Startek Inc (SRT) 2014 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 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 investor section of the 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 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 the Regulation G, the Company has reconciled these amounts back to the closest GAAP basis measurement. The 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, Whitley, and thank you all for joining us today.

I'm proud to share StarTek's progress and results for the third quarter of 2014. We continue to execute our strategic plan, while improving operational execution.

We continue to win new clients and business. During the quarter, we signed seven new clients and added two new programs with existing clients, equating to $23 million annual contract value. Year to date, we have added 15 new logos and $43 million of annual contract value, doubling the number of logos from early last year.

Revenue grew 5.2% year over year. Diversification is greater and opportunities continue to increase as clients recognize the value of the STARTEK Advantage System and trust us to execute.

Gross margin increased to 14.7% from 11.2% versus same quarter last year. Overall operational performance and capacity utilization improvements is responsible for this result.

Noteworthy is that third-quarter gross margin was penalized by 240 basis points, due to ramp-related and new capacity investments. We completed the closure of Costa Rica and announced the openings of Myrtle Beach, South Carolina, and Iloilo in the Philippines.

SG&A finished at $7.5 million, or 12.2%, which is flat as a percent of revenue to last year. The dollar cost -- variable cost increase was due mainly to healthcare vertical investments and our new revenue expenses.

Operating income finished at $300,000, almost $1 million up from last year and included a $1.3 million restructuring charge, primarily due to the Costa Rica closure and our IT transformation.

EBITDA was $5 million, or 8.2%. Without the new sites and Costa Rica, EBITDA was 10.6%, reflecting the impact of continued growth and resolution of underperforming capacity.

Subsequent to the end of the quarter, we acquired CCI, a company focused on receivables management primarily in the healthcare market. This further expands our receivables management breadth and deepens our service offering to the healthcare market.

Also subsequent to quarter-end, we strengthened the leadership team with the addition of Kamalesh Dwivedi as CIO. I am very happy that Kamalesh saw the opportunity in StarTek's unique culture and the STARTEK Advantage System, particularly with regard to our IT platform initiative. Kamalesh has long been regarded as an IT leader, with over 30 years of experience, and has held leadership roles for large global companies, most recently with Bellsystem24 in Japan. He has the right experience and leadership style to lead the team to the next level.

I would now like to take a couple minutes to update you on progress across several key initiatives. The healthcare vertical has surpassed expectations for this year. We will complete the year with approximately $10 million in revenue and seven new logos focused in two new sites.

Including our two recent acquisitions in healthcare, we now serve over 130 healthcare providers. We have built an experienced team to provide valuable services to healthcare clients and execute our plans.

Back office and nonvoice services are now running over $30 million of annualized revenue. Receivables management is now running over $25 million of annualized revenue, including the CCI acquisition.

The IT platform is nearing completion and we have already realized cost receipt savings of over 41%. We have experienced some delays and are coordinating final transition dates with clients and will be fully complete early in the first quarter of 2015. A significant amount of the efficiency gains are being realized and we expect minimal restructuring charges going forward.

Ideal Dialogue's diagnostics will be part of StarTek's core analytics offering in 2015, creating business and customer engagement insight for our clients.

Four new sites with 2,500 new seats have been completed with $9.5 million of capital investment, providing capacity for an incremental $80 million of revenue growth. We now have revenue in eight verticals -- communications, media and entertainment, retail, healthcare, education, financial services, utilities, and nonprofits.

The focus of StarTek is now execution, continuous improvement, and growth. Growth will continue to dilute financial results while we bring on more capacity and new business. However, as we scale, the dilutive effect of growth will become more muted and the risk of client concentration will lessen. We have greatly diversified our revenue base, as well as the services we provide.

I am confident the pieces we have put into place will bode well for the future and our ability to continue building value for our shareholders. As always, we will deploy a balanced long-term approach to build a stronger and more successful Company.

Whitley, Lisa and I will now take questions.

(Operator Instructions). Dave Koning, Baird.

Nice job ramping profitability.

Thank you, David.

I guess my first question, you mentioned EBITDA 10.6% on an adjusted basis this quarter and minimal restructuring charges going forward. Does that mean that EBITDA margin is pretty sustainable going forward?

Taking growth into account, yes.

