StarTek, Inc. (SRT) Q1 2022 Earnings Call Transcript

StarTek, Inc. (SRT)
Q1 2022 Earnings Call
May 09, 2022, 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 first quarter ended March 31, 2022. Joining us today are Startek's Global CEO, Bharat Rao; the Company's Global CFO, Nishit Shah; and the company's head of business transformation, Ronald Gillette. 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 the 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 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 Global CEO, Bharat Rao.

Sir, please proceed.

Bharat Rao -- Chief Executive Officer

Thank you, Kate. Good afternoon, everyone, and thank you all for joining us. Like always, I first want to recognize all our hardworking Startek ambassadors who are helping us become a premier global customer experience solution provider. Without your help, we would not have been able to accomplish the progress we've made since embarking on our transformation to reinvigorate growth across our organization.

Thank you all for your dedication to this company. Our first quarter efforts were heavily focused on investing in our sales and technology ecosystem to drive organic growth in our key verticals, and explore new relationships with new clients. Through our efforts, we experienced year-on-year revenue growth, increased our number of services through new digital partnerships and improved upon our overall platform to support new opportunities within our industry. Early in the quarter, with the backdrop of inflationary pressures, we worked with our customers to develop unique solutions to rising wages and cost of services.

We focused on creating an open dialogue to address their customer service needs, worked to find the best combination of services for each unique client, and reiterated our desire to form strategic customer relationships not just valuing them as revenue streams. As such, we made the difficult decision to graciously step back from a contract we had with the client operating in our e-commerce vertical. Though, we valued working alongside them, we wanted to channel our efforts into opportunities where we could make a long-term impact and in the medium-term, be margin accretive in that vertical. This decision led to a temporary decline within the e-commerce vertical, though, we fully expect to make up the loss with continuing growth in other clients in this vertical.

Our financial and business services vertical continue to perform well this quarter. We saw year-on-year growth and we are expecting strong performance throughout the year from this segment as we deepen our relationships with our existing clients and cultivate new logos. In telecom, we drove year-on-year growth by doubling our efforts to deepen and grow our existing client relationships. As I mentioned in our previous interactions, we are now fully ramped with our client in South Africa, and we continue to win new lines of business with another large telecom client.

We also began to see improvement in our travel and hospitality sector as some of our clients prepared to normalize volumes back to pre-COVID levels. This sector is soft compared to pre-COVID levels, but we believe it has begun to trend in the right direction. Despite the organic growth that we experienced through the quarter, we set to rework our existing pipeline, and I am confident that it is now stronger than ever. Like I alluded to you earlier, we brought in several sales members in our U.S.

territory that has the expertise and experience to aggressively go out and identify new client relationships. Our new sales team have deep domain expertise in the specific verticals that we want to strategically grow. These efforts are part of our larger overall strategy to revamp our sales ecosystem, one of the three pillars we have identified for growth within our company. We will continue to refine our strategy, but you can expect us to be highly focused on realizing more revenue opportunities within our U.S.

territory. I am excited and optimistic with our wins this quarter, and therefore, confident that the sales pipeline is encouraging. As we discussed on our last call, we have also augmented our capabilities in our infrastructure and cybersecurity front, and will continue to identify and prioritize key areas to invest within our technology and cybersecurity areas in an ongoing effort to remain prepared for any malicious attacks against our platform. We also worked and developed digital partnerships to increase our overall capabilities and product offerings to further grow our platform to offer cutting edge and relevant solutions to our clients.

These added digital solutions allowed us to enter new RFP and have strengthened our overall reach to tackle new and emerging opportunities. A key strategy around our transformation into a digital-first CX organization is to have strategic partnerships that give us access to the latest digital toolsets. As part of this strategy, we entered into partnerships with Krisp, an AI-powered noise cancellation solutions provider, to ensure that we can deliver superior voice-based experience to both our employees and our clients' customers. While our company is poised for growth, we want to ensure that we are continuing to operate within a lean and efficient structure.

