Startek, Inc. (NYSE:SRT) Q4 2022 Earnings Call Transcript

Startek, Inc. (NYSE:SRT) Q4 2022 Earnings Call Transcript March 27, 2023

Operator: Good day everyone, and thank you for participating in today’s conference call to discuss the Startek Financial Results for the Fourth Quarter and Full Year Ended December 31, 2022. 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 various risks and uncertainties that could cause actual results to differ materially.

Startek 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 measurement. The 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.startek.com. Additionally, the company has included a presentation which can be found via the webcast link and on the Investors section of the company’s website to coincide with the call.

Now, I would like to turn the call over to Startek Global’s CEO, Bharat Rao. Bharat, please proceed.

Bharat Rao: Thank you, Joe. Good afternoon, everyone and thank you all for joining. I’d like to take you to Slide 3 and recap the highlights for the quarter, I trust all of you have the presentation. As we wrap up for the year, we made significant progress during the fourth quarter, expanding our presence in key geographies, strengthening our existing service offering, building a robust sales pipeline and improving the health of our balance sheet. Another highlight of this quarter was the stabilization of our gross margin driven by lower pressure from wage inflation and our ability to recover expenses associated with onboarding new agents earlier in the year. Throughout 2022, we focused heavily on making strategic investments to optimize our platform to meet our clients’ needs while positioning Startek for topline growth and margin improvement.

We also made significant progress in our offshoring initiatives as the softening macroeconomic climate has allowed many of our clients to reevaluate their operations and consider nearshore and offshore delivery options to drive cost savings within their business. As a result of this trend, we have received an increased amount of interest in our near and offshore delivery locations, leading to engaging and productive site visits from potential clients. I’d like to provide you a brief summary of our client wins and performance across different geographies and industry verticals during the quarter. We were pleased to secure 2 new high-value clients during the quarter that we believe will contribute significantly to our overall revenue mix in the future.

The clients won are primarily in the utilities and cable verticals. Services will be delivered both onshore and offshore. And the majority of onshore delivery being delivered under the work-at-home model, utilizing the proprietary-started cloud platform which presents a higher margin than our traditional onshore model. These strong new wins are a testament to the hard work and persistence of our sales team which we believe will begin to bear fruit in terms of top line growth beginning next year. We continue to see growth in our core telecom and travel and hospitality and renewed activity in business services. Operations in our travel plans are quickly returning to the pre-pandemic levels and we have expanded our wallet share with some of our key strategic clients in these verticals.

I’d like to turn to Slide 4 and walk you through some strategic decisions that we made to strengthen our balance sheet and align our efforts to focus on our core business. The first step that we took was monetizing uptake in Movate, formerly known as CSS Corp. In December 2022, our Board began weighing option and given the tightening environment in the financing world concluded that it was best for Startek to monetize its stake and not pursue exercising the call option. The monetization resulted in a 1.5 turns — return on our investment in less than 2 years. We continue to collaborate with the excellent team at Movate on an arm’s-length basis as part of our efforts to continually bolster our service offering. The proceeds were used to prepay debt by USD 41.3 million.

We entered into an agreement to exit our stake in the Saudi joint venture entity, CCC. We have obtained the necessary regulatory approvals and the transaction is expected to close soon. We expect to generate approximately $55 million in net proceeds and this will be used to further prepay debt. Continuing our focus on prioritizing our core business, we made the decision to explore options to exit our operations in South America which are limited to only Argentina. For context, Argentina has been facing economic difficulty and elevated inflation which combined with the stringent exchange controls, makes it a very challenging operating environment. On revaluation of our capital allocation strategy and geographic priority, we have decided to initiate the strategic process to identify the right partner to take over our operations in the country.

We will provide further update on this in the next quarter. In the main guide, our Argentina operations are being accounted for under held for sale accounting policies in accordance with the U.S. GAAP standard. As you will see on Slide 5, these divestitures have contributed to reducing our pro forma net leverage to 1.3x following the close of the CCC deal which we expect to result in the strongest balance sheet we’ve had in 5 years. This is a significant improvement from where our debt level has decided during the past several years and given the current interest rate scenario, these couldn’t have come at a better time. Improving our net leverage ratio will give us more flexibility to invest in our strategic pillars and pursue inorganic opportunities.

Overall, these strategic moves demonstrate our commitment to deleveraging our balance sheet and sharpening our focus on our core operations to position us for sustained success in the future. In addition to adding 2 significant global and spearheading several critical strategic moves for the quarter, we continue to receive positive recognition for our outstanding leadership and the value we deliver to our clients which you can see from the summary of the awards and recognition we recently received on Slide 6. We are especially honored by the recognition we received from Comparably throughout the year, including the Best Company for Diversity and the Best CEOs for Diversity Awards as these ratings directly reflect the pulse of our associates.

