Startek Inc (SRT) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StarTek second quarter 2005 financial results conference call. Today's call is being recorded. A dial-in replay will be available at the conclusion of the call and can be accessed through August 9th. A Web-based replay will be posted at StarTek's corporate website, www.StarTek.com by August 5th and will be accessible through August 22nd. Please note that the discussion today will encompass certain statements which are forward looking and subject to various risks and uncertainties as summarized in our 2004 Form 10-K and other SEC filings. Actual results may vary based upon these risks and uncertainties. I would like to now turn the call over to Mr. Steve Butler, StarTek's President and CEO. Please proceed, sir.

Thank you. Good morning and welcome to the call and thank you for this opportunity to speak with you this morning. Our agenda this morning first includes comments on the quarter's business progress, followed by a discussion of our financial results, and then we will open up the line for some Q&A. This call will conclude no later than 9:30 a.m. Eastern standard time.

First, I would like to congratulate Rodd Granger on his appointment to Chief Financial Officer of StarTek and welcome him to this call.

On the business side, let me begin by stating that the Company continued to make progress in its turnaround process during the second quarter and we will maintain the diligent and ordered focus through the year. However also during this quarter we have made significant strides in securing new business as a result of targeted marketing sales and business building efforts that we have invested in over the last 12 to 15 months.

During the quarter, StarTek added a new client company to our overall client portfolio, As I had indicated to you in previous calls when we sign a new client I would shout it from the rooftops. However I am limited by client confidentiality agreement as to what I can say today.

We were selected by one of the largest telecommunications companies in the United States to deliver customer care support. We have been operating on an accelerated ramp schedule to begin service delivery and yesterday, August 1, what we took our first call for this client. We will deliver our initial support for this client through existing capacity.

This organization chose StarTek over several competitors, primarily based on our customer care expertise in the wireless industry and our track record of quickly and flexibly ramping new client capacity and programs.

We are actively pursuing additional commitments from other new client prospects. We will share further information as these business opportunities are finalized in the near-term. These new opportunities have been a result of dedicated relationship development after (indiscernible) expanded last year and should continue to improve our capacity utilization.

As far as our current clients, consistent with prior quarter, our relationship and service delivery performance with each of these clients continued to be very solid. Several key examples illustrate that StarTek's consistent operational excellence include the following.

On our national wireless and largest client we continue to have a strong relationship and maintain volume and feet. We have a large number of people in training that will move into production very soon.

For our international wireless clients, StarTek was entrusted with the launch of and support for another new program for their high-value business customers. We have been actively launching this service expansion at one of our existing Canadian centers. We are also in the process of renewing our agreement with this client which -- when concluded -- will secure this business until 2007.

For one of our national business telecommunications clients we renewed our contract to deliver business care services and subsequently expanded the volume of work. We were awarded this additional work by our client, who had been previously serviced by one of our leading competitors.

Also as you may have seen from our press release of June 27th we renewed our agreement with Nikon to revise tier 1 and tier 2 technical support as well as presell consultation for their digital imaging product line. This renewal is on the foundation of a 2-year track record in quality support where StarTek recently achieved a 10 out of 10 client satisfaction rating which is virtually unheard of in the industry.

At this time I would like to move onto the financial results. All figures in my following remarks are from continuing operations unless otherwise noted.

Comparing the second quarter of '05 to the second quarter of '04 our total review fell 15.9% or $10.1 million to $53.2 million. Business Process Management Services revenues for Q2 '05 compared to Q2 '04 fell 4.8% or $2.6 million to 50.9 million while volume remained essentially flat primarily due to an unfavorable shift in revenue mix with our second largest client.

As I have indicated to you previously our WL&T (ph) billing rates were higher than the current services we deliver to this client today. Supply team management revenue for Q2 '05 compared to Q2 '04 fell 77.3% (indiscernible) 7.5 million to 2.2 million resulting from a decrease in the volume of work for our largest supply chain management client.

On the gross profit side, our total gross profit for Q2 '05 compared to Q2 '04 fell 31.5% or 5.3 million to 11.6 million. Again negative impact from the shipment revenue mix with our second largest client from higher to lower margin services and tiered pricing accounted for $2.1 million of the change. Our change in foreign currency rates from the second quarter of '04 to the second quarter of '05 accounted for approximately 1.3 million of this change and a decrease in supply chain management volume also impacted this change.

