Startek Inc (SRT) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the StarTek first quarter 2009 earnings conference call. My name is Maria and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's conference, Julie Pierce. Please go ahead.

Thanks, Maria. Good morning everyone and thanks for calling in. I'm Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations and it is my pleasure to welcome everyone to StarTek's first quarter 2009 earnings call. I'm joined on the call today by StarTek's President and Chief Executive Officer, Larry Jones and Chief Financial Officer, David Durham. Larry and David will deliver prepared remarks today with some brief comments about this morning's release. At the conclusion of their prepared remarks they will conduct a question and answer session. For those of you who have not yet received a copy of today's earnings release please go to www.startek.com where you can download a copy from the Investor Relations section of our website.

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 2008 Form 10K posted on our website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections. Further, our discussion today includes some non-GAAP measures. In accordance Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found in a table at the end of this morning's release as well as on the Investors page of our website under Regulation G.

I will now turn the call over to Larry Jones, StarTek's President and CEO.

Thank you, Julie, and welcome everybody. I'll cover the highlights of the first quarter after which Dave Durham, our CFO will cover the numbers in detail. Following that I'll comment on the rest of 2009 and open up the call for questions. I'm truly excited about our first quarter results. This quarter was a turning point for StarTek. Over the last several years the executive team and I have worked hard to grow the top line, add new contracts, fix and expand the delivery platform and return to profitability.

I'm pleased to report today that we have made great progress this quarter on all these fronts. We reported profitability for the first time in five quarters. We continued our trends of near double-digit revenue growth. We closed three new sales contracts year-to-date. Our site performance is improving. Our utilization is up. Our margins are up. And finally, we are expanding our service offering with new technology products. I'd like to talk to you about each of these in a little more detail.

First, I'll cover the highlights of our financial results for the quarter. Not to take away Dave's story, but the numbers are the biggest story we have to talk about today. As you have undoubtedly seen in our release we reported GAAP and adjusted EPS of $0.04. This is our first profitable quarter since the second half of 2009. This is a result of, one, the site improvement efforts made throughout 2008 resulting in improved gross margins of 15.2%. And two, lower SG&A, down about 6% from the prior quarter from the efforts taken in the fourth quarter to contain costs.

While profits are up, so are our revenue and sales. Our total revenues were up 9.5% over the same period last year and AT&T was up 45% over last year as we have ramped new business for them in four new sites over the past 12 months. Unfortunately, during the same period T-Mobile quarter revenues were down 18% due to the closure of two sites that service their business. We also reported improved cash flow with EBITDA margins for the quarter of over 7% and a strong balance sheet with cash and investments of over $28 million.

Now, let me turn to some of the major operational accomplishments for the quarter. First, there's clear evidence of a turnaround on our sales effort. Year-to-date we've closed three new contracts with commitments of over 450 seats. One of these contracts was with Cincinnati Bell, which we announced on Tuesday. Much of this work will be performed in the Philippines and consists of customer care, technical support, sales and retention work previously performed by a competitor. This contract also includes hosted technology infrastructure and application services which we'll provide over the life of the contract.

In the first quarter we also continued to win new add-on business from our existing clients. While we've yet to identify a new Senior VP of Sales we've made significant progress in restructuring of our sales and marketing operations resulting in better messaging, more market presence, better lead flow and our ability to respond to opportunities more professionally and in a more timely manner. All of these efforts have resulted in a strong pipeline of new business opportunities that we hope will result in the ability to continue to grow quarterly revenues for the foreseeable future.

Our second major accomplishment during the quarter was that our site improvement efforts initiated in 2000 began to pay off. As you may recall, these efforts included the ramping of our new sites, closing of sites where labor markets were depleted, instituting improved accountability and operating metrics, and rebalancing our portfolio with more offshore and less Canadian capacity. As a result of these efforts during the first quarter utilization improved to 70%, up from 62% in the prior quarter and gross margins improved in all three regions -- the US, Canada and the Philippines.

