Startek Inc (SRT) 2015 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss StarTek's financial results for the second quarter ended June 30, 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, I 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 security laws. These statements are subject to various risks, uncertainties, and actual results may vary materially from those projections. StarTek advises all listening on the call to review the 2014 Form 10-K and latest 10-Q 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-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 webcast replay of today's call will be available via the investor 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, Denise. Good afternoon, and thank you all for joining. The second quarter was highlighted by our acquisition of Accent. Accent is a business process outsource provider offering customer engagement solutions. This acquisition meaningfully diversifies our client base and the opportunity to grow in newer verticals. The customer engagement solutions builds on our initiatives to engage with clients in a different and more meaningful way by expanding analytics and insights, as well as social and digital service capabilities. I will provide a bit more color on the Accent integration later in the call.

Second-quarter results were hindered by lower client volumes, which we discussed on the last quarterly call. The announced erosion with some large clients has resulted in lower capacity utilization, reflected clearly in our gross margin results. When facing similar challenges 3 1/2 years ago, we were sitting on an unhealthy footprint. Since that time, we have closed underperforming facilities and opened new centers in better locations, using financial arrangements much more conducive to long-term success.

The strategy we have been executing over the past few years has been to diversify our revenue base. Albeit from a small base, we've made solid progress on that front, now at roughly 30% of our total revenue, a 377% year-over-year growth of non-telecom, cable, and media revenue. It's worth noting that this is our ninth consecutive quarter of growth on this metric, reflecting the continued execution of our sales strategy. This will lead to greater diversification going forward.

Due to the revenue headwinds from client volumes, we have adjusted our CapEx plan. We have also taken steps to reduce and control operating expenses. While we have been adjusting to the dynamics in our StarTek business, we have also worked to quickly integrate Accent.

Before commenting further on our operations, I'd like to turn it over to Lisa to provide more detail on our second-quarter financial results. Lisa?

Thanks, Chad. Total revenue in the second quarter increased 4% to $63.5 million compared to $61.3 million in the year-ago quarter. This growth included $14.4 million of incremental revenue from new clients and programs signed over the last year, as well as $5.5 million of contribution from the acquisition of Accent in June earlier this year.

This revenue growth was offset by $15 million from lower volumes with existing clients, discussed earlier. Client revenue concentration has always been a risk to our goal of sustainable, predictable, and profitable growth. Diversification has been a key focus of our strategic plan, and played a large role in our decision to acquire Accent.

During the quarter, we signed $4.3 million of new business, which includes one new client in the financial services vertical, and one client expansion.

Gross margin in the second quarter was 8.4% compared to 9.3%, with the decline largely attributable to lower utilization resulting from lower client volumes and newly added seat capacity. With regards to seat capacity, our utilization and margins will ramp as we convert pipeline and win new business. Utilization remains a key focus. We like our capacity footprint, and remain focused on filling open seats in order to generate free cash flow, pay down debt, and grow profitably.

As such, we have reduced our CapEx plans from $18 million to roughly $9 million for the calendar year 2015, which includes $2.5 million of investment in new seats. Through June 30, we have invested approximately $5 million in CapEx, which includes $1.5 million for 600 new seats, roughly. This is in addition to the 2,000 incremental seats gained through the Accent acquisition. Our total seat count stood at 13,400 at the end of the second quarter.

SG&A expenses during the second quarter totaled $8.6 million compared to $7.3 million in the year-ago period. The increase was largely associated with expenses from Accent, as well as $300,000 in transaction costs from the acquisition. We have, and will continue to, reduce SG&A costs as we realize cost synergies from Accent. Second-quarter SG&A included only one month of Accent costs. SG&A, including Accent costs for the full quarter, would have been $11.1 million. We plan to reduce this to approximately $9 million in the fourth quarter.

During the second quarter, we signed a new five-year, $50 million secured revolving credit facility with BMO Harris Bank. This new facility replaced our $20 million secured line of credit with Wells Fargo; and, more importantly, comes at a more favorable interest rate. The increased borrowing capacity speaks to the confidence our new commercial banking partner has in StarTek. And we look forward to working with their team as they provide us with the flexibility to fund our growth and execute on our strategic initiatives.

This concludes my prepared remarks. I will now turn it back over to Chad.

Thank you, Lisa. With respect to Accent, first we are happy to communicate to our shareholders that the integration is tracking ahead of schedule. We now expect the integration to be largely complete by the end of the third quarter, with Accent contributing positively to our bottom line in the fourth quarter of 2015.

Secondly, we are excited about the differentiation the customer engagement practice adds to the STARTEK Advantage System. This positions StarTek to deliver higher value and results for clients, which leads to a stickier and more profitable relationship.

Accent significantly enhanced our customer engagement capabilities. Historically, Accent provided traditional contact center services. But over the past couple of years, they developed a differentiating customer engagement practice that benefits many clients. We are integrating this capability with Ideal Dialogue's proven methodology to enable StarTek with a comprehensive approach and end-to-end platform, providing analytics and insights from actionable data to assist clients in their strategy, and ultimately how they adjust and engage with this new world, where the customer is in control and omni-channel service is an absolute requirement.

