Startek's (SRT) CEO Chad Carlson on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Startek Inc. (SRT)

Startek Inc. (NYSE:SRT)

Q2 2014 Results Earnings Conference Call

August 12, 2014, 05:00 PM ET

Executives

Chad Carlson - President and CEO

Lisa Weaver - Chief Financial Officer

Analysts

Marco Rodriguez - Stonegate Securities

Omar A. Samalot - Independent Financial Analysis and Stock Research

Operator

Good afternoon, everyone and thanks for calling in. It is my pleasure to welcome everyone to StarTek’s Second Quarter 2014 Earnings 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 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 the 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. These reconciliations can be found in the earnings release on the Investor page of the website.

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

Chad Carlson

Thank you, Denise and thank you all for joining. StarTek made meaningful progress during the second quarter of 2014. The underlying trends are positive even though our results for the quarter reflect the lumpy nature of this business. We are entering the late innings of this turnaround story.

Accomplishments for the quarter included further revenue diversification, significant footprint improvements, continued implementation of the new IT platform and a new general manager organizational structure. Revenue was $61.3 million, an increase of 10% over second quarter of last year. I am pleased that we signed four new logos and one new program with an existing client, equating to $10 million of annual contract value. Included in this was another healthcare win.

We have now added eight new logos year-to-date, furthering our opportunity for more meaningful revenue diversification. Revenue growth excluding our three largest clients was 21% over second quarter of last year. Overall growth was softer than our forecast, and though a healthy pace I have higher expectations. The softness was due primarily to lower than forecasted volumes on some client programs and a transition for one program to another with a large client and the loss of one smaller client due to some vendor consolidation.

The pipeline is more robust than at anytime over the past few years. We continue to enhance the valuable solutions we offer to clients through the Startek advantage system and deliver the strong customer experience, performance and flexibility with many clients demand. The core business is healthy. Gross margin was 9.3%, and was penalized by a ramp in new capacity expenses of approximately 190 basis points.

During the quarter we completed the closure of Jonesboro, announced the closure of Heredia, Costa Rica and went live in the new provincial Philippine location. We have now added four new sites year-to-date. These are all significant steps and our plan to enhance the capacity footprint and continue meeting our client’s needs. This also set the stage for stronger financial performance. We continue to manage SG&A effectively with only $100,000 increase over the same quarter of last year while growing revenue over 10%. This reduced SG&A as a percentage of revenue from 13% last year to 11.9% for the second quarter of this year.

As we discussed we are investing in our growth with new capacity and we have now have invested $6.8 million year-to-date. Our strategy was to sell real estate in order to invest in new healthier capacity and this initiative was completed with the sale of the Laramie, Wyoming facility.

We remain diligent in our cash management and have ample room in our line to support foreseeable growth. Implementation of the new IT platform continues and we expect to have it fully completed by early fourth quarter of this year. Startek will be enabled by a very dependable, efficient, secure and robust IT platform. This is a key accomplishment for successful performance and growth well into the future as it allows us to provide the flexibility and scale which our clients and prospects desire.

During the quarter we transitioned into a more focused general manager organizational structure. We now have a team focused on our core customer support operations as well as a team focused on our healthcare vertical and other emerging services. This not only moves the accountability of sales and operations closer to our clients but helps assure successful performance and growth of the business.

As I mentioned we are entering the late inning of this turnaround story. I am proud of the balanced approach the team is taking while tackling some tough business challenges. We have accomplished a great deal, trends are positive and we are optimistic about the future operational and financial performance of Startek.

Denise, Lisa and I will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Marco Rodriguez with Stonegate Securities. Please proceed.

Marco Rodriguez - Stonegate Securities

Good afternoon guys. Thank you for taking my questions.

Lisa Weaver

Hi, Marc.

Marco Rodriguez - Stonegate Securities

Hi. I was wondering if you guys provide an update on seats by region.

Chad Carlson

We don’t really disclose our seat information in that way as a matter of policy, Marco.

Marco Rodriguez - Stonegate Securities

Okay, any sort of…

Chad Carlson

Lot of competitors listen to these calls so…

Marco Rodriguez - Stonegate Securities

Sure, I understand that. Any sort of color then in terms of direction where you sit on your capacity versus the year-end of ‘13?

Chad Carlson

We have grown all three segments.

Lisa Weaver

Yeah, we talked about, we added about 1,500 seats last year and we've disclosed we're adding an additional 2,500 this year. That's not a net number. We obviously shook out Jonesboro, have announced the closure of Costa Rica but the guidance that we've shared in 2,500 seats is still our plan for the year. We've started on a lot of that capacity in all three regions but we haven't ramped the full 2,500 seats yet or built them out.

Marco Rodriguez - Stonegate Securities

Okay, understand that. Then just in regard to the press release you guys mentioned obviously a $2 million restructuring in products related to IT. I am just confirming is that kind of retiring all the equipment as you're implementing your new system?

