Startek Inc (SRT) 2015 Q4 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 fourth quarter ended December 31, 2015.

Joining us today is StarTek's President and CEO, Chad Carlson, and the Company's CFO, Don Norsworthy. 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 the 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 and September 2015 Form 10-Q posted on the website for the 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 a webcast replay of today's call will be unavailable 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, Bridget. Good afternoon and thank you all for joining us. Earlier today we issued a press release announcing our financial results for the fourth quarter and full year ended December 31, 2015. I am happy to report StarTek posted much improved results for the quarter. Despite a challenging year, we finished on a strong note with more scale, more diversification and a differentiating customer engagement BPO platform.

We have been focused on converting the sales pipeline and implementing cost reductions to reach our goal of sustained predictable and profitable growth. We still have work to do but we are pleased with StarTek's market position as we exit 2015. Later in this call I will walk you through some of the highlights from Q4 as well as key focus areas for 2016.

Before commenting further, I would like to introduce Don Norsworthy, who was appointed as CFO last November. Don brings a wealth of experience and knowledge of our industry especially given his prior position as CFO of ACCENT which we acquired in June of last year. He has hit the ground running and is already a strong contributor in helping StarTek reach its financial objectives.

With that, I will now hand it over to Don to take you through the fourth-quarter results. Don?

Thank you, Chad. I am pleased to be here at StarTek and to have the opportunity to reengage with some of my former ACCENT colleagues and to work with the StarTek team.

Moving right into the results for the quarter, total revenue increased 28% to $82.3 million compared to $64.2 million in the year-ago quarter. This was due to incremental revenues from new client wins and current client expansions as well as contribution from ACCENT which was acquired in June 2015. This was partially offset by lower client volumes from one of our larger clients compared to the prior year.

Gross margin in the fourth quarter increased to 11.8% compared to 11.7% in the year-ago quarter. For other perspective, gross margin was 4.3% in Q3 and 8.4% in Q2. The significant improvement sequentially is from stronger volume with some of our larger clients, improved utilization from new client wins and higher-margin verticals, our focus on rightsizing capacity and the near completion of ACCENT's integration.

SG&A expenses during the fourth quarter totaled $8.4 million compared to $8.3 million in the year-ago period. As a percentage of revenues, SG&A expenses decreased 270 basis points to 10.3% compared to 13% in the year-ago quarter. Adjusted EBITDA in the fourth quarter increased 106% to $4.8 million compared to $2.3 million in the year-ago quarter. The increase was due to the aforementioned new client wins and current client expansions, cost reduction initiatives and contribution from ACCENT.

Net income increased significantly in the fourth quarter to $0.3 million or $0.02 a share compared to a net loss of $1.6 million or $0.10 per share in the year-ago quarter. This was our first quarter of profitability since Q4 2012 demonstrating our commitment to cost reduction, converting our sales pipeline and better aligning capacity with demand.

At December 31, 2015, the Company's cash position was $2.6 million compared to $5.3 million at December 31, 2014 with a $32.2 million balance on our $50 million credit facility.

CapEx in 2015 was $7.7 million which includes $2 million from new capacity in early 2015 and for 2016, we expect CapEx to be roughly $5 million.

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

Thank you, Don. As we outlined last quarter, the StarTek team has made it a top priority to be profitable. Our results over the last couple of quarters were hindered by lower client volumes and temporary dilution from the ACCENT acquisition. However, our Q4 results are a glimpse of the positive trend StarTek is capable of producing.

These results reflect the execution of three key initiatives, converting the sales pipeline, cost reductions and the integration of ACCENT. I will provide some more detail on each of those initiatives beginning with sales.

During the quarter, we won $10 million of annual contract value through current client program expansions and the signing of two new clients. These new clients were outside the communications and media verticals. For all of 2015, we won $53 million of annual contract value in new business further demonstrating our commitment to converting the sales pipeline.

With regard to cost reductions, during the fourth quarter we removed over $6 million in annualized cost while maintaining full capabilities which is in addition to the ACCENT synergies of over $7.5 million and $0.9 million in savings from the closure of ACCENT's Kansas City facility. As a reminder, we retained all related revenues from this facility so the savings flowed through straight to our bottom-line.

