Startek Inc (SRT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and full-year 2011 StarTek, Incorporated earnings conference call. My name is Carol 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 this conference. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to start to Julie Patterson, Senior Director of SEC Reporting. Ma'am?

Thanks, Carol. Good morning everyone and thanks for calling in. I am Julie Patterson, StarTek's Senior Director of SEC Reporting and Investor Relations. It is my pleasure to welcome everyone to StarTek's fourth-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 Lisa Weaver. Chad and Lisa 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 of those listening to this call to review our 2010 Form 10-K and subsequent Forms 10-Qs 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 reconcile these amounts back to the closest GAAP-based measurement. 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 earnings call. I feel very good about the progress we made in 2011 strengthening our foundation and leadership team. Since becoming StarTek's leader about eight months ago, we've made significant strides at building a culture within the Company that supports our mission of empowering and enabling our Brand Warriors to fight for our clients' brands every day.

We've also reinstituted the StarTek Advantage, which is the sum total of our culture, core processes, and customized solutions that our clients value. We close 2011 as a more capable company.

Our pipeline continues to grow. Unfortunately, some of our targeted opportunities delayed their decision into first quarter this year. We remain very focused on bringing these opportunities across the goal line during this quarter.

We signed one new agreement in Q4 worth approximately $1.5 million in contract volume. During 2011, we closed eight new agreements totaling $29 million in contract value. This is solid evidence of our ability to win more business.

More importantly, I am happy to report that our leadership, empowered by our StarTek operating platform and excellent global process implementation team executed the implementation of these programs with solid operational performance.

We experienced 17% growth in revenue of clients outside of our two largest clients compared to 2010. Revenue growth, exclusive of our two largest clients, was 11% in fourth quarter of 2011 from third quarter, and 24% versus the fourth quarter of 2010.

We announced last week a loss of domestic business impacting our Jonesboro, Arkansas and Decatur, Illinois sites. While a meaningful revenue impact, this has little impact on our roadmap to profitability this year. These sites have solid leadership, and over the past several months have shown demonstrable performance improvements. Our scorecards are green and performance solid.

In fact, our results have continued to climb even after the announcement. This is a true testament to the quality of our leadership, our Brand Warriors and the power of the StarTek Advantage. We are working hard to winning new clients to leverage these valuable resources and get these operations on the path to profitability.

We knew, and I've shared with you on pass calls, that we had a lot of work ahead to return StarTek to consistent positive financial results. Our revenue, gross profit and full-time equivalents offshore all experienced healthy growth as we reached 16.9% gross profit offshore, with over 3,600 full-time equivalent agents in the fourth quarter of 2011.

During the first half of this year we will be addressing domestic capacity, and throughout the year we will continue our G&A cost optimization initiatives.

We continue to have a solid balance sheet and are confident that we have sufficient liquidity to fund our operating plan for the year. And we expect to exit 2012 as a much healthier Company, with stronger revenue diversification, a leaner G&A structure, more enhanced solution offerings, and improved financial performance.

I'd like to now turn it over to Lisa Weaver, our new CFO, and she is going to review more specific financial results with you.

Thanks, Chad, and good morning everyone. Revenue for the fourth quarter was $51.1 million, down 1% compared to the $51.7 million reported last quarter, and down approximately 21% compared to the fourth quarter of 2010.

As expected, we continue to see strong growth in our offshore segment. Offshore revenue increased sequentially by $3.4 million or approximately 21%, and now represents 39% of total revenue as compared to 18% in the same quarter a year ago.

We expect offshore revenue to continue to grow in 2012. The offshore revenue growth was more than offset by reductions in both the US and Canadian segments. US revenue declined sequentially by $2.2 million, due primarily to lower call volumes in a handful of locations. And Canadian revenue dropped sequentially by $1.8 million, or 18%, due entirely to the previously announced closure of one site and the significant downsizing of another.

Gross profit for the quarter totaled $5.5 million and 10.8% of revenue, a 350 basis point improvement compared to third quarter, and up 110 basis points compared to fourth quarter of 2010.

