STARTEK's (SRT) CEO Chad Carlson on Q2 2016 Results - Earnings Call Transcript

| About: Startek Inc. (SRT)

STARTEK Incorporated (NYSE:SRT)

Q2 2016 Earnings Conference Call

August 09, 2016 05:00 PM ET

Executives

Chad Carlson - President & CEO

Don Norsworthy - SVP, CFO & Treasurer

Analysts

Eric Stetler - Robert W. Baird

Matt Blazei - Lake Street Capital Markets

Omar Samalot - Independent

Operator

Good afternoon, everyone and thank you for participating in today's conference call to discuss STARTEK's Financial Results for the Second Quarter Ended June 30, 2016. Joining us today is STARTEK's President & 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 Security Laws. These statements are subject to various risk and uncertainties and actual results may vary materially from these projections. STARTEK advises all those listening to this call to review the 2015 Form 10-K posted on their Web site 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-based measurement. The reconciliations can be found in the earnings release on the Investors page of their Web site. I would like to remind everyone that a webcast replay of today's call will be available via the Investors section of the Company's Web site at www.startek.com.

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

Chad Carlson

Thank you, Michelle. Good afternoon and thank you all for joining. Earlier today, we issued a press release announcing our financial results for the second quarter ended June 30, 2016. During the quarter, we continued to execute on our strategic growth initiatives of growing with existing clients, winning new business, improving capacity utilization and optimizing existing client contracts, all of which progressed despite Q2 being the seasonally slowest quarter of the year for us. These improvements have led to another quarter of margin expansion more than 4.5 million in free cash flow.

We also added 7.7 million of annual contract value in new business from both new and existing clients largely assisted by re-tooling the STARTEK Advantage System with improved processes and messaging. Additionally, we announced the appointment of an industry veteran Cory White as the Chief of Sales & Marketing. While I am not happy that we weren't able to deliver positive net income for the quarter, it's important to note that this was the strongest second quarter we have posted in over six years proof of the stronger foundation of STARTEK.

Later on this call, I'll walk you through some more of the highlight from Q2 as well as key focus areas for the remainder of the 2016. But before commenting further, I would like to turn the call over to provide more details on our second quarter financial results. Don?

Don Norsworthy

Thank you, Chad. Good afternoon every. Total revenue increased 16% to 73.7 million compared to 63.5 million in the year ago quarter. This growth was attributable to partial contribution from ACCENT which was acquired on June 01, 2015 as well as contract optimizations, new client wins, and growth from existing clients. This was particularly offset by expected seasonality, poor comp revenue from lower margin programs and the transition of one client program that restructured their outsourcing strategy. Gross margin in the second quarter increased to 110 basis points to 9.5% compared to the year ago quarter as a result of contract optimizations, further efficiencies coming from the IT platform and some rightsizing of our capacity.

SGA during the second quarter decreased by $0.5 million compared to the year ago quarter to 8.1 million, a 6% reduction on a 16% increase in year-over-year revenue. As a percentage of revenues, SGA decreased 250 basis points to 10.6%. Net loss for the quarter was 1.7 million or a negative $0.11 per share, compared to a net loss of 5.1 million or negative $0.33 per share in the year-ago quarter. Adjusted EBITDA in the second quarter increased year-over-year over 500% to 2.3 million compared to 400,000 in the year ago quarter, with the increase due to new business wins, current client expansions, cost reduction initiatives and full quarter contribution from ACCENT.

At June 30, 2016, our cash position was 1.3 million compared to 2.6 million at December 31, 2015 with the $23.5 million balance on our $50 million credit facility compared to 32.2 million outstanding at December 31, 2015. The reduction in cash is largely the result of a 27% debt reduction and the timing of receivables. We plan to continue paying down debt in 2016. CapEx for the second quarter was 200,000 and for 2016 we continue to expect CapEx to be roughly 5 million. It's also worth noting that we generated over 4.5 million in free cash flow during the second quarter compared to a use of 2.2 million in the year ago quarter.

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

Chad Carlson

Thank you, Don. As I mentioned earlier despite Q2 being our seasonally slowest quarter, we achieved solid double-digit revenue growth, strong margin expansion and 4.5 million in free cash flow. This was all led by a continued focus on key growth initiatives in conjunction with the continuing focus on cost control, which I’d like to provide a bit more color on.

Beginning with the revenue dynamics, we added 7.7 million in annual contract value by adding a new client and expanding in several current client engagements enabled by solid operational execution. It is also important to note that return to year-over-year growth for a few larger clients with the top-10 clients up 3.5% during the quarter. We also expanded a handful of newer client relationships. The strong growth was partially offset by the loss of one client program that discontinued due to pricing, which resulted in margins that were below our thresholds, as well as a loss of a client that changed their outsourcing strategy. Of the new business wins, four of these clients are in the consumer products, travel, healthcare, and education verticals demonstrating continued execution and diversifying vertical concentration and the breadth of our service offerings.

Moving on to capacity utilization, which remains top of my mind for STARTEK. As we mentioned during the last quarterly update, the factor weighing most on results is less than optimal utilization. As such in June, we removed some excess space to better align capacity with demand. Right now we believe we are much closer to the right balance and the capacity to manage our near-term sales pipeline, which enables us to run at acceptable margins even without the additional new business we plan to win.

To further support revenue growth efforts and as mentioned earlier, we hired Cory White to serve as the Chief of Sales & Marketing. Cory is a seasoned sales and operations leader who brings nearly 20 years of BPO experience to our executive team. He previously led the healthcare and government verticals of a large competitor, which realized over 500% growth in just five years in Cory's division. Prior to that he held various sales leadership positions at another company during the a year tenure. Cory has deep knowledge and experience in offering analytics as a part of the overall value proposition for new and existing clients. We are confident in Cory's ability to further STARTEK’s mission of enabling clients to better connect with their customers by offering the full breadth of the STARTEK advantage system.

On the last quarterly update, we discussed the retooling for our message and lead generation process. We have since experienced a strong uptick in the pipeline and will work to convert these prospects into new clients to further growth and improve capacity utilization. As Don mentioned earlier, Q2 SG&A came in at 8.1 million, a reduction of 500,000 from the year ago quarter. This resulted from the several cost reduction initiatives implemented last year, including the successful integration of ACCENT. I'm happy with the effort by the team to get into this operating earnings to support the business. We will remain diligent and always look for more efficiencies, balanced with smart investments to enable growth.

Looking towards the second half of 2016, we will continue to focus on various growth initiatives, while properly aligning capacity with demand to enhance utilization. The fundamentals of our business are strong and we remain committed to achieving consistent profitability while we grow. I'm pleased with the work that we have accomplished and believe significant momentum has been built. For the first time in five years and after a very challenging year last year, I believe we now have all the tools in place to achieve the goal of consistent profitability. We have the leadership team and IT platforms to scale efficiently, the added value solutions and execution model delivered through the STARTEK advantage system, the footprint, the differentiation, the overall client metric performance, multiple verticals full of opportunity, greatly improved revenue and client diversification, and the employee brand warrior culture.

We now serve over 60 clients from nine verticals, providing omni-channel customer care, technical support, sales, receivables management and back office solutions across every customer touch point. We are now licensed in 49 states and working to expand healthcare focused receivables management, in addition to existing first-party receivables business. We have clinicians providing remote patient monitoring, emergency triage and after hours support for hospitals and health systems and with the differentiating ideal dialogue suite of customer engagement solutions, we are helping clients transform their customer engagement strategy through meaningful insights, analytics and execution supported by the science of human communication. We are a much stronger and more capable company today.

Now we must execute for existing clients to help them grow and grow with them, while continuing to build sales momentum and winning new clients. Our capacity is in a position where it will just take a few key wins to quickly enhance bottom-line performance. In the meantime, Don mentioned our low level of CapEx planned for this year, and we would be mindful to not add new capacity until the demand is there for healthy margin, customer centric clients. As we are in our some of the stronger amongst of the year, I feel good about the work our incredible employees have done to set us up for results that can meet the expectations of all our stakeholders.

Michelle, Don and I will now take any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Eric Stetler with Baird. Your line is open. Please go ahead.

Eric Stetler

A couple of quarters ago you mentioned that you expect double-digit revenue growth in 2016, is that still the expectation for the full year?

Chad Carlson

Certainly, our goal.

Eric Stetler

Okay. And then, it seems like looking at kind of the sequential growth trends in Q1 and Q2, it seems like they've been kind of a little bit below the average over the last couple of years kind of on a sequential growth basis. So I just kind of wondering going into the back half, do you guys -- it seems like you have enough kind of new stuff going on that growth to be a little bit better than it has historical been sequentially so maybe just may be a reason for why it's been a little slower in the first half versus why it could be maybe a little better in the back half?

Chad Carlson

I think you’ve kind of answered your own question Eric, but we don't look so much sequentially as we do year-over-year from a trend standpoint since we've been building upon building of our efforts that -- and that's also why we use the phrase lumpy, tends to be a lumpy business. But we have certainly seen stronger performance in the second half over the past some years and as I referenced we're going into a stronger looking second half for us again.

Eric Stetler

Okay thanks. And then on capital expenditures kind of your guidance at about 5 million for the full year or yet, in the first half it was only about 600,000 and you said kind of capacity is at a place you needed to be so I guess why -- what's the reasons for the step up in CapEx there in the back half of the year?

Don Norsworthy

Yes, most of it is going to be IT related PC refreshes, nothing really major from a facility standpoint. But there is a certain inherent level of maintenance CapEx associated with this business model.

Operator

Thank you. And our next question comes from the line of Matt Blazei with Lake Street Capital.

John Godin

Hi guys this is John Godin on for Matt. I appreciate your taking questions.

Chad Carlson

Hi John.

John Godin

Hi. Just a little curious on what you guys are kind of seeing in the competitive environment and it's specifically around the customer that you lost whether you think there is more competition entering or if this was kind of a one-off sort of deal?

Chad Carlson

We really haven’t faced that type of an issue very much at all and so I see it more as a one-off versus trend.

John Godin

Okay. And then just to clarify there was one new customer win in the quarter?

Chad Carlson

One new client logo, yes and several…

John Godin

Okay.

Chad Carlson

…new SOW agreements for the existing clients.

Operator

Thank you. And our next question comes from the line of Omar Samalot with Independent Corp. Your line is open. Please go ahead.

Omar Samalot

So I was very happy to see the revenue level achieved in Q2 and I'm knowing that it's a quarter and also I was happy to see that pay down of what 3.3 million off to the line. You did a better than what I expected in terms of gross margin for its each segment accept domestic, could you maybe give us a little bit of color there of why the results there?

Chad Carlson

The one client we mentioned that changed their outsourcing strategy had a pretty significant impact on our domestic market and while we were able to transition a lot of that headcount on to some existing programs, there was a, basically a transition period that transpired with that, so that was really the biggest impact in the second quarter.

Omar Samalot

Okay. And so you were able to quickly plug that into an existing relationship?

Chad Carlson

Yes, the bulk of it…

Don Norsworthy

The bulk of it…

Chad Carlson

Both the hedge went to existing relationships, a few different existing relationships.

Omar Samalot

Okay.

Chad Carlson

But with the transition we lost the revenue margin obviously from that running program.

Omar Samalot

Right, go it. Okay, and why the increase in SG&A versus the previous quarter despite the lower revenue?

Don Norsworthy

It really -- I wouldn’t deem it to be a measurable amount of money, I mean you are going to see some of the ebbs and flows in the SG&A.

Omar Samalot

Okay, all right. And you mentioned that you were able to offload some seats realigning your footprint, I'm assuming that is in the offshore segment. Is there more to do there, can you give us a status on that initiative?

Don Norsworthy

We’re getting close to being where we need to be, there is a little bit more we might do. It kind of depends on how the demand is shaping up.

Omar Samalot

Okay, all right. A few days ago I saw it was announced on the Iloilo City Mayor’s Web site that your facility there is targeted to grow to about 2,500 employees by December of this year. That would be quit a massive ramp, so I am wondering is that related to the new business wins you gained in Q2 or maybe that's some of the business that you gained so far in Q3?

Chad Carlson

I am not sure of the exact numbers that they're quoting in there, but we certainly get ready for some seasonal ramp as we move into the stronger portion of our year and we have to keep an very active recruiting from that standpoint.

Omar Samalot

Okay. Let me see, during the shareholder meeting last month, I asked you about improvements that seemed to be happening at your Canadian site, which is important because that site has been a drag on your domestic gross margin. At that time you were not able to provide any gross margin range, I was wondering if you could talk about that site and maybe I don’t know if you could offer a range at this point?

Chad Carlson

I'd rather not provide ranges by country especially when it's -- particularly when it's only one site, but I'll just give an update as far as how that location is doing for us. Obviously the currency has swung back in the favorable direction for that support. We also have a very strategic client there that has some very unique programs, key programs that are strategic and they're been working very closely with us to align to a good wage model, a reward for the employees that are performing and a good margin view for us. We're pretty pleased with the margin performance coming out of that site right now and are much less concerned about that than say we were four to five years ago.

Omar Samalot

Got it, okay, okay. And have you already started seeing that improvement during Q2 or that is something that you expect Q3 onwards more, if you can give me an idea there?

Chad Carlson

Yes I think some of that improvement was certainly there in Q2.

Omar Samalot

Okay.

Chad Carlson

And should be going forward, again as part of our domestic segment, in the domestic segment really the biggest negative hit in the domestic segment was, as I mentioned that one client that changed their outsourcing strategy.

Omar Samalot

Got it. Okay, so comparing this Q2 result versus similar revenue level for example in Q3 of last year where you guys lost $0.39 non-GAAP before restructuring and integration cost versus the $0.10 non-GAAP loss that you showed this quarter with very similar revenue level, obviously it shows me that you have significantly lowered your cost structure breakeven point. So is this as low as we go in terms breakeven point? Number one and then number two, would it be fair to say that given the current structure, I guess that will allow for I guess 60% to 70% of every additional $1 of growth profit improvement to fall straight into the bottom-line?