Our total gross margin for Q2 '05 compared to Q2 '04 fell to 21.8% from 26.7%. We attribute this decline to the shift in revenue mix, again different product offerings at lower margin, underutilized (indiscernible) capacity, continuing decreases in revenue and margins in our supply chain management platform and, again, unfavorable foreign exchange.

As far as selling, general, and administrative expense our total SG&A for Q2 '05 compared to Q2 '04 decreased 2.3% or 160,000 to 6.7 million. The decrease was due to savings associated with the staff reductions that occurred late in Q1 offset by a recurring fixed cost of three new call centers opened in 2004 and expenses related to investments and information technology infrastructure.

Our operating margin for Q2 '05 fell to 9.1% from 15.8% in Q2 '04 and our net income margin for Q2 '05 fell to 5% from 10.2% in Q2 '04. Contributing to this loss in margin was a decline of 1.6 million and other income primarily due to the repositioning of our portfolio investment, which is in line with our current investment policy.

Fully diluted earnings per share from continued operations decreased 61.7% to $0.18 a share from Q2 '05 compared to $0.47 a share from (ph) Q2 '04. Fully diluted earnings per share including discontinued operations decreased 59% to $0.18 a share for Q2 '05 to $0.44 for Q2 '04. Discontinued operations consisted of operations in the United Kingdom which, as I previously reported, were sold on September 30, 2004.

On the balance sheet, our working capital for Q2 '05 compared to Q4 '04 fell 6.6 million ending Q2 '05 at 78 million (indiscernible) primarily by decline in Taxes Receivable of 8.3 million and a decline in Outstanding Accounts Receivable of 7.1 million.

Stockholders' equity for Q2 '05 fell 6.3 million compared to Q4 '04 ending Q2 '05 at $130.6 million.

Year-to-date Q2 '05 we have invested 4.8 million in capital expenditures and incurred $11.4 million in dividend payments. Capital expenditures were primarily in support of our ERP system and ITM infrastructure upgrade. Accounts Receivable increased by 8.2 million during the quarter.

StarTek's Board of Directors declared its quarterly dividend of $0.36 per share. We believe that our current cash position is strong enough to allow us flexibility with regards to the amount of the dividend and to keep our options open on growth opportunities. The Board and management will continue to evaluate the dividend based on earnings, cash position and to use growth opportunities in the future.

In summary, let me recap with a few key points. As we conclude the first half of 2005, StarTek continues to be financially strong in its position to take advantage of organic and other growth opportunities. We still face near-term hurdles as we launch new clients and continue with our turnaround process. However, StarTek's clients relationships are on solid ground and we continue to outperform our competitors in service and satisfaction metrics. We are recognized by our clients as a key factor in their own business success as demonstrated through multiple years of partnership. Our operational excellence is the result of highly skilled dedicated team of professionals and our commitment to the success of our clients.

Our future is bright as we have made significant strides in positioning for new business growth. As a result of targeted marketing sales and business building efforts that we have invested in over the last 12 to 15 months. We will continue to take proactive steps in developing new clients and looking for opportunities in other market verticals.

Although we continue to successfully focus on serving and gaining clients in our primary business sectors of telecommunications, cable, and Internet communications, we are also achieving success stories in other industries such as consumer products. Our depth of industry and process expertise across all these areas, in addition to our operational excellence in delivering customer care solutions has been contributed to recent developments in the business.

As I wrap up our prepared remarks for our second quarter performance I'd like to again welcome Rodd Granger as our new CFO and restate our commitment to achieving a successful turnaround of the Company and continued growth. As I had indicated on a previous call expect the turnaround process to be a 12 to 18 month timeframe.

I will now open up the call for the question-and-answer session. Please stand by while the operator provides some instructions. Operator.

(OPERATOR INSTRUCTIONS) Arnold Ursaner of CJS Securities.

Couple of quick questions. No. 1, at year-end you had talked about 3 targets for new clients. Was the one that you are now announcing one of those three?

Yes. I don't recall actually mentioning 3 targets for new clients but these are people who have been in the pipeline for a while that have taken time to come to fruition. I think what I have said is the sale cycle for these clients now seems to be about 9 to 12 months.

In the quarter can you give us a sense for what volume growth was?

Volume for the quarter was about flat.

So some of the price degradation we have seen is minimizing or is becoming less severe?

Correct.

You have been running much higher volumes but minimal revenue growth?

Right. Basically the tiered pricing structure is working as it was set to do. Greater volume but at a lower rate.

