Startek Inc (SRT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth quarter 2004 StarTek earnings conference call. My name is Andrea, I'll be your coordinator today. We'll be facilitating a question-and-answer session towards the end of the today's conference. If you require assistance, pleas press star followed by zero. A coordinator will assist you. As a reminder, this conference is being recorded for replay purposes. I would now like turn the presentation over to the host of today's call, Amy Claire Wild, Vice President of Marketing and Communications.

Thank you, Andrea. Good morning. Today's call is being recorded. A dial-in replay is available at the conclusion of today's call. A web-based replay will be posted at Startek's corporate website, www.startek.com, by March 4 and will be accessible to you through March 30. Please note that our discussion today will encompass certain statements which are forward-looking and subject to various risks and uncertainties, as summarized in our 2003 10-K and other SEC filings. Our actual results may vary based on these risks and risks and uncertainties.

Good morning. Welcome to the quarterly earnings conference call for StarTek. We thank you for this opportunity to speak with you today. We'll cover not only our quarterly results but our yearly results as well.

I'm Steven Butler, I'm the Chief Financial Officer and acting Chief Executive Officer for StarTek. Many of you listening to the call today have worked with Bill Meade, our former CEO. And I will be conducting both the business side and the financial side of the call today. Our agenda this morning first includes comments on the quarter's business progress, followed by a discussion of our financial results.

Then we will open the the line for some question and answers. This will conclude no longer than 9:30 a.m. Eastern time.

During the course of our remarks today, we will not be giving any forward-looking financial guidance about our business. Nor will we at this point in time provide specific financial guidance for the balance of the calendar year. I want to start the business review discussion with a couple of topics that have been in the press recently, and have been circulated in various written statements by analysts. Please accept my apologies for not address this details earlier, but we were in a quiet period.

Bill Meade resigned on February 16 after the a meeting with the Board of Directors. We really have nothing more to say on the matter beyond what is outlined in our press release on February 18th regarding the management change. Just know that StarTek is moving on and moving forward. The Board then offered me the opportunity to be the acting CEO, the Company is currently going through a restructuring and realignment process.

Since January 1 of this year, we've already begun this process and reduced expense and cost of services in SG&A by some $750,000 on annual basis. First steps towards bringing our capacity infrastructure in line with current volume. As a CFO, it is my mandate to reposition the Company financially and focus it on growth opportunities. This is the type of leadership the Company needs at this stage in it's corporate business cycle. I also received several calls last week from analysts inquiring if StarTek had lost one of our major clients. I assure you that this is absolutely not the case.

Indeed, if it were the situation, you would have seen a public announcement and subsequent 8-K giving the percentage of revenue that this client represents to the Company. I recognize and appreciate that you have a number of questions and issues you want to address during the call today. I will do my best to get through the results in a timely matter to allow for a reasonable period of time to take your questions.

Onto the business review. For the third consecutive year we retained 100 percent of our major business process management service clients. In all earned and maintained very strong client satisfaction scores compared to our primary competitors. Our relationship with each of our clients is strong. To date we have not seen any reduction in seats from them. Our delivery performance has produced solid, consistent client satisfaction results. There are several specific instances I want to share with you today.

From our international wireless client, StarTek was the first of their 8 outsourcer providers to gain premiere status for our superior performance based on operational metrics, such as service level and quality, as well as end-user customer satisfaction surveys. For example, in January one of the Startek's sites received the the highest end user satisfaction core score ever any of the clients outsourced sites. Our sites hold 4 of the 5 top positions out of 13 out-sourced sites, in the clients overall quality rankings.

Our international business telecommunications client, we recently participated in the Outsourcing World Summit, where AT&T Business gave a public case study presentation along with StarTek, about the role model relationship the 2 Companies have enjoyed over the past five years. AT&T Business highlighted Startek's quality performance and responsiveness that consistently delivered significant measurable results to their business. These are just two examples of our operational excellence as confirmed by our satisfied clients. Again, our relationships with our clients continues to be very strong and very secure at this point in time. We see the effects of our preemptive price reduction with our largest client having a positive impact on our production volumes.

During the quarter we began generated production revenue in our new Collinsville, Virginia site, which is our 16th business process management services facility. The operational support delivered to our newest telecommunications client continues to go extremely well, We're pleased with their business contribution towards our overall growth moving toward. As you know, most public Companies are addressing the challenge of Sarbanes-Oxley 404 compliance. StarTek is currently engaged in this process as well. We believe that our Sarbanes-Oxley 404 testing will be completed before the issue of our 10-K. We recently signed the mobile virtual network operator business with an existing client. We believe that the MVNO market is a strong opportunity for Startek, as we believe our strengths in wireless telecommunications, play directly to the critical demands of this rapidly emerging market.

