Startek Inc (SRT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 StarTek, Inc. earnings conference call. My name is Diana and I will be the coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to your host, Miss Julie Patterson, Director of SEC Reporting. Please proceed.

Thanks, Diana. 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 Third 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 10K and subsequent Form 10Qs 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 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, all, for joining the StarTek Third Quarter Earnings Call. When we spoke last quarter we indicated that the remainder of 2011 would be a challenging period financially as we incurred the cost of downsizing and closing certain sites in North America and at the same time incur costs to ramp up new program wins in our offshore operations. We also continue the effort to right size our D&A structure while being careful not to impact our level of execution.

In the third quarter of 2011 we saw those factors play out and reflect in our financial results. Our top line was a little bit stronger than we planned and gross profit was slightly lower due to the geographic mix. All of this activity put pressure on our cash position which we expected would drop this quarter and going forward we'll be intensely focused on aggressively managing what is still a strong balance sheet and as we work our way through this period. As discussed in our last call, we are focused on putting into place a solid growth platform which will allow us to execute more consistency and improved financial results, and sustained profitability.

Our pipeline is stronger and larger than ever and during the third quarter we completed two new contracts worth approximately $8 million. Our Makati site in the Philippines is full and generating significant gross profit and cash and our Ortigas site is ramping quickly. At one point in the third quarter we had over 500 agents in training and over 35 training classes which would be coming online over the fourth quarter. Our Costa Rica site has an additional program from an existing client and our Honduras site went live two weeks ago. All of these ramps are coming online with solid performance and overall client satisfaction is good.

We're still facing challenges in our US sites but have made significant progress in filling key leadership positions and are beginning to show early signs of performance improvement. We completed the downsizing of one Canadian site and have the closure of another Canadian site. We've made solid progress in our IT cost [proceed] initiatives and [Mark Fayette] and the team have negotiated and made changes to improve our network stability and uptime as well as beginning to transition much of our IT spend into variable costs. Many of these cost reductions will begin to flow through our results next year.

A bright spot in our results is the 14% sequential growth of our existing clients outside of our two largest clients. This has helped to improve our client revenue diversification and with Honduras online, an improvement in our geographic diversity as well. As mentioned in our last call, we have some significant work ahead to return StarTek to sustained profitability and we are now implementing many of those disciplines and processes to ensure our success.

I'll now pass it to Dave to review more specific financial results.

Thanks, Chad. Thanks to everyone for calling in. Revenue for the second quarter totaled $52 million, down 9% compared to the $57.1 million reported last quarter and down roughly 21% compared to the third quarter of 2010. US revenue declined sequentially by $4.9 million due mainly to the significant downsizing of one of our sites and to a lesser extent lower call volumes in a handful of other locations.

Canadian revenue dropped sequentially by $3 million due entirely to the closure of one site and the significant downsizing of another. Partially offsetting these declines was the expected and solid revenue growth in our offshore segment which increased by $2.8 million sequentially, grew by 20% compared to last quarter and now represents approximately 32% of total revenue compared to 15% 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 and into 2012 based on existing client commitments.

Gross profit for the quarter totaled $4.1 million and 7.8% of revenue, a 320 basis point drop compared to last quarter and down 230 basis points compared to Q3 of 2010. US margins experienced a significant decline, dropping 640 basis points to 6.5% compared to 12.9% last quarter and dropping 860 basis points compared to 15.1% in the third quarter of 2010. The significant downsizing of the site combined with lower call volumes and lower utilization in several other sites accounted for that decline.

Canadian margins also declined, dropping 690 basis points to 3.8% compared to 10.7% last quarter and dropping 170 basis points compared to the 5.5% gross margin reported in the third quarter of 2010. The significant downsizing of the site, closure of another plus negative foreign exchange impacts accounted for that decline. Offsetting the margin declines in the US and Canada was our offshore segment which delivered a very healthy gross margin improvement on solid revenue growth. Offshore gross margin improved to 12.2% compared to 7.3% last quarter and compared to negative 3.9% in the third quarter of 2010.

The ramp activity that has been occurring in both the Philippines and Costa Rica has now translated into a scaled operation that is delivering very healthy incremental profit on sizable revenue gains. Compared to last quarter, current quarter offshore revenue grew by $2.8 million and gross profit grew by $1.1 million delivering incremental margin of 39%. We expect this trend to continue now that Makati is running at full capacity and delivering expected margins. Ortigas is profitable and scaling. And as we continue to ramp in Latin America.

