StarTek Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.12.13 | About: Startek Inc. (SRT)

StarTek (NYSE:SRT)

Q2 2013 Earnings Call

August 12, 2013 5:00 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

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Omar Samalot

Howard Smith - First Analysis Securities Corporation, Research Division

Operator

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek's Second 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 received a copy of today's earnings press release, please go to www.startek.com, where you can download a copy at 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 this call 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. Please proceed, sir.

Chad A. Carlson

Thank you, Celia, and thank you, all, for joining. Second quarter of 2013 revenue of $55.6 million grew more than 25% over the same quarter of last year, and our revenue diversification has greatly improved. This is a strong testament that the execution and solutions brought to our clients through the StarTek Advantage System are producing results and generating value for our clients.

Our new business signed during the quarter was $12 million, which includes 1 new logo and brings our year-to-date new business to $18.5 million. We have invested in solution capabilities, the operating platform and how we engage and build trust with our clients, and I'm pleased to see these efforts paying off with organic revenue growth.

Gross margin improved overall, with both North America and Latin America up and Asia Pacific relatively flat, held down mostly by significant ramp up in program conversion costs associated with new business. The operating challenges I discussed in the Philippines last quarter are largely behind us. We have closed the temporary capacity we had in the Philippines and are currently ramping in our new provincial site in Angeles City, Philippines.

Adjusted EBITDA for the quarter was just under $2 million, and the cash balance at the close of the quarter was $10 million.

Over the past few months, we made significant progress in line with our strategic plan. As previously discussed, the acquisition of Ideal Dialogue; further progression of the IT platform initiative and most recently, solidifying our move into the health care services vertical; differentiating our services for clients; and diversifying our revenues are key to accomplishing sustainable, predictable and profitable growth, and these moves will all contribute to this.

SG&A was down 7.7% year-over-year, reflecting continued focus on efficiencies, and has now decreased to 13% of revenue.

We also recently promoted Pat Hain to lead our IT organization and Emily Millar to lead our Clients Solution and Strategy. I'm proud of the team we have built, and we are committed to generating value for our stakeholders.

Celia, Lisa and I will now open the line and take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Tim Wojs from Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

I guess, just my first question really, if you go back to last quarter, you guys had talked about Q2 really being, at least from an operational standpoint, maybe in a trough in terms of profitability and you should see an improvement in Q3 and in Q4. And I just wanted to get an update from you guys on that aspect.

Chad A. Carlson

Yes, I believe that's still an accurate picture, Tim.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. So as we exit the year in Q4, you guys feel pretty confident that you'll be able to exceed where you were in Q4 last year?

Chad A. Carlson

I won't set that expectation, but we'll certainly be in the ballpark.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay, okay. And then, I guess, just to touch on gross margins in both the domestic and the Asia Pacific business, I guess, first on the domestic business, is kind of the low to mid-teens gross margin pretty sustainable, or is there something there that can kind of ebb and flow, or I guess, how should we think about that as some of the wins you guys are putting out or are ramping?

Chad A. Carlson

I think with solid utilization of both personnel and continue to focus on our asset utilization, and that's certainly the range we like to operate in.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, I guess, just on Asia Pacific, the margins there have been a little bit closer to 10% or 11% the last couple of quarters, and if you look at last year, you had gross margins there closer to the low-20s, maybe even the mid-20s. So I know you've had some challenges or some one-time expenses during the first half, but, I guess, could you bridge for us how you guys get back to that 20%-ish gross margin level in Asia Pacific?

Chad A. Carlson

Yes, our expectations for gross margins for Asia Pacific have not changed, and we believe we can get back into those levels. It will be somewhat dependent on the ramp-up of our new facility there, which we're off to a good start.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, I guess, just my last question, could we get the revenue concentration for both your 2 largest clients?

Lisa A. Weaver

Yes. For AT&T, for the quarter, Tim, a little over 26%; and for T-Mobile, a little over 27%.

Operator

The next question comes from the line of Omar Samalot, Independent Analyst Corporation.

