Q3 2019 Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Starteks financial results for the quarter ended September Thirtyth 2019.
Joining us today or Starteks, President Global CEO Lance Rosenzweig.
The company C of O Ramesh Kumar.
During the remarks, well open the call for your question.
Before we continue we would like to remind all participants that the discussion today may contain certain statements, which are forward looking in nature pursuant to the safe Harbor provisions of the Federal Securities Law.
These statements are based on information currently available to us and are subject to various risks and uncertainties.
<unk> actual results to differ materially.
Summary of these risks and uncertainties Startek does not undertake the responsibility to update any forward looking statements. Further discussion today may include some non-GAAP measures in accordance with regulation G. The company is reconciled these amounts back to the closest GAAP base measurement.
Conciliations 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 investor section of the company's website at Www Dot Startek dotcom.
Now I'd like to turn the call over Starteks President Global CEO .
Rosenzweig Sir please proceed.
Thank you Daniel good afternoon, everyone and thank you all for joining.
Our third quarter was one of the strongest in the history of Startek with record high revenue gross margin and adjusted EBITDA since last year's business combination with ages.
The work we have put in place over the last year to integrate with aegis drive synergies create a powerful client centric operating model and execute on our sales pipeline are all translating into material improvements in our business. We're very pleased that are operating results are no proving out the thesis.
In combining startek in ages to create such a strong platform and global customer experience management.
These solid results have been further supported by our client diversification strategy in Q3, our non telco verticals accounted for 63% of revenue up from 59% last quarter and 51% in calendar 2018.
As we have stated in the past, we're highly focused on targeting new clients that accelerate our growth both by cross selling services and geographies and also organically driven by our clients own growth.
Most of these new client wins have come from exciting high growth verticals like technology, Nexgen retail healthcare financial services and even travel in education. However, that does not preclude us from winning new business and establish verticals like telco or media and cable as long as we find.
Right opportunities with strong growth prospects and attractive margins.
And during the third quarter, we found just that in a growing UK based wireless telco leader. We're startek is now providing a broad suite of customer experience management solutions for this company's broadband and mobile businesses. We had a successful launch of this new client and expect subsequent launches into htwo.
Many 20, both in customer experience management, and an accounts receivable management solutions.
Startek has a long history with companies operating in the telco vertical and recent years have seen more headwinds and tailwinds. However, today most of our U.S. telco vertical is stable and even growing and our UK telco region is showing strong growth.
We do continue to see softness with our telco business in India. During the quarter, we decided not to bid on a renewal of one particular Indian telco clients due to its low margin characteristics and limited opportunity for growth.
Although this decision will offset some of our revenue growth in the near term. The result will be an improvement in our margins, we remain committed to positioning startek as a premium provider in the industry, which means partnering with the right companies companies that are growing and seeking a truly differentiated experience for their customers.
This is where startek is at its best.
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, which is very different from merely serving as a vendor with traditional call center support services.
This mindset across the Startek organization is driving the improvements that we are seeing in pricing and expanded relationships with our clients and ultimately our growth and profitability, which tells us that our strategy is working.
Building on this momentum at the high end of the market during the quarter, we signed an exciting new SAS driven engagement, where we are providing a pure technology solution for one of our clients captive customer care operations. In addition to winning the outsourcing business for this client.
Well the SaaS offering is a relatively small engagement. It comes with very strong margins and demonstrates the success of our digital initiatives and they're growing position as a value added partner to our clients.
This is further reflected by the numerous awards Startek is one over the last couple of months, including being named the BP over the year in Malaysia by Frost <unk> Sullivan, receiving a ons best employer Award in India, and most recently, winning the I.D. GE, India C. O 100 award that.
Igniting or I T teams, great work in AI powered digital solutions.
Im incredibly proud of what our team has accomplished in just over one year as we have transformed startek into a purpose driven organization that leverages innovation and technology to deliver extraordinary customer experiences for our clients well at the same time being recognized as a great place to work.
Finally during the quarter, we completed our rebranding and we now go to market globally as Startek, our rebranding was very well received by our clients and employees around the world.
Startek is passionate about becoming the premier partner for the world's finest brands, we now have global consistency and uniformity in operations sales and marketing under the Startek brand.
Before I wrap up with closing remarks, I would like to now turn the call over to our CFO Ramesh come up to take you through Starteks financial results for the quarter Ramesh.
Thank you Lance.
The quarterly results, we are reporting could be it was for the group.
Include started can you just financials from July flows.
