Startek, Inc. (SRT) Q4 2018 Earnings Conference Call Transcript

StarTek, Inc. (SRT)
Q4 2018 Earnings Conference Call
March 13, 2019 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss StarTek's financial results for the quarter ended December 31, 2018. Joining us today is StarTek's President and Global CEO, Lance Rosenzweig, and the company's CFO, Ramesh Kamath.

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 risks and uncertainties, and actual results may vary materially from these projections. StarTek advises all those listening to this call today to review the latest 10-Q and 10-K 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-based measurements. The reconciliations can be found in the earnings release on the Investors section of their website. I would now like to remind everyone that a webcast replay of today's call will be available via the Investors section of the company's website at www.startek.com.

Now I would like to turn the call over to StarTek's President and Global CEO, Lance Rosenzweig. Sir, please proceed.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thank you, Sonia. Good afternoon everyone and thank you all for joining. The StarTek and Aegis integration is largely complete and led to a very strong quarter of operational performance and business development. Our post-merger integration team also continued to identify and implement both revenue and cost synergies across the organization.

Operationally, StarTek grew revenue and adjusted EBITDA sequentially due to improved client diversification and strong growth from our non-telecom verticals. For the second quarter in a row, excluding telco, we grew revenue with every one of our top 10 clients with some clients even accelerating grow from last quarter. Further, we experienced some of the strongest holiday volumes ever seen by the company as we now have a great mix of next-gen retail clients.

A good portion of our growth in Q4 was driven by a shift in operational structure. During the quarter, we implemented a new client-centric model in the Americas to replace our previous geographic model. To summarize, historically, StarTek followed the old-fashioned call center industry geographic based organization where center heads report to regional heads who report to country heads, etcetera. In this model, if a client was utilizing our services in multiple geographies, each operating team would report to a different regional leader. This resulted in an inconsistent performance with no single point of responsibility. Now, in our next generation client-centric model, client teams in all campuses report to a single client leader that manages that client relationship.

Under this new model, we are able to better understand, and address client needs consistently and globally while deploying services in the most appropriate geographies to enhance performance and utilization. After implementing this new structure, the benefits to both our clients and to StarTek was immediately evident. Our performance was up. Our clients were happier. And we were rewarded with more business and an increasing number of campuses delivering services.

Given the strong reception from our clients in the Americas. We have recently begun to roll out this new model with the rest of our global client base which we expect will benefit both revenue and margins going forward.

From a business development perspective, we continue to see accelerating demand for our new geographic footprint and service capabilities. Due to this growing demand and strong client growth, during the fourth quarter, StarTek added to our capacity with the opening of a new campus in Tegucigalpa, Honduras. This is now our third delivery campus in Honduras and the grand opening was quite the event. We were greeted by Honduras president, Juan Olando Hernandez, senior government officials, and many community partners during a celebration that included presentations and a ceremonial ribbon cutting to mark the opening of the new facility. In 2011, StarTek became one the first BPO companies to launch a delivery campus in Honduras and today we are one of the largest outsourced customer care providers in the entire country with more than 22,000 customer experienced experts.

Touching a bit further on our global presence, I believe an important aspect of our company that is often overlooked is the unique culture and support we can bring to other countries around the world. For example, in Saudi Arabia, our 51% owned joint venture is currently the largest employer of women in the entire country. I recently visited our team in Riyadh and was extremely impressed with the passion, leadership, and excellent performance of the team for clients in the region.

Globally, StarTek is exhibiting strong leadership in diversity and inclusion. In particular, employing and supporting persons with disabilities. We were proud to be recognized by the Society for Human Resource Management for excellence in diversity and inclusion. It was a great honor to meet with some of our award-winning disabled team members in Gurgaon, India who are delivering excellence for our clients every day and whose accomplishment in the face of adversity serve as an inspiration to our entire company. I am proud of the opportunities and benefits we are bringing to the individuals and countries in which we operate.

