Startek Inc (SRT) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2005 StarTek Earnings Conference Call. My name is Raika, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Ms. Jennifer Martin, Director of SEC Reporting and Compliance. Please proceed ma'am

Good morning and thank you for joining us today. With me, on the call, is Steve Butler, our President and Chief Executive Officer, and Rodd Granger, our Chief Financial Officer. Steve will begin our prepared remarks, today with an overview of our business, and Rodd will follow with a review of our financial results. At the conclusion of our prepared remarks, we will conduct a question-and-answer session, with instructions following at that time. This call will conclude no later than 10:30 AM, Eastern Time.

Please note that the discussion today may contain certain statements, which are forward-looking in nature, pursuant to the "Safe Harbor" provisions of the Federal Securities laws. These statements are subject to various risks and uncertainties, and actual results may vary materially from these projections. StarTek advises all those listening to this call to review our Form 10-K for the year 2004, posted on our website, for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections.

I'll now turn the call over to Steve Butler, StarTek's President and CEO.

Thank you, Jennifer. Good morning and thank you for this opportunity to speak with you this morning. This quarter concluded a turnaround year for StarTek, punctuated by significant changes in our business and senior management team. We look much different today than we did this time last year.

There is a new senior management consisting of members, which are primarily promoted somewhat from the ranks of the organization. We have an increased focus on the core business after the sale of our Supply Chain Management Services platforms in December of last year, a much more active sales force, which delivered some significant new clients during the course of 2005, and a much leaner corporate organization.

Many of these changes evolve out of some of the promises we made to you, our investors, last year. I'd like to review what those promises were and how we've begun to address them.

First and foremost, we promised that we would realign our corporate structure to better match our operational activity. The goal was to bring our focus both productively and financially back out into a field where the real money gets made. During the year, primarily in the first quarter, we reduced our corporate headcount by over 30% as well as taking significant reductions in our supply chain management headcount.

We estimated our gross annual savings to SG&A and cost of services to be approximately $6 million from these cost-cutting measures. While we expect to start seeing some of these savings mid-2006, we also recognized that topline growth may require us to build our infrastructure to support new clients as we grow.

We also worked on improving our capacity utilization. We don't generally speak to capacity utilization percentages, but proof of our improved utilization lies in the announcement of three new call center sites -- one in Virginia and two in Ontario, Canada. These were needed primarily due to new clients contracts and commitments as well as service level demands, which could not be met using our preexisting capacity.

We promised to announce new clients as contracts were signed. We reorganized our entire sales staff. And under the direction of Mike Griffith our SVP of Sales and Marketing, who came on board in late 2004, we achieved some significant new client contracts. The second half of the year brought a flurry of these new clients.

In August, we signed a significant large North American telecom provider. In September, we signed a new Fortune1000 multinational communications provider. In October, we signed a significant Canadian contract, which will provide a natural hedge to our Canadian dollar expenses. And we've recently announced a three-year contract with WildBlue, a broadband Internet services provider via satellite, after completing an interim contract that we signed with them in October. This is particularly notable, as we will be the exclusive customer care provider under the contract for WildBlue. Our success in our sales efforts did lead us to securing the three new facilities, as I discussed above.

Of course none of these things would have been possible without two other key factors -- overall client satisfaction and retention of our legacy clients through strong client relationships and service delivery. In January of 2006, T-Mobile was awarded a [JT Power & Associates] Wireless Customer Care Performance award for the third straight reporting period.

Our relationships remained healthy, and during 2005, we renewed our contract with T-Mobile as well as another one of our large telecom clients that include one-year renewal clauses, which would extend the contracts through August and June of 2007, respectively.

Our renegotiating with Cingular is on track. As of the date of this call, both Cingular and StarTek have expressed a mutual intent to amend and extend the service contract, which expires in December of this year. And our relationship remains healthy with them.

We also promised a stable, proactive management team. We have set in place a senior management team that we believe can help take this company into new markets, offering greater growth opportunities. Together, we have created a strategic vision to continue to improve margins and return the Company to its historical growth patterns.