To September toward your 2019.
Due to certain limitations with regard to publicly available in financial information.
We are unable to provide the combined company financials from the euro to <unk>.
As a result, we will not discuss yodle your comparisons as we would be combating the financials off good companies against the one for a certain portion of the portal.
Instead, we believe it would be more effective.
To highlight the quarter to quarter results.
With qualitative commentary about the general trends and the drivers for each major line item.
This wouldn't be the final court, though that we will only be highlight sequin should results as we lap our reporting I know at city of the module.
Moving on total revenues for the quarter increased 3% sequentially 200 in $6 million to $4.6 million as compared to 260.6 million in the quarter ended June Thirtyth 2019.
As Lance mentioned, we continue to increase the revenue mix in a high growth workloads with non telcos accounting for 63% over revenue in Q3.
Gross profit for the quarter increased 3% to 28.5 million as compared to 27.6 million in the second quarter would the gross margin percentage, increasing 10 basis points to 17.3% as compared to 17.2 person.
Margins I once again improved sequentially.
Ripping up we've got a track record of expanding margins every quarter since the business combination with aegis last year.
Our margins continue to benefit from offline centric management Martin.
Enabled stronger employee utilization across our global footprint.
Margins also continued to improve as a result of positioning started.
As a premium provider, which enables us to come on stronger pricing.
If you didn't do for the quarter was all those 22.9 billion as compared to 24.9 billion in the quarter ending June Thirtyth 2019.
As a percentage of revenue.
As Ginny was 13.9% as compared to 15.5 person would the improvement dry was driven by local spring on infrastructure repurpose communication provision for doubtful debts legal and other costs.
Net loss for the quarter was dollars 2.8 million or seven cents for sure.
Compared to a loss of Dollarsthree point, Sixmillion or 10 cents per share in the quarter ending June 30 it.
Although net loss improved this quarter.
It would happen even better I did not being for the foreign exchange losses, and before tax adjustments below the operating line.
Adjusted EBITDA for the quarter.
Increased strongly $2 13.4 million as compared to 11 million in the quarter ending June 2019.
As a percentage of revenue.
Adjusted EBITDA was 8.1 person as compared to 6.9%.
As Lance mentioned earlier.
The improvement.
Flick, the culmination of executing all radius initiatives over the last one youre, including group synergies cost optimization and operational efficiency.
During the quarter, we reduced our net debt.
Oh My God. This 10 million 260.4 million at the end of September as compared to 170.9 million I'd June Thirtyth.
We remain focused on keeping a tight cash flow cycle.
But with adequate funds available to support our growth.
This concludes my prepared remarks, I would note on the call all back to let Lance.
Thank you were mesh.
Our team has worked very hard this past year to turn Starteks merger with aegis into a great success. We are pleased that our results. This quarter demonstrate the powerful advantages we can now bring to our clients our employees and our shareholders.
With the anniversary of our aegis business combination now behind US I believe we are in a strong sustainable position to provide more color on the longer term outlet outlook for startek.
We have met with many of our shareholders and prospective investors over the past year and we're consistently asked about the potential for Startek down the road.
As a matter of company policy, we have not provided annual financial guidance and we'll continue to keep that policy in place. However, we do think it is important to share our vision and expectations with investors. So that they can understand why we're so excited about the potential we are unlocking it startek.
We expect startek to become a leader of innovative and tech enabled customer experience management solutions ultimately, becoming a billion dollar organization that is capable of consistently delivering double digit EBITDA margins.
Well, we don't expect this to happen in 2020 I do believe we can get to low double digit EBITDA margins in the next couple of years, well before achieving a billion dollars in revenue.
Although we have some offsetting headwinds with telco in India.
Growth elsewhere is ramping and taking over a stronger portion of our total revenue mix with strong margins and ample opportunity for growth.
Our sales pipeline is robust around the world with numerous high growth prospects seeking a premium provider.
The best years for Startek are right in front of us and I look forward to the benefits this will bring to all our stakeholders.
Daniel Remission I will now like to open the call up for questions.
At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad should anyone need assistance at any time, Please press star zero and an operator, we'll sit here.
Our first question comes from Mark Argento with Lake Street Capital. Please proceed.
Hi, My answer.
Sure.
I don't down a little bit into some of the vertical strength you're seeing.
We are talking.
Non telco being 63%, obviously getting some traction in some other areas.
You highlighted a couple of years now you're seeing.
Thanks, Good traction in and you know where you see activity going forward.