Yes.

We will continue growing, David.

Yes, the 10.6% is adjusted for the impact for the capacity we invested in this year, what Chad alluded to earlier as the 240 basis-point impact on gross margin. Obviously, a big part of that impacted EBITDA as well, and then with Costa Rica out of the mix, which we finalized in third quarter.

Got you. Okay. Maybe you can just talk a little bit about the acquisition. How much Accounts Receivable management revenue does the acquisition provide? And then, how much did it cost and maybe what was the date of the acquisition?

The date was October 1 and it was $4.3 million, of which about $2.6 million was paid on 10/1, and then the balance we paid out over two quarters. We are not -- I'm sorry, two years, not two quarters, David. We're not -- we don't really want to disclose the financials of the acquisition right now.

Okay. Okay, then I guess, finally, just maybe you can give -- in the past, you have given -- I know the 10-Q, we will get data on AT&T and T-Mobile and a couple other larger ones, Comcast and Time Warner. Can you just give a breakdown of how much revenue or percentage of revenue those were?

Yes, so T-Mobile is up to 31.9% in the quarter, AT&T is down to 22.1%, Comcast at 14.8%, and Time Warner Cable is 11.1%.

Got you. Okay. Great, well, thank you. Nice job.

Marco Rodriguez, Stonegate Securities.

Thanks for taking my questions. I was wondering if you could talk a little bit about your capacity utilization levels, if you can help us understand where you are right now versus your expectations at the start of the year. And any sort of quantifying metrics that you could perhaps provide to help us understand a little bit better the improvement you saw sequentially here.

As you know from past calls, we don't disclose what our capacity utilization figures are, but I will tell you that we exited the quarter with a much healthier footprint with about 11,600 seats. 37% of that was here in the US and Canada and the balance in the Philippines and Honduras.

We are pleased with the way the new capacity is ramping. As Chad mentioned, we closed another $23 million of business this quarter that is ramping. And with Costa Rica and Jonesboro out of the mix, again, we think we have got a healthy footprint in all three geographies.

Perfect, that's very helpful. Then in terms of the new business that you just signed on that you mentioned in your prepared remarks, can you give us a sense as far as how that is going to ramp over the next few quarters?

It will be pretty consistent with what we have seen historically. Maybe a little quicker, though, because a significant part was healthcare.

Typically, you see about a quarter ramp, about 25% ramp over four quarters, but I think we feel pretty good that this will ramp a little faster. As I mentioned, a big portion of it was healthcare, which tends to have shorter training time.

Got it. Just a clarification, I wasn't able to write down and follow some of the numbers you were talking about. The four new sites with the 2,500 seats, they're done? Just confirming that.

Then, also, did I catch that you said that would add an incremental $80 million of revenues, and I'm assuming that's at full capacity?

Correct.

Got it. Okay. Then just last quick question, if I might, not looking for any kind of specific guidance here, but once I start to think about fiscal 2015, what sort of goals might you be thinking about in terms of seats, any other expansion to verticals or M&A? Anything of that might be helpful.

We will look to deepen our exposure in some key verticals and it's probably going to be in line with what -- the vertical list that I shared. We have always held an opportunistic position around M&A and we will continue to be in that mode.

Really, the focus of the organization is on execution, continuous improvement, and revenue growth. I would expect us to continue to add capacity as it makes sense.

Got you. Just one quick housekeeping item. On the acquisition, will you be filing an 8-K in regard to their financials?

No.

Got it. Thanks a lot, guys.

[David Gearhart], [Hertz & Rose].

Just to go back to the acquisition, just curious if this is an outbound-focused company? I'm assuming it is.

Yes.

Yes.

Okay, and then, is this -- would you say this is a departure from your current business, and is this -- their capability something that you think you could sell into your existing base?

It's really an enhancement. It's one of the reasons I gave additional color on the diversification that we have within the organization.

We actually have now over $25 million of annualized revenue and receivables management business. We do receivables management. This is a deepening of our receivables management expertise, and particularly how it crosses with the healthcare industry and fits in our healthcare vertical focus. So I do not see it as a departure, rather a deepening and an added breadth of our service offering in our healthcare vertical development.

Okay, well, that's it for me. Thanks a lot.