I would like to address that many of you have also inquired about the dividend policy of the Company. The Board supports the current dividend policy, and at this time has no intention of making any changes to that policy.

Moving onto the financial results, we're going to look at fourth quarter of '04 compared to the fourth quarter of '03 to begin with. Then we'll get into the annual results. And looking at our quarterly revenue, our total revenue for the fourth quarter compared to the fourth quarter of 2003 remained flat at $64.8 million. Business process management services revenue for Q4 '04 however, compared to the fourth quarter of last year, rose 13 percent or $6.7 million, to $58 million. Production volume rose some 35 percent driven by continued strength in the growth of our relationships with our two largest wireless clients, as well as a strong performance serving our newest clients that were secured in early 2004.

Our supply chain management revenue for the fourth quarter of Q4 compared to the fourth quarter of '03, fell some 49 percent or $6.5 million to $6.8 million, resulting from a decrease in volume of work from our largest assumed client, as -- that we serve in the business line, which was not fully replaced by new clients. As far as growth profit, the total gross profit for the fourth quarter of '04 compared to fourth quarter of '03, fell 32 percent or $6.2 million, to $13 million.

Total gross margin in the quarter compared to the fourth quarter of last year fell 9.7 percent to 20 percent. Largely the result of greater costs from the launching of new call center capacity to handle anticipated volume growth, that materialized at lower levels than our clients forecasted, continuing decreases in revenue and margins in our supply chain management platform, and increased volume billed at lower agent rates, due to the tiered incentive priced model. Finally, the weakened U.S. dollar relative to the Canadian dollar resulted in a $1.7 million rise in Canadian dollar denominated expenses for business process management services during the quarter.

On the selling, general and administrative side, our total SG&A for the fourth quarter '04 compared to the fourth quarter of '03, declined 7 percent or $530,000, to $6.6 million. Reductions would have been greater, but for the offset of increased spending to support Sarbanes-Oxley compliance. On operating profit, our total operating margin for Q4 '04 compared to Q4 '03 fell 8.8 percent to 9.8 percent. Our net income margin for Q4 '04 compared to Q4 '03 fell 6 percent to 6.8 percent.

Depreciation expense increased 21 percent in Q4 '04 over Q4 '03 due to the launch of a new call center in the fourth quarter with residual effect from the other new sites launched earlier in 2004. For the entire year of 2004, I believe we brought three new call centers on board. Fully diluted earnings per share from continuing operations decreased 46 percent to $0.30 for Q4 '04 compared to $0.56 for Q4 '03. Fully diluted earnings per share including discontinued operations decreased 44 percent to $0.30 for Q4 '04 compared to $0.54 for Q4 '03.

As far as the balance sheet, our working capital for Q4 '04 remained essentially flat compared to Q3 '04 closing at $84.6 million. Cash and investments for Q4 '04 compared to Q3 '04 fell 9.6 million, while accounts receivable rose $8.7 million. It's a typical fourth quarter phenomenon as many Companies delay their payments until after the first of the year. Stockholders equity for Q4 '04 compared to Q3 '04 rose $1.8 million to close 2004 at $136.9 million.

Now we'll look at the full year of 2004 compared to the full year of 2003. As for revenue, total revenue for the full year of 2004 compared to '03 rose 15 percent or $32.7 million to $258.1 million. Our business process management services revenue for the full year of 2004 compared to full year 2003 rose some 34 percent or $56.4 million to $221.5 million. Our business process management services revenue now comprises 86 percent of our total revenue compared to 73 percent of our total revenue in 2003.

Production volumes rose 49 percent. Again driven by continued strength in the growth of our relationships with our two largest wireless clients, is well over our strong performance serving our newest clients that were secured in early 2005. While supply chain management revenue for the full year in '04 compared to '03 fell 40 percent, or $23.7 million to $36.2 million, again attributable to the decrease in the volume of work of our largest client. Supply chain management revenue now makes up only 14 percent, obviously of our total revenue.

As far as gross profit, our gross profit for the full year '04 compared to '03 rose 5.3 percent, or $3.2 million, to $62.3 million. As previously mentioned, the rise in business process management services production volume of 49 percent, more than offset the following developments. A weakened U.S. dollar, relative to the Canadian dollar, a fall of $3.1 million in gross profit from the supply chain management division, and our operating capacity, again, was greater than our anticipated volumes. Our gross margin for the full year Q4 compared to the full year '03 fell 2.1 percent, to 24.1 percent.

As far as the selling, general, and administrative expenses for the full year, total SG&A for the full year '04 as compared to '03 rose 8.1 percent, or 2.1 million to $27.9 million. This was primarily due to increased spending again, to support Sarbanes-Oxley compliance and staffing costs to launch our three new call center sites. Our operating profit for the full year of '04 compared to '03 rose 3.2 percent or $1.1 million to $34.4 million. Our operating margin for the full year compared to the full year of '03 fell 1.5 percent to 13.3 percent.