Yeah. Thank you Mark it's it's actually quite a broad range of verticals, we're seeing some strong growth in our healthcare vertical we're seeing a particularly strong growth in nexgen retail.
In in our education vertical where we haven't really wonderful niche a in travel and you know kind of a broad spectrum of of of really diverse opportunities in pretty diverse geographies.
Great and then also in terms of the ability to cross sell them each he.
On a same client revenue expand in certain areas more than others.
I think that a client.
Gross.
Within a client is a function of a number of things and part of it is performance you know we deal with some of the finest largest companies in the world and they prioritize their partners that performed well and a you know we're thrilled with the operating performance at our teams are executing and a and the new business that we're winning with.
I'm really find clients a second part is also due to the growth that our clients have just themselves and we are increasingly aligning ourselves with very rapidly growing businesses and so we grow as they grow and a and third some verticals that we focus on have have.
Finally high levels of growth and we're benefiting from some of that vertical diversification as well.
Great. That's helpful mobile start turning of the balance sheet.
12 month basis.
Oh, no fully ships 47 million shave each quarter, you put up a pretty good number can be opportunity on the balance sheet.
We fall mall.
Got any additional all the legacy without some sort of the legacy from say three the merger.
What do you guys thoughts in terms of.
Yeah, the balance sheet going forward.
Yeah, I think we've done really a an excellent job in improving the income statement and you know revenues are growing EBITDA grew tremendously this quarter and we're just quite excited about our operating performance in terms of the balance sheet, we do have a legacy death.
Which was in place at the merger of there are two companies and we are continuing to work to make sure. We've got the right capital structure in place to support our future growth. So Oh, maybe Ramesh you want to add a little color to that as well.
[noise] Marlins, I think you summed it up Oh I'm quite comfortable that we were able to keep a tight lid on cash flows and improve.
I'm trying to convert a large part of a deeper dive into cash and that is a focus that you're not going to change.
And I think you saw that in the numbers for the quarter, where our net debt was $10 million lower than the prior quarter.
It's nice to see the de leveraging happening.
Just one last one certainly over the long term.
Double digit EBITDA margin target, Yeah, where do you need obviously, you've got to get the Ravinia Rodney Juan.
Well, a bunch of ports vessel in the business to be able to achieve all mobile the ball margins, where do you need to see up again.
Where do you need to have up into two though.
The double digit.
Yes.
It's a great. It's a great question part of it has to do with with revenue, but there are a lot of other factors I think will contribute to improved EBITDA margins.
One is capacity utilization and a if were able to grow our clients in existing capacity than that has the benefit of generating much higher returns on that incremental capacity while at the same time minimizing the capex it would be required for new capacity. So we're very tightly managing.
Capacity utilization to try to do it with or without requiring huge increases in capex in some areas, though where we are working with very sophisticated clients. You know, we do have capex requirements to support their growth and <unk> and will be funding that from air from our operating sources.
Well as our balance sheet going forward.
That's on the wonder that we're seeing nice work severance for you guys from a long way.
Thank you Mark really appreciate it.
Thank you. Our next question comes from Omar Samalot.
Please proceed.
Hey, guys how are you.
Excellent Omar.
Good.
A lot a lot to like here guys.
Revenue growth lower as DNA.
Higher operating income and EBITDA.
Free cash flow positive and debt repayment and that's.
What a job well done on that I really.
Sincere congratulations to you as ours.
We appreciate it thank you.
Okay. So.
Could you guys explain that higher than the unusual tax expense for the quarter that essentially took you from a breakeven before taxes to to the net loss.
Landfill that Texas.
Yes, please remission.
Oh Omar during the quarter, we've caught could upstreaming the cash to help us before that.
In a couple of geographies, we structured for the first time.
And once we do dart under an accounting standard.
The presumption is that the company will move all its return openings.
Upstream again in food should and therefore the appropriate.
Taxes on dividend, whether its withholding on dividend dive needs to be provided on the and returned a new felt that particular countries slashed company.
Because of that you do have a geography bid we started <unk> during the fourth time.
Only on the opening of as those we had to make a deferred tax provision of $1.35 million. So that was a significant impact.
The second impact is typical investment companies when do they see it wouldn't.
If they don't have too much for the income taxes to be as is the one in investment companies.
Any withholding tax on the do it ends the C, which is foreign tax code that unable to offset so we hope <unk> expense at all that was another $400000 approximately.
