StarTek (SRT) Q4 2019 Earnings Call Transcript

StarTek (SRT)
Q4 2019 Earnings Call
Mar 12, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

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, 2019. Joining us today are StarTek's chairman and CEO Aparup Sengupta; the company's CFO, Ramesh Kamath, and the company's global COO, Rajiv Ahuja. Following their remarks, we'll open the call for your questionsBefore we continue, we would like to remind all participants that the discussion today may contain certain statements, which are forward-looking in natu. re 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. StarTek advises all those listening to this call to review the latest 10-Q and 10-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. The reconciliations can be found in the earnings release on the investor section of their website. 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 website at www.startek.com. Now I would like to turn the call over to StarTek's chairman and CEO, Aparup Sengupta.

Sir, please proceed.

Aparup Sengupta -- Chairman and Chief Executive Officer

Thank you very much, Gigi, and good afternoon, everyone. And thank you all for joining. Our exceptional fourth quarter results reflect the strength of our now fully integrated company. Since our combination with Aegis, we have driven consistent improvements to our business quarter after quarter, especially in the second half of 2019 as we made key additions to a leadership team.

2019 was our first full year as a consolidated company, and we are proud of the work that we have done to drive synergies and become an industry leader in the global customer experience management space. During the fourth quarter, we focused on better leveraging our global presence through improved operating efficiencies and implementing new quality control procedures across all of our geographies. Since Rajiv Ahuja joined our team as global COO last summer, we have been optimizing our service capabilities throughout every region we serve. In fact, during the quarter, we established a centralized virtual command center that monitors our customer service activity around the world 24/7.

This capability ensure that all of our customers receive the same high-quality experience no matter of time, day, night, or location. Rajiv's leadership already in driving material improvements in our business, and you will hear from him later on the call for more details on what he and his team have been up to. To further optimize our customer experience, we have been working to expand our service offerings to include higher-margin digital solutions. Using insights from analytics and artificial intelligence, our digital capabilities was center on predicting and managing customer experience.

We want to ensure that we are at the forefront of driving innovation to better serve our clients, and these digital initiatives with help us deliver on that. Regarding client diversification, we continue to execute on strategy laid out over the past several quarters. We are highly focused on adding new clients that can accelerate our growth, both by upselling services and geographies and also organically by nature of our clients' own growth. For new clients, we continue to target exciting companies in high-growth verticals like technology, next gen retail, financial services, travel, education and healthcare.

In fact, healthcare presents a significant near-term opportunity for us as we're seeing strong levels of interest from prospect across the globe. For perspective on our execution, our non-telco verticals accounted for 62% of the revenue in calendar 2019, up significantly from 51% in 2018. As a reminder, while vertical concentration is useful data point, it's important to note that we are not opposed to targeting more established verticals like telco and cable media as long as client is positioned for high growth such as the recently signed UK Telco provider we highlighted on our last quarterly update. Today, most of our US telco verticals remain stable.

However, we do continue to see softness with our telco business in India. We have taken steps to mitigate the impact including our decision not to renew an engagement with one of our low-margin Indian telco client during Q4. We will continue working to improve our margins in the region as opposed to chasing unprofitable revenue. As we have stated in the past, we want to serve as a strategic partner to our clients and help them achieve their customer goals rather than merely serve as a vendor with traditional call center services.

StarTek is at its best when partnered with the right companies, companies that are growing and seeking a truly differentiated experience for the customers. This mindset across the StarTek organization is driving the improvements we have seen in our operations, technology and, ultimately, our growth and profitability. Before commenting further, I would now like to turn our call over to our CFO, Ramesh Kamath, to take you through the StarTek's financial results for the quarter. Ramesh?

Ramesh Kamath -- Chief Financial Officer

Thank you, Aparup. Jumping right into the results. Net revenue for the quarter increased 8% to $171.6 million as compared to $158.6 million in the fourth quarter of 2019. with the increased growth driven by growth in e-commerce, healthcare and holiday volumes.

