Q2 2023 Startek Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss the Star Trek financial results for the second quarter ended June 30th 2023.
Joining us today are start take global CEO , Bob Rowe.
The company's global CFO .
Raj Jain.
Following their remarks, we'll open the call for your questions.
Before we continue we would like to remind all participants that the discussion today may contain statements, which are forward looking in nature pursuant to the safe Harbor provisions of the federal Securities laws.
These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially.
Star Trek advisors all of those listening to this call to review the latest 10-K posted on its website for a summary of these risks and uncertainties.
Star, Texas, 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.
These 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 Dot Star Tech Dotcom.
Additionally, the company has included a presentation to accompany the call which can be found via the webcast link and on the investors section of the company's website.
Now I would like to turn the call over to Star Ted Global CEO about outgrow.
Please proceed.
Thank you Paul.
Good afternoon, everyone.
Thank you all for joining.
As Paul just mentioned.
Encourage everyone to follow along with the quarterly investor presentation that can be accessed through the webcast link.
I see.
Right.
Let's start on slide two and recap our Q2 highlights along with some recent events.
Overall, we continued to provide best in class services to our customer base.
And I'm proud to report our data showing us in top quartile performer.
I mean that top 20 clients.
The investments we've made in our platform over the past 18 months haven't really begun to take hold it is great to see these investments translate into a better customer experience across the board.
As we have discussed at length.
2022 was about investing in our capabilities.
And right.
Footprint in <unk>.
Sure.
Organization was focused on driving growth through our core competencies.
In 'twenty three.
Our goal is to put our foot on the gas to grow our client base.
And continue looking for ways to expand offerings with cutting edge science.
This type of deal we made meaningful progress with the consolidation of our digital and scenes team under one umbrella led by a chief growth officer I'd be James.
Although it is still in the early innings of the transition we are seeing positive signs that this organizational shift is benefiting starting from an efficiency and pipeline conversion.
Yeah.
In fact, our momentum from the first quarter continued into quarter two as he successfully ramped up services with new clients and worked on increasing volumes with existing clients.
One of these zones.
Included a large client.
It came in the sector.
Finding delivery to additional geographies.
We also gained four new logos.
All set to be delivered offshore.
While I'll dive into further detail about our growth initiatives later on.
It is encouraging to see.
That we have been able to sustain margins. Despite the decline in our revenue base as a result of our strategic divestitures that we have already made and plan to make.
Before we move on I want to address what is probably top of mind for everyone.
Subsequent to quarter end.
A majority shareholder.
S P.
Made another take private offered to our board of directors.
Within the proposal CSP is offering.
<unk> $8 a share for the remaining shares not already owned by <unk>.
And this is not a board has put together a special committee comprising three independent directors to evaluate the offer and determine if it is suitable for our shareholders.
At this time I have no further update.
Special Committee has commenced the deliberation process.
Turning to slide three.
We are always proud to be recognized by our team's hard work innovation and workplace culture.
We run a Stevie award for our new products and a handful of comparatively.
Everything from culture to Korea.
We also participated in customer contact week maybe.
Wherever you are able to interact and exchange ideas with clients and industry participants.
Notably many of the conversations are centered around the project impact of artificial intelligence.
And how we can better leverage this groundbreaking technology.
Enhanced customer experiences.
We are grateful to be recognized as a leader in our industry for the way, we treat our employees and.
In fact, we need when it comes to new innovations.
We expect our reputation for success to benefit us as we continue to scale our sales pipeline.
Moving to slide four I wanted to dive a bit deeper into our growth initiatives as I mentioned earlier.
Did you of consolidating our sales and digital teams under one umbrella of group.
Putting into our chief growth officer is beginning to show results.
If you look at the momentum we've already generated in the first half of 2023.
We have more than doubled our new logo wins from 2021.
And half.
Already reached 75% of the total new logo wins, we had in all of 2022.
In quarter, two alone, we signed 14, new campaigns and four new logos.
Our year to date, new logo wins have a contract value in excess of 57 million U S dollars.
We firmly believe that we are well positioned to capitalize on the opportunity in the long term.
