Global Chief Executive Officer, Lance Rosenzweig.

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Lance E. Rosenzweig, Aegis Limited - Global CEO [2]

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Thank you, and good afternoon, everyone. I am thrilled to be here today leading this newly combined organization of Startek and Aegis. Since assuming the CEO role a couple of weeks ago, I have greatly enjoyed meeting so many of the exceptional Startek team members and clients and getting reacquainted with many of my former colleagues at Aegis with whom I worked when serving as CEO of Aegis USA in 2014 and when serving as CEO of PeopleSupport through our IPO and up until our acquisition by Aegis in 2008. Let me begin today's call by quickly reviewing the closing transaction details as there were a few updates from Startek's last earnings call.

Startek issued 20.6 million shares of its common stock to Capital Square Partners, or CSP, the primary shareholder of Aegis, to acquire all of the outstanding common stock of Aegis. Concurrently, CSP purchased approximately 166,667 primary shares of Startek common stock at $12 per share, representing a $2 million investment. Post closing, Startek's shareholders owned approximately 45% of the combined entity with CSP owning the remaining 55%. The transition period is progressing smoothly, and I am grateful to Startek's former CEO, Chad Carlson, and former CFO, Don Norsworthy, who have been extremely helpful to me and our team in this transitionary period. I want to thank them both. Chad is remaining with Startek as our Chief Innovation Officer where he will be providing sage counsel on the many exciting innovations in our company and industry. There's a real opportunity in the BPO industry to become a pioneer in integrating advanced technologies with exceptional human capital to unlock higher margins and increase market share.

Our journey to cement our position as the leader in this space has already begun, and is a large part of why our leadership team and I are so excited about the long-term prospects for the newly combined Startek and Aegis. The combined company has created a truly global platform with more than 50,000 employees operating in 13 countries on 6 continents. With people at the core of any business, our plan is to maximize the potential of this extraordinary talent base by implementing best practices from each company to drive down attrition rates and costs and drive up performance and employee satisfaction.

In my meetings over the past several weeks with key clients, I have heard tremendous praise of our employees, and I have no doubt they will continue to propel us forward as difference makers in this competitive space. Our global model is a differentiator for our company. Let me explain what I mean by this. We do not see our international operations merely as low cost delivery locations for U.S. clients. Instead, our focus is to serve the customers of the world's largest companies and finest brands around the world. In addition, our footprint allows us to serve international companies in their own backyards. In fact, we currently serve local clients in most of the 13 countries in which we operate.

The diversification of clients, geographies and currencies will help us to improve the predictability of our results while reducing the risks inherent in customer and country concentration. This is particularly important given the challenges Startek has faced with some of its large wireless clients over the last few quarters, which we expect to continue into 2019 as one of these clients becomes fully transitioned off our platform. New client wins is another area in which we are very optimistic. We are focused on and seeing progress toward replacing lost wireless volumes and programs with a pipeline increasingly comprised of global and next-generation companies in retail.com, healthcare, financial services and travel and hospitality. While we recognize that this transition will be a multi-quarter process, we are confident that we will emerge a stronger company with a more diversified client base and markets, higher growth and higher margins in 2019 and beyond. And finally, I want to touch upon technology. Today's customers want service customized to their specific desires and often, technology provides that solution. We can now bring Aegis' leading AI technologies to automate transactions where it makes sense while leveraging the power of Startek's proprietary ideal dialogue suite of services and social media acumen for a truly holistic best-in-class solution for clients globally. Our newly combined companies afford significant benefits to our clients, our shareholders and our team members. Our current and future client base will reap the benefits of our global reach and access to new markets, multilingual offerings and technology-led innovations. Our shareholders can benefit from the diversification of our revenues, added scale and cost and revenue synergies to enhance margins and growth in the years ahead. And our employees will now become part of an even larger organization with vast opportunities for professional development and cross functional training. We are extremely appreciative of our team's hard work to get us where we are today, and I want to offer my sincere gratitude to all for the heavy lifting required as we integrate both companies into a seamless global operation.

