StarTek's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.24.14 | About: Startek Inc. (SRT)

StarTek, Inc. (NYSE:SRT)

Q4 2013 Results Earnings Conference Call

February 24, 2014 5:00 PM ET

Executives

Chad Carlson - President and CEO

Lisa Weaver - Chief Financial Officer

Analysts

Omar Samalot - Independent Analyst Corporation

Dave Koning - Baird

Operator

Good afternoon, everyone, and thanks for calling in. It’s my pleasure to welcome everyone to the StarTek’s Fourth Quarter 2013 Earnings Conference Call. I am 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 remark, Chad and Lisa will conduct a question-and-answer session.

For those 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 Security Laws. These statements are subject to various risks and uncertainties, and actual results may vary materially from the projections. StarTek advises all of those listening to this call to review the 2012 Form 10-K posted on their website for a summary of those risks and uncertainties. StarTek does not undertake the responsibility to update those projections.

Further, the discussion today may include some non-GAAP measures in accordance with the Regulation G. The company has reconciled this amount back to the closest GAAP basis measurements. These reconciliations can be found in the earnings release on the Investor page of the website.

I will now turn the call over to Mr. Chad Carlson, StarTek’s President and CEO. Please proceed.

Chad Carlson

Thank you, Jackie and good afternoon everyone. Our goal is to achieve sustainable, predictable, profitable growth; winning new business from existing clients is a preferred step in this process because it proves that the StarTek Advantage System delivers results clients, value. Closing 2013 with 16.7% revenue growth over 2012 is proof to current and potential new clients that StarTek is viewed as a trusted partner. Our fourth quarter revenue was $63.4 million, a 15% increase over prior year. New business booked in the quarter was $2 million and was our first healthcare client outside of the acquisition completed in July. SG&A was at a level I am satisfied with for now, coming in under 12% of revenue.

We’ve progressed on a several key strategic initiatives. We made the final selection of a key strategic supplier to complete the IT platform initiative. We just recently completed that contract and will be making an industry first announcement in the near future. This transformation is underway and we expect to complete this effort midyear. There will be approximately $2 million of investment to complete the project. We launched the StarTek healthcare website and as previously mentioned, closed our first healthcare client, new client logo outside of the acquisition.

We launched the first center using the full suite of Ideal Dialogue’s unique customer engagement methodology. We disposed of non-core real estate access in order to redeploy that capital. Over the past several months, we have added 1,500 seats of capacity across all geographies and committed to building out another 2,500 seats. These investments in smart growth are target to continue trends and achieve our financial objectives.

Bottom line results from this expansion will lag investments. We are confident in the returns these new investments would generate longer term as we continue to grow the company and build value. Our footprint is greatly improved, the result of our disciplined process for new investments. That said, we still have a few assets performing below margin expectations and we are taking a balanced approach to adjust these as aggressively as possible.

We existed 2013 with better scale more diverse revenue streams, stronger solution differentiation and significant progress on several key strategic initiatives, all of which will lead to long term value creation for our shareholders.

Jackie, Lisa and I will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Omar Samalot with Independent Analyst Corporation. Please proceed.

Omar Samalot - Independent Analyst Corporation

Hey, guys. How are you doing?

Chad Carlson

Hey Omar, great. How are you?

Omar Samalot - Independent Analyst Corporation

Solid quarter. Last quarter you mentioned that there was like a 100 to 125 bps impact on the gross margin due to the investments in new -- new investments in growth. Could you tell us what was the impact in Q4?

Lisa Weaver

Yes, it was a little less than that, around a 100 basis points, Omar.

Omar Samalot - Independent Analyst Corporation

Okay. So, let me see, like in the envelop here, [investments] up $0.04 a share, so on a normalized basis you were probably coming around $0.06 a share, is that a fair assumption?

Lisa Weaver

If you are factoring in the impact of the ramp facilities as well as the IT investments, yes.

Omar Samalot - Independent Analyst Corporation

Okay, got it. Now, I have seen that you obviously been very busy expanding since the last call, like we see outlined in Honduras, Colorado Springs, Myrtle Beach, Iloilo in Philippines. Can you explain how much of this capacity expansion is to accommodate the large $44 million in new business you won in Q3 and maybe what part of that is new business won in Q4 and maybe even Q1? In other words, what part of it is for what you already have in the books and what part of it is what you see coming forward?