We're looking to discover in our new market verticals and product offerings, which we believe will provide valuable growth opportunities for the Company. We will also explore the idea of diversifying geographically, if we find situations that we believe are advantageous to the growth of the Company.

To show our dedication to this kind of growth, we created a new position in August of 2005 of Senior Vice President of Corporate Development and Strategic Planning, occupied by Pat Hayes, whose primary objective is to find the next growth wave for StarTek. Pat and his team are charged with looking into all the possibilities of diversifying and growing the Company, including M&A activities, strategic partnerships, and finding innovative ways to continue to grow organically.

We are currently exploring diversification opportunities into market verticals such as financial services, healthcare, media and entertainment. Our entry point into many of these verticals would be via our customer care services, much in the way we currently service our telecom clients. We've already begun this process with our recent announcement of our contract with WildBlue.

We've also made significant strides during this turnaround period for StarTek. However, the future is not without its risks and challenges. With increases in sales comes increased demand for space and infrastructure. The capital requirement it will take to ready our new facilities for use averages 4 million to 5 million per site.

At Petersburg, our most recent announced opening in January, most of those capital costs were incurred in the fourth quarter of last year, as the facility began taking calls in January. However, ramping costs will continue throughout the first quarter of this year. Our sites in Hawkesbury and Thunder Bay are scheduled to open during April and are currently incurring capital investment and initial ramp charges during this quarter.

As these facilities go online, there is a mismatch between revenue and expense as we incur additional recruiting and hiring expenses on the front-end to staff the facilities. As a result, our operating margins will be negatively impacted until the clients at these facilities are fully ramped and functional. We don't expect to see real revenue and earnings growth from a lot of these new clients until mid-year.

As I said before, our philosophy regarding opening new sites or expanding current facilities has been a little more cautious than we may have been in the past. Instead of opening a new center based on [talk] of volume, we are actually securing the volume contractually prior to incurring the cost of a build-out.

With that update, I will now turn the call over to Rodd Granger, our Chief Financial Officer, who will give a brief overview of our financial results for the quarter and for the full year of 2005.

Thank you, Steve, and good morning everyone. I'd like to start out my discussion by making a few key notes about the financial results I'm about to provide. As you can see from our published financials in the earnings release, we have disclosed the financial results from our Supply Chain Management Services platform as "discontinued operations" in our consolidated statements of operations for all periods presented. This is a result of finalizing the sale of the SCM platform in December of 2005.

Consequently, all numbers stated for both years exclusive of discontinued operations in total net income are from continuing operations, unless otherwise noted. Likewise, all comparative information relates to comparable periods in 2004 and 2005, unless otherwise noted.

I'll start with the financial results from the fourth quarter of 2005. Revenue for Q4 of '05 compared to Q4 of '04 was fairly consistent, up slightly, $58.2 million. Incremental revenue from new clients totaling approximately $4.6 million and increases in volume of two of our larger clients were partially offset by decreased volumes from Cingular.

The decreased Cingular volume year-over-year was more of a result of experiencing higher volume and premium pricing in Q4 2004, resulting from their merger, than declining volume during 2005. Gross profit for Q4 '05 compared to Q4 '04 was flat, at about $12.6 million. Gross margin was also relatively flat at 21.6% in Q4 '05 compared to 21.8% in Q4 of '04.

We experienced improved margins on two of our larger clients during the quarter. Offsetting these improvements were costs to ramp our new client volume and build out our Petersburg, Virginia, site as well as the impact of a stronger Canadian dollar year-over-year. This currency effect had a negative impact of approximately $1.3 million on our cost of sales during the fourth quarter.

Selling, general and administrative expenses for Q4 '05 compared to Q4 '04 increased slightly by about $500,000. This increase is due in large part to increased investment in IT infrastructure upgrades in our ERP system. All this activity resulted in Q4 2005 operating profit declining roughly $500,000, to $5.6 million, or 9.5% of revenue.

We experienced lower income and gains from our investment portfolio contributing to a decline of $600,000 in net interest and other income during the fourth quarter of 2005 versus the same period in 2004. This was a result of a more conservative approach in our investment policy as well as general market conditions.

