Chad Carlson - President, Chief Executive Officer Don Norsworthy - Senior Vice President, Chief Financial Officer and Treasurer

Matt Blazei - Lake Street Capital Markets Omar Samalot - Independent Analyst

Good afternoon, everyone, and thank you for participating in today's conference call to discuss STARTEK's Financial Results for the First Quarter Ended March 31, 2016. Joining us today is STARTEK's President and CEO, Chad Carlson; and the company's CFO, Don Norsworthy. 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 subject to various risks and uncertainties and actual results may vary materially from these projections. STARTEK advises all those listening to this call to review the 2015 Form 10-K 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 based measurement. The reconciliations can be found in the earnings release on the Investor page of their website. I would 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, Christie. Good afternoon and thank you all for joining. Earlier today, we issued a press release announcing our financial results for the first quarter ended March 31, 2016. Most notably, we reported our second consecutive quarter of profitability led by a 23% year-over-year increase in revenue and the realization of several cost reduction initiatives and client contract optimizations. We also added over $3 million in new business from both new and existing clients demonstrating the value of our enhanced customer engagement platform and strong client performance metrics. On a cumulative basis, our top-five client volumes also returned to growth during the quarter with a 5% increase over the prior year. Later on this call, I will walk you through some of the highlights from Q1 as well as key focus areas for the remainder of 2016. But before commenting further, I would like to turn the call over to Don to provide more details on our first quarter financial results. Don?

Thank you, Chad. Total revenue increased 23% to $78 million compared to $63.7 million in the year ago quarter. This was largely attributable to the contribution from ACCENT which was acquired on June 1, 2015 as well as growth from existing clients and new client wins. This was particularly offset by lower volumes from select clients and other loss programs over the course of last year. Gross margin in the first quarter increased 110 basis points to 10.7% compared to the year ago quarter resulting from enhanced capacity utilization and optimizing client contracts, several of which were former ACCENT clients. Q1 margins also benefited from continued efficiencies enabled by the completion of last year's IT platform migration and closing ACCENT's Kansas City facility. SG&A during the first quarter decreased to $7.8 million compared $8.1 million in the year ago period. As a percentage of revenue, SG&A expenses decreased 270 basis points to 10% compared to the year ago quarter. The significant decrease is attributable to cost reductions and continued efficiencies from our new IT platform. Adjusted EBITDA in the first quarter increased 156% to $4.2 million compared to $1.7 million in the year ago quarter with the increase due to the aforementioned new client wins, current client expansions, cost reduction initiatives, and contribution from ACCENT. We reported a slightly positive net income in the first quarter compared to a net loss of $3.2 million or $0.21 per share in the year ago quarter. At March 31, 2016, our cash position was $800,000 compared to $2.6 million at December 31, 2015, with the $26.9 million balance on our $50 million credit facility compared to $32.2 million outstanding at December 31, 2015. The reduction in cash is largely the result of paying down debt and the timing of receivables. We plan to continue paying down debt in 2016 and build upon the first quarter’s 16% debt reduction. CapEx for the first quarter was $400,000, and for 2016 we continue to expect CapEx to be roughly $5 million. This concludes my prepared remarks. I will now turn it back over to Chad.

Thank you, Don. As I mentioned earlier, Q1 was highlighted by double-digit revenue growth and our second consecutive quarter of profitability. Albeit smaller this quarter, it was nevertheless a stark improvement from the $3.2 million net loss in the year ago quarter. This quarter's growth in profitability was led by the successful integration of ACCENT, cost reduction initiatives, and a ramp of several new clients won in 2015 that improved STARTEK's capacity utilization. During the quarter, we won $3.1 million of new business by signing premium clients and expanding existing client engagements. Two of these new clients are outside of the telecom and cable media verticals building upon our continued initiative to diversify our vertical and client concentration. For the first quarter, our largest client accounted for 21% of revenue compared to 28% in the year ago quarter and the five largest clients now make up 64% of total revenue or 74% a year ago. On the last earnings call, I discussed our focus on customer centric clients, those who seek to utilize the extensive customer engagement services which are now part of the STARTEK Advantage System powered by Brand Warrior driving in a unique culture. I discussed the fact that STARTEK is now a fully capable, multi-channel customer engagement BPO differentiated through performance and our engagement methodology. During the first quarter, we re-tooled our Lead Gen targeting process to focus on prospective clients with customer engagement needs. We found that these clients appreciate a partnership focused on bringing added value to their overall strategy and customer engagements. This created somewhat of a transitional phase in Q1 that offset our full conversion potential. Since we have completed the retooling process, we've seen the ramp of quality prospects in our sales pipeline which over time will improve the profile of the overall portfolio of the business. As Don mentioned earlier, Q1 SG&A came in at $7.8 million or 10% of revenue, a 270 basis point decrease resulting from several cost reduction initiatives. The primary contributors to the year-over-year improvements and efficiencies came from continuing to leverage our cloud-based IT platform and successful integration of the ACCENT acquisition. The fundamentals of our business are strong and we have momentum on several fronts. The factor weighing most on results is that we have lower capacity utilization than what we deem to be optimal. We will improve this by converting on quality opportunities in the pipeline and introducing some capacity where practical. Excluding some of the excess capacity, I feel good about the footprint we have in place. The less than optimal capacity utilization results in lower gross margins. It also accounts for less CapEx requirements over the short term. With sales conversion and organic growth raising our capacity utilization to more desirable levels over the next year, we have the ability to ramp revenue and EBITDA with CapEx expected to be less than $5 million for this year. As many of you may recall, during our third quarter 2015 conference call, we stated our expectation of generating free cash flow by Q3 of 2016. Well, I'm happy to say we beat that target by two quarters generating $4.5 million of free cash flow in the first quarter. For the remainder of 2016, we will continue to focus on pipeline conversion by targeting new business while leveraging the added scale and capabilities from ACCENT. We will optimize current client contracts and improve capacity utilization by filling or removing seats where practical, and we will continue to work on being more efficient with overhead expenses. Though Q2 is our seasonally slowest quarter of the year, we believe our optimization initiatives and cost controls position us to achieve our goal of double-digit growth and profitability for 2016. Christie, Don, and I will now open up for questions.