And with this new client over over the next few quarters, I guess 2 questions related to the new client. One is over the next few quarters if you can give us a sense of the percent of your revenues that may be driven from the telecom space and the other specific question about the new client is, given that you are now doing business starting August 1 were there ramp up expenses you incurred in Q2? And any sense of what they may be in Q3?

Good questions. Of course a majority of our review will still be from telecom so that is not going to shift a lot. Obviously since this client is the telecom client. We did incur launch expenses when we are ramping up this client. I can't give you an indication today what that revenue is going to look like going forward because it is early stage in the game and I don't have a real good feel yet of what the impact of those launch expenses are going to be for the third quarter. Primarily these launch expenses were incurred during the course of the third quarter.

I'll get back in queue. Thank you and look forward to seeing you at our conference.

Tobey Sommer of Suntrust Robinson Humphrey.

I have a question regarding what kinds of customers you are targeting in terms of the industries. I think I recall hearing from you in the past perhaps trying to diversify out of telecom. And could you give us an update as to your current thoughts and any progress your Company has made in that regard?

Good question. Certainly we still focus on the telecom sector because that is our primary expertise. But we are looking at all industries right now. We look at the entertainment industry. We are looking at consumer products industry. We're even looking at some biotech stuff. So we are looking at all the industries at this point in time because, again, it is a service-oriented business and that is what our goal is, is to continue to deliver the services and make processes better for whatever client might be out there in whatever industry. So hope we get the specific targeting of any specific industry -- is actually going out after all the industries.

Maybe ask the question a different way. If the sales cycle is 9 to 12 months can you describe the industries that you were looking at 9 months ago? Some of those industries that you just mentioned could be relatively new endeavors.

Yes I mean, certainly, the telecom industry, the high-tech industry, Internet satellite industries, consumer products industry. I mean probably 9, 12 months ago that was primarily the focus of the Company, was more along those lines.

Go ahead and ask the question. Get it out. On the dividends and I know you have been fairly clear on your thoughts there but just want to see if there is any update regarding what you think of the dividend at its current levels?

I think it's fine. I mean again our cash position that we have today is strong enough that it gives us that flexibility. I think you start to review that heavily every single quarter as you move forward and we do that now. Not just based on earnings but certainly as we begin to sign new clients and look at other growth opportunities, that starts to be a better use of our cash at that point in time. Then you start to reevaluate it from that standpoint. But today this is the right dividend at this point in time.

Historically when you have added a customer, what are the typical costs that have been involved in ramping up that customer?

Obviously there's going to be training cost. There is going to be IT cost. There's going to be cost associated with recruiting people, staffing, even specific to the client -- their requirements will be involved in all that as well from the kind of software and everything else they demand in the utilization on their side of servicing their client.

Is there any historical benchmark for the amount of money that it has taken to ramp up a new client?

No because it is going to vary by client. It is going to vary by how many seats you are going to ramp up initially. It is going to vary by the sophistication of the call, the kind of people you have to hire, the IT equipment you might need. It is very much non-predictable on an ongoing rate and ongoing cost basis.

One last question out and I will get back in the queue as well. In looking at your cost structure and capacity utilization, I know you've got sales efforts underway. At what point do you look at the capacity that you have and think about adjusting that for your current book of business?

We look at capacity weekly right now. To be honest, we've got meetings that go on everyday -- every week from an operational standpoint in looking not only at new client possibilities in capacity utilization but existing clients and new lines of business of those clients. So that is an ongoing effort inside the Company not only to look at the possibility of having to expand to take on additional capacity but still looking at as well that there's going to ever be a need to do some consolidation. That is a weekly discussion.

I guess to the point of that consolidation I understand that you must monitor it on an ongoing basis. But at what point given the way sales cycles are and the progress of the closing deals would you consider consolidation?

Right now to be honest with you, it's not even a consideration to be frank because of what we have achieved during this quarter. And looking forward from where we are today. I think you look at it more from a standpoint of recruitment issues and things like that that start to arise in certain areas from a consolidation point of view. That it might make some sense to do something different with the side if you're starting to see levels of competition creep in, that may cause your cost to go up in certain areas or just inefficiencies here and there. From a capacity standpoint I think we are right where we want to be at least at this point in time.

Tom Carpenter of Hilliard Lyons.

Can you give us an idea if the new customer is wireline or wireless? The type of business you're going to be doing for them.

I can tell you it is a telecommunications client. That's all I can tell you.

How many facilities -- just to get an idea of the magnitude -- how many facilities will you be utilizing to run the business for them?

Right now you launch in one center to begin with and then you expand as they expand. But you never really launch in multiple centers so we are launching in one center today.