As a continuation of our efforts, we have been executing on a number of right sizing initiatives to go along with our growth strategy. This includes optimizing various locations across the globe, and working with our employees to develop the best solution for an evolving hybrid work environment. We are seeing positive conversations with our clients involving our hybrid work structure, as we have developed solutions that work for both our people and our customers. As the work environment continues to evolve, we want to be able to offer the same high quality solutions that our clients have come to expect from us, while being able to provide these solutions in variable work environment.

Furthermore, we have been evaluating our physical centers around the world and have been taking steps to ensure that we are maximizing the utility out of each location. These initiatives are still in preliminary stages, so you won't see the tangible benefits in our cost structure just yet. So we expect to begin seeing some of these benefits toward the later quarters of this year. We have the momentous quarter here at Startek, and I am very proud of the progress that we have made to position the company for future opportunities.

I want to reiterate that our work done this quarter was all about finding new ways to grow Startek. While we achieved incremental topline growth, our focus is on driving sustainable growth. Only possible by optimizing our cooperations and procedures. I would now like to turn the call over to Nishit Shah to provide further details on our first quarter financial results.

After Nishit concludes his review of our financial performance, he is going to turn the call over to Startek's head of transformation, Ron Gillette, to provide more insights into our strategic initiatives for the remainder of the year and beyond. Thank you all of us for joining us and I'll be happy to answer any questions you may have during the Q&A session at the end of this call. Nishit, I'll now pass on the call over to you. Thank you.

Nishit Shah -- Chief Financial Officer

Thank you, Bharat, and good afternoon all. Starting on the topline. Net revenue in Q1 increased to $167.3 million compared to $163.1 million in the year-ago quarter. On a constant currency basis, net revenue increased by 4.9% compared to the year-ago quarter.

This year-over-year growth reflects continued performance strength across our telecom and financials and business service verticals. Our growth in geographies, such as India and in the Middle East also contributed to the year-on-year revenue increase. Gross profit was $21.1 million compared to $24.7 million in the year-ago quarter. Gross margin was 12.6% compared to 15.1% in the year-ago quarter, which was primarily attributable to the wage increases due to inflationary pressures, as well as higher spending in our expanded technology and cybersecurity infrastructure.

It's worth mentioning that we proactively increased wages to further support our employees within this inflationary environment. And we now offer a minimum wage of $14 per hour in the U.S. Selling, general, and administrative, SG&A expenses for the first quarter increased to $15.9 million compared to $14.2 million in the year-ago quarter. As a percentage of revenue, SG&A was 9.5% compared to 8.7% in the year-ago quarter.

Our investments in high performing sales, solutioning, marketing, and digital team to drive growth impacted our SG&A in the first quarter. Net loss attributable to Startek shareholder for Q1 was $1.2 million, or $0.03 per share compared to a loss of $12.2 million, or $0.30 per share in the year-ago quarter. Adjusted net income attributable to Startek shareholder for Q1 was $1.9 million ,or $0.05 per diluted share compared to $1.7 million, or $0.04 per diluted share in the year-ago quarter. Adjusted EBITDA in the first quarter was $13.7 million compared to $18 million in the year-ago quarter.

As a percentage of revenue, adjusted EBITDA was 8.2% compared to 11.1% in the year-ago quarter. The decrease is primarily on account of increasing the investments in our sales, marketing, and digital team, as well as the impact of rate adjustment due to inflationary pressure. From a balance sheet perspective, at March 31, 2022, our cash and restricted cash balances stands at $52.2 million compared to $55.4 million at December 31, 2021. Total debt at March 31, 2022 was $169.5 million compared to $170 million at December 31, 2021.

Net debt excluding restricted cash at March 31, 2022 was $126.2 million compared to $122.1 million at December 31, 2021. In addition, we repurchased an aggregate of 259,407 shares of our common stock under a repurchase plan during the first quarter at an average cost of $4.88 per share. This is a reflection of our confidence we have in our overall growth strategy. This concludes my prepared remarks.