(multiple speakers). One thing I do want to just clarify there. Our strategy, and to be a little more clear and specific on our receivables management, it is work we do for clients and direct for clients, so first- and third-party direct with clients.

We are not interested in taking on paper and debt buyer activity in receivables management, so that's probably an important clarification for you around receivables management strategy.

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

Awesome quarter. Congratulations. (multiple speakers) might want to point out that $5 million in EBITDA has been the highest on record since five years ago. That's quite an achievement, so I'm very proud of you guys.

Thank you.

First of all, could you break down for me the $1.3 million in restructuring charges between Costa Rica and the IT platform?

Yes, it's about half.

Half and half, okay.

No, there is -- there is a little cleanup in there for some other corporate restructuring in Jonesboro of a couple hundred thousand, so I would say, just to be a little more specific, probably $500,000 Costa Rica IT, and then the rest is Jonesboro and some other corporate restructuring cleanup.

Okay, understood. Now that this is the last quarter that we will see an impact from Costa Rica, would you be able to quantify for us that impact on the gross margin on the Latin America segment gross margin?

You will see the effects in our results going forward will strengthen. You see that to some extent this quarter, but we do have a new site coming on in Honduras, in Tegucigalpa, so you will see some of that dilutive effect of a new site opening.

But that new site, it's opening in Q4?

We are already in operation in a temporary facility, but we will be coming -- early next year, we will be getting into the permanent site with more expansion space.

Okay, got it. Can you go a little bit into the improvements that you saw in the gross margin for the Asia-Pacific segment? It was quite nice.

Yes, we saw improvements in our operational efficiencies and performance in Ortigas, which you'll recall was a site that we struggled with for a few quarters last year. Some of that was certainly pricing related, but then it was also, as I said, just improved efficiencies in labor utilization.

Then the mix of these sites there, too. Angeles came on last year and they are performing nicely.

Okay.

We're pretty pleased with the discipline that the combined operational and FP&A teams are having around on focusing on our productivity and bill-to-pay elements within the different operations.

Okay. You guys have been breaking out for us the cost of investment in growth-related expenses from the gross margin for the past three or four quarters. By when would you expect those expenses to end as they relate to the current capacity increase wave, if you want to call it, or --

Yes, I would like to think that as it relates to the current capacity, that would be mid-2015, but then, obviously, if we continue to grow at double digit year over year, we would look to invest in traditional capacity next year that could be dilutive. That will be dilutive.

Right, right, got it. Okay. Some of your competitors have higher seasonal volumes overall as they relate to last year, for example, during this back half of this year. Are you experiencing similar kinds of volumes?

On some programs, yes. We have had some seasonal strength, yes.

Okay, all right. It seems like now, obviously, in looking at your results with the IT platform mostly implemented and the underperforming sites dealt with, your focus seems finally to be shifting from -- away from legacy issues into other things. Is that a fair statement? Can you maybe talk a little bit about that?

Execution, continuous improvement, and growth, that's our focus.

Perfect, no more dealing with legacy stuff. I noticed a sale of assets, proceeds of $425,000 there. Could you tell me what that was?

Yes, that was related to some equipment we sold in one of our Philippines locations.

We have been working to address one of our sites in the Philippines. It's not in a great location for us, and we have announced actually locally in the market there that we're going to be moving to another facility in metro Manila, reducing the footprint a little bit. But as a result, we have already started to consolidate and sell off some of those assets.

Okay. Are we going to see some type of restructuring charges or anything from that move?

No.

Beautiful, okay. Finally, on the income tax, I noticed a little bit higher than usual. Is there anything out of whack there? I know that usually you have to accrue for the Canadian operation.

No, that's nothing -- that is not cash tax. Very little of it is cash. It's basically the reversal of the -- remember the large credit we took last quarter you asked about. Again, when you look at the gain or loss that is hung up in other comprehensive income, you have to take -- you have to tax effect it on a year-to-date basis.

Got it, got it.

So we had to reverse all of the gain we recognized year to date with the $650,000 expense in Q3.

Okay, understood. Well, guys, thank you very much, and congratulations.

There are no further questions in queue at this time. I will now turn the call back over to management for closing remarks.

Thank you, everybody. We appreciate your interest. We will get back to work and talk to you next quarter.

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