Q1 2023 Startek Inc Earnings Call
Speaker 2: Good afternoon everyone and thank you for participating in today's conference call to discuss the Star Tech financial results for the first quarter ended March 31st 2023. Joining us today are Star Tech Global CEO , Barat Rao and the Global Companies Global CFO , Mishit Shah.
Speaker 2: Following that remarks will open the call for your questions.
Speaker 2: 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 harbour provisions of the federal securities laws. These statements are based on information currently available to us and are subject to the various risks and uncertainties.
Speaker 2: that could cause actual results to differ materially.
Speaker 2: StarTech also advises listening to this call to review the latest 10k posted on its website for a summary of these risks and uncertainties. StarTech does not undertake the responsibility to update any forward-looking statements.
Speaker 2: Further, the discussion today may include some non-GAAAP measures. In accordance with regulation G, the company has reconciled, reconciled. These amounts back to the closest GAAP based measurement.
Speaker 2: I would like to remind everyone today that the
Speaker 2: Webcast replay of today's call will be available via the investor section of the company's website at www.startech.com. Additionally, the company has included a presentation which can be found via the website link and on the investor section of the company's website to coincide with the call.
Speaker 2: I'll now like to turn the call over to Star Tech Global CEO Barathrough. Barat please proceed.
Speaker 3: the quarterly investor presentation that you can find on our investor relations site and via the webcast link.
Speaker 3: So let's start on slide 2 and recap some of the highlights from the start of the year.
Speaker 3: As we have talked about at length, last year's focus was on investing in our capabilities.
Speaker 3: clients.
Speaker 3: while simultaneously attracting new clients across all our key verticals.
Speaker 3: We dedicated a significant amount of time and resources into these initiatives to ensure that we had the right structure in place and that all of our agents were trained accordingly for successful implementation.
Speaker 3: While we were working on these initiatives, we were also making strategic moves to ensure that we were focusing on our core competencies that we believe will drive long-term profitable growth and showing up our balance sheet to ensure our cost of capital did not prove to be a hindrance to these growth objectives.
Speaker 3: We enter 2023 with the main priority for this year being execution.
Speaker 3: I'm pleased to report that we made significant progress on execution as we deploy the solutions that we have spent the last few years developing. We've been talking of a two-pronged sales approach to scaling our solutions. First, enhancing our performance and growing volumes of current clients. The second strategy that I bring further back to Growth is to increase our performance and contracts size and progress across the expected price. This is to make other transition partners run better by improving competitiveness and networking. No? Exactly. We Some started aren't sure and so we won't figure that out. Our past year has been done across all our points because people did not decide to have enough data and sense build-up via our platform.
Speaker 3: using our proof of concepts and performance-driven reputation to attract new clients.
Speaker 3: We have a total of 12 new wins in the first quarter.
Speaker 3: Five of these wins, new logos across the utilities, e-commerce, healthcare and VHSI verticals.
Speaker 3: While the remaining wins included successful rampups providing new services and additional volumes to existing clients. To continue this momentum forward, we have integrated the digital and same teams under the Chief Growth Officer Ambrella in order to better align our objectives and capitalize on both these strategies.
Speaker 3: We also find that our clients are aligned on our focus to transition services to our offshore model in an effort to become more cost efficient in the current macroeconomic environment. Most of the digital tools we have invested in have focused on agent amplification.
Speaker 3: which improves the ability of agents to be able to understand processes easier and shorten training cycles, making a ramp-up stage much quicker and more efficient.
Speaker 3: Ultimately allowing for better agent and customer engagement.
Speaker 3: To continue aligning our organizational priorities.
Speaker 3: We also make progress with our strategic diverse teachers, subsequent to the quarter closing.
Speaker 3: We officially completed our transaction to sell our interest in contact center company and have so far repaid about 60% of the total debt that was outstanding at the beginning of the year.
Speaker 3: We have also unveiled a new visual identity that better aligns with the investments we have made into our platform over the last few years.
Speaker 3: And lastly, we announced a 20 million.
Speaker 3: dollar share purchase authorization as we believe our prevailing share price does not reflect the value of our long-term potential and we continue to view our own stock as a great investment. I am Hearthstone ??