I am also happy to report that subsequent to year end, we strengthened our board of directors with the appointments of Julie Schoenfeld and Albert Aboody. Each of these new directors brings unique and relevant skill sets to our board and we look forward to leveraging their experience and knowledge as we capitalize on the many growth opportunities ahead. I would like to thank Ben Rosenzweig and Robert Sheft for their contributions to the board over the last several years. We wish them the best going forward.

Before wrapping up with my closing remarks, I'd like to turn the call over to our Chief Financial Officer, Ramesh Kamath, to take you through StarTek's financial results. Ramesh.

Ramesh Kamath -- Chief Financial Officer

Thank you, Lance. The quarter results we are reporting today include StarTek and Aegis financials from October 1 through December 31, our first time reporting a full quarter. As mentioned on our last quarterly call, the business combination resulted in a change in fiscal year end from December 31st to March 31st which is the fiscal year end for Aegis. However, in October, the StarTek board of directors voted to change the fiscal year end back to December 31. As a result, we will be filing a transitional report on form 10-KT for the nine months ending December 31, 2018.

Due to certain limitations in regard to publically available financial information, we are unable to provide the combined company financials from the year over period. As a result, we will not discuss year on year comparisons as we would be comparing the financials of two companies against one. Instead, we believe it will be more effective to highlight the quarter over quarter results with qualitative commentary about the general trends and drivers for each major line item.

As noted in our press release today, the comparative results for the quarter ending September 30th included StarTek results from July 20th through September 30th combined with Aegis results for the full quarter July 1st through September 30th, 2018.

Now, having said that, total revenue for the fourth quarter of 2018 increased 5% to $158.6 million compared to $151.5 million in the quarter ending September 30th. We continue to face headwinds in our telecom vertical. However, it is having less of a profit impact on our overall business due to strong growth from our non-telecom clients. Our non-telecom growth has been driven by excellent client expansion programs and new client wins including the finding of a large retail client during the last quarter.

As Lance mentioned, we also experienced higher volume related to holiday seasonality, which reflects the ongoing diversification of our client base as we now have a greater mix of next-gen retail clients.

Gross profit for the quarter increased 10% to $25.1 million compared to $22.8 million with gross margins of 15.8% compared to 15% in the quarter ending September. Margins continue to improve primarily due to the cost savings associated with synergies from the business combination along with higher volumes related to the holiday season.

SG&A for the quarter was $21.9 million as compared to $22.8 million in the quarter ending September. As a percentage of revenue, SG&A was 13.8% as compared to 15.1%.

Net loss for the quarter was $9.7 million or a negative $0.26 per share compared to a loss of $10.9 million or $0.32 per share negative in the quarter ending September 30th. Note that although this loss is lower than the previous quarter, it's higher than what we would expect on a normalized basis due to transaction-related and restructuring costs incurred in the quarter. In addition, we were not able to recognize the tax benefit for losses and certain benefits which led to a higher tax provision for this quarter.

Adjusted EBITDA for the quarter increased 40% to $11.4 million compared to $8.1 million in the quarter ending September 30th. As a percentage of revenue, adjusted EBITDA was 7.2% compared to 5.4%.

From a cost synergy perspective, we completed additional actions during the quarter to bring our total reduction in annualized cost to over $16 million since completing the merger. We are well on track to deliver on our previously stated goal of realizing $30 million in adjusted EBITDA from synergies, revenue growth, and operating efficiencies by mid-2021.

From a balance sheet perspective as of December 31, we are approximately $24.6 million of cash and approximately $185.7 million of gross debt. This compares with $20.5 million of cash and $178.3 million of gross debt at September 30th.

In 2019, we expect to reduce our net debt position and spend on the balance sheet while also utilizing our free cash to deploy across various investments to our technology infrastructure.

This concludes my prepared remarks. I will now turn over the call back to Lance. Lance?

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thank you, Ramesh. Overall, I am very proud of the progress our team has made to return StarTek to higher growth and margin expansion. We are truly gaining momentum with our new global footprint and capabilities as we implement best practices and operational excellence throughout the company.

Looking ahead, we will continue to identify opportunities for revenue growth and operating efficiencies while focusing our business development efforts in high-growth verticals such as technology, financial services, next-gen retail, healthcare, and travel. We are well positioned to execute on our growth initiatives and look forward to carrying this momentum through 2019.

