Chad Carlson - President and CEO Lisa Weaver - CFO

Dave Koning - Baird Matt Blazei - Lake Street Capital Markets Omar Samalot -

Good afternoon everyone, and thank you for participating in today’s call to discuss STARTEK’s Financial Results for the Third Quarter ended September 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 question. Before we continue, we’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 provision of Federal Securities Laws. These statements are subject to various risks and uncertainties and actual results may vary materially from these projection. STARTEK advises all those listening to this call to review the 2014 Form 10-K posted on the 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, and 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 would like to turn the call over to STARTEK’s President and CEO, Chad Carlson. Sir, please proceed.

Thank you Lauren, good afternoon and thank you all joining. As most of you saw earlier today, we issued a press release announcing our financial results for the third quarter. From the last earnings call, I stressed our determination to STARTEK’s profitability. To do so, we're focused on two key initiatives converting the sales pipeline and cost reductions. I feel good about our sales conversion as we got back on track in the third quarter and we have made better-than-expected progress with the synergies associated with the ACCENT integration as well as other significant cost reductions as we elevate the urgency to generate net income for our shareholders. During today's call, I'm going to walk you through some of our progress on these initiatives as well as some of the reasons why STARTEK’s results have not yet met our expectations this year. More specifically, I'm going to discuss what we're doing to address these results to ensure this difficult period is behind us. But before commenting further, I will hand it over to Lisa to take you through the third quarter results. I'd also like to take this opportunity to thank Lisa for her dedication to STARTEK over the last four years. As many of you may have seen last month, she announced her decision to back to Tennessee to be closer to her family. Lisa served as an exceptional finance executive for STARTEK and we wish her all the best in her future endeavors. We also appreciate her assistance while transitioning out as we research for her replacement. We're making good progress on our search and expect to have a successor for Lisa named very soon. With that, I'll turn it over to Lisa to provide more detail on our third quarter financial results. Lisa?

Thank you Chad, much appreciated. Moving right into the results for the quarter. Total revenue increased 18% to $72.8 million compared to $61.4 million in the year ago quarter. This was largely due to $10.7 million of incremental revenues from new client wins and $17.3 million of contributions from ACCENT which was acquired in June. This was partially offset by lower client volumes from several of our larger telecom and cable clients. We believe these client volumes have stabilized. Gross margin in the third quarter was 4.3% compared to 14.7% with the decrease due to the previously mentioned lower client volumes and incremental costs from added seat capacity in late 2014 and 2015, resulting in lower utilization, which can be remedied as we continue ramping our new sales win. This was partially offset by the positive margin impact of new client wins in higher margin verticals and the closing of Jonesboro, Heredia and Enid sites over the last year. SG&A expenses really during third quarter totaled $9.3 million compared to $7.5 million in the year ago period. This quarter included $1.3 million of ACCENT G&A and $700,000 of integration related costs. As a percentage of revenue, SG&A expenses were 12.8% compared to 12.2% in the same quarter a year ago. Adjusted EBITDA in the third quarter was negative $2.2 million compared to $5 million in the year ago quarter. The decline was due to lower call volumes, incremental costs from new sites and the ACCENT acquisition, all of which was partially offset by new client wins and other cost actions taken in response to soft revenues. We have and continue to take actions to reduce cost. It is important to note that the benefit of the ACCENT acquisition, while not fully realized until the first quarter of next year will be accretive in the fourth quarter. At September 30, the Company's cash position was $800,000 compared to $5.3 million at year-end 2014 with an outstanding balance of $28.4 million on a $50 million credit facility. We have reduced our Capex for 2015 to approximately $7.5 million. Through September 30th, we’ve invested approximately $6.5 million, which includes $2 million for 500 new seats early in 2015. This is in addition to the 2,000 incremental seats gained through ACCENT acquisition. At the end of the third quarter, our total seat count stood at 13,800. This concludes my prepared remarks. I will now turn it back over to Chad.