Speaker 3: So let's dive into some of the details.
Speaker 3: and what we are prioritising over this coming year.
Speaker 3: Turning to slide 3.
Speaker 3: I am very excited about the brand identity.
Speaker 3: for the year for 2023.
Speaker 3: When multiple TV awards for a technology and services and receive an A-plus rating uncompairably, along with winning awards for our culture and human resources teams.
Speaker 3: At the end of the day, we operate in a human capital business amplified by the power of technology. So we are proud to be consistently recognized as a leader in our industry.
Speaker 3: We believe this will continue to serve us well and further expand our sales pipeline as our reputation becomes more widely known.
Speaker 3: to the strongest level we've seen in five years.
Speaker 3: from the CCC transaction closing.
Speaker 3: We were able to allocate $7 million towards the prepayment of our revolving credit facility and $48 million towards prepayment on our senior terminal.
Speaker 3: We've been able to eliminate just over $100 million in debt repayments from our balance sheets. As a result, our net leverage ratio has come down significantly and we continue, expect this to continue to move down as we begin our sales effort which flows through to the bottom line and expand our EBITDA base along with using proceeds from a planned divestiture of our Argentina operations to further pay down debt.
Speaker 3: In the current interest rate environment these means have significantly lower interest cost.
Speaker 3: digital and IT efforts.
Speaker 3: Now, turning to slide 6, we believe we are very well positioned to continue capitalizing on the sales momentum we've begun to generate.
Speaker 3: As you will see on the graph on the right-hand side,
Speaker 3: We have already generated more new logo wins than we did in all of 2021.
Speaker 3: We have a strong pipeline of new sales needs that we believe will allow us to exceed our 2022 new logo win number. To help us accomplish this, we've been integrating our marketing data into our sales CRM to enable an AI driven lead generation. This will allow us to deploy digital tools that can mine our databases and improve our conversion rates.
Speaker 3: With the macroeconomic environment
Speaker 3: Being unpredictable and challenging, as I mentioned earlier, our clients are pushing to move services nearshore and offshore at a much quicker pace. Although this does have an impact on top line.
Speaker 3: We believe increasing volumes from new client wins and expanded services from existing clients will more than offset this impact.
Speaker 3: And we believe we will continue to see gross margin expand throughout the rest of the year.
Speaker 3: In fact, I can confidently say that we do not expect to see wage increases as we did in 2022. We have also been able to capture additional pricing with our customers.
Speaker 3: as their contracts come up for renewal.
Speaker 3: which is further helping us maintain a healthy margin profile.
Speaker 3: Overall, I'm confident in the direction our organization is moving in. We built a strong foundation, made the necessary investments, and significantly improved the health of our balance sheet. Now we need to execute and capitalize on all the effort we have put into this platform, with a strong pipeline and efficient cost structure.
Speaker 3: and the capital to continue investing in our best-in-class capabilities, I firmly believe that we are on the right path towards profitable growth and delivering sustainable value to all our stakeholders. I'd now like to turn over the call to Nishit Shah to provide further details on our first quarter financial results.
Speaker 3: of which you can see a recap starting on slide seven. Thank you all for joining us, and I'll be available to answer any questions you may have during the Q&A session at the end of this call.
Speaker 3: and mission as pass over the call to you. Thank you.
Speaker 3: Thanks Varun. Before I get started.
Speaker 3: We have registered our financial statement to exude revenue from discontinued operations in the current and prior period. For a full reconciliation of our first quarter results, please see the financial table Mr. and our quarterly earnings release or thank you that will be posted on the investor relation section of our website. Starting on the top line, net revenue in Q1 was 92.1 million compared to 101.1 million in the A-Ago quarter. I just think for the high base in the A-Ago quarter.
Speaker 3: million in the year go quarter. eight.
Speaker 3: Gross profit margin increase approximately 40 basis point to 40 in percent.
Speaker 3: to 13.6 percent in the year 2014. The increase was primary due to productive pricing and?Allah Allah, Rinsten Ikhi,
Speaker 3: a higher portion of service delivery through nearshore, offshore and less pressure from inflation on wage costs during the period.