For those less familiar with our industry, note that the fourth quarter is historically the strongest quarter of the year due to seasonality. so it would not be appropriate to expect higher levels of revenue sequentially in quarter one 2020. Gross profit for the quarter increased 10% to $27.6 million as compared to $25.1 million in the quarter-ended December 2018, with gross margin up 30 basis points to 16.1% as compared to 15.8% in the quarter – year-ago quarter. Our margins continue to benefit from a focus on stronger employee insight utilization across our global footprint.

Margins also continue to improve as a result of positioning StarTek as a premium provider, which enables us to command stronger pricing. Selling, general, and administrative, SG&A expenses, decreased to $19.4 million as compared to $21.9 million in the year-ago quarter. As a percentage of revenue, SG&A improved 250 basis points to 11.3% as compared to 13.8% in the year-ago quarter, with the improvement driven by lower spend on travel, communication, power, legal, and other costs. Net loss attributable to StarTek shareholders for the quarter was $5.3 million on $0.14 per share as compared to a net loss of $9.7 million or $0.26 per share in the year-ago quarter.

Net loss in the fourth quarter of 2019 includes a $7.1 million goodwill impairment, largely pertaining to Argentina and South Africa. Although net loss improved this quarter, we would have been GAAP-positive had it not been for the goodwill impairment below the operating line. To reflect these non-operating impacts adjusted net income for the quarter of 20 – the fourth quarter of 2019 was $5.8 million or $0.15 a share as compared to an adjusted net loss of $6.9 million or $0.19 a share in the fourth quarter of 2018. Adjusted EBITDA for the quarter increased 48% to $16.8 million compared to $11.4 million in the year ago quarter.

As a percentage of revenue, adjusted EBITDA increased by 260 basis point to 9.8% from -- as compared to 7.2%. As Aparup mentioned earlier, our improvements here reflect the culmination of executing our various initiatives over the last year, including conversion of our sales pipeline, group synergies, and operational efficiency. From a balance sheet perspective at December 31, our cash and restricted cash increased to $32.6 million as compared to $24.6 million as on December 31, 2018. Our net debt at the end of 2019 was reduced to $174.8 million as compared to $185.7 million at the end of 2018, which resulted in a reduction of net debt to $142.2 million as compared to $161.1 million.

Note that our December 2019 net debt excludes $9.8 million of factor customer receivables on a nonrecourse basis. This concludes my prepared remarks. I'll now turn the call over to Rajiv. Rajiv?

Rajiv Ahuja -- Chief Operating Officer

Thank you, Ramesh. Since joining StarTek in the middle of 2019, one of my top priorities has been to take a long, hard look at the processes and competencies that reside in the organization. Having developed deeper understanding of the two, I have gone about, in part, deconstructing portions of the organization, and then have gone about reconstructing a team to put best practices in place. Through this process, over the last two quarters, we have created immense operational momentum, and I'm extremely pleased with the improvements that we made so far.

The nucleus of our business is centered around a client-driven, geography-led focus, ensuring that regardless of which corner of the globe the call originates from, we strive to create a consistent and world-class experience for our customers, one call at a time, all adding up to over a billion moments of truth. As Aparup mentioned earlier we've established a centralized virtual global command center this quarter to keep track of our customer experience touch points all across our network. With this, we can more fully align our operational standards and global best practices. Implementation of technology like this will position us well financing and further refining our global client management model in times to come.

We have also added a lot of horsepower in sales, operations, and other resource units, all focused on driving revenue as well as margin by creating new digital value-added products for our customers. And I now feel very confident that we are set up for continued success in 2020 by building out what I refer to as our dream team, a team that is committed to defining the future. Following the fourth quarter we appointed a new global head of sales, Rick Ferry, and a new chief technology officer, BS Reddy, who each bring unique and relevant skill sets to our organization. Rick was a founding team member at Aegis and has significant experience in maintaining strong customer relationships and driving sales growth.

BS Reddy who joined us recently as the CTO has a very strong background in managing global IT networks, having worked in the past for many world-class organizations. For the most part, we have completed the buildout of our robust team focused on driving sales and creating value-added digital products. Very soon, we would be in a position to announce the latest addition to our executive team, a new chief information and digital officer. This expanded team will help us bolster our pipeline with high-growth companies and drive innovation to better serve our clients.

