Startek Inc (SRT) 2015 Q1 法說會逐字稿

Good afternoon, everyone. (Operator Instructions). Thank you for participating in today's conference call to discuss StarTek's financial results for the first quarter ended March 31, 2015. Joining us today is StarTek's President and CEO, Chad Carlson and the Company's CFO, Lisa Weaver. Following their remarks, we will open the call for your questions.

Before we continue, we would like to remind all participants 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 2014 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, this discussion today may include some non-GAAP measures in accordance with Regulation G. The Company has reconciled these amounts back to the closest GAAP-based measurement. The reconciliations can be found in the earnings release on the investor page of their website. I would like to remind everyone that a webcast replay of today's call will be available via the Investors section of the Company's website at www.startek.com.

Now I would like to turn the call over to StarTek's President and CEO, Chad Carlson. Sir, please proceed.

Thank you, Joyce. Good afternoon and thank you for joining. An exciting day at StarTek for sure. We will discuss today's acquisition announcement in a few minutes, but first I will discuss our first-quarter results. StarTek's first-quarter revenue was flat versus the same quarter last year due primarily to lower AT&T volume, which I will further discuss later and the closure of Costa Rica.

In the face of these reductions, our intense focus on the execution of our strategy to create healthier revenue diversification was validated. Revenue outside of telecommunications and cable, including StarTek Health, grew 197% versus the same quarter last year to over $16 million. During the quarter, we won $10.5 million annual contract value of new business, including five new clients consisting of healthcare, financial services and consumer products to name a few.

With regard to our AT&T relationship, I have some good news and bad news. We have been navigating many changes. If you'll recall, during late Q2 of last year, we transitioned one of our large sites from mobility care to consumer mobility credit and collections. We are now considered by AT&T to be a strategic partner for the credit and collections group due to strong performance and a good relationship.

Over the past five years, the mobility care group has been executing on a vendor consolidation strategy and this was one of the largest blocks of business StarTek had with AT&T. As AT&T moved on that strategy, StarTek experienced some lost revenue. The best defense was to keep execution strong and fight to win other business. This prevented us from taking larger losses.

During that transition last year, aside from a new agreement with lower pricing, we expected volumes would come back in line. That clearly has not occurred. Volumes with this group have been much lower than the client expected. At the same time, AT&T has been bringing some work back to the US and as the quarter closed, we were informed the last remaining mobility care work we had in the Philippines will also be going away.

These impacts will play out through this year affecting approximately 5% of our revenue. Performance over the past couple years has helped to rebuild our brand with AT&T and we have recently won some key projects and are in discussions on other opportunities.

Gross margin was 9.6%, a decrease from Q1 of last year. This was negatively impacted by the revenue dynamics I just outlined, as well as bringing on four new sites. Three of the four new sites were at or near our margin targets as we exited first quarter. During the subsequent quarter-end, we reduced our total Manila seats by 250 with a move to a very nice new facility in Frontera Verde, not too far from the old site in Ortigas, which will be a great environment for our Brand Warriors.

We have also discontinued operations in our Enid, Oklahoma facility and do not plan to keep that site. Due to the revenue dynamics mentioned, our capacity utilization is lower and consequently we will be delaying CapEx plans for added capacity as we work our existing capacity in line with our pipeline opportunities. This is always an interesting balance to manage.

I am very happy to announce that we have now completed the datacenter move related to the IT platform initiative. While this was a difficult transition for the team, StarTek now sits on a reliable, scalable and very robust IT platform, which will enable our future and require little capital to scale and update.

Today, StarTek announced the acquisition of ACCENT Marketing Services. ACCENT is a business process outsourcing company providing contact center services and customer engagement agency solutions with six locations in the US and Jamaica. ACCENT's data-driven approach helps brands maximize their engagement with consumers and enables brands to influence behavior all while generating a better return on investment across all customer touch points, including phone, online and social media channels.

ACCENT has 18 clients across several industries, including telecom, technology, retail, financial services and consumer products. I'm excited at the opportunity to combine ACCENT with IDEAL Dialogue to form a very capable customer engagement agency to help our clients develop a customer strategy through the use of data and analytics to improve the customer experience. We are then able to support clients to execute that strategy through our omnichannel contact centers staffed with over 14,000 Brand Warriors.

The purchase price for this transaction is $16 million and we are financing this through our new credit facility with BMO Harris Bank. We expect to close no later than May 31. ACCENT's current annual revenue run rate is approximately $67 million and based on the synergies we can achieve through integrating the StarTek Advantage System, which now includes our new IT platform, the purchase price is approximately 3.5 times EBITDA on a standalone basis. We expect to achieve most of these synergies by the end of this year making the transaction accretive to our shareholders in 2016.

Taking on debt is not a decision we made lightly and we are determined to increase our margins and generate the free cash flow necessary to pay this debt down quickly. The Board and I were very deliberate in this decision and the team has completed extensive diligence and now we must execute.