Chad Carlson

I think $20 million to $30 million would be booked business.

Omar Samalot - Independent Analyst Corporation

Okay. But my question is, is all this expansion from what you have announced or there is more capacity for potential new business?

Chad Carlson

We will capacity to sell through, Omar.

Omar Samalot - Independent Analyst Corporation

Okay, got it. Okay. I also saw the Jonesboro facility closing announcement which was kind of expected, at least for me. Were you able to accommodate that client’s business into another location?

Chad Carlson

Yes.

Omar Samalot - Independent Analyst Corporation

Okay. And should we expect, I guess a restructuring charge for the early lease termination in Q2?

Chad Carlson

Yes.

Omar Samalot - Independent Analyst Corporation

Okay. And I guess finally, since that facility was a drag on the U.S. segment gross margin, should we expect this closing to help gross margin improvement in that segment going forward?

Chad Carlson

Longer term, I believe so. We’ll have to get through the transition and we have a couple of new sites domestically coming on line.

Omar Samalot - Independent Analyst Corporation

Okay, got it. Could you tell us what is the budgeted CapEx for 2014 [Technical difficulty] already announced?

Lisa Weaver

Yes, it will be more than 2013, Omar, with additional capacity that we’ve already announced obviously.

Omar Samalot - Independent Analyst Corporation

So, I’m guessing that you’ve the bank has been flexible in allowing for more CapEx, correct?

Lisa Weaver

Yes.

Omar Samalot - Independent Analyst Corporation

Okay. And now you mentioned the status of the new IT platform. So savings on that implementation is that [Technical difficulty] on target for Q2 onwards?

Chad Carlson

Yes, maybe towards the end of Q2, but we should be through it all, hopefully by the end of 2Q.

Omar Samalot - Independent Analyst Corporation

Okay, perfect. Well guys, thank you very much. I think it was a solid quarter. Thanks.

Chad Carlson

Thanks Omar

Lisa Weaver

Thanks Omar.

Operator

And your next question comes from the line of Adam Goldstein, private investor. Please proceed.

Unidentified Analyst

Hi

Lisa Weaver

Hi Adam.

Chad Carlson

Hi Adam.

Unidentified Analyst

Hi, how are you doing? So my first question is, it looks like in the second half of 2013, you guys signed, it looks like a total of $46 million of annual contract value worth of new business, so that’s basically Q3 and Q4 combined, at least by my math. So if we term that into a quarterly number that comes out to $11.5 million of quarterly revenue from the new business that was signed in the second half of 2013. So my question is how much of that $11.5 million in quarterly revenue is already reflected in the Q4 2013 reported revenue?

Lisa Weaver

Probably about 25%.

Unidentified Analyst

Okay, great. So 75% of it is early business won that’s going to be coming in the future?

Lisa Weaver

Correct.

Unidentified Analyst

Okay. All right, I noticed even if we back out the IT, the one-time IT transition cost and if we back out this 100 basis points that Omar was just referring to for investment in growth, it looks like gross margin still came out to only 13.9%....

Chad Carlson

You also need to look at the Greeley loss that we had to take in there.

Lisa Weaver

Which didn’t impact growth margin, but did impact our bottom-line, there is one other thing you got to watch is the mix for domestic this quarter was a much bigger percentage of our revenue than same quarter last year.

Unidentified Analyst

Okay. How much of that -- what was the -- I wasn’t aware, so there was a loss on the sale of the Greeley building?

Lisa Weaver

Yes, you will see it in our results. We sold both Greeley properties; one of them was a sale leaseback.

Unidentified Analyst

Right.

Lisa Weaver

And we have roughly 700,000 plus on the sale of both assets.

Unidentified Analyst

Okay. All right, so if we back that out do you know how much is that going to affect gross margins?

Lisa Weaver

It’s not affecting gross margin. It’s below…

Unidentified Analyst

Okay. Well then I’m still -- if we go back to what I was asking then so still it seems gross margins are still only 13.9% and that loss doesn’t really impact it so I guess I am still a little bit confused as to why it’s down?

Lisa Weaver

As I said, mix is a part of it so remember domestic margins are not as high as APAC, but you have to factor in the mix year-over-year as well. And then as Chad mentioned, we still have a couple of underperforming assets that we’re dealing with. So that’s impacting gross margin as well.

