Startek Inc (SRT) 2016 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, 2016. 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 various risk and uncertainties and actual results may vary materially from these projections.

STARTEK advises all those listening to this call to review the 2015 Form 10-K posted on their website for a summary of these risks and uncertainties. STARTEK does not undertake the responsibility to update these protections.

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 measurements. The reconciliation can be found in the earnings release on the investor page of their website.

I would like to remind everyone that the webcast replay of today's call will be available via the investor section of the Company's website at www.StarTek.com. I would like to turn the call over to STARTEK's President and CEO Chad Carlson. Sir, please proceed.

Thank you, Michelle. Good afternoon and thank you all for joining.

Earlier today we issued a press release announcing our financial results for the second quarter ended June 30, 2016. During the quarter we continued to execute on our strategic growth initiatives of growing with existing clients, winning new business, improving capacity utilization and optimizing existing client contracts, all of which progressed despite Q2 being the seasonally slowest quarter of the year for us. These improvements led to another quarter of margin expansion, more than $4.5 million in free cash flow.

We also added $7.7 million of annual contract value in new business from both new and existing clients, largely assisted by retooling the STARTEK Advantage System with improved services and messaging. Additionally, we announced the appointment of an industry veteran, Cory White, as the Chief of Sales and Marketing. While I am not happy that we weren't able to deliver positive net income for the quarter, it is important to note that this was the strongest second quarter we have posted in over six years, proof of the strong foundation of STARTEK.

Later on this call I will walk you through some more of the highlights from Q2 as well as key focus areas for the remainder of 2016. But before commenting further, I would like to turn the call over to Don to provide more details on second-quarter financial results. Don?

Thank you, Chad. Good afternoon everyone.

Total revenue increased 16% to $73.7 million compared to $63.5 million in the year-ago quarter. This growth was attributable to partial contribution from ACCENT which was acquired on June 1, 2015 as well as contract optimizations, new client wins and growth from existing clients. This was partially offset by expected seasonality, [poor comp] revenue from lower margin programs and the transition of one client program that restructured their outsourcing strategy.

Gross margin in the second quarter increased 110 basis points to 9.5% compared to the year-ago quarter as a result of contract optimizations, further efficiencies coming from the IT platform and some rightsizing of our capacity. SGA during the quarter, the second quarter decreased by $0.5 million compared to the year-ago quarter to $8.1 million, a 6% reduction on a 16% increase in year-over-year revenue. As a percentage of revenues, SGA decreased 250 basis points to 10.6%.

Net loss for the quarter was $1.7 million or negative $0.11 per share compared to a net loss of $5.1 million or negative $0.33 per share in the year-ago quarter. Adjusted EBITDA in the second quarter increased year over year over 500% to $2.3 million compared to $400,000 in the year-ago quarter with the increase due to new business wins, current client expansions, cost-reduction initiatives and full-quarter contribution from ACCENT.

At June 30, 2016 our cash position was $1.3 million compared to $2.6 million at December 31, 2015 with a $23.5 million balance on our $50 million credit facility compared to $32.2 million outstanding at December 31, 2015. The reduction in cash is largely the result of a 27% debt reduction and the timing of receivables. We plan to continue paying down debt in 2016.

CapEx for the second quarter was $200,000 and for 2016 we continue to expect CapEx to be roughly $5 million. It's also worth noting that we generated over $4.5 million in free cash flow during the second quarter compared to a use of $2.2 million in the year-ago quarter.

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

Thank you, Don. As mentioned earlier, despite Q2 being our seasonally slowest quarter we achieved solid double-digit revenue growth, strong margin expansion and $4.5 million in free cash flow. This was all led by a continued focus on key growth initiatives in conjunction with the continuing focus on cost control which I'd like to provide a bit more color on.

Beginning with the revenue dynamics, we added $7.7 million in annual contract value by adding a new client and expanding several current client engagements, enabled by solid operational execution. It is also important to note the return to year-over-year growth for a few larger clients with the top 10 clients up 3.5% during the quarter. We also expanded a handful of newer client relationships.

The strong growth was partially offset by the loss of one client program that discontinued due to pricing which resulted in margins that were below our thresholds as well as the loss of a client that changed their outsourcing strategy. Of the new business wins, four of these clients are in the consumer products, travel, healthcare and education verticals, demonstrating continued execution and diversifying vertical concentration and the breadth of our service offerings.