We have a very strong pipeline and the differentiation of our client engagement and the value of the StarTek Advantage System is evident with 15 new clients won last year and five more in the first quarter of this year. We will continue to work hard on executing for existing clients and convert pipeline opportunities into new clients and continued revenue diversification.

The goal to deliver sustainable, predictable, profitable growth has always required improved revenue diversification. The strategic plan to grow our client base, expand verticals and add higher valued services has been underway now for almost four years with a lot of successes to show. With continued strong performance for our clients and converting a very strong pipeline into wins, we will work hard to get revenue growth back on track by the end of this year and begin to generate cash from our existing and new capacity. Now, with ACCENT, we will have a more robust customer engagement agency offering and over 50 clients' brands being protected and promoted by StarTek Brand Warriors. Joyce, Lisa and I will now take questions.

(Operator Instructions). [Adam Demean], Baird.

I guess just the first one on free cash flow. The ACCENT acquisition, is that free cash flow positive on a standalone basis? And then I am just curious through 2015 given some of the investments you'll need to integrate, should we think about positive free cash flow this year, or is that something that we should kind of think about more for 2016?

More for 2016, Adam.

Okay. And then any details maybe you could provide in terms of the CapEx you will need to integrate this acquisition this year?

It will be minimal CapEx. And it would just be some typical integration OpEx, but it's not anything that is significant from our perspective.

Okay, great. And then I guess just one more question on AT&T. You talked about it impacting about 5% of your revs. They had I think a $55 million run rate in 2014. Is it fair to expect a run rate of just north of $40 million then this year?

Probably a little less than that, Adam.

Okay. I think that's all my questions for right now. Thanks, guys.

Matt Blazei, Lake Street Capital Markets.

Question for you. You talked about the 2300 employees I believe at ACCENT. Is there a seat count associated with that?

Yes, approximately 2000.

Okay. So 2000 seats. I know that your previous outlook was to add 2500 new seats of capacity here in 2015. How does that change now with the acquisition?

Yes, between the acquisition and some of the volume softness that Chad referenced in his comments, we will be slowing that down.

We will try to balance that with our pipeline.

Yes, and the incremental capacity we are picking up with ACCENT.

Right. And so potentially you won't be having to spend as much money on just general capital investment here to add new seats post this deal?

Correct.

I see. Okay. And then as far as -- obviously, your gross margins were down quite a bit in Asia-Pacific in the quarter. Is that going to be a slow ramp back to previous levels, or what should we expect there in terms of -- in Asia-Pacific given I would assume that's where the AT&T business came from?

It came from both the domestic segment and Asia-Pacific segment. Asia-Pacific is still diluted, if you will, for the cost of the new capacity we brought on last year in Iloilo and then also the transition from the Ortigas facility to the Frontera Verde facility during the quarter had some redundant costs or duplicate rent for a period of time where we were bringing the new site up. Asia-Pacific was in fact impacted by more volume softness with AT&T that Chad alluded to, but there's also some of the new site movement at play there as well.

I see. And then referencing the previous question on the acquisition, you talk about it being EBITDA positive for you in 2016. Is it at a breakeven level now, or is this going to be -- I'm just trying to get an idea of what sort of dilution we are looking at here in 2015.

We tend not to provide guidance as a matter of policy, but the bulk of our synergies probably won't be achieved until towards the end of Q4.

Okay. Thank you, guys.

Omar Samalot, Independent Analyst Group.

You've never downloaded so much info in one day on us, so thanks. So could you tell us what was the impact of your growth investment expenses on the gross margin overall and if you could maybe give us a rough breakdown by segment?

Yes, it was less than 100 basis points overall for the quarter because, as Chad mentioned, three of the four new sites we brought on last year were either at or near our margin target. The segment that was impacted the most from bringing new capacity online was Asia-Pacific, as I mentioned in the previous question, but then obviously the segment that benefited the most from closure was Latin America with the exit of Costa Rica during the year, last year.

Okay. In terms of the decreased volume from AT&T, was it all AT&T in Q1 as compared to say the previous quarter?

Clarify that. Are you asking if sequentially it all came out or did it all -- we started to see some of it in fourth quarter, I would say, but didn't see quite the impact that we saw in first quarter.

Okay. But my question is was it focused mostly on AT&T business, not any of the other big clients that you have?

Yes, the primary impact was AT&T. You know this business, Omar. It ebbs and flows and can be lumpy. So we certainly saw puts and takes with our other clients, but, yes, the significant impact we need to address is AT&T.

Okay. Now does this mean that -- so the whole mobility piece from AT&T I guess is being pulled out and are you going to maintain the receivables management piece?

Yes.

Okay.

That's why I tried to really focus on the fact that we have been declared a strategic partner for that group and working some opportunities there.

Okay, got it. And when you said the impact of 5% of 2014 revenue, did you mean -- I'm sorry -- you said 5% of revenue, did you mean 5% of total 2014 revenue or 5% of AT&T-specific 2014 revenue?

