Chad Carlson - President and CEO Lisa Weaver - CFO

David Koning - Baird Matt Blazei - Lake Street Omar Samalot - Independent Analyst Corporation

Good afternoon, everyone, and thank you for participating in today’s conference call to discuss STARTEK’s Financial Results for the Second Quarter ended June 30, 2015. Joining us today is STARTEK’s President and CEO, Chad Carlson; and the company’s CFO, Lisa Weaver. Following their remarks we’ll open the call for your questions. Before we continue, I’d 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 subject to various risks and uncertainties and actual results may vary materially from those projections. STARTEK advises all those listening to the call to review the 2014 Form 10-K and latest 10-Q posted on their website 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 base measurement. The reconciliations can be found in the earnings release on the Investor page of the website. I’ll like to remind everyone that a webcast replay of today’s call will be available via the investor section of the company’s website at www.STARTEK.com. Now, I'd like to turn the call over to STARTEK’s President and CEO, Chad Carlson. Sir, please proceed.

Thank you, Denise. Good afternoon and thank you all for joining. The second quarter was highlighted by our acquisition of ACCENT. ACCENT is a business process outsource provider offering customer engagement solutions. This acquisition meaningfully diversifies our client base and the opportunity to grow in newer verticals. The customer engagement solutions builds on our initiatives to engage clients in a different and a more meaningful way by expanding analytics and insights as well as social and digital service capabilities. I’ll provide a bit more color on the ACCENT integration later in the call. Second quarter results were hindered by lower client volumes, which we discussed on the last quarterly call. The announced erosion with some large clients has resulted in lower capacity utilization reflected clearly in our gross margin results. When facing similar challenges three and half years ago, we were sitting on an unhealthy footprint. Since that time, we have closed underperforming facilities and opened new centers in better locations using financial arrangements much more conducive to long-term success. The strategy we have been executing over the past few years has been to diversify our revenue base. Albeit from a small base, we have made solid progress on that front. Now roughly 30% of our total revenue, 377% year-over-year growth of non-telecom, cable and media revenue is worth noting that this is our 9th consecutive quarter of growth on this metric reflecting the continued execution of our sales strategy. This will lead to greater diversification going forward. Due to the revenue headwinds from client volumes, we have adjusted our CapEx plan. We have also taken steps to reduce and control operating expenses. While we have been adjusting to the dynamics on our STARTEK business, we have also worked to integrate ACCENT. Before commenting further on our operations, I’d like to turn it over to Lisa to provide more detail on our second quarter financial results. Lisa?

Thanks, Chad. Total revenue in the second quarter increased 4% to $63.5 million compared to $61.3 million in the year-ago quarter. This growth included $14.4 million as incremental revenue from new clients and programs signed over the last year as well as $5.5 million of contribution from the acquisition of ACCENT in June earlier this year. This revenue growth was offset by $15 million from lower volumes with existing clients discussed earlier. Client revenue concentration has always been a risk to our goal of sustainable, predictable, profitable growth. Diversification has been a key focus of our strategic plan and played a large role in our decision to acquire ACCENT. During the quarter, we signed $4.3 million of new business, which includes one new client in the financial services vertical and one client expansion. Gross margin in the second quarter was 8.4% compared to 9.3% with the decline largely attributable to lower utilization resulting from lower client volumes and newly added seat capacity. With regards to seat capacity, our utilization and margins will ramp as we convert pipeline and win new business. Utilization remains a key focus. We like about capacity footprint and remain focused on selling open seats in order to generate free cash flow, pay down debt and grow profitably. As such, we've reduced our CapEx plan from $18 million to roughly $9 million for the calendar year 2015 which includes $2.5 million of investment in new seats. Through June 30, we've invested approximately $5 million in CapEx which includes $1.5 million for 600 new seats roughly. This is in addition to the 2000 incremental seats gained through the ACCENT acquisition. Our total seat count stood at 13,400 at the end of the second quarter. SG&A expenses during the second quarter totaled $8.6 million compared to $7.3 million in the year ago period. The increase was largely associated with expenses from ACCENT as well as $300,000 in transaction costs from the acquisition. We have and will continue to reduce SG&A costs and will realize cost synergies from ACCENT. Second quarter SG&A included only one month of ACCENT cost. SG&A including ACCENT cost for the full quarter would have been $11.1 million. We plan to reduce this to approximately $9 million in the fourth quarter. During the second quarter, we signed a new five-year $50 million secured revolving credit facility with BMO Harris Bank. This new facility replaced our $20 million secured line of credit with Wells Fargo and more importantly comes at a more favorable interest rate. The increased borrowing capacity speaks to the confidence our new commercial banking partner has in STARTEK and we look forward to working with their team as they provide us with the flexibility to fund our growth and execute on our strategic initiatives. This concludes my prepared remarks, I will now turn it back over to Chad Carlson.

