Startek Inc (SRT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 StarTek, Inc. earnings conference call. My name is Kendall and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, this Julie Patterson, Senior Director of SEC Reporting. Please proceed.

Thanks, Kendall. Good morning, everyone, and thanks for calling in. I am Julie Patterson, StarTek's Director of SEC Reporting and Investor Relations, and it is my pleasure to welcome everyone to StarTek's second-quarter 2011 earnings call.

I am joined on the call today by StarTek's President and Chief Executive Officer, Chad Carlson, and Chief Financial Officer, David Durham. Chad 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 press release, please go to www.StarTek.com, where you can download a copy from the investor 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 2010 Form 10-K and subsequent 10-Q filings 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 with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurements. These reconciliations can be found in the appendix of the earnings release and on the investor page of our website under Regulation G.

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

Thank you, Julie, and thank you, everyone, for joining my first earnings call as the CEO of StarTek. I very much appreciate your interest in our team and Company. I am excited for the opportunity to lead such a strong team and a Company which I believe holds great promise for a brighter future.

The transition from my predecessor, Larry Jones, has gone smoothly, is complete, and we are a team focused on execution and returning StarTek to sustained profitability. Over the next several months, we will be very tactically focused on completing the rightsizing of our general administrative cost structure, completing the deployment of our growth platform, and developing a comprehensive strategic plan.

I am grateful to the Board of Directors for supporting me in this effort, whereby our focus, discipline, and execution in this plan will build a stronger StarTek. Through this approach, we will be more profitable, have a more diverse portfolio of clients locations, and provide more comprehensive services to our clients.

In rightsizing our overall cost structure, one of our weakest points remains our US capacity utilization. We will continue to selectively unwind underutilized assets. And included in these -- in underutilized assets is our IT cost structure. Optimizing this is a top priority for our CTO, Mark Veyette, who is leading the development of an IT roadmap focused on uptime performance and efficiency.

While our second-quarter results were disappointing from a profitability standpoint, we are pleased with the continued growth that we've experienced offshore and our recent sales momentum. Revenue for the second quarter totaled $57.1 million, a decline of 4% from the first quarter due to lower North American volumes. However, offshore revenue grew 17% from the first quarter as we ramped new business wins.

Gross margins were down slightly due to our US capacity utilization and also ramp costs offshore. Dave will discuss in more detail later.

We experienced improving momentum toward the end of second quarter around existing client performance and most important, our sales pipeline. Sheila Fisher and team have closed five new agreements with new logos worth $20 million of annual contract value during the first half of 2011. The team has made solid progress in rolling out our StarTek operating platform initiative, with all high-priority core processes implemented throughout our sites at the end of the second quarter. You may recall the development of this program began almost a year ago and these are the core processes which enable us to be consistent in our service offering across sites and geographies and establishes a baseline and enables the organization to be on a continuous improvement path.

We have a lot of work ahead to return StarTek to sustained profitability and a healthy portfolio. I believe many of the pieces are coming together and we're building momentum from our recent new logo wins and our strong execution and the implication and ramp of new customers. We have earned a lot of trust with both our new and existing clients.

Our announcement this month about our new site in Honduras has created a buzz and we are excited to cut the ribbon and launch our new site into production in the fourth quarter. This is also a significant step toward a more diversified global footprint.

With that, I will now hand it over to Dave Durham, our CFO, to further review and detailed financial results.

Thanks, Chad, and thanks to everyone for calling in. Revenue for the second quarter totaled $57.1 million, down 4% compared to the $59.5 million reported last quarter and down roughly 16% compared to the second quarter of 2010.

US revenue declined sequentially by $3.8 million due to the closure of an Alexandria, Louisiana site in the first quarter combined with lower call volumes across several other US sites. Canadian revenue dropped slightly due to be announced downsizing of our Cornwall, Ontario facility, but revenue in our high-performing Kingston location grew in the quarter.

Offsetting these declines was very solid revenue growth in our offshore segment, which increased 17% compared to the first quarter and represented approximately 25% of total revenue. This compares to 12% of total revenue in the same quarter a year ago.

We expect quarterly offshore growth to continue at similar rates through the end of the year based on existing client commitments.