At this point, I would like to buy the ball back to Aparup for his closing remarks. Aparup?

Aparup Sengupta -- Chairman and Chief Executive Officer

Thank you very much, Rajiv. I appreciate that. As I mentioned earlier, our goal is to position StarTek as one of the premier global customer experience providers for high-growth companies, and we have never had a stronger foundation to get us here. The majority of our team is in place.

Our sales pipeline is filled with high-growth prospects. Our global footprint is optimized. And our technology infrastructure has been refined and conditioned to create innovative digital solutions to further differentiate StarTek as a value-added partner. We are proud of the momentum we have built for 2020, but we all know there is still work to be done to achieve our ambitious goals of becoming a billion-dollar corporation down the road with strong double-digit adjusted EBITDA margins.

Before opening up the call for Q&A, I would want to express my deepest condolences for all the families affected by tragic COVID 19 outbreak. We are monitoring the situation closely. And while it certainly remains a global concern, the outbreak had virtually no effect on our operations to date. We plan to provide updates accordingly as we learn more.

That aside, we will now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Mark Argento from Lake Street. Your line is now open.

Unknown speaker

Hey, guys. This is John, on for Mark. Thanks for taking my question. First, just surrounding the Coronavirus.

I guess, any more color you can provide there. I know you said no impact in your organization but any line of sights with potential clients or verticals that could be more impacted than other. And out of that, within the quarter, you touched on some of the vertical diversification. Could you peel back the onion a little bit more there on where you're seeing the most strength? And then third, you know, you talked about becoming a full technology strategy partner, is it because maybe go through an example of what that looks like outside of just the call center relationship with one of your clients.

that would be helpful. Thank you, guys.

Aparup Sengupta -- Chairman and Chief Executive Officer

Sure. Thank you very much, John. And I'll just give you the answer to your questions. First of all, on the Coronavirus, I can only tell you that I don't know what I don't know because the whole world is trying to figure out what's going on.

But I can just lay some of our experience of managing a 24/7 operations. We understand that many times disasters happen, and there are breakages, there are outages. We have handled so many storms that we have handled in our life, I mean, being in Philippines and so many other places. We have seen all of that.

What we've learned and we are going to constantly monitoring as to what needs to be done at this point in time is use patience and signs. By that, I mean that we have to, what we call, is deploy a containment strategy, and I'll ask Rajiv to share more on that. But the fundamental pieces of that is we have kind of put an airport-like scanning and monitoring system in most of our centers as we speak. And it has been deployed in the Asian side, of course, but it is getting deployed globally by putting infrared scanners and ensuring that all the employees are communicated, too.

Rajiv would you like to quickly give some highlights off some of execution that we have done on that? And on the balance question, I will answer a few of those.

Rajiv Ahuja -- Chief Operating Officer

Sure thing, Aparup. So, the first step that we took was obviously imposing a global travel ban that was part of our containment strategy. The next thing we've done is, across most of our sites, we've deployed thermal scanners as well as digital thermometers, which can take temperatures for -- temperature readings for anybody entering the site. This is not restricted only to employees but is also restricted to visitors as well as vendors.

We've also bought in for a split location policy which means shifts start coming in and the resource source unit shifts are coming in split shifts so as to try and contain any potential outbreak, if at all there is some that is detected. Whenever we are finding the readings to be beyond the permissible limits, as laid out by the WHO guidelines, the individuals are being directed to the nearest hospitals which have the adequate testing facilities. They are being -- once they have the testing, which typically takes about 72 hours for the reports to come back, if the individual is found to be beyond the permissible limits, there is a quarantine that is immediately put into place. We've limited large gatherings.

We've stopped meetings where a large number of people getting together. We are encouraging the use of technology. So a number of, Mark – John, initiatives that have been put in, most of them in line with the WHO guidelines that have been issued. And happy to state that, at this point, while it seems to be spreading at a very rapid pace none of 44,000, 45,000 employees that we have spread across 13 different countries, not a single case reported so far.