Operator, Ramesh and I will now open up the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Dave Konig of Baird. Your line is now open.

Dave Konig -- Baird -- Analyst

Yeah. Hey, guys. Thank you and congrats on the retail clients. That sounds like good momentum there.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thank you, Dave.

Dave Konig -- Baird -- Analyst

Yeah. And I guess my first question, so the $158 million kind of base. At the first quarter, we have a kind of clean combined company base. Is that a good place to kind of as a starting point think of next year just using that $158 million as kind of your baseline quarterly result? From there, how is this seasonality going to work? Is Q1 a little lower than that and the rest of the quarters are a little above and maybe average the $158 million for the year? How should we think of that?

Lance Rosenzweig -- President and Global Chief Executive Officer 

Yeah. So, we're not, as we've mentioned in the past, providing forward-looking guidance. But I would say that this is our first full and clean quarter. There is a bit of seasonality in it as is typical in our industry with companies who have some seasonal clients. So, you're likely to see that seasonal trend will continue to the extent that we have this kind of retail business going forward.

Dave Konig -- Baird -- Analyst

Okay. Thank you. Secondly, you called out that the loss should be less going forward just simply because you had the restructuring type stuff in Q4. Are the other line items more normalized? There was nothing kind of one-off in some of the other line items like the gross margin and the SG&A?

Ramesh Kamath -- Chief Financial Officer

Hi, David, this is Ramesh. No, David. No other one-off items anywhere else. It's all par for the course.

Dave Konig -- Baird -- Analyst

Okay. Got you. And then, a couple of just housekeeping ones. I know Argentina the peso has been weak. Is there any way to think about how that impacted Q4 and maybe even how that impacts 2019?

Ramesh Kamath -- Chief Financial Officer

Everybody asks me about the Argentina peso and the good news is it has remained completely stable all over the last quarter for us. In our previous quarter, the value had depreciated by 50% in just one quarter, but quarter four has remained completely stable and as of today also for most of the first quarter it has remained stable. So, we are remaining reasonably hopeful that the worst is behind them. As I said, the reelection is in May. We'll know after that.

Dave Konig -- Baird -- Analyst

Got you. One last quick one. Free cash flow for '19, I would imagine your capex spending is going to probably be semi-low relative to D&A. Do you expect to have a free cash flow positive year in '19?

Ramesh Kamath -- Chief Financial Officer

As Lance keeps telling me all the time, we do not provide forward-looking guidance. So, you'll have to excuse us. But we have mentioned in our prepared speech that we are looking at investing in our retail technology and infrastructure assets.

Dave Konig -- Baird -- Analyst

Okay. Great. Thank you.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thanks, David.

Operator

Thank you. And our next question comes from analyst Omar Samalot. Your line is now open.

Omar Samalot -- Analyst

Thank you. Hello, guys.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Hey, Omar.

Ramesh Kamath -- Chief Financial Officer

Hey, Omar.

Omar Samalot -- Analyst

I was pleased to see an improvement quarter over quarter and EBITDA improvement despite the lighter revenue. I guess it must mean that the market business continues to increase. How do you see the revenue picture evolving?

Lance Rosenzweig -- President and Global Chief Executive Officer 

As we mentioned in our remarks, we're continuing to see good growth from our client mix outside of telecom and moderating headwinds on the client mix within telecom. And that varies globally depending on the region of the world in which we are operating. So, we feel good about that. We're very happy with both the existing client performance and growth as well as the building pipeline by our sales team. So, we're feeling good.

Omar Samalot -- Analyst

Okay. Are you guys in a position yet to disclose utilization rates by segment for example? You're touting business wins, but we have no real idea in terms of concrete numbers. I was wondering if you were at a point where you can disclose some of that?

Lance Rosenzweig -- President and Global Chief Executive Officer 

We at this stage have not disclosed utilization rates in any kind of segmented way, but we are highly focused on it. And we see opportunities in certain parts of the world to better grow into our capacity and in other parts of the world, like Honduras, we needed new capacity and we launched it. And so, new capacity is clearly only a function of growth and outside of that better capacity utilization does drive better margins in a particular region.