Income tax expense was down $1.2 million quarter-over-quarter. We experienced positive effects from state tax return true-up activity and were able to garner higher than normal work opportunity credits.

Income from continuing operations for the quarter was up 1.6% from the prior year, resulting in earnings per share of $0.30, up $0.01 from last year. For the quarter, we had basic outstanding shares of 14,631,000 and fully diluted shares outstanding of 14,688,000.

I'll now move on to the results for the full year. For the full year, we generated $216.4 million of revenue. This is a decrease of 2.5%, or $5.5 million, versus the prior year. This decline was driven by a number of factors. The revenue mix from T-Mobile involved a shift away from higher-margin, higher-priced services, such as WL&P, while volume on lower-price, lower-margin services actually increased year-over- year. This resulted in a drop of dollar revenue during 2005 from T-Mobile.

We experienced a slight decline in annual Cingular revenue of about 1.6%. Cingular volume and revenue was up for the first three quarters of the year. However, as discussed previously, we experienced a significant amount of volume in Q4 of 2004 that was billed at premium rates. This brought our revenue from Cingular down year-over-year, despite increases in volume.

We were also affected by a decline in business on one of our utility clients. Partially offsetting these declines was an increase in volume on one of our larger non-10% clients, which was due in part to the fact that the client ramped late in 2004, but we also nearly doubled the number of service lines we provide to that client.

Other new business ramped late in the year brought an additional $5.7 million year-to-date in 2005. Revenue concentration for 2005 of our major clients was Cingular, 52.6%; T-Mobile, 23.9%; AT&T Corp., 11.1%. Gross profit for 2005 compared to 2004 decreased $8.4 million to $49.1 million.

Gross margin declined from 25.9 in 2004 to 22.7 during 2005, due to the following factors. The previously mentioned change in revenue mix on T-Mobile. The premium pricing on services provided to Cingular in Q4 2004, which realized higher gross profit margin. Cost associated with ramping new clients and opening our new Petersburg site. And finally, another major contributing factor was the strengthening Canadian dollar, which had a 5.5 -- $5.1 million negative impact on gross profit.

Selling, general and administrative expenses for 2005 compared to 2004 increased $1 million, or 3.6%. Cost realignment strategies decreased corporate headcount, but this was largely offset by severance costs during the year. We also had a full year of fixed costs in 2005 associated with three new call centers opened throughout 2004.

As noted in our press release today, our selling, general and administrative expenses as a percent of revenue declined from 14.5% in the first quarter of 2005 to 12.1 in the fourth quarter, a reflection of management's efforts to keep our fixed costs in line with our operations. Operating profit for 2005 declined approximately $9.3 million to $20.8 million, which is 9.6% of revenue.

Year-to-date net interest and other income was $2.1 million lower in 2005 compared to 2004. We experienced lower income and gains from our investment portfolio due to our more conservative investment policy and overall general market conditions. Partially offsetting this decline was a third-quarter $800,000 gain on the sale of our Greeley East facility.

As I mentioned previously, we finalized the sale of our Supply Chain platform in December. As a result, we recognized a $300,000 gain on this sale in the fourth quarter of 2005. This gain, together with the financial results of operations from this platform, has been reported as "discontinued operations" in 2005.

The operations of the Supply Chain platform have also been reported as discontinued operations in 2004 for comparative purposes. As a reminder, 2004 discontinued operations also includes the results of operations and related loss on the sale of StarTek Europe, which occurred in September of 2004.

Fully diluted earnings per share from continuing operations was $0.96 in 2005, down from $1.41 in 2004. Fully diluted earnings per share, including discontinued operations, was $0.88 in 2005, down from $1.42 in 2004. Basic and diluted shares, respectively, for 2005 were 14,629,000 and 14,681,000 shares outstanding.

Our cash, cash equivalents and investment position continues to be strong, increasing $6.2 million to $45.6 million at December 31st, 2005. Working capital declined $16.7 million, ending 2005 at $72 million. This decline was primarily the result of decreases in accounts receivable and income tax receivable. Days sales outstanding declined from 72 days at the end of 2004 to 63 days at 2005, a decrease of nine days.