Thank you, Lisa. I'll be frank, our results this quarter are not reflective of results our company is capable of producing, specifically with regards to margins. As Lisa mentioned earlier, margins were impacted by the decline in large client volumes, investments in newly added seat capacity and temporary delusion from ACCENT. I’d like to provide a brief overview on each of these items and then review the actions we have and are planning to take to restore profitability and growth. Starting with the decline in large client volumes. We have reported and discussed this over the last couple of quarters. Fortunately, we believe these volumes have now for the most part stabilized and our metric performance for clients continues to be strong. These soft client volumes are primarily driven by AT&T, who will be down approximately $21 million year-over-year. This has been due to some vendor consolidation and their initiative to bring programs back on shore. As I have stated in the past, we are now positioned as a strategic supplier to one of AT&T's divisions and we're working to grow that line of business as well as create other opportunities with this value client. Other client volume reductions have come from three other large clients but for the year, we’ll be down roughly a combined $20 million year over year. Some of this is due to mix changes, program changes and some risk mitigation actions with concentrated SKUs by spreading the volume to other partners. These revenue dynamics occurred during the period when we were adding capacity, creating a significant misalignment with capacity utilization and ultimately resulted in a decline of gross margins. Before we begin to experience the decline in volumes from our larger clients, we added 2,875 seats in four locations late last year as well as in early 2015, adding $11 million in fixed cost. We actually had plans to expand another 1,700 seats this year. Once the erosion in these large client programs was apparent we immediately stopped additional capacity expansions. We have responded to the volatility and large client volumes with the commitment to increase utilization in the objective of returning to profitability and free cash flow generation. This is demonstrated by the reduction of our 2015 CapEx plan over the course of the year which started at $18 million and is now down to approximately $7.5 million. When we assess the ACCENT opportunity, we saw an underperforming asset that we could quickly remove costs and become accretive. They also had a large client in a vertical we are a leader in, a very capable footprint and most importantly valuable customer engagement solutions to add to the STARTEK Advantage System. However, ACCENT was not making money and therefore had a short term dilutive effect of Q3. We have since realized cost synergies and ACCENT should contribute positively in Q4. As I mentioned earlier, this team is committed to attaining profitability by focusing on sales pipeline conversion, cost reductions and operational efficiencies. Now I will further discuss the ACCENT integration progress and outline the actions we have taken and plan to further reduce costs. First, the integration of ACCENT. This year we will have achieved approximately $7.5 million of annualized cost reductions exceeding the original synergy target. Improvement in gross margin is running slightly behind our expected time frame by several weeks due to investments in operations and leadership, but we're seeing performance improvements and are pleased with the overall progress thus far. I'm very happy with the team's execution through the integration. This was a relatively large deal for STARTEK and to have exceeded the synergy target in four months speaks volumes about our teams' abilities. A few elements remain and we expect to achieve additional synergies through Q1 of '16. With regard to capacity and CapEx, we now have a healthy footprint. As Lisa mentioned, earlier we recently made the decision to close ACCENT’s Kansas City facility as it was not meeting profit margin requirements. This will save 300,000 of cost per quarter and I am pleased that the team was able to retain all related revenue. We are actively working to further reduce pockets of capacity where practical and are planning 2016 CapEx to be less than $6 million. We are further reducing and streamlining G&A. In addition to the ACCENT synergies, over the past few months we have taken out to $2.8 million in costs and plan for an additional $1 million of further cost reductions over the next couple months. These actions combined with operational efficiency gains and revenue growth should enable STARTEK to achieve profitability. The other focus area for return to profitability is adding incremental revenue growth and increasing capacity utilization by converting the sales pipeline. This quarter we continued to execute on this initiative with four client wins, three of which are in newer verticals totaling 17.5 million in annual contract value. Including expansion of a new program with an existing client, we closed 20 million of new business during the quarter. Two of these new client wins were health care clients, both were healthcare providers offering specialty services I’d also like to note that revenue from our top four clients only accounted for 51% of revenue in Q3 compared to 80% of revenue in the year-ago quarter, building on our mitigation of client concentration risk. Though painful in near term, by diversifying our revenue base and reducing our dependence on our top four clients, we should be much better positioned to weather unpredictable volumes and maintain margin integrity going forward. We will continue to focus on diversifying our revenue base and becoming less reliant on volumes from our larger clients. We will continue to leverage the differentiating customer engagement practices within the STARTEK Advantage System to aid clients with their customer engagement strategies followed by the execution of those strategies. These are more valuable stickier solutions that we're offering clients across multiple verticals. It's worth noting that we now have the most revenue diversification client and vertical diversification in the history of STARTEK. As we close out the year and look ahead to 2016, we will continue to win new business, streamline the footprint and improve efficiencies to expand margins. I am confident that our Q4 and 2016 results will be much more indicative of the company that you and I have envisioned for some time. All-in-all, I will leave you with this. Our client performance metrics remain strong. We hope to continue growing revenue at a double digit rate. And we will continue to aggressively convert the sales pipeline and target cost reductions and efficiencies to reach our objective of profitability and generating free cash flow. Lauren, Lisa and I will now open the call for questions.