Moving onto capacity utilization, which remains top of mind for STARTEK, as we mentioned during the last quarterly update, the factor weighing most on results is less than optimal utilization. As such, in June we removed some excess space to better align capacity with demand. Right now we believe we are much closer to the right balance of the capacity to match our near-term sales pipeline which enables us to run at acceptable margins even without the additional new business we plan to win.

To further support revenue growth efforts, and as mentioned earlier, we hired Cory White to serve as the Chief of Sales and Marketing. Cory is a seasoned sales and operations leader who brings nearly 20 years of BPO experience to our executive team. He previously led the healthcare and government verticals of a large competitor which realized over 500% growth in just five years in Cory's division.

Prior to that he held various sales leadership positions at another company during a 14-year tenure. Cory has deep knowledge and experience in offering analytics as a part of the overall value proposition for new and existing clients. We are confident in Cory's ability to further STARTEK's mission of enabling clients to better connect with their customers by offering the full breadth of the STARTEK Advantage System.

On the last quarterly update we discussed the retooling of our message and lead generation process. We have since experienced a strong uptick in the pipeline and will work to convert these prospects into new clients to further growth and improve capacity utilization.

As Don mentioned earlier, Q2 SG&A came in at $8.1 million, a reduction of $500,000 from the year-ago quarter. This resulted in the several cost-reduction initiatives implemented last year, including the successful integration of ACCENT.

I am happy with the effort by the team to get into this operating earnings to support the business. We will remain diligent and always look for more efficiencies balanced with smart investments to enable growth.

Looking towards the second half of 2016, we will continue to focus on various growth initiatives while properly aligning capacity with demand to enhance utilization. The fundamentals of our business are strong and we remain committed to achieving consistent profitability while we grow.

I am pleased with the work that we have accomplished and believe significant momentum has been built. For the first time in five years and after a very challenging year last year I believe we now have all the tools in place to achieve the goal of consistent profitability. We have the leadership team and IT platform to scale efficiently, the added value solutions and execution model delivered through the STARTEK Advantage System, the footprint, the differentiation, the overall client metric performance, multiple verticals full of opportunity, greatly improved revenue and client diversification and the employee Brand Warrior culture.

We now serve over 60 clients from nine verticals providing omnichannel customer care, technical support, sales, receivables management and back-office solutions across every customer touch point. We are now licensed in 49 states and working to expand healthcare-focused receivables management in addition to existing first party receivables business.

We have clinicians providing remote patient monitoring, emergency triage and after hours support for hospitals and health systems. And with the differentiating IDEAL Dialogue suite of customer engagement solutions we are helping clients transform their customer engagement strategy through meaningful insights, analytics and execution supported by the science of human communication. We are a much stronger and more capable Company today.

Now we must execute for existing clients to help them grow and grow with them while continuing to build sales momentum and winning new clients. Our capacity is in a position where it will just take a few key wins to quickly enhance bottom-line performance. In the meantime, Don mentioned our low level of CapEx planned for this year and we will be mindful to not add new capacity until the demand is there for healthy margin, customer-centric clients.

As we enter some of the stronger months of the year I feel good about the work our incredible employees have done to set us up for results that can meet the expectations of all of our stakeholders. Michelle, Don and I will now take any questions.

(Operator Instructions) Eric Stetler, Baird.

Hey guys, thanks for taking my question. A couple of quarters ago you mentioned that you expect double-digit revenue growth in 2016. Is that still the expectation for the full year?

Certainly our goal.

Okay. And then it seems like looking at the sequential growth trends in Q1 and Q2, it seems like they've been a little bit below the average over the last couple of years on a sequential growth basis. So I was just wondering going into the back half it seems like you have enough new stuff going on that growth could be a little bit better than it has historically been sequentially so maybe just a reason for why it's been a little slower in the first half versus why it could be maybe a little better in the back half?

I think you kind of answered your own question there. We don't look so much sequentially as we do year over year from a trend standpoint since we have been building the fun building of our efforts but that is also why we used the phrase lumpy.

It tends to be a lumpy business. But we have certainly seen stronger performance in the second half over the past some years. And as I referenced we're going into a stronger looking second half for us again.