Thank you, Lisa. With respect to ACCENT, first we are happy to communicate to our shareholders that the integration is tracking ahead of schedule. I now expect the integration to be largely complete by the end of the third quarter with ACCENT contributing positively to our bottom line in the fourth of 2015. Secondly, we are excited about the differentiation the customer engagement practice adds to the STARTEK Advantage System. This positions STARTEK to deliver our value and results for clients, which leads to a stickier and more profitable relationship. ACCENT significantly enhances our customer engagement capabilities. Historically, ACCENT provided traditional contacts and services, but over the past couple of years they developed a differentiating customer engagement practice which benefits many clients. We are integrating this capability with ideal dialogues of proven methodology to enable STARTEK with a comprehensive approach and end-to-end platform providing analytics and insights from actionable data to assist clients in their strategy and ultimately how they adjust and engage with this new role where the customer is in control and omnichannel service is an absolute requirement. I am pleased that John Hoholik, now Senior Vice President of Global Marketing and General Manager of the Customer Engagement group came over from ACCENT to join the team. During the second quarter, we signed a contract with an existing client to launch our first customer engagement laboratory. The lab will allow STARTEK to provide clients with proactive insights that generally improve their ability to engage with their customers across channels and increase revenue and bottom-line results. To illustrate the differentiation of having a strong customer engagement practice, I would like to highlight one of our recent client expansions that would not have been possible without a customer engagement focus. In the first quarter of 2013, support began for a global consumer product manufacturer and retailer. At the time of engagement, we were brought on to consolidate and improve consumer affairs strategy, delivery, store support and customer interactions. Service quickly evolved into a critical enterprise-wide strategy that included incremental revenue via sales conversions, cost savings through eliminations and then efficiencies across their customer engagement process, introduction of self serve solutions, deploying an end-to-end social care environment and overall improved service delivery, all of which ultimately led to a 59% reduction in cost per engagement. And by proactively managing their social and digital customer activity, STARTEK is frequently the first contact point for customers who are in danger of defecting from the brand due to a poor product experience. We’re working closely with the customer in retail management to fully resolve poor experience issues. The team has transformed over 15,000 ad risk customers into brand promoters. These saves represent over $1.3 million of annual revenue retained for this client. We are now a true strategic partner and their corporate executives have gone on record to say that our work as a strategic mandate to better serve the evolving needs of their customers. We are excited to have created a high touch positive brand experience for this client and we’ll continue to align their cross channel capabilities to generate revenue and mitigate customer defections. We suggest the single example of our ability to differentiate and expand client engagements through the customer engagement booth within the STARTEK Advantage System. Over the past few months, the customer engagement model has been introduced to current STARTEK clients with great success. For the remainder of 2015, we are very focused on ensuring that the action integration remains on track. At the same time, we need to convert the great opportunities in our pipeline to both improve our capacity utilization and further diversify our revenue. With the added scale and solid execution on sales and optimizing performance, this management team is determined to return STARTEK to consistent profitability. Dennis; Lisa and I will now open up for questions.