And whether it's short term headwinds.
But uncertainty persisting in the global macro economy, we are seeing longer sales cycles, and delayed decision, making with current and potential clients.
But cost reduction being at the forefront of many discussions with customers. We believe the investments we have made to expand nearshore and offshore services positions us well.
We are able to provide a compelling offer that can introduce our company's expansion.
Simultaneously enhancing the overall customer experience.
To further supplement these conversations also focusing on expanding.
Logical capabilities.
Through continued internal investment.
Long with entering into advantages partnerships.
Looking at the game changing technology like AI.
We need to ensure.
We remain in the forefront of leveraging this appropriately and passing on the efficiencies to our clients.
We are in discussions with our digital partners to build margins around AI that can further help us.
Elevate agent performance.
Efficiency.
Engagement.
We are also building vertical specific margins alongside started cloud and <unk> platforms.
Leveraging our deep expertise in select verticals to enable transformational solutions.
Okay.
On the topic of investing in our capabilities.
Look at slide five.
I wanted to highlight an important milestone we accomplished this quarter.
As many of you are aware.
<unk> has always been top of mind for our organization.
And it's only getting more important in this day and age.
We have spent a considerable amount of time upgrading our security a pattern to it.
So it is best in class.
As a result, we received a rating of <unk>.
Eight or 97 out of 100 from security scorecard.
Exceeding the industry average and continuing our trend upwards.
We also received a big site security rating of 750 is also above the industry average of 720.
And considered and advanced security score.
On the lowest end of the risk spectrum.
While these high ratings are not new for us the continued improvement and commitment.
<unk> in this side of our business serves as a reminder, the premium we place on the security of our customers' data.
Okay.
All of them.
The progress we have made in the second quarter.
While there may be some choppiness in the short term, we are continuing to push forward aggressively and execute the long term goals, we have set for ourselves.
Now I'd like to turn the call over to our new CFO need edge.
Neither <unk> brings to us more than two decades of experience in corporate development.
Organizational transformation and financial leadership.
We are happy to have his extensive experience and leadership and board.
As we enter this next phase of our growth strategy.
Needed will now provide further details second quarter financial results.
Which you can see a recap.
On slide six.
Thank you all for joining us and I'll be available to answer questions you.
You may have during the Q&A session at the end of this call.
Neither Joe now pass over the call to you.
Thanks for the introduction Brett.
I have only didn't CFO for a couple of months.
In that time I've been impressed with the team's determination Andrey good.
I'm happy to be here and excited to play a role in that.
<unk> growth as we look forward to Oklahoma city from sort of it.
I would like to note that although the run off of the burn and Glenn Davis Churns. We have are just third our financial statements.
We exclude revenue from discontinued operations.
The current and prior periods.
But if one of the reconfiguration of our second quarter results.
You see the financial tables in this third quarterly earnings release, or the 10-Q that will be posted on the Investor Relations section of our website.
Starting on slide six looking at our top line.
Drilling into Google was 91 $1 million.
Compared to $96 2 million.
Good quarter.
If you adjust for the hiring of a new business in the prior year, either resulting from Mexico third Brian Chin.
Long with ethics impacts revenue actually increased 3% year over year on a constant currency basis.
Gross profit in the second quarter and could you use a five 7% to 11 $7 million.
<unk> to $11 million in the year ago quarter.
Gross profit margin could be used one could be basis points to 12, 8% compared to 11, 5% in the year ago quarter.
The improvement in Bras preferred and gross margin is primarily attributable to lower employee cost.
Is there anything from a higher portion of sort of risk and reward in the onshore and offshore.
Along with proactive pricing disciplines to account for the inflationary environment.
But just sort of breakdown from continuing operations in the second quarter was seven $7 million compared to $7 9 million in the year ago quarter.
Adjusted EBITDA margin increased 20 basis points to eight 4%.
Compared to 8.2% in the year ago quarter.
Please note that second quarter typically is a low margin quarter it wouldn't be.
Kind of lowest count of working days.
As a result of the efficiencies that would be a big glut of platform what are the thoughts to you.