SG&A totaled $10 million or 19.2% of revenue, a decrease of $3.2 million compared to last quarter which included $2.9 million in severance expense and a decrease of $300,000 compared to the third quarter of 2010. The general administrative cost reductions that we have been and continue to focus on have not fully -- have not yet fully flowed through to our results but are expected to be realized in the coming quarters. The reduction in SG&A that we did realize was not enough to offset lower revenue and gross profit and as a result we reported an operating loss before impairment restructuring charges of $5.9 million for the quarter compared to a loss of $6.9 million a quarter ago and a loss of $4.1 million in Q3 of 2010.

We incurred restructuring charges in the quarter totaling $300,000, consisting of severance and a lease liability in the Canadian site that closed. As a result of the above items, the Company had a third quarter net loss of $6.2 million or $0.41 per share. The current quarter loss compares to a second quarter net loss of $9.6 million or $0.64 per share and a net loss of $4.5 million in the third quarter of 2010 or $0.30 per share.

Moving on to the balance sheet and cash flows, the balance sheet remains strong at the end of September with cash and investments totaling $11.5 million and no debt. Our cash balance was down $8.5 million compared to the balance at the end of June. Negative adjusted EBITDA of $1.5 million, CapEx of $3.2 million, plus the payment of $3.3 million in accrued liabilities associated with severance, vacation payouts, and restructuring charges, all in connection with events from last quarter accounted for the majority of the decline.

DSOs increased to 71 days from 65 due to a change in contract terms with one of our large clients and as a result our accounts receivable balance was down only slightly even though revenue declined sequentially by $5 million. Working capital total $37 million and our current ratio was 2.4 to 1. CapEx for the quarter, as I mentioned, was $3.2 million and depreciation expense totaled $3.9 million.

With that, I will turn the call back over to Chad.

As discussed last quarter, we knew we'd face a tough stretch while rightsizing our G&A and implementing our offshore ramps. Management is dealing with these challenges aggressively. We're implementing the processes and disciplines to execute more effectively and sales activity is stronger than ever with $28 million booked year to date. Our offshore investments are showing a return and we have good momentum on our growth platform.

With that, I'll open the line up to questions.

(Operator Instructions) The first question will come from the line of Arnie Ursaner, CJS Securities. Please proceed.

Good morning. This is Dan Moore filling in for Arnie. Chad, good morning.

Good morning.

Thinking globally, beyond cost cutting initiatives, what types of opportunities have you identified over the last couple of months to improve the business and perhaps enhance revenue opportunities over the coming years?

The first part of that you mentioned something about globally or geographic?

Outside of pure cost cutting, what opportunities have you identified to improve the business and expand revenue opportunities going forward?

Okay. We have made some significant progress on the StarTek advantage and how we differentiate our service platform and how we're presenting ourselves in solutions for clients and the approach to our partnerships with our clients is I think, I'd say, being received pretty well and also made some additional changes within our business development team to strengthen that team and be more aggressive in going after some of the markets that we definitely need to grow our utilizations in.

Okay. And if we look at gross margins in the US and Canada, given the restructuring downsizing and other costs in the quarter, would you expect Q3 to be a bottom for gross margin in those markets?

I think in Canada we're pretty close to solid capacity utilization there. We still have obviously some exposure with primarily a US client sitting up there and execution. We continue to focus on some efforts in our US -- to improve our utilization and if we're not right at the bottom in the US, we're close there right now.

That's helpful. And finally, you've talked in the past about a 20% margin goal. Would that imply an improved -- or would that require an improved macroeconomic environment? Or is that something that's within your control over the next two years regardless of the economy?

I think that's within our control over the next few years based on aggressively targeting sales to where we have capacity we need to fill.

Thank you very much.

Thank you.

The next question will come from the line of Matt McCormack, BGB Securities. Please proceed.

Yes. Good morning. I guess in terms of the revenue decline in North America, can you kind of break that out? What is market share losses versus continued offshore migration? Is there anyway to quantify that?