I was thinking of 2015 total revenue.

Okay, so 5% of 2015, got it. Okay. I guess aside from AT&T, the slowness in volume for -- that we saw in Q4 and Q1, how are you seeing volumes currently?

I think we've addressed that with the first-quarter readout where the bulk of the softness is coming from and certainly from a year-over-year basis, Costa Rica is part of that as well.

Right. Okay. It seems like the cash restructuring charge leaseout for Q1, including the IT platform transition costs, is around $850,000. Is that accurate?

Correct.

Okay. And then I guess another $200,000 for Q2?

We will have some this quarter. $200,000 might be a little high.

Okay, so $200,000 balance spread out between I guess the rest of the year?

Yes.

Okay, and that should be it in terms of cash restructuring charges so far, as far as you know?

Yes.

Okay. The acquisition of ACCENT, is there any way that you can talk about profitability at all on the business that you acquired and maybe expected margins?

I think if you review my comments, you will be able to get to that, Omar, post synergies.

Okay, got it. I didn't see the BMO credit agreement in the Q that was released. Will that be released soon?

It will be released with the second-quarter Q.

The second-quarter Q, got it, okay. All right. And then I saw also that you have two new US facilities that are scheduled to open later on this year. Would the CapEx for those facilities come out during Q2 or during Q3 when they are expected to be operational?

Yes, I think it will be spread over the balance of the year and again, we are going to really balance bringing capacity online as the pipeline and client needs suggest. So I think it's reasonable to assume it would be Q2 and Q3, Omar.

Okay, got it. And I don't know how much you can say, but given the acquisition and given that these two facilities are opening later on this year, do you see any further need for additional capacity so far for this year?

We do have the commitment for Tegucigalpa. You will recall last year we opened a (technical difficulty) facility, so that capacity will come online later this year as well. And then again we will get through the ACCENT integration and assess what our needs are by market at that point.

We have stated that this is an investment year for us and while we'll try to stage our current capacity expansion plans as close to our pipeline as possible and demand, we were planning this year as an investment year, setting ourselves up for 2016 to really much less than our capital expenditures and expansion and focus on optimizing our profitability and really beginning to drive free cash flow. And that's a focus we will have certainly into next year so that we can generate the free cash flow required to delever the Company.

Okay, that's helpful and fair. So is it fair to say that -- obviously you're going to have a few things to digest -- is it fair to say that with Tegu and the two new facilities in the US and the acquisition that should be what you should be I guess enough to digest during the year before you get into more new capacity?

We'll see.

Okay. Fair enough. Thanks for taking my questions.

(Operator Instructions). Ryan Nelson, Special Situation Funds.

It's actually Alex for Ryan. So in terms of the facilities you plan to open this year, do you have leases at this point signed that you have to then put on hold, or -- help us with thinking through that?

We do have leases signed for both Wichita and Hamilton -- Hamilton, Ohio and Wichita, Kansas. But the CapEx really is the buildout and somewhat IT equipment that we would invest in the site to bring it online. And that's when we talk about timing and pushing it out -- that's what we are talking about.

And that's the more material of the two.

The CapEx is?

Yes.

The buildon CapEx? Okay. So Hamilton and Wichita get put on the back burner. I assume ACCENT -- it sounds like they have most of their facilities in the US and Jamaica. Is that right?

Yes.

Okay, how fully utilized are their facilities?

We would like to not get into too much of that right now until we get past closing, Alex.

Okay. That's reasonable.

Alex, if I could just clarify, we haven't back-burnered Hamilton and Wichita. We will continue to assess that based on our pipeline and determine what the appropriate timing is for both of those facilities as it relates to our current footprint and the ACCENT footprint.

Which is why I stressed the strength of our pipeline and that balance. It's always interesting to balance capacity to try to bring that in line with capacity requirements as tight as possible.

Very reasonable. Offshore and nearshore expansion this year, what's in the plan?

Well, at Tegucigalpa, Lisa mentioned Iloilo, she mentioned on A-Pac is there, so it would be not much past that.

Okay. And then I assume you've got the capacity that AT&T is freeing up?

Yes.

Okay. Thank you very much.

Adam Demean, Baird.

Thought of one more question. You guys had, I think, called out last quarter the expectation for double-digit top-line growth. I'm wondering if on a like-for-like basis we are looking at sort of mid-single digits given the update on AT&T, or if maybe some of these new deal signings have provided some upside there.

I think the double-digit obviously is put under a lot of pressure now with this development, but by the end of the year with our pipeline hope to get that back on track.

Great. Makes sense. And then as far as ACCENT goes, will that all fall into the domestic piece of your reporting segments or I guess how is that spread out?

Yes, the majority of it will be in the domestic segment, but there is a portion that will be categorized as nearshore.

Okay. Perfect. Thanks, guys.

At this time, this concludes our question-and-answer session of the call. I would now like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

I would just like to thank everyone for your interest and continued support and obviously we have a lot of work to do, so we will get at it. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Have a great day.