This quarter we experienced sequential gross margin improvement in all segments. The offshore segment continues to deliver significant gross margin improvements on solid revenue growth. Offshore gross margin improved to 16.9% compared to 10.6% last quarter and compared to 6.1% in the fourth quarter of 2010.

These increases are the result of the substantial ramps during 2011, primarily in the Philippines, offset slightly by the ramp cost of our new Honduras location.

Compared to last quarter, fourth-quarter offshore revenues grew by $3.4 million and gross profit grew by $1.6 million, delivering incremental margin of 47%. As mentioned last quarter, we expect this trend to continue based primarily on capacity utilization improvements in the Philippines and Honduras.

US margins increased 150 basis points quarter-over-quarter to 8% and dropped 600 basis points compared to 14% reported in the fourth quarter of 2010.

This increase versus third quarter was the result of improved efficiencies across a handful of locations. Previously discussed site closures, combined with lower call volumes and lower utilization in several other sites, accounted for the decline versus the same quarter of 2010.

Canadian margins stabilized with a slight increase of 20 basis points to 4% as compared to third quarter. This compares to 1.2% in the fourth quarter of 2010, a 280 basis point increase. This improvement is due to the absence of a negative impact of the site closures and volume reductions that we saw in the fourth quarter of 2010.

SG&A totaled $11 million or 21.4% of revenue, an increase of $700,000 compared to last quarter and a decrease of $800,000 compared to the fourth quarter of 2010. There was approximately $700,000 of severance expense recorded in the fourth quarter of 2011. We fully expect to realize our general and administrative cost reduction initiatives in the coming quarters' financial results.

The reported operating loss before impairment and restructuring charges was $5.4 million for the quarter compared to a loss of $6.5 million a quarter ago and a loss of $5.5 million in Q4 of 2010.

We incurred $1.9 million of impairment and restructuring charges in the quarter related to previously closed facilities and the write-down of two owned facilities to estimated market value.

As a result of the above items, the Company had a fourth-quarter net loss of $7.5 million or $0.49 per share. The current quarter loss compared to a third quarter net loss of $6.8 million or $0.45 per share, and a net loss of $6.6 million in the fourth quarter of 2010 or $0.44 per share.

Regarding the balance sheet and cash flows, the balance sheet remains strong at the end of December, with cash totaling $9.7 million and no debt. Our cash balance was better than expected due to the successful implementation of enhanced cash management strategies during the fourth quarter.

Cash decreased by $1.8 million as compared to the balance at the end of September, and this reduction was due to the negative adjusted EBITDA of $1.2 million, CapEx of $1.5 million, and other working capital use of $900,000.

These uses were offset by a reduction in Accounts Receivable of approximately $1.8 million. This reduction was due to a DSO improvement from 71 days to 68 days, a result of the improvements in cash management referenced earlier.

Working capital totaled $32.8 million and our current ratio was 2.4 to 1. CapEx for the quarter totaled $1.5 million and depreciation expense totaled $3.8 million. CapEx for the year totaled $9 million and depreciation expense totaled $15.8 million. For the year 2011 revenue decreased 17.3% from $265 million in 2010 to $219 million (technical difficulty) in 2011 compared to 10.4% in 2010.

SG&A of $44.1 million in 2011 compared to $43.3 million in 2010. However, excluding severance expense and legal fees related to the settlement of an employee labor relations lawsuit, SG&A would have been $39.9 million in 2011 compared to $42.1 million in 2010.

Operating loss before impairment and restructuring charges was $21.1 million in 2011, and adjusted EBITDA was negative $3.8 million. This compares to 2010 operating loss before impairment and restructuring of $15.6 million and 2010 adjusted EBITDA of $3.8 million.

2011 adjusted EBITDA, excluding the $3.6 million of severance expense, was a negative $100,000. Net loss for the full year 2011 was $1.75 per share compared to a net loss of $1.30 per share in 2010.

Now we will open it up to questions. Carol?

(Operator Instructions). Matt McCormack, BGB Securities.

So the first question -- you talked about you had some delays on new business. I was wondering if you could elaborate on that, if it's across the board, just one or two potential new wins, or what verticals you're seeing those delays in?