Our focus will be on maintaining the full year adjusted EBITDA margins in the similar range as last year.
Despite increasing cost towards upgrading our technology and security.
Additionally, as we expand.
<unk> offshore and near shore mix, we should continue to see improvements without a dispute that margins overtime.
Adjusted net income attributable to <unk> shareholders from continuing operations was $1 $5 million compared to $6 $2 million in the year ago quarter.
At the consolidated level, including discontinued operations.
Took net income, but can you just do $1 $5 million or for defense for diluted share compared to $6 $3 million or 15 trends.
Diluted share in the year.
Good quarter.
I'll move to slide seven you will see a breakdown of our revenue by vertical and geography for the first hospital.
Compared to the first half of 2022.
Please note that much of these declines were expected as we navigate through the transition off of our asset base and focused on higher margin offerings.
In addition to many of the wins, we experienced in the first half of <unk>.
Not flowing through to our financials the roads until the back half of the year and 2024.
Turning to slide eight.
You will see in the first half of 'twenty three.
We have been able to sustain a healthy adjusted EBITDA margin. Despite the decline in revenue this compared to the prior year period.
We are improving our internal processes to make us more agile and proactive in managing our cost to align with the revenue movements.
Lastly, turning to slide nine for a look into our balance sheet.
As of June 30th Brinci, 20, clean our cash and restricted cash balance stood at $39 $1 million.
Compared with $24 $9 million on March 31st 2022.
Our total debt on June <unk>, 2020 to be improved to $78 $5 million as compared to <unk>.
And then put the $7 million on March 31st 2023.
You will see how significantly paid down our debt since the start of the year you didn't do a current and respectfully.
Additional $39 $4 million and a net leverage ratio of one onex.
This has played a crucial role in improving our cash flow in the current interest rate environment, and we expect to continue deleveraging the balance sheet going forward.
With that we will now open the call for questions Paul over to you.
Thank you Sir.
If you would like to ask a question. Please press star one on your telephone keypad now.
You will be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question please press star one.
On your phone now.
And our first question is from Alex Paris of Barrington Research.
Your line is open.
Thank you all for taking my.
Questions.
And near Raj I'm pleased to meet you and look forward to working with you are welcome to Star Tech.
Likelihood that and thank you so much.
I have a couple of questions Oh, I'll start with the bigger picture questions first and it is the macro.
Hmm.
<unk> you said in.
In your prepared comments that are in this current macro economic environment, we're seeing longer sales cycles and.
Delayed decision, making which is not surprising most companies are seeing that in this environment.
But I'd like to just get an update of your on your new new wins, new business wins overall and your new logo wins, specifically you seem to be really bringing on new ones despite that macroeconomic headwind.
What do you attribute that to and what does the pipeline look like for the rest of the year.
Sure. Thanks.
I think the new wins I would.
I attribute to a lot of work that has gone into a building pipelines.
As I as I talked about strengthening nearshore and offshore capabilities on the one hand.
And secondly pressure on <unk>.
Some of the some of our customers essentially look at optimizing the delivery costs.
Without necessarily compromising the customer experience.
Leading.
Many of our customers all prospective customers.
Options from an outsourcing and offshoring perspective.
So what we have seen is customers, who what he there too.
Operating effectively captives have started looking at outsourcing those who are looking at outsourcing.
Sure now actively looking at near shore offshore solutions from our cost optimization perspective, exactly the same reasons that everyone else is looking at.
Are they using volumes.
Cost pressures and therefore looking at how do you optimize your delivery cost without compromising quality.
Which is where some of our wins enzymes that happened really off the back of not just what we can do onshore, but essentially us.
This nearshore and offshore.
Does that kind of resonate with what you're hearing in the industry and you.
You know from some of our competitors as well.
Yeah, No that was helpful. I appreciate the additional color there.
And then just to be clear.
Today, you announced.
For new logos.
Offshore and near shore.
And in addition to that 14 new campaigns.
So.
I just want to put it on the same apples to apples with the first quarter in the first quarter I believe you had five new logos.
Which we're a part of 12 of business wins.
