Startek Inc

F:K2R

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone. And thank you for participating in today’s conference call to discuss the Startek Financial Results for the First Quarter ended March 31, 2023.

Joining us today are Startek Global CEO, Bharat Rao; and the company’s Global CFO, Nishit Shah. 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 certain 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 the various risks and uncertainties that could cause actual results to differ materially. Startek also advises all those listening to this call to review the latest 10-K posted on its website for a summary of these risks and uncertainties. Startek does not undertake the responsibility to update any forward-looking statements.

Further, the discussion today may include some non-GAAP measures. In accordance with Regulation G, the company has reconciled these amounts back to the closest GAAP-based measurements. The reconciliations can be found in the earnings release on the Investors section of their website.

I would like to remind everyone today that the webcast replay of today’s call will be available via the Investors section of the company’s website at www.startek.com.

Additionally, the company has included the presentation, which can be found via the website link and on the Investors section of the company’s website to coincide with the call.

I’d now like to turn the call over to Startek Global CEO, Bharat Rao. Bharat, please proceed.

[Bharat Rao, Global Chief Executive Officer]

Thank you, Darcy. And good afternoon, everyone, and thank you all for joining. As Darcy mentioned, we will be following along the quarterly investor presentation that you can find on our Investor Relations site and via the webcast link.

So let’s start on Slide 2 and recap some of the highlights from the start of the year. As we have talked about at length, last year’s focus was on investing in our capabilities to enhance the customer experience and begin rolling out proof of concepts for innovative new tools. We did this with the goal of driving further upselling with current clients while simultaneously attracting new clients across all our key verticals. We dedicated a significant amount of time and resources into these initiatives to ensure that we have the right structure in place and that all of our agents were trained accordingly for successful implementation.

While we were working on these initiatives, we are also making strategic moves to ensure that we were focusing on our core competencies that we believe will drive long-term profitable growth and shoring up our balance sheet to ensure our cost of capital did not prove to be a hindrance to these growth objectives. We enter 2023 with the main priority for this year being execution. I’m pleased to report that we made significant progress on execution as we deployed the solution 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 with current clients; and the second, using our proof of concepts and performance-driven reputation to attract new clients.

We’ve had a total of 12 new wins in the first quarter. Five of these wins are new logos across the utilities, e-commerce, healthcare and BFSI verticals, while the remaining wins included successful ramp-ups providing new services and additional volumes to existing clients. To continue this momentum forward, we have integrated the digital and sales teams under the Chief Growth Officer umbrella in order to better align our objectives and capitalize on both these strategies.

We’re also finding 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 are focused on agent amplification, 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, ultimately allowing for a better agent and customer engagement.

To continue aligning our organizational priorities, we also made progress with our strategic divestitures subsequent to the quarter closing. 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. We’ve also unveiled a new visual identity that better aligns with the investors we’ve made into our platform over the last few years.

And lastly, we announced a $20 million 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.

So let’s dive into some of the details and what we are prioritizing over this coming year. Turning to Slide 3. I’m very excited about the brand identity that we’ve introduced last month. We believe this new visual identity reflects our company’s mission, vision and values and embodies our commitment to innovation and customer experience excellence. It also marks the final integration with Aegis as we have retired all legacy Aegis branding and will be using this visual identity as our branding across the globe.

We believe this is a perfect way to start our next chapter focused on execution and encapsulates all the work we’ve put into developing this platform over the last several years. We’ve already noticed benefits from having a unified brand across all our markets and believe this will further propel our growth objectives of becoming a leading customer experience solution provider.

I encourage all of you to visit our website and social media channels along with the marketing collateral we’ve issued to experience the new branding. Coinciding with the progress we have made in developing our solutions and services to be the best-in-class, we are also continually recognized for these efforts from third parties to further validate the effectiveness of our platform.

Looking at Slide 4, I’m proud of our team’s consistent efforts to showcase our services, and it’s an honor to be recognized as the outsourced partner for the year for 2023, win multiple Stevie awards for our technology and services and receive an A+ rating on Comparably along with winning awards for our culture and human resources teams. At the end of the day, we operate in a human capital business, amplified by the power of technology, and we are proud to be consistently recognized to be the leader in our industry. We believe this will continue to serve us well and further expand our sales pipeline and our reputation becomes more widely known.