[Operator Instructions] Our first question comes from the line of the Dave Koning from Baird.

Yeah. Hey, guys, how are doing?

Hi, Dave.

Hi, Dave.

And I guess, first of all, just so we kind of get an organic growth assumption, do you have the ACCENT revenues for the quarter?

17.3 million.

Okay. And what about just the breakdown between the top four clients, AT&T, Comcast, T-Mobile, Sprint like did you have each of them or I think you gave the combined total?

Yes, I will tell you that T-Mobile was $16.3 million for the quarter or 22% of our revenue. AT&T was $7.4 million or 10% of our revenue and Comcast was $7.6 million, about 10.5% of revenue.

Okay. And I know you guys have done a nice job now on the cost cuts with ACCENT and it takes a little while obviously to get that all to play out as you cut some of the capacity and stuff but the locations and all that, but do you have kind of a timeframe now on EBITDA profitability in – at some point in 2016 maybe?

We are expecting pretty meaningful improvements in the very near term.

Okay, or maybe even by the end of this year?

I am not going to – we are pushing it. I am not going to provide guidance, David.

Okay. And if we back into your comments about the top clients, I mean it sounds like and if we back out ACCENT, actually that next layer of clients is actually growing pretty well. Is it just a function of sales or is it clients that you have installed that already starting to layer on additional work with you guys or maybe describe kind of how that’s going?

Well, both. I think the clients and logos that we've added over the past year or so have grown nicely for us as well as new sales.

Good one. That’s all I have got for now. Thank you.

Thank you, David.

Our next question comes from the line of Matt Blazei from Lake Street Capital Markets.

All right. Hello, guys. I was curious, the regional breakdown that you typically provided in your releases, I didn’t see them as press release, is there a change in that?

No, we will have to check that after the call, but I can give you the revenue breakdown.

That would be great.

Onshore was $44.6 million, offshore was $17.1 million and near-shore was $11.1 million.

So $11.1 million?

Yes.

Okay. That table is not in here. You mentioned potentially getting your EBITDA profitability here relatively soon, I am curious as to your CapEx expectations for next year and when you might think you start to see positive free cash flow?

Yeah, I think as Chad mentioned, we are obviously working through 2016 plans now and we don’t see a plan that has a spending more than about $6 million next year.

We are looking for ways to minimize that even further.

Yeah, and I don’t think our plan has changed from our discussions on the last call. We are looking to generate cash in second quarter.

Okay, in Q2?

Yeah.

All right, thank you very much.