Total net income for the full year 2004 compared to the full year 2003 remained essentially flat at $23.5 million. Total net income margins for the full year '04 compared to the full year '03 fell 1.3 percent to 9.1 percent, again, a big factor total depreciation expense increased 25 percent for the year ending '04, compared to '03 due the mentioned new call center sites. The impact of depreciation on earnings per share was $0.17 per share. Fully diluted earnings per share from continuing operations remained essentially flat for the year at $1.59 compared to $1.60 for the prior year. Fully diluted earnings per share including discontinued operations decreased 6.5 percent to $1.42 for the full year 2004, compared to $1.52 for the full year '03.

For the balance sheet, working capital for the year in 2004 compared to '03 rose $7.4 million to close 2004 at $84.6 million. Long-term debt for the year into 2004 compared to the year end 2003 rose $8 million to close '04 at $8.1 million, as the Company secured a line of equipment financing. Stockholders equity for the year ended 2004 compared to the year end in 2003 rose $3.9 million to close 2004 at $136.9 million.

As far as the cash flow statement for the year, capital expenditures were 19.5 million in 2004, compared to $23.9 million for the full year in '03. Our dividend payments in '04 were 22.8 million, compared to $10.4 million for the full year in 2003. And that pretty much covers the financial results.

In summary, let me summarize with a couple of points. StarTek is currently actively engaged in a turnaround to realign its current capacity infrastructure to realign with the volume and improve its gross margins. The Company is very focused on continuing to grow the revenue base and secure long-term relationships with its clients. We still believe that our client-facing highly competitive operational excellence model is working, as we define it to be StarTek's unique ability to efficiently swiftly ramp new capacity, which we believe is 30 to 40 percent faster than our competitors. Usually in less than 90 days.

StarTek has a unique focus on resource planning, scheduling and staffing to the 15 minute interval. StarTek's desire to be the #1 outsource provider with respect to unsurpassed customer service and quality, is backed up with our client satisfaction survey and performance. We have entered 2005 with a current client base where all major relationships are on a growth curve or very, very stable.

As I conclude with our remarks for the fourth quarter performance, I'll restate our current practice of not offering forward-looking financial guidance at this point in time, and for the duration of '05. I would like to now open up the call for questions, and provide you with some answers. I know that there is quite a few out there. Operator?

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] One moment while we compile a list of questions. Our first question comes from Jeff Nevins from First Analysis.

Good morning. I know you addressed the dividend. My question is, could you help me just understand the math on the cash flow and the dividend and kind of what point you think your will get back to a level where the dividend is actually being funded through internally generated cash flow? You've been burning money in '03 and '04 to pay it. How does the math work?

Jeff?

Yeah?

This is, Steve. I'm sorry. You're correct. We have burned some cash. Quite honestly, not a lot. Because of the debt financing that we put in place for the equipment, which is, obviously provided us with cash to do some of the capital spend. Certainly as we addressed earlier, part of this whole turnaround process is improving our margins. Therefore increasing our cash position to the bottom line. But at this point in time, there is no threat to the dividend given our current cash position in this Company.

Okay. Just my second and last question is on the facility that you have with Wells Fargo, it looked like you drew some off the line of credit sometime in the fourth quarter. That was the 1.25 million. That's the Wells Fargo line of credit?

Yeah. It's an operating line of credit. Quite honestly we usually repay it within the quarter.

Okay.

It's a draw down. It's primarily timing.

I guess my question is -- I think it's a $10 million line. You have some capacity there left. Are there -- I know there is a restriction on, you can't break any covenants to pay the dividend. Will there be any changes in the relationship just given the fundamentals in the fourth quarter and what we're looking at going forward?

As far as changes in relationship, if you mean increasing the line or something like that, there is always the possibility. We have no intention to do that at this point in time. That's not necessary. We've never actually even drawn that whole line at any one point in time. So, the covenant structure is very reasonable. It is not a threat to our ability to be able to draw on the line at all.

Okay. Thanks. I'll hop off.

Sure. Thanks, Jeff.

Our next question comes from Arnold Ursaner from CJS Securities. Please proceed.

Hello. Good morning. I missed one number, which if you could perhaps, just freshen it up. You gave volume for the full year of 49 percent. I missed the number for the quarter.

Okay. Bear with me.

The reason I'm asking the question, it's obvious you're getting quite strong volume growth. But given the revenue growth, you're giving away a substantial amount to get it.

The volume for the quarter, production volume rose 35 percent during the quarter.

Right.

And, again, most of the volume is driven by one of our largest clients. There is a tiered pricing effect that goes into play, as the volumes increase. So, when a tiered pricing effect comes into place, of course, you're revenue base probably takes a hit from that, and certainly your margins do. It's something we've done to stay competitive in the market.