Okay, thanks. Then on capital expenditures you have guidance at about $5 million for the full year, yet in the first half there's only about $600,000 and you said capacity is at a place you needed it to be. So what's the reason for the step-up in CapEx in the back half of the year?

Most of it is going to be IT-related, PC refreshes, nothing really major from a facility standpoint. There is a certain inherent level of maintenance CapEx that's associated with this business model.

Okay, thanks guys.

Matt Blazei, Lake Street capital.

Hey guys, this is John Godin on for Matt. I appreciate you taking the question. Just a little curious on what you guys are seeing in the competitive environment and specifically around the customer that you lost, whether you think there's more competition entering or if this was kind of a one-off deal?

We really haven't faced that type of an issue very much at all. So I see it more as a one-off versus a trend.

Okay. And then just to clarify, there was one new customer win in the quarter.

One new client logo, yes, and several new SOW agreements with existing clients.

Okay, cool. Thank you, guys.

Omar Samalot, Independent Corp.

Hey guys, so I was very happy to see the revenue level achieved in Q2 and knowing that it's a slow quarter and also was happy to see the paydown of, what, $3.3 million off the line. You did better than what I expected in terms of gross margin for each segment except domestic. Could you give us a little bit of color there of why the results there?

The one client we mentioned that changed their outsourcing strategy had a pretty significant impact on our domestic market. And while we were able to transition a lot of that headcount onto some existing programs, there was basically a transition period that transpired with that. So that was really the biggest impact in second quarter.

Okay. And so you were able to quickly plug that into an existing relationship?

Yes, the bulk of it.

The bulk of it.

The bulk of the heads went to existing relationships, a few different existing relationships.

Okay.

But with the transition we lost the revenue margin, obviously, from that running program.

Right, got it. Okay. And why the increase in SG&A versus the previous quarter despite the lower revenue?

It really -- I wouldn't deem it to be a measurable amount of money. You are going to see some ebbs and flows in the SG&A.

Okay. You mentioned that you were able to offload some seats realigning your footprint. I'm assuming that's in the offshore segment.

Is there more to do there? Can you give us a status on that initiative?

We're getting close to being where we need to be. There's a little bit more we might do. It kind of depends on how demand is shaping up.

Okay, all right. A few days ago I saw it was announced on the Iloilo City Mayor's website that your facility there is targeted to grow to about 2,500 employees by December of this year.

That would be quite a massive ramp. So I'm wondering is that related to the business wins you gained in Q2 or maybe that some of the business that you gained so far in Q3?

I'm not sure of the exact numbers that they are quoting in that. But we certainly get ready for some seasonal ramp as we move into the stronger portion of our year and have to keep a very active recruiting front from that standpoint.

Let me see. During the Shareholder Meeting last month I asked you about improvements that seem to be happening at your Canadian site which is important because that site has been a drag on your domestic gross margin.

At that time you were not able to provide any gross margin range. I was wondering if you could talk about that site and maybe I don't know if you could offer a range at this point.

I'd rather not provide ranges by country, especially when it's particularly when it's only one site. But I will just give an update as far as how that location is doing for us. Obviously, the currency has swung back in a favorable direction for that support.

We also have a very strategic client there that has some very unique programs, key programs that are strategic and they have been working very closely with us to align to a good wage model and reward for the employees that are performing and a good margin view for us. So we're pretty pleased with the margin performance coming out of that site right now and are much less concerned about that than say we were four or five years ago.

Got it, okay. And have you already started seeing that improvement during Q2 or that's something that you expect Q3 onwards? If you can give me an idea there.

I think some of that improvement was certainly there in Q2 and should be going forward. Again, that's part of our domestic segment and the domestic segment, really the biggest negative hit in the domestic segment was as I mentioned that one client that changed their outsourcing strategy.

Got it. Okay, so comparing this Q2 result versus a similar revenue level, for example in Q3 of last year where you guys lost $0.39 non-GAAP before restructuring and integration costs versus the $0.10 non-GAAP loss that you showed this quarter with very similar revenue level, obviously shows me that you have significantly lowered your cost structure breakeven point.

So is this as low as we go in terms of breakeven point? Number one. Then number two, would it be fair to say that given the current structure I guess it would allow for 60% to 70% of every additional $1 of gross profit improvement to fall straight into the bottom line?