Omar Samalot

In terms of the -- can you expand a little bit more about that new facility in the Philippines, are you opening, and how far along is it being ramped already?

Chad A. Carlson

Yes, we've already started hiring for our first client into there, and we have some good progress on a couple other programs coming shortly after that. So I'm pleased with our start there.

Omar Samalot

Okay, so it seems like you already have committed business for that. Did Q2 see any training ramping costs for that facility at all?

Chad A. Carlson

Yes.

Omar Samalot

Okay. On the margin improvement, the domestic, did the margin improvement expected in Canada help a bit there?

Lisa A. Weaver

It did a little bit, Omar.

Omar Samalot

Okay, great. And in terms of the new business that you've signed this quarter, can you expand a little bit more on what you've been able to sign? And, I guess, congratulations are in place for finally landing a health care client. I know that was a goal for you guys.

Chad A. Carlson

Well, the health care piece was subsequent to the close of the quarter, so that was a small acquisition we made, but I think important in an area we're very excited about. As far as the new business goes, 1 new logo and then quite a bit of organic growth and expanded programs with some existing clients.

Omar Samalot

Okay. And then your acquisition, are you buying revenue at all there? Is it strategic? How should we think about that?

Chad A. Carlson

Strategic, but there's a little bit of revenue there.

Omar Samalot

Okay, and it's related to the health care logo?

Chad A. Carlson

Yes.

Omar Samalot

Last question for me. I believe that last quarter, there was -- I think you indicated something like an IT asset write-down charge. I'm not sure I saw much of it this quarter. Is that still on the -- pending?

Chad A. Carlson

Yes, you'll see that in the second half, and it'll probably come in the form of accelerated depreciation. But we're still working through the details of that.

Omar Samalot

Okay, and I'm imagining it's completely directly related to the new IT platform that you're implementing?

Chad A. Carlson

Yes.

Omar Samalot

Is that implementation on track, or is it delayed a bit? How would you characterize that?

Chad A. Carlson

It's underway now. I mean, it's been a lengthy project, and we're not fully through all of the decision points on it yet. But the -- some of the significant components of it we have had decision points on, and we're in implementation mode now.

Omar Samalot

Okay, so at this point, we still haven't seen any of the, let's call it, cost savings or efficiencies of that platform yet?

Chad A. Carlson

No.

Operator

[Operator Instructions] The next question comes from the line of Darius Noory [ph].

Unknown Analyst

I just have 1 question for you guys. T-Mobile's been reporting some good subscriber growth recently. I wanted to know if you could talk a little bit about how that is impacting or could impact your relationship with that client.

Chad A. Carlson

Yes, I think our execution with the client has been strong over the past couple of quarters. And as long as we continue to execute well, I think those opportunities will bode well for us.

Unknown Analyst

So are you starting to see that subscriber growth in the demand for the -- from calls from that client?

Chad A. Carlson

I missed the first part of your question.

Unknown Analyst

Meaning, are you guys -- with having more subscribers signing on, the need for call services goes up, so are you starting to see that at all on your end?

Chad A. Carlson

I think there's opportunity there for us.

Operator

[Operator Instructions] We have a question from the line of David Gearhart, First Analysis.

Howard Smith - First Analysis Securities Corporation, Research Division

Actually, Howard Smith here at First Analysis. 2 questions. One, I just wanted to follow up on the ramp-up in Asia, in the province, it sounds like you have some net new business or new programs, but you're also transitioning some of your existing work from one facility to another. I just want to make sure I understand that right. And maybe, order of magnitude, what's kind of transitioning from one place versus kind of net new?

Chad A. Carlson

The new logo won in second quarter is part of that. We have some work that we are transitioning from one of our other sites. And we also have new programs that have been added from one of our existing clients.

Howard Smith - First Analysis Securities Corporation, Research Division

Great, that's helpful. And then, just a clarification of the one-time, actually, benefit not charged, can you just remind me what that is about? Is that a building or...