Gross profit for the quarter totaled $6.3 million and 11% of revenue, a 140 basis points drop compared to last quarter and down 30 basis points compared to Q2 of 2010. Margins in the US declined due to lower utilization on lower call volumes. Margins improved slightly in Canada, due mainly to lower training costs. And despite the big offshore revenue increase, gross margin was down in that segment to 7.3% compared to 8.6% last quarter.

The margin decline is due to the aggressive ramp activity that is occurring in both the Philippines and Costa Rica. Ramp costs consisting primarily of agent training expense will be far less impactful in future quarters and we expect offshore margins to improve significantly in the rest of the year.

SG&A totaled $13.2 million or 23.1% of revenue, an increase of $3.5 million compared to last quarter and an increase of $2.9 million compared to the second quarter of 2010. SG&A was higher than normal due to $2.9 million of severance expense paid to several departing executives.

As a result of lower gross margin and higher SG&A, we reported an operating loss before impairment and restructuring charges of $6.9 million for the quarter compared to a loss of $2.3 million a quarter ago and a loss of $2.6 million in Q2 of 2010. We incurred impairment restructuring charges in the quarter totaling $3.3 million. The total consists of approximately $1 million in impairment charges against certain assets in our US and Canadian segments plus restructuring charges totaling $2.3 million consisting of mainly severance owed in connection with the closure of Kingston and downsizing of Cornwall plus an adjustment to a lease reserve previously established for our Regina, Saskatchewan location, which closed in 2009.

As a result of the above items, the Company had a second quarter net loss of $9.6 million or $0.64 per share. Excluding severance and the impairment and restructuring charges, our loss would have been $4.2 million or $0.27 a share. The current quarter loss compares to a first-quarter net loss of $2.6 million or $0.17 a share and a net loss of $5.2 million in the second quarter of 2010, $0.35 per share.

Moving on to the balance sheet and cash flow, the balance sheet remained strong at the end of June with cash and investments totaling $20.2 million and no debt. Our cash balance was relatively flat compared to the balance at the end of March as DSOs remain at 65 days, receivables were down by $800,000 on lower revenue and accrued expenses, mainly severance and restructuring charges, increased.

Working capital totaled $43 million and our current ratio was 2.4 to 1. CapEx for the quarter totaled $2.2 million and depreciation expense totaled $4.1 million.

In terms of cash flow, EBITDA came in at a loss of $2.4 million for the quarter, however excluding severance of $2.9 million, adjusted EBITDA was a positive $500,000.

While the numbers for the quarter were not good, there are several positive things happening in the business that give us optimism for the future. Sales activity continues to be strong with bookings of $20 million for the first half of the year. We are ramping several new programs in the Philippines, Costa Rica, and in the third quarter in Honduras, which have yet to show up in our financial results. And we have realigned our cost structure in a way that will lower SG&A while at the same time allowing us to be more nimble.

All very positive and important elements that are critical to our expected return to profitability.

With that, Chad and I will open up the call for questions.

(Operator Instructions). David Koning, Baird.

Yes, I guess first of all I was just wondering early in the quarter you put out an 8-K and just discussed the reduction in FTE around the one client. I guess I'm just wondering if we take the Q2 revenue base, kind of how do you see that playing out the rest of the year? Do we take 10%, 15% off of that revenue base and then kind of do that in Q3 and then start ramping it back up again as some of these contract wins get added to revenue? Maybe you can just talk to a little bit of the moving parts there.

Yes, Dave, this is Dave Durham. I think we are not really interested in giving precise percentages as you suggest, but I think it is fair to expect revenue to come down in the second half with increases starting in the first quarter of 2012.

Okay, and do you have a timeframe when you return to positive net income again? Is that two, three quarters out again or how soon do you see that?

We do expect the second half of the year to continue to be a little bit of a challenge. Our primary goal, and Chad can certainly chime in, but we are squarely focused on being in a position at the end of the year to exit 2011 strong and have a very positive 2012.

Okay, good. And then I guess I didn't see the size of AT&T and T-Mobile in the quarter.

Yes, it was right at 80% of revenue between the two combined.

Okay, good. I guess just the final thing just on cash flow, was there anything unnormal I guess in cash flow? As we look forward I guess the more important question I guess, would you expect cash flow to be positive for the rest of the year or is there anything that would -- that could be a drag on the kind of $20 million or so of cash that you've got on the current balance sheet?