I am pleased that John Hoholik, now Senior Vice President of Global Marketing and General Manager of the Customer Engagement Group, came over from Accent to join the team. During the second quarter, we signed a contract with an existing client to launch our first customer engagement laboratory. The lab allows StarTek to provide clients with proactive insights that genuinely improve their ability to engage with their customers across channels, and increase revenue and bottom-line results.

To illustrate the differentiation of having a strong customer engagement practice, I'd like to highlight one of our recent client expansions that would not have been possible without a customer engagement focus. In first quarter of 2013, support began for a global consumer product manufacturer and retailer. At the time of engagement, we were brought on to consolidate and improve consumer affairs strategy, delivery, storage support, and customer interactions.

Service quickly evolved into a critical enterprise-wide strategy that included incremental revenue via sales conversions; cost savings through elimination of inefficiencies across their customer engagement process; introduction of self-serve solutions; deploying an end-to-end social care environment; and overall improved service delivery; all of which ultimately led to a 59% reduction in cost per engagement. And by proactively managing their social and digital customer activity, StarTek is frequently the first contact point for customers who are in danger of defecting from the brand due to a poor product experience.

By working closely with the customer and retail management to fully resolve poor experience issues, the team has transformed over 15,000 at-risk customers into brand promoters. These saves represent over $1.3 million of annual revenue retained for this client.

We are now a true strategic partner. And their corporate executives have gone on record to say that our work is a strategic mandate to better serve the evolving needs of their customers. We are excited to have created a high-touch, positive brand experience for this client, and we will continue to online their cross-channel capabilities to generate revenue and mitigate customer defections.

This is just a single example of our ability to differentiate and expand client engagements through the customer engagement group within the STARTEK Advantage System. Over the past few months, the customer engagement model has been introduced to current StarTek clients with great success.

For the remainder of 2015, we are very focused on ensuring that the Accent integration remains on track. At the same time, we need to convert the great opportunities in our pipeline to both improve our capacity utilization and further diversify our revenue. With the added scale and solid execution on sales and optimizing performance, this management team is determined to return StarTek to consistent profitability.

Denise, Lisa and I will now open it up for questions.

(Operator Instructions). Dave Koning, Baird.

I guess my first question just -- Sprint is a big client of Accent, obviously; and probably, kind of in the same ballpark as Comcast and AT&T for you guys. Is that a big risk? I know it came down quite a bit in 2014, but how do you look at that risk compared to some of your other big clients?

Actually, considering -- and a lot of time was put into that in diligence, David -- and considering the strategy that they are executing right now, we feel that we have a good opportunity to -- because of Accent's alignment with certain queues, as well as it being a very domestically focused footprint.

Okay. And you've definitely -- we started stripping out the revenue from the other big clients; you've done a really nice job signing new revenue to offset some of the big clients. But when we do look at the bigger clients, AT&T, I think the contract comes up at the end of this year, and T-Mobile maybe in 11 months or something.

How do you look at those renewals, and how do you look at the current pace of revenue going away? Are these contracts likely to stay at the current level, or could they actually grow? Or how do you see the next few quarters with AT&T and T-Mobile in particular?

With AT&T, I spent quite a bit of time last quarter talking about now being strategically aligned with the division there, and feel good about that. And there are certainly some other opportunities we are chasing. Their contact rates have clearly dropped, which has allowed some of their vendor consolidation. But with the recent success of their DIRECTV acquisition, there might be opportunity for us there as well, so feel there's opportunities with us with AT&T as we continue to execute well.

From a T-Mobile perspective, we have a solid relationship and our site performance is very strong. And while we have some ebbs and flows, different queues, we handle a lot -- I think, somewhere close to 20 different queues and call types in that relationship. And obviously they are a client that's exciting to be a part of, and on the move and a lot of changes. So some of their business changes move, but our relationship is pretty solid there.

Okay, good. And the last one for now, just when we look at the cash position in the business, post-acquisition, I think you are at $28 million of debt now and then there's some capital leases out there, too. Can cash flow start to pay that back and improve the debt position? Or do we do have a couple more quarters of a little more leverage coming on before that starts to ramp? Maybe when do you hit that free-cash-flow-positive quarter and start to delever?

Yes, I think we've talked about this on a couple of previous calls, too, Dave. I see that starting to turn mid-2016 for us.

Okay. Okay, good. Well, thank you.

(Operator Instructions). Matt Blazei, Lake Street.

Just following up on the last question, are you saying that you are not going to start delevering now until mid-2016?

Correct.

I see. I know you have -- I think it's a $40 million credit facility. Are you planning to continue to draw down on that here over the next few quarters?

It is actually a $50 million credit facility. And we've said we reduced our CapEx plans to $9 million, so we're going to spend another approximately $4 million of CapEx this year. And then really continuing to work through the integration of Accent, and having Accent be -- on a standalone, anyways -- cash flow positive as we come out of this year. So, yes, I see our working capital needs, in the way that that ebbs and flows, could mean that we tap into that line a little more than the $28.5 million we have now.