I will turn the call over to Ron now.

Ron Gillette -- Head of Transformation

Thanks, Nishit. I am going to use the time to discuss our strategic focus going forward. The rest of 2022 is going to be centered around capitalizing on a robust sales pipeline and continuing our efforts to evolve further and optimize our core operations. With our revamp sales pipeline now stronger than ever, we expect to be able to benefit from on the new and emerging markets that we have identified.

We will also continue to invest in our sales ecosystem, which includes our ongoing investments in senior sales personnel as well as in our marketing and branding initiatives. As a leading solutions provider in customer experience, we want to be able to communicate our unique digital-first capabilities to the world and cement ourselves in the industry with a great brand. Our marketing team will continue to find ways to drive brand content in front of the eyes of our target audience, and utilizing this activity, our growing sales team will be able to target key clientele for emerging customer opportunities. Throughout the rest of the year, we expect to grow our sales team by hiring several domain experts in the U.S.

to specifically target key clients in that territory. As we have said in past calls, we remain focused on driving additional digital partnerships throughout the year. We will continue to have conversations with our clients to solve their evolving problems with innovative solutions. We operate in a fast paced, evolving space, and we are constantly looking for ways to find the most cutting edge and relevant product offerings to our clients.

To do so, we will continue to drive new digital partnerships with emerging providers around the globe. This will not only help us retain our position as a leading solutions provider, but also allow us to expand into spaces we currently are unable to such as predictive and prescriptive analytics, customer journey design and insights, and customer experience as a service. These initiatives all revolve around putting our company in the best position to grow, and we will begin to capitalize on these efforts throughout the year. Earlier in the call, Bharat mentioned that we had taken several steps to examine the correct right sizing actions that we expect to take throughout 2022.

I want to reiterate that we are continuously reviewing the ways to operate this company to ensure we are performing at an optimal level. We are disciplined in our cost structure and no amount of growth will take us away from this principle. As the work environment is continuing to evolve further into a hybrid system, we want to make sure that we are taking the right steps to offer our people the right solutions that works for us and for our clients. This involves us looking carefully into our physical centers to find areas that are underutilized and potentially ready for consolidation.

We will be able to offer more specifics about the impact and benefits of these efforts toward the second part of the year. Our approach is simple. We want to capitalize on the opportunities that we've set up for ourselves while investing heavily into the future. I want to reiterate that we anticipate seeing limited growth in our bottom line for the near-term.

With the work that we are focused on, we are looking to position Startek for a long-term success, and we are willing to invest in ourselves to do so. We believe that there is still a lot of untapped potential in this space we operate in, and we have a strong foundation in place to pursue these opportunities. We remain as confident as ever in our company's position and our ability to drive long-term value to our shareholders. With that, we'll now open the call for questions.

Operator, over to you.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Howe of Barrington Research. Please go ahead.

Chris Howe -- Barrington Research -- Analyst

Good morning, everyone, and good afternoon, and thank you for taking my questions. Sorry, long day. I wanted to start-off just on some of Ron's comments that were just mentioned about the cost structure and looking at the physical footprint as it is now. As we think about these benefits, which should start sometime in the second half, can you talk about or provide some additional detail on what's underneath this plan? What portion of these benefits are known? And what portion would you describe as dynamic or not known at this juncture but will need some time to develop? I would presume there's some portion that is known versus having some time to develop.

Can you explain?

Bharat Rao -- Chief Executive Officer

Sure. I'm happy to take that and request Ron and Nishit, and Nishit can provide some specific numbers. I think what you wanted to understand was the extent of identification, if you will, of the areas of optimization that we have identified. Would that be a correct way of summarizing your question?

Chris Howe -- Barrington Research -- Analyst

Yes. That's correct. I would presume that some – there's a checklist of things to accomplish as we move through the year, while some will be discovered as you go about your optimization strategy.