Omar Samalot -- Analyst

Okay. And what in terms of these business wins?

Lance Rosenzweig -- President and Global Chief Executive Officer 

So, we are not commenting on specific new business wins, but I would say that the global sales reorganization that we've done, which enables us to focus on global clients as opposed to just in region clients, is generating a strengthening pipeline by a very strong and active sales team. So, I'm actually quite excited about the opportunities ahead in sales and client development.

Omar Samalot -- Analyst

Okay. And I'm assuming that given Ramesh's last answer, you are not providing a capex budget at this point yet?

Lance Rosenzweig -- President and Global Chief Executive Officer 

Correct. We are not providing forward-looking guidance. That's both in operating performance as well as capex.

Omar Samalot -- Analyst

Okay. I see a pretty nice draw up in the trade accounts receivable quarter over quarter. I was wondering, Ramesh, if you can comment on your DSOs for the quarter?

Ramesh Kamath -- Chief Financial Officer

Okay. My DSOs for the quarter should be in the range of about, let me give you a number, close to between 66 and 68 on bill receivables. And the last time, Omar, we spoke I must correct something. When I told you the DSO, I included the unbilled also which it looked higher but was not giving a good picture. So, if you were to do that comparison then you could say knock off about 13 to 15 less from what I told last time. And that will give you a proper comparative.

While DSOs have come down, I think please remember it is a holiday season in the US and collections in the last two weeks of December generally tends to be slow and it has picked up in the first of January. It's routine in this industry.

Omar Samalot -- Analyst

Okay. Got it. Okay. I also noticed that the provision for doubtful accounts increased to $2.2 million from $1.7 million quarter over quarter. Can you explain what's going on there?

Ramesh Kamath -- Chief Financial Officer

Yes. What we have done is we have, like we mentioned last time on our policy basis, we have been reviewing each of our accounts. During this account, we have done this provision to clean up all the financials. We don't expect such large numbers going forward. There has been a full scope audit done and we made sure that it's all cleaned up. Again, Omar, like I mentioned last time, in our case the provision is on a conservative basis. From the previous quarter's provisions, we actually collected $300 thousand already. So, I'm hoping that the next quarter will be a good quarter.

Omar Samalot -- Analyst

Got it. Okay. And I guess whatever collections you would be able to make would go straight to the bottom line?

Ramesh Kamath -- Chief Financial Officer

Correct.

Omar Samalot -- Analyst

Okay. In terms of the income taxes, they came in a bit higher than what I expected. I don't know if you can offer some color there and how you see that going forward and was a large part of that cash or non-cash?

Ramesh Kamath -- Chief Financial Officer

Most of the increase is non-cash. It's a deferred tax plan which we created. This arose from a discussion from our auditors where we took a very conservative stand. In one case we have a deferred tax asset. We said that the probability of the entire recovery in the near future may not be good. Personally, I am optimistic it will be, but the auditor said let's take it safe. In another case, accounting standards have changed. We decided to make a deferred tax provision for the first time, a liability actually.

So, yes. This is non-cash and you're not likely to see this lumpiness going forward.

Omar Samalot -- Analyst

Perfect. Okay. That's very helpful. All right. Some of your competitors have mentioned their ability to reprise North American based programs given the tight labor market. How are you guys doing in that area?

Lance Rosenzweig -- President and Global Chief Executive Officer 

It varies on a program by program basis and on a region by region basis. Overall, you did see margin expansion over the quarter in terms of gross margins. So, we're not seeing, for example, that rising labor rates are having a negative impact on our gross margins.

Omar Samalot -- Analyst

Okay. The Aegis side brought pretty important AI capabilities to the merger. I was wondering if you could talk about how though capabilities fit into your overall strategy?