Our Philippine operation was profitable for the first quarter and we have two-thirds of that site capacity under contract. Also during the first quarter we completed the closure of Petersburg and Regina ahead of schedule.

Our third major area of accomplishment was the effort to improve our organizational effectiveness and leadership. We've added two new members to our senior leadership team. Lana Little joined as VP of Support Services and Michael Stefanoudakis as our General Counsel replacing Michael Clayton. During the quarter we kicked off a process improvement and standardization effort that are proceeding nicely and our recruiting team continues to hire more effectively and at less expense per hire. During the quarter we also upgraded a number of site directors and field support staff and continue to roll out a company-wide leadership development program.

Our final significant accomplishment for the quarter was the introduction of our new service offerings. These new offerings are intended to complement our voice services allowing our clients to outsource some or all of their customer care infrastructure. These services included hosted technology infrastructure and application services for interactive voice response, IVR, virtual queuing, Voice over IP phone services, E-mail, chat and self-help applications.

We also introduced outsourced work force management and quality assurance services. These value added services provide us with additional revenue stream and allow us to build stronger partnerships with our clients.

In summary, many of the plans that we've been talking about over the past few years have become a reality this quarter. And while there is much more progress to be made we're very proud of the results to date.

With that, I'll let Dave run you through the numbers.

Thanks, Larry and thanks to everyone for calling in. As Larry mentioned we're quite pleased with our financial results for the first quarter. Our top line growth was solid on a year-over-year basis and though down slightly sequentially compared to last quarter we came in ahead of our internal business plans. More importantly gross margins expanded nicely compared to last quarter and were also up year over year. Most important we returned to profitability for the first time in five quarters and believe that trend will continue.

Moving on to the details. Revenue for the first quarter totaled $70.7 million, up a healthy 9.5% compared to the first quarter of 2008 and as expected revenue declined sequentially compared to last quarter. The growth compared to the first quarter of 2008 was attributable -- was attributed to the continued ramping of our four sites open throughout 2008 offset by the three that we closed resulting in a net revenue increase of $6 million. The sequential decline of $2.8 million was actually less than we expected.

The decline was due to two things. One, there were two less billing days in the current quarter compared to last. And second, we closed Petersburg at the end of the fourth quarter and ramped down Regina during the quarter. The calendar cost us a little over $2 million in revenue and the closure of Petersburg and ramp down of Regina accounted for the decline of over $3 million. Net of those two items revenue actually grew on as a sequential basis by a little over $2 million mainly due to our Philippine operation which incrementally added $1.6 million in revenue in the quarter.

Recognizing that many of you track our client concentration, revenue from our largest client AT&T represented 65% of our current quarter total, compared to 49% in the first quarter of 2008. T-Mobile revenue totaled 21% for the quarter compared to 28% in the comparative 2008 period. It's worth reminding that while these clients represent a significant percentage of our overall revenue each of these accounts have numerous programs serving multiple lines of business within both accounts with multiple service types.

More significant than our strong top line performance was the progress made in the quarter to expand gross margins. Gross margin for the first quarter of 2009 was 15.2%, a 40 basis point improvement compared to the first quarter of 2008, but more importantly a 420 basis point improvement compared to last quarter and the first sequential improvement in the last five. We achieved gross margin improvement in the US and Canada and most impressive was achieving profitability in our Philippine operation only five months after that Greenfield operation was launched.

Margins in the US improved to 17.8%, the best in four quarters due to higher utilization. Canadian margins improved to 9.1%, the best since 2006 aided by an improving exchange rate and better utilization. The Philippines' posted gross margin of 8.3% and $200,000 in gross profit contribution; this after generating a loss last quarter of over $900,000. All good news and a strong indicator that our site optimization strategy that went into full swing in early 2008 is beginning to pay dividends.