Lisa Weaver

No, it's not we took some impairment charges last year related to the first phase of our IT transition. This is really related to some of the other charges that we’re incurring as we make the transition.

Marco Rodriguez - Stonegate Securities

Got it and can you quantify how much was related to IT?

Lisa Weaver

About $600,000.

Marco Rodriguez - Stonegate Securities

Got it, okay. And then switching gears here, just in terms of your guys’ strategic focus of expanding into different verticals, can you may be provide us little bit of an update where you stand on making any new inroads on different verticals or may be talk about what verticals are of interest to you guys?

Chad Carlson

The only vertical expansion that we have committed to resources, meaningful resources is in our healthcare focus as we've talked about in the past and as mentioned we've added another healthcare logo this past quarter and pleased with our progress there. We also last quarter announced some work with financial services in this quarter even some education and utility verticals. But those aren’t necessarily concentrated efforts. It's just the value solutions we are bringing to those particular clients.

Marco Rodriguez - Stonegate Securities

Okay, and then in terms of the healthcare vertical, obviously you mentioned that you added another client there. Where does the performance of that vertical stand versus your initial expectations?

Chad Carlson

We’re not a point where we're really -- versus our expectation. We're pretty pleased with our progress on our expectation and growth into that market. But it's not at a stage where we would like to separate that reporting out yet.

Marco Rodriguez - Stonegate Securities

Sure understand that. And then just other quick question here in terms of your top client, one of your competitors on the earnings call talked about one of their largest client consolidating vendors, how they thought that they were sitting pretty in terms of their position with that particular customer, that customer over last few years and I was wondering if you can may be provide some color on what you might be seeing and how comfortable you sit with your largest telecom customers?

Chad Carlson

Yeah, we had a couple of large competitors discuss this topic and as mentioned in the script here we also experienced some of that. But the performance with that client was extremely strong and we transitioned a location over to a different program where that vendor consolidation took place. So that vendor consolidation swings both ways and due to our performance and strength of performance on not only the program that we moved off of, but the performance we have on the program that we already were into, we expanded one and shrunk another. We feel pretty good about where we are there.

Marco Rodriguez - Stonegate Securities

Okay, perfect thanks a lot guys.

Chad Carlson

Yeah thank you.

Operator

Our next question comes from [Adam Dum with BU]. Please proceed.

Unidentified Analyst

Thanks for taking my question. Just wondering if you guys could provide the revenues for those top three clients, so we could get that in our model here?

Lisa Weaver

Yeah T-Mobile was about 31% AT&T was 22.5% and Comcast was 17.5%.

Unidentified Analyst

17.5%, perfect, thank you. And then just in terms of kind of the ongoing restructuring, what do you guys see kind of for the remainder of the year? Just curious like from I guess like from -- down to the bottom line from EPS perspective is this something -- I know you guys kind of mentioned it was late innings, do we see that kind of turning positive this year, is that something we think is more of a 2015 kind of timeline?

Lisa Weaver

Well, we won't see the significant structuring and impairment charges this year. We've done now, completed the majority of the heavy lifting if you will in the site rationalization obviously we're always looking at our site performance but the charges that we will see this year will be mainly related to the additional actions associated with the Costa Rica closure and the IT initiative. We have gotten the big repair, restructuring and impairment behind us Adam.

Chad Carlson

The last part of your question and as I mentioned you will see the full effects of these moves we have made over the next few quarters and certainly later this year you will some improvements there from some of these actions.

Unidentified Analyst

Great, thanks so much guys.

Chad Carlson

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of [Adam Goldstein], a private investor. Please proceed.

Unidentified Analyst

Hi.

Chad Carlson

Hi, Adam.

Unidentified Analyst

Hi, there. So Lisa you mentioned that the plan is still for 2,500 new seats this year. Could you give us a feel for how what percentage of that 2,500 has already ramped and what’s left to be ramped the remainder of the year?

Lisa Weaver

Yes, built out seats, probably 50%.

Unidentified Analyst

Okay.

Lisa Weaver

The remainder will come on in Q3 and Q4.

Unidentified Analyst

Okay. Say I mean unfortunately though I missed some of Chad’s initial comments here. I mean you know the revenue did come in lighter then I was expecting. So Chad I heard a few reasons, one of them was lower than expected call volume on one of your clients, did I hear that right?

Chad Carlson

On a couple of different programs, yes.

Unidentified Analyst

A couple of different programs.

Chad Carlson

More than one client.

Unidentified Analyst

Is there something global, I mean something macroeconomic about that, is it just something specific to these programs?

Chad Carlson

Second quarter is always a very difficult quarter in this space and work with their clients and their forecast to plan properly, some of our clients were surprise with some of the softness that occurred and I don’t know that I’d read much more than that into it.

Unidentified Analyst

Okay. Could just repeat the other two reasons you said for the softness?