Well, first of all, from a longer-term perspective I think you can always lower your breakeven point but we're also preparing for success and growth and that's a little different plan. So we're certainly planning for growth that we need to be able to support and a lot of resources involved in preparing and trying to achieve that growth. So we could always lower our breakeven point and certainly as the organization knows I'm always pushing on that.

But that's why I'm mentioned our optimism about where we are and what we've put in place and believe that we have all the tools in place to be consistently profitable and now we have to go execute. But if the revenue is not coming we will clearly make moves to improve our breakeven point.

And about every additional dollar of improvement, anything you can say around that?

That one is tough to say. There are so many different variations as to what can occur. You can have unbilled training on a new ramp on new business.

You can have discounted training. There is just so many different variations. It can vary by specific market as to what we get in the way of pull-through on incremental business, so it's tough to make a holistic statement like that.

Understood. Okay.

Your flow-through on dollar in one market is going to be different than a dollar in another market.

Sure, sure. But where I'm going with this is obviously you've lowered your cost structure pretty significantly where you could probably say this much of additional business is going to bring us, is going to go more towards the bottom line than is going to be eaten up through cost.

In my closing comments there, a few deals, new business and it's a big lever that can quickly lever the bottom line in this business. No question about that.

And the challenge in this industry, Omar, is second quarter traditionally is so slow and there is a balance there between managing expenses and allowing yourself to be in a position to capitalize on what traditionally is a stronger third and fourth quarter.

Right, right. All right, thank you for that.

I know that you guys don't give specific guidance, but maybe you can give us an idea at least directionally or comparatively as to what you expect for Q3. For example, given the call volume is seasonally higher in Q3 would you expect results to be at least comparable to what we saw last Q4 for example, since now all of the synergy savings have been achieved, SG&A has been managed lower and capacity utilization seems to continue to increase.

Well, Omar, you said it. We don't provide guidance. What I will say is that it is certainly our goal to do much better than what we did this quarter.

Okay.

And that is what we're all focused on.

Okay, all right. You know I've always supported not giving annual guidance especially given all the moving parts you've been dealing with since last year, but now that things are much more stable and improving would you consider putting out some type of guidance, maybe just one quarter out? I think that would go a long way in providing investor confidence and interest and would also benefit current shareholders like myself.

Not at this time but I will take your recommendation under advisement and it's duly noted.

Okay, thank you. My last question, during the Shareholder Meeting I heard you talk to one of the auditors about something called Speed of Trust. I must confess I didn't know much about that so I did a little research, and I invite anybody listening to this call to do some research on that, as well.

Anyway, I stumbled upon the 13 behaviors of a high trust leader and I have to say that I have experienced most if not all of those behaviors with you, Chad, over the last five years. And that is what has given me the conviction to continue to invest in you and your team. So can you tell us how maybe has that impacted how you have spearheaded change within the Company in terms of culture or anything else that you can give us an idea of how has that influenced your management style?

Well, thank you for that. I appreciate your kind words there. I believe strongly that people do business with people they trust, and I think that that culture of trust and building trust has certainly been part of the attraction to get such a strong leadership team across the organization.

I think it's one of our core values and beliefs that bring a lot of very talented people to a Company that has obviously had its fair share of challenges and believe in the opportunity to be part of something fun and exciting and challenging and rewarding at the same time. We also believe strongly that if we have that ourselves as a team and we're able to extend that to our clients, then that can become a differentiator for us. And I think it is a differentiator for us and our employee engagement and our overall retention of key employees and some very trusting client relationships.

And that's held true through some pretty challenging times, obviously. So, yes, it's something that certainly I and I believe our organization believe strongly in.

The one thing I would add to that, Omar, is you look at the addition of Cory to our executive team and how impactful it has been. I don't want to get overly optimistic but you look at the sales culture that he has put in place in a very, very short time and we're all excited to have him on the team. He's meshed well with the SLT, our senior leadership team, and again it is just one more thing that reinforces our enthusiasm for the business and how optimistic we are.

But Omar, I don't want you to get overly optimistic. It's a tough business, but I'd say trends are in the right direction.

Well, thank you very much for that and I can't wait to hear more about the second half. Thank you.

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

Well, thank you Michelle. I thank everybody for the time and interest and we will get back to work.

We'll talk to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.