Going forward we expect continued margin expansion in all three geographic segments based on continued healthy demand in our US sites, Canada benefiting from further FX gains and the closure of Regina and the Philippines continued ramp of committed business.

In addition to improving gross margins we made adjustments at the end of the fourth quarter of last year to level set our SG&A run rate. As a result selling, general and administrative expenses for the quarter decreased to $9.7 million, compared to $10.3 million the fourth quarter of 2008 and $10.1 million in the first quarter of 2008. As a percentage of revenue SG&A decreased to the lowest levels since the fourth quarter of 2006 at 13.7%.

Going forward, we do expect SG&A spending to increase, but plan to manage that spend to coincide with expected increases in revenue and expanded margins and plan to keep SG&A as a percentage of revenue in the 14% range. Our gross margin expansion and SG&A savings resulted in operating income before impairment restructuring charges totaling just over $1 million. This compares to a loss of $2.2 million last quarter and a $600,000 loss in Q1 of 2008.

As expected, we incurred a restructuring charge associated with our closed Regina facility and we also took an impairment charge in a second location where the expected future cash flows of that operation do not support the current carrying value of the assets. Combined impairment restructuring charges totaled $6.4 million in the quarter resulting in a loss from continuing operations before income taxes of $5.5 million. For the remainder of 2009 we currently believe that any further impairment or restructuring charges will be minimal, if any.

During the quarter we also recorded the sale of one of our subsidiaries, Domain.com, which consists of several domain names and trademarks. These assets were not strategic to our long-term business model and as such we conducted a formal auction sale, which resulted in cash proceeds of $7.1 million. Given the size of the sale price relative to our recent earnings the sale was reported as a discontinued operation and net of tax appears on our statement of operation as income from discontinued operations of $4.6 million.

GAAP net income for the quarter totaled $652,000 or $0.04 a share, up compared to a loss of $0.02 a share reported in the first quarter of 2008 and a loss of $0.21 per share last quarter. Most importantly excluding both the impairment and restructuring charges and the income from discontinued operations adjusted net income totaled $600,000, also $0.04 per share.

Moving on to the balance sheet, our balance sheet strengthened considerably compared to the end of last year with cash and investments totaling 21.8 -- excuse me, $28.1 million at the end of March, a $10 million increase compared to the cash and investment balance at the end of December due in part to the Domain.com sale, but also due to strong accounts receivable collections at quarter end.

CapEx for the quarter totaled $1.2 million, well below the amount spent in previous quarters due to the absence of any new site expenditures. We do expect CapEx to increase in future quarters, but plan to stay within our original annual budget of approximately $13 million.

Depreciation expense totaled $4 million for the quarter and EBITDA defined as operating income before impairment and restructuring charges plus depreciation totaled $5 million or 7.1% of revenue, up from last quarter's $2.1 million or 2.9% of revenue.

While there is still much work to do our positive earnings and strengthened balance sheet clearly reflect that the turnaround strategy initiated in 2007 is moving in the right direction and beginning to bear fruit. With that, I will turn the call back over to Larry?

Thanks, Dave. While the first quarter was a big success, our work is far from complete. For the rest of the year we will be focused on four initiatives. First and foremost is our efforts to continue to improve profitability. Throughout 2009 we expect steady quarterly improvements in utilization, gross margin and EPS as our site optimization efforts further FX gains and the Philippine ramp continues.

Second, we expect to continue 8 to 10% year-over-year quarterly revenue growth driven by our backlog, our renewed sales efforts and our ability to secure more add-on business from our existing clients. During the second quarter we also hope to hire a new SVP of Sales and finish the restructuring of our sales and marketing operation.

Third, we'll continue our site optimization and expansion efforts. The ramp of our Philippine site will continue in the second and third quarters and we are identifying expansion opportunities for the Philippines for 2010. Likewise, we hope to secure a Costa Rica facility for our Latin America expansion initiative with a potential launch in the fourth quarter of 2009.

