Startek Inc (SRT) 2013 Q3 法說會逐字稿

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek's third-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 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 of the Investor 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 the Regulation G, the Company has reconciled these accounts back to the closest GAAP basis measurements. These reconciliations have been found in the earnings release on the Investor page of their website.

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

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

Third-quarter revenue grew 23% over third quarter of 2012. During the quarter, we signed $44 million of new business including one new logo and various programs with existing clients. This is a testament to the solid performance and solutions our team is delivering for our customers. Year-to-date, book-new business is $62 million in terms of annual contract value.

Gross margin decreased year-over-year impacted mostly by unusual non-recurring costs.

Excluding these charges, gross margin was basically flat year-over-year. LATAM showed the most improvement due to increased capacity utilization while APAC decreased due to mix, facility expansion, and ramp-related costs.

SG&A expense was in line with expectations. As a percent of revenue it was down to 12.2% from last year's third quarter of 14.5%.

This is due to continued focus on cost management and efficiencies. Excluding the unusual expenses previously noted, net income was positive for the quarter.

On previous calls, I have discussed the IT platform initiative and would like to report that we are close to finalizing all key decisions and a significant facet of the initiative is currently being implemented. The goal has been to enhance our service offering and shift as much of our IT costs as possible from a fixed capital intensive model to a variable cost model both at the same time.

We have made good progress in this will be a key accomplishment for the future. This will allow us to open new capacity in a capital-lite manner. This should ensure a much better return on investor capital than the Company has achieved in the past.

I am pleased with several aspects of our business. We have stabilized and are growing our core business. The differentiation we have built is being recognized by our clients and potential new clients.

We are and will continue to be investing in a new capacity across all geographies. We have added new revenue opportunities into our portfolio, which will add to our diversification.

We are focused on growth. Continued focus on optimizing existing operations and wise investment and growth opportunities remain core aspects of our strategy. The growth rates we're experiencing may lead to temporary margin contraction as we bring new operations along, but [once ran] will be accretive to the overall margin performance.

This is partially why I have used the word lumpy with respect to our results and why it is better to assess our year-over-year trends. It is important to recognize StarTek is trending in the right direction and has many opportunities ahead.

We ended third quarter with $6 million in cash and no debt. Our credit facility with Wells Fargo provides ample resources to fund further growth. We are making strides toward our vision and I'm encouraged with our progress.

I have always stated our objective is to create value for our shareholders through predictable, profitable, sustainable growth and this remains our focus. I am proud of the team and all of their efforts to date, and I am excited about our future. Jeanine, Lisa and I will now take questions.

Thank you, Chad. We will now begin the question and answer session. (Operator Instructions) Dave Koning, Baird.

Nice job on the new signing, that's great to see. First of all, that's by quite that the biggest new signings that you've had in a quarter. Is that pretty broad based across several clients and how quickly do some of those revenues come on?

Yes, it is across a handful of clients, Dave. A significant portion is new programs with existing clients. And we have started ramping a portion of that, but I'd say that we don't expect to complete the ramps probably until mid-to-late Q2, 2014.

Okay. Good.

In terms of T-Mobile and AT&T -- I think you should file your 10-Q tomorrow -- but just wondering if you have any color on about how much revenue each of those contributed this quarter?

Yes, sure. AT&T was a little over 25% of our revenue for the quarter, and T-Mobile was a little over 28%.

Okay. And, finally, just on gross margins, it was a little weaker in the US this quarter but quite a bit better in Latin America, just wondering on both of those, are we pretty sustainable here in Latin America around, I guess, close to 10%? And US, should that bounce back a little bit?

Yes, so keep in mind the one-time costs that we reconciled in the Reg G table. A significant portion of those costs hit domestic.

So if you were to look at our normalized results, if you will, the results are actually better than same quarter last year. You asked about Latin America, and we're on track with expectations there as we continue to increase our capacity utilization.

Okay, good. And then just finally then so, basically, the IT initiative costs are in the gross margins of the US. When do those stop? Are we going to see a little more of that or was this just a one-quarter event?