Speaker 3: As we move through the remainder of the year, we expect our grass mage to continue improving.
Speaker 3: Adjusted EBITDA for the first quarter from continuing operation was 8.3 million compared to 8.9 million in the year ago quarter.
Speaker 3: adjusted a bit of margin increase 20 basis point to 9 percent compared to 8.8 percent in the EAGO QuarterLAUGHTER
Speaker 3: At the consolidated level, including the discontinuing operations, adjusted EBITDA remained constant at 14.1 million compared to years ago quarter.
Speaker 3: With adjusted EBITDA margin increasing 20 basis points to 8.6% compared to 8.4%. Adjusted net income attributable to StarTech shareholder from continuing operation decrease slightly to 2.2 million compared to 2.8 million in the year ago quarter.
Speaker 3: At a consolidated level, including discontinued operations, adjusted net income decreased by 3% to 3.2 million or 8 cents per delta share compared to 3.3 million or 8 cents per delta share in the year ago quarter.
Speaker 3: Looking at our balance sheet, as of March 31, 2023, our cash and restricted cash balances stood at 24.9 million compared to 72.4 million at the end of 2022.
Speaker 3: We utilised the proceeds from CSS redemption to pay down debt in January .
Speaker 3: A total bet as on March 31st, 2023 was 131 million as compared to 176 million on December 31st, 2022.
Speaker 3: As Bharat previously walked through, we further repayed Rs. Rs.65 million for debt in April . So, the CCC connection procedure and our current debt stands at about Rs. 75 million.
Speaker 3: Given the interesting scenario, this significant delivery will help.
Speaker 3: save about 8 million in the annual interest expense. Lastly, our board authorized a new 20 million dollar share repurchase program in April , which we expect to begin utilizing as soon as possible with a prevailing share price representing an attractive investment opportunity from the company's perspective.
Speaker 2: Thank you. We will now begin the question and answer session.
Speaker 2: To ask a question you may press start then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press start then 2. At this time we will pause momentarily to assemble our roster.
Speaker 2: Your first question comes from Alex Paris from Barrington Research.
Speaker 2: and Barrenson Research. Please go ahead.
Speaker 4: Thank you and thank you Barat and Nishit for taking my questions.
Speaker 4: Thank you, and thank you, Bharat and Nishit, for taking my questions.
Speaker 4: Starting first at a high level, I was wondering if you can highlight your strengths, your top-line strength in the quarter by vertical. I think you mentioned in the press release economic, sorry, e-commerce and banking, financial services, BFSI, and then maybe
Speaker 3: Sure. I can start and we should feel free to add.
Speaker 3: The way we see our business, if you look at telecom, media, cable, and media, if I broadly look at that, we have kind of, we look at that being in the late 30s to early 40s. Are you done?
Speaker 3: of collateral. And therefore telecom media and cable, as you see a lot of convergence in that sector from the use of extensive use of technology to acquire customers, customer attention, how do you make your work?
Speaker 3: you compete in a very competitive environment, at the same time deliver cost efficiencies. It requires the players, such as ourselves.
Speaker 3: media cable will continue to be a vertical that is going to close to heart and one of our strengths across geographies.
Speaker 5: The other area that we see that is rapidly growing
Speaker 5: through COVID because now we just don't do, you know, it's not just a customer support, but we provide customer support the entire, down the entire value chain, going from customer support to supporting many of the sellers, sell their services, their products.
Speaker 5: on various e-commerce platforms that we support to talking about e-commerce logistics and that whole gamut of services. So telecom, media and cable as I mentioned if I look at them broadly as kind of one large sector.elfish.io
Speaker 5: e-commerce and retail.
Speaker 5: So travel and hospitality is starting to pick up well with obviously that sector has come under a little bit of pressure with COVID but as the world kind of starts to deal with COVID in the right fashion travel and hospitality is picking up very well.
Speaker 5: The other and the fourth area for us is our business.
Speaker 5: and financial services. So we provide again a full range of services delivered from across various geographies. So that's another vertical which is obviously a strong area for us.
