Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

StarTek (NYSE:SRT)

Q1 2013 Earnings Call

May 09, 2013 6:00 pm ET

Executives

Chad A. Carlson - Chief Executive Officer, President and Director

Lisa A. Weaver - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Rob Romano

Omar Samalot

Tom Carpenter - Hilliard Lyons, Research Division

Operator

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek's First Quarter 2013 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 their 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 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 conference to review the 2012 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 today may include some non-GAAP measures in accordance with Regulation G. The company has reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found in the earnings release on the Investor page of their website.

I'll now turn the call over to Chad Carlson, StarTek's President and CEO.

Chad A. Carlson

Thank you, Carla. Good afternoon, and thank you for joining. Revenue was a bright spot at $53.8 million, a 5.8% increase over first quarter of 2012. But I was disappointed that our bottom line demonstrated the lumpiness inherent to our business. I will not be satisfied until we can achieve sustainable, predictable, profitable growth.

The revenue growth reflects a 29% increase, excluding our largest client at this time last year. During the first quarter, we closed 2 new statements of work with one of our larger clients, amounting to an annual contract value of $6.5 million. We also added a new global client through the acquisition of Ideal Dialogue, which I will discuss later.

Our largest client is now just under 25% of total revenue. This is a significant accomplishment and the best in the company's history.

I was pleased with North America results and progress in Latin America, but I am not happy with our Asia Pacific performance. While we expected a drop in bottom line results during first quarter, I did not fully anticipate the magnitude of the impact from poor performance on a few key programs in Asia Pacific. Gross margin of 8.8% compares to first quarter of 2012 gross margin of 10.5%. It is important to point out that the gap to our expectations is primarily from a few specific programs within one site. We are working closely with our clients and have taken the appropriate steps to address this performance. The performance across most programs has improved with our execution focus and the upgrading of leadership talent in key positions.

SG&A expense was aligned with expectations due to the continued focus on cost management, decreasing from 16.4% of revenue in the first quarter of 2012 to 13.5% of revenue in the first quarter of 2013. Although aligned with what we expected, as you know, I'm never satisfied with the level of SG&A expenses. We have recently completed a project to refresh reporting tools. And once we complete the IT platform initiative, we will have Phase II opportunities to further improve efficiencies.

It is important for us to continue enhancing the StarTek advantage system with solutions to differentiate us and add value to our clients. We were pleased to announce the acquisition of Ideal Dialogue during the first quarter. We are in the communication business, and Ideal Dialogue has developed specific methodologies designed to improve the customer experience. Ideal Dialogue will enable new business wins, improve existing performance and continue to offer stand-alone products for clients focused on improving their customers' experience.

The IT platform initiative is important to our future. The goal of this initiative is to improve efficiency and stability; lessen future capital requirements, thus changing a large portion of currently fixed IT expenses into variable expenses; and create a strategic differentiation. We are close to a final decision on this initiative and are confident we will hit these objectives. You can expect to see the impact of this transformation over the next few quarters.

We still have some final elements to work, but expect to reduce ongoing IT expenses by more than 10% per year, and in conjunction with this decision, we will likely write off over $3 million of outdated IT assets. Perhaps the best news will be the improved stability and robust nature of the new platform, providing us the ability to turn out new business quickly and efficiently.

The addition of Jay Kirksey to the StarTek executive leadership team as the Senior Vice President of Human Resources will further our Brand Warrior culture and mission, which is a differentiator for us. His experience and focus on improving the employee life cycle is a great opportunity for StarTek.

In closing, to address our performance issues, we have taken action and made progress, but have work left to do during the second quarter, and I expect Asia Pacific to be more in line with our expectations during the third quarter. We have also shown progress on key strategic initiatives, most importantly, revenue diversification and a leapfrog solution for our IT platform. I am confident we will continue our momentum and expect us to exit this year even stronger.

