Chad Carlson - President and CEO Lisa Weaver - CFO

Adam Jump - Robert W. Baird & Co. Omar Samalot - Independent Analyst Corporation

Good afternoon, everyone, and thanks for calling in. It is my pleasure to welcome everyone to StarTek’s Fourth Quarter 2014 Earnings Call. I'm joined on the call today by StarTek’s President and Chief Executive Officer, Chad Carlson; and Chief Financial Officer, Lisa Weaver. Chad will deliver some brief commentary today. At the conclusion of Chad’s prepared remarks, Chad and Lisa will conduct a question-and-answer session. For those of you, who have not yet received a copy of today’s earnings press release, please go to www.startek.com where you can download a copy from the Investors section of the Web site. Please note 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 subject to various risks and uncertainties and actual results may vary materially from these projections. StarTek advises all those listening to the call to review the 2013 Form 10-K posted on the Web site for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections. 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 basis measurement. The reconciliations can be found in the earnings release on the Investor page of the Web site. I'll now turn the call over to Chad Carlson, StarTek’s President and CEO. Please proceed, sir.

Thank you, Denise, and afternoon and thank you all for joining. 2014 was a pivotal year with solid progress from key initiatives to increase capacity and diversify our revenue to build a profitable company. Our focus on diversification is developing into more material results. StarTek finished 2014 with 250.3 million in revenue, an 8% increase over 2013. We have more revenue diversification than at any time in the company’s history. The 17 new clients and 48.6 million of annual contract value is proof that the enhancements we have made to the STARTEK Advantage System and our focus on customer engagement is a valuable solution for our clients. You may recall that I have stated in the past that I will now be happy if we didn’t achieve double-digit growth. So from that perspective, I am not happy. We experienced some headwinds on revenue related to the closure of Costa Rica, delayed ramps due to our IP platform migration and softer than expected volume on a few large clients during the fourth quarter. That said, I am extremely excited about the momentum we have in the STARTEK Health vertical and other service offerings such as receivables management and back office services. The total company pipeline is also very strong. Therefore, my expectations of achieving double-digit revenue growth have not changed. Revenue in the fourth quarter of 2014 increased to 64.2 million compared to 63.4 million in the year-ago quarter. We’ve signed two new clients with annual contract value of 5.5 million and the integration of the CCI acquisition is progressing according to plan. In fact, we are seeing a lot of potential with their existing clients to provide additional services. Gross margin in the fourth quarter of 2014 was 11.7% compared to 11.8% in the same year-ago quarter. The slight decline was due to a 280 basis point impact of client start-up and increasing capacity expenses. Excluding this dilutive impact of these investments, gross margin would have increased 270 basis points to 14.5%. Thus, the base business is healthy. SG&A expenses increased 15% to 8.3 million in the fourth quarter compared to 7.2 million in the year-ago quarter. The increase was due to sales commissions and additional resources focused on the expansion of STARTEK Health. Without these incremental expenses, SG&A will be flat year-over-year. It’s important to note that the commission paid to our employees for winning new business is reported in SG&A. Therefore, last year’s success of diversifying our client base and revenue came at a cost of increased commission expense. This variable expense will tail off as this new business matures. Furthermore, the incremental investments to build out the healthcare vertical is very scalable. I’d not like to provide a quick summary of 2014 accomplishments. We invested 17.4 million in our footprint to open four new facilities with 2,900 new seats. Locations include two domestic sites; one in Honduras and one in the Philippines. We also optimized our footprint with the closure of two underperforming sites; Jonesboro and Costa Rica. While these closures negatively impacted revenue and profitability in the short term, we are confident these closures will improve profitability in 2015. In combining the two closures and 2,900 new seats, we added 2,000 seats on a net basis in 2014. We continued to add clients and execute our growth strategy. The diversification of revenue will continue to be a high priority in 2015. In 2014, we had 150% in verticals excluding telecom/cable and media clients, exiting the year at 17.4% of revenue. While we have placed a heavy focus on diversifying the client base, we continue to execute at the highest level for our existing clients, and today we are better aligned strategically with these clients than we were one year ago. We remain on track to fully complete the IT transformation during the first quarter. As a reminder, this cloud-based platform will enable us to continue growth [indiscernible] CapEx in traditional models. As we enter 2015, we are confident our strategic investments will grow a more diversified organization that delivers clients high-value services while reducing their costs. We will continue to invest in new capacity in 2015. In fact, our current 2015 plan is for over 20 million of investment of capital expenditures and operating expenses to expand approximately 2,500 seats for additional growth. While our margins will continued to be pressured by the cost of growth this year, our general expectations for double-digit revenue growth remains. We are confident that the success of key initiatives in 2014 along with our runway for growth will achieve sustainable, predictable, profitable growth and deliver long-term value to our shareholders. Denise, Lisa and I will now take questions.

[Operator Instructions]. Our first question comes from Adam Jump with Robert W. Baird. Please proceed, sir.

Hi, guys. Thanks for taking my question. I guess just a couple of housekeeping items first off. Can you tell me what the contribution was from CCI in the quarter?

We will not provide that level of detail.

Okay. And how about some of your large clients you typically give the percent of revenues. Do you guys have that?

We do.

Yes. For the quarter, T-Mobile was 30.6%, AT&T 19.6% and Comcast was 15.7%.

Thank you. And then you guys mentioned you’re expecting 20 million in CapEx in 2015. Are you --?

