Startek Inc (SRT) 2005 Q1 法說會逐字稿

Welcome to the first-quarter 2005 StarTek earnings conference call. At this time all participants are on a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host of today's call, Ms. Amy Claire Wild, Vice President Marketing and Communications at StarTek.

Again to all on the call welcome to our first-quarter 2005 financial results conference call. As Andrea mentioned, the call is being recorded today. We'll provide a dial-in replay and it will be available at the conclusion of today's call. It can be accessed through Friday, May 13th, a week from today. A Web-based replay will also be posted at StarTek's corporate website, www.StarTek.com. This will be available by Tuesday, May 10th, and you'll have full accessibility through May 27th.

Please note that our discussion today will encompass certain statements which are forward-looking and are subject to various risks and uncertainties as summarized in our 2004 Form 10-K and other SEC filings. Our actual results may vary based upon these risks and uncertainties. At this time I'll turn the call over to Steve Butler, StarTek's Chief Financial Officer and interim Chief Executive Officer.

Good morning, everyone, and welcome and thank you for the opportunity to speak with you this morning. The agenda this morning will include comments on the first-quarter's business progress followed by a discussion of our financial results of then I'll open up the line for some Q&A. We hope to conclude the call no later than 9 AM Eastern time. During the course of the remarks today we will not be providing any forward-looking financial guidance about our business. I will elaborate a little bit more later in the call.

Let me begin by stating that the Company is continuing to follow its strategy of a turnaround. Since January 1st of this year we have reduced expenses in cost of services and SG&A by approximately $6 million on an annualized basis, which is a significant step towards bringing our capacity infrastructure and cost in line with current volume as well as a move towards improving our margins. The leadership team is diligently working to reposition the Company financially and focus StarTek on strategic growth opportunities.

During the quarter our relationship and service delivery performance with each of our clients continued to be very solid. No matter what business process we executed on behalf of our clients, our tailored solutions were delivered through strong strategic partnerships that are founded on StarTek's core competencies of large-scale project implementation, distribution, distributor resource planning and our extended training and quality assurance.

Several key examples during the quarter illustrate our consistent operational excellence and include some of the following. In the case of our national wireless client, our transition from their pre-acquisition platform to their post-acquisition platform remains on track and we are confident about our position as a supplier to this client. In the case of our international wireless client during the quarter, StarTek was entrusted with the launch of and support for another new program for their high-value business customers. And lastly, for our national business telecommunications client, our implementation of a new Voice over IP customer tailored support program continues to progress very well and is on track with our client's expectations and needs.

In addition to our current lines of consumer care, the demand from our clients for Voice over IP and business care programs continues such as receivables management, complex provisioning and business-to-business care to drive ongoing growth opportunities for us at StarTek. As a further example of our strong business relationships, Aspect Communications, a leading provider of contact center solutions, has recently (indiscernible) to team with StarTek to incorporate StarTek customer care services as a component of the branded Aspect Solutions portfolio.

Aspect and StarTek have had a long-standing relationship in merging our core competency to create and deliver a best in class customer care service for Fortune 1000 clients. Our shared foundation of operational excellence and track record of loyal clients makes us a superior team to meet the needs of the growing customer care marketplace.

Another significant result for the quarter is StarTek received unqualified opinions from our independent registered public accounting firm, Ernst & Young LLP, on our consolidated financial statements and on the effectiveness of our internal controls over financial reporting. This was indeed a great achievement as we came off of red letter status in our third quarter of 2004 to achieve the status we did with our internal controls.

At this time I would like to move on to the financial remarks. All the figures in my following remarks are from continuing operations unless I otherwise note. Looking at first quarter of '05 compared to the first quarter of '04 in revenue, our revenue fell 14% or $9 million to $54.3 million. Business process management services revenue for Q1 '05 compared to Q1 '04 fell 4.4% or 2.5 million to 53.5 million while our volume remained essentially flat. Our supply chain management revenue for Q1 '05 compared to Q1 '04 fell 87% or $6.5 million to $1 million resulting from a decrease in the volume of work from our largest supply chain management client.

In looking at gross profit, our total gross profit for the first quarter of '05 compared to the first quarter of '04 fell 35% or $6.4 million to 11.7 million. The change in foreign currency rates from the first quarter of '04 to the first quarter of '05 accounted for $1.3 million of this change. In addition, our tiered pricing incentives and reduced supply chain volume accounted for approximately $4 million of this change.

