StarTek (SRT) Q3 2021 Earnings Call Transcript

StarTek (SRT)
Q3 2021 Earnings Call
Nov 02, 2021, 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 third quarter ended September 30, 2021. 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. Before we continue, we would like to remind all the 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 the 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 Investors section on their website. And I would like to remind everyone that a webcast replay for today's call will be available by the Investors section of the company's website at www.startek.com. Now I would like to turn the call over to StarTek's executive chairman and global CEO, Aparup Sengupta.

Please go ahead.

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Thank you very much, Joseph. Good afternoon, everyone, and thank you for all joining 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. 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. 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.

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 gradual 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. By contrast, we experienced some year-over-year revenue softness in the United States due to disruption caused by the 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. 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 dexterity we have consistently demonstrated during a dynamic time for the global BPO industry. 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 were working from home. We swiftly eradicated the threat and restored the affected agents and clients safe secure access to our platform and have since further bolstered our platform security and protection measures to safeguard against 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. In addition, we have also created a 24/7 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. 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. I'd now like to turn the call over to Vikash to a more detailed overview of our Q3 financial performance. Vikash?

Vikash Sureka -- Chief Financial Officer

Yes. Thanks, Aparu. Starting on the top line. Net revenue in Q3 increased 6% to $172.8 million, compared to $162.7 million in the year-ago quarter.

On a constant currency basis, net revenue increased by 7% compared to the year-ago quarter. This year-over-year growth reflects continued strength across key verticals and geographies. On a nine-month basis, revenue increased 13% 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. Gross profit for Q3 was $21.5 million, compared to $22.3 million in the year-ago quarter. Gross margin was 12.5%, compared to 13.7% in the year-ago quarter. This decline is primarily attributable to the cybersecurity incident, where we lost 75 basis points.

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. 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 margins. Selling, general, and administrative -- SG&A for short -- expenses for Q3 decreased to $13.1 million, compared to $14.3 million in the year-ago quarter. As a percentage of revenue, SG&A improved 120 basis points to 7.6%, compared to 8.8% 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. 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&A costs relative to our revenue performance. Having said this, we continue to remain guided by our stated objective of achieving sustainable double-digit adjusted EBITDA margins.

Net income attributable to StarTek shareholders for Q3 was $0.1 million or $0.00 per share compared to a net income attributable to StarTek shareholders of $0.4 million or $0.01 per share in the year-ago quarter. Adjusted net income attributable to StarTek shareholders for Q3 was $2.9 million or $0.07 per share compared to an adjusted net income attributable to StarTek shareholders of $3.3 million or $0.08 per share in the year-ago quarter. Adjusted EBITDA in Q3 increased slightly to $15.9 million, compared to $15.6 million in the year-ago quarter. As a percentage of revenue, adjusted EBITDA was 9.2%, compared to 9.6% in the year over quarter.

During the quarter, we received $2.7 million in government grants compared to $1.1 million in the year-ago quarter. This helped offset the loss of margin caused by the cybersecurity incident. Led by revenue growth, our adjusted EBITDA for the nine-month period increased by 53% as compared to the year-ago period. And as a percentage of revenue, adjusted EBITDA for the nine-month period was 10.4%, compared to 6.2% in the year-ago period.

From a balance sheet perspective, at September 30, 2021, our cash and restricted cash totaled $63.5 million, compared to $54.1 million at June 30, 2021, with the increase due to improved working capital during this quarter. Total debt at September 30, 2021, improved to $170.4 million, compared to $173.9 million at June 30, 2021. Net debt at September 30, 2021, improved to $106.9 million, compared to $119.8 million at June 30, 2021. Our net leverage on a trailing 12-month 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 of 57,759 shares of our common stock under our repurchase plan during the third quarter. We did this at an average cost of $5.67 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. As we progress into the fourth quarter and prepare for 2022, we have maintained our 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.

We expect these investments, combined with the strengthened security measures we have put in place to bolster our operational foundation for the quarters ahead, and we look forward to providing further updates on our growth trajectory. 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.

Bharat Rao -- President

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's team as President, I have been on the company's board since 2018 and been a managing partner at Capital Square Partners, the company's controlling shareholders.