[Operator Instructions] And our first question comes from David Koning with Baird. Please proceed.

Yeah, hey guys. I guess my first question just, Sprint is a big client of ACCENT and probably kind of in the same ballpark like Comcast and AT&T for you guys is, is that a big risk, I know it came down quite a bit in 2014 but how do you look at that risk compared to some of the other big clients?

Considering and a lot of time was put into that diligence data in considering the strategy that they are executing right now, we feel that we have a good opportunity there because of Axon’s alignment with certain cues as well as in the end, very domestically focused footprint.

And you’ve definitely, we started stripping out the revenue from the other big clients, you’ve done a really nice job assigning new revenue to offset some of the big clients but when we do look at the bigger clients, AT&T I think their contract comes up at the end of this year and T-Mobile maybe in 11 months of something. How do you look at those renewals and how do you look at the current pace of revenue going away, are these contracts likely to kind of stay at the current level or could actually grow or how do you see kind of the next few quarters with AT&T and T-Mobile in particular.

With AT&T, I spent quite a bit of time last quarter talking about now being strategically aligned with division there and feel good about that and they’re certainly some other opportunities we’re chasing, their contact rates have clearly dropped which has allowed some of their vendor consolidation but with the recent success of their DirecTV acquisition, there might be opportunity for us there as well. So, I feel there is opportunities with us with AT&T as we continue to execute well. From a T-Mobile perspective, we have a solid relationship, and our site performance is very strong and while we have some ebbs and flows, different cues, we handle I think somewhere close to 20 different cues and call types in that relationship and obviously they are a client that’s exciting to be a part of and on the move and lot of changes, so some of the business changes moved but our relationship is pretty solid there.

Okay, good. I guess the last one for now just, when we look at the cash position in the business, after post acquisition, I think you’re at $28 million of debt now and there is some capital leases out there too. Is there, I guess, can cash flow start to pay that back and improve the debt position or do we have a couple more quarters of a little more leverage coming on before that starts to ramp and maybe when do you hit kind of that free cash flow positive quarter and start to delever?

Yeah, I think we’ve talked about this on a couple of previous calls today, but I see that starting to turn mid-2016 for us.

Okay, good. Well, thank you.

Thank you, Dave.

Thanks, Dave.

[Operator Instructions] Our next question comes from Matt Blazei with Lake Street. Please proceed.

So -- hi, guys, I just following up on last question, are you saying that you’re not going to start delevering now until mid-2016?

Correct.

I see. So, are -- I know you have a -- I think it’s a $40 million credit facility. Are you planning to continue to drawdown on that here over the next few quarters?

It’s actually $15 million credit facility and we’ve said -- we reduced our CapEx plan [indiscernible] we’re going to send another approximately $4 million of CapEx this year and then really continuing to work through the integration of ACCENT and having ACCENT be -- on a standalone, anyways cash flow positives as we come out of this year. So, yeah, [indiscernible] working capital needs in a way that that ebbs and flows could mean that we taped into that line a little more than the $20.5 million we have now.

I see. And I’m sorry it got cut off before the first question, but is the 23% reduction from your two large silicon plants, is that over now or is that -- is there anything to say about that or that’s pretty much done?

The bulk of that in fact we’ve seen in second quarter.

Okay. So, basically the $15 million -- I think you’ve said you lost $15 million from one of your clients this year? Is that correct? I think you said from mid-50s to 40.

Yeah, on a full year basis, that was the color that we’ve given on the last call and that’s for AT&T.

And the $5.5 million that you announced from ACCENT, is it a monthly -- is it a seasonal thing or is that a pretty sort of recurring revenue monthly thing?

I’m sorry. I don’t understand.

ACCENT and ongoing revenues.

Yes, I’m sorry, so you said $57 million I think when you originally announced it and I think you just have said $5.5 million, it is month to quarter?

Yeah.

So, that would make it about $62 million, $63 million? Is that sort of a runway we can work with?