Yes, so a couple of things going on. We did accrue severance expense as we mentioned of almost $3 million. And we also accrued some restructuring charges, which are cash charges. So we do expect cash to come down a bit between now and the end of the year. We also are building out a new location in Honduras. So there will be some CapEx associated with that, but we still are expecting to have a very strong balance sheet throughout the rest of this year and be in a position to start building cash in 2012.

Okay, great. Thank you.

Arnie Ursaner, CJS Securities.

Yes, good morning. It's actually Fred Buonocore calling in for Arnie. How are you today? Just wanted to talk about some of the new bookings that you captured during the course of the quarter. I think you said $20 million since the beginning of the year and I think there were $10 million gotten in the first quarter, if I'm not mistaken. So another $10 million in Q2, is that correct?

A little over $10 million in Q1, but yes, directionally that's --

These are new customers and you mentioned new logos. Can you give us any color on types of areas you are involved with here?

We're seeing some expansion, Fred, in the cable space, and there's an electronics component organization within that and then a client within the ISP space.

Okay, very good. And then can you give us a little more color on the Honduras facility in the -- I guess it's an existing customer going in there. Just can you talk about your expected ramp timeline and the capacity you expect to have there? Just any other details you can provide on that new facility?

Just really that we are going to begin to see ramp up and some revenue in the fourth quarter and it is an existing client that we're moving in there with. We will be -- we are phasing it in such a way that as we ramp, we will bring on more capacity and have room to grow. And we are pretty excited about the opportunity to grow that site to a significant presence in our footprint.

So presumably, it is a telecom customer?

One could guess.

Fair enough. And then just in terms of the costs in the Philippines related to training -- that been the drag on margins. Dave, can you give us a little bit more of a sense for what the trajectory -- what the drag should look like there if that is expected to continue? And then when we start seeing an upward trajectory and any other specificity you can give around margins?

I think I tried to address it a little bit in my comments but we do expect the revenue in the offshore segment, which obviously the Philippines is the largest component, we expect the top line to continue to grow in Q3 and Q4 at kind of the same levels that it grew sequentially this quarter. And we do expect margins to improve pretty significantly in Q3 and Q4.

So I think you can expect a nice sequential improvement and our long-term target for that segment is still 30%, so that hasn't changed.

Okay, so the margins would then during the second half exceed where they had been in Q1?

Yes, that's a fair expectation.

Okay, thank you very much.

Howard Smith, First Analysis.

Good morning, gentlemen. Just a couple of follow-up detail questions. First of all on Honduras, what is the ultimate size in terms of seats that you can build out or you've contracted for in that facility?

We have options on real estate in the facility that we went into to grow that to a pretty significant footprint. So we are going to just go as we earn business and --

Okay, just kind of scale up as the business scales?

That's correct.

Sorry, Howard, just to expand on that a little bit, we are going in in a way that I think is a lot more efficient from a lease perspective. As Chad alluded to kind of staggering the growth and commitment as volume comes in. We are also expecting our CapEx spend to be less impactful from a cash perspective, limiting the only thing that we will be buying really is computer and telephony equipment. The landlord is actually building out almost a turnkey facility. So that's a model that we think makes a lot of sense from a cash perspective and we will likely do that on future expansion efforts.

Okay. Makes sense. In Canada, you noted lower training costs. It actually pushed your margin above your long-term target. Is that just a timing thing or is the nature of the client relationships there right now -- is that sustainable here at least in the medium term?

A couple things going on there. One is we really employed our employee attrition rates in one of our largest sites in Canada and then also with the announced closures that we are working through in Canada, we didn't have the need and requirement to continue doing a lot of the training to maintain operations in those facilities.

I don't -- our targets really haven't changed in Canada. We will be down to a limited amount of capacity there with the announcement of one of the Kingston locations and then also the downsizing of Cornwall. So -- and I would also say we've got FX headwinds in the second half of the year.

But Kevin said that -- I'm sorry. I was just going to say (multiple speakers)

You are only partially hedged, if I recall as we get out in Canada throughout this year and certainly into next?

Yes, we are actually hedged for 100% through the remainder of the year and partially as we get into '12 and it is -- but it's basically at a couple points above where spot is today, so it wasn't at the higher rates that we had through the first half.

Right. Okay.

Just one note on Canada because I know it has been a concern and a topic for discussion on past sessions, we are basically down to two sites, one large, one fairly small and our capacity utilization is very high in Canada. I'm pretty pleased with our position there right now as we complete our announced moves.