Chad Carlson

Yeah, we had a transition due to some vendor consolidation of moving off of one program onto another program and that transition impacted our revenues and margins to some extent and then we lost one smaller client due to some vendor consolidation.

Unidentified Analyst

Lost a smaller client, can you give us an idea of the annual contract value of that lost client?

Lisa Weaver

Yes, it’s about $2 million.

Unidentified Analyst

Okay, that’s not too much. And you mentioned the transfer off of one and on to another, was that a net -- is that a net negative or a net positive to Startek?

Chad Carlson

Fairly neutral.

Unidentified Analyst

Okay. So I guess I’m just trying to figure out like I mean have talked about this before in the last two calls I have called in on, you guys announced $46.2 million of new contract value in fact in one quarter it was an enormous amount, $43.6 million was announced in Q3 of 2013. So I know you have explained some of the softness but it just seems like by now I would have expected a lot more -- I would expected to see a lot more of the revenue, has some kind of client ramp really got delayed unexpectedly or can you give any help on this?

Lisa Weaver

I wouldn’t say there is any significant delay. Adam this is a question that we talk about in every call as you said. Typically there is no typical ramp but I’d say in general the ramp about 25% a quarter and we did have some pretty significant wins in the second-half of last year that was depending upon on our capacity build. So, we are very deliberate with the clients in how we ramp that business. So we are not concerned.

Unidentified Analyst

Okay.

Lisa Weaver

Again there is a little bit of, I think probably a little bit of a slowdown in one of the ramps but we are not concerned about it.

Unidentified Analyst: Okay. So, last time you said you expected the full ramp to complete to by Q3 do you think -- would you still think that or maybe now it goes to the end of the year till it’s fully ramped?

Lisa Weaver

Yeah, it’s just hard to comment to a timeline. I mean it’s really based on different client requirements. But I would say what we are looking at now yeah, I would expect it to be fully ramped by the end of the year.

Unidentified Analyst

Okay, all right, I guess that’s about all for me.

Lisa Weaver

Thanks Adam.

Chad Carlson

Thanks Adam.

Unidentified Analyst

Okay.

Our next question comes from Omar Samalot with Independent Analysis Corporation. Please proceed.

Omar Samalot - Independent Financial Analysis and Stock Research

Hey guys.

Chad Carlson

Hey Omar.

Lisa Weaver

Hi Omar.

Omar A. Samalot - Independent Financial Analysis and Stock Research

How are you?

Chad Carlson

Good, how are you?

Omar A. Samalot - Independent Financial Analysis and Stock Research

Good, good. Alright so, I see that you took some restructuring charges for Costa Rica in Q2. Will we see any more in Q3 when the facility actually closes?

Lisa Weaver

Yes.

Omar A. Samalot - Independent Financial Analysis and Stock Research

Okay.

Lisa Weaver

The lease expires in December so, it won’t be significant.

Omar A. Samalot - Independent Financial Analysis and Stock Research

Right, okay, got it. So, you took the bulk of it in Q2?

Lisa Weaver

We did.

Omar A. Samalot - Independent Financial Analysis and Stock Research

Okay. So I noticed that you mentioned Laramie, Wyoming sales I guess that roughly 647,000 in proceed from sale of assets?

Lisa Weaver

That’s correct.

Omar A. Samalot - Independent Financial Analysis and Stock Research

All right. And it seems like you exited the quarter with an outstanding balance of around a $1 billion in your line of credit, is that close?

Lisa Weaver

That’s correct, yes.

Omar A. Samalot - Independent Financial Analysis and Stock Research

All right, okay. Can you explain the income tax benefit for the quarter, was this related to an extended tax holiday in the Philippine at all?

Lisa Weaver

No, it wasn’t. It’s related to some OCI adjustments, some of the unrealized hedge gain set in OCI that flipped out this quarter.

Omar A. Samalot - Independent Financial Analysis and Stock Research

Okay, okay. And Chad you mentioned in the past, I think in last call that there were three underperforming locations you obviously addressed two of them by now. Can you update at all on the progress on addressing the third one?

Chad Carlson

Yeah, we have progressed quite a bit there. So we have -- the Costa Rica announcement was a really big move from a bottom line perspective and that will be accretive to the company one we are done with that transition. And so we have made a lot of progress on the third and don’t have any current plants to have many more address well as Lisa said we are always looking at our sites and while we continue to optimize performance there but I guess a lot of progress second quarter on a footprint to get really about our progress there and outlining things up in the future.

Omar A. Samalot - Independent Financial Analysis and Stock Research

Okay, cool. Well, thank you very much guys, good luck.

Chad Carlson

Thank you.

Lisa Weaver

Thanks Omar.

Operator

We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed.

Chad Carlson

Okay, we appreciate your interest. Look forward to speaking to you next quarter and we’ll get back to work. Thank you

Operator

This concludes today’s conference. You may now disconnect. Have a great day.

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