Okay. Normally you give out a lot more detail in the K, which I'm assuming we'll not have for a while. Can you give us some of the numbers on your disclosable clients, that will be in the K?

As far as our top clients?

Yes.

That mix has not changed that was noted in the previous Q. AT&T Wireless is still a major client. Cingular is a major client. T-Mobile is a major client.

You usually give a breakdown of the actual percentage.

We will in the K. We will give you a breakdown of the actual percentage revenue that they drive.

Okay. My final question if I may. In looking at your investing activities, the purchase and investments available for sale and proceeds from disposition. It looks like you turned your portfolio, something. The actual portfolio is about $24 million of investments, maybe an additional 14 if you use the cash. You guys are turning this a lot more often than a hedge fund. Can you explain what happened there?

What we've done in the last year, driven to some extent by Sarbanes-Oxley, and to some extent a change in internal philosophy, has revised our cash investment philosophy, and to the effect that we're investing in better secured paper, more conservative products. So, yes, we've turned some of the investment portfolio to do that to invest in more investment grade paper.

But are the short-term maturities of under six months?

In some cases, yes. Obviously -- because of what's been going on in the interest rate markets, we're not willing to lock into very long-term maturing instruments, because of the rate increases that have been consistent with Mr. Greenspan.

Several more questions. I'll go back in queue. Thank you.

Uh-huh.

Our next question comes from Martin [Bach] from Morgan Stanley. Please proceed.

Good morning.

Good morning. How are you?

Question for you. You have not mentioned anything about the stock buyback that was mentioned in the last quarterly conference call.

Right.

Has any stock been bought back? Is there anticipation of continuing it and doing more?

Well, at this point in time, no, we haven't bought any stock back. We constantly evaluate the process. Certainly once we do decide to get into the market and do something like that, we will have to disclose it. We'll do so at the time. That hasn't been the focus, a primary focus at this point in time. The program is in place. The program is still in place. We continue to evaluate the opportunity.

All right. Second and last question. Timeframe that you guys are using internally for replacing Bill Meade.

That is a Board -- that's a Board question that I can't speak to. You know that there is a process that they put into place. They form their own search committee. I don't know. I can't answer specifically what that timeline is.

Thank you.

Our next question comes from Troy Mastin from William Blair & Co. Please proceed.

Hi, Troy.

Good morning. You say in the press release that you're disappointed with the performance in the back half of the year. Can you just give us some insight as to why you're disappointed? There weren't any major clients lost, your pricing was set with your largest client in the first part of the year, is the disappointment on new business, or can you give us some more insight on what are your internal thoughts coming in below plan?

There is a couple of things, Troy. Certainly the delivery of the volume that we anticipated didn't come to fruition. That was somewhat of a disappointment. Our margins have, you know, in the last two quarters, so obviously from what you can see, consistently taken a hit. You know, when you start to look at those things and look at the overall position of this Company currently, if we're going to stay competitive in this space, we'll have to tighten down some things here, and realign what we're doing from a capacity utilization point, that aligns with more of the volume that we're seeing, you know, seeing from our clients.

We launched three new call centers in anticipation of a lot greater volume, with a couple of the clients that we signed last year. That didn't materialize last year, it could materialize this year in a lot greater way. When you look at those things and you start to monitor your margins more carefully, that's what we're going to do. We have to start to take some corrective action. That's where we're at.

This is the #1 surprise is less volume than anticipated?

The delivery of that volume, yes. Yeah, our largest client, obviously, delivered greater volume. The tiered pricing structure affected us there to some extent. A couple of other clients didn't deliver the volume we anticipated, having excess capacity for anticipated volume that wasn't there. So we're starting to realign the capacity with the volume.

And with regards to the tiered pricing, and how that might impact other clients. Have you seen any signs that it will be necessary to renegotiate contracts with your number two or number three clients, with a similar structure you have with your number one client?

No. Not at this point in time, we haven't at all of

The contract for number two is up at the end of this year, is that correct?

That is correct.

Okay. And then on the new business pipeline, there has been a lot of discussion over the last 6-9 months that it was healthy. It's characterized as the strongest ever. You didn't mention any new clients on the call, can you give us up an update on any landed in the quarter, and what the pipeline looks today in your assessment?

That's always interesting. You can talk to pipelines and you can talk to possible percentages of closing deals. I don't really believe in that until you sign on the bottom line, does the deal get closed. Our pipeline is fairly healthy today. We're certainly actively engaged with a number of large clients in the telecommunications, cable, and internet spaces. We hired a new head of sales in October, who completely revamped the sales force during the course of the fourth quarter, and during the course of January. I cannot announce any clients today.