Okay, good. Last, just a detail on the 80% between AT&T and T-Mobile, do you have a breakout between the two you are willing to give us?

Yes, it's disclosed in our Q, which we will publish next week, early next week, and it's 63% and 17%.

Great, thank you very much.

Matt McCormick, BGB Securities.

Good morning. In terms of the question, the AT&T, T-Mobile obviously 80% that came down, can you characterize your relationship with those two clients?

I will start with T-Mobile, which it is stronger than it has ever been. And with AT&T, I will say that it's a very diverse client in that we have several different business groups that we support and there have been a couple business groups where we have had some challenges, but I believe we are on the right trend. For the most part, I feel that the organization and leadership and the focus that we are putting around that client right now is -- I am feeling much more confident about than where I was several months ago.

Okay. And then turning to the SG&A line, it looked like it was about $10 million this year if you ex out the charges. I guess you talked about SG&A cost cuts. Where should that normalize at?

Without getting real specific with the changes that were made at the end of this quarter, we do expect SG&A to come down. Our target is lower than obviously the normalized number for this quarter and I think you will see that play out in the second half.

Some of the reductions are through some process improvement initiatives and trying to drive efficiencies through the standard operating platform that Chad alluded to, as well as some technology investments that we think will drive lower costs. It will take a little bit of time for those to play out, but we are feeling pretty good about the direction that we are going in our cost structure.

Okay. And then you did mention you're expecting cash burn over the next two quarters from the $20 million level. Can you give us a sense of where that bottoms out at after these expenses you have accrued for? Is it $15 million? Is it $20 million -- I'm sorry -- $15 million or $10 million?

Yes, it's not $10 million, I will tell you that. It is I will call it between the $13 million and $15 million range. We think that we have ample working capital with that kind of a cash balance to grow the business and we do expect that from that low point for cash to build pretty significantly into 2012.

Okay, and then the strong sequential growth offshore, how -- can you quantify at all what percentage of that is through migration, what percentage of that is due to new logos?

Yes, a significant portion of that is due to new logos. But there is also an existing client that we've been expanding quite a bit. So it is, you might say, -- it's a mix, but it's a healthy mix, I would frame it in that context.

Okay. But the existing -- is it one of the top two, the existing one, or is it another one?

It's actually -- I said one existing. It's a couple of existing clients actually, who have been expanding, but we are getting a large amount from one of the top two.

Okay, and I kind of missed this, but their offshore margin, I think you said long-term it's 30% is the goal and that they should improve throughout the rest of this year?

I'm sorry, what was the last part of your comment?

Yes, you were talking about a 30% margin target and I had missed what segment you had referred to. I am assuming that would be offshore segment.

Yes, exactly.

Okay. Then I guess could you -- there obviously was a CEO change. Can you kind of walk us through the logic behind that?

I think when I joined the Company, succession planning was certainly a discussion with Larry and the Board and I just think in the lifecycle of the Company the Board made a decision that it was the right time to make change and to also help from a cost structure perspective.

Okay, and it's my understanding that there is several members of senior management that don't actually live in Denver and I think that included the former CEO. Is that something -- is this kind of -- is that true? And then also is this a kind of business that can work well without people in the same location or is that a change that you plan to make?

Actually the former CEO did live in the Denver community. And so it sounds like there's a lot of rumors in maybe that perception. But it is true that I am not here yet but plan to be when appropriate, and I think the critical people to the business that we need to have in one location is what we will do.

Okay, thank you so much.

Omar Samalot, Independent Analyst Corp.

Good morning. Okay, first question is you guys gave a guidance on revenues of a decline of 12% to 15% from last year. I was wondering if there could be an updated guidance or is it going to be worse or within that range?

Omar, this is Dave. We are really not -- I think you maybe picked it up in our tone. We need to get back to profitability in short order here and I think we are going to be less specific about percentages going forward. I would tell you that the one unanticipated element going into the year was the closure of one of our US locations, which will result in a revenue decrease from those original numbers. But we are very bullish based upon the things that we have ramping that we are going to get growth, the topline growing again as we exit this year and go into 2012.

Okay, okay, touching again on the SG&A, previously you had mentioned that it should come in below $10 million going forward, somewhere between $9.5 million and $10 million. Is that still the outlook going forward for the SG&A line?