Bharat Rao -- Chief Executive Officer

Sure. So we are looking at various buckets and I think this – and this is clearly a dynamic process because, right? Because we did that when we looked at our situation last toward the end of last year as well going into FY2022. And this is a dynamic process because one needs to look at, not just where business volumes are, but also look at technology initiatives that we are putting in place to optimize our delivery structure. And Ron, talked about partnerships, which is clearly very high up from a priority perspective.

So at this stage, what we know is for the first quarter, we had identified aspects toward the end of last year. And as we talk to clients – as I mentioned, it's a dynamic process, as we talk to clients, we are getting feedback from them and working out, which are the areas we can optimize, whether that is in terms of real estate, our IT infrastructure, the teams we have in terms of what other areas that can be involved with. And therefore, our strategy around our fixed costs and indirect costs will continue to evolve and to a great extent will be guided by the ongoing discussions with our clients. Now, if you recall, we did the same in end of last year and talked about that going into this year, and we are already working on that at this point.

And I think as we get more clarity, we should be able to share more details with you. But the underlying principle that Ron talked about is ensuring that we right size the organization, so that all opportunities arising from that, and all the benefits arising from that can effectively be focused on the three pillars of growth that we had identified and talked about at the end of last financial year.

Chris Howe -- Barrington Research -- Analyst

OK. That's perfect. And the reasoning or rationale behind that question was to lead me to my next question. We talked about gross profit in the quarter and the impact that wage inflation had on gross profit.

You also made many key hires that impacted the SG&A line. First off, can you talk about employee turnover in this environment? What's your rate of attrition and how has that impacted your hiring goals? And if we think about my last question, you talked about the benefits that will eventually happen while we also consider the ongoing inflation. As you shift more to an optimized footprint, and let's say, if inflation were to lessen at some juncture in the future, is there a way to think about what margin for the company could look like in a more normal environment?

Bharat Rao -- Chief Executive Officer

Sure. I can start that and then we can have more specific, I request Ron, Nishit and Ankul to add on. Ankul is also a head of corporate planning for Startek, and obviously working very closely with our frontline teams. So you see one of the things that we talked about, and one of the elements of optimization for instance is the infrastructure, the cloud infrastructure, and you've also got the on-prem infrastructure.

So apart from looking at our facilities, right, I'm just laboring on the point I made earlier, we are also critically looking at are there any overlaps for instance in IT infrastructure. Can those be optimized, right? Based on the guidance our clients are giving us because some clients are talking about getting back to work from site, others are very comfortable with the systems that we have developed, so one has to optimize the two to minimize the overlap. So that's something that is underway and that is part of the dynamic process that I talked about in response to your last question. In terms of where things stand with respect to investments, I would say at senior levels, especially with the new hires that we are looking at in the key areas or key priority areas, our turnover has been – I'm happy to say that our turnover has been relatively low.

For instance, when we've built up a sales team, right, we had – we brought in a few sales leaders in this quarter. We bulked up on our marketing team, and Ron talked about the initiatives on putting our brand there out in the market with customers. We substantially strengthened our presales and solution team, the lead generation team, and the digital solutioning capabilities and partnerships team. So a lot of investment has gone in across areas, and I'm happy to say that the attrition that we have seen in these areas, although I must admit there is a war for talent has been relatively low.

We had some attrition in areas for instance, where from an operational perspective, we may have consolidated and we are looking closely at how do we ensure that we don't lose, "the tribal knowledge that we have gained". But at this point, I would say there isn't anything that from an attrition point of view at the senior levels that I'm particularly concerned about. Now as in terms of – I think our margins – the way for adjusting our margins clearly is discussions with our customers as we look at renegotiating our contracts as they come up for renewal. So my sense is that, we would probably take a quarter or two for the margins to get back to the original levels that we had and not therefore, I would think that our -- margin dilution that you alluded to is probably more transitory in nature.