Carla, Lisa and I will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dave Koning.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Just your comments at the end that are about -- that by Q3, you expect things to be a little more in line with your more typical expectations. Just to understand that a little better, are you kind of saying that by Q3, you'll get back to the profitability similar to what Q4 was? And then by Q4 of this year, I think you said better, you said you expect to exit this year even stronger, meaning stronger than Q4 of last year? I just want to kind of understand the kind of the progression through the year.

Chad A. Carlson

Yes. Yes, I believe on both accounts.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. So kind of we should think about Q2 probably still being a little bit of a loss, Q3 getting back a little more to what last -- the prior -- excuse me, I guess Q4 was like and then Q4 of this year being a little better yet.

Chad A. Carlson

Yes. I think it's important that within our foundation in our business, we're more in line with where we were in the fourth quarter last year, not necessarily this quarter.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes, got you. Yes, and I guess secondly, you've done a tremendous job giving the -- I guess, what we can think of as other clients, the non-top 1 or 2 clients, to grow extremely well. I think what you said this quarter was you grew 29% x your largest client. Did I understand that right?

Chad A. Carlson

Yes, but that was compared to year-over-year. So 29%, excluding our largest client at this time last year.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And did -- is it fair to say that your -- did your 2 largest clients decline year-over-year? I know I'm assuming one continued to decline year-over-year, the other one had faced a pretty tough comp, but was your second largest client up or was that down a little bit?

Chad A. Carlson

Think of it as down, just...

Lisa A. Weaver

Down slightly.

Chad A. Carlson

Slightly, yes, not significantly.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then Ideal Dialogue, you paid, I think, less than $1 million. How big of a revenue contribution will that be? And when did that start contributing revenue?

Chad A. Carlson

It started at the tail of the quarter. We actually paid $1.5 million for that, of which $750,000 was paid down in cash in the first quarter.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. And how much revenue about on an annual basis?

Chad A. Carlson

I'm not going to provide that guidance right now. We were actually doing some business with them as well.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. Okay, and then I guess, just my last question, the cash balance above $7 million and at the end of this quarter, and I know it sounds like you'll pay a little -- you paid a little more to Ideal Dialogue into Q2. You paid, I guess, the rest of it, I'm assuming. How does cash go throughout the year? I mean, if you lose a little bit of money in Q2, maybe where does cash trough during the year and how can we maybe expect that to end the year?

Lisa A. Weaver

David, I'm not concerned about our cash position, as I've mentioned before, between line of credit with Wells Fargo and our cash where -- we don't have any concerns with being able to fund our working capital needs, even with the performance in Q1 and some of the anticipated performance in second quarter.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. Good. Well, I know this quarter wasn't quite what you expected, but good job. You guys have made a lot of progress, so congrats on that.

Chad A. Carlson

Well, thanks, Dave. And you had asked about Ideal Dialogue, I would like to -- one specific to your question. I mean, that was an acquisition really driven by the strategic advantage in addition to our capabilities. It wasn't so much a revenue acquisition. While we do have a client with some decent revenue and some potential upside to it, it wasn't a revenue play. It was a play from a differentiation perspective. And as I spent time with a lot of clients in weighing that decision, they felt that, that would set us apart. So that was some of the driver behind that decision.

Operator

[Operator Instructions] Our next question comes from the line of Rob Romano with 1st Source Bank.

Rob Romano

Could you give us the new business wins for the quarter?

Chad A. Carlson

$6.5 million, 2 statements of work, in annual contract, okay?

Rob Romano

Okay. Any progress with the real estate?

Lisa A. Weaver

Yes, we continue to market those properties. We're obviously not going to do a fire sale, but we've got some interest. And one market we're really going through and trying to get a price right relative to what's going on in that Greeley market, specifically, but I'd say no material updates at this point.

Rob Romano

Okay. And could you talk of a little bit about -- your costs of services were up significantly year-over-year, and I'm assuming that had to do with the execution in Asia. Can you just provide a little color on what happened around there? And why was it such a spike in the cost of services?

Lisa A. Weaver

Yes, you're exactly right. It is primarily driven by what's happening in Asia Pacific in terms of the margin performance. If you look at the gross margin year-over-year on that segment, you can see the decline.