Total gross margin for the first quarter of '05 to the first quarter of '04 fell 7% to 21.6%. We attribute this decline to a greater portion of client volume billed at lower rates, some excess call center capacity, continuing decreases in revenue and margins at our supply chain management platform and an unfavorable foreign exchange shift from the first quarter of '04 to the first quarter of '05.

On the selling, general and administrative expense side for the first quarter of '05 compared to the first quarter of '04 these (indiscernible) was 14% or $1 million to 7.9 million. The increase was primarily due to costs associated with reductions in staff, recurring fixed costs for the three new call centers we opened in 2004, expenses related to investments in information technology infrastructure and costs associated with Sarbanes-Oxley.

Our operating margin for the first quarter of '05 compared to the first quarter of '04 fell 10.6% to 7.1%. Our net income margin for the first quarter of '05 compared to '04 fell 6.6% to 4.9%. Our fully diluted earnings per share from continuing operations decreased 63% to $0.18 for the first quarter of '05 compared to $0.49 for the first quarter of '04. Fully diluted earnings per share including discontinued operations decreased 61% to $0.18 for Q1 '05 compared to $0.46 for Q1 '04. Again discontinued operations consisted of operations in the United Kingdom which, as we previously reported, were sold on September 30, 2004.

On the balance sheet our working capital for the first quarter of '05 through the first quarter '04 fell $4.4 million ending Q1 '05 at 80.2 million. This was driven primarily by a decline in outstanding accounts receivable of $15 million. Our stockholders equity from Q1 '05 compared to Q4 '04 fell 3.7 million ending Q1 '05 at 133.2 million.

With regard to the cash-flow statement, Q1 '05 experienced 3.5 million in capital expenditures as well as $6.1 million in dividend payments. Capital expenditures were primarily in support of our ERP system and IP infrastructure. Overall our cash position remained strong as we generated over $30 million from operations during the first quarter of 2005.

Moving on to some other points, with regards to the dividend StarTek's Board declared a quarterly dividend of $0.36 a share which is a reduction of the dividend from prior quarters. As we stated in the press release, the Company is reallocating the use of its cash flow to begin to strategically pursue growth opportunities in market and service diversification.

We believe that our current cash position is strong enough to allow us flexibility with regard to the amount of the dividend to keep our options open on growth opportunities. The Board and management will continue to evaluate the dividend based on earnings, cash position and growth opportunities in the future. If this dividend level were to remain in place, the impacts would amount to an increase of approximately 3.5 million to our cash position in 2005 versus keeping the recent turn of increasing the dividend opportunity per share quarterly.

In summary let me close with a few points. StarTek is financially strong and stable and we have been, we were before the turnaround and we are even stronger due to the actions we have taken with regard to the turnaround. Our client relationships are on solid ground and we continue to outpace our competitors in service and satisfaction metrics. Our client retention reflects these strengths. We believe that our future is bright but not without its challenges. We believe that the joint go to market relationship that we have forged with Aspect is evidence of the value of and demand for our track record for operational excellence.

We have entered into 2005 with a current client base where all major relationships are strong. We continue to focus on serving our primary business sector of telecommunications, cable and Internet communications in 2005 with great depth of industry and process expertise. As I conclude my remarks on our first-quarter performance I'll restate our current practice of not offering forward-looking guidance at this time. We are still weighing the effects of the recent realignments to our cost structure as well as those yet to take place.

I'm only willing to tell you that the Company is on course to continue to work towards margin improvements in revenue growth. You can be certain that our focus is clearly on returning to greater profitability and our turnaround strategy has begun to have the desired impact as has been demonstrated by the improvement of our gross margin in Q1 '05 from Q4 '04.

With that brief description of the business for the first quarter of '05, I'll open up the call to questions and hopefully we'll be able to provide you some answers. Operator?

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust Robinson & Humphrey.

I have a question for you regarding the restructuring program. You state 6 million in annualized expenses. Can you let us know how much of those expenses were trimmed in the first quarter and where those expenses are trimmed? Is that SG&A? Is that in the cost of service line? Thanks.

