Startek Inc (SRT) 2013 Q1 法說會逐字稿

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek's first-quarter 2013 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 Lesa 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 their 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 the 2012 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 may include some non-GAAP measures in accordance with Regulation G. The company has reconciled these announced facts to the closest GAAP basis measurement. These reconciliations can be found in the earnings release on the investor page of their website.

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

Thank you, Karla. Good afternoon and thank you for joining.

Revenue was a bright spot at $53.8 million, a 5.8% increase over first quarter of 2012. But I was disappointed that our bottom line demonstrated the lumpiness inherent to our business. I will not be satisfied until we can achieve sustainable, predictable, profitable growth.

The revenue growth reflects a 29% increase excluding our largest client at this time last year. During first quarter we closed two new statements of work with one of our larger clients, amounting to an annual contract value of $6.5 million. We also added a new logo client through the acquisition of Ideal Dialogue, which I will discuss later.

Our largest client is now just under 25% of total revenue. This is a significant accomplishment and the best in the company's history.

I was pleased with North America results and progress in Latin America, but I am not happy with our Asia-Pacific performance. While we expected a drop in bottom-line results during first quarter, I do not fully anticipate the magnitude of the impact from poor performance on a few key programs in Asia-Pacific.

Gross margin of 8.8% compares to first quarter of 2012 gross margin of 10.5%. It is important to point out that the GAAP to our expectations is primarily from a few specific programs within one site. We're working closely with our clients and have taken the appropriate steps to address this performance. Performance across most programs has approved with our execution focus and the upgrading of leadership talent in key positions.

SG&A expense was aligned with expectations due to the continued focus on cost management, decreasing from 16.4% of revenue in first-quarter 2012 to 13.5% of revenue in first quarter of 2013. Although in line with what we expected, as you know, I am never satisfied with the level of SG&A expenses. We recently completed a project to refresh reporting tools and once we complete the IT platform initiative we will have Phase II opportunities to further improve efficiencies.

It is important for us to continue enhancing the StarTek Advantage System with solutions that differentiate us and add value to our clients. We were pleased to announce the acquisition of Ideal Dialogue during first quarter. We are in the communication business, and Ideal Dialogue has developed specific methodologies designed to improve the customer experience. Ideal Dialogue will enable new business wins, improve existing performance and continue to offer standalone products for clients focused on improving their customers' experience.

The IT platform initiative is important to our future. The goal of this initiative is to improve efficiency and stability, lessen future capital requirements thus changing a large portion of currently fixed IT expenses into variable expenses, and create a strategic differentiation. We are close to a final decision on this initiative, and are confident we will hit these objectives. You can expect to see the impact of this transformation over the next few quarters. We still have some final elements to order but expect to reduce ongoing IT expenses by more than 10% per year, and in conjunction with this decision we will likely write off over $3 million of outdated IT assets.

Perhaps the best news will be the improved stability and robust nature of the new platform, providing us the ability to turn up new business quickly and efficiently. The addition of Jay Kirksey to the StarTek executive leadership team as the Senior Vice President of Human Resources will further our Brand Warrior culture and mission, which is a differentiator for us. His experience and focus on improving the employee lifecycle is a great opportunity for StarTek.

In closing, to address our performance issues we have taken action and made progress but have work left to do during second quarter and I expect Asia-Pacific to be more aligned with our expectations during third quarter. We have also shown progress on key strategic initiatives -- most importantly, revenue diversification and a leap frog solution for our IT platform.

I am confident we will continue our momentum and expect us to exit this year even stronger. Karla, Lisa and I will now take questions.

(Operator Instructions). Dave Koning.

Just your comments at the end there about by Q3 you expect things to be a little more in line with your [more typical] expectations. Just understand that a little better, are you kind of saying that by Q3 you'll get back to the profitability similar to what Q4 was and then by Q4 of this year, I think you said better -- you said you expect to exit this year even stronger, meaning stronger than Q4 of last year? I just want to kind of understand the progression through the year.

Yes. Yes. I believe on both accounts.

Okay. So kind of we should think about Q2 probably still being a little bit of a loss, Q3 getting back a little more to what last -- prior, I guess, Q4 was like, then Q4 of this year being a little better yet.

Yes. I think it's important, within our foundation we are out in our business. We are more aligned with where we were fourth quarter of last year, not necessarily this quarter.

Yes. Got you. And I guess secondly, you've done a tremendous job getting the what we kind of think of as the other clients, the non-top one or two clients to grow extremely well. And I think what you said this quarter was you grew 29% ex your largest client, do I understand that right?

Yes, but that was compared to year-over-year. So 29% excluding our largest client at this time last year.

