Startek's (SRT) CEO Chad Carlson on Q4 2015 Results - Earnings Call Transcript

| About: Startek Inc. (SRT)

Startek Inc. (NYSE:SRT)

Q4 2015 Earnings Conference Call

February 18, 2016, 05:00 PM ET

Executives

Chad Carlson - President, Chief Executive Officer and Director

Donald Norsworthy - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Dave Koning - Baird

Matt Blazei - Lake Street Capital Markets

Omar Samalot - Independent Analyst

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss STARTEK's financial results for the fourth quarter ended December 31, 2015. Joining us today is STARTEK's President and CEO, Chad Carlson; and the company's CFO, Don Norsworthy. Following their remarks, we'll open the call for your questions.

Before we continue, we would like to remind all participants that the discussion today may contain certain statements, which are forward-looking in nature pursuant to the Safe Harbor provisions of the Federal Securities Law. These statements are subject to the various risks and uncertainties and actual results may vary materially from these projection. STARTEK advises all those listening to this call to review the 2014 Form 10-K and September 2015 Form 10-Q 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 base measurement. The reconciliations can be found in the earnings release on the Investor page of their website.

I would like to remind everyone that a webcast replay of today's call will be available via the Investor section of the company's website at www.startek.com.

Now, I would like to turn the call over to STARTEK's President and CEO, Chad Carlson. Sir, please proceed.

Chad Carlson

Thank you, Bridget. Good afternoon and thank you all for joining. Earlier today we issued a press release announcing our financial results for the fourth quarter and full year ended December 31, 2015. I am happy to report that STARTEK posted much improved results for the quarter. Despite a challenging year, we finished on a strong note with more scale, more diversification and a differentiating customer engagement BPO platform.

We have been focused on converting the sales pipeline and implementing cost reductions to reach our goal of sustained, predictable and profitable growth. We still have work to do, but we are pleased with STARTEK's market position, as we exit 2015. Later in this call, I will walk you through some of the highlights from Q4 as well as key focus areas for 2016.

Before commenting further, I would like to introduce Don Norsworthy, who was appointed as CFO last November. Don brings a wealth of experience and knowledge of our industry, especially given his prior position as CFO of ACCENT, which we acquired in June of last year. He has hit the ground running and is already a strong contributor in helping STARTEK reach its financial objectives.

With that, I'll now hand it over to Don to take you through the fourth quarter results. Don?

Donald Norsworthy

Thank you, Chad. I'm pleased to be here at STARTEK and have the opportunity to reengage with some of my former ACCENT colleagues and work with the STARTEK team.

Moving around to the results for the quarter. Total revenue increased 28% to $82.3 million compared to $64.2 million in the year-ago quarter. This was due to incremental revenues from new client wins and current client expansions as well as contribution from ACCENT, which was acquired in June 2015. This was partially offset by lower client volumes from one of our larger clients compared to the prior year.

Gross margin in the fourth quarter increased to 11.8% compared to 11.7% in the year-ago quarter. For other perspective, gross margin was 4.3% in Q3 and 8.4% in Q2. These significant improvements sequentially is from stronger volume with some of our larger clients, improved utilization from new client wins and higher margin verticals, our focus on rightsizing capacity and the near completion of ACCENT's integration.

SG&A expenses during the fourth quarter totaled $8.4 million compared to $8.3 million in the year-ago period. As a percentage of revenues, SG&A expenses decreased 270 basis points to 10.3% compared to 13% in the year-ago quarter.

Adjusted EBITDA in the fourth quarter increased 106% to $4.8 million compared to $2.3 million in the year-ago quarter. The increase was due to the aformetioned new client wins and current client expansions, cost reduction initiatives and contribution from ACCENT.

Net income increased significantly in the fourth quarter to $0.3 million or $0.02 a share compared to a net loss of $1.6 million or $0.10 per share in the year-ago quarter. This was our first quarter of profitability since Q4 2012, demonstrating our commitment to cost reduction, converting our sales pipeline and better aligning capacity with demand.

At December 31, 2015, the company's cash position was $2.6 million compared to $5.3 million at December 31, 2014, with $32.2 million balance on our $50 million credit facility. CapEx in 2015 was $7.7 million, which includes $2 million from new capacity in early 2015. And for 2016, we expect CapEx to be roughly $5 million.

This concludes my prepared remarks. I'll now turn it back over to Chad.

Chad Carlson

Thank you, Don. As we outlined last quarter, the STARTEK team has made it a top priority to be profitable. Our results over the last couple of quarters were hindered by lower client volumes and temporary dilution from the ACCENT acquisition. However, our Q4 results are a glimpse of the positive trends STARTEK is capable of producing.