Most all of those expenses except for I think the 750,000 that we mentioned previously on the last call were done in the first quarter. The majority of those were SG&A and the rest were cost of services. It resulted primarily in the staff reduction of approximately 169 people; again with most of those on the SG&A side.

And could you tell us what SG&A may have looked like on a run rate basis excluding some of that in the first quarter?

It would have been about $700,000 lower.

Okay. And then a question for you regarding the Cingular contract. Volumes have been slow to ramp there. Would it be your expectation that in negotiating future contracts you'd be less likely to take the lower margin on that business in anticipation of higher volume?

I think quite honestly the volumes have been strong with Cingular. They haven't really been slow to ramp. In fact, the Cingular volumes have continued to increase. The contract we currently have with them runs through the end of 2006. And don't forget, the fourth quarter typically is very seasonal in nature in and of itself.

So that's to say that you could foresee negotiating similar type deals?

Possibly.

Okay. And then I did have a question regarding the outlook for new deals and what the pipeline looks like relative to last time we heard from you on your conference call.

I think What I said last time was that I can sit here and tell you that the pipeline is (indiscernible) and strong and very good and has a lot of depth to it, which is true, it does. But as far as announcing new clients, as I said before, I'll do that when they sign on the dotted line and the ink is dry. Certainly when they do we'll do a release and, as I said before, shout it from the rooftops. But I'm not going to sit here and tell you, yes, we're 85% sure on this number of clients or 90% sure on this number of clients because this business, as you know, Tobey, is fickle. People can change their minds depending on what's going on with their own business.

Sure. Have you noticed any change in the length of the sales cycle?

Yes, I think the sales cycle is lengthening to some extent. But again, that also depends on the size of the company that you're dealing with. Obviously the larger the company the longer the sales cycle. In most cases now it's probably averaging around 9 to 10 months.

I'll ask one last question and then I'll get back in the queue. Could you update us on the CEO search? I know you're still carrying both titles. Thanks.

Yes, I can just tell you that the search is progressing and I know that the Board is very active in it and hopefully we'll have an announcement to make in the near future here. That's about all I can tell you at this point.

Thank you. I'll get back in the queue.

Arnold Ursaner, CJS Securities.

Could you give us the key client revenue numbers which will be available when you put out your Q? Can you give us those now?

As far as the percentages that they make up of the revenue?

Yes.

At the end of the first quarter Cingular was about 55%, T-Mobil was around 21 and AT&T was around 11.5. Those are the top three.

Okay. Focusing on the supply chain for one second. You mentioned you had about 1 million in revenue. If I exclude that you basically then, if I'm doing my math right, had essentially no growth in your core business. Is that correct?

On the supply chain you're indeed correct. There was no growth there. In fact it was down and the BPMS side was essentially flat.

Again, given the growth that you've been seeing -- you've been showing 25% or so growth. Is there any specific factor you could highlight that caused essentially no growth in the quarter?

No, not really. I think again the volumes from our largest client were up. You have the tiered pricing incentive that kicks into place there. Some of the volume from our second largest client did not hit what we thought it would hit so it was down a bit. Again, some of that, to be honest, was due to some of the delays in some of the new programs that these clients are preparing to launch. We were awarded a new business care program with one of those clients that is starting to ramp during this quarter. So it was primarily just a fact that some of the other clients' volume deliveries and new programs were just not initiated in the time frame they had anticipated.

Going back to the supply chain for a second, you've got a fair amount of assets tied up in the business, unless you can replace the customer that is essentially winding down what is your plan on the assets there?

We're still evaluating that whole line of business to be honest with you, Arney. To be very frank, these guys are out -- actually they've got a pretty decent sized sales pipeline as well. We're evaluating that over the course of the next 90 to 120 days just to see where things head. Certainly our largest client has begun to wane on one program, but then on the other hand they've started another new program that's just beginning to ramp with them. So we'll take our time in evaluating that because it has been a line of business for us for quite a while.

Final question from me if I could on your cash flow statements. There are three items that essentially account for more than half of the cash provided by operating activities, at least two of which could be somewhat non-recurring. Could you comment a little bit on the three items in -- sales of trading securities, trade accounts receivables and income tax receivable all had huge jumps in the quarter.