We reduced long-term debt by $2.5 million and had capital expenditures of $15.4 million during the year. Capital expenditures were primarily in support of our ERP system and IT infrastructure upgrades early in the year. However, we also designated a significant portion to the build out of our new Petersburg facility.

Another item of note, in December 2005 we accelerated divesting of approximately 144,000 employee stock options in anticipation of implementing FAS 123R. These options represented the majority of out of the money stock options at the time. This action did not impact our 2005 financial statements. With that, I would like to hand the call back over to Steve for a discussion of our dividend and his closing remarks.

Thank you, Rodd. As most of you know, we announced a dividend of $0.36 per share on February 3rd, which was paid on February 23rd to shareholders of record as of February 14. We continue to believe that our current cash position is strong enough to allow us flexibility with regard to the amount of the dividend and allow us to keep our options open for growth and expansion opportunities. The Board and management will continue to evaluate the dividend based on earnings, cash positions, immediate cash needs, and growth opportunities in the future.

In closing, let me summarize with a few key points. In 2005, we made significant strides in demonstrating our dedication to realigning our costs structure. During the year, our Selling General and Administrative costs declined as a percentage of revenue from 14.5% to 12.1%.

Our sales team is delivering solid new wins, which are already beginning to demand growth for us resulting in StarTek securing three new operating facilities in Canada and Virginia. Our senior management is aligned and focused on continuing to proactively seek out growth opportunities in market diversification while working to improve our margins.

We'll now open up the call for question-and-answer session. Please stand by while the operator provides you some instructions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Josh Vogel of Sidoti & Company.

Hey. Good morning.

Good morning, Josh.

How are you?

Good. How are you?

Good. Thank you. Just a couple of questions for you. With the three new sites, can you tell us how many total seats these facilities are going to add?

Well, our average sizes of our facilities are typically 400 to 500 seats, and these will be typical of most of our sites.

Okay. With the -- your utility client, why did the volume decline? Is this a ramping down of business with them?

Yes.

Okay. And when is that --

They were never a significant client and the businesses really ramped almost completely away.

Okay. And I think I missed it but what was the percentage of the Cingular volume in the quarter and for full year?

In the quarter it was 48%, in the full year 53 -- I think, it's the 52.6 for the full year.

Okay. Great. And I know you mentioned that both sides have expressed interest to amend the service contract. Do you expect to retain all this business? Will this contract have more favorable pricing for you guys?

Well, we certainly have no reason to think that we're not going to maintain the same kinds of services that we do for them today. As far as pricing, I think it's early to tell at this point, but we don't expect anything significant to change there.

Okay. So at this point in time you expect to retain all of their business?

We do. We have no reason to think that we would not.

Okay. Thank you.

And your next question comes from the line of Tom Carpenter of Hilliard Lyons.

Good morning, everyone.

Good morning. Tom.

Hi, Tom.

Could you give us an idea -- you had a quite a bit lower tax rate in the quarter than you normally do, can you give us an idea what type of tax rate to expect in 2006?

Yes. I would think that our tax rate would get back to more normal. I know in the third quarter we had a very high tax-rate due to the issue we talked about then. This one's very low due to the state tax return true up in and the work opportunity credits that we discussed, so I would expect it to be at a more normal level in the 38 to 39% range going forward.

Okay. And it looks like revenue is stabilized quite a bit from earlier in the year. And I know you guys get some seasonality in the fourth quarter [inaudible] the new activations. Do you expect maybe not off Q4 levels -- but do you expect sequential quarterly increases in revenue in '06 based on the three significant new customers you add in 2H '05 and also WildBlue, which looks like it's going to be a smaller new customer that you recently got?

I think what I said in during the course of my remarks, Tom, is that we don't expect to see a lot of real impacts from these new clients until probably mid-year. And that's our expectation levels at this point in time because we're still very much in ramp mode with every single one of them.

