Startek Inc (SRT) 2013 Q4 法說會逐字稿

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to the StarTek fourth quarter 2013 earnings conference 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 prepared remarks, Chad and Lisa will conduct a question-and-answer session.

For those 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 the discussion today may 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 the projections.

StarTek advises all of those listening to this call to review the 2012 Form 10-K posted on their website for a summary of those risks and uncertainties. StarTek does not undertake the responsibility to update those projections.

Further, the discussion today may include some non-GAAP measures in accordance with the Regulation G. The Company has reconciled this amount back to the closest GAAP basis measurement. These reconciliations can be found in the earnings release of the investor page of their website.

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

Thank you, Jackie, and good afternoon, everyone. Our goal is to achieve sustainable, predictable, profitable growth. Winning new business from existing clients is the first step in this process because it proves that the StarTek advantage system delivers results clients value.

Closing 2013, the 16.7% revenue growth over 2012 is proof to current and potential new clients that StarTek is viewed as a trusted partner. Our fourth quarter revenue was $63.4 million, a 15% increase over prior year. New business booked in the quarter was $2 million and was our first healthcare client outside of the acquisition completed in July. SG&A was at a level I am satisfied with for now, coming in under 12% of revenue.

We progressed on seven key strategic initiatives. We made the final selection of a key strategic supplier to complete the IT platform initiative. We just recently completed that contract and will be making an industry first announcement in the near future. This transformation is underway and we expect to complete this effort mid year. There will be approximately $2 million of investment to complete the project.

We launched the StarTek healthcare website and, as previously mentioned, closed our first healthcare client -- new client logo outside of the acquisition. We launched the First Center using the full suite of ideal dialogues unique customer engagement methodology. We disposed of non-core real estate assets in order to redeploy that capital.

Over the past several months we have added 1500 seats of capacity across all geographies and committed to building out another 2500 seats. These investments and smart growth are targeted to continued continue trends and achieve our financial objectives. Bottom line results from this expansion will lag investments. We are confident in the returns of these new investments will generate longer-term as we continue to grow the Company and build value.

Our footprint has greatly improved the result of our disciplined process for new investments. That said, we still have a few assets performing below margin expectations and we are taking a balanced approach to address these as aggressively as possible. We exited 2013 with bigger scale, more diverse revenue streams, stronger solution differentiation, and a significant progress on several key strategic initiatives all of which will lead to a long-term value creation for our shareholders.

Jackie, Lisa, and I will now take questions.

(Operator Instructions)

Your first question comes from the line of Omar Samalot with Independent Analyst Corporation. Please proceed.

Solid, solid quarter. Last quarter you mentioned that there was like 100 to 125 bips impacting the gross margin due to the investments in -- new investments and growth. Can you tell us what was the impact in Q4?

Yes, it was a little less than that, around 100 basis points, Omar.

Okay. Let me see. Back of the envelope here.

That's about $0.04 a share, so on a normalized basis you would probably come at around $0.06 a share. Is that a fair assumption?

If you are factoring in the impact of the [Ramp] facilities as well as the IT investment, yes.

Okay, got it. Now, I've seen that you obviously have been very busy expanding since the last call. Tegucigalpa in Honduras; [Cloara] Springs, Myrtle Beach; [Iloilo] in Philippines.

Can you explain how much of this capacity expansion is to accommodate the large $44 million in new business you won in Q3? And maybe what part of that is new business won in Q4 and maybe even Q1? In other words, what part of it is for what you already had in the books and what part of it is what you see coming forward?

I think $20 million to $30 million would be book business.

Okay, so what -- my question is, is all this expansion from what you have announced or there is more capacity for potential new business?

We'll have capacity to sell to.

Got it. I also saw the Jonesboro facility closing announcement which was kind of expected, at least for me. We you able to accommodate that clients business into another location?

Yes.

Okay. Should we expect I guess a restructuring charge for the early lease termination in Q2?

Yes.

Okay. And I guess finally, since that facility was a drag on US segment gross margin, should we expect this closing to help gross margin improvement in that segment going forward?

Longer term, I believe so. We will have to get through the transition and we have a couple new sites domestically coming online.

Okay. Got it. Could you tell us what is the budgeted CapEx for 2014 based (technical difficulties) already announced?

Yes, it will be more than 2013, Omar, with the additional capacity that we've already announced, obviously.

Okay. I'm guessing the bank has been flexible in allowing for more CapEx, correct?

Yes.

You mentioned the status of the new IT platform, so savings on that implementation, is that on target for Q2 onwards?