We'll see a little more of that. A significant portion of that was accelerated depreciation of assets that are involved in the transition, so that'll certainly continue for another couple of quarters. And then we do anticipate having some additional costs related to the initiative next year, and we'll continue to publish that reconciliation on the supplemental Reg G table going forward.

Should be through most all of it midyear next year.

Okay. Great. Thank you.

Adam Goldstein, private investor.

I missed the very beginning of this call. I don't know if you gave any more detail about this $43.6 million of new business, is, well, astoundingly good. Is there anything more, what happened? What's going on here?

We won some new business. I tell the team all the time nothing sells like operational excellence. And I think, all in all, the team is doing a good job with our core business and the bulk of that is coming from existing client relationships. In this business, success begets success.

Okay, that's obviously great. So I was curious about this you made the small acquisition in the healthcare vertical. Any progress in getting some new business in that new vertical?

I'm pretty pleased with our pipelines and our opportunities there. And this is an exciting time in the healthcare industry. With the need to drive improvement in patient care and also improved efficiencies in the overall system, I'm particularly excited about our ability to leverage our executive and our management team's experience in this space, which is actually probably kind of unknown to a lot of people, but a breadth of our team has a significant amount of healthcare experience.

And to combine that with the deep technology experience that StarTek has had over the years through device support, wireless services, things of that nature and combining that with the platform company that we picked up and moving into the clinical care side of things, some of the transformation going on in the healthcare industry puts us at a very interesting time in that industry. And we're pretty excited about our opportunities there.

All right, well, that sounds great. I remember last quarter we were talking a little bit about -- I know that you've had this one extremely underutilized location in the US -- I was wondering if, maybe, this any progress towards filling up that capacity? Or could any of this new business, perhaps, be put into that capacity?

We've made progress on our plan there, but the impacts of that are still within these numbers.

Okay. Would you still say that in terms of gross margin that the underutilization of that facility is still a significant drag on US gross margins?

Yes. We still have a few facilities that we're working through the process of how we optimize margins in those locations.

Okay. Here I've got kind of a generic question. Usually every quarter you discuss the amount of new business, this quarter plus the year to date, but one problem I have in trying to analyze is I never really know how much of that new business is truly new business as opposed to just kind of being a rolling over of previous contracts that maybe have now had their --

We never count anything that's a rollover or continuation as new business. We never report that as a new business number.

Okay, great. What about, also, is this new business net of any lost old business?

No, it's just new bookings.

Okay. So that's just new bookings. But what I'm asking is when these numbers -- when you guys give these numbers, is it possible there is some expiration of old contracts that are detracting from this that really ought to be subtracted from this or would you separately report any lost old business?

If we have material losses we'll report those.

Losses meaning lost revenue?

Yes.

Okay, so basically, I can assume when I see new business won it's not a rollover and I don't need to subtract out any previous business that may have been lost, that's basically growth?

Yes, and let me just clarify that, Adam. Call volumes have been slow to the extent that there's that contraction of volume and existing contracts that wouldn't be called out specifically. So when Chad says if we have material losses that would be contracts or business that we have, in fact, lost.

Yes, I understand that. But it's interesting you say call volume is low. Is that across all of the clients?

No, I was giving that is an example. I said if call volumes were up or down on existing contracts, that would not necessarily, that would not be reported.

As a win or a loss.

Okay. I understand. That makes sense. Okay.

That's about it, that's all my questions. I am, obviously, thrilled with these results and keep up the good work.

(Operator Instructions) [Omar Samalan], independent analyst.

Thank you for the non-GAAP breakdown provided, that was really helpful and congratulations on a $0.01 a share results that was really good despite all of this growth, so excellent execution. I'm impressed.

So, $44 million, wow. Again, I have to repeat the question before, what happened? Could you give a breakdown of industries? How did you get that?

It's mostly coming out of our core business, our core clients.

Okay. I also noticed that, I don't know if you're familiar with the ISD outsourcing index for Q3, it's an information services group, and they reported StarTek made their Top 20 BPO list for the first time in annual contract value.