And did -- is it fair to say -- did your two largest clients decline year-over-year? I'm assuming one continued to decline year-over-year, the other one faced a pretty tough comp. Was your second largest client up or was that down a little bit?

I think it was down.

Down slightly.

Okay.

Not significantly.

Okay. And then Ideal Dialogue, you paid, I think, less than $1 million for it. How big of a revenue contribution will that be, and when did that start contributing revenue?

It started at the tail of the quarter. We actually paid $1.5 million for that, of which $750,000 was paid out in cash in the first quarter.

Okay. And how much revenue about on an annual basis?

I'm not going to provide that guidance right now. We were actually doing some business with them as well.

Okay. And then I guess, just my last question, the cash balance, about $7 million. And at the end of this quarter. And I know it sounds like you paid a little more to Ideal Dialogue into Q2, you paid I guess the rest of -- I'm assuming. How does cash go throughout the year? If you lose a little bit of money in Q2, maybe where does cash drop during the year and how can we maybe expect that to end the year?

I'm not concerned about our cash position. As I've mentioned before between the line of credit with Wells Fargo and our cash, we don't have any concerns with being able to fund our working capital needs even with the performance in Q1 at some of the anticipated performance in second quarter.

Okay. Good, well, I know this quarter wasn't quite what you expected, but good job. You guys have made a lot of progress, congrats on that.

Thanks, Dave. You asked about Ideal Dialogue, I would like to -- one specific to your question. That was an acquisition really driven by strategic advantage in addition to our capabilities. It wasn't so much a revenue acquisition. While we did have a client with some decent revenue and some potential upside to it, it wasn't a revenue play, it was a play from a differentiation perspective. And as I spent time with a lot of clients in weighing that decision, they felt that that would set us apart. So that was some of the driver behind that decision.

Yes. Good. Thanks for that color.

Thank you.

(Operator Instructions). [Rob Romano, First Source Bank].

Thank you for taking my call. Could you give us the new business wins for the quarter?

$6.5 million, two statements awarded.

Thank you (multiple speakers)

Okay. Any progress with the real estate?

We continue to market those properties. We are obviously not going to do a fire sale, but we've got some interest in one market where we are really going through and trying to get it priced right relative to what's going on in that [Greeley] market specifically. But I would say no material update at this point.

Could you talk a little bit about your cost of services were up significantly year-over-year. And I'm assuming that had to do with the execution in Asia. Could you just provide a little color what happened around there, and why was there such a spike in the cost of services?

You're exactly right, it is primarily driven by what's happening in Asia-Pacific in terms of the margin performance. If you look at the gross margin year-over-year on that segment, you can see the decline.

What actually happened?

We had four elements that we expected in the first quarter. One was our closure of the Cornwall facility, we had an impact from that. We had some incremental temporary capacity costs that we brought on fourth quarter. We also had a planned shift of some business Asia-Pac to Latin America for one of our clients. And then we had the seasonal peak, and we had, as I mentioned, some performance concern. So, really five things. Four, we are planning unexpected, and one obviously performance issue that we are addressing.

Okay. And why should we --? I guess just a question regarding the execution. Why should we believe this is going to be a one- and two-quarter event, and then things will be fine by the second half? What gives you confidence in that things are going to be much stronger in the second half?

We are deep into it. I'm confident in the level of dialogue with the client, the steps that have already been taken, the leadership and as well as some leading indicator results that I am already seeing out of our more daily management reporting. I know that Rod Leach, our Head of Operations, and some of his team members just got back from the Philippines. I'm going over there next week with Jay Kirksey, our Head of HR, and Rod and team will be back over there shortly after that.

So, the intensity is there, we definitely have stronger leadership in place today that are beginning to turn those results that has me speak to those key indicators, and we are starting to see some of those improvements with our client scorecards as well as attrition and things of that nature. So I'm seeing some leading indicators that made me feel comfortable enough to put that expectation out there on what, where we would see the turn of that impact.

Okay. That's good, but it's safe to say that some of these issues are going to go into Q2 also.

Yes, we still have some things to take care of.

Okay, thank you.

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

How are you doing? Obviously disappointing, I guess, versus the stellar quarter last quarter. But it is turnaround at the end of the day, and as you say, Chad, plenty of lumpiness.

Let me tackle Philippines first. Was that drop in revenue from last quarter mostly due to FTE counts/production or due to lower ASPs per FTEs?

We had seasonal -- quite a bit of seasonal drop, and actually a lot of our new revenue coming on line helped counter that. So, there's a lot of movement between the seasonal dips and then bringing new business online in that, as I mentioned earlier, that transition of some business from Asia-Pac to Latin America.