Yes, it would be towards the end of Q2, but we should be through it all hopefully by the end of Q2.

Okay. Perfect. Guys, thanks very much. I think was a solid quarter.

Thanks, Omar.

And your next question comes from the line of Adam Goldstein, private investor. Please proceed.

My first question is it looks like in the second half of 2013 you guys signed it looks like a total of $46 million of annual contract value worth of new business. So that's basically Q3 and Q4 combined, at least by my math. So, if we turn it into a quarterly number, that comes out to $11.5 million of quarterly revenue from the new business that was signed in the second half of 2013. So, my question is how much of that $11.5 million in quarterly revenue is already reflected in the Q4 2013 reported revenue?

Probably about 25%.

Okay. Great, so 75% of it is already business one that's going to be coming in the future?

Correct.

Okay. All right. I noticed even if we back out the IT -- the one-time IT transition cost and if we back out this 100 basis point that Omar was just referring to for investment in growth, it looks like gross margin still came out to only 13.9%.

You also need to look at the Greeley loss that we had to take in.

Which didn't impact gross margin, but did impact bottom line. Yes, there is one other thing you've got to watch is the mix, so domestic this quarter was a much bigger percentage of the revenue than same quarter last year.

Okay. How much of that -- what was the -- I wasn't aware, so there was a loss on the sale of the great Greeley building?

Yes, you'll see it in our results. We sold both Greeley properties, one of them was a sale lease back.

Right.

And we had roughly $700,000 loss on the sale of both assets.

Okay. All right. So, if we back that out, do you know how much of that is going to affect gross margins?

None of it's in gross margin. It is below.

Okay, well, then I'm still -- if we go back to what I was asking then. So still it seems gross margins are still only at 13.9% and that loss doesn't really impact us, so I guess I'm packs like a some us some still little bit confused as to why it is down.

As I said, mix is a part of it so remember domestic margins are not as high as A-PAC. You have to factor in the mix year-over-year as well. And then, as Jeff mentioned, we still have a couple of underperforming assets that we are dealing with, so that's impacting gross margin as well.

Okay, and that's -- the underperforming assets is something in addition to Jonesboro, or are you just talking about Jonesboro there?

Jonesboro is included in those.

Okay. All right.

Now I've got -- some questions about the new healthcare business. When -- looks like you guys are opening up two sites with healthcare business, one in Colorado Springs and one of them in Myrtle Beach, is that correct?

We are opening those two centers certainly could be for healthcare with the healthcare focus. But if we have other core business that we close we could use those assets for that as well.

Okay. Can you give -- I know you don't usually get too detailed on stuff like seat counts, but can you give us any idea in terms of seat counts FTE's or some kind of capacity that you're planning for this new healthcare business?

I'm not going to provide guidance there. We're excited about the opportunity in healthcare and believe there's a lot of opportunity for us to grow in that industry and in that vertical segment. How much, how quick, and how we utilize that across our geographic site capacity to be determined based on activity.

Okay. And can you comment on what kind of gross margins could be expected in this healthcare-type of vertical? Is it similar to the other types of services you guys provide or is it typically higher or lower?

It really depends on what segment of the healthcare you are closing and some elements of healthcare are more mature and outsourcing than others.

Okay.

Any of our asset investments goes through our disciplined investment process, so we are comfortable that we will be able to hit the type of margins we expect to hit with our investments.

Okay. I also was a little bit curious about -- we've been hearing about this IT initiative for quite a while. And I guess could you give any more detail about what type of IT we're talking about? Is this just sort of run-of-the-mill IT like if your, I don't know, like providing PCs or wireless connectivity to your customer care specialists?

You will get a lot more detail on that in an upcoming announcement we will be making. But I can say it is not run-of-the-mill and it mostly incorporates both network, telecom, telephony.

Okay. All right. I guess that's about it for me.

Thank you.

Thank you.

(Operator Instructions)

You're next question comes from the line of Dave Koning with Baird. Please proceed.

Yes. Hi, guys. Just a few things. I guess to start out with, can you just give I guess rough sizes of the declines AT&T, T-Mobile, and Comcast?

Yes, I think T-Mobile was around 30%. Just getting that reference document out for you, David.

Okay.

Fourth quarter AT&T was 25.3% and T-Mobile was 27.7%, Comcast 19.8%.

Okay. Great. Thank you. And then I guess secondly, how much acquired revenue in the quarter from recent acquisitions?

I don't think we've given revenue breakouts from those acquisitions.

