Startek Inc (SRT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2012 StarTek earnings conference call. My name is Rachel and I will be your operator for today.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Rosemary Hanratty. Please proceed, ma'am.

Thanks, Rachel. Good morning, everyone, and thanks for calling in. I am Rosemary Hanratty, StarTek's Director of Marketing and Communications, and it is my pleasure to welcome everyone to StarTek's second-quarter 2012 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 will deliver some brief commentary today. At the conclusion of Chad's prepared remarks Chad and Lisa 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 Investors section of our website. Going forward, the Company also expects to file its Form 10-Q in advance of its earnings call.

As a reminder during the first quarter of 2012 StarTek began presenting certain human resource recruiting and facilities costs within cost of services rather than SG&A to provide enhanced clarity on the Company's operations and cost structure and to drive segment efficiencies and accountabilities. All historical 2011 financial information in today's earnings press release has been adjusted to provide comparability.

In addition, during the first quarter of 2012 StarTek realigned its segment reporting into three distinct operating segments. The Domestic segment includes the results of the US and Canadian sites, the Asia Pacific segment includes the result of the Philippine sites, and the Latin America segment includes the results of the Costa Rica and Honduras sites.

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 2011 Form 10-K 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 measurement. These regulations 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, Rosemary. Good morning and thank you for joining. Our focus on returning to sustained profitability continues to be revenue growth and diversification, margin improvement, and SG&A cost reductions.

Our second-quarter results were temporarily down from a revenue and margin improvement standpoint, but we continued progress in SG&A cost reductions. As I have stated in the past, with any turnaround you can expect results to be lumpy until the right foundation is in place and operating smoothly before achieving sustainable, predictable, profitable growth.

Our revenue declined from $50.9 million in first quarter to $44.4 million in second quarter as the result of the previously announced domestic revenue loss as well as volume softness from primarily two other clients. We continue to build sales momentum with a promising pipeline and year-to-date we have six new agreements with an annual contract value of $24 million.

Our gross margin of 7.4% as compared to 10.5% in first quarter reflects the volume softness combined with new business ramping in Asia Pacific and Latin America. We have continued to expand our FTE count, our full-time equivalent count in Asia Pacific and Latin America by 8% and 36% versus first quarter, respectively. This geographic diversification along with our new clients will help improve our margins to more acceptable levels.

Our SG&A expenses were reduced by $1 million versus first quarter, or 12%, as our initiatives continue to show improved efficiency. We are not satisfied and continue to push for better results. Our cash position remains strong with $11.4 million in the bank and no debt.

Our accounts receivable days outstanding is significantly improved compared to previous quarters. We will not be satisfied with our results until we are producing double-digit EBITDA and EPS growth.

Having been in this business for a long time our executive team and I have a good understanding of what a successful company looks like and the milestones and metrics that need to be achieved in order to get there. We have been making steady progress toward our goals.

Now that our fixed costs are being reduced to match our anticipated revenue base we expect to return to sustainable, profitable growth in the future. We remain on track to be a much stronger and healthier company by year-end.

Rachel, Lisa and I will now open to questions.

(Operator Instructions) Nathan Novak, Robert W. Baird.

Nice to see quite a few new client signs this quarter. Any color around that? I guess, for one, are they all new clients or are they signs with existing clients? And, two, is there anything from AT&T in there?

New programs, new divisions, new expansions of existing clients is the bulk of the new signings this quarter, Nathan. And I believe in second quarter -- first quarter we had some elements of AT&T growth in that or new arrangements in that. Second quarter no.

Got you. I know it is kind of a touchy subject on what you can and cannot say, but any color around the short-term extension with AT&T? It looks like in your Q the extension was pushed out until, I believe, October of 2012 compared to July of the previous one. Any color on conversations, confidence of potentially getting a longer term MSA with AT&T?

No concerns, really just the process -- going through the process. It is not something that we are concerned about at this time.

Got you. The conversations still are surrounding getting a longer-term contract though?

Yes, yes.

Got you. Last one for me; potential of free cash flow remaining positive in the second half. It has been positive for the last couple of quarters, wondering if you guys have any confidence on that in the second half as well.

Hi, Nathan. It is Lisa Weaver. The working capital investment required for the new bookings that we have announced will really come into play in the second half of the year. So I would anticipate that we will use some working capital to ramp that new business.

Got it. Thanks a lot.

Howard Smith, First Analysis.

Thank you and thank you for taking my questions. I was hoping to get a little more color on Asia Pacific. You talked about a ramp and that affecting margins. The near-term trend in revenues quarter over quarter was down. I am just trying to reconcile that and understand the puts and takes a little better.

Really the decline from first quarter was due to several factors; they are all coming together. We had a transition of FTEs from a seasonal program where we transitioned those FTEs to other business. We also had volume softness from a few clients and then also continued ramp in new business. And then also had margin performance challenges on two specific programs.