Is that right.
Correct.
We have five wells in the first quarter.
And we had four new logos coming in this quarter.
And then but.
In addition to that in the first quarter you had seven additional engagements.
And in the second quarter, you had 14 additional engagements or.
You know our campaigns so to speak.
Right I mean, these are lines new lines of business and lines of service, maybe augment with existing customers as well. So typically we tend to look at new lines that beta launch with existing customers and new logos.
Got you alright.
Okay. That's helpful. And then last quarter, I think we talked a little bit about inflation and its impact on your business as well as the impact of <unk>.
On your customers.
You had said 202023 youre not going to have the same impact from employee wages as you did in 2022.
But.
And youre trying to recapture price as contracts come up for renewal.
And I'm wondering where are you in that process have have are you halfway through the process for example of renegotiating price on renewals because I'm, assuming they renew at different times throughout the year.
Yes, so as they come up that that process is an ongoing cycle, so as contracts come up for renewal.
There are two ways of looking at it one as contracts come up for renewal we talk about.
Including aspects such as non just cola, but also looking at repricing.
The other one is when we look at the contract and there is there are contracts that are moving towards transaction based pricing.
We talked about.
Able to deliver efficiencies for customized what kind of gain share marches of you're going to build it and it's not just us I think the industry has been talking really about the impact of generating AI and how customers can benefit from it.
Move to deliver value how do we ensure that we and custom customized both partake in the benefits arising from that so.
That's gonna forgive tens that E contracts as they come up will be subject to renew kind of.
Negotiations and.
Various aspects of contract renewals and the second aspect is with respect to inflation of the <unk>.
Yes.
I think what Youre doing is.
Well.
To counter some of that you've you are focusing more on nearshore and offshore delivery locations, which essentially helps us towards that makes 10 balance that and keep our margins stable.
Home that provide you some context in terms of <unk>.
Contract and the cost management part of it.
Absolutely. Thank you and then one.
Oh, one last big picture question.
With regard to AI you brought it up it's on most every conference calls these days.
You want to make sure that you are at the forefront.
Of developments and AI.
<unk>.
Is there a timeline when should we expect a star tech answer to AI built.
Built into your service offering.
So I think we are already building.
Elements of AI into our service offerings.
If you look at what we are doing with respect to <unk>.
Amplification tools for instance.
And the stuff that we have talked about in the past.
I think that those investments and the effect of those investments on improving the quality of.
Our support to the agents.
So.
And that's something that you also talked about and some of the content how do we have released.
That we expect gen rent them.
And AI driven margins.
Essentially help us improve the quality of customer experience arising from better tools being available to agents to be able to respond. So essentially what you would expect and that's what we see with our customers as we go through discussions with them, but that's for <unk>.
<unk> new business, there is an expectation of improvement in efficiency and what I mean by that is foster designation of twenties.
Our average handling times.
Lower transfer rates.
Ability of agents to take more complex calls and therefore, multi skilling of agents and all of that is the result of Inducting AI and AI.
Any big tools into the entire customer experience ecosystem, so I wouldn't necessarily see that you'd draw almost a line in.
And then say post this particular point, we have AI and getting into our system.
Already into our system and an integral part of our offering today.
Assumes and actually inductor AI into the offerings suite.
Great.
Thank you for that and then my last question I promise is I wonder if we could get in Argentina.
Of the three noncore assets that you recently selling that was the last one that you began the process on and I was wondering Uh huh.
How that's coming.
Sure.
Going through a process there.
<unk> of interest from various parties.
And at this time.
Ages of discussion.
Because we have to make sure obviously that we are.
Uh huh.
<unk> Dot dawn.
To the right party that continues a tradition because we are not looking at just winding down operations.
Have a good set of employees good set of customers. We have made the investments that we want to ensure that.
When we sell.
Interest in Argentina, we want to make sure that it passes into the right hands.
It will to continue the.
But with the team and the performance.
So in terms of.
Discussions those discussions are on a I wouldn't be able to give you a sense clearly the plan is for that to conclude this year.
<unk> off.