And this should smoothen out as we have very focused discussions with our clients. Hence, the point that I made earlier on looking at where we should be, what makes sense for us from medium-term and a long-term perspective because only if you have a strategic relationship with a client, can you actually think of having those conversations. I'll just see if Ron or Nishit have anything else to add to that, if I have missed anything out?

Ron Gillette -- Head of Transformation

Sure, Bharat. As we look at the part of your discussion also was around inflation and how we see that going forward. So we've come through some pretty unusual inflationary times here. As mentioned earlier, we had to wage – increase wages of the agents and other levels within the company because of the talent issues out there in staffing.

Now, well, that's stabilized with the improvement in the COVID situation. The inflationary pressures in North America and in other geographies around the world continue to be there. Not sure how that's going to play out in the long-term, but we responded well and worked well with our clients to address that going in the past that brought us to where we are today. We are hopeful that these inflationary pressures would subside in the future, but we'll continue to work with our clients to be able to come to the right solution that allows us to staff and invest effectively to serve them and solve their needs going forward.

Chris Howe -- Barrington Research -- Analyst

That's perfect. I certainly appreciate all of the color. I will hop back in the question queue to give others a chance. Thank you.

Operator

The next question is from [Inaudible] of B. Riley. Please go ahead.

Unknown speaker -- B. Riley Securities -- Analyst

Hi. Thanks for taking my question. Firstly, I was wondering if you could provide any updates on your outstanding go private offer from Capital Square Partners considering that it's been almost three months since you hired outside financial advisor to evaluate the deal. Just wonder if you could provide any additional insight on that?

Bharat Rao -- Chief Executive Officer

Sure, Ethan. At this stage, all we can tell you is that, the special committee was constituted and their advisors Freshfields and [Inaudible] are still evaluating the situation. They're looking at the business given the dynamics that Ron and I talked about. So obviously, they are fine tuning their numbers, assessing the situation and they haven't formed a view as yet.

But as soon as that does or they're able to form their view, I think really provide a lot more information. But at this point, fair to say that they're still evaluating the situation given everything that's happening in the industry and the environment around us.

Unknown speaker -- B. Riley Securities -- Analyst

Absolutely. Thanks. And secondly, I was wondering if I'm correct in assuming that the wage inflation is the primary driver of lower gross margins here. I was wondering if there were any other elements that I should be worried about?

Bharat Rao -- Chief Executive Officer

Not really. It's been largely wage pressure on the one hand. And of course, we make some investments too, right, in terms of -- especially our cybersecurity, because I don't think today any organization in the world can say there's completely cybersecurity proof because the actors in that space also continue to get smarter. So we will have to continue investing there.

And I think while that may have a temporary – might result in a temporary dip in margins. Going forward, it'll provide a far more stable and secure system for us. So it's really those two attributes other than anything else that has contributed to the decline in margins.

Unknown speaker -- B. Riley Securities -- Analyst

Thanks. And then last question, I was wondering if you have seen any early returns from your sales investments so far and what that means for your new opportunities [Audio gap]

Bharat Rao -- Chief Executive Officer

Sorry, could you repeat that? I think I missed the last part of your question.

Unknown speaker -- B. Riley Securities -- Analyst

Apologies. I was asking what kind of returns you've seen in your sales investment so far? And if you've seen any visibility into that and what that means in terms of new opportunities in your pipeline?

Bharat Rao -- Chief Executive Officer

Sure. We've had some good wins and that's what is very encouraging. Now we are – as we – we believe in announcing those ones once the ink is dried. So on the positives side, I'm very encouraged to see new logos that we have won in this quarter.

And after almost gap of two years, in terms of new logos, barring some of the seasonal work that we got. The wins that we have had are very encouraging, and we have got almost 10 new logos in the first quarter, which is quite encouraging. And that does suggest that our investments are in the right direction. Most of our proposals now we have substantially revamped our offering, and most of our proposals going out have an integrated proposition around our digital offering and the impact that our digital offering will have on the overall customer experience and called, resolution mechanics, etc..