I'll tell you that we're very bullish on the fact that there are a lot of good prospects out there. I know, I think, mentioned in the previous call we thought we had two or three clients that we might sign before the end of the quarter. I think what we found with those 2-3 clients is the financial metrics for us just didn't make sense. In one case, one client decided he couldn't make it work with anybody, and kept it himself. We won't take any client on that comes our way if the financial metrics don't make sense, because then there goes my gross margin inning, but we are activity seeking clients. We've got a number in the queue. When we sign one, trust me you'll see it a big press release. We'll shout it from the rooftops. At this point in time, we haven't signed anybody to date.

Okay. And then to think about the structure of your P&L today, maybe from a gross margin perspective, primarily. Is there any reason to expect gross margin to swing any way from another if your business mix doesn't change? Is there anything one-time in nature in the fourth quarter that would lead to maybe better gross margins going forward? If your business mix stays the same that it is today on a client basis, should we see a pretty similar gross margin going forward?

Without getting into the whole realm of financial guidance, which I said I wouldn't do,, what I would revert back to, is that you know what the gross margins are today. You know where they exist, you know we're not happy about that. I guess you take it from there from the standpoint that we're in a turnaround process to realign our costs. That would be obviously where it would go, right?

Okay.

Hopefully in the right direction.

G&A drop from Q3 to Q4? -- what was driving that, was there anything like a bonus reversal, or anything that was one-time there that would lead to that pretty significant drop sequentially?

Well, obviously, you know, it would have been greater except for our friends at Sarbanes-Oxley driving up the cost of it, there was some reduction in staff. You know, and probably some more renegotiations of some contracts that we had in place. And so, therefore, obviously some compensation costs were less than we anticipated. That would be the primary drivers. There was some staff reduction and, again, we have been pretty aggressive on renegotiating some supply and vendor contracts. So, some of the those things came to fruition during the fourth quarter,

Nothing one-time like a bonus accrual reversal?

One of the biggest things that hit costs -- that hit cost a little bit was that we've been going through and doing a very, very thorough audit of our telecom bills. If anybody with familiar with what those can look like, we had a significant reduction in costs there. Found a lot of errors in billing. That actually contributed to some of the decrease.

Okay. Thanks.

As reminder, if you would like to ask a question, please key star one. Our next question comes from David Grossman from Thomas Weisel Partners.

Thank you. Just going back, I guess, quickly to the margin question that was asked earlier. Ask you give us a sense for what are some of the actions that you may be taking to improve the margins over the next couple of quarters?

Yeah, I mean obviously we're looking at the whole capacity utilization structure and looking at our sites and seeing how we can get a lot more operationally efficient within that context. You know, we're really focused on fixed costs. There is a lot of things -- I come from the cable industry. If any of you are familiar with that, the cable industry is a very field-driven machine. Your corporate office is usually fairly light with people, and most of your activity is in the field. That is some of the restructuring and realigning we're doing with this Company as well. You're operating expense and your revenue is driven at the field level. Not at the corporate level.

We made some changes. There will be more changes. But our focus is on fixed costs and, again, utilizing our capacity more efficiently. The other big contributor is we're now hedged. We didn't have a great hedging policy in place until the end of last year to protect us from the movements against the dollar, especially with the Canadian dollar this past year. Those are some of the things that we're doing, David.

And in terms of the capacity utilization, given that you're seeing, I assume fairly substantial ramps with your largest customer, is it an issue of managing capacity in the right place for the right customer, or maybe you could help us better understand where the ?

We have 16 sites. So, some of the sites aren't nearly as utilized as others. It's probably looking at, you know, what makes the most sense when we're distributing the call base out, and how we're handling the calls. Where we're handling the calls, if one of the sites is very severely underutilized, then maybe one of the conversations becomes, do you consolidate a site, and divert some of the volume up into another site, and maybe mothball and/or close a site. Those are some of the analysis we're going through now.

I see. And then just on the currency. You said it was $1.7 million in the quarter. Should I assume that's translates into $0.06 on the bottom line, tax effected. That's the EMS effect in the quarter?

That's pretty close.

Is it. You said that you put hedging -- was there any hedging done in the quarter?

Yes.

There was?

for Q1 we've hedged

Not for Q4?

Q4, yes.

So that $1.7 million in the fourth quarter. That was a fourth quarter number?

Right. That's correct. We didn't get hedged until late in the quarter.

I see. And then just on the receivables. It looks like you had -- to your comment was a similar pattern, in terms of cash down, receivables up in the fourth quarter of last year. Can you give us a sense of where your DSO is right now, has it come back down to more normal levels?

The fourth quarter phenomenon with receivables is constant. We have it every year. A lot of these Companies delay payments until after January 1. Obviously January is a big collection month for us. That's pretty much been the history for this Company. It is the way companies pay us. It's maintaining a little better balance sheet for themselves. We have a huge collection month in January.

Right

There is no DSO, problem for us. Our days outstanding for collecting accounts is under 30 days, in most cases.

