Startek Inc (SRT) 2014 Q2 法說會逐字稿

Good afternoon everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek's second quarter 2014 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 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 Security laws. These statements are subject to various risks and uncertainties and actual results may vary materially from these projections. StarTek advises all of 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. Further 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 basis 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, and thank you all for joining. StarTek made meaningful progress during the second quarter of 2014. The underlying trends are positive, even though our results for the quarter reflect the lumpy nature of this business. We are now entering the late innings of this turnaround story. Accomplishments for the quarter included further revenue diversification, significant footprint improvements, continued implementation of a new IT platform, and a new General Manager organizational structure.

Revenue was $61.3 million, an increase of 10% over second quarter of last year. I am pleased that we signed four new logos, and one new program with an existing client, equating to $10 million of annual contract value. Included in this was another healthcare win. We have now added eight new logos year-to-date, furthering our opportunity for more meaningful revenue diversification. Revenue growth excluding our three largest clients was 21% over second quarter of last year. Overall growth was softer than our forecast, and though a healthy pace, I have higher expectations. The softness was due primarily to lower than forecasted volumes on some client programs, and a transition from one program to another with a large client, and a loss of one smaller client due to some vendor consolidation.

The pipeline is more robust than at any time over the past few years. We continue to enhance the valuable solutions we offer to clients through the StarTek advantage system, and deliver the strong customer experience, performance and flexibility which many clients demand. The core business is healthy. Gross margin was 9.3%, and was penalized by ramp in and new capacity expenses of approximately 190 basis points. During the quarter we completed the closure of Jonesboro, announced the closure of Heredia Costa Rica, and went live in the new provincial Philippine location. We have now added four new sites year-to-date. These are all significant steps in a plan to enhance the capacity footprint and continue meeting our clients needs.

This also sets the stage for stronger financial performance. We continue to manage SG&A effectively with only a $100,000 increase over same quarter of last year, while growing revenue over 10%. This reduced SG&A as a percentage of revenue from 13% last year to 11.9% for the second quarter of this year. As we have discussed, we are investing in our growth with new capacity, and we now have invested $6.8 million year-to-date. Our strategy was to sell real estate in order to invest in new, healthier capacity, and this initiative was completed with the sale of the Laramie, Wyoming facility. We remain diligent in our cash management and have ample room in our line to support foreseeable growth. Implementation of the new IT platform continues, and we expect to have fully completed by early fourth quarter of this year. StarTek will be enabled by a very dependable, efficient, secure and robust IT platform. This is a key accomplishment for successful performance and growth well into the future, as it allows us to provide the flexibility and scale which our clients and prospects desire.

During the quarter we transitioned into a more focused General Manager organizational structure. We now have a team focused on our core customer support operations, as well as a team focused on our healthcare vertical and other emerging services. This not only moves the accountability of sales and operations closer to our clients, but helps assure successful performance and growth of the business. As I mentioned, we are entering the late innings of this turnaround story. I am proud of the balanced approach the team has taken while tackling some tough business challenges. We have accomplished a great deal, trends are positive, and we are optimistic about the future operational and financial performance of StarTek. Denise, Lisa and I will now take questions.

(Operator Instructions). Our first question comes from Marco Rodriguez with Stonegate Securities. Please proceed.

Good afternoon guys, thank you for taking my questions.

Hi Marco.

I was wondering if you guys could provide an update on seats by region?

No, we don't really disclose our seat information in that way as a matter of policy, Marco.

Okay.

A lot of competitors listen to these calls.

Sure. Sure, I understand that. Any sort of color then in terms of direction where you sit on your capacity versus year-end of 2013?

Well, we've grown in all three segments.

Yes, we talked about we added about 1,500 seats last year, and we've disclosed we're adding an additional 2,500 this year. That's not a net number. We obviously took out Jonesboro, and have announced the closure of Costa Rica, but the guidance that we've shared on the 2,500 seats is still our plan for the year. We've started on a lot of that capacity in all three regions, but we haven't ramped the full 2,500 seats yet, or built them out.