Unidentified Analyst

Okay. And that’s the underperforming assets are something in addition to [Johannesburg] or are you just talking about Johannesburg there?

Chad Carlson

Johannesburg is included in those…

Unidentified Analyst

Okay, okay. All right, now I’ve got some questions about the new healthcare business. When are these -- it looks like you guys are opening up two sites for the healthcare business, one in Colorado Springs and one of them in Myrtle Beach, is that correct?

Chad Carlson

Opening those two center is certainly could be for healthcare with a healthcare focus, but if we had other core business that we closed, we could use those assets for that as well.

Unidentified Analyst

Okay. Can you give any -- I know you don’t usually get too detailed on stuff like fee counts, can you give us any idea in of terms of fee counts or FTEs are some kind of capacity that you are planning for this new healthcare business?

Chad Carlson

Yes. I am not going to provide guidance there. We are excited about the opportunity in healthcare and believe there is a lot of opportunity for us to grow in that industry and in that vertical segment. How much, how quick and how we utilize that across our geographic site capacity to be determined based on activity.

Unidentified Analyst

Okay. And can you comment on what kind of gross margins could be expected in this healthcare type of vertical, is it similar to the other types of services you guys provide or is it typically higher or lower?

Chad Carlson

It really depends on which segment of the healthcare you’re closing and some elements of healthcare are more mature in outsourcing than others.

Unidentified Analyst

Okay.

Chad Carlson

Any of our asset investments goes through our disciplined investment process. We are comfortable that we will be able to hit the type of margins we expect to hit with our investments.

Unidentified Analyst

Okay. Also I was a little bit curious about, we’ve been hearing about this IT initiative for quite a while and I guess -- could you give any more detail about what type of IT we’re talking about like is this just like sort of running the [mail] IT like if you are, I don’t know like providing PCs or wireless connectivity to your customer care or specialist...

Chad Carlson

You’ll get a lot more detail on that in an upcoming announcement we’ll be making. But I can say it’s not running the [mail] and mostly incorporates -- most network don’t come [telephony] so.

Unidentified Analyst

Okay. All right, I guess that’s about it for me?

Chad Carlson

Yes. Thank you.

Unidentified Analyst

All right thank you.

Operator

(Operator Instructions) And your next question comes from the line of Dave Koning with Baird. Please proceed.

Dave Koning - Baird

Yes, hey guys, just potentially to start out with, can you just give I guess rough sizes of the three big clients AT&T, T-Mobile and Comcast?

Chad Carlson

Yes. I think T-Mobile was around 30%. It’s in the reference document out for you Dave.

Dave Koning - Baird

Okay. Maybe…

Lisa Weaver

AT&T was 25.3% and T-Mobile was 27.7%, Comcast 19.8%.

Dave Koning - Baird

Okay. Great, thank you. And then I guess secondly how much of the acquired revenue in the quarter come from recent acquisitions?

Chad Carlson

I don’t think we have given the revenue breakouts of those acquisitions.

Dave Koning - Baird

Okay. And then I guess how do you expect cash flow to kind of go through 2014. I know you just obviously have your investment in growth. Do you expect the full year to be free cash flow positive maybe with the first half being negative and in the second half making, maybe you can talk just a little bit about cash flow?

Lisa Weaver

Yes. With the growth in investment in new capacity, we do expect to tap into our line with Wells Fargo, probably some working capital with AR [growing]. I wouldn’t feel comfortable saying we expect full year to be free cash flow positive, but we do expect to be able to see the return on those investments and that CapEx in the second part of the year.

Dave Koning - Baird

Okay. And I guess as we look at gross margins been pretty stable over the last four years, pretty much it’s in 10.5% and 11.5%. And I know you’re investing a lot to sustain your U.S. facilities. Is that -- I guess how should we see a bump in gross margins with SG&A slightly coming down as revenue growth?

Chad Carlson

Yes. SG&A, keep an eye on it as a percent of revenue and I’m comfortable right now with the amount of investment grade we have and growth there to be under 12%. Dave, we’re not -- mind you I’m never happy with SG&A. And from a gross margin perspective, it’s going to a depend a little bit on how quickly we bring those frontline with other investments or rents we have going on and how quickly we can address some of the underperforming assets that I mentioned earlier. So, it’s going to be really a combination of all three variables that we’re working on.

