Startek Inc (SRT) 2017 Q3 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 third quarter ended September 30, 2017. 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 that 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 the call to review the 2016 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 may include some non-GAAP measures. In accordance with Regulation G, the company has reconciled these amounts back to their closest GAAP-based measurements. 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, Amanda. Good afternoon, and thank you all for joining.

Earlier today, we issued a press release announcing StarTek's financial results for the third quarter ended September 30, 2017. As discussed on our last quarterly conference call, we made the decision to accelerate our high-grading efforts in Q3 and removed approximately $10 million of lower-than-acceptable margin business during the quarter. This was a difficult decision to make. We're obviously in this business to grow, not replace revenue.

However, we believe strongly that this was the right decision to ensure proper return on invested capital for shareholders and to further enable StarTek to achieve sustainable profitability.

This decision was made possible by strong bookings and an increasing pipeline of new opportunities. Unfortunately, there is a gap over a couple of quarters to work through these transitions and replace lower margin revenues with higher margin revenues. The process of transitioning revenues is difficult work and impacted results during the quarter with a temporary decline in production billings while we continue to incur site fixed costs and variable costs related to these efforts. The new business and the locations involved should be fully ramped by early 2018, at which point we expect to realize the revenue and margin improvements.

The high-grading initiatives that began nearly 2 years ago is almost complete. All said, by the end of the year, we will have replaced approximately $86 million of planned annualized revenue throughout this period.

Our pipeline of new business opportunities continues to grow to the highest levels yet and our bookings for 2017 are already well over plan. In fact, we booked more than $11 million in new business in the third quarter, bringing our year-to-date total bookings to $104 million of annual contract value. We're currently on track to have approximately 70% of this annual contract value ramped by year-end.

We will continue to leverage these opportunities to further diversify StarTek's revenues. It's worth noting that our pipeline reflects increased momentum in health care and e-commerce retail business and includes many new logos throughout all of our different industry verticals.

Specifically relating to health care, which is a priority for us, earlier in the year, I challenged the team to a stretch goal of exiting 2017 with $50 million of annualized health care revenue in hand, and we are very close to achieving this target. This would be an exceptional achievement for the team as we have effectively taken our health care business from 0 to approximately $50 million annual run rate in roughly 3 years and plan to continue this growth trajectory.

So we have many reasons to be optimistic for 2018 and beyond. We have also been working through some other adversities. Last quarter, I mentioned agreeing to shift revenue from 1 client to offshore to onshore. While we're still working through this transition and its impacts, partnering with this client and accommodating their needs has positioned us for more opportunities with them into the future. We do not expect to lose any revenues from this transition long-term.

We also spoke last quarter about the potential benefit to our revenues in the third and fourth quarter resulting from any spike in call volumes associated with the iPhone launches. Unfortunately, the iPhone 8 has reportedly experienced soft demand. So we've yet to see the volumes that we had anticipated from wireless clients, and don't expect to see much of a benefit in the fourth quarter. The delays on iPhone X will likely push its associated call volumes into 2018.

From a balance sheet perspective, we continue to reduce leverage during the quarter, paying down debt by more than $1.5 million to $17.4 million. Despite the challenges to revenue and margins this quarter, we were pleased to maintain our recent track record of generating free cash flow and paying down debt.

In summary, we will continue to focus on key initiatives to enhance growth and profitability. We will maintain tight G&A management and improve capacity utilization by continuing to win and ramp new business.

Business development efforts will continue to focus on customer-centric clients who value the STARTEK Advantage System, which provides a differentiated customer engagement methodology guided by insights and analytics. We believe our execution of these initiatives has and will continue to position StarTek for success.

As we exit the year and complete our high-grading initiative, we expect to realize the meaningful financial benefits of that process in 2018. I have stated an objective for StarTek is to achieve double-digit top line growth and 25% adjusted EBITDA growth. I stated that if not at those levels you could assume that we will be addressing the challenges and making the necessary changes. We're obviously not at those goals yet, and we certainly do not like the business of replacing revenue.

However, I do believe the high-grading initiative was an important step to achieve acceptable levels of profitability. The strength of our pipeline and differentiation through the STARTEK Advantage System powered by the science of ideal dialogue provides us with confidence these goals are achievable.

Amanda, Don and I will now open up for questions.

(Operator Instructions) Our first question comes from the line of Mark Argento of Lake Street Capital.

This is John on for Mark. I just want to clarify, I know last quarter you stated that your goal was to replace about $86 million of revenue. Would it be safe to say that you are finished now with that high-grading replacement? Or is there a little bit more to go in Q4?

We will be done at the end of Q4.

At the end of Q4? Okay. And then just kind of going over to some of the areas you mentioned where you are seeing strength in health care. Can you talk a little bit more about what's driving that strength, in particular?

Execution on the business that we have, one, differentiation with our service offering of ideal dialogue is really resonating with the clients in that space who are under continued pressures to compete and offer stronger customer experience within their engagements. And I think our approach and certainly the investments we've made in our business development team focused on health care where we've added a few resources has all added to that momentum that we're seeing.

Any other verticals that you're kind of paying special attention to or focusing on?

I mentioned e-commerce as part of our pipeline. We have seen a lot of traction with our customer experience focuses, leveraging our unique customer engagement methodology with ideal dialogue has been recognized by Frost & Sullivan and others as a innovative approach in our industry. We're seeing a lot of traction in e-commerce as well in retail.

Our next question is from the line of Dave Koning of Baird.

And so I guess, first of all, just -- I guess a follow-up on the last question. The high-grading effort, you talked about the replacement and everything by the end of Q4. Does that mean sort of the replacement meaning Q4 will still be down? There's still some revenue to go away from that effort? And then as we enter '18, you start to get some of the higher margin replacement stuff coming on?

It's kind of an all-in process, Dave. So there's a mixture as we're coming through fourth quarter and in throughout the quarter continuing to improve, obviously, from a month-over-month perspective. But still some of that transition working through the system in fourth quarter.

Okay. In the -- kind of the long-term targets of double-digit revenue and 25% EBITDA margin growth, this year is obviously difficult with the movements. But in next year, I would imagine, it's a little tough with the revenue side of it given kind of the entry point into '18. But the EBITDA margin target for next year at least seems like it could be possible just if you're getting rid of lower margin and better margin stuff is coming on?

Yes, profitability -- the profitability part of that goal has always been our priority. And I think that, that will play out in the achievement of that goal as well. So I think you're reading that right, David.

Okay. Good. And then, did you have -- are you seeing a little of the same? I mean it sounds like the iPhone launch not quite playing out as you expected, but are you saying the same difficulty on the AT&T volumes, I think some of your bigger competitors have mentioned as well?

Yes. That's one of our disclosed clients, I believe. So you will see softness in AT&T revenues for sure.

(Operator Instructions) And our next question comes from the line of Omar Samalot, a private investor.

So obviously your revenue high-grading efforts resulted in that year-over-year revenue contraction for the quarter. Do you think that you'll be able to get back on track in terms of year-over-year revenue growth come Q4?

Yes, it's a little close from a guidance perspective, but we're still working through the transition, Omar.

Okay. Sounds good. And in terms of that $86 million in annual revenue that you are -- you hope to have replaced by year-end, can you give us an idea of the magnitude of the gross margin improvement that you expect from this high-grading effort?

I'll say that the revenue that we're replacing it with should be within our threshold gross margin targets.

Okay. You cannot give us a little more of what type of improvement you could -- we should expect, or -- and when we could see some of that improvement show in the results?

I think I said in my script, you'll begin to see the improvements in those -- in that effort certainly in the next year.

Okay. Okay.

If I were to say what the improvement was client by client and everything, it's a just -- it's a number that's difficult to articulate, and not further complicate the issue.

I get it, I get it. We just -- obviously, we are anxious to see the work that you've done in terms of replacing all this revenue. And as said, is it worth the while of going through it all. Obviously, I'm sure it is. But just kind of wanted to get an idea. But I understand.

Unfortunately, I think your article is apropos, short-term pain, long-term gain.

Okay. With all the new business that you're bringing online, do you feel like you're hitting your ramp targets overall?

We've seen a couple of our ramps a little behind schedule depending on site location, and working through some of those challenges. We've had a couple ramps delayed by clients. But still confident that those ramps are going to come through close discussions with the couple of those clients. But all-in-all, I mean, we're definitely in ramp mode, so.

Okay. Okay. Any updates on your expansion plans? I noticed a few days ago an article mentioning a new facility in San Antonio to serve hurricane relief government contracts. I was pretty impressed to learn that within 30 to 45 days you guys had found a location, had it set up and hired over 200 agents. That was pretty impressive. I was wondering if you could share a little bit more on those expansion plans? And are you expecting this just to be temporary site or more of a permanent?

Yes, temporary site, and I didn't really mention any of that within our information. It's really entrée into that type of work for us. And there's some learnings that we have to go through. And it's a little bit unknown as to how quick we can get that up and into billable process and working with the government. We're kind of new to the game there. But obviously, very intrigued and excited to have our first entrée into government work. And we'll have to see how that plays out. And we're seeing it as temporary right now, but certainly, working to try to that to turn that into permanent opportunities.

Okay, very good. All right. I noticed that the nearshore revenue was...

I will say that our IT team has set a new standard. Because once we got address, I think we're ready to go in 2 weeks and then let them know that, that's our new standard for how quick we can launch new sites, so

Careful what you wish for. Nearshore revenue was a bit lower than what I had expected as I assume that the high-grading effort wouldn't impact that segment that much. Maybe you could share a little color there? And if that also impacted the margin that we saw?

Nearshore wasn't affected by any high-grading efforts. That was really just some shifts going on with some of our existing clients, but nothing to cause alarm there. We still have very strong demand for the capacity plans that we have nearshore. And that's really just some lumpiness of the business taking place.

Okay. All right. And finally, I imagine that obviously the growth profit for the quarter must have been impacted by a significant amount in terms of growth investment expenses as you ramp all of these new businesses. Is that a fair assumption?

Yes.

Okay. And even though it was a tough quarter, obviously I was impressed to see that you still were able to lower your debt. I'm assuming that as things pick up for the Q4 does not necessarily what we're going to see.

Yes, when you look at what we anticipate from CapEx and what we're going to invest in AR, that's going to be a difficult goal to achieve in fourth quarter.

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

Well, we thank and appreciate everyone's interest and we'll get back to work. We'll talk to you next time. Thank you.

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