Obviously now I see why. But what caught my eye was that there was many other competitors that did not make that list. So do you think that you have been able to carve out a niche for you guys in the BPO market that's maybe giving you an edge versus the competition?

I think we work hard every day to execute well for our clients in handling their customers and try to engage with our employees and our clients and, therefore, their customers in a different way. And I think some of our approach and how we try to engage with our clients in a trusted, straightforward approach is refreshing to some in the industry.

And we'll continue to try to do that and to execute well on behalf of our clients. Whether that creates an edge or an itch, I don't know, but we're pretty pleased with our results, so far.

And it's obviously working so --. Okay, I saw a $900,000 loss on disposal of assets. Is that basically the IT asset writedown you've been referring to?

Yes.

Okay. Perfect.

I saw the announcement that you were reopening Enid location which you've had closed for some time. Is that -- could you say what type of vertical, is that a new vertical, or part of the existing business? And when do you think that that will be ongoing?

Yes, it's a new program with an existing client and we're in the process of hiring management staff and bringing that facility back up now. And should be starting production there late this year, early next year.

Okay, good. All right.

Could you give us an update on the buildings that you were trying to sell in Greeley? I noticed that some that were under in-contract status, I don't know if you can say anything about that?

We've had good activity there, Omar, so that's --

That's all we can say at this point.

Okay, got it. No problem.

I know that you don't like to give guidance at all. Is there anything that you would feel comfortable saying about how Q4 is shaping up at all?

Right now we're hands down focused on bringing in a lot of this new business and growth and looking at some new facilities that we've added capacity for and making sure that we have the right leadership in place to handle those initiatives in a successful fashion while, also, really honing in on focusing on how do we make a mark in the healthcare space.

Okay. Good. Well, guys, thank you very much and think this is a great quarter. Congratulations.

Dave Koning, Baird.

So just as kind of a follow-up, I know you don't like to provide a lot of guidance, but are we at a point where this quarter on a normalized basis, I guess, you generate a $0.01 of positive EPS. Are we at a point where on a normalized basis you feel like you're going to kind of achieve ongoing profitability and have natural leverage across gross margins and a little leverage across lower operating expenses as a percent of revenue too?

I think our trends are up, but I think it's going to depend on how much growth and some of the investments in growth in new facilities that we're looking at bringing on and how that impacts us on a quarter-to-quarter basis, Dave. We're certainly headed in the right direction.

Okay. Good. Is there any way to --

You've been around this space for a while, so you know when we bring in a new facility we're investing a lot in plant and resources and leadership and personnel and training of production agents and everything before we're able to move into revenue mode. So if we're bringing a few of those online, for instance this quarter, I think we were somewhere between 100 and 125 basis point dilution due to our ramps and growth initiatives. So if we have a few of those going on you could see some contraction in our margins.

Got you, yes. That makes sense. Kind of margins just naturally being a little choppy depending on timing of ramps, that makes sense.

On a revenue basis, if we look at the last five quarters now, outside of Q1 which is seasonally weak and I think sequential growth was between 3% to 16% each of the last four out of the last five quarters, so really good sequential growth among, probably the best in the industry. Is that the right level like this 3% to 5% we've seen the last couple of quarters? Is that based on some of the new ramps what we should just kind of expect over the next several quarters now other than maybe Q1, which is seasonaly weak?

I don't look at it as much sequentially. I look more year-over-year. And if we're double digit growth I'm pretty happy.

Okay. So we shouldn't necessarily expect mid-20%s on an ongoing basis but somewhere in the double digits might be sustainable at least for a little bit?

Yes. At this scale I think so. I'm not happy if we're below double-digit growth right now on an annual basis at this level of scale.

Yes, a lot of your competitors would like to have that same level of growth, so congrats on that.

If we're below that you know I'm not happy.

All right. Thanks.

We have no further questions at this time. I will now turn the call over to Chad for final remarks.

Okay, we appreciate all your interest and we'll get back to work. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.