Comparably is a leading workplace culture site and corporate brand reputation platform with widely respected views. And over the span of the last 3 quarters, we improved our Culture Score on Comparably from 2.5 to 4.6 on a scale of 5 and have been designated as a Choice Employer. We continue to be encouraged by the many great recognitions that we receive quarter after quarter and we believe these are a testament to our commitment to delivering world-class CX services to our clients and outpacing our competitors. Whilst we always enjoy being recognized for our achievements, we are also committed to working behind the scenes to promote diversity, equity and inclusion at Startek. Because of this, we chose to partner with Curio Digital Therapeutics to provide postpartum mental health support for our U.S.-based associates.

We are committed to creating a vibrant workplace for all our 43,000 people around the globe, implementing region-specific benefits program and one way in which we do this and Curio is a great example. CDC data revealed that postpartum depression affects as many as 1 in 8 mothers in the U.S. and can lead to women leaving the workplace. By introducing the Curio platform, we are able to ensure that new mothers at Startek has easy access to personalized and flexible postpartum mental health programs they need to thrive both at home and in their professional lives. In this way, we are supporting our team members and the retention of women in our business during this important time in their lives. In summary, this quarter was marked by meaningful progress attracting 2 sizable new logo win, making significant progress towards deleveraging our balance sheet, stabilizing our margins and undergoing several strategic operational changes made to better align our operations and our process.

Looking ahead, we remain optimistic about the shift to remote work which presents an opportunity for us to transition more of our customer base to a nearshore and or offshore delivery, further optimizing our operations and increasing efficiency. We are especially encouraged by the numerous near and offshore opportunities within our expanding sales pipeline which underscores the strength of our business model and our ability to capitalize on emerging trends in the industry. Looking ahead to the new year, we remain committed to executing on our strategic pillars that has served as our guiding principles throughout the past several quarters. As detailed on Slide 7, these pillars and some several key areas, including providing industry’s possible solution, enhancing our technology platform through unique digital partnerships, investing in our workforce to incentivize engagement and ensuring that our IT infrastructure and security measures are unmatched by competitors and provide a safe experience for us and our clients.

During the past quarter, we continued to invest heavily in our people, making improvements in quality, training, reporting and automation. As a result of these efforts, our associate engagement score reached a record high of 82%. Additionally, we have increased our investment in IT facility to protect against data breaches and cyber-attacks, especially as we adapt to a sustained hybrid work model. One of our products that serve a good demonstration of the high importance that we place on security is our award-winning Startek Cloud which utilizes patient recognition systems, voice biometric, end-to-end data encryption and AI to aid remote and home-based specialists and improve the business agility real-time. Looking at Slide 8. We remain committed to aligning our digital solutions with our clients’ strategic growth.

When we think about how we expand our digital solution, we first make sure that we are aligning our service solutions with our clients’ strategic goals. To do this, we utilize a combined agent, customer and channel-centric approach to offer a wide range of value-added capabilities that can apply to almost any customer setting. By focusing on engaging and incentivizing agents by leveraging AI to streamlined replicated process across different channels and ensuring the diversified service solutions are highly adaptive to our client needs. In one of our partner case studies, for instance, we were able to reduce customer contact by approximately 50%, improve customer satisfaction by 25% and lower attrition by 30%, all while generating a better average handle time and higher sales conversion.

One of the key elements to aligning our digital solutions with the needs of our customers and their customers is our partner-driven strategy. We have now proven case studies around some key digital interventions, including Startek AI Coach and Startek Gamification that have delivered significant benefits in lowering the overall cost of delivery to our clients while improving service delivery metric. We recently received a Bronze Stevie Award in the Best Use of Technology in Customer Service category at the Annual Stevie Awards for Sales and Customer Service for our work in Gamification. During 2023, we will be dedicating more efforts in transitioning these pilots to become central elements of our ongoing operations while simultaneously looking for new value-added base to enhance our existing digital partnerships.

Turning to Slide 10 which describes the structure and success of our sales approach, we have seen significant traction from our revised sales efforts which has led to addition of 12 new logos to our year. Our approach leverages 7 experienced sales professionals in the U.S. and 4 regional sales team members. To aid our sales leadership in becoming more effective, we are investing in utilizing data-driven marketing to proactively generate new deals across our core verticals, including cable, media and telecom, retail and e-commerce, travel and hospitality, financial services and healthcare. So far, we are encouraged with the results we are seeing from our reinvigorated approach. And we will continue to prioritize our current sales approach to drive top line growth, expand our global footprint and strengthen our presence within our core verticals.

