Startek, Inc.
Q3 2014 Earnings Call Transcript

Published: 14 Nov 2014

[Operator:]

Good afternoon, everyone and thanks for calling in. It is my pleasure to welcome everyone to StarTek’s Third Quarter 2014 Earnings Call. I'm joined on the call today by StarTek’s President and Chief Executive Officer, Chad Carlson; and Chief Financial Officer, Lisa Weaver. Chad will deliver some brief commentary today. At the conclusion of Chad’s prepared remarks, Chad and Lisa will conduct a question-and-answer session. For those of you, who have not yet received a copy of today’s earnings press release, please go to www.startek.com where you can download a copy from the Investors section of the website. Please note 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 and uncertainties and actual results may vary materially from these projections. StarTek advises all those listening to this call to review the 2013 Form 10-K posted on the 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 basis measurements. The reconciliations can be found in the earnings release on the Investor page of the website. I'll now turn the call over to Chad Carlson, StarTek’s President and CEO. Please proceed.

[Chad Carlson:]

Thank you, [Willy] (ph), and thank you all for joining us today. I'm proud this year's StarTek's progress and results for the third quarter of 2014. We continue to execute our strategic plan while improving operational execution. We continue to win new clients and business. During the quarter, we signed seven new clients and added two new programs with existing clients equating to $23 million annual contract value. Year-to-date we have added 15 new logos and $43 million of annual contract value, doubling the number of logos from early last year. Revenue grew 5.2% year-over-year. Diversification is greater and opportunities continue to increase as clients recognize the value of the StarTek Advantage System and trust us to execute. Gross margin increased to 14.7% from 11.2% versus same quarter last year. Overall operational performance and capacity utilization improvements is responsible for this result. Noteworthy is that third quarter gross margin was penalized 240 basis points due to ramp related and new capacity investments. We completed the closure of Costa Rica and announced the openings of Myrtle Beach, South Carolina and Iloilo in the Philippines. SG&A finished at $7.5 million, or 12.2%, which is flat as percent of revenue for last year. The dollar cost -- variable cost increase was due mainly to healthcare vertical investments and our new revenue expenses. Operating income finished at $300,000, almost a $1 million up from last year and included a $1.3 million restructuring charge primarily due to the Costa Rica closure and our IT transformation. EBITDA was $5 million, or 8.2%. Without the new site in Costa Rica, EBITDA was 10.6%, reflecting the impact of continued growth and resolution of underperforming capacity. Subsequent to the end of the quarter, we acquired CCI, a company focused on receivables management, primarily in the healthcare market. This further expands our receivables management breadth, and deepens our service offering to the healthcare market. Also subsequent to quarter-end, we strengthen the leadership team with the addition of Kamalesh Dwivedi as CIO. I'm very happy that Kamalesh saw the opportunity in StarTek's unique culture and StarTek Advantage System, particularly with regard to our IT platform initiative. Kamalesh has long been regarded as an IT leader with over 30 years of experience and has held leadership roles for large global companies, most recently with Bellsystem24 in Japan. He has the right experience and leadership style can lead the team to the next level. I will now like to take a couple of minutes to update on progress across several key initiatives. The healthcare vertical has surpassed expectations for this year. We will complete the year with approximately $10 million in revenue and seven new logos focused in two new sites. Including our two recent acquisitions in healthcare, we now serve over 130 healthcare providers. We have built an experienced team to provide valuable services to healthcare clients and execute our plans. Back office, non-voice services are running over $30 million of annual as revenue. Receivables management is now running over $25 million of annualized revenue including the CCI acquisition. The IT platform is nearing completion and we have realized cost proceed savings of over 41%. We have experienced some delays and our coordinating final transition dates client and will be fully complete early in the first quarter of 2015. A significant amount of the efficiency gains are being realized and we expect minimal restructuring charges going forward. Ideal dialogues, diagnostics will be part of StarTek's co-analytics offering in 2015, creating business in customer engagement insight for our clients. Four new sites with 2,500 new seats have been completed with $9.5 million of capital investment providing capacity for an incremental $80 million of revenue growth. We now have revenue in eight verticals, communications, media and entertainment, retail, healthcare, education, financial services, utilities, and non-profits. The focus of StarTek is now execution, continuous improvement, and growth. Growth will continue to dilute financial results while we bring our more capacity and new business. However, as we scale the dilutive effect of growth will become more muted and the risk of client concentration will lessen. We have greatly diversified our revenue base as well as the services we provide. I'm confident the pieces we have put into place will bode well for the future and our ability to continue building value for our shareholders. As always we will deploy balance, long-term approach to build a stronger and more successful company. [Willy] (ph), Lisa and I will now take questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of David Koning with Baird. Please proceed.

[David Koning:]

Yeah, hey guys. Nice job raising profitability.

[Chad Carlson:]

Thank you, David.

[Lisa Weaver:]

David.

[David Koning:]

Yeah. Thanks. And I guess my first question, you mentioned EBITDA 10.6% on an adjusted basis this quarter and minimal restructuring charges going forward. Does that mean that EBITDA margin is pretty sustainable going forward?

[Chad Carlson:]

Taking growth into account, yes.

[Lisa Weaver:]

Yes.

[Chad Carlson:]

We will continue growing David.

[Lisa Weaver:]

Yeah. The 10.6% is adjusted for the impact for the capacity we invested in this year what Chad eluded to earlier as the 240-basis point impact on gross margin. Obviously, a big part of that impacted EBITDA as well and then with Costa Rica out of the mix, which we finalized in third quarter.

[David Koning:]

Got you, okay. And maybe you can just talk a little about the acquisition, how much accounts receivable management revenue does the acquisition provide? And then how much did it cost? And maybe what was the date of the acquisition?

[Lisa Weaver:]

Yeah. The date was October 1st, and it was $4.3 million of which about $2.6 million as paid on 10/01 and then the balance we paid out over two quarters and we're not -- I'm sorry, two years not two quarters David. And we're not -- we don't really want to disclose the financials of the acquisition right now.

[David Koning:]

Okay. Okay. And then I guess finally just -- maybe you can give a little -- in the past, you've given, I know the 10-Q we'll get data on AT&T and T-Mobile and a couple of other larger ones, Comcast and Time Warner. Can you just give kind of a breakdown of how much revenue -- or a percentage of revenue?

[Lisa Weaver:]

Yes. So, T-Mobile is up to 31.9% in the quarter, AT&T is down to 22.1%, Comcast at 14.8%, and Time Warner Cable is 11.1%.

[David Koning:]

Got you. Okay, great. Well, thank you. nice job.

[Chad Carlson:]

Thank you, David.

[Lisa Weaver:]

Thanks David.

[Operator:]

Your next question comes from the line of Marco Rodriguez with Stonegate Securities. Please proceed.

[Marco Rodriguez:]

Good afternoon guys. Thanks for taking my questions.

[Chad Carlson:]

Good afternoon.

[Marco Rodriguez:]

I was wondering if you could -- hey I was wondering if you could talk a little bit about your capacity utilization levels. If you can kind of help us understand kind of where you are right now versus your expectations at the start of the year? And any sort of quantifying metrics that you can perhaps provide to help us kind of understand little bit better the improvement you saw sequentially here?

[Lisa Weaver:]

Yeah, I mean, as you know from past calls we don’t disclose what our capacity utilization figures are, but I will tell you that we exited the quarter with a much healthier footprint with about 11,600 seats, 37% of that was here in the U.S. and Canada and the balance in the Philippines and Honduras. We are pleased with the way the new capacity is ramping. As Chad mentioned, we closed another 23 million of business this quarter that’s ramping. And with Costa Rica and Jonesboro out of the mix again, we think, we've got a healthy footprint in all three geographies.

[Marco Rodriguez:]

Perfect. That’s very helpful. And then in terms of the new business that you just signed and you mentioned in your prepared remarks, can you give us a sense as far as how that’s going to ramp over the next few quarters?

[Lisa Weaver:]

It will be pretty consistent with what we've seen historically, maybe a little quicker though, because a significant part was healthcare. So typically you see about a quarter ramp, about 25% ramp over four quarters, but I think we feel pretty good that this still ramp a little faster. As I mentioned, a big portion of it was healthcare which tends to have shorter training time.

[Marco Rodriguez:]

Got it. And just a clarification, I wasn’t able to write down and follow some of the numbers you were talking about, four new sites with 2,500 seats that are done, just confirming that. And then also did I catch you said that would add an incremental 80 million of revenues and I'm assuming that’s a full capacity?

[Lisa Weaver:]

Correct.

[Marco Rodriguez:]

Got it. Okay. And then just last quick question, if I might. Not looking for any kind of specific guidance here, but I want to sort of kind of think about fiscal 2015, what sort of goals might you be thinking about in terms of seats? Any other expansion to verticals or M&A, anything, that might be helpful.

[Chad Carlson:]

We'll look to deepen our exposure in some key verticals and it's probably going to be in line with what the vertical list that is shared. We've always held an opportunistic position around M&A and we will continue to be in that mode. And really the focus of the organization is on execution, continues improvement in revenue and so I would expect us to continue to add capacity as it makes sense.

[Marco Rodriguez:]

Got you. And just one quick housekeeping item on the acquisition, will be filing an 8-K in regard to their financials?

[Lisa Weaver:]

No.

[Marco Rodriguez:]

Got it. Thanks a lot guys.

[Chad Carlson:]

Thank you.

[Lisa Weaver:]

Okay, thanks, Marco.

[Operator:]

Your next question comes from the line of David (Inaudible). Please proceed.

[Unidentified Analyst:]

Hey Chad. Hey Lisa, how you are doing. Thanks for taking my call.

[Chad Carlson:]

Hey, Dave, we are good. How are you?

[Unidentified Analyst:]

No, not too bad. Just to go back to the acquisition, just curious if this is an outbound focus company, I'm assuming it is?

[Lisa Weaver:]

Yes.

[Chad Carlson:]

Yes.

[Unidentified Analyst:]

Okay. And then is this -- would you say this is kind of departure from your current business and is this -- their capability is something that you think you can sell into your existing base?

[Chad Carlson:]

It's really an enhancement. It's one of the reasons I gave additional color on the diversification that we have within the organization. We actually have now over 25 million of annualized revenue and receivables management business. So we do receivables management. This is deepening of our receivable management expertise and particularly how it crosses with the healthcare industry; it fits in our healthcare vertical focus. So I do not see it as a departure, rather deepening and an added breadth of our service offering in our healthcare vertical development.

[Unidentified Analyst:]

Okay. Well, that's it for me. Thanks a lot.

[Chad Carlson:]

Yeah, one thing I do want to just clarify there. Our strategy to be will be little more clearance specific on our receivables management. It is work we do clients and direct for clients, so first and third-party direct with clients. We are not interested in taking on paper and debt buyer activity in receivable management. So that’s probably an important clarification for you on our receivable management strategy.

[Operator:]

(Operator Instructions) Your next question comes from the line of Omar Samalot with Independent Analyst Corp. Please proceed.

[Omar Samalot:]

Hey, guys.

[Chad Carlson:]

Hey, Omar.

[Omar Samalot:]

Awesome quarter. Congratulations.

[Chad Carlson:]

Thank you.

[Lisa Weaver:]

Thank you.

[Omar Samalot:]

Might want to point out that 5 million in EBITDA is -- been the highest on record since five years ago, so that’s quite an achievement. So I'm very proud of you guys.

[Chad Carlson:]

Thank you.

[Omar Samalot:]

First of all, could you break down for me the 1.3 million in restructuring charges between Costa Rica and the IT platform?

[Lisa Weaver:]

Yes, it's about half.

[Omar Samalot:]

Half and half, okay.

[Lisa Weaver:]

There is a little cleanup in there for some other corporate restructuring and Jonesboro of a couple of hundred thousand, so I would say just to be a little more specific, probably 500,000 Costa Rica, IT and the rest is Jonesboro and some other corporate restructuring cleanup.

[Omar Samalot:]

Okay. Understood. Now that this is the last quarter that will see an impact from Costa Rica, would you be able to quantify for us that impact on the gross margin on the Latin America segment gross margin?

[Chad Carlson:]

You will see the effects in our results going forward will strength and you will see that for extent this quarter. But we do have a new site coming on in Honduras in Tegucigalpa. So you will see some of that -- the little effect of the new site opening.

[Omar Samalot:]

So that site is opening in Q4?

[Chad Carlson:]

Well, we are already in operation in a temporary facility. But we will be coming -- early next we will be getting into the permanent site with more expansion space.

[Omar Samalot:]

Okay, got it. Can you go little bit into the improvements that you saw in the gross margins for the Asia Pacific segment, it was -- let me know it was quite nice?

[Lisa Weaver:]

Yeah, we saw improvements in our operational efficiencies and performance in Ortigas, which you will recall was a site that we struggled with for a few quarters last year. Some of that was certainly pricing related, but then it was also, as I said, just improved efficiencies in labor utilization. And then the mix of the sites there too, Angeles came on last year and they are performing nicely.

[Omar Samalot:]

Okay.

[Chad Carlson:]

We’re pretty pleased with the discipline that the combined operational FP&A teams are having -- focusing on our productivity and bill to pay elements within the different operations.

[Omar Samalot:]

Okay. You guys have been breaking out for us the cost of investment in growth related expenses from the gross margin for the past three or four quarters. By when would you expect those expenses to end as they relate to the current capacity increase wave, you want to call it or…?

[Lisa Weaver:]

Yeah, I would like to think if it relates to the current capacity that that would be mid-2015. But then obviously if we continue to grow at double-digits year-over-year we would look to invest in traditional capacity next year that could be dilutive -- that will be dilutive.

[Omar Samalot:]

Right, great. Got it. Okay. Okay, some of your competitors have higher seasonal volumes overall as it relate to last year, for example, during this back half of this year. Are you experiencing similar kinds of volumes?

[Chad Carlson:]

On some programs, yes, we've had some seasonal strength, yes.

[Omar Samalot:]

Okay, all right. It seems like now -- obviously, and looking at your results with the IT platform mostly implemented and the underperforming sites kind of dealt with your focus seems finally to be shifting from away from legacy issues into other things. Is that a fair statement? Can you maybe talk a little bit about that?

[Chad Carlson:]

Execution, continues improvement and growth, that's our focus.

[Omar Samalot:]

Perfect, no more dealing with legacy stuff. I noticed a sale of assets proceeds of $425,000 there, could you tell me what that was?

[Lisa Weaver:]

Yeah, that was related to some equipment we sold in one of our Philippines locations. We've been working to address our -- one of our sites in the Philippines, it's not in a great location for us and we're -- we've announced actually locally in the market there that we were going to be moving to another facility in Metro Manila, and reducing the footprint a little bit. But as a result we've already started to consolidate and sell off some of those assets.

[Omar Samalot:]

Okay, are we going to see some type of restructuring charges or anything in that -- from that move?

[Lisa Weaver:]

No.

[Omar Samalot:]

Beautiful. Okay. And finally on the income tax, I noticed a little bit higher than usual, is there anything out of whack there? I know that usually you have to accrue for the Canadian operation?

[Lisa Weaver:]

Yeah. No, that’s nothing. It's not cash tax, very little of its cash. It's basically the reversal of the large credit we took last quarter you asked about. Again, when you look at the gain or loss that’s hung up in other comprehensive income, you have to take -- you have to tax effect it on a year-to-date basis.

[Omar Samalot:]

Got it, got it.

[Lisa Weaver:]

So, we had to reverse all of the gain we recognized year-to-date with this $650,000 expense in Q3.

[Omar Samalot:]

Okay, understood. Well, guys thank you very much and congratulations.

[Lisa Weaver:]

Thanks, Omar.

[Chad Carlson:]

Thank you.

[Operator:]

There are no further questions in queue at this time. I will now turn the call back over to management for closing remarks.

[Chad Carlson:]

Well, thank you everybody. We appreciate your interest. We will get back to work and talk to you next quarter.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.