Right. I think as far as Accounts Receivable, on the last call, remember our accounts receivable was very high because of the anomaly that goes on in the fourth quarter where people hold their payments. Well, we collected those just as I said we would in the first quarter and that was the big positive from the Accounts Receivable side. We did have an income tax refund during the quarter as well which, to your point, wasn't a onetime anomaly also. Those are the two primary components; I'm not sure what the third one is that you were addressing.

You had almost 3 million from the sales of trading securities.

Yes, I think again with the fact that our investment portfolio is moving to more conservative investments in nature and we turned the portfolio a lot because of the interest rate structure that's currently out there. Usually we turn short-term commercial paper -- averages probably three to five days. That's why you see a tremendous amount of activity on that line item as well.

Thank you.

Carmel Gerber (ph), Thomas Weisel Partners.

Could you give some color around tiered pricing milestones with Cingular? I guess this quarter you reached a new tiered pricing level,

Incrementally it's all volume driven and I'm not going to get into specific rate structures on the conference call. And it's reset every quarter, but when they meet certain volume milestones during the quarter then the pricing incentives kick into place.

And in the press release it mentioned that there was excess capacity and I was wondering, is that concentrated at certain operational centers and are you thinking of closing those down or what's your point going forward?

I think as I stated on the last call, this is something we're going to evaluate during the course of the first six months of this year. The sales team that's in place today is still fairly new. Most of them came on board November, December, January time frame. So we're obviously going to give them a shot. And we have started to see increases in volume and we're picking up some new programs with some of our clients. The excess capacity is throughout. It depends on how you handle calls and how you distribute those calls among call centers. One call center could be 95% utilized and the other one could be 70% utilized or 60% utilized. We'll continue to look at that throughout the course of the first half of this year and certainly if it makes some sense to do some consolidation we'll take action appropriately.

And can you just tell us how many employees you ended the quarter with?

Approximately 6,000 I believe.

And I didn't see your share count in the press release.

I think it's around 14,650,000. Hold on just a second, Carmel, let me get you a number. Fully diluted it was 14,691,709 shares.

Great, thank you very much.

Tom Carpenter, Hilliard Lyons.

A quick question for you -- maybe this is a clarification of another question Tobey had. Can you give us an idea maybe of what charges were in the first quarter, any onetime stuff or severance so we can account for that in our model?

Absolutely. Just a second here. I believe it was around $700,000, Tom.

Okay. I just wanted to clarify because you said I think in answer to his question that SG&A on a run rate basis would be 700K lower and I was just -- I was trying to account for the 1.5 million on a quarterly basis that you guys have taken out going forward.

It's a little bit different there. From Q4 '04 to Q1 '05 that would have been the run rate differential, but the 700,000 is separate from that in that that was a charge (indiscernible) to severance and stuff like that.

So backing the charges out and also maybe some of the 1.5 million you do expect, I guess your gross margin and operating margin to go up throughout the year based on some of the cost-cutting you guys have done in the absence of the severance payments?

Certainly that's our strategy.

And then in regards to the dividending cuts, your all's cash I think was up 40% quarter-over-quarter based on some of the stuff you touched on earlier. You guys could have maintained a dividend if you wanted and obviously you want to align it more with your earnings. Should we view this as maybe phase one of some dividend changes? Are you pleased with where it is now?

I don't know if it's, Tom, a phase or not. I think, as I've said, the management and the Board will continuously evaluate the dividend and where it sets. It depends on what's going on with the Company during the current quarter. If there is a growth opportunity that we're looking at or if earnings just continue to rebound and go to the right direction -- there are a lot of factors that go into that discussion. I can't tell you other than we'll continue to look at it on a quarterly basis.

Sure. And as far as uses of some of the cash or some of the opportunities you're looking at, obviously one of the big one for you guys is revenue diversification. Can you maybe give us a little bit more of an idea of -- I assume you guys are going to stay on the call center side if you do look at some growth opportunities, but can you maybe give us some other characteristics of businesses that might be attracted to you?

Well, certainly I think as I've said before, we look at different market verticals and product diversification. But even along those lines, if there's something that really looks nice in the space that we're in that makes some sense that gives us more diversity and location possibly or geography wise, we'll look at those things as well. But we have different internal hurdles that we look at and it's not just ROIs, it is a lot about what it's going to do to expand our business whether it's geographically, product wise, market wise, etc.