So maybe some seasonality in the first quarter and then things picking up in the second, third and fourth quarter by -- ?

That certainly what we anticipate. Of course that always depends a bit upon the clients themselves and how fast they continue to ramp and their demand, and things like that, but that's our expectation, yes.

Okay. And from your remarks when you talked about some of the startup costs, I guess, that was part of the reason why gross margin went down in the fourth quarter as well as some pricing mix issues. But do you see the gross margin, kind of, staying at this -- the fourth quarter level in the first half of the year and then picking up in the second half of '06?

Yes. I think, again, we said in our -- in my comments that they would be somewhat negatively impacted during the first quarter because of the ramp costs and things associated with three new centers coming online. But certainly, our expectation is to try to maintain at least the fourth quarter level, if we can. But if the ramp really picks up speed then they could be impacted in a negative -- more negative way.

Okay. And then one final question. On SG&A you guys held that steady most of last year. You talked about maybe we're going to see savings this year which could be offset by the ramp costs that's in the facilities if you add, I know you said 400 or 500 seats at the site. Do you see SG&A on a dollar basis begin flat versus last year or should we model it as going up based on the workers coming on board?

Interestingly enough, most of the agents that come on board probably have more of a cost of sales area when they do the SG&A line. So I don't expect SG&A to increase much unless we continue to see significant growth. But as a percent of revenue, it will probably maintain the level that it's at today or maybe decline.

Okay. Great. Thank you.

And your next question comes from the line of Tobey Sommer of SunTrust Robinson Humphrey.

Good morning, guys. This is Mike --

Good morning Tobey, how are you?

I'm doing well. This Mike Fitz in for Tobey this morning. A couple of quick questions. Could you discuss what you're seeing as far as the sales cycles? Do they seem to be shortening a little bit?

No. I don't think so. I think again it depends on the size of the client that you're dealing with. If it's a larger client, and more bureaucracy levels to deal with, it takes a bit longer. I think usually we anticipate 9 to 12 months for some of those even. If it's a smaller company, maybe like a WildBlue, for example, at this point in time, typically six months, somewhere in that area, so it's staying about what it's always maintained.

I think that the pipeline is probably stronger because the demand for outsourcing seems to be increasing. But as I've always maintained I don't really speak to pipelines because until you actually sign somebody it doesn't really matter, but I do think there has been a pickup in the pipeline.

Could you discuss a little bit the opportunities in the different verticals, you mentioned -- I'm recalling, you're mentioning finance, healthcare; entertainment as being kind of some vertical areas that you're interested in. Can you just speak a little bit to the kind of opportunities you are seeing there?

I think that as I just stated, I think, the demand for outsourcing across all market verticals is picking up. And certainly because of our reputation in the customer care area and our performance in that respect, it's opened some doors for us to get into some of these other market verticals to a large degree.

It's always going to continue to take time to finalize any kind of contract something like that, but I will tell you that because both of those industries are some of our primary targeted verticals that we have, we are focused on trying to deliver some of the clients in those industries during the course of 2006. And we think we have the opportunity to do so. We certainly have the wherewithal to deliver the kind of services they're looking for. It's a matter of just getting in and closing the deal.

And then stepping back and say you guys are able to ramp up these new centers and get some -- maybe some more profitable business out of some of those other verticals. Do you foresee that maybe operating margins could return -- or start to return toward some of the higher levels that you guys have seen in the past?

We'd sure like to think so. I mean, I think that as you move into different types of offerings and services your primary focus is to find those services that offer greater margins than maybe the ones that you're doing today. So certainly that is the task that Pat and Mike have is to find opportunities that will increase our overall margin performance.

Okay. And then kind of one final kind of housekeeping question. Can you give us a sense of any kind of what you guys are looking for as far as option expense for 2006?

Yes. I would say roughly at this point we're still figuring all of that out because it is a moving target for us. But once -- as we're going through this implementation of FAS 123R, I would say it would be somewhere in the tune of 0.5 million to 750,000 for the year.

It gets back to deciding whether you're going use Black-Scholes method or binomial method. I mean there is a lot of different thing that you've got to consider in the calculation. So I think our range is probably accurate at this point.

Okay. Great. Thanks very much guys.

And your next question comes from the line of Arnold Ursaner of CJS Securities.

Good morning. Can you attempt to quantify the startup expenses you're likely to incur in the first quarter and perhaps even give us a feel for what it may be in Q4?

I can't attempt to quantify for Q1, Arnie, because it's certainly in the middle of it and it's a little bit difficult at this point in time. Rodd do you have anything on Q4 that you can --?

Yes. Q4, if we just looked at the start-up cost for the Petersburg site, Arnie as well as, the tail-end of ramping the new clients, I would say someone in the tune of about 750 to maybe 1.2 million.

Well, again, thinking about Q1, would it be higher or lower than those types of numbers?

Well, I think it would probably be greater than that because we're still ramping the Petersburg facility to some extent, and we got two new ones that are going to come on, hopefully, first part of April.

Okay. So something north of 1.2, and we can guess beyond that. And would those expenses likely continue into Q2 as well?

Yes. Because the ramping -- the ramping costs is associated with recruiting personnel, absolutely.

So as I think about your margin, unless there's some offset that you could, perhaps, give us some better clarity on -- we should see some pretty good margin erosion in the first two quarters on the cost of goods line in particular?

I don't know. We could get volume offsets against that as well. So on the revenue side -- I don't know. I think there's obviously, as I said before, there's going to be some negative impact from those costs, but it could be offset by the topline as well.

Okay. Can you give us any feel for the volume decline in Cingular in Q4?

It was the -- the actual volume decline?

Correct.

Yes. It was -- I think, it was about 5% year-over-year. Again, most of that decline in the revenue was in Q4 of '04, as they were going through the merger. There was a lot of work with the AT&T transition over to Cingular that was at premium pricing due to overtime and things like that. So that was more of the Q4 over -- Q4 decline over Q4 decline was based on that rather than actual volume declines.

And your next question comes from the line of David Grossman of Thomas Weisel Partners.

Thanks.

Good morning David.

Yes. Good morning. Steve, you talked about, kind of, some changes in your major customers during the course of the year. And I'm just curious, do you think you've, kind of, seen the major shift is behind you at this point or do you think you have more mix shift to come here in 2006?

I would say the large part of it is probably behind us because WNL -- WLNP was a major component of all of that. I'm sure, there will be some more shifts going forward during the course of the year, but I don't expect them to be as significant as they were from '04 to '05. But I guess, I remain encouraged that most of that is behind us.

But I -- that there will still probably be some of it because of the way their businesses shift in and among themselves. But again, most of that was WLNP related last year, and I think most of that has worked its way out.

And in terms of, kind of, looking at volume growth, again, within the kind of the same customer base, if you will. How much visibility do you have on that in terms of either months -- do you have a quarter's visibility or is it really just tracking it on a day-to-day basis?

Yes. Typically, it's about 60 days, I believe -- 60 to 90 days visibility.

On the volumes?

Yes.

Okay. And then if you -- you talked a little bit about growth, and I'm not sure I heard you correctly, but you talked about new services and geographic diversification. Can you give us some better sense of the types of services that may provide, I think, to your own point about higher margin opportunity? And in terms of geographic diversification, are you thinking more in terms of the sales effort or are you thinking more in terms of expanding your delivery capacity into other geographies?

I think there's a couple of things there. There are strategic partnerships that we're looking into that will give us much more geographical diversity possibly. Certainly, there are bilingual opportunities that geographically might make some sense. But we're also looking at business opportunities in particular regions. As I've indicated before, on almost everyone of my calls, the philosophy that I have is that we will go offshore, we'll look offshore for opportunities as long as there's the opportunity to do business in that region with businesses in the region, not just for North American clients.

However, that being said, a number of our clients are very much global and offer us some opportunities as well in some of the areas. So we're looking at all those different factors when we're looking at geographical diversification. There is a demand for bilingual. There is a demand for looking into other regions outside of India and the Philippines, let's say, where there is significant business being done in those regions that actually have some outsource demand.