Matt, this is Dave. I don't think there's necessarily a one to one relationship between the declines in the US and growth offshore. I think there's clearly a macro trend. But having said that we're seeing lots of US opportunities that we hoped to capitalize on and as Chad mentioned, increase our utilization in the US. So, I don't know that there's a single statement that you can make to kind of characterize that picture.

Okay. And then in terms of I guess the new center in Honduras, can you talk about the logic behind choosing that country specifically?

Yes. We believed when we through Latin America and obviously I have a lot of experience there and really felt that the Honduran market was one that was yet to be tapped and had a lot of potential within the people in Honduras and the government was very supportive of us coming in there. Good facility we were able to line up. So, we saw it as a good opportunity to be a first mover into that market and so far, so good.

Okay. And then I guess my last question, I think last quarter you did say that you expected your cash balance to go down to about $11 million or $12 million. I guess should we expect continued cash burn over the next few quarters? And if you could just remind us of your liquidity in your credit facility, that would be great, thanks.

Sure. We do expect, based upon the payment of some of the crude restructuring that we had at the end of June which still hasn't been paid out plus the need to spend some CapEx to build out the Honduras facility and support some of the launches. We do expect the cash number to come down in the fourth quarter before going back up in 2012.

And with respect to the credit facility, we did, at the end of September, not meet the tangible net worth requirement of $83 million. If you look at the balance sheet you'll see that our tangible net worth came on at $81.4 million. We have received a waiver from the bank on that and we are working through the specifics of the amendment to that agreement but at the end of the day believe that we will have a facility in place that will support our working capital needs and support our growth as we go into 2012.

Okay. Thank you.

The next question will come from the line of Dave Koning, Robert. W. Baird.

Hey, guys. When we look at the two big clients, AT&T was down I think close to $8 million sequentially and T-Mobile was up nicely sequentially. And I'm just wondering are we at a stable level with both of those going forward? Should we continue to just expect AT&T to kind of flat-line from here or is there a movement either way? And then conversely is T-Mobile going to continue upward trajectory now just given maybe wins from some of that business?

David, the T-Mobile relationship and our performance there and some of our ramps that we're doing for them continue. The AT&T relationship I'm sure as you can appreciate is pretty complex in that there's several different divisions and business groups that we're engaged with there and we have had some challenges where we've had to get key leadership roles in place to drive better execution and performance.

That's created some headwinds for us in some areas of AT&T relationship but we also have some bright spots in a few other areas of the AT&T relationship. And we actually have a win on some of the back office work that we're doing with AT&T. A program will be implemented early next year. It's really a mix there as they continue to evolve and we continue to evolve and obviously the decrease in the level of our dependence on AT&T revenue is a critical diversification move for us and it's one that I know AT&T has a keen eye on as well.

Okay. And then just timing of profitability. Do you have kind of a rough estimate when you get back to a net income position kind of some time next year? How are you looking at that?

Yes. This is Dave. We fully expect to return to profitability in 2012 and that is absolutely what we're focused on. We do expect, as we mentioned last quarter, for profitability to be down for the rest of 2011 but positioned at the end of '11 to be profitable for the year 2012.

Okay. It's hard to know right now whether you'd turn in 2012 --

Yes. I don't think we want to get all that granular on quarters but I will -- I think it's fair to say that we expect to make steady progress to get back to profitability and be profitable for the year.

Good. Then the number of seats -- I don't think you gave it this quarter. I don't know if you have those or -- but just the number of seats in the US-Canada and offshore?

We purposefully modified the financial scorecard and the main reason for doing it, frankly, was for competitive reasons. We felt like there was a level of detail in the former scorecard that wasn't appropriate necessarily to be sharing and everything that's in the scorecard pretty much maps to what's disclosed in our queue. That's a number that we won't be sharing on a go forward basis.

Thank you.

Thank you.

(Operator Instructions) The next question will come from the line of Omar Samalot, Independent Analysis Corp.

Hey, guys. Good morning.

Good morning.

Good morning.

Okay. I have a few questions regarding the cash position. The payment of the current liabilities, was that basically -- most of it, the restructuring charges that you took last quarter that was due this quarter?

Yes. It was a combination of restructuring charges. We also had a number of employees in Canada who had large accrued vacation balances that were paid as those employees exited the Company. And then there was to a lesser extent some severance that was paid in the quarter that was accrued at the end of June. But in total, those three items represented about a $3.3 million cash drain in Q3.