Through this better alignment of capacity with demand coupled with sales execution, our utilization has increased and this continued effort will result in stronger gross margin performance. We will continue to optimize the footprint in 2016 and reduce pockets of capacity where practical.

Another key contributor to profitability was ACCENT. The ACCENT integration is largely complete several months ahead of plan and I am proud to say we have retained nearly 100% of their clients and have expanded the engagements with several of them. In addition, we have also had success cross-selling and displaying the value of an enhanced customer engagement capability with analytics, insights and social media services to existing StarTek clients.

As I mentioned in the past, ACCENT was a key strategic addition for us. In addition to the added scale, the robust customer engagement platform enhances the STARTEK Advantage System and has created a differentiated customer engagement BPO platform.

As stated on the last call, the large client volumes had stabilized and you can see that reflected in the sequential quarterly results. Our metric performance for clients remains very strong and we are actively pursuing many expansion opportunities with existing clients.

While client volume reductions were unfortunately a significant headwind in 2015, we have weathered this adversity and significantly diversified our client base over the course of the year. We now have the most revenue and vertical diversification in the history of our Company.

For the year we signed 14 new clients, generating an incremental $22 million in new revenue. This led to approximately 32% of our fourth-quarter revenue coming from newer verticals like healthcare, financial services and retail among others. This compares to just 17% of total revenue in the fourth quarter of 2014. We plan to continue ramping business from these other verticals to further diversify our client concentration. During the fourth quarter, our largest client accounted for approximately 22% of revenue compared to 31% of revenue in the year-ago quarter.

Over the past four years, we have made significant investments in the capacity footprint, the STARTEK Advantage System, getting the right company culture, developing an outcome based engagement model, making the acquisitions of Ideal Dialogue, [RNR], CCI and ACCENT and developing a comprehensive customer engagement BPO.

The market has reached a fork in the road where clients who are customer centric need these services in order to compete in their respective industries. Customer centric companies are looking for more effective ways to engage customers on their terms and preferred contact channels. With solutions that are not available via traditional contact center companies, we believe StarTek is in a position to lead and deliver added value to our clients.

Recently an executive from one of our new and valued clients, a premier global food and beverage brand, was visiting a StarTek Engagement Center. After reviewing performance and StarTek's capabilities and culture, he said, "You feel a vibe here. It is dynamic, it is the feel of people happy to be at work. You feel like a startup. I came here and expected to see an outsourcer but you feel more like Google."

This in essence is what we have been striving for and we plan to do a lot more of it across multiple verticals.

In the first half of 2016, we will continue to convert the sales pipeline and optimize capacity where practical to enhance utilization during a period that typically represents a seasonally slower part of the year for our business.

I remind investors and analysts that Q4 has historically been our strongest quarter given the ramp in seasonal demand and client volumes. And 2015 was no exception. We had very strong seasonal demand in Q4.

Nevertheless, the initiatives to enable success in 2016 are clear and this management team is focused on executing those initiatives. We will continue to target new business with higher margins while leveraging the added scale and capabilities from ACCENT. We will optimize current client contracts and improve capacity utilization by filling or removing seats where practical and we will continue to work on being more efficient with a goal of achieving double-digit growth and profitability in 2016.

Bridget, Don and I will now open for questions.

(Operator Instructions). Dave Koning, Baird.

Nice job on the sequential revenue. I guess first of all, how much was the ACCENT revenue in Q4 and kind of as part of that, is that also pretty seasonally strong in Q4 or not necessarily?

Not necessarily although it did improve. But, David, we are really one company now. We are not going to spend a lot of resource trying to keep up with ACCENT and StarTek. We are treating it all as one now since we are so far completed with the integration. It was in line a little bit healthier than where you saw it third quarter.

Is it fair just for everyone's benefit, do you think you are in organic growth mode now? And by I guess by the next couple of quarters you will have anniversaried that anyway but do you feel like you are sustainably in growth mode?

Yes, that is certainly our target with the goal I mentioned of 10%. We are not factoring any acquisitions in that statement with a goal of double-digit growth and profitability.