It is based on obviously the June revenues indicative of that but when we acquired ACCENT, we acquired it first time of the excess capacity as well. So, we do intend on continuing to improve utilization on the key sites there that have open seats.

I see. Okay, all right, thank you.

Thank you.

Our next question comes from Omar Samalot with Independent Analyst Corporation.

Hey guys, how are you doing?

Hey, Omar.

Tough quarter. So, without the $5.5 million in revenue contribution from ACCENT, obviously there was a $5.7 million revenue drop from Q1, was that mostly AT&T reduction? Was there anything else going on with other clients’ reductions?

Yeah, about half -- little more than half of that was AT&T and then we had some small variances for T-Mobile, Comcast, that would be the bulk of it, Omar.

Got it. Okay. Could you say were there any growth investment expenses impact on gross margin for Q2?

It was less than 100 basis points, again.

Okay. All right. And I saw that you had $1.5 million restructuring charge and $720,000 of that was ACCENT. Can you walk us through the difference that the balance of that total charge?

Yeah, the majority of it was IT. You recall in the last call, we discussed that maybe $200,000 was a good estimate of what was remaining and that was higher in second quarter.

Okay. And I saw in the cue that that should be done by next -- well, I think you said the balance --

This quarter.

Yeah, okay. Got it. Alright. I saw a gain on asset sale, could you give us some color on that.

That was in one of the Philippines locations. You’ll recall we relocated from one facility to another and there were some assets that we sold as a result of that move.

Got it. Okay. And the CapEx amount, I think I saw $1.7 million for Q2. Can you walk us through what that -- what went in to that and what facilities, maybe an update on what you saw?

Yeah. So a big piece of the second quarter spend was Hamilton and then we had a little bit of carryover from some of the facilities that we opened last year, Iloilo, Colorado Springs, then we had some just small PC upgrades, IT related upgrades, there is really nothing else material. Omar, it was just primarily the Hamilton investment and we’ll see some of that carry over in to second quarter as well.

Okay. Got it.

I mean, third quarter, sorry. In to third quarter.

Right. In the restructuring charge for ACCENT, was there any of those sites that you acquired being restructured? I don’t know how much of that you can say, any of those sites need some rightsizing or anything like that or was that included in that amount?

Nothing in that amount for that and nothing scheduled there right now.

Okay, got it. Alright. Could you talk a little bit about obviously ACCENT brings the footprint that you purchased, you guys have your own footprint, how does that fit with each others’ pipeline going forward? Are there any synergies there at all, how should we look about that?

Yeah. It’s very complementary. The Caribbean location is a very attractive location and good attractive margins can be produced out of that site and that will be in our Nearshore category going forward. In the domestic footprint, we’re seeing a good pipeline domestically and a few of their locations we feel are very suitable to swing towards core or healthcare or other services. So feel good about the footprint being very complementary to our pipeline or our overall strategy.

Okay. Alright. I mean obviously you guys have seen how the share price has dropped significantly about 50% since your last quarter release. I’m looking at this release and I don’t see a specific reason for such a drop. I have to believe that that was mostly driven by a -- liquidity and lack of investor confidence. I really think that the lack of investor confidence is mostly due to by argument of information and I’ve been a supportive of you guys not offering long-term guidance, but I think there may be some kind of financial guidance maybe one quarter out would go a long way to restore that confidence. Today, you gave a little bit more information than usual, so I do appreciate that, but also getting some currency come by segment and maybe some realization rates could also be helpful. I don’t know if you have any thoughts about that or anything about that you could, I don’t know, say today.

Well, always appreciate your perspective and feedback. I think [indiscernible] confidence in our shareholders is getting to a positive bottom line and that is our focus right now and we see with solid pipeline conversion, solid execution that we’ll be there sooner than later and that’s our focus right now.

Right guys. Well, thank you very much and good luck.

Thank you, Omar.

Thanks, Omar.

[Operator Instructions] At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

Thank you, Dennis and thank you all for joining and your interest. We’ll get back to work and talk to you next quarter.

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