As in any transaction of this size, the integration process will take time, but we are well underway. Our post merger integration or PMI team, has already kicked off and is making substantial progress. By harnessing the combined power of both organizations, we now have the potential to unlock enormous opportunities for growth that neither company could achieve alone.

In fact, we have already seen several clients express genuine interest in expanding their level of engagement with us. These opportunities range from new service and technology offerings to expanded geographical presence. I would now like to turn the call over to our new CFO, Ramesh Kamath, to take you through Startek's second quarter results. Ramesh is no stranger to our industry, having previously served as CFO of Aegis, CFO of Minacs, and CFO of Progeon, now known as Infosys BPO. He brings a wealth of knowledge and experience to our executive team with a proven track record of helping businesses grow while maximizing profitability. We very much look forward to Ramesh leading our finance organization. So welcome, Ramesh.

I'll turn it over to you.

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

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Thank you, Lance, for that warm introduction. It's great to be here. So now let me jump straight into the Startek second quarter results. Total revenue in the second quarter was $59.7 million compared to $74 million in the same period last year. The decrease was primarily driven by low volumes and lost programs from Startek's top wireless clients, which, as Lance noted, has been a common theme over the last few quarters.

These low volumes and lost programs also impacted gross margin for the quarter, which decreased to 8.8% compared to 12.1% in the second quarter of 2017. In addition, gross margin was also affected by costs associated with onboarding a new program for an existing client. For listeners less familiar with our industry, there's often a period at the start of the engagement or a new program when we must incur additional cost to get a client up and running without recognizing much revenue in tandem. That is why we expect our margin pressure to continue through 2018 as we look to ramp up new programs to replace the wireless volumes. Consequently, the lower revenue and gross margin yielded in a net loss for the second quarter of USD 3.7 million or a negative $0.23 per share compared to net income of USD 600,000 or $0.6 million or $0.03 per share in the year-ago quarter.

Adjusted EBITDA. The non-GAAP metrics we plan to focus on for tracking our bottom line going-forward was $700,000 or $0.7 million in the second quarter of 2018 compared to $4.4 million last year. Again, the decrease was largely driven by factors associated with lower volumes and lost programs from our wireless clients. The impact from these soft volumes and lost programs in the second quarter was partially offset by growth in cable, retail and financial services clients. Operationally, we have many opportunities to realize cost synergies as well. These synergies will range from the consolidation of corporate functions and duplicative overhead to implementing global best practices across our delivery campuses to leveraging our scale and purchasing power, to drive procurement efficiencies with our various technology and systems providers. Over time, the improved utilization of existing infrastructure, including the expanded plan to service clients in different geographies should prove to be highly accretive to our bottom line.

In Startek's proxy filings, the company described the promise of $30 million of improvement in EBITDA due to synergies, revenue growth and operating efficiencies by 2020. We can now reiterate our confidence in this opportunity, but please note, we expect minimum benefit of cost synergies in 2018 as we work to integrate our combined new platform.

I will now turn the call over back to Lance.

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Lance E. Rosenzweig, Aegis Limited - Global CEO [4]

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Thank you, Ramesh. We now have the scale, breadth and capabilities to compete more effectively and profitably in the marketplace. We are uniquely positioned to become a truly global BPO provider with global clients, a global management team, global best practices and global thinking. The opportunities ahead for Startek are just beginning, and I look forward to leading the team and all stakeholders into this next chapter of growth.

Ramesh and I will now open 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 will come from the line of Patrick Schulz with Baird.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Analyst [2]

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I guess, first of all, looking at Aegis' growth in the second quarter, what kind of revenue contribution should we expect to see in the second half of the year coming from Aegis?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [3]

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Patrick, thank you for that. Startek has had a long-standing practice of not providing forward-looking guidance, and we are going to be continuing that practice. So unfortunately, we cannot comment on expectations for later this year.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Analyst [4]

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Perfect. And I guess, looking back at your proxy as well, looks like you guys are expecting roughly $400 million of revenue from Aegis in 2018 and 2019. Have these assumptions changed at all given the current market environment? And if they have, how much of that is driven by core business, and how much is driven from currency volatility? Or lower volumes and lost programs?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [5]