That’s CapEx and OpEx for the capacity expansion, Adam, not just CapEx.

Okay.

We’re actually looking at a CapEx plan of 15 million to 18 million for this year with the majority of that obviously being focused on expansion.

Okay. And would you guys look at – the way cash flow has been the last few quarters, would you guys be looking at take on debt to achieve those goals, or I guess how are you thinking about the balance sheet?

To fund this growth, we’re still comfortable with the line that we have with Wells. This quarter we ended with about 4.5 million in the line. So between the line availability and our free cash from the operation, we’ll be able to fund the growth.

Perfect. And then I guess just one last one, if I could. You can some really good commentary in terms of kind of why revenues have decelerated. Are some of those drivers do you consider more transitory? I guess, how should we look at growth in 2015 from a top line perspective?

I tried to give that general expectation that I expect double-digit growth and [indiscernible] from that at all. I feel very confident about the plans and strategy we’re executing upon.

All right, great. Thanks a lot.

Thank you.

[Operator Instructions]. Our next question comes from Omar Samalot at Independent Investor. Please proceed.

Hi, guys.

Hi, Omar.

Hi, Omar.

I guess congratulations on the year-over-year, amazing how much has been able to accomplish.

Thank you.

I have a few questions on the quarter. I noticed there was a decline in revenue on the APAC and Latin America segments quarter-over-quarter. I was wondering if you could give a little more color about that.

Yes, as you know we closed our Costa Rica facility and some of that business did move to other locations. There’s about a $2 million impact in the quarter versus the same quarter last year. And then we also had some low volumes with a couple of programs on large accounts that it would have impacted both of those segments.

Okay. Were there any FX losses recognized into cost of service in the quarter?

No, not anything significant.

Okay. I obviously noticed that the gross margin did take a decline as well obviously coming from the lower call volume, I’m assuming, from Q3 to Q4?

Yes, we had some seasonal spikes and some programs in third quarter and then we also had the impact of the growth and the investments was larger in fourth quarter than it was in third quarter.

Okay. In terms of SG&A, it seems like it came a bit higher than what was targeted for the year. I know you guys would like to see it under 12% of revenue. Could you break down the 800,000 increase from last quarter, how much of it was commissions more or less, how much of it was the investments in the healthcare vertical?

I believe we’re around 500,000, Omar, and cost of 400,000 in the initiatives around the healthcare expansion.

Okay, got it. All right. Are you guys – I know you don’t like to give out any utilization ratios. Is that still the case?

That is still the case but the core business is healthy. It’s the reason you hear us talking about the expansions, about selling our services and to the capacity that we’re building out in the timeframes that we like to see in those facilities.

Okay. In terms of the investment-related expenses that have been impacting gross margins throughout this growth, do you expect that to continue over the next few quarters or do you see at some point that it would pass and then as growth continues and reappear?

I think it’s safe to say for the last quarter and the next few quarters and then I feel we’ll have pretty good availability to sell to. So I don’t know that it will pause but I think it will slow.

Okay, got it. And finally, as you mentioned that the IP platform should be finalized this quarter that we’re on, would there be any transition costs in Q1?

Yes, we’re still wrapping that up so we expect to see some additional restructuring costs as we complete that.

Okay. Thank you, guys.

Omar, let me go back on a question you were asking about our continued investment expansion or you were asking about how long do you see the dilutive effect of the expansions around? I may have misheard your question.

Yes, I was talking about the dilutive effect of the expansion into the gross margin.

Okay. Yes, you’ll see that over the next few quarters for sure.

Okay, got it. All right, thank you guys.

Thank you.

Thanks, Omar.

[Operator Instructions]. Our next question comes from Douglas Pats [ph] with Riley Associates. Please proceed.

Hi, Chad and Lisa. Can you hear me?

Yes, Douglas.

Okay. My first question is about your investments for 2015. Can you say at all what portion of these investments are related to the business that you’ve recently won say in the last quarter or two?

Yes, none of this growth is for business that we’ve already won. That’s business that we can put in the capacity that we built out in 2014, reinvest in 2015 or the anticipated needs to continue to fund the growth.

Okay, got it. And about the impairment in restructuring charges for the business, it seems like it’s been a regularly recurring expense going back for a long time and I was just wondering if there is any way to predict when they might end or tail off, or is it just kind of you’re always looking into --?

No. I think Chad mentioned we had a couple of underperforming locations that we were dealing with this year and we’ve closed those, and that’s Costa Rica and Jonesboro. So we don’t anticipate any additional restructuring as it relates to facility closures at this time, so that should tail off.

All right. And with your new business and continued focus on growth, I was just wondering if there are any other opportunities out there or are you just simply focusing on your current market verticals?

So we got into several new verticals this past year, so on an expense and heavy investment standpoint we had a very later focus on the healthcare vertical but several of the other verticals that we’ve opened up there, we discussed on our last call, verticals that we feel we can continue to sell into and build upon our capabilities. And then we have always had an opportunistic view at acquisitions as well.

All right, that sounds great. I’ve got no other questions. Thank you.

Thank you.

Thank you, Doug.

[Operator Instructions]. At this time, we have no additional questions. I would now turn the call back over to management for any closing remarks. Please proceed.

We thank all of you for your interest. We look forward to 2015 and we’ll go get after it. Thank you. Take care.

This concludes today’s conference. You may now disconnect. Have a great day, everyone.