The kind of discussions that we have had a few interested parties doors are currently underway and fairly actively.
Very good well. Thank you very much for answering my questions and ill, let somebody else have a chance.
Thank you.
And we have a question from Zach Cummings from B Riley security.
Your line is open.
Great. Thanks for taking my question.
Can I just ask you about <unk>.
We anticipated revenue ramp.
However, we should be thinking about that in the second half of the year just related to your new business wins from the first half of this year and then building upon the logos that you secured in <unk> of last year with the large cable customer in utility customer.
Sure.
Deep issue that we have at the moment is whilst we've got and then they happy that we've been able to secure the kind of wins.
That we had talked about.
These the ramp in these wins in the from these wins will continue as the ramp from the customers that we won towards the end of last year.
But what we do see this year.
Is that the holiday season volumes that normally saw getting into quarter three.
A lot softer.
So to that extent.
Typically quarter two for us in the past has been a lot has been softer leading to stronger quarter three in quarter four I would expect.
<unk>.
That that kind of holiday Ram holidays, so you're getting into the holiday season that essentially increases the volumes is going to be a bit softer this year.
Secondly, we have an active pipeline, but what we have seen is that the decision making is getting extended because people are.
There seems to be yes.
General tendency to currently.
And watch.
So I would think that the traditional increases that we had going into quarter, three and quarter four might be a little more muted this time.
So not another fundamental business.
It's more on the question of timing and or.
Over the next two quarters.
And for two reasons, one people are trying to figure it out.
Pending inflation cost increases et cetera.
And secondly customers are also trying to figure it out.
What does generally do.
Do how much can you use that to deflect volumes to automated channels and therefore can you actually set targets because why airlines to be on pace.
Pacing ourselves I think so our customers in terms of one gender.
Capable off.
So I think everybody is dealing with quarter accord.
<unk>.
Understood.
Got it got it and final question for me is just really around gross margin I mean should we think of Q2 is typically the trough when it comes to gross margin for the year or how are you thinking about those dynamics with a potentially software revenue ramp in second half and increasing mix of.
Nearshore and offshore cable deliberate engagements.
Gross margins, we should we should be able to continue unless where gross margins really get affected or does it feel to make substantially more investment.
In ticked.
Technology in some of our delivery capabilities. So.
Let's say you have typically impact on gross margins.
Now what.
Vans is gross margins getting uplift is more work around near shore.
Virtual nearshore and offshore locations, so to the extent that a nearshore and offshore locations.
<unk> delivery.
You would see an improvement, but equally because volumes are going to be softer.
And the investments we have made and will continue to make me want to strip that off.
I don't think we are going to look at significantly improved margins.
That's where you're coming from but I don't think equally we would have.
Difficult decline either because of the investments you're making so I would think.
The.
There'll be a bit of a counterbalance between inc.
Ramps happening nearshore and offshore.
It will effectively offset the softness that we've seen volumes.
And these are jonquil, if you've got if you would like to chime into that.
<unk> yeah.
Yes, I will just start but I think that.
Third as.
As we see for the full year basis.
Basically it says the counters that will happen right and because of the.
And nearshore and offshore that they seem to be using the investments that were made in technology.
The volume drop and the seasonality will definitely be counted so I agree with you.
We don't foresee any major broken down margins because of the operating efficiencies that we are currently living which we have done in each one.
This award because all good enough margin to the niche ones.
Continue to focus on those areas if you look at Oh.
I'm going to call if we look at our operating efficiencies.
Including the IP cost and we should be able to hold onto our margins. So I agree with you.
Understood well, thanks for taking my questions and best of luck with the rest of the quarter.
Thank you Sir.
Thank you.
Seeing no further questions I'll turn the call back over to Mr. Rowe for closing remarks.
Okay.
Okay.
Yeah.
Thank you all.
Thank you Paul and thank you all for joining us this afternoon.
And for your continued support of starting.
Look forward to speaking with you when we report our third quarter 2000, Twenty's pleases us.
Yeah.
The meeting has now concluded thank you for joining and have a pleasant day.
The House has ended this call goodbye.