Rob Romano

What actually happened?

Chad A. Carlson

We had 4 elements that we expected in the first quarter. One was our closure of the Cornwall facility. We had an impact from that. We had some incremental temporary capacity cost that we brought on fourth quarter. We also had a planned shift on some business from Asia-Pac to Latin America for one of our clients. And then we had the seasonal peak, and then we had, as I mentioned, some performance concerns. So really, 5 things, 4 we were planning and expected and 1, obviously, performance issue that we're addressing.

Rob Romano

Okay. Okay. And why should we -- I guess the question regarding execution, why should believe this is going to be 1 and 2 quarter event and then things will be fine by the second half? I mean, what gives you confidence in that things are going to be much stronger in the second half?

Chad A. Carlson

Well, we're deep into it. I'm confident in the level of dialogue with the client, the steps that have already been taken, the leadership, and as well as some leading indicator results that I'm already seeing at our more daily management reporting. I know that Rod Leach, our head of operations, and some of his team members have just got back from the Philippines. I'm going over there next week with Jay Kirksey, our head of HR. And Rod and the team will be back over there shortly after that. So the intensity is there. We definitely have a stronger leadership in place today that are beginning to turn those results, that has me speak to those key indicators. And we're starting to see some of those improvements with our client scorecards, and as well as attrition and things of that nature. So I'm seeing some leading indicators that made me feel comfortable enough to put that expectation out there on where we would see the turn of those -- that impact.

Rob Romano

Okay. That's good. But it's safe to say that some of these issues are going to go into Q2 also?

Chad A. Carlson

Yes. We still have some things to take care of.

Operator

[Operator Instructions] Our next question comes from the line of Omar Samalot with Independent Analysis Corp.

Omar Samalot

Obviously, disappointing, I guess, versus the stellar quarter last quarter, but it is a turnaround at the end of the day, and as you say, you had plenty of lumpiness. I guess, let me tackle Philippines first. Was that drop in revenue from last quarter mostly due to FTE counts/production? Or due to lower ASPs per FTEs?

Chad A. Carlson

We had a seasonal -- quite a bit of a seasonal drop and actually, a lot of our revenue coming online helped counter that, Omar. So there's a lot of movement between the seasonal dips and bringing new business online. And then as I mentioned earlier, a transition of some business from Asia-Pac to Latin America.

Omar Samalot

Okay. All right. You've mentioned the operational challenges you've got there in the past. Was this quarter's performance a direct result from those challenges?

Chad A. Carlson

Yes. We've made progress, so it's really one of our key programs right now, and we have made progress on several other programs there. And I would say, as of today, there's really 2 that we're really still focused and digging on. But I'm pretty confident we'll begin to turn those with a few more elements that we'll do this quarter and see the result in the third quarter.

Tom Carpenter - Hilliard Lyons, Research Division

Okay. All right. Are you still using that temporary space there in Manila? Was that -- and if so, was that for seasonal work?

Chad A. Carlson

Yes. And it was to capture a lot of the opportunity we had for new revenue in the fourth quarter that we just didn't have space for, but with the seasonality, with some of the transition of work to LatAm that I mentioned and -- we felt we needed to take that opportunity and grab that business. And we'll be out of that site by the end of the second quarter.

Tom Carpenter - Hilliard Lyons, Research Division

Okay. Did you think that, that contributed a little bit to the performance on the gross margin side?

Chad A. Carlson

Yes. It had over $400,000 impact to us in the first quarter versus fourth quarter.

Omar Samalot

Okay. In Latin America, it seems like you guys are ramping pretty aggressively in Honduras. Can you talk a little bit about the performance there?

Chad A. Carlson

Yes, we're very pleased with our performance there, as well as our client is.

Omar Samalot

Okay. In the U.S., I know that you guys recently won a #1 position in Mansfield national facility for one of your biggest clients in terms of performance. Could you -- is that something that you can talk about? What made that happen? And would you expect new business wins from -- as a result from that, either from that client or maybe others?