Actually verticals there's a good mix of business in that opportunity set. You mentioned across the board, I think there's a handful of opportunities that we are pursuing very intensely.

Right, but what is the main reason for the delays of the decisions on the part of the client?

Just really timing and working through their internal processes; nothing that we would have control over.

And then you mentioned the client losses that was in the recent SEC filing and said that was expected to be, I guess, neutral to profitability going forward. I guess, could you elaborate on that? And then also does that assume that those seats are backfilled with another client?

First of all let me clarify it. I did not say it would be neutral, but what I did say was that it would have little impact on our roadmap to profitability. And our goal and what the team is working extremely hard on is to win new business for those sites.

And then in terms of the SG&A cost plan, I guess you mentioned it was $40 million if you took out the one-time items. So what kind of a run rate for SG&A expense should we expect on a quarterly basis in 2012?

As you know, we tend not to give a whole lot of forward guidance, but I feel pretty confident we have a solid plan in place to continue to drive our G&A expenses down. And there is obviously some transformational and a lot of effort that has to go underway there that I've talked to some extent about in the past involving our IT platform, some of our back-office processes and things of that nature that we need to be much more efficient on. But I'm confident in the plan that we have in place.

And then on DSOs improving to 68, what is the target, if you will, and where do you think that -- where would you be happy to have those at?

I think we have room for some more improvement there. I would hesitate to give you what the target is, but internally we absolutely work toward optimal objectives on all of our key operating metrics.

And then just the last question. In terms of the buildout offshore and CapEx spending expectations for this year do you plan to continue to expand the capacity or are you just -- is the plan to increase the utilization of your existing facilities offshore?

We're going to be opportunistic, but definitely believe our CapEx spending for this year will be less than what we did last year.

Dave Koning, Robert W. Baird.

First of all, I understand on the guidance side it's hard to -- it is quite hard at this standpoint, but a couple of things. On the new wins you mentioned they slowed a little bit in Q4, and hopefully will pick up again in Q1.

But are the wins from Q1 through Q3, have those hit revenue already, meaning if new wins don't start to pick up already -- or don't start to pickup in the future the revenue growth we have gotten from those new wins eventually starts to decelerate if you don't continue, I guess, filling the pipeline and winning new business.

I'm not sure if I was clear just in the way I said that, but I guess the main thing is just are those new wins from the first three quarters in revenue already, and we really need to keep the new wins coming now to keep that growth rate strong?

I think that's a pretty safe assessment. And I think we been clear that being able to add new logos and drive new revenue growth is obviously an imperative to the -- and what I've been asked to do and what certainly the goal of the Company and what we need to do to get the Company back on track and growing again.

Good. And then you mentioned the 8-K, the 3,800 seats. Should we think about the lost revenue from those specifically as pretty normal kind of domestic revenue per seat, and then with the hope that you win new business to offset it. But just in isolation is it fair to just assume those are pretty normalized US revenue per seat when we look at revenue?

Just a clarification, Dave, you said something about -- a comment around 3,800 seats in the 8-K. I'm not sure what you're referencing there.

I meant 380, I'm sorry.

Oh, okay, and thanks. You can assume that's pretty normal domestic business.

And I guess the one other thing, should we figure, since I think you talked about Q1 having an impact and then Q2 kind of finalizing the roll off of those seats -- so is Q2 kind of at the low -- hopefully the low revenue period, and then as new wins come on and offset some of that we would expect revenue to go up again after that?

Yes, that's a pretty safe assessment.

Good. And then my last two kind of short ones. Philippine gross margins, I mean is 17% kind of full or can that go up to 20%, 25% over time?

Well, 17% included all offshore so that also had our Latin American operations in it. And we're making some good improvements in our Costa Rica facility, and Honduras has just come online, so that was all offshore gross margin. Philippines obviously performs above that, and is certainly performing at the levels that we would expect.

And finally Matt asked about CapEx in 2012, do you expect free cash flow to be positive in 2012 and so the cash balance starts to grow again?

I don't -- this is Lisa Weaver, I don't -- on the full year I would say that cash flow will be neutral to slightly positive, yes.

Great. Well, thank you.