All right. You've mentioned the operational challenges you've had there in the past. Was this quarter's performance a direct result from those challenges?

Yes. Although we've made progress, so it's really a few key programs right now, and we've made progress on several other programs there and I would say as of today there is really two that we are really still focused and big on. But I'm pretty confident we will begin to turn those with a few more elements that we will do this quarter and see the results in the third quarter.

Okay, all right. Are you still using the temporary space there in Manila? Was that --? And if so, was that for seasonal work?

Yes. And it was to capture a lot of the opportunity we have for new revenue in fourth quarter that we just didn't have space for. But with the seasonality with some of the transition of work to [Lat-Am] that I mentioned, and we felt we needed to take that opportunity and grab that business. And we'll be out of that site by the end of the second quarter.

Okay, do you think that also contributed a little bit on the performance on the gross margin side?

It had over $400,000 impact to us, first quarter versus fourth quarter.

In Latin America, it seems like you guys are ramping pretty aggressively in Honduras. Can you talk a little bit about the performance there?

Yes. We are very pleased with our performance there, as well as our client is.

Okay. In the US, I know that you guys recently won a number one position in Mansfield -- in your Mansfield facility for one of your biggest clients in terms of performance. Could you -- is there something you could talk about what made that happen, and would you expect new business wins as a result from that, either from that client or maybe others?

Leadership, we have a solid SOP and the execution of that SOP being standard, our StarTek operating platform which is our operating procedures or processes. So strong leadership and strong execution and a good culture being driven in that site.

And it has absolutely helped us to turn the tide of our brand with that large client that you're mentioning. And some of the new wins we've had late last year and early this year are coming from that better relationship and performance with that client.

And is that -- obviously that's something that you are looking to replicate in other facilities globally, I guess.

Absolutely.

Can you talk about business overall in the other US facilities that you have been trying to get filled?

Overall, I am pleased with the US, it was a good result. We did -- we still have quite a bit of capacity left in one of our sites. And we are selling to it all the time. As you know, as we have in the past, we will always assess our capacity and look to try to optimize that capacity utilization.

Right. Generally on your SG&A, I know that you're never satisfied with that. Do you have -- do you currently have more operating leverage with your current support to get more growth, or would you have to add more support to that level?

Yes, we have more operating leverage. We also have some other initiatives underway, one specifically that Jay Kirksey's leading right now. And as I mentioned, once we complete our IT platform, I believe we will have Phase II opportunities for driving more efficiencies there from a corporate standpoint with a lot of our systems and reporting and support.

So it sounds like you still have some operating leverage and on top of that there might be some savings down the line.

Yes.

And talking about the IT platform initiatives, do you have an idea of costs at this point of how much that will cost? And would those be capitalized when they happen?

You are talking about cost, as far as one-time transition costs?

I'm not sure because I don't know if it's going to increase your fixed costs, or if it's a one-timer or --

Yes, we do have an idea on what the costs are obviously at this point. We are still sorting through the savings when the savings will hit, and then what the impact of any potential one-time transition costs would be. But we don't think that they will be material this year.

Okay, perfect.

Other than what Chad mentioned in his initial comments about the write off of some outdated IT assets.

Got it. And those -- I guess those costs would be capitalized, that we're talking about -- or would they be expensed?

We still going through that right now.

Got it. Thank you very much and good luck going forward.

Adam Goldstein.

Hi. I've got a couple of questions, one about Ideal Dialogue. Is this new company at least -- is that profitable or is it -- and cash flow positive?

Yes.

Okay. And my other question is about these performance problems in the Philippines. I was wondering if you could give a little more explanation of how it is -- I guess I'm having some trouble understanding how it is that performance problems cause a reduction in gross margin. Is it something -- one possibility is that there are fines from the client, if something is wrong with the scorecard then they ding you on revenue, or is it training cost --?

I'm just trying to understand how -- what it really means when there are performance problems and how it hits the gross margin like that.

Okay. We look at profitability by program internally. And you have an expectation of that profitability by program contributing to your gross margin performance. And so when you have weakness on those programs and you're not producing the profitability you expect, that falls straight through to your gross margin line. And so with a couple of those programs I discussed, yes, there is a penalty for poor performance as a percent of revenue. We also had some significant attrition on those programs that we were doing a lot of training for and really making sure we have the right skill sets in place. A lot of off-line training resources is being put in to help the situation.

And then just overall staff efficiencies while we are working through some of those challenges that we have. Does that help, Adam?

Yes, that does. That's all for me.

Thank you.

(Operator Instructions).

Okay, thank you for joining and we'll get back to work.

Thank you.

Thank you.

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