Moving to Slide 5, as I mentioned earlier, we have made significant strides to shore up our balance sheet to the strongest levels we’ve seen in five years. With the US$55 million in proceeds from the CCC transaction closing, we were able to allocate $7 million towards the prepayment of our revolving credit facility and $48 million towards prepayment on our senior term loan. If you combine this with the previously disclosed strategic moves, we’ve been able to eliminate just over $100 million in debt repayments from our balance sheet. As a result, our net leverage ratio has come down significantly, and we expect this to continue to move down as we begin our sales effort, which flow through to the bottom line and expand our EBITDA base along with using proceeds from our planned divestiture of our Argentina operations to further pay down debt.

In the current interest rate environment, these moves have significantly lowered our interest cost burden, improve the overall health of our balance sheet and have provided us flexibility to allocate more capital for investing into our sales, digital and IT efforts.

Now turning to Slide 6, we believe we are very well positioned to continue capitalizing on the sales momentum we’ve begun to generate. As you will see on the graph on the right-hand side, we’ve already generated more new logo wins than we did in all of 2021 and we already accomplished nearly half of what we generated last year. We have a strong pipeline of new sales leads 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. With the macroeconomic environment 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, we believe increasing volumes from new client wins and expanded services from existing clients will more than offset this impact, and we believe we will continue to see gross margins expand throughout the rest of the year.

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 as their contracts come up for renewal, which is further helping us maintain a healthy margin profile.

Overall, I’m confident in the direction our organization is moving in. We built a strong foundation, made the necessary investments and significantly improve the health of our balance sheet. Now we need to execute and capitalize on all the efforts we have put in to this platform with a strong pipeline and efficient cost structure 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, of which you can see a recap starting on Slide 7. 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.

Nishit, I’ll pass over the call to you. Thank you.

[Nishit Shah, Global Chief Financial Officer]

Thanks, Bharat. Before I get started, I would like to note that as a result of our current and planned divestiture, we have adjusted our financial statement to exclude revenue from discontinued operations in the current and prior year period. For a full reconciliation of our first quarter results, please see the financial table listed in our quarterly earnings release or 10-Q that will be posted on the Investor Relations section of our website.

Starting on the top line, net revenue in Q1 was $92.1 million compared to $101.1 million in the year ago quarter. Adjusting for the high base in the year ago quarter, which included the previously disclosed terminated operations with cable and media client, revenue in the current quarter declined by 4% year-over-year.

Furthermore, existing for foreign exchange movement as the U.S. dollar continued to strengthen, relative to emerging market currencies where we operate, the revenue actually increased 1% year-over-year.

Gross profit in the first quarter was $12.9 million compared to $13.8 million in the year ago quarter. Gross profit margin increased approximately 40 basis points to 14% compared to 13.6% in the year ago quarter. The increase was primarily due to proactive pricing adjustments, a higher portion of service delivery through nearshore, offshore and less pressure from inflation on wage costs during the period. As we move through the remainder of the year, we expect our gross margin to continue improving.

Adjusted EBITDA for the first quarter from continuing operations was $8.3 million compared to $8.9 million in the year ago quarter. Adjusted EBITDA margin increased 20 basis points to 9% compared to 8.8% in the year ago quarter. At the consolidated level, including the discontinuing operations, adjusted EBITDA remained constant at $14.1 million compared to year ago quarter, with adjusted EBITDA margin increasing 20 basis points to 8.6% compared to 8.4%.

Adjusted net income attributable to Startek shareholders from continuing operations decreased slightly to $2.2 million compared to $2.8 million in the year ago quarter. At a consolidated level, including discontinued operations, adjusted net income decreased by 3% to $3.2 million or $0.08 per diluted share compared to $3.3 million or $0.08 per diluted share in the year ago quarter.

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. We utilized the proceeds from CSS Redemption to pay down debt in January. Our total debt as of March 31, 2023, was $131 million as compared to $176 million on December 31, 2022.

As Bharat previously walked through, we further repaid $55 million of our debt in April for the CCC transaction proceeds and our current debt stands at about $75 million. Given the interest rate scenario, this significant deleveraging would help save about $8 million in the annual interest expense.

Lastly, our board authorized a $20 million share repurchase program in April, which we expect to begin utilizing as soon as possible with the prevailing share price representing an attractive investment opportunity from the company’s perspective.

With that, we will now open the call for questions. Operator, over to you.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Alex Paris from Barrington Research. Please go ahead.