Okay. I understand that. Then just in regard to the press release, you guys mentioned obviously a $10 million restructuring and part of it's related to IT. I'm just confirming, that's kind of retiring old equipment as you're implementing your new system?

No, it's not. We took some impairment charges last year related to the first phase of our IT transition. This is really related to some of the other charges that we're incurring as we make the transition.

Got it. And can you quantify how much is related to IT?

It's about $600,000.

Got it. Okay. And then switching gears here just in terms of your guys' strategic focus of expanding into different verticals, can you maybe provide a little bit of an update on where you stand on making any new inroads on different verticals, or maybe talk about what verticals are of interest to you guys?

The only vertical expansion that we've committed true resources, meaningful resources to is in our healthcare focus, as we've talked about in the past, and as mentioned, we've added another healthcare logo this past quarter, and are pleased with our progress there. We also last quarter announced some work with financial services, and this quarter even some educational and utility verticals, but those aren't necessarily concentrated efforts, it's just the value solutions we're bringing to those particular clients.

Okay. And then in terms of the healthcare vertical, obviously you mentioned that you added another client there. Where does the performance of that vertical stand versus your initial expectations?

Oh, versus our expectation? We're pretty pleased with our progress on our expectation and growth into that market, but it's not at a stage where we'd like to separate that reporting out yet.

Sure. I understand that. And then just another quick question in terms of your top clients. One of your competitors on their earnings call talked about one of their largest clients consolidating vendors, and how they felt that they were sitting pretty in terms of their position with that particular customer. That customer overlaps with yours, and I was wondering if you could maybe provide some color on what you might be seeing, and how comfortable you sit with your largest telecom customers?

We had a couple of large competitors discuss this topic, and as mentioned in the script here, we also experienced some of that, but the performance with that client was extremely strong, and we transitioned a location over to a different program where that vendor consolidation took place, so that vendor consolidation swings both ways. And due to our performance and the strength of performance on not only the program that we moved off of, but the performance we had on the program that we already were into, we expanded one and shrunk another. We feel pretty good about where we are there.

Okay. Perfect. Thanks a lot, guys.

Yes. Thank you.

Our next question comes from Adam [Jump with Baird]. Please proceed.

Thanks for taking my question. I was wondering if you guys could provide the revenues for those top three clients so we could get that in our model here?

Yes, T-Mobile was about 31%, AT&T was 22.5%, and Comcast was 17.5%.

17.5%. Perfect. Perfect. Thank you. And then just in terms of kind of the ongoing restructuring, what do you guys see kind of for the remainder of the year? I'm just curious, like from I guess, if I look down to the bottom line from the EPS perspective, I know you guys mentioned it was late innings do we see that kind of turning positive this year, or is that something we think is more of a 2015 kind of time line?

Well, we won't see the significant restructuring and impairment charges this year, we've done, completed the majority of the heavy lifting, if you will, on the site rationalization, obviously we're always looking at our site performance, but the charges that we'll see this year will be mainly related to the additional actions associated with the Costa Rica closure, and in the IT initiative. But, yes, we've gotten a big restructuring and impairment behind us, Adam.

To the last part of your question, and as I mentioned, you'll see the full effects of these moves we've made over the next few quarters, and certainly later this year, you'll see some improvements there from some of these actions.

Great. Thanks so much, guys.

Thank you.

(Operator Instructions). Our next question comes from [Adam Glostein], a private investor. Please proceed.

Hi.

Hi, Adam.

Hi there. So, Lisa, you mentioned that the plan is still for 2,500 new seats this year. Could you give us a feel for what percentage of that 2,500 has already ramped, and what is left to be ramped the remainder of the year?

Yes built out seats, probably 50%.

Okay.

So the remainder will come on in Q3 and Q4.

Okay. So, yes, I mean, unfortunately though I missed some of Chad's initial comments here. I mean the revenue did come in lighter than I was expecting. So let's see. Chad, I heard a few reasons, one of them there was lower than expected call volume on one of your clients, did I hear that right?