Fourth, we'll also continue to pursue M&A opportunities to add scale, bring new logos, diversify our vertical market coverage and add new services. Our team is actively pursuing a number of opportunities, but will be very selective to ensure that any deal is accretive, has strategic and cultural fit, and manageable integration risk.

In closing, let me say I am very proud of our management team and all the employees at StarTek for their accomplishments during this quarter and their perseverance during the continued journeys to growth and profitability. Thank you all and I'd like to open it up now for questions.

(Operator Instructions). Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Good morning. Terrific quarter. My first question relates to -- you had a 14.5% increase in FTEs, but a 9.5% increase in revenue. Obviously, the implication of that is you're still ramping up your headcount as you enter Q2. What sort of impact does that have on margin or held back margin in Q1?

Arnie, I would say part of the relationship between FTE increase and revenue increase -- you have to take into effect that we are ramping in the Philippines at lower rates. So, that's certainly part of that equation, but in general we are continuing to add capacity, continuing to add FTE, and I think the key going forward as Larry mentioned just increasing our utilization.

I think in general rates are holding and in some cases increasing, so I don't think it's a rate issue. I think it is a mix issue on the Philippines offshore site.

Staying on the Philippines I want to make sure I understand what you're trying to say here. I know you obviously indicated you intend to have the Cincinnati Bell contract worked on there and that's greater than 450 seats. When you say you've got commitments for two-thirds of the capacity, the whole issue on the Philippines is you're going to ramp capacity in various stages. Is it two-thirds of kind of Stage One or is it two-thirds of the overall expected capacity in the Philippines facility that you have?

If you think of the capacity of the Philippines there's 1,100 seats. We've got contracts for two-thirds of that. So, you have the scorecard there on what we posted in the first quarter. By the end of the first quarter we had nearly 300 FTE and by the end of the third quarter we expect to have over 700 FTE.

My next question. You obviously mentioned an important new issue for you is this expanded technology service offering. Is this something you had in house, but had not been selling externally or is it a technology acquired from someone along the way?

It was not acquired. It's internally developed. I would say that a few pieces of it are still under development, but it is a lot of integration of external components. So, for example, the IVR is a Cisco IVR system of which we wrap the spaghetti around and put professional services around. So, it's more of a packaging and integration deployment than a R&D effort.

Final question if I can. You mentioned the Costa Rica facility that you hope to possibly open in Q4 of '09. Is that embedded in the $13 million overall CapEx expenditure you believe you might have for the year? Is that included in that?

It is not; however, the Costa Rica CapEx is going to be somewhat limited, not nearly what we would typically spend, assuming we do go there. It's not what we would typically spend in a site either in the US or in the Philippines. The site that we've identified in the event that we do go there is more of a turnkey operation, so the CapEx exposure is pretty minimal for that opportunity.

And I assume if you go there you're going because of a customer request? And I also assume it would be a bilingual facility?

Yes to both.

Thank you very much.

Your next question comes from the line of Tom Carpenter with Hilliard Lyons. Please proceed.

Good morning, guys.

Good morning, Tom.

[Second's] on a strong quarter. Can you break out the margins even though they're not new on the three newer facilities versus the existing in the US?

Well, you'll notice from the score card that because all are at or near a year old we've combined them with all of our US operations. I would say that in the aggregate those sites -- the margins are consistent with the margins in the remaining US sites. Some are a little higher, some are a little lower, but I think if you took the three together they are up to the standard and there's still some upward movement there above the aggregate number there. They're under 15 when you combine the three.

From the US you add 17.8% with the Q1 GP percentage for all sites.

Right. I'm talking about, I guess, the three, let's just call them newer ones.

Right. That was kind of the point is that those are included in that total. I would say the margins are pretty similar for those three combined to what we have in the existing. But I would also tell you that we do look for and we do expect there to be continued expansion in gross profit or gross margin in our US locations. The target as we've talked before is 20% for the US. So, we think that that is still very achievable.