Thank you. [Operator Instructions] Our first quarter comes from the line of Matt Blazei of Lake Street Capital. Your line is open.

Hey guys, good to hear from you. You mentioned that your CapEx was going to be under $5 million for the year and obviously it was $400,000 in Q1. So are you expecting that to probably ramp up in the back half of the year?

That is correct, yes.

So something around the $5 million is what we should be looking at?

That's correct, yes.

And my second question is, I [indiscernible] but is the $3 million new business is that an expected run rate through the year or do you expect that to ramp up as the year goes on?

New sales tends to be lumpy in nature when we report that, and if you can look historically over the past few years what we've reported on an annual basis, and I couldn’t see our expectations changing from what we've been able to produce in the past few years.

All right and then lastly, I see that the debt, the $26.9 million you guys did a great job of paying off a good chunk of that, but it [indiscernible] recurrent liability for now, can you give us just sort of a timeline of when that debt is due?

It is a revolver line of credit.

Yes, it is an ABL, they sweep our cash.

Oh, I see, got it.

We pay down just based on the cash flow generated.

I see, got it okay. Thank you, guys.

Thank you, welcome.

Thank you. Our next question is from Eric [indiscernible] of Baird. Your line is open.

Hey guys, nice job this quarter.

Hey Eric. Thank you.

Thank you.

On the free cash flow, it is great to see that positive this quarter. I guess, you called out a benefit from the timing of receivables, and look like working capital was about $1.1 million benefit. So just how exactly, how largely is the benefit from receivables timing?

We did decrease the DSOs. Actually, the performance would have been a little bit better. When you look at the timing of when we fund our payrolls, we fund -- in two quarter in the year, we fund seven payrolls and then two quarters we fund six. We actually funded seven payrolls in first quarter, and the last one we funded the last day of the quarter. So the performance to me from an operational standpoint was even better. Just take into account that we had to fund that payroll the last day of the quarter.

Okay, and then I think on the last call you guys mentioned you expect free cash flow to be positive for the full year. Is that still in line with your expectations?

Yes it is.

Okay. And then SG&A, you guys have done a good job of keeping that down to about 10% over the last couple of quarters now, is that the normalized percent of revenues that you are thinking for going forward?

We are pretty comfortable in that range. That could [indiscernible] little bit depending on investments in the business and bonuses and commissions, et cetera, but we feel like we're pretty comfortable where we've gotten right now, and we will just continue to focus and manage it tightly.

Okay great, thanks guys, nice job.

Thank you.

Thank you. [Operator Instructions] Our next question is from Omar Samalot an Independent Analyst. Your line is open.

Hey guys.

Hey, Omar.

Hey, Omar.

Very strong quarter. I just want to say congratulations, first quarter over quarter profitability in five years, return to free cash flow positive, very strong debt reduction after successful integration, I mean that’s just great and you are keeping SG&A very, very lean. So I'm very proud.

Thank you.

Thank you.

I noticed that you showed a gross margin improvement in the offshore segment, was that due mostly to capacity optimization there?

It was. There was a little bit of a change in mix that was beneficial for us, but as with our – it is sort of some puts and takes, but that really is what has driven --.

Okay, and if we're not at optimal levels there yet, how is the progress so far to get us to that more optimal level that we're used to seeing in that segment?

I think we're making some good progress there with -- the pipeline has picked up there and we're actively working on couple of pockets of capacity to perhaps divest them, so I think it is a high priority for us and expect that to greatly improve through the rest of the year.

Okay, good. All right, given that obviously utilization rate remains on the low side in that segment and Q2 being the weakest quarter seasonally for the industry, I imagine it will probably be pretty hard to show you got profitability in Q2, but do you feel like it will be close?

Well, considering where we came in at first quarter, now in the second quarter is the weakest quarter, then I think your assumption is true there. It is going to be tight, but everybody is focused and pulling hard.

Okay, good. And I'm assuming that despite that, that Q2 should probably also show free cash flow positive since the working capital needs would probably be lower given the weakest -- the weaker quarter?

That's our goal every quarter.

Good, good, okay. On the DSOs, Don, could you tell us how much did it improve from Q4 to Q1?

It went from 72 days to 66 days.

Okay, so that's which is the more normal for you guys, okay. Back when the company was much less diversified, the domestic segment gross margins struggled to reach 10%, 12% in a good quarter. Given your composition today, what sort of gross margin range are you targeting for this segment?

You know, with capacity utilization, again our capacity utilizations across the board in all three geographies that I spoke to, but with capacity utilization coming more in line, I think 12% to 15% is certainly what we'd like to achieve as a goal there.

Okay, okay, that's helpful. And kind of the same question for nearshore, you've been improving this segment's gross margin to around, I guess the 12% to 15% range. Is that the goal for that second or is there a little bit more room for the upside?

No, we expect nearshore to run much better than that and basically it should fall within about midway point between where domestic and offshore is.

Okay, great, great. Guys, again thank you very much and very strong quarter. Thank you.

Thank you, Omar.

Thank you. And that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

Okay. Well, thank you all for your attention and your support and we will get back to work and look forward to speaking with you next quarter.

Thank you, ladies and gentlemen. This does conclude today’s conference. You may all disconnect. Everyone have a great day.