I see. And I'm sorry; I got cut off before the first question. But is the 23% reduction from your two large telecom clients, is that over now? Or is that -- is there anything to say about that, or that's pretty much done?

The bulk of that impact was seen in the second quarter.

Okay. So, basically the $15 million -- I think you said you lost $15 million from one of your clients this year. Is that correct? I think you said from the mid-50s to 40.

Yes, and on a full year basis, that was the color that was given on the last call, and that's for AT&T (multiple speakers).

And the $5.5 million that you announced from Accent, is that a monthly -- is it a seasonal thing, or is that a pretty recurring revenue, monthly thing?

I'm sorry, I don't understand.

Accent, ongoing revenues.

Yes, I'm sorry. So you said $67 million, I think, when you originally announced it, and I think you just had said $5.5 million this month, this quarter?

Correct, yes.

So that would make it about $62 million, $63 million. Is that a run rate we can work with?

It is, but based on obviously the June revenue is indicative of that. But when we acquired Accent, we acquired it for some of the excess capacity as well. So we do intend on continuing to improve utilization in the few sites there that have open seats.

I see. Okay. All right, thank you.

Omar Samalot, Independent Analyst Corporation.

Tough quarter. So, without the $5.5 million in revenue contribution from Accent, obviously there was a $5.7 million revenue drop from Q1. Was that mostly AT&T reduction? Was there anything else going on with other clients, reductions?

Yes, about half -- a little more than half of it was AT&T. And then we had -- there were some small variances for T-Mobile, Comcast. That would be the bulk of it, Omar.

Got it. Okay. Could you say, were there any growth investment expenses impact on gross margin for Q2?

It was less than 100 basis points again.

Okay, all right. And I saw that you had a $1.5 million restructuring charge, and $720,000 of that was Accent. Can you walk us through the difference -- the balance of that total charge?

Yes. The majority of it was IT. You'll recall in the last call, we discussed that maybe $200,000 was a good estimate of what was remaining, and that was higher in second quarter.

Okay. And I saw in the Q that that should be done by next -- well, I think you said the balance --.

This quarter.

Yes, okay, got it. All right. I saw a gain on asset sale. Could you give us some color on that?

Yes, that was in one of the Philippines locations. You'll recall, we relocated from one facility to another, and there were some assets that we sold as a result of that move.

Got it, okay. And the CapEx amount, I think I saw $1.7 million for Q2. Can you walk us through what that -- what went into that, what facilities? And maybe an update on Wichita?

Yes, so a big piece of the second-quarter spend was Hamilton. And then we had a little bit of carryover from some of the facilities that we opened last year -- Iloilo, Colorado Springs. Then we had some just small PC upgrades, IT-related upgrades. It's really nothing else material, Omar. It was primarily the Hamilton investment, and we'll see some of that carry over into second quarter as well.

Okay, got it.

I mean third quarter, sorry. Into third quarter.

Right. In the restructuring charge for Accent, was there any of those sites that you acquired being restructured? I don't know how much of that you can say. Or any of those sites need some rightsizing or anything like that? Or was that included in that amount?

Nothing in that amount for that, and nothing scheduled there right now.

Okay, got it. All right. Could you talk a little bit about -- obviously Accent brings the footprint that you purchased. You guys have your own footprint. How does that fit with each other's pipeline going forward? Are there any synergies there at all? How should we look about that?

Yes, it's very complementary. The Caribbean location is a very attractive location; and good, attractive margins can be produced out of that site. And that will be in our near-shore category going forward. In the domestic footprint, we are seeing a good pipeline domestically. And a few of their locations, we feel are very suitable to swing towards core or healthcare, other services. So feel good about the footprint being very complementary to our pipeline and overall strategy.

Okay. All right. Obviously, you guys have seen how the share price has dropped significantly; about 50% since your last-quarter release. I am looking at this release, and I don't see a specific reason for such a drop. I have to believe that that was mostly driven by stock illiquidity and lack of investor confidence. I really think that the lack of investor confidence is mostly due to a vacuum of information. And I've been supportive of you guys not offering long-term guidance, but I think that may be some kind of financial guidance, maybe one quarter out, would go a long way to restore that confidence.

Today, you gave a little bit more information than usual, so I do appreciate that. Also getting some current seat count by segment, and maybe some of your utilization rates could also be helpful. I don't know if you have any thoughts about that, or anything about that you could say today.

Well, always appreciate your perspective and feedback. I think a way to instill a lot of confidence in our shareholders is getting a positive bottom line, and that's our focus right now. And we see, with solid pipeline conversion, solid execution, that we will be there sooner than later, and that's our focus right now.

All right, guys. Well, thank you very much, and good luck.

Thank you, Omar.

(Operator Instructions). At this time, this concludes our question-and-answer session.

I will now turn the call back over to Mr. Carlson.

Mr. Carlson, please proceed.

Thank you, Denise, and thank you all for joining, and your interest. We'll get back to work and talk to you next quarter.

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