Aparup, back to you.

Aparup Sengupta -- Chairman and Chief Executive Officer

Sure. And on the digital transformation that we're working on is that many people talk of digital and AI, but we want to work on something that is substantial and is meaningful and has a value proposition for our customers, and that's very critical. And we always I strongly believe that you have to build an organization which is customer inside than organization outside. So as a person to that we're doing is we believe that we are in the business of managing moments of truth, so -- which is customer experience.

And the adjacent space around that is go deeper into those conversational nuggets and find out what's going on in the enterprise and get a sentiment of the organization that we're for, both in terms of how many are happy, how many are neutral, how many are unhappy, and do some more mining around that. And in terms of becoming a balance sheet partner, I'll give you an example. You wanted me to site an example. Let's say you are a organization and you have multiple service lines.

And let's say you provide a broadband service. You also have a consumer retail service. You have, let's say, kind of bandwidth service. You have digital streaming service.

Many of these organizations have they've built this service offering incentive taken them to the marketplace. They have isolated silos. So, for instance, if I am a subscriber for all these three services, and when I call from one service, I mean, the company does not know that I am also a buyer and I am a prestigious customer who has brought the other service. So that unification which is required to give a single view of a customer and the share of wallet that customer has in terms of the brand is, at times, surprisingly missing.

And those are some of the areas which I call as adjacencies around the moments of truth that unfold during a conversation that we are working on. And our technology team is going with other propositions, with some of those engineering solutions that can be quickly solved instead of going through a grand design approach in making this happen. And in addition to that, we are -- our chief digital officer as he comes in and we're been in conversation with some of our internal team that is working on creating analytics around customer conversation and find out insights about what is going on within the brand. Not everything is to do with the agent and the conversation.

It has to do with some internal insight about the brands. Pricing policies or brand's billing systems or other brand's technology issues, all those things are getting plated. And we will be able to create dashboards for our companies and for our clients around those lines. So those are some of the vision that we have on the digital side.

So that's the long answer to the series of questions that you asked, John.

Unknown speaker

And also, if I may ask --Unidentified Corporate ParticipantGo ahead.

Rajiv Ahuja -- Chief Operating Officer

John, just to further clarify what Aparup was just saying. You kow, we've -- our digital strategy rather than adopt a very short approach, we basically identify and working closely with five pillars, which are omni channel support, social media, speech analytics, analytics, and RPA. So these are the five pillars that our current digital strategy is based off. And to be -- to your last question, which is what impact are we seeing in terms of volume, typically, the industries that I think would get hit the most, given where we are, would probably be travel, hospitality, airlines etc.

Fortunately, we do not have too much of an exposure to these industries. In fact, some of the other industries that we are dealing with have, in turn, seen a slight pickup because as people stay at home, you know, we've seen there is a tendency to shop more online. So, volume probably will start picking up in -- for clients that are dealing in the online or retail space. So as of now, I'm not seeing any kind of material volume softness that we need to be worried about.

Unknown speaker

Awesome. Very helpful, guys. Thanks for taking the time, and congrats on the quarter.

Rajiv Ahuja -- Chief Operating Officer

Thank you, John.

Operator

Thank you. Our next question comes from the line of Zach Cummins from B. Riley FBR. Your line is now open.

Zach Cummins -- B. Riley FBR -- Analyst

Yeah. Hi. Thanks for taking my questions, and congrats on a strong quarter here. In terms of the new executive appointments for head of sales and chief technology officer, I mean, is there any material changes in strategy from what you were doing throughout 2019? Or what's really the goal here to build upon the success you've seen through 2019 and into 2020 and beyond?

Aparup Sengupta -- Chairman and Chief Executive Officer

Yeah. The head of sales that I've hired, our global head of sales, Rick Ferry we wanted to get what I strongly believe to be the dream team is to get entrepreneurs and just on employees or senior executives. So, Rick, just to give a little bit of background, has worked with me for several years and was an entrepreneur in residence who built Aegis and I can narrate that story of how Aegis was built from a small company to a billion-dollar organization. So Rick comes up with phenomenal experience and understanding of the North American market and he was also very close and he's an export in the healthcare system ecosystem all four peers and providers.