Through this position and my past roles at Credit Suisse in Asia, ING Bank, PwC, and Citibank, I have gained extensive experience in driving growth and innovation, and I greatly look forward to leverage this experience to advance statics strategic initiatives, which I will detail shortly. 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 25 years of experience with managing large enterprise clients across technology and business process services. He will play a critical role in driving StarTek's new phase of growth, building momentum with a 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. 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 core areas of growth.

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. We will provide further updates as the appointments are made, but I am proud of the progress we have made so far and honored to experience a tremendous strength and capability of our management team firsthand. 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 build out across our organization will be concentrated within the sales and marketing as we further develop our lead generation, digital solutioning capabilities, and brand positioning.

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. To provide you some additional color on specific geographies, we have already announced our intention to hire up to 300 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. We also went live with the previously announced telecom client in South Africa, where we now run 100% 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.

We continue to see significant growth in our India operations, where we are gaining ground in 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-level programs, the growing teams will focus on delivering end-to-end digital customer experience solutions for some of the finest brands globally. 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.

As we and our clients prepare for next year's budget, we will begin discussing with them the steady-state roadmap toward a long-term split of at-home versus on-site. We continue to believe that this will end up eventually with perhaps a 75-25 split, but only time will confirm that. This will help us assess potential optimization of our physical infrastructure as well. 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 our long-term strategy. 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. 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. We will primarily focus 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.

These are sectors that we have deep domain knowledge, global capabilities, a demonstrable track record with, and/or 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 near-shoring opportunities, which are margin accretive. As we move into the fourth quarter of 2021 and prepare for 2022, we remain focused on maintaining our momentum within our key geographies and 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.

Operator, we will now open the call for questions. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Chris Howe from Barrington. Your line is open.

Chris Howe -- Barrington Research -- Analyst

[Technical difficulty] everyone and nice to hear your voice Bharat in the comments on the company moving forward.

Bharat Rao -- President

Thank you, Chris.

Chris Howe -- Barrington Research -- Analyst

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 in 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.

Bharat Rao -- President

Sure. Aparup, do you want to provide a context or I'm happy to start and then would request Aprarup and Vikash to chime in. But that's a very fair question, Chris. I guess, when you talk of recovery in the travel space, while 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, what was the volume increase, Chris came off the back of cancellations, rescheduling? And as some of these -- some capacity comes online, we would think until the 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. So while 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 concern from our perspective. I'll just take a pause there and see if Aparup and Vikash would like to add to that?

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Sure. Bharat, I think you are bang on. And as you rightly said, what we saw was this whole world getting into a world win 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. Just to give you an example, on an average, traveler used to go to a website for a travel portal, booking 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 RTPCR that we have to get it done? 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 volume. 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.

Chris Howe -- Barrington Research -- Analyst

That's perfect. 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 markets. 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?

Bharat Rao -- President

Sure. 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, are quite happy to outsource what they deem as noncore operations.

So to that extent, there are tailwinds in this sector because of the supply side kind of the demand-side dynamics. Now equally, what's happening is that there are companies who are the service providers, i.e., our competitors, who are obviously positioning themselves for this increase in demand and no marks or guessing when you look at some of the numbers of some of our competitors. Now, where do we see our differentiation? I think, a, we have the ability to support -- so we have -- from a competitive differentiation perspective, what do we bring to the table? We have a very strong back end of near onshore, nearshore, and offshore geographical locations, which is perhaps unmatched. If you look at much -- definitely companies in our 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. Now secondly, we have the ability to offer support in over 30 languages globally. All right. So a, in terms of the geographies that we can offer support from.

B, we -- 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. Now that, coupled with the deep domain knowledge of having supported some of these companies and having an understanding of their own internal systems and processes, 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 really looking to get into domains that we have got no capabilities or a track record in.

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 a unique customer experience, as I mentioned, in over 30-odd languages. I hope that gives you some perspective. And Vikash and Aparup, if you guys have anything else there?

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Yeah, that's fine. You have covered everything. 

Chris Howe -- Barrington Research -- Analyst

OK. I have other questions, but I'll hop back in the queue to give others a chance. Thank you for the color.

Bharat Rao -- President

You are very welcome, Chris. Thanks.