So in some cases the forecast we were ramping to was actually higher than volumes actually received and we are working through that, but our expectations on gross margin performance through Asia Pacific has not changed.

Okay, thank you.

Thank you.

Matt McCormack, BGB Securities.

I guess to follow up on the two clients that you just mentioned in terms of the margin weakness offshore, can you talk about -- have those issues been resolved and should we expect the gross margins in that segment to turn back up into the mid-20%s over the next one to two quarters?

We are addressing performance there from a margin standpoint on those programs. In this business it is a half hour by half hour. You got to keep your finger on the pulse of things and you need to be on top of things.

The good news element there I want to point out is that we have much better visibility to our productivity by program and are better enabled as an organization to address those areas of concern when they arise. And the team is working it feverishly right now. So I am confident we have the right resources and focus in place to get those operations turned around.

From a margin performance standpoint, as I mentioned, our margin expectations for the Philippines is not any different than what it has been in the past and fully expect the Philippines to get back on track over the coming quarters.

And in terms of your optimal margins in the Philippines, I guess what level of quarterly revenue do you need to get to to get those at a sustainable level, near 30%?

I think we have it within our sites with the amount of ramps we have coming on and everything, so again our expectations out of the Philippines has not changed. We just need to get the new business in, up, and running, and capacity still pretty tight. We will have to see how some of the puts and takes move along through that process.

Okay. And then I guess the revenue decline sequentially offshore by 5%, although the number of agents increased 8%, so I am assuming utilization dropped down as you are training to ramp to these new wins. Is that what is going on there?

Yes, that is the right assumption.

Okay. Then just another follow-up on -- at-home has been in the news recently with SYKES big purchase and then, of course, all the other providers talk about it as well. I guess you did announce a new onshore win for a client using the at-home model. I guess is there any kind of update that you could provide in terms of that service offering?

Yes, I mean it is definitely an offering that is within our service envelope. One thing I will point out is that that announcement -- we are still finalizing that agreement so we are working through with the client and getting those details nailed down.

Okay. Thanks a lot.

Thank you.

Omar Samalot, Independent Analysis Corp.

Good morning. I apologize, there was a problem with the conference call number so I came in late so I'm not sure what was said or what was not. So I apologize if I'm asking something that has already been asked.

No worries.

I just heard that previous caller was asking about the lower revenue on the Asia Pacific so I wanted to hone in on that. I wanted to ask about SG&A. I thought it was great feeding, controlling expenses there and slashing it by $1 million from last quarter.

Given that you have mentioned before that the bulk of the savings would come in in the second half of the year and that we are already into this period, can you give us a range for that line the second half of the year?

No, but I think my comment in that we are not satisfied and we continue to work it. I am pleased with our progress. I think we are achieving a lot of the roadmap initiatives and goals that we set out to accomplish.

We still have several initiatives that we are continuing to work and both of those that we have discussed in the past come out of a lot of our focus on the IT side and some other smaller events, like the corporate office and things of that nature, that I would expect us to continue to reset where our SG&A costs will come out.

Okay. So you still expect some more savings there. Did the cost savings from the relocation, is that already showing up in Q2 or is that still to show up?

Partial impact in second quarter, Omar. Full-quarter impact will be in Q3.

Okay, excellent. Great.

Next question I had was back in May I saw an article that said you guys had -- well, Xerox had moved into one of your empty Greeley facilities and it was expected to move into it in July. I am assuming that you have leased that facility to them and based on a rough calculation that would probably mean somewhere around between $0.04 and $0.05 per share on an annual basis for you guys that should go straight to the bottom line.

Can you comment on that at all and clarify if that will show up as other income or if it would show against your SG&A line?

We have leased a portion of that building to ACS and the treatment for that income would be other income and expense.

And I guess that should start coming in Q3 forward?

It was signed in second quarter.

Okay. Then is that $0.04 to $0.05 a share annual basis is that way off or close or --?

That sounds high to me almost.

Okay, all right. You have also had a number of announcements of new hirings -- Jonesboro, Lynchburg, Grand Junction. Are all of these included in that $24 million year-to-date new business that you mentioned in your remarks?

No.

So all of these would be additional, too?

We are working to close the details of our near pipeline.

Okay, great. And based on those new businesses and given what you know today, did Q2 see the trough in quarterly revenues for your US facilities, at least in the short term?

I will just say while Q2 was a low point in terms of financial results, in terms of actions to drive future performance it was a good quarter. We are optimistic with our new business. The pipeline, SG&A reductions, and efficiencies enabled a gain as well as the current initiatives that we are working. We are optimistic about how we will come out of the latter half of the year.

Great, awesome. Thank you, guys, and keep up the good work.

Thank you.

There are no further questions so I would like to turn the call over to Chad Carlson for closing remarks.

Okay, bit of a short thing. Thank you very much and we will get back to work.

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect. Good day.