Our next question comes from the line of [indiscernible] Q – Unidentified Analyst: Hi. So it looks like, if I got the math right, you said, $17.3 million came from ACCENT, so I guess that means $55.5 million came from StarTek original. So I guess that’s about 10% revenue decline, is that right – is my math right?

Yes. Q – Unidentified Analyst: Okay. So I guess my – the overall question is here, I mean, I’ve heard you talk about – actually let me get one other number here, I think you said 20 – you were down $20 million year-over-year from non-AT&T telecom. How much are –

I said a few other large clients. Q – Unidentified Analyst: Okay. And then how much –

It’s full year, year-over-year. Q – Unidentified Analyst: Right. And how about from AT&T?

20, 21. Q – Unidentified Analyst: Okay. So a total of about $41 million of loss business in telecom?

Erosion, yeah, telecom and cable. Q – Unidentified Analyst: Yeah, so I just – I am just not understanding what happened here. I mean, at the end of – if you go back – as you guys know, I mean, I have been a stockholder for long, long, long time. So going back to like 2013, I mean, things were going great. Something happened and I noticed, when I used to call in, and I would always ask about what’s happening with the revenue ramps. I don’t know if you guys remember, but every quarter I would call in ask. And it seemed, I mean, the reason I kept asking that was it seemed something wasn’t going right with the revenue ramp. I mean, that’s why I kept asking every quarter, what’s going on. So can you – I still don’t really understand what happened, why has the telecom business declined so dramatically?

Adam, I have spoken to that in detail over the last couple of quarters and laid out specifically after the first quarter call. What we’re seeing in AT&T and some of the other erosion we are dealing with and alerted our shareholders to what was going on in the business to the extent that I could as that was commencing. So yes, it is a large year-over-year erosion ad revenue in those large clients, the concentration of large client revenue has been a risk in this business that we spoke about quite a bit, which is why we have had the strategy to mitigate that risk of revenue concentration and have made significant progress with the new bookings and the new adds of business, new logos and the business. To the point that David just mentioned, the growth in the business outside of those large clients has been market and we are going to continue that process and it’s also why I highlighted the fact that we believe those volumes and revenues have stabilized at this stage with those large clients. But we definitely went through some significant erosion that we’re quickly tried to address and adapt to get back to a better footing in the business going forward. And then we have a much – obviously, not all of it happened the way we would like it happen, but we’re a much more diversified today, which is very important going forward. Q – Unidentified Analyst: Oh yeah, I agree with that. I mean, is it correct to say now that the only remaining AT&T business at this point is the receivables management?

Yes. Q – Unidentified Analyst: So I mean, just to drive this point, I believe like if we go back like five years ago or something, was AT&T’s customer care service, the large majority of StarTek’s whole revenue?

Yes. Q – Unidentified Analyst: All right. I mean, obviously I am unhappy with what’s happened, but I do understand that without – that if you hadn’t been able to grow other business, I mean that would have been the end. So I understand AT&T basically consolidated with another vendor, a competitor and maybe not – why the loss of market share in the other telecom clients, is there some larger – is there some kind of consolidation happening? Is there some reason for the market share loss in telecom?

I spoke to exactly what’s going on as other clients in my scrip, so I’d ask you to reference that because I feel I laid out the reasons in there. Q – Unidentified Analyst: Okay.

Thank you, Adam.

Our next question comes from the line of Omar Samalot.

Hey, guys. So how would you characterize the ACCENT sites in terms of their performance versus your initial expectation so far and maybe as it pertains to expect return on investments?

In general, I think we're, for the most part, on track, Omar. I did mention in my script though that with some of the investments we made and a few of the sites, investments within the labor force as well as leadership, we are, I think I mentioned, we’re several weeks behind the gross margin numbers that we had expected at the outset, but we’re pleased with the progress we’re seeing and the performance on those sites now and are getting into the range of what we had expected there. So a little bit behind on margins in a few of the sites because of some of the investments we made in the business, but getting on track pretty quickly right now. So all in all, feel pretty good about the results out of the business, the revenue retention, the sales pipeline, conversion of the asset that we acquired and then certainly we stressed, pretty pleased with the execution against our synergy target.

