Startek Inc (SRT) 2012 Q3 法說會逐字稿

Good morning everyone and thanks for calling in. It is my pleasure to welcome everyone to StarTek's third-quarter 2012 earnings call. I'm 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 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 investor section of their website.

Please note that this 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 the 2011 Form 10-K posted on their website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections.

Further, the discussion today includes some non-GAAP measures. In accordance with Regulation G, the Company has reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found on the investor page of their website under Regulation G.

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

Thank you, Erica. 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 third-quarter results show solid progress.

Our revenue increased from $44.4 million in the second quarter to $47.7 million in third quarter with increases in all geographies. Revenue diversification continued to improve, now with four clients above 10% each, and no single client representing more than 30% of our revenue. We continue to build sales momentum and have signed 10 new agreements year-to-date with an annual contract value of $50 million.

Improved performance and increased capacity utilization in all three geographies led to a gross margin improvement from 7.6% in the second quarter to 12.8% in third quarter. SG&A expenses are down by $500,000 compared to second quarter as we continue with our platform initiatives. We remain unsatisfied and continue to push for better efficiencies.

As anticipated, the revenue growth experienced in the third quarter required investment in terms of both working capital and capital expenditures. Our cash position remains strong with $9.2 million in the bank and no debt.

We still want to divest of all real estate currently owned. This quarter we sold our Kingston, Ontario, Canada site on a sale-leaseback agreement for approximately $4 million, which improves our cash position.

I am confident in the executive team we have assembled, with the most recent change being the promotion of Rod Leach to Senior Vice President of Global Operations. Rod is a seasoned veteran to the industry with a wide breadth of experience and a no-nonsense approach to managing the business.

We continue progressing toward our goals, which is showing in our improved EBITDA this quarter and the strongest revenue diversification the Company's history. This makes us a healthier Company.

We'll now open the line to questions.

(Operator Instructions) Howard Smith, First Analysis.

Yes, good morning and congratulations on the solid quarter. Two quick questions; one, as far as the real estate holdings, what facilities do you have left that you would be looking to divest?

And then the second question is on the domestic business stabilization; looks like it has -- you've probably churned a lot of the business that you knew was coming off. Is there further churn, that you are aware of, that's still left to come in Q4? Or is most of the stuff that you're currently aware of out of the system?

Thank you Howard, I'll take the latter half of the question and Lisa will go through our real estate view. I think we've kind of stabilized where we're at domestically right now. And then Lisa, if you want to go through real estate?

Sure, so we currently have three properties that are classified as held for sale -- one of our Greeley properties in Colorado, and then Laramie, Wyoming and Enid, Oklahoma. In addition to those three that are held for sale, we have current operations in another Greeley, Colorado facility that we own.

Great, thank you very much.

You're welcome, thank you.

Nathan Novak, Robert W. Baird.

Hey guys, thanks for taking my questions. Related to AT&T, was there at all an iPhone-related spike that could potentially reverse in the coming quarters? It looks like revenue sort of stabilized a bit this quarter, so I was wondering what was the cause of that.

Yes, volumes are pretty strong with iPhone and -- but we also have had some improvement in performance. And as we mentioned in the second quarter, we actually had added a couple of programs in other business groups within AT&T. So, there's kind of a mixed view there.

Got it. Looking at revenue from all clients, outside of your top two, it looks like it jumped pretty nicely, up 25% sequentially. Was there anything nonrecurring or any call-outs here? Or do you expect this to continue to ramp aggressively?

We expect those to continue to ramp and get into full production, so.

Got you, got you. And you know you mentioned that domestic gross margins are stabilized. It looks like it's up to 8% after being 2% to 4% the last few quarters. Is that just a one-time jump? Or do you feel pretty confident in this current level that you're at?

No, I think we've had good improvement from a performance standpoint as well as capacity utilization. And actually, if you'll recall, we had kind of re-opened the Jonesboro, Arkansas facility, which had more of a negative impact to our gross margin results in the US. So we'll continue to focus on that and get that up to healthier levels.

Got you, got you. And you know, related to the sale and then the leasing of the Ontario facility, how much do you expect of new annual expense to come from this since you be renting in the facility now?

Yes, the leaseback rate wasn't -- it was in line with the rest of our lease agreements. I wouldn't really want to share the specifics of that on this call.

Got you, got you. I completely understand. Well, then, last one for me, you know, cash was about $9 million at the end of Q3 and it looks like you get about $4 million from the facility sale. With maybe positive free cash flow in Q4, is it safe to say that cash could be in the mid-teens million by year end?

I would caution you on that assumption, because we do -- we are continuing to ramp the new bookings that we've had to date and do anticipate using some working capital, and then some capital expenditure investments as well in fourth quarter to support those ramps.

Also, still moving through the IT platform transformation and it's a little undetermined at this point what type of cash we'll need to make that transformation.

Got you, got you, and just to clarify, you said you are looking to sell your -- the rest of your -- the owned real estate holdings, correct?

Correct.

Yes.

Any timeline on that whatsoever? I know it's kind of hard to know.

We continue to market all of the properties that we have listed right now. You're absolutely right. It's hard to put a timeline on any of those at this point.

Excellent. Well, thanks for taking all of my questions.

Omar Samalot, Independent Analysis Report.

Hey guys, good morning.

Good morning.

Great result, guys. I did want to point out that these are the best quarterly results in over two years, and that the last time you had similar results were -- you had revenues in the $6 million to $7 million range per quarter. I think that speaks to your ability to significantly lower the breakeven and concrete evidence that the turnaround is real. So I just want to congratulate you for that.

Well, thank you and appreciate your interest in our team.