Lance Rosenzweig -- President and Global Chief Executive Officer 

Long-term we're very excited about the opportunities that our digital offerings will have in the marketplace. It takes a while for these to productize, for clients to test them, for them to actually have a material impact on the financials. But we just have a great team of developers that are working on these products. We are also looking at partners who have excellent third-party products and then looking to kind of create integrated offerings for our clients.

I would say where we also are seeing great success is in our Ideal Dialogue offering. Ideal Dialogue is a proprietary product that we have here at StarTek, and we are rolling out that offering globally across our other operations and there is quite a bit of interest outside of the US. I think that we're going to see some nice opportunities for Ideal Dialogue going forward.

Omar Samalot -- Analyst

Okay. Cool. All right. In the past, you mentioned how Australia presents a great opportunity given your Philippines and Malaysian footprints allowing for almost around the clock utilization for those seats given their different time zones. I know you guys have been working to build that sales pipeline and recently I saw that you attended that Global Business Week in Sydney, I think it was last month. I was wondering if you could share any progress at all in that initiative?

Lance Rosenzweig -- President and Global Chief Executive Officer 

I don't know how you're getting my plane records. But I was in Australia a few weeks ago and our operations are actually in Melbourne. I'm quite upbeat about our opportunities there. I think we've got a great team. We've got some great clients with whom I met and I'm enthusiastic about our opportunities in Australia.

I will say that in our industry there is a sale cycle and it does take time. And so, as we talk about and look at new client opportunities, the sale cycle takes a bit of time. There is a lot of diligence that clients do. So, there's no immediate impact, but I think longer-term I'm feeling good about that part of the world.

Omar Samalot -- Analyst

Okay. Good. Excellent. Finally, I see the largest shareholder bought some more stock in December. I think it's a great confident signal. I was wondering if there is anything you can comment in terms of their thinking behind the transaction?

Lance Rosenzweig -- President and Global Chief Executive Officer 

Your question was a bit garbled, Omar. Are you talking about the CSP investment?

Omar Samalot -- Analyst

I saw that the largest shareholder in December bought some stock through a private transaction. So, I took that as a good confident signal. I was wondering if there was any comment that you could make on their thinking behind the transaction?

Ramesh Kamath -- Chief Financial Officer

I don't think we really have a comment around anyone buying our shares. On a very personal note, as long as they keep buying and not selling, I'm always a happy person.

Omar Samalot -- Analyst

Okay. Fair enough. Fair enough. Well, guys, thank you very much and I hope to see continued improvement going forward.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thank you, Omar.

Operator

Thank you. And again, ladies and gentlemen, if you would like to ask a question at this time, please press * then 1 on your touchtone telephone. And our next question comes from Dave Konig of Baird. Your line is now open.

Dave Konig -- Baird -- Analyst

Hey, guys. Just a couple of quick ones on the financials. What would the share count have been if profitable? I know you have 37.2 million shares. You don't have the options into the share cup, but what would the diluted share cup be if you were profitable?

Ramesh Kamath -- Chief Financial Officer

We don't have.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Yeah. We don't have that number. We can try to get back to you on that one, David.

Dave Konig -- Baird -- Analyst

Yeah. No problem at all. The only other one is the interest expense that was close to $4 million. Is that a normalized number, nothing in there that's kind of one-off? Just so we know if there is something to take out in future quarters.

Ramesh Kamath -- Chief Financial Officer

No. This is a normalized number now.

Dave Konig -- Baird -- Analyst

Okay. Perfect. That's all I've got. Thank you for that.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Okay. Thanks, David.

Operator

Thank you. Ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mr. Rosenzweig. Please, proceed.

Lance Rosenzweig -- President and Global Chief Executive Officer 

Thank you, Sonia, and thank you all for joining us this afternoon and for your continued support of StarTek. We are always happy to make ourselves available to our shareholders and prospective investors by phone and encourage you to reach out. We look forward to speaking to you next quarter when we report our results in May. Thank you very much.

Operator

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

Duration: 30 minutes

Call participants:

Lance Rosenzweig -- President and Global Chief Executive Officer 

Ramesh Kamath -- Chief Financial Officer

Dave Konig -- Baird -- Analyst

Omar Samalot -- Analyst

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