Got it. Okay. Now in terms of the CapEx of $3.24 million, could you explain a little bit more of what did that go into?

Yes. Without getting too specific, the bulk of the expense was on revenue generating activities, primarily the build out of our Honduras facility, which as we mentioned last quarter we're doing more efficiently and not really spending a whole lot on lease holds but baking a lot of that expense into our operating lease. But we did have some IT and telephony CapEx charges there and then we spent a fair amount on again IT related expense for the launches that are taking place in our Philippines operations. So, even though we built out our Ortigas facility in 2010, we did not equip all the agencies with computer equipment until we won the business. So we are seeing that element of CapEx come in as those launches occur.

Okay. And going forward could you say maybe next quarter or going forward, what do you expect in terms of CapEx?

We're not really going to get specific on that number I think. But I think it's absolutely fair to expect that our CapEx spend is going to come down significantly on a go forward basis with the caveat that we will have some level of expense in the first quarter -- in Q4 of '11 and in the first quarter of 2012 associated with Honduras and these client ramps. But after that we expect the number to come down.

Just a comment I'd like to make on that, Omar, is that -- and it's detail that you probably will never see, but as a comment on the Company and some of our progress and some of our processes and disciplines, our cost to build out a revenue producing seat has been dramatically improved over the past several months. As we put more revenue production online we'll be much more efficient and able to see better financial returns on those investments.

Right. And I guess that goes towards your built in operating leverage into your offshore segment that we still haven't seen the full extent of it?

Yes.

Another obviously component of cash and I was surprised to see the performance of the gross margins in US and Canada, can you talk a little bit more about what happened there? I was under the impression that most of the expenses were taken last quarter. What can you say about that?

I think some of the closure in Canada was maybe a little less efficient that maybe we had hoped and the US still faces, as I mentioned, some challenges from an operating perspective where we've had to put some cost into the mix to address some of our operating concerns and that's why I tried to stress and point out my comment about the placement of key leadership roles that I think will really help tighten that up as we go forward. That and in combination with the improved sales activity?

Just to clarify too, Omar, you made the comment that you would have expected the bulk of those expenses to have been accrued at the end of June. What we accrue at the end of any quarter are impairment charges and certain restructuring expenses but there are still significant operating costs that you continue to incur and you expense them as incurred that are associate with the ramp down. So, we did experience those as we expected to and they were expenses that were not those that were appropriate to accrue as part of any impairment or restructuring.

Got it. Okay. I guess it would be safe to assume that as you go forward and obviously depending upon what happens with the existing capacity that you have in onshore, those ramp down expenses would also come down and help your margins in those segments?

Correct.

So, I guess that was the -- I guess -- I mean, last quarter you did mention that your expectation of cash trough was going to be somewhere between $14 million and $15 million. Obviously it overshot that. So, I was wondering if that was a surprise in the execution of those closures?

Yes. I think the number, the range that we gave on the last call was $13 million to $15 million. We came at $11.5 million.

Right.

I think it's a combination of a little bit higher operating loss than we had expected. We also frankly had higher revenue than we had planned for which translated into a higher receivable number which also hurt us a little bit.

Exactly. I see. Okay. So, can you comment at all on the -- what sort of training and ramp costs are in the offshore for this quarter? For Q3?

Let's put it this way. The margins that we delivered in the offshore segment per the scorecard was about 12.2%. We still have a target for that region of 30% gross profit and in the mature locations we're hitting those expectations. It's just a function of continuing to ramp those sites that are not fully utilized.

So, somewhere in between there then there's those additional ramp up costs and training coming from all the new programs you have started since last quarter, a quarter or two ago?

And unused capacity.

Okay. And so, last question, in terms of the other analyst, he asked about the seat number and all that -- we should not expect any more info in terms of that and the 10Q as well either?

Yes. That information was never in the 10Q and that's really -- we've limited information that we're going to present on the financial scorecard to the segment level information that is outlined in the Q.

Finally, any thoughts on your stock? $2.40 -- any comment you care to make?

No.

Okay, guys. Thank you.

(Operator Instructions) There are no more questions at this time. I'd like to turn the call to Chad Carlson for closing remarks. Please proceed.

Thank you, everybody. We'll talk to you next quarter. We're going to get back to work.

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