These results reflect the execution of three key initiatives, converting the sales pipeline, cost reductions and the integration of ACCENT. I'll provide some more detail on each of those initiatives beginning with sales.

During the quarter we won $10 million of annual contract value through current client program expansions and the signing of two new clients. These new clients were outside the communication of the media verticals. For all of 2015 we won $53 million of annual contract value in new business, further demonstrating our commitment to converting the sales pipeline.

With regard to cost reductions, during the fourth quarter we removed over $6 million in annualized cost, while maintaining full capabilities, which is in addition to the ACCENT synergies of over $7.5 million and $0.9 million in savings from the closure of ACCENT's Kansas City facility. As a reminder, we retained all related revenues from this facility, so the savings flowed through straight to our bottomline.

Through this better alignment of capacity with demand, coupled with sales execution, our utilization has increased, and this continued effort will result in a stronger gross margin performance. We will continue to optimize the footprint in 2016 and reduce pockets of capacity where practical.

Another key contributor to profitability was ACCENT. The ACCENT integration is largely complete, several months ahead of plan. And I am proud to say, we've retained nearly 100% of their clients and have expanded the engagements with several of them. In addition, we have also had success cross-selling and displaying the value of an enhanced customer engagement capability with analytics, insights and social media services to existing STARTEK clients.

As I mentioned in the past, ACCENT was a key strategic addition for us. In addition to the added scale, the robust customer engagement platform enhances the STARTEK Advantage System and has created a differentiating customer engagement BPO platform. As stated on the last call, the large client volumes have stabilized and you can see that reflected in the sequential quarterly results.

Our metric performance for clients remains very strong and we are actively pursuing many expansion opportunities with existing clients. While client volume reductions were unfortunately a significant headwind in 2015, we have weathered this adversity and significantly diversified our client base over the course of the year. We now have the most revenue and vertical diversification in the history of our company.

For the year, we signed 14 new clients, generating an incremental $22 million in new revenue. This led to approximately 32% of our fourth quarter revenue coming from newer verticals like healthcare, financial services and retail among others. This compares to just 17% of total revenue in the fourth quarter of 2014. We plan to continue ramping business to meets other verticals to further diversify our client concentration. During the fourth quarter, our largest client accounted for approximately 22% of revenue compared to 31% of revenue in the year-ago quarter.

Over the past four years, we have made significant investments in the capacity footprint, the STARTEK Advantage System, hitting the right company culture, developing an outcome-based engagement model, making the acquisitions of ideal dialog, RNOC, CCI and ACCENT, and developing a comprehensive customer engagement BPO.

The market has reached a fork in the road with clients, who are customer-centric, need these services, in order to compete in their respective industries. Customer-centric companies are looking for more effective ways to engage customers on their terms and preferred contact channels. With solutions that are not available via a traditional context-centric companies, we believe STARTEK is in a position to lead and deliver added value to our clients.

Recently an executive from one of our new and valued clients, a premier global food and beverage brands, was visiting the STARTEK engagement center. After reviewing performance and STARTEK's capabilities and culture, he said, you feel a vibe here, it's dynamic. It's the feel that people are happy to be at work. You feel like a startup. I came hear and expected to seen an outsourcer, but you seem more like Google. This in essence is what we've been striving for, and we plan to do a lot more of it across multiple verticals.

In the first half of 2016, we will continue to convert the sales pipeline and optimize capacity where practical through enhance utilization during the period a typically represents a seasonally slower part of the year for our business. I remind investors and analyst that Q4 has historically been our strongest quarter, given the ramp and seasonal demand and client volumes, and 2015 was no exception. We had very strong premium demand in Q4.

Nevertheless, the initiatives to enable success in 2016 are clear, and this management team is focused on executing those initiatives. We will continue to target new business with higher margins, while leveraging the added scale and capabilities from ACCENT. We will optimize current client contracts and improve capacity utilization by filling or removing seats where practical. And we will continue to work on being more efficient, with the goal of achieving double-digit growth and profitability in 2016.

Bridget, Don and I will now open for the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Dave Koning with Baird.

Dave Koning

And I guess, first of all, how much was the ACCENT revenue in Q4? And kind of as part of that, is that also pretty seasonally strong in Q4 or not necessarily?

Chad Carlson

Not necessarily, although it did improve. But David, we're really one company now. We're not going to spend a lot of resource trying to keep up with ACCENT and STARTEK. We're treating all as one now, since we're so far completed with the integration. But it was in line a little bit [indiscernible] where you saw third quarter.

Dave Koning

Is it fair just for revenues benefit, I mean, do you think you're in organic growth mode now? And I guess by the next couple of quarters, you'll have anniversaried that anyway. But do you feel like you're sustainably in, in growth mode?