[Alex Paris, Barrington Research]

Thank you. And thank you, Bharat and Nishit, for taking my questions. Starting first at a high level. I was wondering if you can highlight your strength – 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 talk a bit about the areas of weakness among verticals? And then maybe pipeline for both.

[Bharat Rao, Global Chief Executive Officer]

Sure. I can start, and Nishit, feel free to add. So the way we see our business, I mean, if you look at telecom, media, cable and media, if I broadly look at that, we have kind of – we look at that thing in the late 30s to early 40s. We’ve done a lot of work across verticals, I mean, across geographies and we have accumulated substantial amount of collateral. I think – 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 retention, how do you make your – compete in a very competitive environment and at the same time deliver cost efficiencies. It requires the players, which is ourselves, to understand the space very well. And therefore, telecom, media and cable will continue to be a vertical that is kind of close to heart and one of our strengths across geographies.

The other area that we see that is rapidly growing is e-commerce and consumer. That’s another area of growth for us and that has continued to grow through COVID because now we just don’t do – it’s not just the customer support, but we provide customer support the entire – down the entire value chain went from customer support to supporting many of the sellers, sell their services, their products or 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 a one large sector, e-commerce and retail, travel and hospitality is starting to pick up well with, obviously that sector has come under. There’s a bit of pressure with COVID, but as the world kind of starting to deal with COVID in the right fashion, travel and hospitality is picking up very well.

The other – the fourth area for us is our business and financial services. So we provide again a full range of services, deliver from across various geographies. So that’s another vertical, which is obviously a strong area for us. And we are starting to grow very well and we’ve 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 valued sectors. So I would say the areas in terms of – for growth would continue to be what I would call as our core sectors that I alluded – the four sectors that I alluded to earlier. And from an upcoming perspective, I would put utilities, healthcare and education as two verticals that we see a lot of traction in, and we see some interesting opportunities and clearly could be areas for growth going forward.

If you ask me verticals that I feel there are concerns, I’m going to really say we’ve got any concerns. I think we’re looking at how do we – what should be the best approach and strategy for the healthcare vertical. And I think that will need some work at our end. We have been moderately successful in that space. But to build a presence in that vertical will need some work to be done, and we are working with the right partners in that space. I hope that gives you a perspective on our priorities.

[Alex Paris, Barrington Research]

Absolutely, Bharat. Thank you, that was great color. 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 on wages. To the first two, I’m curious, how do you go about proactively getting price adjustments? Is it usually around the renewal of the contract?

[Bharat Rao, Global Chief Executive Officer]

Most price adjustments happen around the time of a renewal of contracts, 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. I’m very – I’m delighted to say that I’ve met almost all our key customers and a big endeavor for me is now that we have stabilized our operations is to actually reach out, meet customers, get their feedback. So therefore, one is making adjustments at the time contracts are renewed.

Equally, we have seen situations as you’ve 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 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 to our brand ambassadors or our associates because at the end of the day, they represent the customer’s brand as the first point 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’ve been able to get price increases midway.

[Alex Paris, Barrington Research]

That’s great. Good to know. Good to hear. I appreciate it. And then with regard to the other key point there with the gross margin improvement, 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?

[Bharat Rao, Global Chief Executive Officer]

That is correct. So we do see some decline in revenues, but at the end of the day that you do see a corresponding improvement in margins. And as we then look at building a stronger franchise with existing customers and the new logos, and I alluded to the new logos that I talked about the numbers. So you saw that in the presentation as well, that kind of new business effectively offset any decline or short-term decline in revenues because of the move. So it’s kind of a good combination of an improvement in margin plus kind of keeps us honest and pushes us to try and look for opportunities with existing customers and leverage our core verticals to acquire new logos.

[Alex Paris, Barrington Research]

And at the end of the day, while it’s good for your margins, it’s also good for the customer. The customer is demanding these lower-cost alternatives of nearshore and offshore in this macroeconomic environment?

[Bharat Rao, Global Chief Executive Officer]

Completely. Completely because there – I mean, obviously, everyone is under cost pressure, and if you – that can be done in a seamless manner without compromising quality. I think it’s a win-win solution for everyone.

[Alex Paris, Barrington Research]

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% and near-term and offshore together were about 40%. 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?

[Bharat Rao, Global Chief Executive Officer]

Good question. I think longer term, 50-50 would be kind of, I would say near-term target. Long-term as customers start getting more comfortable because you can’t really push the pace beyond the point. Ideally, you would like from a long-term perspective to take it to potentially a 40-60 or a 35-65. That’s where we would want to end up with, and when I’m talking of, it’s not just offshore, it’s a combination of nearshore and offshore. That gives the best value for customers.

