Startek Inc (SRT) 2014 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 2014 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 prepared remarks, Chad and Lisa will conduct a question-and-answer session. For those of you who have not 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 the discussion today may contain certain statements, which are forward-looking in nature pursuant to the Safe Harbor provision 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 the call to review the 2013 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.

Furthermore, the discussion today may include some non-GAAP measures. In accordance with Regulation G, the Company has reconciled these amounts back to the closest GAAP basic measurement. These reconciliations can be 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. Please proceed.

Thank you, Denise. Good afternoon, and thank you for joining. I'm happy to report that 2014 is off to a good start with progress on all major initiatives. Positive trends continued with first-quarter revenue of $63.2 million, an increase of 17.5% over Q1 of last year. Revenue growth, combined with improved operating performance, translated to a gross margin of 13%, up 4.2 points over Q1 of last year. EBITDA was up 145% over first-quarter of last year.

During the quarter, we won $10 million of new bookings. This included four new logos across multiple verticals consisting of healthcare, financial services, wireless, and logistics. This provides testament that the improved customer experience and lower total cost of ownership we deliver to clients through the StarTek Advantage System.

Our core business performance is healthy. We began operations in three new sites as part of our current plan to expand 2500 new seats this year. This is in addition to the 1500 seats we added late last year. Our plan to address underperforming capacity is taking shape with a balanced approach, and this plan will play out over the rest of this year.

In February, we strengthened the leadership team's focus by separating emerging services from core operations. Rod Leach is now leading our emerging services, including healthcare. Pete Martino has joined the Company to focus on our core operations. This is an important shift in order to continue intense focus across our organization on executing our strategic initiatives.

Over the past year, we have built a very experienced team to grow and support StarTek Health Services as we leveraged the acquisition made last year, and built out other value-added services for healthcare clients. StarTek Health recently added another significant client engagement, and I am pleased with our progress to date and remain confident in our strategy.

We were excited to make a joint announcement with a key strategic partner, AT&T, with an industry-first cloud service engagement. This was the last large partner decision for the IT platform initiative I've discussed the past several quarters. We are on track to have the bulk of this implemented later this year. We have been diligent throughout this process, and I am very happy with the outcome and the resulting benefits to our longer-term capabilities.

The significance of this transformation to the Company cannot be overstated. It will bring predictability -- predictability of cost and predictability of service. It will significantly lower our IT cost per seat, and relieve us of several long-term burdens stemming from out-of-date technologies, marking the end of significant IT capital investment favoring on-demand cloud-centric computing and telephony technologies on a subscription basis. It also positions StarTek on the technology forefront, which can further enhance the customer experience.

As we progress over the next few quarters, the team remains focused on executing the transition to a new IT platform, launching new sites, optimizing the footprint, bringing new services to market, and continuing the strong execution of core business. Our initiatives are on track and important to enabling the strategic plan to return value to our shareholders.

We have a lot of important work to complete, and I'm proud of the team and what we have accomplished thus far. We are very excited to be working on the future of StarTek.

Denise, Lisa and I will now take questions.

(Operator Instructions). Dave Koning, Baird.

And my first question, I'm just wondering you talked about last quarter already and again today about adding 2500 seats. I'm just wondering how do you expect the progression through the year? And is any of the Q1 strength just that you haven't added the last yet year-to-date and that you're just getting good margins because those new seats have not come out yet? I'm just wondering kind of how that pattern plays, both in terms of the timing of the seats coming out and then how that plays with the gross margin?

And Dave, it's Lisa. I think the way that you're phrasing it is accurate. While we did begin operating in three new markets in the quarter, the bulk of the 2500 seats won't come out until later in the year.

Okay. So is it fair to think of the gross margin this quarter, at least for this year, is probably maybe being the high mark, but obviously, as you leverage those seats over time, you would expect gross margins eventually to get better?

It is very timing-dependent, David. I think no question the growth this year will have a dilutive effect to margins. Kind of difficult to lay that out specifically right now. Later in the year, with new programs coming on, et cetera, things should begin to strengthen.

Okay. And then I saw that there was an SA filed -- the registration statement for 500,000 new shares. How does -- is that going to impact the share count? Like, maybe you could just talk through how that kind of impacts anything.

Yes. Obviously, that will over time, but that was really set up for recruitment of future employees, and also continue with our independent directors' all-stock compensation.

Okay. But that is stuff that will be issued over time? It's not like an immediate step-up or anything --?

No, not immediate. No.

Great. Well, thanks. Good job.

Thank you, David.