Chad Carlson

Yes. Certainly our target with the goal I mentioned of 10%, we're not factoring any acquisitions in this state with a goal of double-digit growth and profitability.

Dave Koning

And then what about, I guess -- the adjusted EBITDA margin was solid. You cut a lot of cost. Do you think you'll be EBITDA positive throughout the quarters in 2016 now or is Q1 still, I know seasonally it's a little weaker on revs, but also is it weaker on margins?

Chad Carlson

Dave that would obviously be a guidance type answer and it's our policy not to do that. But first half of the year, certainly first and second is always a tighter period. But I think we've made significant progress in lowering our breakeven point. But with revenue coming off of seasonal highs, I think it will be tighter. But we're certainly trying hard to push everything over the line.

Dave Koning

And then I guess just finally on the free cash flow side, just given the growth, with the working capital it's been hard through the year to turn free cash flow positive. But now that CapEx, I mean, I was surprised to hear, it's going to be about $5 million next year, does that allow you to soon hit kind of a free cash flow breakeven point at some point during 2016?

Chad Carlson

Well, kind of a mixed blushing of what transpired last year with some of the revenue headwinds. We have a misalignment of excess capacity. So that allows us to be pretty favorable with our cash looking out in this year and certainly one could take from that. The more cash we can generate, the more sales we convert, more cost we keep down, we'll be able to get there much quicker.

Operator

Our next question is from Matt Blazei with Lake Street Capital Markets.

Matt Blazei

Obviously, your revenues and your gross profits and both your offshore and near-shore business was pretty much in line with sort of expectations. And obviously, the surprise is in your domestic business, both in terms of revenues and obviously in enormous sequential increase in your domestic gross profits. Is that attributed to any specific thing, because that's a very surprising sequential change in gross margins on a domestic business?

Chad Carlson

One of the thing that I used to try to describe our business quite a bit, that it is a lumpy business just by its nature. And a lot of our seasonal influx did impact more greatly than the domestic market. On top of that I think some of the revenue erosion we saw or experienced last year, certainly had pretty intense pressures on Philippines on some of the added capacity we brought on there. So we're not happy with gross margins in the offshore market. And certainly working our initiatives that we discussed here to get that back on track, where we expected to perform. But that's kind of what's playing out in those market segments.

Matt Blazei

A second question, you mentioned something about double-digit revenue growth for 2016. Obviously, you still get a kicker in the first half from the ACCENT acquisition. Are you talking about double-digit revenue growth x the ACCENT acquisition? I'm just trying to get a feel for sort of where that --

Chad Carlson

We're all one company now. So we reported [ph] 282 change in 2015. So that's the baseline we're discussing from.

Matt Blazei

Just the ACCENT acquisition loan, which you had close to 10% growth in the first half of the year with the added revenues, so I'm just trying to figure that part out? Secondly, as you mentioned, it looks like you had -- you lost a little bit of free cash flow in Q4. Obviously, your CapEx is going to be lower this year. The first half you said is going to be tighter. I think last quarter your goals was to be free cash flow positive by Q3, is that still something we should be looking at?

Donald Norsworthy

That is certainly our goal.

Matt Blazei

So free cash flow positive by Q3. And when you mentioned 10% profitability growth, I imagine you're speaking to adjusted EBITDA? I guess, if you lost money in that year, so I'm assuming that when you're saying a 10% increase in profitability, you're speaking towards EBITDA?

Chad Carlson

I'm not sure of your 10% profitability comment. We said double-digit revenue growth and profitability. Can you help understand your reference point?

Matt Blazei

Yes, you're right. You said double digit profitability growth. But I'm wondering if that profitability is [multiple speakers] EBITDA?

Chad Carlson

I said double-digit revenue growth.

Matt Blazei

But nothing about profitability?

Chad Carlson

No. But profitable as you go.

Operator

Our next question is from Omar Samalot an Independent Analyst.

Omar Samalot

If I sound a little weird, is I'm trying to contain my smile, so great quarter. I have a few housekeeping questions, maybe Don you can help me out. Where there any growth investment expenses during Q4 that hit the operating expenses, specifically the gross margin?

Donald Norsworthy

Yes, there were some ramps going on, Omar, based on how you've looked at things in the past would have impacted. I'm not sure that we have that number in front us. But we did have some significant ramps going on in fourth quarter.

Omar Samalot

And will there be more in Q1. I'm assuming that you're still ramping up Hamilton and Iloilo.

Donald Norsworthy

There is some.

Omar Samalot

Did G&A line include any non-recurring expenses, maybe integration related expenses?