(Operator Instructions). Omar Samalot, Independent Analyst Corp.

Okay, I just had a question for Lisa as well. Could you talk a little bit more about the impairment charges that you took on Q4 and your restructuring charges?

The impairment in Q4 -- or restructuring and impairment of $1.9 million, about $1.3 million of that was impairment primarily for the write-down of two of our own facilities to the estimated market value. And then the $600,000 of restructuring was really just a true-up of the reserves that we had put on the books previously for closed facilities in prior periods.

And could you tell me what the cash restructuring charge was for Q4 -- in other words what was paid out in Q4?

I don't think we have that number at our fingertips here, Omar.

I noted that you guys didn't add the $700,000 severance pay for the former CFO on your adjusted EBITDA. Is there a reason for that or is it because letting us kind of do that?

It wasn't intentional.

Now, I think this quarter you guys actually beat a lot of my numbers. I guess, the only part that didn't see a beat was on the SG&A part, and obviously, Chad, you mentioned a few things about that. When will we see some improvements on the line?

I think -- you know, I've talked about some of the transformation that has to take place there, Omar. And I think -- you know, pretty confident we'll start seeing some traction there in the second half of this year.

Okay, that's helpful. So I know you guys don't -- are not in a position to give guidance. Could you say that overall gross margins should start to build on the improvement we saw in Q4 going forward?

That is certainly the plan. Obviously, a bit a curveball we were handed here with the domestic announcement, and we will have to see how we move through that transition period with those two sites.

Could you comment at all on how the ramp up on your new Honduras site is going?

It's going pretty well. I was down there just before the holidays. The team is very energetic. I am very pleased with the personnel and putting a lot of management training into the system. And I think off to a good start and meeting our expectations at this stage.

Okay, good. You are showing over $20 million a quarter in revenue from offshore. So in two years ago that was close to zero, so I think that is a pretty good showing, so congratulations and hopefully for better things coming forward.

Well, thank you.

Thank you.

Matt McCormack, BGB Securities.

Yes, just a couple of follow-ups. Can you give us -- provide us, excuse me, an update on your credit facility?

Our current credit facility is with UMB, and the availability on that credit facility is currently $7.5 million.

Now, if I'm not mistaken that was -- you were in violation of a few covenants in the last quarter, so is that accurate and so those have been resolved?

There was one covenant, yes, that is a net worth covenant that we were in violation of as we received a waiver and we are not in violation for fourth quarter.

And then just the last housekeeping item. Can you break out the revenue contribution from your largest two clients?

Yes, our largest client at the end of the year was under 50% of our revenue.

But in terms of the quarter for the top two do we need to wait for the financials?

For fourth quarter the top two were at 73%.

73%. And can you break out the top one and the top two?

That 47.5% and roughly 25%.

Okay, perfect, thank you.

Dave Koning, Robert W. Baird.

Yes, and two follow-ups. The first one is, do you have an adjusted EPS in Q4? And I realize it's a little technical. It is not overly important, but we have adjusted numbers going back for all of 2010 and 2011, and given the charges, I'm just wondering if we could have that just so we have an apples-to-apples basis?

We don't have it at our fingertips here but we can provide that.

No, that is great. And it really just comes down to the tax adjustment on those severance charges and that sort of thing.

And then the other thing, again, understanding that you don't want to give a lot of guidance going forward, is there any indication you want to give on Q1 just so none of us create an estimate that is either way too aggressive or way too conservative, just so that at next reporting there's no kind of shock to the system -- is there any just very baseline -- anything you want to give on revenue or EPS?

I guess, obviously, a little hesitant to do that, David, but I think we're starting off the year within our expectations.

That's fine. And certainly understand that with the moving parts around the lost piece of business that does make it a lot more difficult than normal, so I can understand that. I appreciate it.

Thank you, ladies and gentlemen. This concludes the question-and-answer portion of today's conference call. I'm now going to turn your presentation back to Chad Carlson for his closing remarks. Sir?

Well, thank everybody. I look forward to speaking with you next quarter. And we will get back to work.

Ladies and gentlemen, this concludes your participation in today's conference. You may now disconnect your lines. Have a great day.