Operator

Thanks. [Operator instructions] OK. We now have our next question from Zach Cummins from B. Riley.

Your line is open.

Katherine Knop -- B. Riley -- Analyst

This is Katherine Knop on for Zach Cummins. The first question I have is what impact of the cybersecurity incidents 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 quarter?

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Vikash, will you take that?

Vikash Sureka -- Chief Financial Officer

Yeah, I'll take that, yes. So yes, 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 75 basis points in this quarter. But the good news for us, really is we acted very swiftly on this incident, and we completely neutralized the event itself, right? And as a result of this, I think our customers are very confident with our back-end 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. 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. So I expect that over the next three, four quarters, that we may enhance our capex and deploy new sets of solutions, thoughts, achievements in the future.

But from a -- purely from a P&L standpoint, the event is neutralized, and I don't see continued impact of that on our financials.

Katherine Knop -- B. Riley -- Analyst

OK. Great. 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? 

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

So, Bharat, would you like to take that?

Bharat Rao -- President

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 had -- 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, that 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 really explains the decline in the healthcare segment. 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, as I mentioned, it was off the back of a decline in our -- the vaccination support program, largely in the U.S. In the e-commerce and the consumer sector, certain -- there were some kind of change in terms of volumes, fairly marginal, 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.

So if you 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 have actually gone up.

Katherine Knop -- B. Riley -- Analyst

Great. OK. One final question for me, which --

Bharat Rao -- President

Does it help?

Katherine Knop -- B. Riley -- Analyst

Yes, that's helpful. Thank you. One final question for me. Just which verticals do you believe will be the key growth drivers for the company going forward of the five?

Bharat Rao -- President

Of the five, I mean, retail e-commerce, clearly, communication, media, and telecom, while these sectors may not be growing as fast as some of the other sectors, for example, high-tech this -- the communication media and telecom space is a space that we have very strong credentials. Having said that, if you see from a tailwind perspective, if you talk purely of a percentage growth, if you think of the next 12 to 18 months, I would think retail and e-commerce based on everything we see, and that is not just -- it's across the U.S., India and some of our other geographies. And some of our customers in the high-tech space. 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?

Katherine Knop -- B. Riley -- Analyst

Yes. Thank you so much.

Operator

We have our follow-up question from Chris Howe from Barrington. Your line is open.

Chris Howe -- Barrington Research -- Analyst

Thanks. One quick follow-up here. I just wanted to ask a question about the SG&A expense line. You mentioned 300 specialists being added in the Philippines, 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?

Vikash Sureka -- Chief Financial Officer

Yes. This is Vikash, and I can maybe take that question and Bharat and Aparup can add. So Chris, I mean, the 300 people that we added in Makati, that really does not impact our SG&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&A in the immediate quarter, Q4, I don't expect our SG&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 cost will go in SG&A. So I expect there will be a step-up in SG&A in the interim period while we scale growth, right? And the quantum of that, we are still assessing, right, and we're making plans, getting into 2022 budget, and we should be able to provide you with more color over the next three, four months when we speak to you next.

Bharat Rao -- President

Yeah, Vikash, thank you. I've got nothing more to add. Chris, does that help?

Vikash Sureka -- Chief Financial Officer

Thanks, Bharat.

Operator

Chris' line was disconnected. [Operator instructions] Chris. You were disconnected from the queue. All right, he's now back.

Chris Howe -- Barrington Research -- Analyst

Perfect. Thank you.

Operator

OK. Chris, you're back on the queue.

Chris Howe -- Barrington Research -- Analyst

Yeah, that's all I have. That was perfect.

Vikash Sureka -- Chief Financial Officer

OK. Thanks, Chris.

Operator

OK. There are no questions at this time. And I would like to hand it over back to Mr. Sengupta.

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

OK. 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.

Operator

[Operator signoff] 

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Great. Thank you so much. Bye-bye.

Vikash Sureka -- Chief Financial Officer

Thanks and bye-bye.

Duration: 60 minutes

Call participants:

Aparup Sengupta -- Executive Chairman and Global Chief Executive Officer

Vikash Sureka -- Chief Financial Officer

Bharat Rao -- President

Chris Howe -- Barrington Research -- Analyst

Katherine Knop -- B. Riley -- Analyst

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