Okay. Got it. That was kind of where the question was going. Can you give us your FX for Canada in the quarter.

The net OpEx rate net of hedges was $1.11, so one-dot-one-one. We had previously communicated that we felt that net of hedges our FX rate was going to be in the $1.12, $1.13 range. We actually, I'll say, over-hedged a little bit and we typically try to hedge about 85% of our expected expense. We ended up hedging a little over 100% of that Canadian expense as a result because stock was $1.25-ish on average for the quarter. That was how we kind of felt we were going to get to $1.12, $1.13. But $1.11 was still a nice sequential improvement from the one-dot-oh ($1.00) of Q4?

Can you give us a little guidance for the remaining quarters?

Yes. The Q2 $1.17 is the number that we're targeting at the moment and we believe based upon forward contracts that are in place is assured. And Q3 and Q4 $1.20, $1.21 I think is a fair assumption. Stock as you probably observed is down to about $1.18. So, the forwards that we put in place are looking like good ideas at the moment.

Yes, who's the genius that did that?

(LAUGHTER)

Talk to us in three quarters. I take no credit.

So, as we look into 2010 obviously investors are pleased with how that's going to impact margins the rest of the year. When you look to '10 what's going to be the hedging strategy and how early can you do that? Is it still kind of two or three quarters out or are you guys going to --?

Yes. I think in our typical strategy and we hedged a little bit more early in 2009 given that rates were at what we felt were pretty extraordinary levels. We'll probably start to hedge 2010 early -- either late this quarter, early third quarter, but we definitely have that on our radar.

We tend to do three or four quarters out a little bit and then build up over those as we get closer.

Okay. I apologize if I missed this. Did you guys talk about the seats you were looking for in Costa Rica?

It depends on the facility. We've got a couple options there. The facilities tend to be smaller there, so sub-500, but really it depends at this point. When we lock in a facility we'll make an announcement.

Okay. In the US now that you've got the newer facilities are close to kind of the older facilities as far as margins can you talk about the demand environment? It sounds like you guys are winning some newer business that you, I guess, discussed in press releases is more offshore. Can you talk about the demand environment for US-based? We have seen some stuff in the media where the lead in India trend has picked up maybe in the past six months.

Yes. We're not seeing a lot of reverse migration back, but we are seeing pretty strong demand particularly in the wireless space for US capacity. Where there is offshore going on it's at the lower end of the customer care arena. So, the customers that we have who are growing are looking for US capacity. So, I think as we look to 2010 we'll have to continue to expand facilities in the US. We also think that an at-home environment would be a good hedge against having to build brick and mortar for the kind of growth we're looking at. But at this point it's a little early to talk about that.

Okay. And as you talk about the growth in '10 in sites or at home clearly if someone like AT&T comes in they generally want their own facility. Do you have some capacity where you can fit in 100 or 200 seats at some of your existing facilities without opening a new one?

Yes. Just look at the utilization numbers. There's capacity in a number of our sites and we're constantly moving programs around. So, yes, we have sites that we're actively selling and pursuing both in the US and Canada.

Okay. That's great. Best of luck this quarter, guys.

Thanks, Tom.

(Operator Instructions). Your next question comes from the line of Nicole Conway with Thomas Weisel Partners. Please proceed.

Good morning.

Good morning.

I was wondering could you give the FX impact on the gross margins in the quarter.

It added about 200 basis points to the net increase.

Q to Q?

Yes.

And then for the new client contracts would you expect a similar gross margin to the other business?

Yes, I would say similar or a little higher.

A little higher? Okay.

Actually, that is to be delivered out of the Philippines as we talked. Our target margins there are north of 30%. So, it really depends upon how quickly we can get that site ramped to a level where those margins are achievable. But steady state, that would be the long-term goal.

And then also for your T-Mobile it looks like that revenue has come down Q to Q. I was curious if that's a good run rate going forward at the 1Q level?