Chad Carlson

A little bit, not significant. It was really probably innocuous, Omar.

Omar Samalot

And that 10.3% G&A percentage revenue that seems low, is that a level that you think is sustainable or as you grow it may hit a little higher?

Chad Carlson

No. As we grow from a dollar perspective that would probably be a little higher. Not significantly higher, but we feel we're fairly closer to a run rate that we can scale the business for the foreseeable future. It will probably come up a little bit. There obviously was heavy commitment and I'm proud of the team for their commitment, pushing profitability over the goal lines for the fourth quarter.

And so there's certainly an aspect to some variable expenses you have control on at the SG&A line and we certainly held those to the lower [ph] level in the fourth quarter. And I would expect to see somewhat more regular business cadence return with travel, et cetera, et cetera, but I think you will see it come up a little bit up, but not dramatically.

Omar Samalot

In terms of the gross margin improvements, incredible job for domestic and the ashore. In terms of offshore, are you expecting gross margin to normalize during the first half of 2016?

Chad Carlson

We're certainly focused on doing what we can do to get our capacity utilization up, Omar, between addressing may be some certain pockets. We had no site closures reminder at this time, while we always keep our options open, but we do have opportunity to remove some pockets where practical.

Some pockets at capacity were practical, so we're certainly working on some initiatives there as well, as filling the seats. Those are really the two big levers, as well as we'll continue to drive efficiencies through our newly updated IT platform, but those are the big levers for getting that gross margin back on track. So I wouldn't expect an overnight miracle there, it's going to take some work.

Omar Samalot

In terms of the new business that you're targeting, can you talk about what you think gives you an edge now and also the type of client/work that you're targeting?

Chad Carlson

I think one of the things that gives us an edge is our size and scale. We can be [ph] numb on react. We're very accustomed with our clients. We absolutely have a very comprehensive, very robust customer engagement BPO platform now. And our mindset on getting into the right type of engagements focused on outcome-based engagements with customer-centric clients.

Those are the clients we accelerate with very well that create great partnerships for us and normally that business is stickier. So it could be to scale client. It could be one of our largest clients who is very customer-centric minded, who is looking to add value to leverage capabilities and solutions we put into play, where we're opened to be able to help them to deliver added value.

But a lot of times its clients that are perhaps not the most mature outsourcers that are looking for an edge, and they are in the streets to compete where we can really help aid them in that process and we have refined and I think have a much better targeting process in place for our pipeline management now and I'm anxious to see how the team performs with this kind of laser focus we have.

Omar Samalot

And I imagine that you must have some cross-selling opportunities within your own current client base where, I guess, one client could take advantage of more than one service that you offer?

Chad Carlson

We do. And if you just look at our receivables management business, it's not across a multitude of our core and historical clients. It's certainly across some, but almost every client we talk to has a receivables management need, and our very customer-oriented Brand Warrior approach with receivables management is being pretty well received in the market, not only with traditional customers, but within our healthcare collections work we're doing is another interesting capability we now have in play.

Omar Samalot

In terms of that current client base in your efforts over the last three years that diversify, how many clients do you serve today versus say 2012 when you started reposition the company?

Chad Carlson

We exited last year with 58 clients in our core business. The sub-element of our healthcare business has roughly a 150 clients in the one portfolio, and I think somewhere around 57 to 60 clients in the other portfolio, so within those two, within our clinical practices, within our STARTEK Health we have significant amount and within receivables management we have a good breadth of client mix there. Compared to where it was when I started I had to look back, but I think we were around, I don't know, 15, 16 maybe.

Omar Samalot

I just saw, J.D. Power they had a study out 2016 U.S. Wireless Customer Care Performance Study, where T Mobile ranked highest among full service carriers performing well in the automated response system then the customer service representative. STARTEK is obviously not the only provider to T Mobile, but do you feel like STARTEK contributed to that success?

Chad Carlson

Sure, I'd like to think that. We're very proud and honored to be part of T Mobile success. You guys have probably have a lot more fun listening to Mr. [ph] Jose's calls than mine, he is a little more colorful than I am, but our teams, our employees have great deal of pride wrapped into what we've been able to help T Mobile accomplish, and its just great to be kind of tangentially part of their story, its pretty impressive story they have underway there.

And in a lot of ways their approach to market has somewhat been a disrupt there, as well as similar to how our culture and how our teams think about things. We're willing to try some different things, we're going to challenge a status quo. I think a lot of clients tie you there in a business partner.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Carlson.

End of Q&A

Chad Carlson

Thank you, Bridget. Well, thank you all for your attendance today and your interest and we'll get back to work and look forward to speak with you next time.

Operator

Thank you, ladies and gentlemen, you may now disconnect.

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