So, I think he will bring those verticals which is not in -- we are not infringed in those articles, frankly speaking, and he's going to bring those to the table. In terms of a chief technology officer and BS Reddy, he's going to bring in optimization in a global network. As you know, I mean, we had what you call is in Aegis part of the organization and a StarTek part of the organization. So, what we are currently doing is we're trying to marry both of them and see where some of the synergies are.

And frankly speaking, we're finding a lot of potential optimization that we can bring to bear. For example, we buy Microsoft license, both in India as well as in the US, so is there a potential for us to really deconstruct, as Rajiv said, and reconstruct and find that now, we are buying some X thousand more licenses, and therefore, we have a larger negotiating muscle. Secondly, on the years of technology or engineering that we might potentially do for some of our client in the consumer experience space. I mean, there is a need for building applications, an IT applications team, that with existing.

So that team got augmented. So those are some of the areas that we're working on, largely to make a difference to our customers. The central team is how can we be very closer to our customer and make a difference to them because in this business it is important for you to be a partner and not just a vendor. So that has been our motto and the management team that we have kind of articulated within the enterprise, and it has going down the value chain within the enterprise.

And in terms of sales, we clearly believe that there are opportunities for working, what you call, is multi-shore and lot of clients are looking for a flexibility of onshore and offshore and having the ability to have the fungibility of movement across cultures and continents. And StarTek earlier was a company that was largely North America-centric. Aegis what rest of the world-centric. So now with these two coming together, customers are liking the ability to really have a network where they can actually move a conversation or a call or a process, what you call, is anywhere, anytime.

Just to give you an example, I always used to give that I call it around the world in eight minutes and not 80 days, which means if somebody makes a call, let's say, which is US-bound which gets originated and he is let's say answered by somebody within the enterprise, within the US, and then the part of the back office work basically goes to India and some of the feet on speed work probably happens somewhere in the -- a near-shore facility. So, I mean, that's pretty much what happens internally within the organization. So that is what we are bringing to the table and that is a story that we are telling our customers that you have the ability to now have an organization that is helping you across cultures and continents, give you the best of both worlds, give you the ability to reconfigure your pricing, and reduce your total cost of ownership, on the one hand, and also get an amazing experience at a faster rate by using the entire world at large.

Zach Cummins -- B. Riley FBR -- Analyst

Got it. That's helpful. I appreciate that. And Ramesh, just a couple quick questions for you for gross margin really strong in the quarter ,but we actually saw gross margin decline a little bit on a sequential basis.

So, can you talk about the drivers of that? And what are really your expectations for gross margin as we proceed forward from here?

Ramesh Kamath -- Chief Financial Officer

There are three top drivers for gross margin. One is this quarter, we had an exceptional pass through cost of $2.8. So you know, it adds to the revenue and cost. That's not recurring at quarter on quarter.

So that's the first reason. The second reason on an urgent basis needing to ramp up, both in this quarter and the quarter ahead, we had to spend extra on our recruitment costs and sometimes pay a little bit more to our agents to join the impact of $400,000 to half a million dollars. The last part is, as is typical event of the end, for all the employee benefits that are available, we need to have the evaluation done for this. Because of the variety of changes that occurred this year on the assumptions on interest rates, volatility etc., that extra cost of almost $1 million, we booked in quarter four.

If you netted all these off, then our gross margin was roughly close to the previous quarter. But having said that, as you can guess, Zach, some of these items would continue in the quarters ahead. How it will lie in the future quarters, you know we don't give a forward-looking statement, but I'm sure you can do your calculations.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. And then on the flipside of that for SG&A, it was nice to see the savings on that line. Can you talk about the drivers there for your SG&A savings in the quarter? And then what's the approach to continue to optimize that as we move forward?

Ramesh Kamath -- Chief Financial Officer

When the drivers of exactly what we have said in the press release and the script too it's spread across multiple items and not just one item and that is what pleases me quite a bit. So there is savings on the power and fuel. There is savings on rentals, travel. There is savings on even some employee costs.

