Startek, Inc. (NYSE:SRT) Q1 2023 Earnings Call Transcript May 11, 2023

Startek, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.07.

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: 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: 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.

Q&A Session

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.

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

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: 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: Thank you.