Lisa A. Weaver

Is that in restructuring, Howard? Is that what you're talking about?

Howard Smith - First Analysis Securities Corporation, Research Division

Yes, the restructuring, exactly.

Lisa A. Weaver

Yes, that was a restructuring reserve we put out for one of our U.S. sites that closed a couple of years back. And we didn't need the entire reserve, so we reversed the balance of it out for some fees that were being paid by the subtenant there.

Operator

The next question comes from the line of Adam Goldstein [ph], private investor.

Unknown Attendee

So my first question is again about the Asia Pacific gross margins. When you say you think you'll be able to -- or your expectations haven't changed, are you -- could you give us a little better feel for what is your expectation, like is it mid-20s, low-20s -- or they used even talked about 30%, I think, the previous management. So any kind of color on that would be helpful.

Chad A. Carlson

Yes, north of 20%.

Unknown Attendee

North of 20%, okay. And how about -- I think the other -- another person asked about domestic, and I think you said low to mid-teens, what about Latin America?

Chad A. Carlson

Better than that. So if you think about the 3 markets we're in, it kind of tears in that way, domestic, LatAm and then Asia Pacific.

Unknown Attendee

Okay, let's see here. I remember, last quarter, you talked about something holding down your domestic gross margin was that one of your largest facilities in the U.S. was very underutilized. I was curious if you made any progress towards filling up that capacity or if -- or perhaps if that business could be consolidated elsewhere.

Chad A. Carlson

Yes, we haven't made progress on that particular facility yet, but -- and we certainly keep all options on the table to address those areas.

Unknown Attendee

Okay, so the gross margin you're getting now is despite the lag being dragged down by that large facility there, right?

Chad A. Carlson

Yes, correct, as well as being in a very immature market with our Canadian site. So we have a couple of things that are some headwinds on our North American gross margin performance.

Unknown Attendee

Okay. Now in this new site in Angeles City, can you give -- I'm curious about how much new capacity you're adding there, like, could you maybe give a ballpark in terms of maybe percentage increase in seat capacity or some kind of indication of how much new capacity we're talking about?

Chad A. Carlson

I'm trying to think how to shape that out for you.

Unknown Attendee

All I know it's a little bit...

Chad A. Carlson

It's in the 500 to 800 seat range, I'll say.

Unknown Attendee

Okay, that's good. Let's see, okay, so this new health care service vertical, this one, I guess, came through the Ideal Dialogue acquisition, is that it?

Chad A. Carlson

No. It's a separate transaction.

Unknown Attendee

Oh, there was another -- that wasn't announced. Was it too small to be announced, or what?

Chad A. Carlson

Yes, and for competitive reasons, we're keeping that somewhat quiet, I guess.

Operator

We have a follow-up question from the line of Tim Wojs from Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Me again, just 2 other questions. One, how much do you guys expect to spend in CapEx in 2013?

Lisa A. Weaver

We'll spend a little more than we did in the first half, Tim. The first half was a little late, some of the growth in new business coming out. We expect it to be higher in the second half.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay, okay. That's helpful. And then just as you look at Q3, do you guys have an expectation that you'll be profitable next quarter?

Chad A. Carlson

With the accelerated depreciation, I think that will be difficult for us to do this year, but it will be more due to the accelerated depreciation with the IT platform initiatives, Tim.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay, so in Q3 -- basically in Q3, it's going to be tough, and then for the year, it sounds like you guys won't be able to -- that will kind of drag down the year.

Chad A. Carlson

Yes. But I think it sets the stage well for us looking into the following years. We're pretty pleased with the savings and the opportunity we have to really get a solid platform that's very efficient in nature.

Operator

Ladies and gentlemen, this will conclude today's question-and-answer portion of today's conference. I would now like to turn the call back over to Mr. Chad Carlson for closing remarks. Please proceed.

Chad A. Carlson

Thank you, everyone, for your interest. We'll talk to you next quarter, and we'll get back to work.

Operator

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

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