Chad A. Carlson

Yes, I mean, leadership, we have a solid SOP and then the execution of that SOP being standard -- our StarTek Operating Platform, which is our operating procedures or processes. So strong leadership, strong execution and a good culture being driven in that site. And it has absolutely helped us to turn the tide of our brand with that large client that you're mentioning, and some of the new ones we've had late last year and early this year are coming, I think, from that better relationship and performance with that client.

Omar Samalot

Okay. And is that -- I mean, obviously, that's something you're looking to replicate in the other facilities globally, I guess?

Chad A. Carlson

Absolutely.

Omar Samalot

Okay. Can you talk about business overall in the other U.S. facilities that you have been trying to get sales?

Chad A. Carlson

Yes, overall, I'm pleased with the U.S. It has good results. We did -- we still have quite a bit of capacity left in one of our sites and we're selling to it all the time. But as you know, as we have in the past, we always assess our capacity and look to try to optimize that capacity utilization.

Omar Samalot

Right. Okay. Generally, on your SG&A, I know that you're never satisfied with that. Do you have -- do you clearly have more operating leverage with your current support to get more growth? Or would you have to add more support to that level?

Chad A. Carlson

Yes. We have more operating leverage. We also have some other initiatives underway, one, specifically, that Jay Kirksey is leading right now. And as I mentioned, once we completed our IT platform, I believe we'll have Phase 2 opportunities for driving more efficiencies there from a corporate standpoint with a lot of our systems and reporting and support.

Omar Samalot

Okay. So it sounds like you do have, you still have some operating leverage, and on top of that, there might be some savings down the line?

Chad A. Carlson

Yes.

Omar Samalot

Okay. And talking about that IT platform initiatives, do you have an idea of cost at this point of how much that will cost? And would those be capitalized when they happen?

Chad A. Carlson

You're talking about cost as far as one-time transition costs or...

Omar Samalot

Well, I'm not sure, because I'm -- I don't know if it's going to increase your fixed costs or if it's a one-time there or I don't know.

Lisa A. Weaver

Yes, we do have an idea on what the costs are. Obviously, at this point, Omar, we're still sorting through the savings, when the savings will hit and then what the impact of any potential one-time transition cost would be, but we don't think that they'll be material this year, other than what Chad mentioned in his initial comment about the write-off of some outdated IT assets.

Omar Samalot

Right. Okay, got it. And those -- and I guess, those costs would be eventually be capitalized. I mean, we're talking about -- or would they be expensed?

Lisa A. Weaver

We're still going through that right now.

Operator

Our next question comes from the line of Adam Goldstein.

Unknown Analyst

I've got a couple of questions, one about Ideal Dialogue. Is this new company at least -- is it profitable, or is it -- and cash flow positive?

Chad A. Carlson

Yes.

Unknown Analyst

Okay. And my other question is about these performance problems in the Philippines. I was wondering if you could give a little more explanation of how it is -- I guess I'm having some trouble understanding how it is that performance problems caused a reduction in gross margin. Is it something -- I mean one possibility is that there are fines from the client. If something's wrong with the scorecard, then they dinged you on revenue? Or is it training costs? I'm just trying to understand how it is -- what it really means when there are performance problems and how it hits the gross margin like that.

Chad A. Carlson

Okay. When we look at the profitability by program internally, and you have an expectation of that profitability by program contributing to your gross margin performance, and so when you have weakness on those programs and they're not producing the profitability you expect, then that kind of falls straight through to your gross margin line. And so with the couple of those programs I discussed, yes, there's a penalty for poor performance as a percent of revenue. We also had some significant attrition on those programs that we were doing a lot of training for and really making sure we have the right skill sets in place and a lot of off-line training resource are being put in to help the situation. And then just overall staff efficiencies while we're working through some of these challenges that we have. Did that help out?

Unknown Analyst

Yes, yes, that does.

Operator

[Operator Instructions]

Chad A. Carlson

Okay. Thank you for joining, and we'll get back to work.

Lisa A. Weaver

Thank you.

Chad A. Carlson

Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: StarTek Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts