StarTek, Inc. (NYSE:SRT) Q3 2021 Earnings Conference Call November 2, 2021 5:00 PM ET
Aparup Sengupta - Executive Chairman and Global Chief Executive Officer
Vikash Sureka - Global Chief Financial Officer
Bharat Rao - President
Conference Call Participants
Chris Howe - Barrington
Katherine Knop - B. Riley
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00:05 Good afternoon everyone, and thank you for participating in today's Conference Call to Discuss StarTek's Financial Results for the Third Quarter Ended September thirty, twenty twenty one. Joining us today are StarTek's Executive Chairman and Global CEO, Aparup Sengupta; the company's CFO, Vikash Sureka; and the company’s President, Bharat Rao. Following their remarks, we'll open the call for your questions.
00:31 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 Laws. These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially.
00:54 StarTek advises all those listening to this call to review the latest ten Q and ten K posted on its website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update any forward-looking statements. 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.
01:24 The reconciliations can be found in the earnings release on the Investors section on the website. And I would like to remind everyone that a webcast replay for today's call will be available via the Investors Section of the company's website at www.startek.com.
01:40 Now, I would like to turn the call over to StarTek's Executive Chairman and Global CEO, Aparup Sengupta. Please go ahead.
01:50 Thank you very much, Joseph. Good afternoon, everyone, and thank you for all joining this today’s call. Our third quarter performance demonstrates the progress we have made with driving growth across core verticals and continuing to strengthen our operational foundation.
02:07 We generated year over year increases across both revenues and adjusted EBITDA and sustained our prudent approach to cost management throughout our organization. On an operational level, we have continued to make key platform enhancements, support our global workforce, and make key additions to our leadership team. These efforts have helped us further optimize our platform and maximize our organizational efficiency.
02:35 Examining our performance by vertical, our growth during the third quarter was primarily driven by our sustained momentum with clients across the telecom banking and financial services and technology and IT services verticals. Consistent with the trends we noted last quarter, these verticals have continued to make a healthy recovery from last year's pandemic related lows.
03:00 While the travel and hospitality vertical was down year over year on a revenue basis, we did see sequential volume improvements relative to last quarter as more geographies start easing restrictions and have begun gradually reopening. By geography, we generated meaningful year over year improvements in India, the Middle East, and South Africa as a result of both our strengthened operations in those regions and our sound recovery from particularly steep pandemic related impacts last year.
03:32 By contrast, we experienced some year over year revenue softness in the United States due to disruption caused by cybersecurity incident and growing constraints around labor availability and wage pressure. As we continue to monitor these trends, we are placing a strong priority on ensuring we have a robust set of resources for delivering our high quality business process management solutions. This includes ensuring we have the team members needed to support onshore solutions for certain verticals and continuing to make investments in new digital capabilities for our platform.
04:07 Our newly appointed President, Bharat Rao will be later on the call to discuss this strategy and specific developments in greater depth, but I'm pleased with the strong progress we have made to date and look forward to further developing an operational debt, we have consistently demonstrated during a dynamic time for the global BPO industry.
04:29 Before I turn the call over to our CFO, Vikash Sureka to walk you through our third quarter financial performance in greater detail, I wanted to provide a brief update on our recovery from the cybersecurity attack we experienced at the end of Q2. As a reminder, the threat involved encryption of some of our systems and was contained to just a few specific geographies, mostly impacting agents who are working from home.
04:56 We swiftly eradicated the threat and restored the affected agents and client safe, secure access to our platform. And I've seen further bolstered our platform security and protection measures to save guarding and similar threats. Some of the measures we have undertaken to enhance our managed and endpoint detection and response include having a two factor authentication protocol, geofencing and predictive analytics tool.
05:22 In addition, we have also created a twenty four seven cybersecurity monitoring command center. While the incident did somewhat impact our financial performance during the quarter, as Vikash will detail shortly, the fact that we nevertheless drove year over year top line growth and adjusted EBITDA, profitability expansion indicates that our team's tireless commitment and flexibility has helped us create a resilient operational and financial foundation.
05:51 This infrastructure has helped us navigate some of the most difficult times our business and our industry have ever experienced and we plan to continue leveraging our solid platform to deliver secure, efficient, and exceptional customer experience management solutions across our global client base.
06:09 I'd now like to turn the call over to Vikash to a more detailed overview of our Q3 financial performance. Vikash?
06:19 Yes. Thanks, Aparup. Starting on the top line, net revenue in Q3 increased six percent to one hundred and seventy two point eight million, compared to one hundred and fifty two point seven million in the year ago quarter. On a constant currency basis, the net revenue increased by seven percent, compared to the ago quarter. This year over year growth reflects continued strength across key verticals and geographies.
06:46 On a nine-month basis, revenue increased thirteen percent as compared to the year ago period. This is a testimony of the resilience and innovation shown by our teams to quickly adapt a hybrid model of working and future proof our business. This also gives us confidence that we have the capabilities to handle any future disruption that may be caused by COVID and we can now strongly focus on driving growth.
07:14 Gross profit for quarter three was twenty one point five million, compared to twenty point three million in the year ago quarter. Gross margin was twelve point five percent, compared to thirteen point seven percent in the year ago quarter. This decline is primarily attributable to the cybersecurity incident where we lost seventy five basis points.
07:36 In addition, gross margin was impacted by the year over year growth we saw in the telecom, financial and business services and public sector verticals that are largely delivered onshore.
07:48 We are also closely monitoring the growing wage pressure and labor shortages, particularly in the U.S. And we will take appropriate measures, including optimizing our infrastructure costs to offset any impact from these on our overall margin.
08:05 Selling, general and administrative, SG and A for short, expenses for Q3 decreased to thirteen point one million, compared to fourteen point three million in the year ago quarter. As a percentage of revenues, SG and A improved one twenty basis points to seven point six percent compared to eight point eight percent in the year ago quarter. This is, as a result of continued operating leverage at the back of the higher revenue base we generated during the quarter.
08:34 We expect to make investments in high performing sales, solutioning, marketing, and digital teams over the next few quarters in order to drive growth and differentiation. This could result in higher SG and A costs related to our revenue performance. Having said this, we continue to remain guided by our stated objective of achieving sustainable double digit adjusted EBITDA margins.
08:59 Net income attributable to StarTek shareholders for Q3 was zero point one million or zero point zero dollars per share, compared to a net income attributable to StarTek shareholders of zero point four million dollars or zero point zero one dollars per share in the year ago quarter.
09:17 Adjusted net income attributable to StarTek shareholders for Q3 was two point nine million or point zero point zero seven dollars per share, compared to an adjusted net income attributable to StarTek shareholders of three point three million or point eight dollars per share in the year ago quarter.
09:36 Adjusted EBITDA in Q3 increased slightly to fifteen point nine million, compared to fifteen point six million in the year ago quarter. As a percentage of revenue, adjusted EBITDA was nine point two percent compared to nine point six percent in the year ago quarter.
09:54 During the quarter, we received two point seven million in government grants, compared to one point one million in the year ago quarter. This helped offset the loss of margin caused by the cybersecurity incident.
10:07 Led by revenue growth, our adjusted EBITDA for the nine months period increased by fifty three percent as compared to the year over ago period, and as a percentage of revenue, adjusted EBITDA for the nine period was ten point four percent compared to six point two percent in the year ago period.
10:26 From a balance sheet perspective at September thirty, twenty twenty one, our cash and restricted cash totaled sixty three point five million, compared to fifty four point one million at June thirty, twenty twenty one, with the increase due to improved working capital during this quarter.
10:45 Total debt at September thirty, twenty twenty one improved to one seventy point four million, compared to one hundred and seventy three point nine million at June thirty, twenty twenty one. Net debt at September thirty, twenty twenty one improved to one zero six point nine million, compared to one nineteen point eight million at June thirty, twenty twenty one.
11:07 Our net leverage on a trailing twelve basis continues to stay well under 2x and we remain comfortable with our liquidity position as it stands today. In addition, we purchased an aggregate fifty seven thousand seven hundred and fifty nine shares of our common stock under our repurchase plan during the third quarter.
11:30 We did this at an average cost of five point five seven dollars per share. This was a testament to our continued confidence in our long term growth prospects, as well as our strong execution on these initiatives.
11:46 As we progress into the fourth quarter and prepare for twenty twenty two, we have maintained a commitment to invest in improving our IT and go to market strategy, including enhancing our sales capabilities and continuing to grow our sales and marketing teams.
12:01 We expect these investments combined with the strength and security measures that are put in place to bolster our operational foundation for the quarters ahead. And we look forward to providing further updates on a growth trajectory.
12:15 This concludes my prepared remarks. I will now turn the call over to our company’s new President, Bharat Rao, who I’m very pleased to formally introduce to all of you today. Bharat, over to you.
12:29 Sure. Thank you, Vikash. It is a pleasure to be joining you all on today's call. While today marks my first earnings call with the StarTek team as President, I have been on the company's board since twenty eighteen and been a managing partner at Capital Square Partners, the company's controlling shareholders.
12:53 Through this position and my past roles at Credit Suisse in Asia, ING Bank, PwC and Citibank, I have gained extensive experience with driving growth and innovation. And I greatly look forward to leverage this experience to advance StarTek’s strategic initiatives, which I will detail shortly.
13:18 I was joined in October by another new appointee to StarTek’s executive team, the company's new Global Chief Revenue Officer, Vivek Sharma. Vivek will lead the global go to market organization, including key client relationships business growth and industry specific digital initiatives. And he brings over twenty five years of experience with managing large enterprise clients across technology and business process services.
13:54 He will play a critical role in driving StarTek’s new phase of growth, building momentum with the focused industry and go to market approach, strengthening our sales and solution capability and sharpening our market positioning. Vivek’s insights will be invaluable as we drive business growth across new industry segments, markets and service lines. And I greatly look forward to working with him to accelerate our capabilities across the customer experience transformation journey that we offer.
14:35 Our appointments come as part of a broader build out of the executive team and will be surrounded by several other key new appointments that are meant to strengthen our leadership in four areas of growth.
14:51 For instance, we have recently onboarded a new Chief Digital Officer, Abhi Jain, who will be responsible for overseeing the design, launch and promotion of our new customer facing digital solutions that are expected to make our platform service suite more tech enabled and comprehensive.
15:16 We will provide further updates as the appointments are made, but I am proud of the progress we made so far and honored to experience the tremendous strength and capability of our management team first-hand.
15:30 As we build out our leadership team, we are also increasing our key personnel to support regions and verticals where we are expressing strong growth trends. As Vikash mentioned earlier, much of our team buildout across our organization will be concentrated within the sales and marketing as we further develop our lead generation, digital solutioning capabilities and brand positioning.
16:04 In fact, we partnered with external advisors and have recently hired a Chief Marketing Officer with a strong background in both consumer products and BPO industries to help convey consistent messaging about our brand and positioning to the marketplace.
16:24 To provide you some additional color on specific geographies, we have already announced our intention to hire up to three hundred customer experience specialists to support our growing business at our Makati, City campus in the Philippines. We anticipate the hiring to be completed by middle of this quarter.
16:47 We also went live with the previously announced telecom client in South Africa where we now run one hundred percent of their customer support operations across multiple sites and we are looking to add a new site in Port Elizabeth to further support this endeavor.
17:10 We continue to see significant growth in our India operations where we are gaining ground to new age digital companies. These updates are in line with our ongoing business expansion across telecom and other emerging consumer segments across major markets. Across these segment programs, the growing teams will focus on delivering end to end, digital customer experience solutions for some of the finest brands globally.
17:45 The majority of our employees continue to operate a significant proportion of our delivery from a work from home environment in compliance with various local regulations and movement restrictions across many parts of the world.
18:02 As we and our clients, prepare for next year's budget, we will begin discussing with them the steady stage roadmap towards a long term split of at-home versus on-site. We continue to believe that this will end up eventually, with perhaps a seventy five twenty five split, but only time will confirm that. This will help us assess potential optimization of our physical infrastructure as well.
18:36 Before we open up the call to questions, I wanted to present some of our key growth areas of focus from where I sit in my new role here. As President, I am responsible for driving business operations, client value and synergy across the organization and aligning organizational priorities with a long term strategy.
19:04 In particular, I plan to focus on transforming StarTek into a more customer centric organization that leverages emerging technologies to deliver innovative solutions in specific industry verticals. With the expanding personnel and leadership teams that we are building, we are quickly strengthening the resources we have in place to drive growth across our verticals.
19:32 In the early days, we have identified five specific verticals that we plan to focus on within our business development strategy. So, I would like to take some time to briefly summarize the drivers and the opportunities we see in each.
19:51 We were primarily focused on the following industry verticals: communication, media and telecom. Second, retail and e-commerce. Hi-Tech, Banking Financial Services and insurance and healthcare and others comprising largely education, travel, and hospitality.
20:16 These are sectors that we have deep domain knowledge, global capabilities, a demonstrable track record, with and our sectors that are likely to experience significant growth in the short to medium term across the geographies that we deliver from. These sectors also offer significant offshoring and nearshoring opportunities, which are margin accretive.
20:46 As we move into the fourth quarter of twenty twenty one and prepare for twenty twenty two, we remain focused on maintaining our momentum within our key geographies as verticals, as well as ensuring the continued efficiency of our global operations. I am pleased to be joining StarTek at this point in the company's journey and look forward to abundant growth opportunities we aim to capture in the near and long term.
21:16 Operator, we will now open the call for questions. Thank you.
21:22 Thank you. [Operator Instructions] And our first question comes from Chris Howe from Barrington. Your line is open.
21:46 [Technical Difficulty] everyone and nice to hear your voice Bharat in the comments on the company moving forward.
21:57 Thank you, Chris.
21:59 Yeah, leading off, in no specific order here, I had a question out of curiosity recently domestically, we've had some complexity as it relates to a recovery in travel, whether that's pilot strikes changes in flight schedules? Can you talk about the recovery and travel aside from increased passenger traffic volume? I would imply that this increased volume could also create temporary pockets of increased complexity that may benefit your recovery in this end market.
22:43 Sure. Aparup, do you want to provide a context or I'm happy to start and then would request Aparup and Vikash to chime in. But that's a fair question, Chris. I guess when you talk of recovering the travel space, whilst we are cautiously optimistic, we feel some of these irregular patterns actually could be beneficial for us. If you think about COVID, right, when COVID struck, I noticed the volume increase, Chris, came off the back of cancellations, rescheduling’s and as some of these – some capacity comes online, we would think until systems, until everything stabilizes, many of these irregularities could actually provide some interesting, a, spurts in volumes; and b, there might be complexity resulting in more queries that might need expertise and handling.
23:49 So, whilst we haven't – it's perhaps a bit too early to forecast this into the future, but we do think this could actually provide some interesting opportunities, which with certain analytical tools that we plan to deploy, could actually create a lot of stickiness as far as customer business and customer response is concerned from our perspective. I’ll just take a pause there and see if Aparup and Vikash would like to add to that.
24:22 Sure. Bharat, I think you are bang on and as you rightly said, what we saw was this whole world getting into a world wind storm and then people just huddled up together to cancel all their travel plans, and it was a pause. So, the world almost came to a standstill, but now things are opening up and as things are opening up, very interesting complexities of calls are happening.
24:46 Just to give you an example, on an average traveler used to go to a website for a travel portal, book his ticket, get it on the app, and then do a boarding with a flight, but now they are asking additional questions, especially on the international sector as to what is the protocol that I have to follow? Is there an RT PCR that we have to get it done?
25:08 So, these are additional questions that are coming up and in terms of whether there is a need for a quarantine, is this vaccine approved while travel portals and airlines are trying to publish as much as information as possible, but safety becoming of paramount importance. There is an element of anxiety and uncertainty, which in a way is raising as you have rightly said Chris, additional complexities of calls, and they are driving some volumes.
25:36 So on a per capita basis for a given number of flight, the number of calls has gone up and that's what is being visible based on the kind of data that we are seeing.
25:50 That's perfect. Thank you for the color. And I have one follow-up here. This is in line with some of Bharat’s comments about the key target growth areas by end market, you mentioned communication media, telecom, retail, e-commerce and many others. Can you comment on what you're seeing today in terms of the intensity of competition for business within these end markets? And your competitive position as it relates to what you're seeing in your [sandbox] [ph]?
26:28 Sure. Thanks Chris. In terms of the sectors that I touched upon, interestingly, there are some interesting both supply side and demand side dynamics. So, on the demand side, there is a lot happening as there is more spend going on in these sectors. Companies are actively focusing on looking at how do they increase their share of wallet with customers? How do they get new customers on board? How do they improve stickiness of offering? And interestingly quite happy to outsource what they deem as non-core operations.
27:12 So, to that extent, there are tailwinds in this sector because of supply side, kind of, the demand side dynamics. Now, it equally what's happening is that there are companies who are the service providers, i.e., are competitors who are obviously positioning themselves for this increase in demand and no marks for guessing when you look at some of the numbers of some of our competitors.
27:44 Now, where do we see our differentiation? I think, a, we have the ability to support – can everyone hear me?
27:59 Yes, I can hear you.
28:03 So, we have from a competitive differentiation perspective, what do we bring to the table? We have a very strong backend of onshore, nearshore and offshore geographical locations, which is perhaps unmatched. If you look at much definitely companies in are domain, we are probably better placed than most including places like Malaysia, where even some of the larger players are just about making a foray into that. We are already very well established and well entrenched.
28:45 Now secondly, we have the ability to offer support in over thirty languages globally. Right. So, a, in terms of the geographies that we can offer support from; b, the languages that we can provide support from; and the third element is also the fact that we are now partnering in the digital solutions area with a number of providers of digital solutions, which allows us to customize our offering.
29:24 Now, that coupled with a deep domain knowledge of having supported some of these companies and having an understanding of their own internal systems and processing, I think that positions us very well. Because Chris to your question, none of these sectors that I talked about are areas that we don't have domain expertise or domain capabilities. So, we're not clearly looking to get into domains that we have got no capabilities or a track record in.
29:56 So, what we will really look to do is to leverage our base, our expertise, and the multiple delivery platforms and locations and last, but not least the multiplicity of languages that we offer to be able to provide unique customer experience as I mentioned in over thirty odd languages.
30:21 I hope that gives you some perspective. And Vikash and Aparup, if you guys have anything else to it.
30:28 Yeah, it’s fine. You have covered everything.
30:32 Okay. I have other questions, but I'll hop back in the queue to give others a chance. Thank you for the color.
30:40 You are very welcome Chris. Thanks.
30:45 [Operator Instructions] There are no questions. Okay. We now have our next question from Zach Cummins from B. Riley. Your line is open.
31:06 Hi. This is Katherine Knop on for Zach Cummins. Thank you guys for taking my questions. The first question I have is, what impact did the cybersecurity incident have on revenue and gross profit during the quarter and do you guys expect revenue and gross margins will continue to be impacted in the coming quarters?
31:27 Vikash, will you take that?
31:28 Yes. I'll take that. So, yeah, during the quarter, we did face some pressure due to the cybersecurity incident itself. And like I called out in my remarks, on a gross margin basis, we lost about seventy five basis points in this quarter. But the good news for us really is, we acted very swiftly on this incident and we are completely the neutralized event itself, right? And as a result of this, I think our customers are very confident with our backend systems. We have had no customer issues because of this event itself. And I don't see any ongoing financial impact because of the incident itself.
32:11 However, I've mentioned that in the last earnings call as well and in some of our discussions that I expect that through this event, we have now identified certain measures that we have to take to strengthen our IT ecosystem and the landscape.
32:29 So, I expect that over the next three, fourth quarters that we may enhance our CapEx and deploy new sets of solutions, thoughts, achievements in the future. But purely from a standpoint, the event is neutralizes, and I don't see continued impact of that on our financials.
32:52 Okay, great. Thank you. And then another question for me would be, can you guys talk a little bit about the performance across key verticals, nice to see the growth in Telecom, but what's driving the year over year decline in e-commerce and consumer vertical and then also what's driving the decline in the healthcare vertical?
33:11 So, Bharat would you like to take that?
33:16 Sure. So, you see e-commerce, I mean, if you look at the healthcare vertical, our decline in healthcare vertical was largely off the back of the vaccination support program that we were already prepared for. So, if you look at a lot of that happened in this quarter, but in the previous quarter, but in this quarter as the vaccination support requirements in the U.S. came to an end, we had already planned for that kind of a decline. And that clearly explains the decline in the healthcare segment.
33:59 Now, this is something that we had already planned for. So, it's not something and therefore already factored into our budgeting process and the way we thought about this particular sector. So, in the healthcare care, as I mentioned, it was off the back of a decline in the vaccination support program largely in the U.S.
34:27 In the e-commerce, and consumer sector, there were certain – there were some kind of change terms of volumes, fairly margin, but largely impacted, if you see on a quarter on quarter basis, largely because of the effect of the ransomware, which obviously meant that we lost as Vikash mentioned, a week or two off revenues and you know that this business can be fairly susceptible and therefore that was really the main driver on a decline in e-commerce and consumer.
35:06 So, if we look at the numbers. If you compare the numbers versus where we were on a quarter on quarter basis. That's really the reason because if you see on a nine month basis, e-commerce and consumer has actually gone up.
35:24 Great. Okay. One final question from me.
35:26 Did it help?
35:28 Yes that's helpful. Thank you. One final question from me, just which verticals do you believe will be the key growth drivers for the company going forward of the five?
35:41 Off to five, I mean, retail e-commerce, clearly. Communication, media, and telecom whilst these sectors may not be growing as fast as some of the other sectors, for example, Hi-Tech. The communication media and telecom space is a space that we have very strong credentials.
36:08 Having said that, if you see from a tailwind perspective, if you talk purely of a percentage growth or if you think of the next twelve to eighteen months, I would think retail and e-commerce based on everything we see and that is not just across – it’s across the U.S., India, and some of our other geographies. And some of our customers in the Hi-Tech space.
36:33 So, these two are actually growing very well and we would think that going forward, they would probably be our engines for growth. With some of the others like BFSI and of course the media and telecom sector following fairly close. Does that help you get some color?
36:57 Yes. Thank you so much.
37:05 We have our follow-up question from Chris Howe from Barrington. Your line is open.
37:11 Thanks. One quick follow-up here. I just wanted to ask a question about the SG and A expense line. You mentioned three hundred specialists being added in the Philippines in the middle of this quarter, as we consider that along with your investments overall, how should we think about the level this past quarter and how we perhaps step up from this level into the fourth quarter and into the early part of next year?
37:45 Yes. So, this is Vikash, and I can really take that question and Bharat and Aparup can add. So, Chris, I mean, the three hundred people that we added in Makati that really does not impact our SG and A because those are people that – these are agents that will be used for executing the projects. So, it's more a COGS line, but on SG and A in the immediate quarter, Q4, I don't expect our SG and A to go up significantly, but the long term vision for us is to invest in our sales marketing, digital teams, and all of that costs will go in SG &A.
38:20 So, I expect there we be a step-up in SG and A in the interim period, while we scale group, right? And the quantum of that, we are still assessing, right? And they're making plans getting into twenty twenty two budget and we should be able to provide you with more color over the next three four months when we speak to you next.
38:55 I've got nothing more. Yeah, Vikash, thank you. I’ve got nothing more to add.
39:01 Yeah, thanks Bharat.
39:02 Chris, does that help?
39:04 Chris’ line was disconnected. [Operator Instructions] You were disconnected from the queue. All right, he is now back.
39:16 Perfect. Thank you.
39:18 Okay, Chris, you're back on the queue.
39:20 Yes, that's all I have. That was perfect.
39:23 Okay. Thanks Chris.
39:29 There are no questions at this time. And I would like to hand it over back to Mr. Sengupta.
39:36 Okay, thank you, Joseph, and thank you all for joining us this afternoon and for your continued support of StarTek. I look forward to speaking with you next when we report our fourth quarter and full year results. Thank you, and have a wonderful day.
39:53 Thank you, ladies and gentlemen. You may now disconnect.
39:57 Great. Thank you so much. Bye-bye.
39:58 Thank you so much. Bye-bye.