And in terms of your services. You mentioned bilingual, I guess, is there anything else?

Well, I guess as far as the focus and the target, probably not. That's probably one of the primary areas we're looking at. However -- and when you start to look at strategic partnerships, those partnerships can also bring a lot more to bear from a product model as well.

So there may be some financial accounting type of services, human resource optimization services and processes we can provide as well. But again for us as a company, bilingual is one of the focuses we do have.

Okay. And I guess others have kind of tried to ask this in different ways, but is there any rule of thumb or any kind of metrics you can give us beyond the 400 to 500 seats that you've added per facility and you gave us a 4Q metric on cost to ramp.

But is there anything you can provide to us that will help us better understand how to model in new facilities and new customers, given that -- I know you don't like to provide forward guidance. Is there any analytical tools you can provide us that kind of may help us do that?

Not really because part of the problem you run into there is just the way that these ramps occur. Certainly, it depends on the line of business you get involved, it depends on the costs, the kind of revenue per seat that you look into.

And to be precise on that, would be trying to throw a dart at a dartboard to some extent. I would say the best place to focus is just to look at the margins and understand somewhat the historical impacts at the times that we have launched new call centers and new clients and go back and do your homework along those lines.

So at what point, do you get large enough scale that the margins aren't significantly impacted by new contracts and new customers?

Yes, I don't know, because if you sign a new client that has a significant better margin than some of the ones that you currently have and they're fairly large, then that would have obviously a positive impact on margins.

So you kind of just have to go with the historical, I guess, background of what we've seen and experienced at this point in time, because we're still out there hunting and trying to find those clients that will increase our margins. And I think once you start to bring those on board, then, yes, your impact isn't going to be felt nearly as much.

Scalability in this business is not the easiest thing in the world because every call center is different. Every location is different. Every client has different demands and types of agents training. Some are three weeks, four weeks. Some are six weeks. So all those variables enter into it.

Right. Just a couple of quick clean-up questions, just in terms of CAPEX and D&A for '06. Based on your ramp, can you give us a sense it will be up year-over-year or you expect it to be relatively flat?

Yes. I think it will be up year-over-year. And just given the fact that we've got two new call centers coming in, plus we continue to invest a little bit in our IT infrastructure. I would look at that to be somewhere in the $20 million to $22 million range for 2006.

And how about D&A?

Depreciation and amortization?

Yes. Depreciation and amortization, right.

I would say it's probably, going to -- once these facilities go online and you start to depreciate them, then naturally you would think there would be somewhat of an increase on the D&A line.

Okay. And you talked a little bit about the options expense -- did I hear you right that the range would be 750,000 to 2.5 million?

No. I believe I said 0.5 million to 750,000.

I'm sorry. Okay. And was the -- what was the share count in the fourth quarter?

Fourth quarter share count -- the basic shares were 14.631 million.

Right.

Fully diluted, 14.688 million.

And does that 14,688 then include the accelerated vest then -- so that's a good number to be using going in for next year?

Yes. Well, the dilution would be the options granted that are in the money.

Right. But didn't you say you accelerated -- but you also accelerated the vesting right during the fourth quarter? Did I hear that right?

Yes.

Okay.

144,000 shares.

Okay. And just one last question on the customer mix, I think you gave Cingular in the fourth quarter. Can you give us the other major customers you typically provide in terms of 4Q percent of revenue?

Sure. Cingular for the fourth quarter was 48%, T-Mobile 25%, AT&T 10%.

Okay. Great. Thank you very much.

And your next question comes from the line of Donna Jaegers of Janco Partners.

Good morning, guys.

Good morning.

Hey, just one quick question. Obviously -- maybe I'm misunderstanding this, but it doesn't sound like any of your ramp-up costs, any of your training costs are going to be covered in these new contracts? Is that a correct interpretation?

Not entirely. I would tell you that to some degree they will, but to a large extent, no. But in some cases, there's parts of it that are covered. But for the majority of the new clients, no, most of it is not.