Back in Q1, you announced reduction of the [turning ADFCs] in the domestic segment. Now with the new business secured and the increase of existing businesses in virtually all your domestic facilities, not only have you made up the [380] but potentially the [FP] gains can surpass [700] according to my calculations.

So, having said that, is it fair to say that Q2 saw the quarterly revenue trough for the near term, barring any unforeseen developments? And number two, given that revenue growth was pretty elusive for the previous management, can you talk about what were the keys to success in terms of securing new business and getting the Company back into a growth trajectory?

I think in Q2 I mentioned we were bumping along the bottom, so, certainly hopeful that we're making the turn, Omar. And from a sales success standpoint, I mean, it's a team effort, but clearly good execution on the part of a couple key players on our business development team, complemented by solutions and operations team, to back up what they're saying.

And you know, I think your message of execution and engagement is resonating well with our clients, and you know as an approach that somewhat unique against a lot of our competitors.

Okay. In terms of the SG&A line, you've made great efforts there. Could you talk about what we should see in that line next quarter and going forward? Do you still expect improvements in that area?

I don't expect we're going to be through the IT transformation for a few more quarters. And it's a little difficult for me.

We're really in deep to that whole process right now, and it's a little difficult for me to project and understand the full impacts that we'll have there. But that is one of the functions that we have the largest opportunity for efficiency gains, as well as improving our platform and capabilities to respond to business and our client requirements. So, I'm a little hesitant to say much there right now because the picture is still a little unclear while we're working through that process.

Okay, that's fair. A housekeeping question on the Jonesboro; you guys did take an impairment charge write-down on that. Since you didn't close it down, would there be a reversal of that at all?

No.

Okay. And finally, what can you tell us? I know that you're pretty tightlipped, but can you tell us anything about revenue growth and gross margins in the different segments for Q4 at all?

No (laughter).

All right. That was what I was expecting anyway (laughter). All right, thank you guys and congratulations. Good quarter.

Thanks, Omar.

(Operator Instructions) Matt McCormack with BGB Securities.

Hi, good morning. So, obviously very good sequential growth a little north of 7% in the quarter, and that's despite, of course, the two largest clients down roughly 4%. You called out two more clients that are now 10% of revenue, so it's roughly $20 million of annualized revenue for each of them.

So, first off, I was hoping you could kind of give us a little bit more color on what industry that those clients come from. And then also talk about when those clients were initially signed, and how long it took to get to those -- to that run rate of revenue again.

I'll say that they're not wireless clients, so that's important from a diversification standpoint. One of those clients has been a client of StarTek's for the past five or six years. And really, we put a team in place that are executing well in the core business we have and finding opportunities to branch out from there within that client.

The other client was added I think early last year, and again, it's been a good opportunity, good relationship that we continue to focus and work hard to continue to earn their trust and their business.

I'm trying to think; you asked a few questions. I think I covered a couple of them. What did I miss?

Well, the industries -- so they're both communications clients?

Yes, they're not wireless, but they're in the communications business, yes.

Okay, perfect. So in light of the growth, or the return to growth, if you will, can you talk about your current seat capacity both in North America and offshore, and the investments you think you might need to make to continue this growth?

I think it's pretty intuitive that with the Philippine results numbers there, you can back into the Philippines is tightening up nicely, as well as Latin America is beginning to tighten up nicely. We still have some room to work in our North America segment from a capacity utilization standpoint.

So, do you expect to add another center in the Philippines, another center in Honduras? Or where do you think you going to add that capacity offshore?

I'm always cognizant of who might be listening to these calls, and it's getting to be -- it's a pretty competitive market, so I'd rather not get into any of our future site selection discussions.

Fair enough. And then in terms of the margins offshore, you know they did bounce back after you talked about the investments for growth, so low [20s] right now. Should we expect the margins to stay somewhat in that range or improve over the next few quarters?

If you recall last quarter, we mentioned having some operational challenges. And while we've recovered there, we still have some work to do on some programs, and some hopefully that will stabilize here and look for opportunities to improve. It will depend on capacity and what decisions we take there, though.

Okay, and I know this was asked a couple times, but just as we look into the fourth quarter, is it fair to say that revenues will either be flat to up?

I think we're on a good footing right now and stabilized in a lot of areas, so.

Okay, and then the last thing, you obviously -- the sale-leaseback, there is three properties for sale, if I'm not mistaken, on the balance sheet at $5 million or so. But the Greeley operation if that -- if you were to do a sale-leaseback transition -- transaction, is it likely in a similar range of $4 million? Is that a similar size operation or is there a material -- should we should expect a material difference there?

It's not the same size.

Is it smaller or bigger?

It's a smaller building.

Okay, okay. Thank you so much.

Thank you.

Thank you.

Nathan Novak, Robert W. Baird.

Hey guys, if my math is right, it looks like new wins were -- you had about four of them for $26 million this quarter. Anything specifically to call out? I mean it looks like it's the best over the last few quarters. Are these new or existing clients, any specific driver at all?

A couple new clients, new logos, and then a couple new programs, new signs with existing clients. The one call-out on one of those programs was related to keeping the Jonesboro, Arkansas facility open.

Got you, got you; and last one for me, have you guys talked internally at all about potentially instituting some sort of -- either broad frameworks for 2013 guidance? Or should we not expect that?

No, I think we've been trying to reflect sequential reporting as we're moving through the turnaround, and we'll begin to look at year-over-year once we think we're back on the right track. But with -- I've already commented the work we still have left to do on our IT platform, and we discussed some on last call, still some contract in Canada and that, that we need to deal with, so probably not going to be giving guidance for next year.

Great, thanks.

There are no further questions at this time. I will now turn the call back over to Chad Carlson for any closing remarks.

Okay, everyone, appreciate your interest in joining us this morning and we'll get back to work.

Thank you for your participation on today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.