Thanks, David.

Eric DeLamarter, Halfmoon Capital.

I think you guys in the last quarter noted that there were some incremental costs associated with the IT hitting the gross margin. I think it was about 100 basis points. Is there some of that still residually in the first quarter here?

There was very little in the first quarter. As we said, we look to finalize that initiative over the next few quarters. We will have some impacts but we took the bulk of those charges in 2013.

Got you. And I think you noted the incremental SG&A for growth. Is that -- so is this kind of the rate we should be looking at in terms of going forward where SG&A will be? Or is this -- is that a more one-time in terms of hiring and such?

Yes, about 80% of our SG&A is what I would consider fixed. So that's highly leverageable or scalable. There's about 20% of our G&A that's variable. So, you need to think of that as you project out with revenue growth.

But as revenues increase, as a percent of revenue, that G&A number will come back down. And I have publicly stated on past calls that, at run rate and scale, I expect to run this business under 12% as a percent of revenue over time.

Got you. That's helpful. One final question. Of that $10 million in new business you guys had won, how much of that do you think to be converted over the next quarter or two? Or what is the timing we should think of there?

Over the next couple quarters.

Got you. Okay. Thank you very much.

Thank you, Eric.

Adam Goldstein, private investor.

So I'm just trying to track the ramp of that -- you guys won a huge amount of new business in -- I think it was Q3 of last year. And there was a total of $46 million of new business won between Q3 and Q4 of last year. So, what percent of that new business would you say has now been reflected in Q1 quarterly revenue?

Yes, I think we told you when you asked the question last quarter, about 25% had been recognized. I would say it's probably similar at this point. We still have revenue to ramp over the next few quarters as we continue to bring on additional capacity.

Oh. Okay. So, I think that the goal you guys had set before to get that business fully ramped up was by end of Q2 of this year, right?

I think in general, that's probably a good statement. But, you know, each deal is different and the ramps are different based on client requirements.

Okay. So the ramp -- maybe it will take till Q3 maybe? Or go a little past Q2?

Potentially, yes.

Okay. All right. And how about of that $10 million that was won in Q1, has any of that actually been reflected yet in Q1 revenue?

Yes.

Yes, some of it has. Yes.

Okay. Can you give me a rough ballpark of what percent?

Yes, probably about 25%.

Okay. All right. My next question is about seasonality. As I understand it, Q1 is the best quarter, then Q2 is second-best, I think Q2 is the worst, and then Q3 is third-best. Is that correct?

I might reverse your Q4, Q1; it kind of depends on your mix of clients.

(multiple speakers)Oh, so, maybe Q1 might be better?

(multiple speakers) Q2 is -- no, Q2 is definitely the worst. Q4 sometimes can be stronger than Q1.

Okay. And -- okay. So if we take the best to worst, what would you say would be just a -- if your annual contract value were staying fixed -- so let's just pretend you're in a mode where you're not growing or shrinking, you're just staying fixed -- what type of a percentage swing would you say there would be typically from your best quarter to your worst quarter.

Well, that's -- you know, we really depend strongly on our clients, our clients' business and the volumes our clients are achieving, and they're forecasting. So it's kind of difficult to give you a hard and fast rule on that, Adam.

Okay. Well, thanks for (multiple speakers) --.

(multiple speakers) I mean, sometimes from true first-quarter, you could see -- from fourth-quarter peaks, you could see 5% to 10% a quarter through the first-quarter, second-quarter. And then you kind of level out and come back out of the summer, sometimes. It's kind of a general rule of thumb.

But so you (multiple speakers) --

But we have so much wireless, it typically is heavier in the late summer, with new devices being released. So it really gets into your mix, and is difficult to compare and contrast different providers from that standpoint.

Okay. All right. Okay. And my last question is about maintenance capital. It looks like -- so again, if we were -- I know you're still in a rapid-growth phase right now, but if we imagine that you were to just sort of level out at whatever business you've already won up to this point -- just pretend you were to flatten out forever -- can you give me a feel for how much maintenance CapEx you would need to spend, just to hold operations flat, on a yearly basis?

Yes. Well, staying flat forever is not really a scenario we look at very often, but I'd say probably [$2 million to $5 million] would be a good range.

[$2 million to $5 million]?

Correct.

Okay. All right. I guess that's -- yes, that's all the questions for me. Thank you.

Okay. Thanks, Adam.

Thank you.

Omar Samalot, Independent Analysts Corporation.

Great quarter, nice gross margin. I was not expecting that this quarter.

Thank you.