Okay. And I saw -- I think Lisa mentioned that there was like 700,000 integration cost in the G&A line, is that a one-time expense?

Yes. It was integration cost this quarter as well, but yeah, that's not recurring.

Okay. So they’ll be a little bit more in Q4 for that?

Very well, yes.

Okay. And could you tell me what were your growth investment expenses for the quarter, or give me an indication more or less how much in growth investment expenses?

CapEx?

No, OpEx.

No. I don't have here at my fingertips, Omar.

Okay. Sounds good. And could you say what would the CapEx for in Q3?

Yeah. It was mainly for the build out of the Hamilton location and then there were some minor maintenance type investments in IT.

Okay. And then I see that you have maybe another 1 million or so in Q4, I'm assuming more or less for maintenance as well?

Correct. And a little bit of run out on the Hamilton investment.

Okay, got it.

We are trying to mitigate that as well.

Okay. The restructuring charges for the quarter, what was that for?

It was really two main things that was for the cost reductions that Chad and I mentioned, there were some people associated with that. So it was the severance reserve for those people and then also the Kansas City people or employee related reserve.

Okay. And I guess by now, we're pretty much done with the cost related with the IT platform?

Yeah. We're finished.

Perfect. Could you tell me what was the cash restructuring charge for the quarter?

No. I don't have that on my fingertips either. That's obviously going to be in the Q.

Okay. I'll wait for that then. Okay. How come the AR went down a bit from the previous quarter despite the 14.5 revenue increase from Q2, as you add ACCENT?

DSO improvement.

But that's quite a bit of an improvement, so what are DSOs now?

65.

Okay. Well, okay. So I mean, at this level, I was expecting a lot more working capital need at this revenue level, do you see more of a need coming down the line as revenues start to increase backup?

Yeah. I mean obviously there is revenue associated with growth. I mean, there is cash associated with growth. Yeah.

Okay. All right. So the offshore gross margin dropped from 10% or so in Q2 to 7.2%. Was that a combination of the lost AT&T mobility plus ramping cost of new business that you are replenishing there right now?

Yes. Some other mix and volume shifts there, but yes, for the most part, Omar, that's what it was.

Okay. And what about the drop in gross margin in the domestic segment from 6% in Q2 to 0.7% in Q3? What happened there?

Yeah. The majority of that was the impact of Hamilton of course coming online for the full quarter and then the impact of the ACCENT side, so they were dilutive in the domestic segment primarily.

Got it, okay. Sprint announced today that they have some pretty significant cost-cutting efforts going on which include optimizing labor as they call it, will that be an opportunity for you guys going forward?

Possibly.

Okay. All right. And so during Q1 conference call, you said that you expected to be back on track by the end of the year. Now with the IT platform in place, the ACCENT integration going ahead of schedule and accretive to earnings in Q4 and obviously as you announced, you are in fact converting the pipeline into wins, so would all this indicate that Q4 should be a much, much improved quarter in terms of earnings results?

Well, I certainly would hope that this quarter, we just reported just kind of the bottom for the foreseeable future, yes.

Okay, all right. And Lisa, we will, at least me, will miss you dearly. I just wanted to ask you’ve been with the company for four years. Do you feel like you're leaving this company better than you found it? Why or why not?

Thanks, Omar. I appreciate that. No, I absolutely do because all of the accomplishments of the team over the last four years and there is a lot of momentum here. We’re excited about the company's future, but yes, I feel like we've accomplished a lot.

Okay, well, thank you very much guys and good luck going forward.

Thank you.

I would now like to turn the call back over to Startek’s President and CEO, Chad Carlson for closing remarks.

Well, thank you everybody for your interest and we’ll talk to you next quarter. We'll get back to work.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.