Okay. And then could you just make a quick comment -- you -- obviously, the pipeline looks like at least people are making decisions on a little more timely basis. But can you talk about the competitive trends and recent pricing on some of your -- on new contracts? Because pricing looks like it's stabilizing and moving up a little bit, but obviously it depends on the country?

I think it very much depends on the kind of service you're going to deliver for that new client. And secondly, certainly with the clients that we do have today, it's all about performance. And if you're performing well then, even though there are competitors are out there and there is an aggressive pricing structure, a lot of does get down to how you're performing with the client. Clients aren't as quickly to jump to other providers as long as you're providing a level of service that they have become accustomed to. And for us that's been pretty status quo. So pricing on our side, we think, is in the ballpark that we've expected in the new contracts.

Okay. And then any other competitive trends? Any of your competitors that you see out there getting desperate and winning business on those desperation pricing?

We've not seen that because, quite honestly, the clients aren't desperate.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] And your next question is a follow-up from the line of Tom Carpenter of Hilliard Lyons.

I didn't think we allowed follow-ups.

I know, I know. These will be brief, I promise. By the second half of this year, based on the number of seats you're talking about for some of those clients, it sounds like they could be fairly decent sized customers. And do you think any of those new clients, if everything goes the way you expect, can be 10% revenue clients on a quarterly run basis by the end of the year?

Tom, it's probably way too soon to tell. I mean I think we'll have to kind of monitor that. We'll probably be better judges of that by middle of the year to kind of see how ramps are going or where things are at. It would be nice, but we just have to watch and see.

Okay. And the final question is on some of the verticals you guys are bidding on. I guess financials and healthcare you guys don't have much of a track record there. Do you think you can win your business there outright based on some of your current reference wins or do you see those maybe making a small acquisition or two to enter those lines of business?

Well, I don't think you rule out looking at acquisition opportunities along with the strategic partnerships. But we do some accounts receivables management stuff today already for one -- for AT&T. And certainly with the care -- kind of care services that we provide and our reputation in that area, we think we can transition those things into the financial services arena, banking arena, human resources arena, healthcare arena. So that's what we're trying to do.

Okay, great. Thank you.

And your next question comes from the line of Adam Waldo of [Silver Oak Service Partners].

Yes. Continuing on this line of discussion around corporate development strategy in terms of new services and geographic expansion, I wonder if you can just give us a framework for how you'll be thinking about building capacity versus joint ventures or [running] capacity relative to acquisitions?

It's always - it does get down to sort of build versus buy and probably time-to-market to be frank, Adam. So when you're looking at a new product and/or market vertical, you've got to look at it from the standpoint what is it going to cost me, if I want to try to build this kind of -- let's say, organic growth mechanism within the confines of the walls of this company -- how long it's going to take me to do that, how long is it going to take me to obtain clients in that new vertical versus if there's an acquisition out there or some kind of a partnership that makes sense that will move me into that vertical much quicker and at lower cost.

If it supports a strategy that we can grow from -- as far as looking at financial services and healthcare and those areas, and it makes sense to build it, and we think we've got the ability to build it through Mike's team achieving some significant client wins in those new verticals, then we'll do that route. But I don't think we're going to sit on the sidelines a long time and wait for all this stuff to develop, because I think there is a time-to-market mechanism that we're very aware of.

That's helpful. And do you have specific objectives for what you seek to achieve this year on diversification?

Well, certainly we have internal hurdle rates, and we certainly have ideas of where we want to get to. I would advise you that if you have specific questions along those lines, to take them offline and give Pat Hayes a call, Adam.

Okay. Will do. Thank you.

Ladies and gentleman, this concludes your question-and-answer session for today. I would like to turn the call over to management for closing remarks.

I appreciate everyone joining the call this morning and continuing to follow us throughout the course of last year. I think we are very encouraged, obviously, with what lies in front of us for 2006. There are a lot of challenges, and a lot of risks, but there are a lot of opportunities. And as I said before, we have a team is very focused on delivering on a lot of those opportunities and continuing to grow StarTek as a company. So thank you very much for your time, and we look forward to speaking with you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.