Dave Koning - Baird

Okay. And so it’s hard, it’s hard, the business will necessarily be up or down just given perhaps some variables?

Chad Carlson

Yes, I think just important to note trends are up and headed in right direction for the most part and we’ll continue that path, it would be lumpy times, so.

Dave Koning - Baird

Sounds good, all right thank you, then.

Lisa Weaver

Hey David. Let me just clarify the concentration numbers I gave you were full year, Third Mobile for the quarter was 30.3% and AT&T was 24.6%.

Dave Koning - Baird

And Comcast for the quarter?

Lisa Weaver

Comcast was 19.8% for the quarter as well as full year.

Dave Koning - Baird

Okay. Great thank you.

Chad Carlson

Thanks, David.

Operator

And your next question comes from the line of Rob Romano, private investor. Please proceed.

Unidentified Analyst

Thank you for taking my questions. I was wondering if you could provide additional color regarding the facilities that are not performing well.

Chad Carlson

I don’t want to get in too many specifics as we’re working individual plans on those sites, but it’s spread across all over geography. So it’s not anyone geography that has real concentration of those, it’s one site per geography, so.

Unidentified Analyst

Okay. Are these, are the issues that we’re having, are they be similar to I guess what came about in Q1 of last year in Asia?

Chad Carlson

No, not really. It is really down with some of those more mature locations that we’re in and what’s the right business mix and approach in those individual markets.

Unidentified Analyst

Okay. Another question on the business we’ve won in 2013 and in 2012. It sounded like business that we win by price and now we’re able to get the margins we need or I just go and try to find out why margins are higher more in line with some of your competitors, I know you’re interacting but it feels you’re unable to break your business on line profitably?

Chad Carlson

No I think new business we’ve added has certainly come online within the margin thresholds that we attained to. And looking at that and I think you need to look at mix and where we’re at through those ramps in that investment. Then we have definitely carved out and identified we have a few centers that are more mature nature that do make it difficult to hit the kind of [GM] targets we want and our growth is allowing us to address those in a balanced way as aggressive as we can.

Unidentified Analyst

This is a 5% operating margin is that something that’s doable?

Chad Carlson

I am not going to give guidance.

Unidentified Analyst

Okay. Plus on your IT announcement that you’re going to make I know you’ve mentioned that this is something that’s not going on with some of the other competitors that I believe for all type solution, is this something that’s really going to have an impact on your margins and be able to move you higher?

Chad Carlson

It will sure have an impact on our ability to scale in a very capital like efficient manner and those efficiencies will come to play as we scale.

Unidentified Analyst

Okay, thank you.

Chad Carlson

Thank you Rob.

Operator

(Operator Instructions) And your next question comes from the line of Adam Goldstein, private investor. Please proceed.

Unidentified Analyst

Hey, thanks for taking my follow up. I was just wondering this when you talked about some performance issues. I guess, I was assuming that you are referring to under-utilized assets that were hurting gross margins, but then I realized maybe that’s not you were talking about. Are there performance problems like where metrics have come in below, where the customer wants sort of like what happened before in the Philippines?

Chad Carlson

No, most of the problem has been really coming from those locations in market [share] agreement to where that were in that has put pressure on our operating model and how best to deal with that.

Unidentified Analyst

Okay. So you are just talking about problems from a business perspective, but there is no problems from a client perspective, is that correct?

Chad Carlson

Well, in this business you already have challenges off and on. So you only said things working on and trying to improve upon is a very competitive business from that standpoint, so…

Unidentified Analyst

I mean, in terms of the metrics like you have like kind of metrics that these clients like AT&T and the others serve great all of their…..

Chad Carlson

Yes, I will say year-over-year our metrics across the board is really improved from a performance standpoint across all of our programs.

Unidentified Analyst

Okay. So you are pleased in terms of performance from the metrics perspective then. It sounds like it’s more of a business perspective you are talking about, like margin initiatives and stuff like that?

Chad Carlson

For the most part yes.

Unidentified Analyst

Okay. I just want to be sure.

Chad Carlson

Yes, thanks Adam.

Unidentified Analyst

Thank you.

Operator

And at this time we have no further questions. So I’d like to hand the call over to Mr. Chad Carlson.

Chad Carlson

Okay. Thank you everybody. We’ll get back to work.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Just have a great day.

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