(laughter) Could you talk about the improvement in the margins in Asia-Pacific overall?

Utilization of capacity, and then performance improvements. And we have been able to optimize some of the contracts that certainly had given us some challenges earlier last year.

Okay. And would you expect similar performance in Q2? Because last time we spoke, I know that you have some more optimization to work through there.

Yes, from a core operation aspects, yes. As we bring on the new site, we will have some dilution there, dependent on the speed of those ramps and how those deals are configured.

Okay. And then on that topic, it seems like you are really ramping aggressively the new facilities in Iloilo and Angeles. Can you comment on their status?

Angeles is doing very well, pretty close to getting full capacity utilization now. Iloilo, we've -- is coming along and we'll be bringing some capacity on here second-quarter. And the bulk of that capacity will be probably coming in later -- later in the year.

Okay. All right. Moving on to Latin America (multiple speakers) -- go ahead?

I was going to say we do have our first anchor tenant for Iloilo lined up, so.

Okay. I guess that explains the higher activity. In Latin America, the gross margin decrease, was it all due to ramping in Honduras? Or is there more to that?

Mostly ramping in Honduras.

Okay. All right. And it seems -- so, and I guess mostly coming into the new temporary location in Tegucigalpa? Or also some in San Pedro?

Yes. Both locations are ramping quite a bit of business.

Okay, cool. I didn't see any IP platform transition costs in Q1. Were there any?

An immaterial amount.

Yes. Nothing material.

Okay. So I guess you lumped it into SG&A? (multiple speakers)

Yes. It's an insignificant amount, Omar.

Okay, got it. Should we expect some more in Q2?

Yes.

Okay. And could you talk about the implementation status of the IT platform at this point? In the past, you've indicated that you might be able to finish it up by end of Q2. How is that timetable looking?

The bulk of the transition implementation will be complete late second-quarter, very early third-quarter, and should be fully completed, for the most part, by the end of the year.

Okay. So does that mean -- do you think we are going to see benefits in terms of savings from that towards the end of the year?

I think it's safe to assume we will see benefits post-implementation, absolutely. It's just a matter of how much. But, yes. Yes.

Okay. So, given all the initiatives that you have going on, how challenging will Q2 be on an earnings basis versus Q1, since you do have a lot on your plate and going underway?

Well, as you know, as a matter of our policy, we don't really provide guidance, Omar. But as we were discussing there with Adam, second-quarter tends to be a tougher quarter in this industry anyway. And -- but overall, I think our trends are up.

Great, great. And last one from me. I was expecting a little bit more CapEx in Q1. How about Q2 compare?

Yes, I think Q1 is just a little bit of timing. So, as I said before, CapEx for full-year this year will be higher than it was last year. So, it's safe to assume that as we said, the 2500 seats will come on in a bigger way through the end of the year, that CapEx will increase over Q1.

Okay. Great. Well, if you ask me, it's steady as she goes. Great job, guys.

Thank you, Omar.

Thanks, Omar. Bye.

(Operator Instructions). Dave Koning.

Can you give us what the -- what percentage of revenue your top three AT&T, T-Mobile and Comcast there? Or just Comcast -- in dollars?

Yes. I have percentages here. AT&T was 24.3%; T-Mobile was 29.5%; and Comcast was 17.3%.

Did you say T-Mobile 23.9%?

I'm sorry, I was going too fast. T-Mobile, 29.5%.

29.5%. Got you, okay. Okay, good. Thank you. And then so other thing, just on free cash flow dynamics, I know you kind of talked about CapEx and everything, but the rest of the year will you expect to continue kind of a slight free cash flow drag? It seems like most of it probably happened in Q1.

Yes, giving some guidance on how you should think about full-year free cash flow, and I wouldn't feel comfortable saying we expect it to be free cash flow positive for the year. But with the continued investment in CapEx and working capital for the growth, I think you can assume that it's going to continue. Definitely the first half of the year or second quarter, the way it was in first-quarter.

And why did G&A dropped off, it looks like? It used to run at like $3 million a quarter. And this quarter was like, I think, $2.3 million or $2.4 million.

Yes. One piece of that would be the IT assets that we fully depreciated last year. We accelerated depreciation on some of our assets that were related to the platform change. And then the rest is just normal cycle of the useful life that we've got on the assets.

Okay. Okay. Great, thank you.

Thank you, Dave.

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Well, I'd like to thank everybody for your interest. And we'll get back to work, and look forward to speaking with you next quarter.

This concludes today's conference. You may now disconnect. Have a great day.