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Right. And again, we cannot give guidance going forward. What we can say is that in our remarks that the quarter was challenging, this past quarter and that we expect those challenges to continue into early 2019, but we cannot, unfortunately, give guidance on specific numbers.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Analyst [6]

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Perfect. And then, one more, if I may. You guys talked about the lost program from one of the top wireless clients. Was this loss as big of an impact as you guys originally thought it would be? Or how did you guys see that one?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [7]

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Yes. So we are on this job for 2 weeks, and we just didn't have the frame of reference from earlier expectations, but what I would say is that in the wireless industry, more generally, there are issues with some of the traditional players who are seeing declines in volumes, et cetera. That's being accompanied by growth in some of the newer portions of the sector, particularly the mobility sector, and we are in a great position to be servicing both sides of that business. So while there are slowdowns in some areas, there are increases in others. And Aegis then, brings in another component, which is much more rapidly growing geographies and countries where they haven't reached the maturity levels that they have in the U.S.

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Operator [8]

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(Operator Instructions) And our next question will come from the line of [Omar Samalot], private investor.

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Unidentified Participant, [9]

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I don't know if how many -- I don't know what type of questions you can ask or in terms of the post closing, but I was looking forward to know the post closing net debt balance and also the total shares outstanding?

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

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The net debt post closing is about $168 million net of cash, and the shares outstanding is about 36.6 million. I don't have the precise decimal, which includes the 20.6 million shares issued to CSP -- 20.76 million shares issued to CSP.

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Unidentified Participant, [11]

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All right. So that's a lower number than initially thought. And also -- and the net debt number, does that also include -- is that after the transaction expenses and the $2 million capital infusion?

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Ramesh Kamath, StarTek, Inc. - CFO [12]

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It is after the $2 million capital infusion. Part of the transaction expenses have been paid and the rest accrued. Not yet paid.

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Unidentified Participant, [13]

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Understood. Okay. Got it. And are you able to talk about the pro forma numbers for Q2 when you include Aegis, or that is something that we'll be seeing in the 10-Q?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [14]

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Yes. Unfortunately, [Omar], the Q1 numbers are in the proxy, and they were reconciled to U.S. GAAP. And post closing and Q3 forward, we will also be reconciling Aegis numbers to U.S. GAAP and providing consolidated numbers. The Q2 numbers, however, have not been reconciled to U.S. GAAP and cannot be disclosed at this time.

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Unidentified Participant, [15]

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Okay. But -- And will that be disclosed in the 10-Q or at a later filing?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [16]

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Yes. That would be disclosed in the Q3 10-Q and going forward.

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

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It won't be given in the 10-Q for this quarter, which will only show Startek numbers.

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Unidentified Participant, [18]

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Understood. I wonder -- you did talk about the $30 million in EBITDA improvement that you're expecting by 2020, some of the revenue and cost savings synergies. I wonder if you can talk about specific levers that you have identified to achieve this. And which of those will yield more of a near-term result, and which will yield more the longer term results.

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Lance E. Rosenzweig, Aegis Limited - Global CEO [19]

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Sure. The leverage that we see, first, on the cost side, include some duplicative overheads, some consolidation of best practices and really taking the opportunities to look at how we do things on a global basis and reorient those in the right geographies by category. The revenue synergies will be largely comprised of new business for existing clients that we can now support in other geographies as well as new clients that could not have been supported before by either company. We see shorter-term implementation of more of the cost synergies, which we expect to see probably starting in early 2019 and the revenue synergies being layered on overtime.

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Unidentified Participant, [20]

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Okay. Good. The proxy also mentioned the potential of debt refinancing opportunities. Can you tell us what you're seeing there?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [21]

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Sure. Let me take a quick stab and then, Ramesh, jump in. The company, going forward, is very focused on running a business that will generate strong cash flow and maximize opportunities for shareholders on a long-term basis. Our rigorous approach to cash flow we think, over time, will enable us to have better access to debt at increasingly better terms. And so I -- we don't have a specific timeline on that, but we think that the company is going to remain highly focused in that direction.