Okay, great. Then what about I guess the adjusted EBITDA margin was solid. You cut a lot of cost. Do you think you will be EBITDA positive through all the quarters of 2016 now or is Q1 still -- I know you said seasonally it is a little weaker on res, but also is it weaker on margins?

David, that would obviously be a guidance type answer and it is our policy not to do that. But first half of the year certainly first and second is always a tighter period but I think we have made significant progress in lowering our breakeven point but with revenue coming off of seasonal highs, I think it will be tighter but we are certainly trying hard to push everything over the line.

Great. And then I guess just finally on the free cash flow side, just given the growth with the working capital, it has been hard through the year to turn free cash flow positive but now that CapEx -- I was surprised to hear it is going to only be about $5 million next year. Does that allow you to soon hit kind of a free cash flow breakeven point at some point during 2016?

Kind of a mixed blessing of what transpired last year with some of the revenue headwind we had. We had a misalignment of excess capacity so that allows us to be pretty frugal with our cash looking out into this year and certainly one could take from that the more cash we can generate the more sales we convert, the more costs we keep down, we will be able to get there much quicker.

Okay, great. Thank you.

Matt Blazei, Lake Street Capital Markets.

Great quarter. Obviously your revenues and your gross profits in both your offshore and near shore business was pretty much in line with expectations and obviously the big surprise is in your domestic business both in terms of revenues and obviously an enormous sequential increase in your domestic gross profit. Is that attributable to any specific thing because that is a very surprising sequential change in gross margins on a domestic business.

One of the things I have used to try to describe our business quite a bit, Matt, is it is a lumpy business just by its nature. And a lot of our seasonal influx did impact more greatly the domestic market. On top of that, I think some of the revenue erosion we saw or experienced last year certainly had pretty intense pressures on the Philippines with some of the added capacity we brought on there so we are not happy with gross margins in the offshore market and certainly working our initiatives that we discussed here to get that back on track to where we expect it to perform but that is kind of what is playing out in those market segments.

Second question, you mentioned something about double-digit revenue growth for 2016. Obviously you still get a kicker in the first half from the ACCENT acquisition. Are you talking about double-digit revenue growth ex the ACCENT acquisition? I'm just trying to get a feel for sort of where that number is coming?

We are all one company now so we reported 282 change in 2015 so that is the baseline we are discussing from.

Right. Because just the ACCENT acquisition alone puts you at close to 10% growth in the first half of the year with the added revenues. So I'm just trying to figure that part out.

Secondly as you mentioned, it looked like you lost a little bit of free cash flow in Q4 obviously your CapEx is going to be lower this year. The first half you said is going to be tighter. I think last quarter your goal was to be free cash flow positive by Q3. Is that still something we should be looking at?

That is certainly our goal.

So free cash flow positive by Q3. When you mentioned 10% profitability growth, I imagine you are speaking to adjusted EBITDA?

I don't. I --.

Could be lost, you lost money in a year is so I'm assuming when you are saying a 10% increase in profitability you are speaking towards EBITDA.

I am not sure of your 10% profitability comment. We said double-digit revenue growth and profitability. Can you help explain your reference point?

Yes, you're right, you said double-digit profitability growth but I am just wondering if that profitability (inaudible) EBITDA?

I said double-digit revenue growth.

But nothing about profitability?

No.

Okay. Thank you, guys.

But profitable is a goal. Yes, sir.

Thank you, guys.

Omar Samalot, Independent Analyst.

Congratulations, guys. If I sound a little weird it is because I'm trying to contain my smile. Great quarter. Maybe have a few housekeeping questions. Maybe, Don, you can help me out. Were there any gross investment expenses during Q4 that hit the operating expenses, specifically the gross margin?

Yes, there were some ramps going on, Omar, that would have based on how you look at things in the past would have impacted. I am not sure that we have that number in front of us. We did have some significant ramps going on in the fourth quarter.

Okay, no problem. And will there be more in Q1? I am assuming that you are still ramping up Hamilton and Iloilo?

There is some.

Did the G&A include any nonrecurring expenses, maybe integration-related expenses?

A little bit, not significant. It was really probably innocuous.

Okay, all right. And that 10.3% G&A percentage of revenue, that seems low. Is that a level that you think is sustainable or as you grow it may get a little higher?