Speaker 5: And we are starting to grow very well and we have seen some of our wins in both the utility space as we talked about earlier and the healthcare education. So these I would say are our budding sectors. So I would say the areas in terms of for growth would continue to be what I would call as the consumer Paulson is right ahead as we get these moves forward now. So flexible so we can look into the trend as a whole here and look into the long-term
Speaker 5: could be areas for growth going forward.
Speaker 5: If you ask me vertical that I feel there are concerns, I wouldn't really say we've got any concerns. I think we're looking at what should be the best approach and strategy for the healthcare vertical. So I think that will need some work at our end.
Speaker 5: Hope that gives you a perspective on our priorities.
Speaker 4: Absolutely, Barrett. Thank you. That was great color.
Speaker 4: Moving on to my next question, I had a question about gross margins. Gross margins improved in the quarter. You attributed it to pricing adjustments, a higher proportion of nearshore and offshore, and then less pressure from inflation and wages. To the first two, I'm curious...
Speaker 4: How do you go about proactively getting price adjustments? Is it usually around the renewal of the contract?
Speaker 5: Most price adjustments happen around the time of renewal of contracts.
Speaker 5: But equally when there are significant inflationary pressures, we have gone back to customers. And I think that's what is important is keeping a very regular dialogue with customers. And I'm delighted to say that I've met almost all our customers.
Speaker 5: key customers and a big endeavor for me is now that we have stabilized our operations is to actually reach out.
Speaker 5: meet customers, get their feedback. And therefore, one is making adjustments at the time contracts are renewed. Equally, we have seen situations where we have got to go back and that's why the regular relationship and being in touch with customers becomes critical because that just allows us to go back even in between contract renewals.
Speaker 5: to be able to put a case forward for adjustment. Because at the end of the day, whenever we make adjustments or we have requested customers for adjustments, it's normally been off the back of paying the right wages and the right salary structure.
Speaker 5: to our brand ambassadors or our associates, because at the end of the day, they represent the customer's brand and are the first port of contact. So to answer your question perhaps in a long-winded way, normally it comes at the time of contract renewal, but equally we have had situations where we have been able to get price increases midway. Jeffery. That's great. Good to know. Good to hear. Appreciate it. And then with regard to the other key point there with the gross margin improvement.
Speaker 4: higher proportion of nearshore and offshore. You did kind of allude to the fact that when you do this it does have an impact on revenue but given the cost to deliver it's a better gross margin. Am I correct in that? That is correct. So we do some we do some sense we do see some decline in revenues but you know at the end of the day that you do see a corresponding improvement in margins.
Speaker 5: And you know as we then look at building a stronger franchise with existing customers and the new logos and I alluded to the new logos and I talked about the numbers and you saw that in the presentation as well. That kind of new business effectively offsets any decline or short-term decline in revenues because of the move.
Speaker 4: And at the end of the day, while it's good for your mergers, it's also good for the customer. The customer is demanding these lower cost alternatives of nearshore and offshore in this macroeconomic environment, correct? Completely, completely. Because obviously everyone is under cost pressure.
Speaker 5: And that can be done in a seamless manner without compromising quality.
Speaker 5: I think it's a win-win solution for everyone.
Speaker 4: I agree. And then last question and I'll get back in the queue. I believe at the end of 2022 you said that onshore was 60%.
Speaker 4: and near-term and offshore together were about 40%.
Speaker 4: Do you have any updates to your targeting there? I think you had said within two years you expect that to get to 50-50. What about longer term? I think longer term 50-50 would be a kind of near term target.
Speaker 5: Long term, as customers start getting more comfortable is you can't really push the pace beyond the point.
Speaker 5: Very good. You give the best value for customers.
Speaker 4: Great. Well, thank you very much for answering my questions, and I'll yield the floor.
Speaker 2: Thank you. Once again if you'd like to ask a question please press star then 1.
Speaker 2: Your next question comes from Zach Cummins from B Riley FBR
Speaker 6: Please go ahead. Hi, good afternoon and thanks for taking the questions.
Speaker 6: Barat, nice to see all the new logo wins and I think you mentioned towards the end of last year two pretty meaningful logos in terms of size. How should we think about the progression or the anticipated ramp up of some of these new logos as we progress through 2023?