[Alex Paris, Barrington Research]

Great. Well, thank you very much for answering my questions, and I’ll yield before.

[Bharat Rao, Global Chief Executive Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] Your next question comes from Zach Cummins from B. Riley FBR. Please go ahead.

[Zach Cummins, B. Riley FBR]

Hi. Good afternoon and thanks for taking my question. Bharat, 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?

[Bharat Rao, Global Chief Executive Officer]

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. And the reason for that is, in most cases, as we start as the team starts understanding new systems, there is the ramp-up phase during which obviously the team is getting to understand expectations, SLAs and once we are deploying technology. You do expect the initial period has cost – ramp-up costs associated, which then gets offset over the course as the client operations stabilize. 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’ve seen off the back of that, we’ve seen some more work come to us off the back of having performed well over the last kind of four, five months from a ramp-up perspective. 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 verticals that we have got extensive collateral and use cases in.

Now when I look at the second one, that’s, I mean, we are delighted to have on that logo. Our teams are working with the teams – with the clients’ teams. There are some, usually T’s to cross and I’s to dot from an implementation perspective, but that is well underway. I would think – I would expect that to progress in line with our expectations. So I don’t see any major challenges with either of the logos from a ramp perspective. And those – the two logos, I think, are going to be good trend setters for us in the utilities and the cable, media and telecom sector to further kind of deepen our credentials in the cable, media and telecom sector and actually to provide us good use cases and reference points for our utility sector.

We’ve done a fair bit of that across geographies, which I’ve had in the past not done a lot of utilities in the U.S. So this provides us a good opportunity to build that presence up as well in the U.S. 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 will have a potential short-term impact on margins? Possibly, because as you ramp-up, you do have as I mentioned, the learning curve, and there are some short-term hiccups from a – I wouldn’t say really a hiccup. There are costs associated with the short-term ramp, but those get very well addressed as the company moves forward and the operations stabilize. So any major concerns around the ramp to the two customers? Answer is no.

[Zach Cummins, B. Riley FBR]

Understood. That’s helpful. And 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, it could have some impact here in the near term with some of these logos ramping up. But I mean, as you shift more of the business towards kind of near and offshore delivery geographies, how are you thinking about gross margin progression, especially as we get towards kind of the back half of this year?

[Bharat Rao, Global Chief Executive Officer]

Yes. I mean, I would think the target, of course, it’s a bit hard to say how exactly it will pan out of the two quarters because of significant ramps associated, right? So that, therefore, margins can be a bit muted because of that. But going into, let’s say towards the end of the year into the following year, I think getting to gross margin levels of mid-teens would be where you would want to be, and I don’t see that as a major issue if we’re able to get our right mix of near and off-shoring?

[Zach Cummins, B. Riley FBR]

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. Any sort of update you can provide on potential exit strategy? And it sounds like any proceeds that you get from this are likely going towards debt paydown?

[Bharat Rao, Global Chief Executive Officer]

Yes. Anything that, I mean, exit strategies we are talking to a couple of parties. We’re just moving forward to the next stage. There is clearly interest, I think the idea will be the proceeds from the sale of our interest in Argentina, as we have done with the sale of our interest in a contact center company will go to reduce our debt. But at this stage, giving you a lot more before we can see a lot more definitive terms from interested parties might be putting in the cart before the horse. So I would rather do that when you’ve got better visibility on that.

[Zach Cummins, B. Riley FBR]

Understood.

[Bharat Rao, Global Chief Executive Officer]

But the process is underway.

[Zach Cummins, B. Riley FBR]

Got it. That’s great to hear. Well, thanks again for taking my questions, Bharat. I always appreciate it, and congrats on the solid results here in Q1.

[Bharat Rao, Global Chief Executive Officer]

Thank you, and no worries at all, Zach. Pleasure talking to you.

[Operator]

Thank you. [Operator Instructions] As there are no further questions at this time. I’d now like to hand the call back over to Mr. Rao for any closing [indiscernible].

[Bharat Rao, Global Chief Executive Officer]

Hello. Sorry, can you hear me? I just want to make sure that, yes, there’s a bit of disturbance. So thank you, Darcy, 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 2023 results. Thanks, Darcy.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

[Bharat Rao, Global Chief Executive Officer]

Thank you.