On a couple of different programs, yes.

A couple of different programs.

More than one client.

Is there something global, I mean, something macroeconomic about that, or is that just something specific to these programs?

Second quarter is always a very difficult quarter in this space, and working with our clients and their forecasts to plan properly, some of our clients were surprised with some of the softness that occurred, and I don't know that I'd read more than that much into it.

Could you just repeat the other two reasons you said for the softness?

Yes, we had a transition due to some vendor consolidation of moving off of one program onto another program, and that transition impacted our revenues and margins to some extent, and then we lost one smaller client due to some vendor consolidation.

Lost a smaller client. Can you give us an idea of the annual contract value of that lost client?

Yes, it's about $2 million.

Oh, okay. That's not too much. And you mentioned a transfer off of one and onto another. Is that a net negative or a net positive to StarTek?

It's fairly neutral.

Okay. I guess that I am just trying to figure out here like I have talked about this before in the last two calls that I called in on. You guys announced $46.2 million of new contract value, in fact in one quarter it was an enormous amount, $43.6 million was announced in Q3 of 2013. So I know that you have explained some of the softness, but it just seemed like by now I would have expected a lot more, I would have expected to see a lot more of that revenue. Is there some kind of a client ramp that really got delayed unexpectedly, or can you give any help on this?

I wouldn't say there are any significant delays, Adam. This is a question that we talk about on every call, as you said. Typically there's no typical ramp, but I'd say in general, they ramp about 25% a quarter, and we did have some pretty significant wins in the second half of last year, that was dependent upon our capacity build, so we're being very deliberate with the client and how we ramp that business, so we're not concerned. Again, there's a little bit of, I think probably a little bit of a slowdown in one of ramps, but we're not concerned about it.

Okay. So, last time you had said you expected the full ramp to complete by Q3. Do you think, would you still think that or maybe now it goes to the end of the year until it fully ramps?

Yes it's just hard to commit to a timeline. I mean, it's really based on different client requirements. But I'd say what we're looking at now, yes, I would expect it to be fully ramped by the end of the year.

Okay. Alright. I guess that's about all for me. Thank you.

Thanks, Adam.

Thank you, Adam.

Our next question comes from Omar Samalot with Independent Analysis Corporation. Please proceed.

Hey, guys.

Hey, Omar.

Hi, Omar.

How are you?

Good, how are you?

Good. Alright so I see that you took some restructuring charges for Costa Rica in Q2. Will we see any more in Q3 when the facility actually closes?

Yes.

Okay.

But the lease expires in December so it won't be significant.

Right. Okay. Got it. So you took the bulk of it in Q2?

We did.

Okay. So I notice that you mentioned the Laramie, Wyoming sale, so I guess that's roughly $640,000 in proceeds from the sale of assets?

That's correct.

Alright. And it seems like you exited the quarter with an outstanding balance of around $1 million in your line of credit. Is that close?

That's correct. Yes.

Alright. Okay. Can you explain the income tax benefit for the quarter? Was this related to an extended tax holiday in the Philippines at all?

No, it wasn't. It's related to some OCI adjustments, some of the unrealized hedge, gain loss and OCI that flipped out this quarter.

Okay. Okay. And Chad, you mentioned in the past, I think last call, that there were three underperforming locations. You have obviously addressed two of them by now. Can you help us at all on the progress on addressing the third one?

Yes, we've progressed quite a bit there. So the Costa Rica announcement was a really big, big move from a bottom line perspective, and that will be accretive to the Company once we're done with that transition, and so we've made a lot of progress on the third, and don't have any current plans to have any more addressed while, as Lisa said, we're always looking at our sites, and what we can do to optimize performance there, but like I said, a lot of progress second quarter on our footprint, and feel really good about our progress there, and how we're lining things up into the future.

Okay. Cool. Well, thank you very much, guys. Good luck.

Thank you.

Thanks, Omar.

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

Okay. Well, we appreciate your interest, look forward to speaking to you next quarter and we'll get back to work. Thank you.

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