Going forward as Rajiv and Aparup mentioned, I think we're going to need to invest a lot more on the sales team. And I would not be disappointed if that adds to our cost. But I know that Aparup and Rajiv and myself, we are focused on every other line item of cost to prevent it from going beyond control.

Zach Cummins -- B. Riley FBR -- Analyst

Understood.

Aparup Sengupta -- Chairman and Chief Executive Officer

I think it may be a good idea for me to also add and which I think Rajiv and I, probably we don't share with you is that we have now got a global spend management leader, and he comes with decades of experience in understanding the entire landscape of the vendor ecosystem. As you know, in this company, there's a lot of spend. And there are lot of non-GAAP expense that also happens on a regular basis and just going into the depth of those and creating what you call is various forms of auctions and using a reverse auction, a Japanese auction, those optimizations have started happening. And so those, we strongly believe, is going to bring our GA down.

And whatever we save on the GA, we're going to deploy on it on the F which is the sales. And that's the way to go. I mean, just take vestiges out of your organization and deploy that into the sales. And that will continue the growth momentum that we envision in the future.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. That's helpful. Congrats on Q4 and best of luck as we go through here in 2020.

Aparup Sengupta -- Chairman and Chief Executive Officer

Absolutely. Thank you very much, Zach.

Operator

Thank you. Our next question comes from the line of [Inaudible] your line is now open.

Unknown speaker

Hey, guys. How are you?

Aparup Sengupta -- Chairman and Chief Executive Officer

Thanks, Omar. How are you?Good, good. Really, what a wonderful quarter, strong quarter congratulations strong EBITDA, great job on the SG&A line, increased cash flow continuing to pay down the debt while still investing in the business. Really great well job done.

Thank you.

Unknown speaker

I wanted to also thank you for finally reporting a non-GAAP earnings per share. It is really very helpful and I've only been asking for it for about five years now. So, it's great to finally see it. In -- are you in a position to say anything about capacity utilization rate? I know that's a metric that you -- the company is not been in a position to touch, but I was wondering what you're at in that sense?

Rajiv Ahuja -- Chief Operating Officer

Yeah. So, Omar, hi. This is Rajiv, and I'll provide a little bit of color to it. Just to give you a sense, Q3 versus Q4, so that gives you a fairly -- you know, I'm giving you a very recent picture be in the Americas went up by almost 9% in terms of capacity utilization.

And across the Philippines which is one of our growth geographies, we saw a jump of close to about 10% in our capacity utilization. We -- as we move along, there are – there – we've already, in fact, announced late last week plans to shut down a center in the US, which is in Grand Junction, and some of that was driven by the fact that some of our clients wanted to move to alternate locations. So we've already announced that -- and while of course it would not lead to capacity -- increasing capacity utilization in the manner that we would ideally like, which is new revenue coming in, and that is why the utilization is going up. But by giving up that center, next quarter, I'm hoping we would be able to report further increase in our utilization across the US.

So, I'm just giving you a couple of data points where [Audio gap]

Operator

Thank you. At this time this does conclude our question-and-answer session. I would now like to turn the call over to Mr. Sengupta.

Please proceed.

Aparup Sengupta -- Chairman and Chief Executive Officer

OK. Thank you, Gigi, and -- for your patient manner in conducting this meeting, and really appreciate that for all your help. And thank you, all, for joining this afternoon and for your continued support for StarTek. Barring in travel restrictions due to the COVID 19 outbreak, I'm looking forward to meeting you with many of our shareholders and covering analysts on my next trip to the US, either this spring or whenever may be the US opens and things become better.

If I don't see you then, I look forward to speaking with you next time when we report our first-quarter results. Thank you very much indeed, and over to you, operator.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Aparup Sengupta -- Chairman and Chief Executive Officer

Ramesh Kamath -- Chief Financial Officer

Rajiv Ahuja -- Chief Operating Officer

Unknown speaker

Zach Cummins -- B. Riley FBR -- Analyst

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