I saw an article in a paper out of Illinois that talked about you guys are increasing hiring at your facility there and you also might need to add capacity in other facilities to handle this business. I didn't know if that was down the road.

Yes we always try to plan -- like I said we have operational meetings every week looking at those kinds of key variables in all of our sites so yes, we try to plan ahead and stay at least a bit ahead of what we think might be demand.

Can you give us a revenue percentage for any customers greater than 10%?

One second, Tom. Let me find that. Yeah let's see Cingular ended -- for six months ended June 30 were at 54.1 for three months 51.4. T-Mobile 22.1 for three months ended 21.8 for six months ended and AT&T Corp. 11%, three months ended, 11.3% six months ended.

That was 11.3 for six months for AT&T?

Yes.

Cingular for six months was 54.1 and three months was 51.4?

That's correct.

On some of the newer customers you signed up in the past year, year and a half can you give us an idea of how Quest (ph) and Texas Utilities are ramping?

As far as I can tell you Quest is on track, from what we anticipated, that would be maybe a little bit slower than we anticipated out of the gate primarily caused by their own doing. But it's going as predicted at this point in time and we've got great satisfaction ratings with them.

Texas Utilities as you know has been taken over that relationship by Cap Gemini and quite frankly that relationship with Cap Gemini, they are starting to take a new direction and we are actually seeing very decreased revenue from them at this point in time. It was never material in any event to the overall revenue of the Company.

Do you have any further charges in the quarter that showed up in your P&L from the restructuring and the layoffs?

It was about $.25 million in severance savings.

Is this the last quarter that we're going to see those in the P&L?

No, you'll still see some more going forward.

(OPERATOR INSTRUCTIONS) David Grossman of Thomas Weisel Partners.

Just a couple of questions, a little bit more getting back to the volume growth. It looks like you were flat year-over-year. Were you -- can you give us a sense of where volume was sequentially?

Hold on just a second. It was essentially flat as well.

So flat sequentially and based on -- I guess -- you talked about a lot of new customer activity beyond the telecom customer. Should we expect to see volume growth sequentially in the September quarter based on the new customer activity?

Hard to tell at this point because, again, since we just did the first call August 1 it's hard to predict exactly where that's going to end up for the quarter. I think what I can tell you is that certainly moving forward beyond that into future quarters, we hope to see growth not only from new client but continued growth possibilities in existing clients but it is hard for me to predict that today.

What is the major headwind for you on the volume side that's holding volumes flat sequentially with the start --?

A lot of it has do with the clients themselves and they experience seasonality as much as we do. So if their volumes are down, then our volumes are going to get impacted by that. If they're going through some transaction or doing something different with their own business then we get impacted by that as well.

How about year-over-year?

I think you -- especially with the fact that we are primarily in the wireless sector -- you see some subscriber shift; maybe they have declined in subscriber growth. That's certainly occurred year-over-year. There's been shift in that between clients and certainly between clients that we don't have.

I guess looking at just the pricing dynamics, just trying to understand how revenues play out and when some of these headwinds (ph) anniversary. Do you see shifts within your tier pricing strategy as well as I guess some of the shifts within your second largest customers. Do those play out on a year-over-year basis by the end of the year or does it continue beyond the end of the calendar year?

The tiered pricing structure is kind of working, as I said like we anticipated it would. We are starting to see the volume growth that we anticipated from that client and in the tiered pricing taking effect there. It is working the way we'd anticipated. As far as second largest client you know, as I said in my remarks, a lot of what drove the great revenue from them was the WL&P and of course the WL&P volumes have dropped off considerably or have become much -- processes have become much more operated. That will continue to be an issue when compared to last year.

I think the question came up a little bit about the restructuring. When do you start seeing the full benefit of that restructuring effort or you really started to see a big chunk of that in the June quarter or should we expect to see more?

(MULTIPLE SPEAKERS)

I think as you filter it through, I think it's going to be a year out. By the time you filter through severance payment and start to see the real impact of it. Some of that will be offset a little bit but we keep picking up new clients and we need to pick up some additional staff to service new clients here and there, but primarily you'll see the effect of it probably a year down the road from when we started. So late first quarter, early second quarter next year is when you will start to see impact of it.

Couple of housekeeping items. Do you know what the (indiscernible) share account at the end of the quarter?

Yes. Hold on just a second; I can give it to you. 14,631,091 shares as of August 1st and 140,630,471 shares as of June 30th.