So I guess the question really is, should we expect more normal levels when you report the March quarter?

Yes.

Very good. Thank you.

We have a follow-up question from Arnold Ursaner. Please proceed.

Hi. Focusing first on your property plant equipment. You indicated you spent 19 million in the year, your PP&E grew by 5 million, did you mark down the value of some facilities?

Hold on just a second. Let me pull some information here. Arnie, it's a combination of things. We had a building in Aurora that we sold. We obviously got rid of the U.K. operation in the third quarter. That contributed to it. We didn't have any writedown of assets. But those are probably the two primary factors that contributed against the total PP&E number.

Okay. You mentioned a few times that you were disappointed with the volume production. What were you looking for?

Volume production, again, you almost have to go through and separate clients. Without giving you a lot of financial guidance, as I don't want to do, the volume that we anticipated from one client, was very good and met our expectations and exceeded. Some of our other clients , the volume that we anticipated from them, did not materialize like we had anticipated. You know, therefore we had significantly ramped up capacity given what we thought was going to be the case and what we were lead to believe in the beginning. It didn't materialize in '04. That doesn't mean it will be the case in '05 at all.

A couple more questions it I can. You've been talking about a utility client that was ramping up. Did we see some contribution there in the quarter?

There was some contribution from the utility client in the quarter, yes.

Again, that was a build-up, some of the facilities were built for that client. Are they meeting the revenue expectations you thought they would?

Well, I don't know that the facilities were built for that specific client to be honest with you. I think they were a part of it. You know, as far as their volumes, during the quarter their volumes were pretty much on par with where we thought they would be. Yeah.

I'll try to ask this question politely. Your stock is down 50 percent from where you did a public offering for a selling shareholder. The idea that you'll make no comments whatsoever about the upcoming year, I speak on behalf of a lot of people that own your stock, they're not real pleased with that. Your margins are down 35 percent. Your revenues are pretty disappointing. Your SG&A expenses are declining for one-time items like audits. The idea that you're giving no guidance at all, is pretty upsetting to your shareholders. Can you give us some of the components of the earnings?

What I said at this point in time, we're not going to give any guidance. You know, we're in the process of doing a turnaround and a realignment of this Company. At we go through this process, which could involve a restructure to some extent, if we make that decision and go down that path. This doesn't make a [expletive] of a lot of sense to give you any kind of guidance at this point in time. Once we get through this process and get beyond the quarter or whatever, then maybe it makes some sense. Right now it doesn't make sense. It wouldn't be fruitful for you. The other thing is, I don't know if any of the people have read the "Wall Street Journal", hardly anybody is giving guidance anymore. Warren Buffet doesn't give guidance anymore. I will give you general direction, as I've done, and that's the best I can do today.

Final question if I may. You mentioned that the Board is intent on maintaining the dividend policy. As opposed to just the idea that you're paying a dividend, what is the policy of the Board? It goes back to the first question. What's the policy related to the dividend?

Well, I think so, you know, not speaking for the Board here. You know, I think their policy is, when they can return money to shareholders, and they feel like that's the best use of those funds. I think right now that's where they are at. They'll continue to do that. As long as we are, you know, in a cash position to handle any kind of a dividend, then we will handle it and do it that way. Right now our cash position is very secure. We are generating cash every quarter. So, I think that policy as far as I understand it is probably more along those lines. They are willing to, you know, return to investors and shareholders a portion of the money that we do earn.

Okay. Thank you.

Uh-huh.

Our next question is a follow-up from Jeff Nevins from First Analysis. Please proceed.

It looks like in the annual numbers and actually in the fourth quarter of last year, there was some changes to the historical revenue reported. Is that true? What was the changes?

The only change that would have occurred, Jeff, would have been the sale of the U.K.

Oh, that's the difference. Okay.

That would have been the difference.

Okay. My second question is the pipeline deals you mentioned, addressing one question that there was three deals talked about a few months ago, that StarTek was one of the top five, and one of the top three, and one of the top two in another. What's the update on those? I thought you had mentioned the status of some of those may be they just didn't fit your financial metrics. I wasn't sure if you were talking about those specific contracts.

I was. What I gave you earlier as the answer, is the answer. They didn't really makes for us as clients. One of them actually I guess couldn't find anybody to make sense for them. They decided to keep it in-house any way.

All three of those are essentially not something the Company is pursuing right now?

One of them is the AT&T MVNO. That is something that we pursued.

Okay. Okay. Thank you very much.

Our next question comes from Rick Sherman, Oppenheimer.

Thank you. My question has been answered.

Thank you, Rick.

Our next question comes from Rick D'Auteuil from Columbia Management. Please proceed.