Yes, I think we're going to be more aggressive there if we can. We are certainly looking for those opportunities.

Okay, excellent. You know, you had some training and ramp up costs on you offshore, which obviously affects the margin. Would you be willing to say if you were to strip out those training and ramp up costs which are really going to bring more revenue, if you were to strip those out, what would your margin have been for that segment?

Omar, we're not going to get that specific. I think the directional comments that we made about significant improvements in the second half and the target being 30 long-term still holds and that's really what we are marching toward.

Okay, and are you expecting the same amount of costs in Q3 on the offshore for training and ramp up or is it going to be less?

Well, there will be more business that is fully ramped and not burdened with training costs in the second half, so -- (multiple speakers)

But we do still have training costs going on.

But would they be more or less at the same level that Q2 experienced or less or more?

I think it would be similar, but again --

More revenue.

Pardon me?

Similar, but with more revenue?

Yes, more revenue that obviously is producing very nice variable margin.

I notice that the available seat count for offshore was up 400 on average. Was that related to the capacity you had in Ortigas or somewhere else?

No, we actually were able to do a little bit more through reconfiguration of our existing. So there was no incremental lease expense. It was purely a function of being more efficient in the space that we have.

Beautiful. Okay, now a question regarding Honduras. Is -- obviously Honduras, Costa Rica are pretty close to each other, so I'm wondering if Costa Rica expected to be fully utilized and that's why you are moving to another location nearby?

Yes, Costa Rica is going to be better utilized and I think getting a more diversified footprint is important to us moving forward.

Okay, moving to onshore for a second, are you expecting more restructuring charges related to the onshore closures you have already announced in Q3?

Nothing that I would put into any material category. The closure of Cornwall -- excuse me -- the closure of Collinsville is really kind of co-terminus with the expiry of our lease in terms of our exit. That's really the only thing that would have created any kind of significant restructuring. So we should be in pretty good shape there.

So it's mostly all baked in into this quarter basically?

Yes.

I notice in your in your 8-K that you had a buyout offer on your Regina location. Is that expected to be sold?

It is a remaining lease obligation, so what we are in the process of negotiating is an exit from that lease and that -- there was an addition to our reserve in the quarter that was captured in our restructuring expense.

Got it, but at this point you don't know if you're going to be able to sublease or not?

We are hopeful. We are hopefully pretty close.

Okay, got it. Finally I have a comment regarding obviously the stock trading below $3.50. That gives you a $50 million market cap. You are basically trading at assets minus liabilities, current assets minus current liabilities. So the market is giving you no value whatsoever for your installed facilities, no value whatsoever for your investments in onshore.

My question is why not take advantage of this opportunity and buy back some stock? On June 30, the stock was booted out of an index, causing a 1.6 million shares traded that one day. You could have bought some shares at $3.50, not moving the stock and once you get profitable, this should at least be trading at or above book value of $6. So that's a 70% return on equity. I don't know, I'm just wondering where is the thinking around that?

Omar, that's a discussion that certainly we are having at the Board level and taking into account and consideration our growth requirements as well as some of the expansion that we are doing. It gets a little bit trickier but it's certainly something that is in discussions.

I understand that you guys need the cash to expand, but it's hard to understand that you will get a return on equity within let's say 12 to 18 months of 70% of any of the operations that you have going. So a little bit going into that existing shareholders like myself would definitely appreciate that you see this plant working. And you recognize that it could make a great return on your own stock.

We are, as Chad said, we are fully aware of the opportunity and I think again, it is a discussion that is very active at the Board level.

Thank you, guys, and good luck going forward.

A follow-up from Howard Smith, First Analysis.

Yes, thank you. Kind of a GAAP accounting follow-up, maybe. It looks to me like you went back and took down your offshore margin from when you were originally recorded it in the March quarter by a couple percent. I'm wondering was that just post quarter cleanup where you filed some expenses that should've been in there, or was there a change kind of in how you are doing things going forward that might cause a permanent slight drag? (multiple speakers)

No, it was your -- good for you for the catch, but it is really just a reclass of some expenses that we had captured in the US segment that really belongs in the offshore segment. But no continued drag in that regard.

Okay, thanks.

Ladies and gentlemen, that concludes our question-and-answer portion of the call. I would now like to turn the conference over to Mr. Chad Carlson for closing remarks.

Okay, thank you, everyone, and onward and upward. We'll talk to you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.