I think it is. I think our relationship is strong with them. The reason that the revenue did come down was because of several sites that we just ran out of labor pool. So, I think that's a good steady state number. It may tick up quarter to quarter a little bit, but that's a good modeling number.

Great. And then, last question would just about your pipeline and the sales cycle, if you could give some color on that.

We're seeing a stronger pipeline. We've got several moving parts going on here. While we have a down economy, we also have a kind of renewed sales initiatives, so we're seeing a pipeline that's growing stronger and obviously closed three deals, which we haven't done since I got here. At the same time, I think the demand environment people are liking outsourcing in this kind of environment and therefore are pushing more to outsourcers and a little more to the offshore arena. I also think that we're seeing people reevaluate their vendor portfolio. So, in some cases we're picking up volume from existing competitors because of the portfolio rebalancing.

Great. Thank you.

Your next question comes from the line of George Goetz, private investor. Please proceed.

Yes, good morning. A couple of quick questions. First of all, the new customers that were signed up in the first quarter besides Cincinnati Bell. The other two were also telecommunications industry?

Yes, both were in the communications sector, yes.

I see. Okay. And also, it seems like an ongoing problem that the company has had until recently was retaining operators and whatever because it was detailed on a previous conference call. It is fatiguing work and retaining and competent and trained operators was an ongoing concern in the company.

I think it's understandable with the unemployment rate going up at this stage of the economic cycle that that problem would be somewhat alleve for the time being because with a scarcity of other job opportunities. Is the company doing anything looking into the future when the economic cycle swings upward and there's a more robust employment situation as far as training and retaining capable and competent operators?

Yes. We're highly concentrated. If you recall history, a little over two years ago the Company really started declining in growth because it couldn't hire enough people to match its attrition. So, high attrition rates, low recruiting rates. As I mentioned in my comments we've done a lot for recruiting, streamlining that process. There's a lot of online process. We're doing a lot of community involvement to make sure we get a steady stream of applicants.

Obviously, as you mentioned the economy helps that stream of applicants, but what it does is it allows us to be more selective now and make sure we get higher quality agents that will be more sticky when they get into the Company and the attrition rates are lower. So, today the attrition rates are lower than they were. They continue to get better, but we also have a lot of initiatives in the centers themselves to make the environment more fun, to have more recognition and do all the things you need to do to manage attrition.

So, despite the economy we don't expect to get back into trouble if and when the economy turns. We think we've got in the markets we're in we've got good labor pools of people and should be able to recruit to demand without issue going forward.

That's encouraging. Correct me if I'm wrong. Didn't the Company -- weren't they experimenting with operators who worked out of their homes? Was that mentioned in the last quarter's conference call? If so, how is that program progressing. Does that seem like it's worthwhile?

Yes. For the past about 18 months we've been piloting various at home projects. We haven't had huge amounts of volume, but we've learned a lot. We built some technology. We built some capabilities. We have had internal reorganization to focus more heavily on the at home project and I think next quarter we'll be able to announce kind of what our planned initiatives are there. It could go big in the at home arena for 2010.

That sounds good. And finally, any possibilities of diversifying outside the telecommunications industry? Is there any new leads, any possibility that the Company might be investigating?

Yes. We've got a number of prospects in the consumer electronics arena, which is an adjacent market we think of. It's very subscriber based, very recurring revenue, very high touch customer care and tech support. But on top of that we'll look to both a new head of sales who comes in who may have some vertical expertise or acquisitions which may have anchor clients in other verticals to expand the marketplace. So, yes, we have a desire. We know it's difficult -- it's not terribly difficult, but difficult to move into other verticals; therefore, moving into adjacent verticals is more of our strategy at this point.

That's very encouraging. Thank you very much and keep up the good work.

Thank you very much.

At this time there are no further questions in queue. Ladies and gentlemen this concludes today's conference. Thank you for joining. You may now all disconnect. Enjoy your day.