Were any shares bought back during the quarter?

No.

I guess one last thing on the balance sheet. If my math is right and maybe you can correct me if I'm wrong. It looks like the DSO crept up a little bit. Is that just a timing or is that a seasonal issue?

That was a timing issue with one of our clients because they centralized their Accounts Payable functions so they were a little bit late in paying.

Has that come back down?

Yes.

In August (indiscernible).

Yes.

Jeff Nevins of First Analyst.

Just a question on Cingular. I don't have all the numbers in front of me -- is it in terms of -- I'm trying to do the math in my head -- but did volume -- the revenue from Cingular decline sequentially and if so what's the -- what -- you -- attribute that to?

Sequentially, no. It was pretty much flat.

And what is your cake on Cingular. They have a lot of call center capacity to my knowledge and I may have no idea what I'm talking about but I don't think they have made a lot of cost in terms of cost reductions which is an overall big initiative in (indiscernible) the company. Did they give you any sense what their intentions are on that front?

I think from what our sense of it is, is that they have actually done that. They have gone through that process to a large extent and are now coming out the other side. All I can tell you is that we've maintained our relationship and certainly our capacity with them hasn't changed. I think they've gone through the process. There could be additional ones, I guess that could come and when they start to do their '06 budget. But right now our sense is that they have gone through it.

(MULTIPLE SPEAKERS)

Subscriber growth happens for them and the conversion continues to happen that gives us more opportunity.

The key mobile you mentioned -- I think it was key mobile that you are in the process of renewing that contract. What's -- maybe give a little more detail? You're doing the entire contract and what are the current terms? What are you thinking on that?

Obviously we are renegotiating the entire contract. Currently, we believe the contract expires in June of '06. So we have already started a process and are down the road to renew the whole contract.

How has the volume been on that front sequentially as well?

It has been down.

Any rationale or thought behind that?

Again comparing it to last year we got a lot of volume last year out of the WL&P stuff and of course that's just not there right now.

It has been replaced by activations and other types of volumes to the extent that we had the WL&P volume.

Is that how you -- same reason for the decline sequentially?

Yes.

How are you defining volume? When you talk about volume year-over-year and sequentially, is that by minutes or by calls or -- how are you defining that?

By minutes. We define by minutes.

Tobey Sommer of Suntrust Robinson Humphrey.

Wonder if you could step back and just look at what you are seeing in your discussions with prospective clients in bidding and talk about trends that you are seeing in terms of pricing on an industry basis?

As far as trends, the trend that we see of course is the fact that it does a while to -- and again it depends a lot on the kind of client, size of the client. From pricing standpoint, volume -- the volume delivery drives the rate structure I suppose that you ultimately will end up with. But the biggest trend is the fact that it does take awhile to get these clients to fruition. The larger the client, the longer it takes to get them to fruition and, certainly, a lot of these clients and customers that we've targeted and gone after have existing vendors in place that have been there for a while that you are also competing against. So there's a lot of challenges out there when it comes to try to get new clients and, again, the trend as far as volume and rate and things like that depends a lot on the type of service that you are going to deliver for them, complexity of call, the call structure, what the price on a per call basis or for handle minute basis and rates vary within that context.

I guess sort of within the comparable types of services and comparable types of quantities of volume, what are the pricing trends then?

It depends on the client because right now we think we see some stabilization in all that because right now, most of the clients that we service -- and certainly the ones that we're talking to -- are more or less looking begin for quality of service. They are all about making sure that their end user has a great experience. So they are not so rate sensitive as much as they are quality sensitive and making sure that we gain those scores on their side that make sure their end user customer is having the experience they desire them to have. Because the marketplace we're in and primarily in from a revenue standpoint is very, very competitive.

You have no further questions at this time, Sir. Ladies and gentlemen this concludes your question and answer session. I'd like to turn the call back over to Mr. Steve Butler for closing remarks.

Thank each of you for your time and I appreciate your patience and diligence. The Company is continuing in its turnaround process but as I indicated to you before, I will speak to pipelines or anything like that. I'll tell you when we sign a client we've signed a client and as we continue in that process and progress towards signing future clients, hopefully, I will do the same. Looking toward to completing this turnaround process within the next 12 months or so and getting thins back in line sequentially. Our margins on the operating margin side and the gross margin side improved over Q1. So we are starting to see progress there.

Thank you for your time and look forward to talking to each of you in the near future.

Ladies and gentlemen, thank you for your participation in today's event. This concludes the presentation. You may now disconnect.