Seafood Big those two Oh, you're left with between 1.6 to 1.7, which is higher order last quarter. That's because all of my geography that started making taxable profits laws.
Does that explain Omar.
Absolutely you were ready for that question for sure. Thank you.
Yeah. The board. It also asked me and I knew somebody or [laughter].
[laughter] so although the gross margin was was marginally higher sequentially. The it seems that it could have been even higher given the revenue growth. So could you explain if that is due to costs that are hearing carrying associated with new programs on our.
Ramping as we speak.
Yes, hi, Lance explain and even a little caused that every time, we start ramping.
That is the cost associated with Scotts earlier than the growth in margins and Oh revenue and therefore, it tends to at times, so whole because the margins down there. So in a sense, you're just talking about fine.
Okay, I got it and I'm doing a quick rough calculation. It looked like you guys were three casual possibly for the quarter after interest expense by about 10 million.
And then would that cause you guys repaid about 4.7 million in charge and bad and in addition to bear longterm debt amortization payments are you asking me correct.
That's what I'm, we have one payment coming up so Q2 Q.
Okay. Okay.
I have noticed increase activity in your hiring efforts for most of your offshore markets, such as India, Malaysia, Saudi Arabia, the Philippines.
I was wondering if you could add some color to that activity in those markets and and it is the hiring increase their stemmed from programs are that you're switching or is it from actual new business growth.
Yeah, it's a it's a varied by region and in some areas. It's a it's strong kind of same store sales per se growth growth within our installed base and in other regions. It involves launches of new clients.
As well and I would say that there is a little bit of by and you'll see more of that in this current quarter a seasonal hiring for some of our strong retail oriented clients.
Okay got you, okay and on the Philippines Precipitately prior prior to the merger Starteks sales pipeline for that market was was entirely for you as business.
I was wondering maybe you could talk about what is your focus now for that market you know.
Given the UK business that you that you explained during your <unk> during the call I saw some things that they had something we've been would that filippi market. So maybe it's something that you can add some color.
Yeah. We're we're just absolutely thrilled with our performance in the Philippines. We have several sites there were in both Metro Manila as well as in the more provincial areas and the teams are just killing it and and we're seeing more international business flowing into the Philippines is well suited.
Turning to the U.S., which as you correctly mentioned has had been pretty much the exclusive location for services in the past we are now seeing growth from the UK and we've recently done a.
Restructuring in a and a focus on our Australian operations.
Where we think that there were also great opportunities for some of the leading Australian brands to outsource to the Philippines as well. So we are seeing more international diversification to those to those campuses.
Beautiful okay.
Could you talk about so the attend that you can how you'd see that picture of profitable revenue growth forming for you going forward and maybe also what steps have you taken internally within the sales team to incentivize that.
Yeah.
It's a multifaceted approach so what I'll caveat the whole answer it is that we are not taking our eye off running very efficient operations in a lean and well managed business. So that's sort of underlies everything we do but as we do that we're seeing.
Strong opportunities for growth and growth is coming from new clients, it's coming from existing clients in some cases, its approving capacity utilization, which is driving higher margins.
We're seeing some my arbitrage opportunities from a higher cost locations to lower cost locations and or all of that is a is driving improvements in both top and bottom line performance.
Okay.
And then finally and I really appreciate your comments I began with your with your long term goal goals, you've mentioned the desire to be more transparent intentions information such as utilization rates and business wins in margin goals and all that can you tell us where our where you where are you in that process.
And when do you foresee releasing maybe a little bit more information to shareholders.
Yeah, we're where we are super excited about the progress that we're making in the the opportunity ahead for us a the Q will be out tomorrow and that's got some good information both on a individual geographies as well as individual verticals capacity utilization is a little trickier for us too.
Make sure that we're consistently.
Looking about so some of the other metrics we are looking internally about.
About releasing publicly we do want to be very transparent in everything we do but we don't want to put too much subjectivity in at where were you know sort of non-GAAP measures.
Or are difficult to compare and contrast, and so we're looking at it were on it we want to make sure. The we are providing really excellent quality information for all our investors.
Great guys will thank you very much for taking my questions and Gilligan fully done Greg.
Thank you Omar.
Thank you at this time. This concludes our question and answer session Oh, now, let's turn the call back over to Mr. Rosenzweig.
<unk>. Please proceed.
Thank you Daniel and thank you all for joining US this afternoon and for your continued support of Startek. We look forward to speaking with you next when we report on our quarterly and annual results. Thank you.
Thank you ladies and gentlemen, you may now disconnect.
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