I'm glad you brought up geography; it segues into my next question. Can you update us on -- you guys have discussed before looking at maybe doing some business in the Philippines. Can you give us an update on your progress there?

Yes, we have a partnership there in the Philippines and we still have a bit of an, I guess, initial ramp there with one of our clients, it's in the very early stages of doing some of the business there. Right now it's still very small and we continue to look at it and evaluate it going forward. But right now it's going very, very well.

And one final question. Can you give us an idea or quantify how many bids you guys might find out about in the second quarter?

How many -- I'm sorry.

How many bids or RFPs you guys might find out about in the second quarter?

No, that would be throwing a dart at a dart board to some extent because they come up all the time. We pursue them as necessary.

Okay, thank you.

Martin Bach, Morgan Stanley.

You didn't say anything about the stock buybacks, so I think it has to be assumed there hasn't been any. Can you clarify that and also give us your gut feeling on the future?

Absolutely. You're correct, there hasn't been a buyback. Again, I guess, Martin, this gets around the most effective use of excess cash in the Company and right now we evaluate this situation just as we do the dividend and growth opportunities. Our strategy and focus in 2005 has certainly grown the revenue base while maintaining good margins. Excess cash can be utilized in several different ways whether it's stock repurchasing, dividend, internal capital investment, portfolio investment or acquisition. At this point in time no decision has really been made to actively pursue repurchasing the Company stock.

Okay, thank you.

Rick D'Auteuil, Columbia Management.

Just a couple of things. On the restructuring effort, is this all that's planned at this point or is this just the beginning?

I think it was a significant beginning, but certainly we continue to look at our cost structure and aligning our costs and infrastructure to volumes and things like that. I don't think it's ever completely done but I would say we made a significant impact in the first quarter with what we intended to do to start to turn around the process.

And my understanding was you talked about on the last call you had excess capacity and that was being looked at. That in fact didn't get addressed in this restructuring, there's no facilities that came off-line, right?

That's correct.

Is that still in the evaluation stage?

It's still in the evaluation stage. The only thing I will tell you is that we did consolidate our supply chain management site down to one center in Clarksville. We did close our Greeley East facility.

Just a comment. I looked back at my notes from the last conference call and I wrote down, and this was on March 3rd, that the Board supports a dividend policy and there's no plans to change it. I may not have taken that down verbatim in my notes, but it seems to me if you guys want to start building credibility you can't give a message like that and then within 30 or 60 days do something contrary.

No, but the dividend policy has always been one that you continuously evaluate it based on where your earnings and everything else are. If everything went to hell in a hand basket would you say that the policy would be that we would continue to pay a dividend at a current rate? The policy is to evaluate where the Company is every quarter and within the context of what its strategy is going forward. And I think we've always been very clear on trying to articulate the strategy of the Company as much as possible on any of these calls.

And just a second comment. Remember that was on March 3rd those comments were made. And I don't know if maybe you would interpret things having gone to hell in a hand basket since March 3rd. It doesn't feel like we're still sliding at the pace we were sliding anyway.

The Board and the management seem still believe in the dividend. It's just looking at what might be the future best way to look at possible growth for the Company and with the cash position we were in we felt that the dividend was very supportable.

That's all I have.

Tobey Sommer.

Steve, I was just curious if you could give us the landmarks or the signs that will cause you to trigger capacity cuts because you said you're going to evaluate that over the first six months of the year. What are the other landmarks and triggers that you're looking for in terms of developing your restructuring plan?

Certainly, Tobey, a lot of it's based on pipeline and what's setting out there, what gets closed in the next 90 days per se. Also you continue to look at your current client base and their effectiveness in delivery of volume and what goes on with their business cycles in the context of their business and if we actually get new lines of business as we did with one of the major clients this time. So all those things come into play when you look at going through evaluating call center capacity and consolidation.

How many contracts did you sign this quarter?

I don't think we signed or announced any.

Okay. And then -- curious, what sort of capacity do you think you're running at now? What sort of utilization rate?

I'm not going to give that information out on a call, that's just too competitive and sensitive.

Okay, thank you.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I will turn the presentation back to Steve Butler for closing remarks.

I'd like to thank everyone for their participation. And certainly if you have follow-up questions that we didn't get to today, I think most of you know how to get in touch with me and I appreciate your time and your continued support. Thanks again.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude your presentation. You may now disconnect, have a good day.