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

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[Omar], to continue, we have started meeting bankers here, but as Lance mentioned, we have just been 2 weeks on the job and 2 weeks since the deal was done. So I wouldn't expect anything too soon, but the conversation with the banks have started. And some of the banks have even reached out to us proactively. So that makes us pretty optimistic that we can refinance the debt as was given in the proxy.

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Unidentified Participant, [23]

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And obviously, you see an opportunity there for more beneficial terms from what you already currently have.

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Lance E. Rosenzweig, Aegis Limited - Global CEO [24]

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Well, again…

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Ramesh Kamath, StarTek, Inc. - CFO [25]

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It won't make sense to sign up new debt on the same terms, would it?

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Unidentified Participant, [26]

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Exactly. Okay. On the Startek side, premerger, the company had mentioned that they expected the highest rating initiative to bring in new business and to replace all of the low-margin stuff by the end of this quarter, Q2. I was wondering if you're able to talk about -- if you're able to achieve that, and if so, how do you see capacity utilization moving into the second half of this year?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [27]

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Yes. It's a very good question. The second quarter was challenging from a revenue point of view with some of these large clients, and that fell through to the margins in the bottom line. Going forward, we are very focused on growth and the opportunity to both grow clients as well as to bring in new clients. As I mentioned, in some of the more rapidly growing sectors, the retail.com sector, healthcare, financial services and travel and hospitality. So going forward, we expect to see a mindset in the company of growth, and we're excited about the building pipeline in that direction.

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Unidentified Participant, [28]

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Okay. In terms of Amazon, have you guys identified mutually beneficial business? And if so, has it been ramping?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [29]

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Sure. We do not, as a practice, comment on individual clients. But what I would say is that we have been very happy on a global basis with some of our larger clients that do have global operations and that are looking at, and are indeed expanding in multiple countries in which we do business.

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Unidentified Participant, [30]

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Perfect. Okay. Can you talk about any new logo opportunities now as a truly diverse global provider? Maybe potential clients that will now open their doors to you because of your size? Or potential cross-selling opportunities among existing clients given the new footprint?

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Lance E. Rosenzweig, Aegis Limited - Global CEO [31]

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Yes. Excellent question. And in my 2 weeks that I've been at Startek, I've spent a good chunk of time on the road visiting with clients and with prospects, and I'm very happy with what we're seeing in terms of both the opportunities ahead, the size of the companies including some of the world's leading brands and the excitement around the new more broad footprint that we can offer to the market.

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Unidentified Participant, [32]

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Okay, good. Ramesh, in the premerger, usually, the DSOs for different cash flow timing was in the 70 to 72 days. I'm wondering if you had a chance to get a handle on how would that work out postmerger. And what you're seeing there?

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Ramesh Kamath, StarTek, Inc. - CFO [33]

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I think that should be possible. Yes. That's a fair thing. We should be done.

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Unidentified Participant, [34]

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Okay. And then, finally, have you thought about the postmerger reporting of what will be included in the SG&A line? Obviously, different competitors in your industry -- put different things in there. And what should we expect to see from a percentage of revenue target standpoint?

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Ramesh Kamath, StarTek, Inc. - CFO [35]

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I won't comment on percentages in specific, but on a template for reporting, given that we are already in the middle of August, I don't propose to make too many changes in our reporting at least for this calendar. Going forward, if things change and we need to make changes, it will only improve disclosure, and we will take it at that time.

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Operator [36]

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At this time, this concludes the question-and-answer session. I would like to turn the call back over to Mr. Rosenzweig. Mr. Rosenzweig, please proceed.

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Lance E. Rosenzweig, Aegis Limited - Global CEO [37]

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Thank you very much. And again, to recap, we've got a great team across both companies, key technology differentiators and a broad new global platform. And Ramesh and I just could not be more excited to be back in the saddle, and we look forward to reporting on our progress next quarter.

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Operator [38]

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Ladies and gentlemen, thank you for your participation on today's conference. You may now disconnect.