Going forward, as we begin to see the return on investment from our sales and offshoring initiatives, we expect these benefits, along with the strategic operational moves we made during the quarter, to flow through to our results in the coming quarters and position us for incremental margin expansion and top line growth in 2023 and beyond. As a whole, we remain committed to pursuing sustainable growth while maximizing value to our shareholders and we are eager to continue executing our strategic growth road map for many years to come. I’d now like to turn over the call to Nishit Shah to provide further details on our fourth quarter and the full year financial results, of which you can see a brief snapshot on Slides 11 and 12. 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.

Nishit Shah: Thank you, Bharat. Before I get started, I would like to note that as a result of our current unplanned divestitures, we have adjusted our financial statements to exclude the revenue from discontinued operations in the current and the prior year periods. For a full reconciliation of our fourth quarter and full year results, please see the financial table listed in our quarterly earnings release, or 10-K, that will be posted on our Investor Relations section of our website. Starting on the top line. Net revenue in Q4 was $93 million compared to $113.7 million in the year ago quarter. As you are aware, from our earlier calls, we had terminated operations with 2 large clients, 1 each in e-commerce and cable vertical in 2021.

Adjusting for the high base in the year ago quarter, the revenue in the current quarter declined by 7.3% year-over-year. The decline was partly due to ForEx movement as U.S. dollar strengthened related to emerging market currencies where we operate. Adjusting for ForEx movement, the decrease was 3.6% year-over-year. The decline was partially offset from a strong performance in our telecom, financial and business services and travel and hospitality vertical. Gross profit in the fourth quarter was $16.8 million compared to $17.4 million in the year ago quarter. Gross profit margin increased 280 basis points to 18.1% compared to 15.3% in the year-ago quarter. The increase was primarily due to relatively larger contribution of revenue from high-margin nearshore and offshore deliveries.

This is also a reflection of various cost optimization effort undertaken during the past few quarters, especially on the rationalization of our brick-and-mortar capacities. Adjusted EBITDA for the fourth quarter from continuing operation was $12.1 million compared to $12.8 million in the year ago quarter. Adjusted EBITDA margin increased 170 basis points to 13% compared to 11.3% in the year-ago quarter. At consolidated level, including the discontinuing operations, adjusted EBITDA increased to $21.3 million compared to $18.9 million in the year-ago quarter. Adjusted net income attributable to Startek shareholders from continuing operations increased to $12.6 million compared to $11.1 million in the year-ago quarter. At a consolidated level, including discontinued operations, adjusted net income increased to $14.1 million or $0.35 per diluted share compared to $12.9 million or $0.32 per diluted share in the year-ago quarter.

Please note that net income included capital gain for the monetization of stake in Movate. From a balance sheet perspective, as of December 31, 2022, our cash and restricted cash balances stood at $72.4 million on December 31, 2022. This included the proceeds from the redemption of our interest in Movate which were used to prepay $41.3 million term loan in January 2023. Net debt on December 31, 2022 was $103.5 million compared to $141 million at September 30, 2022. As Bharat discussed earlier, we expect our net debt to significantly decline as we make another prepayment from the CCC transaction proceeds. Now let’s review the full year 2022 performance. From continuing operations, net revenue in 2022 was $385.1 million compared to $470.3 million in 2021.

Adjusting for the high base of 2021 which included revenues from the COVID-19 support program and e-commerce and cable client that terminated operations in 2021, our like-for-like revenue grew by 0.8% in 2022. On a constant currency basis, the growth was 4.8% year-over-year. This was driven by our growth in our core verticals of telecom, travel and hospitality and business services. Gross margin increased 120 basis points to 15% compared to 13.8% in 2021. The margin expansion was driven by exit of low-margin accounts and change in business mix towards nearshore and offshore delivery. This also reflects the cost optimization effect undertaken through the last fiscal. Adjusted EBITDA in 2022 from continuing operation was $38.4 million compared to $47.3 million in 2021.

Adjusting for the high base in 2021, as outlined earlier, adjusted EBITDA grew year-over-year while we delivered consistent margin at 10%. At a consolidated level, including the discontinued operation, adjusted EBITDA was $63.1 million compared to $72.4 million in 2021. Adjusted net income attributable to Startek shareholders from continuing operations was $25.9 million compared to $24.8 million in 2021. At consolidated level, including discontinuing operations, net income was $26.7 million or $0.66 per diluted share compared to $27.3 million or $0.67 per diluted share in 2021. We repurchased an aggregate of 426,445 shares of our common stock under a repurchase plan during the full year at an average cost of $4.29 per share. This was a testament of our continued confidence in our long-term growth prospects.

With that, we will now open the call for questions.

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Bharat Rao: Sorry, there was a bit of background noise in the background. Joe, thank you. So thank you, Joe 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 first quarter 2023 results.

Operator: Thank you, ladies and gentlemen. You may now disconnect your lines and have a great day.