Speaker 5: Sure, Zach and good to talk to you again. I think this year what you would normally see, what happens is when you ramp up new logos you do see a temporary decline in margins.
Speaker 5: You do expect the initial period has costs, ramp up costs associated.
Speaker 5: which then get offset over the course as the client operations stabilize.
Speaker 5: So from a ramp up perspective, I think we are ramping up pretty well. I think the two new logos, the first one actually started last year itself. And we have seen off the back of that, we have seen some more work come to us off the back of having performed well over the last four or five months from a ramp up perspective.
Speaker 5: So I find that pretty encouraging. And I think that's a good reference point, and that's a case in point for us to continue to focus on the vertical that we have got extensive collateral and use cases in.
Speaker 5: Now when I look at the second one, we are delighted to have one that logo. Our teams are working with the client's teams. There are some usually T's to cross and I's to dot from an implementation perspective but that is well underway.
Speaker 5: I would think, I would expect that to progress in line with our expectations.
Speaker 5: So I don't see any major challenges with either of the logos from a ramp perspective. And those two logos I think are going to be good trendsetters for us in the utilities and the cable media and telecom sector to further kind of deepen our credentials in the future.
Speaker 5: cable media telecom sector and actually to provide us good use cases and reference points for our utility sector. We have done a fair bit of that across geographies but have had in the past not done a lot of utilities in the US.
Speaker 5: So this provides us a good opportunity to build that presence up as well in the US. So to answer your question perhaps in a long-winded way, do we see any major challenges with respect to RAMPS? I think the answer is no. Do we see that could have a potential short-term impact on margins? Possibly because as you ramp up you do have as I mentioned the learning curve.
Speaker 5: and there are some short-term hiccups from – I wouldn't say really a hiccup, but there are costs associated with the short-term ramp. But those get very well addressed as the company moves forward and the operation stabilizes. So any major concerns around the ramps to the two customers? The answer is no. Understood. That's helpful.
Speaker 6: I guess just to the point on gross margin, it sounds like you're still thinking that can trend higher from even what you did in Q1. Obviously could have some impacts here in the near term with some of these logos ramping up. I mean as you shift more of the business towards kind of near and off.
Speaker 5: I think the target of course it's a bit hard to say how exactly it will pan out over the two quarters because of significant ramps associated, right? So that therefore margins can be muted because of that. But going into let's say towards the end of the year into the following year, it's
Speaker 5: I think getting to gross margin levels of mid-teens would be where we would want to be.
Speaker 6: And I don't see that as a major issue if we're able to get our right mix of near and offshoring. Got it. Got it. That's helpful. And just final question for me is just with your Argentina operations, it sounds like you're still kind of going through the process there. Thank you, sir.
Speaker 5: There is clearly an interest. I think the idea will be that proceeds from the sale of our interest in Argentina as we have done with the sale of our interest in the contact center company will go to reduce our debt.
Speaker 5: But at this stage, you know, giving you a lot more before we can see a lot more definitive terms from interested parties might be putting the card before the horse. So I would rather do that when you have got better visibility of that.
Speaker 5: But at this stage, you know, giving you a lot more before we can see a lot more definitive terms from interested parties might be putting the card before the horse. So I would rather do that when you've got better visibility of that. All right. Understood. Well. But the process is underway. Q & A
Speaker 6: Got it. That's great to hear. Well, thanks again for taking my questions, Bharat. Always appreciated, and congrats on the solid results here in Q1. Thank you, and no worries at all, Zach. Pleasure talking to you. Thank you.
Speaker 2: Once again, if you'd like to ask a question, please press star then one. As there are no further questions at this time, I'd now like to hone the call back over to Mr. Ralph for any closing remarks.
Speaker 7: Hello, sorry can you hear me?
Speaker 5: I just want to make sure that there is a bit of disturbance. So thank you, Darcy, and thank you all for joining us this afternoon and for your continued support of StarTech.
Speaker 5: I look forward to speaking with you next when we report our second quarter 2020 results.
Speaker 2: and remind me how this connects. Thank you.
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