It's Rick D'Auteuil I look back at my notes a quarter ago. Some of the reference to the margin pressures related to the Cingular, AT&T business. Some of the specifics referenced on the call, were that training costs were hurting margins, and the ramp up costs, I guess related to that were hurting margins. Can you get, are the training costs now absorbed from the ramp up, and I know they were being expedited a quarter ago. How much did training costs or ramp up costs result in a drag on margins in the quarter that you just reported? Again, I guess I would like to know the status. Is that part of the drag on margins behind us? Are we still looking at that impacting current results?

Obviously it did have an impact on the fourth quarter. Now it's all been absorbed. So, I guess that's where I can tell you we're at today.

You know, some of the questions are the margins have gone to [expletive] here. Part of it was the pricing that you negotiated with Cingular. But part of it was related to the ramp stage. If you're saying that's behind us, I'd like to know how much specifically you think that hurt margins in the fourth quarter, so that we can at least factor in where they're likely to recover having had that cost behind us at this point.

I can't specifically answer your question as to what that single thing, and how it impacted the margins, at least right now. I'd be happy to discuss it with you later. It obviously did have some impact. I just can't specifically tell you how many points it impacted the margin.

Yeah. And then I'd -- as one of your shareholders, I'd like to throw my comments out there in support of Arnie's comments on the guidance issue. I understand if you're in a position where there is too many moving parts that it's not practical. What I thought you said earlier on the call was we will not give any guidance during 2005. Is that -- is that going to be the policy? As things become more clear and you go into this restructuring, realigning later on this year, we're likely to see guidance from you guys

We'll evaluate it as we go. At this point in time it's our inclination to do so. I'm not going to tell you that it may remain that way throughout the entire year, again, what I told Arnie, and I'll tell you, is that I understand analysts need some guidance because they need to build their models. I'm trying to work with them on some of that. I'm not great about believing in public guidance. Because it doesn't buy you much any more. If you need help from an analytical point of view, to put your models together, then fine we can do that. No, I'm not big on giving financial guidance. I'll give you direction. I'll give you an understanding of where we're going with this company. But as to specific numbers and ranges and things like that, most Companies are getting a away from that. StarTek, quite obviously, has never been there. So I don't foresee a change at this point in time. Could that happen? Yeah. There's a possibility of it. But for now, that's kind of where I stand.

Just to correct you on the most companies aren't giving that. I think you need to go back and reread that article from the other day that were referring to. Most companies are giving guidance. More companies are not giving guidance than they had in the past. Most companies are giving guidance.

Okay. Forgive me for mis-speaking. That's true. Most companies may be, there is a growing number that aren't. I think that number is going to continue to grow going forward. I'll tell you what, with all the SEC regulations and other things out there, companies are being conservative from that stance. Very wary of ramifications from some of that stuff. You know, I'm not saying we won't do it for the entire year. Right now that's our position.

I'll pass it to others.

Our next question comes from Tobey Sommer.

Tobey Sommer with SunTrust Robinson Humphrey.

Did we hire you, Tobey?

Not yet. A question for you in terms of -- you mentioned realigning capacity. You have got mid-double digits in terms of sites now. I'm curious, from a historical standpoint. How quickly can you adjust those -- either the number of sites, or the capacity in there? I know that's kind of a lever at your disposal, I want to get a sense for how quickly you can pull it. If you need to.

Certainly it depends on the site that we decide to do, and how we decide to do it. If we decide to just mothball it, versus close it completely. There are a number of factors that go into that, and looking at the IT infrastructure, and what we might have to do from that standpoint. You know, Tobey, to be honest I'm not sure I can give you a specific number. It does depend on a specific site that we decide to do so that with. Weather it's a Big Spring site or a sight in Lynchburg or Laramie or Alexandria, or wherever. It kind of depends on the kind of volume they handle, the client they handle, are they Spanish speaking or not. A lot of factors go into that decision. You know, to say wow, we can do that in three months or six months, it just depends on, again the site and what's it's doing for the Company at this point in time.

You mentioned a couple of expenses, I think, that impacted the quarter. Sarbanes-Oxley, of course, being one that impacted the year and the quarter. And then the adjustment for billing errors the quarter. I was wondering if you could quantify those impacts?

I would say for Sarbanes, at this point in time and for the full year of '04, Sarbanes cost us around $1.2 million or so. As far as the billing adjustment, is that what you were referring to?

That is correct.

Yeah. I I don't have that information in front of me, Tobey. I'll have to get back to you on it. Sarbanes was about a 1.2 million for the year.

In the quarter, how big was the impact from Sarbanes-Oxley?

About, most of it was in the fourth quarter. About $700,000.

Okay. And I was curious -- on a couple of details, if you could just refresh our memory. In terms of the covenants on your borrowing capacity, and then if you could give us a cash flow from operations in the quarter?

Hold on just a second.

Sure. If I may ask a question or two while you're looking for that.