Chad Carlson

Well, first of all from a longer term perspective I think you can always lower your breakeven point, but we're also preparing for success in growth and that's a little different plan. So we're certainly planning for growth that we need to be able to support, and a lot of resources involved in preparing and trying to achieve that growth. So we can always lower our breakeven point and certainly as the organization knows I am always pushing on that, but that is why I mentioned kind of our optimism about where we are and what we've put in place and believe that we have all the tools in place to be consistently profitable and now we have to go execute because if the revenue is not coming we will clearly make moves to improve our breakeven point.

Omar Samalot

Okay. And about every additional dollar of improvement and anything you can say around that?

Chad Carlson

That one is tough to say, I mean there is so many different variations as to what can occur, you can have unbilled training on new ramp, on new business. You can have discounted training, there is just so many different variations that can vary by specific market as to what we get in the way of pull through on incremental business so it is tough to make a holistic statement like that.

Omar Samalot

Understood, okay. I know that you guys are [Multiple Speakers]…

Chad Carlson

Pull through on dollar in our whole market is going to be different than dollar in other market.

Omar Samalot

Sure, sure. But where I'm ongoing with this is obviously you've lowered, you've really lowered your cost structure pretty significantly where you could probably say, this much of additional business is going to bring us, it is going to go more towards the bottom-line than it's going to be enough through cost?

Chad Carlson

And in my closing comments there, I mean few deals new business and it's a big lever that can quickly lever to bottom-line in this business no question about that.

Don Norsworthy

From the challenge in this industry Omar is second quarter tradition is so slow and there is a balance there between managing expenses and allowing yourself to be in a position to capitalize on what traditional is the stronger third and fourth quarter.

Omar Samalot

Right. All right, thank you for that. I know that you guys don’t give specific guidance but maybe you can give us an idea at least directionally or comparatively as to what you expect for Q3 for example given the call volume is seasonally higher in Q3 would you expect results to be at least comparable to what we saw last Q4 for example, since now all of the synergy savings have been achieved, SG&A has been managed lower, and capacity utilization seems to continue to increase?

Chad Carlson

Omar you said that we don’t provide guidance but I will say that it is certainly our goal to do much better than what we did this quarter.

Omar Samalot

Okay.

Chad Carlson

And that's what we are all focused on.

Omar Samalot

Okay, all right. Although we've supported not giving annual guidance especially given all the moving parts you've been dealing with since last year, but now if things are much more stable and improving would you consider putting out some type of guidance maybe just one quarter out, I mean I think that would go a long way in providing investor confidence and interest and would also benefit current shareholders like myself.

Chad Carlson

Not at this time, but I'll take your recommendation and advisement and it is duly noted.

Omar Samalot

Okay, thank you. My last question during the shareholder meeting I heard you talk to one of the auditors about something called speed up trust, I must confess that I didn’t know much about that so I did a little research and I invite anybody listening to this call to do some research on that as well. Anyway, I stumbled upon the 13 behaviors of the high trust leader and I have to say that I have experienced most if not all of those behaviors with you Chad over the last five years. And that is what has given me the conviction to continue to invest in your and your team, so can you tell us how the -- maybe how has impacted, how you have spearheaded change within the Company in terms of culture or anything else that you can give an idea of how has that influenced your management style?

Chad Carlson

Well thank you for that. I appreciate your kind words there. I may not believe strongly that people do business because with people they trust and I think that, that culture of trust and building trust has certainly been part of the attraction to get such a strong leadership team across the organization. I think it's one of our core values and beliefs that bring a lot of very talented people to a company that obviously has its fair share of challenges and believe in the opportunity to be part of something fun and exciting and challenging, and rewarding at the same time. And we also believe strongly that if we have that ourselves as a team and we're able to extend that to our clients then that can become a differentiator for us. And I think it is a differentiator for us and our employee engagement and our overall retention of key employees and some very trusting client relationships and that's held true through some pretty challenging times obviously, so yes it is something that certainly and I believe our organization believes strongly in.

Omar Samalot

Okay.

Don Norsworthy

Just the one thing I would add to that Omar is, you look at the addition of Cory to our executive team and how impactful it has been. I don’t want to get overly optimistic but you look at the sales culture that he's put and placed in a very-very short time and we're all excited to have him on the team. He has meshed well with the SLT our senior leadership team. And again, it's just one more thing that reinforces our enthusiasm for the business and how optimistic we are.

Chad Carlson

But Omar I don’t want you to get overly optimistic, it's a tough business but I would say trends are in the right direction.

Operator

Thank you. At this time, this concludes our question-and-answer session and I'd like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

Chad Carlson

Well, thank you Michelle. I thank everybody for their time and interest and we'll get back to work and talk to you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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