As we grow from a dollar perspective, it will probably be a little higher. Not significantly higher but we feel we are fairly close there to a run rate that we can scale the business for the foreseeable future. It will probably come up a little bit. There obviously was heavy commitment and I am proud of the team, their commitment in pushing profitability over the goal line for the fourth quarter. And so there is certainly an aspect to some variable expenses you have control on at the SG&A line and we certainly help those to a low roar in the fourth quarter and I would expect to see somewhat more regular business cadence return with travel etc., etc.

But I think you will see it come up a little bit but not dramatically.

Okay, all right. In terms of the gross margin improvement, an incredible job for domestic and near shore. In terms of offshore, are you expecting gross margin to normalize during the first half of 2016?

We are certainly focused on doing what we can do to get our capacity utilization up, Omar, between addressing maybe some certain pockets. We have no site closures in mind at this time. While we always keep our options open but we do have opportunity to remove some pockets where practical, some pockets of capacity where practical. And so we are certainly working on some initiatives there as well as filling the seats and those are really be two big levers as well as we will continue to drive efficiencies to our newly updated IT platform. But those are the big levers for getting that gross margin back on track so I wouldn't expect an overnight miracle there. It is going to take some work.

Okay, got it. In terms of the new business that you are targeting, can you talk about what you think gives you an edge now and also the type of client/work that you are targeting?

I think one of the things that gives us an edge is our size and scale. We can be nimble and react. We are very custom with our clients. We absolutely have a very comprehensive, very robust customer engagement BPO platform now and our mindset on getting into the right type of engagements focused on outcome-based engagements with customer centric clients, those are the clients we accelerate with very well that create great partnerships for us.

And normally that business is stickier so it could be a large-scale client, could be one of our largest clients who is very customer centric minded who is looking to add value to leverage the capabilities and solutions we put into play where we are open to be able to help them to deliver added value.

But a lot of times it is clients that are perhaps not the most mature outsourcers that are looking for an edge in their industries to compete where we can really help aid them in that process. And we have refined and I think have a much better targeting process in place for our pipeline management now and I am anxious to see how the team performs with this kind of new laser focus we have.

Okay. And I imagine that you must have some cross-selling opportunities within your own current client base where I guess one client could take advantage of more than one service that you offer?

We do. If you just look at our receivables management business, it is not across a multitude of our core and historical clients. It is certainly across some but almost every client we touch has receivables management needs. And our very customer oriented Brand Warrior approach with receivables management is being pretty well received in the market not only with traditional customers but within our healthcare collections work we are doing is another interesting capability we now have in play.

In terms of that current client base and your efforts over the last three years to diversify, how many clients do you serve today versus say 2012 when you started to reposition the Company?

We exited last year with 58 clients in our core business. The sub element of our healthcare business has roughly 150 clients in the one portfolio and I think somewhere around 57 to 60 clients in the other portfolio. So within those two within our clinical practices, within STARTEK Health, we have a significant amount and then within receivables management, we have a good breadth of client mix there. Compared to where that was when I started, I would have to look back but I think we were around -- I don't know 15, 16 maybe.

Wow, okay. I just saw J.D. Power, they had a study out 2016 US wireless customer care performance study where T-Mobile ranked highest among full-service carriers performing well in the automated response system than the customer service rep. StarTek is obviously not the only provider to T-Mobile but do you feel like StarTek contributed to that success?

I would sure like to think that and we are very proud and honored to be part of T-Mobile's success. You guys probably have a lot more fun listening to Mr. Legere's calls than mine; he is a little more colorful than I am. But our teams, our employees have a great deal of pride wrapped into what we have been able to help T-Mobile accomplish and it is just great to be kind of tangentially part of their story. It is a pretty impressive story they have underway there.

And in a lot of ways their approach to the market somewhat being a disruptor is a little similar to how our culture and how our teams think about things. We are willing to try some different things. We are willing to challenge the status quo and I think a lot of clients value that in a business partner.

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

Thank you, Bridget. Thank you all for your attendance today and your interest and we will get back to work and look forward to speaking with you next time.

Thank you, ladies and gentlemen. You may now disconnect.