I've got it. Let me answer these first. As far as the covenants, they're minimal. I think one of them is not to have net operating losses of two quarters in a row. There is not much beyond that. There is one other one that has to do with adding a percentage of net income into retained earnings and coming up with a number. They're very deminimus. And nothing that we're close to being in breach of. What was the other question, cash flow for the quarter?

Cash flow from operations?

Hold on. Tobey, I'll have to get back to you.

I'll shift gears then. I was interested in capacity utilization in the quarter. When it comes down to looking at large customers who are going to have their contracts up for renewal over the next several quarters, year. I was wondering what -- what gives you confidence that the pricing will not be kind of ratcheted down, I gets, particularly given the fact that the couple of clients you had in the pipeline in the third quarter, were, you know, proposing and negotiating from a standpoint that the margins were such that you felt you didn't want to take on the business.

Well, I think the biggest thing that we have going for us is the quality of the service that we offer against our competitors, is outpacing them by a fairly large margin. So, I don't think we expect that there is going to be a lot of negotiations from that standpoint. And, you know, the pricing that mechanism the we have in place today are still going to be a lot better than what they could do, if they try to do it themselves. When clients come to you, they look at a couple of things. They look at how well you can deliver their service, and handle their customers. And secondly, if you can do it at a better rate than they can do it themselves, I can tell you, we've maintained these client relationships like I said, for the third year in a row, we haven't lost one. We're very competitive from a pricing model. We're obviously very good at our service model. So I don't anticipate any issues with these clients.

In terms of capacity utilization in the quarter?

What would you like to know about that?

I'm curious what kind of range it was at in the quarter. And then wow that may compare to what historical goals have been in terms of maintaining capacity utilization?

Well, it's not a number I'm giving out over the phone. You know, it's fairly competitive information. I think suffice is to say, that we are trying to get a lot more efficient in the way we use capacity. I'm not going give you percentages over the phone. It's too much competitive information.

Okay. Thank you very much.

Yeah. Thank you.

Our next question is a follow-up from Jeff Nevins.

Sorry to get on the for the third time. Just a few questions.

[laughter] You're done after this one, bud. Yeah, cut me off. Follow-up to the last question on Cingular or just the contracts.

The Cingular contract expires in December of '06, is that correct? That's still

correct.

Is there any time that Cingular can change the pricing from now to then?

No. I mean, I think there is always the opportunity, everybody -- it's like a major league ball player. You can always come back and try and renegotiate a contract. At this point in time we don't anticipate that happening. It certainly has not been the trend and has not been the case in the past.

Okay. And my last and final question is the cost reduction focus. Is it more on the corporate side, or more on the operations side? I'd always viewed StarTek as a pretty lean company on the corporate side.

It's on both. To be very honest, it's on both. You know, -- like I said, we definitely need to -- if you're talking about capacity utilization and things like then you're on the operational side. If your on fixed cost, it's probably more on the corporate side, it's a focus on both. There could be more changes to come here and there. Like I said, we're definitely focused on improving our margins in the year.

Okay. Thank you very much.

You're welcome.

Our next question is a follow-up from Tobey Sommer, SunTrust Robinson Humphrey.

I want to ask a you a question in terms of aligning capacity. Historically when you've adjusted capacity and perhaps closed a site, what should we think of in terms of the potential for a restructuring charge? Historically last time you closed a site, did you have a charge, and kind of order of magnitude what was the quantity of that charge like?

The charge was zero. We have never closed a site at this point in time. I can't quantify that for you until we decide if we are going to close one, versus mothball one, what it's going to be. Like I talked earlier, Tobey. There is a lot of factors that go into that decision. I can't give you that number until we make a decision on what and where will it be and when it's going to be. We have time for one more final question. Adam Waldo, are you on the phone?

Sorry to get on the call late. You may have already covered this. Can you comment a little bit about capital structure at this point? Obviously you're likely not be adding capacity, and possibly shrinking it in 2005, you're overcapitalized, cash flow is still fairly solid if you don't add capacity this year. How should we think about share buybacks and maintenance of the dividend at this point?

We did address that a little bit earlier. That's fine, Adam. I'm fine to address it again. As far as the share buyback, that's something we constantly evaluate. As you said, the balance sheet is strong. You know, we do have the wherewithal, if we decide that's what we want to do with the cash, to do that. We have a strong balance sheet. From that stand point, we have the capabilities to support the dividend going forward. The dividend policy that the Board has put into place, is not anticipated to change at this point in time. The balance sheet also offers us a lot of other opportunities as you can imagine, from a financing point of view and other things, that we may choose to do during the course of the year.

Thanks very much.

You're welcome. Thanks everyone for your time and your questions. If you have any kind of follow-ups or things that you decide that, oh my gosh, I wish I would have asked that question, certainly don't give hesitation to calling me. I will try to get back to you as promptly as I can. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. Good day.