Okay. And then I guess just how do you expect cash flow to go through 2014? I know there's obviously heavier your investment in growth. Do you expect the full year to be free cash flow positive, maybe with the first half being negative and then the second half (technical difficulties), maybe you could talk little bit about cash flow?

Yes, with the growth and investment in new capacity, we do expect to tap into our line with Wells Fargo and probably some working capital with the AR growing. I wouldn't feel comfortable saying we expect full-year to be free cash flow positive, but we do expect to be able to get -- see the return on those investments in the CapEx in the second part of the year.

Okay. I guess as we look at gross margin has been pretty stable the last four years, pretty much between 10.5% and 11.5%, and I know your investing a lot in US facilities. Is that -- I guess how soon should we see a ramp in gross margin, SG&A? Should that keep coming down as revenue grows?

SG&A keep an eye on it as a percent of revenue and I'm comfortable right now with the amount of investment ramp we have and growth we have to be under 12%. David, mind you that I'm never happy with SG&A.

The -- and from a gross margin perspective, it's going to depend a little bit on how quickly we bring those online what other investments or ramps we have going on and how quickly we can address some of the underperforming assets that I mentioned earlier. So, it's going to be really a combination of all three variables that we are working on.

Okay. So, it is hard to (technical difficulties) be up or down just given some variables?

Yes, I think important -- trends are up and they're heading in the right direction for the most part and we will continue that path, though you know it will be lumpy at times.

Sounds good. All right, thank you.

David, let me just clarify the concentration numbers I gave you were full year. T-Mobile for the quarter was 30.3% and AT&T was 24.6%.

What was Comcast for the quarter?

Comcast was 19.8% for the quarter as well as full year.

Okay, great, thank you.

Thanks, David.

You're next question comes from the line of [Rob Romano], private investor. Please proceed.

Thank you for taking my question. I was wondering if you can look provide additional color regarding the facilities that are not performing well?

I don't want to get into too many specifics as we're working individual plans on those sites. But it's spread across all of our geographies, so it's not any one geography that has a real concentration of those. It's, say, one site for geography.

Okay. Are these issues that we're having, are they similar to what I guess what came about in Q1 of last year in Asia?

No, not really. It's really dealing with some of the more mature locations that we're in and what's the right business mix and approach in those individual markets.

Okay. Another question on the business we've won in 2013 and in 2012. Some of this business did we win by price and that we are unable to get the margins we need or -- I'm just struggling to going to try to find out why margins are not higher, more in line with some of your competitors? I know you're investing, but it appears you are unable to bring this business online profitably.

I think new business we've added is certainly going online with the margin thresholds that we attain to. And looking at that and I think you need to look at mix and where we're at through those ramps and that investment.

And we have definitely carved out and identified we have a few centers that are more mature in nature that do make it difficult to hit the kind of GM targets we want. And our growth is allowing us to address those in a balanced way as aggressively as we can.

Is a 5% operating margin, is that something that's doable?

I'm not going to give guidance.

Okay. A question on your IT announcement that you're going to make. I know you mentioned that this is something that's not going on with some of your other competitors and it is a leap frog-type solution. Is this something that's really going to have an impact on your margins and be able to move you higher?

It will have an impact on our ability to scale in a very capital light efficient manner and those efficiencies will come to play as we scale.

Okay. Thank you.

Thank you, Rob.

(Operator Instructions)

You're next question comes from the line of Adam Goldstein, private investor. Please proceed.

Hi. Thanks for taking my follow-up.

I was just wondering when you talk about some performance issues, I guess I was assuming that you were referring to underutilized assets that were hurting gross margins. But then I realized maybe that's not what you're talking about. Are there performance problems like where metrics have come in below where the customer wants sort of like what happened before in the Philippines?

No, the bulk of the problem is really coming from those locations in the markets that are very mature in. Has put pressure on our operating model and how best to deal with that.

Okay, so you are just talking about problems from a business perspective, but there's no problems from a client perspective, is that correct?

Well, in this business you always have challenges off and on, you always have things you're working on and trying to improve upon. It's a very competitive business from that standpoint.

I mean in terms of the metrics, like don't you have metrics that these clients like AT&T and the others sort of grade all of their --

I will say year over year our metrics across the board really improve from performance standpoint across most of all of our client programs.

Okay. So, you are pleased to terms of performance from the metrics perspective then. It sounds like it's more of a business perspective you're talking about like margin issues and stuff like that?

For the most part, yes.

Okay. I just wanted to be sure.

Thanks.

Thank you.

And at this time we have no further questions. So, I would like to hand the call over to Mr. Chad Carlson.

Okay. Thank you, everybody. We will get back to work.

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