So we are clearly seeing the benefits of that. Now, obviously, as you can imagine, these do take time for markets to understand and appreciate. And therefore, as Ron mentioned, we are integrating that with our marketing efforts. So you'll increasingly see a lot more on our social media as we talk of our releases on our partnerships and the benefits that these partnerships actually provide to customers rather than just partnerships as an end in themselves.

So that's, clearly, from my perspective, a good pipeline that Ron alluded to. The fact that we have won 10 new logos this quarter, I think all those, from my point of view, are very encouraging given that we've just about embarked on our journey of building our sales force. Does that help give you a sense of the returns?

Unknown speaker -- B. Riley Securities -- Analyst

Absolutely. Yes, I really appreciate that. That's all for my questions. Thanks again, and best of luck.

Operator

The next question is a follow-up from Chris Howe of Barrington Research. Please go ahead.

Chris Howe -- Barrington Research -- Analyst

Hi. Thanks for taking my questions again. There's one that stood out in my mind, that I wanted to follow-up on. You mentioned the step back from a client's in e-commerce vertical.

Can you provide some more color on the decision to step back? Is this reflective of a pricing situation? And if it is, can you talk about how delicate the pricing environment is right now?

Bharat Rao -- Chief Executive Officer

Actually, it's -- and I can provide an overall context. Pricing was only one factor that we took into account. We had to look at a number of other related factors, so pricing is one aspect, which is why we wanted to ensure that we have a strategic relationship becomes quite critical. The other challenges that we faced, to be fair was that one, there was no – we didn't have a firm volume forecast when there are no minimum in the environment, it does get a bit challenging.

You've got upfront capex requirements. And if you can see that the margins from a trend perspective are going down, which is where we talked about strategic relationship and value add going forward. It was really a combination of this rather than just a pricing attribute that we took into consideration. So the fact that we didn't have adequate visibility of volumes, we didn't have any minimum guarantees.

The fact that we had to incur upfront capex and if you're incurring that if it's very specific capex, which is not interchangeable or fungible with other clients, and you have questions around pricing flexibility. All those put together become really factors that have influenced our decision. And to be fair, all the conversations that we are having with our customers, which is the point that Ron made, we anticipated these trends, and we've probably seen the kind of inflation we haven't honestly seen for quite some time now, which is why we've proactively stepped up, had conversations with customers, worked out what can we do to ensure that we can come up with win-win solutions, leveraging technology to the extent we can. All the more reason underpins are the need for investment into digital solutions because to my mind that – that will only -- that help us overcome some of the pressure that we see out there.

As you see if Ron and Nishit have anything else and Ankul, if you want to add anything to this to provide some more color?

Ron Gillette -- Head of Transformation

Bharat, I think you covered it well. For the specific client, I think in a broader sense, I will give our clients overall though, a positive note in that, both of us client and Startek have had to experience this new environment of wage pressures and both learn through it and the dialogue has been good overall positive and we'll continue to work on ways to -- for both parties to control costs where we can. And then – if not, then we'll have to get into those discussions in the future, hopefully not, hopefully the worst of inflation is behind us.

Bharat Rao -- Chief Executive Officer

Thanks, Ron. I would agree with that. I think while we have been very fortunate and have enjoyed working with them, the factors I talked about, essentially suggest that we go back to the drawing board and see what can we do from a strategic relationship perspective.

Chris Howe -- Barrington Research -- Analyst

Perfect. Thank you for taking my questions.

Operator

This concludes our question-and-answer session. I would like to turn the call back over to Mr. Rao. Please proceed.

Bharat Rao -- Chief Executive Officer

Sorry, I think I pressed my mute button, but clearly, didn't believe in unmuting me. Thank you, Kate, 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 second quarter results. Over to you, Kate.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Bharat Rao -- Chief Executive Officer

Nishit Shah -- Chief Financial Officer

Ron Gillette -- Head of Transformation

Chris Howe -- Barrington Research -- Analyst

Unknown speaker -- B. Riley Securities -- Analyst

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