Chad Carlson - President & CEO Don Norsworthy - SVP, CFO & Treasurer

Mark Argento - Lake Street Capital 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 Third Quarter Ended September 30, 2016. Joining us today is STARTEK's President & 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 Security Laws. These statements are subject to various risk 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. These reconciliations can be found in the earnings release on the Investors page 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. Now I would like to turn the call over to STARTEK's President & CEO, Chad Carlson. Sir, please proceed.

Thank you, Liana. Good afternoon and thank you all for joining. Earlier today, we issued a press release announcing our financial results for the third quarter ended September 30, 2016. Our third quarter was highlighted with positive net income. This was Startek's third quarter with positive net income since 2009 which reflects the positive trend accomplished by continued execution of our strategic plans and growth initiatives During the quarter we won 31.8 million of new businesses. The most in a single quarter in several years, increased revenue and expanded margins enabling us to generate 5 million and adjusted EBITDA. Q3 also marked the third consecutive quarter of generating free cash flow and paying down debt even while investing for future growth in our business. Later on in this call I will walk-through some more of the highlights from Q3 as well as key focus areas for the remainder of the year and 2017, but before commenting further I would like to turn the call over to Don to provide more details on third quarter financial results. Don?

Thank you, Chad. Good afternoon every. Total revenue increased 8% to 72.8 million in the year ago quarter. The increase was primarily attributable to new and expanded client engagements as well as strong volumes from the company's top four clients. Gross margin in the third quarter increased 890 basis points to 13.2% compared to the year ago quarter as a result of enhanced capacity utilization and margin optimization initiatives. SG&A during the third quarter decreased 5% to $8.8 million compared to the year ago quarter primarily due to the cost reduction initiatives and IT platform migration completed in late 2015. As a percentage of revenue, SG&A decreased 160 basis points to 11.2% compared. Net income for the quarter came in at $900,000 or $0.05 per share, compared to a net loss of $7.7 million or a negative $0.49 per share in the year-ago quarter. Adjusted EBITDA in the third quarter increased to $5.0 million compared to negative $2.2 million in the year-ago quarter with the increase was due to the aforementioned new client wins, current client expansions and cost reduction initiatives. At September 30, 2016, our cash position was $800,000 compared to $2.6 million at December 31, 2015 with a $22.2 million balance on our $50 million credit facility compared to $32.2 million outstanding at December 31, 2015. The decrease in cash is largely result of a 31% debt reduction over the course of the year. CapEx for the third quarter was $300,000 and for 2016 we continued to expect CapEx to be roughly $5 million obviously with the majority of these expenditures occurring during the fourth quarter. And for Q3 we generated 1 million of free cash flow compared to a use of $4.7 million in the year ago quarter. As Chad mentioned earlier this was our third consecutive quarter of generating free cash. This concludes my prepared remarks. I will now turn it back over to Chad.

Thank you, Don. Over the past several years Startek has been executing upon a strategic plan to achieve sustainable, predictable and profitable growth. This strategic plan was designed to capitalize on the industry growth, add new clients and verticals, grow existing client relationships, expand service offerings and enhance our footprint and optimize operations. The momentum evident in these improvement financial results validates the execution of this plan by a solid team. As Don mentioned earlier Q3 SG&A came in at 8.8 million, a $600,000 or 5% reduction from the year ago quarter despite 8% top line growth. We continue to realize the benefits of our cost reduction initiatives and IT platform migration from last year. I'm satisfied with the progress we have made to get our SG&A to an optimal range of 10% to 12% depending on ebbs and flows of the business. We will remain diligent and always look for more efficient balance with smart investment to enable growth. As I mentioned earlier we added approximately 31.8 million in annual contract value through new client wins and expanding client engagements. So this is still is the largest single quarter of bookings earned during my tenure. This was the result of adding six new client and three new program expansions with existing client. Notably however new client wins came from the retail financial or healthcare verticals. It's also worth noting that we experienced another strong quarter of volumes from our larger clients. Moving on to gross margin capacity utilization. Past quarter we removed some excess space to better align capacity with demand. Through this realignment coupled with real progress on a contract optimization initiatives and adding more business we improved gross margin by nearly 900 basis points despite our improvements in the utilization we remain in a less than optimal operating level and thus still have room to scale and further improve margins within existing capacity. We are keeping a close eye on the balance of capacity versus demand with a robust pipeline to manage this to an optimal level. Our strong and growing pipeline goes beyond sales and marketing efforts. We're challenging the status quo of traditional call centers by enabling unique customer experiences powered by the science of dialogue. World class customer engagement starts with a [indiscernible] dialogue. The Startek advantage system encompasses a suite of solutions and hands by our proprietary Ideal Dialogue model which provides not only everything you need to engage with customers but also provides solutions to maximize customer satisfaction, sales and retention as a result of every conversation in customer interaction be it through voice, chat, e-mail or social media. As we close out the year and look ahead to 2017 we will to focus on executing our strategic growth initiatives. Startek's fundamentals are stronger than they have been for several years and we believe we're well positioned for sustainable, predictable and profitable growth. Liana, Don and I will now open the call for questions.

[Operator Instructions]. Our first question comes from Mark Argento with Lake Street Capital. Your line is open.

Just a couple of questions, just wanted to dig in a little bit more. I know you had mentioned that $31.8 million in HCV that you guys signed up in the quarter you had six new engagements but could you feel the [indiscernible] a little bit in terms of the verticals you’re focused on. I think I heard you say financials, healthcare, maybe talk a little bit about where you're seeing opportunities?

Yes the six new clients came in in retail, financials, and healthcare and those are certainly in our focus. We're now servicing eight verticals and same very significant interest across the board. It's been part of our strategic plan to continue the [indiscernible] from a concentrated position in the communications vertical. So pretty pleased with our progress there.

In the healthcare space if you could kind of telemedicine win or different type of healthcare win at this point?

I will consider that in the telemedicine area and if you reflect on the last earnings call we went into quite a bit detail on what our healthcare services platform looks like now but it's pretty robust comprehensive healthcare service capability that we now have at our disposal and [indiscernible].

And it sounded you took some capacity out of the network and was that specific call centers you just reduced overall seats across how do you go about taking capacity down and do you have the flexibility to scale back up if and when I think makes sense.

We were able to do that without removing a full sight. So we were able to remove an element of our capacity, not removing a site and we do have the ability to scale back in the future as needed.

And then last one for me, I know you talked about just briefly touched on the unique your customer engagement opportunities and some of the other types of services you could sell. Could you maybe provide an example of some maybe a new win or where you're getting some traction with some of those types of services?

The investment we made with the acquisition by Ideal Dialogue a few years ago has really truly differentiating capability is that into our overall Startek advantage system. So we’re are able to offer insights and analytics through that process through identifying key habits to help our agents and sign some dialogue or better optimize communication and we're doing right now fairly - and that’s now being applied to retail and airline retail services as well as cable [ph] and healthcare services to name a few very close that were apparently doing that.

Our next question comes from [indiscernible] with Baird. Your line is open.

I guess on Asia and Latin America, the gross margins what it looks like happened was all the sequential revenue growth fell right to the gross profit line. So it looks like the utilization is getting dramatically better and I'm wondering are you kind of just hitting much more optimal utilization levels in which - are we kind of maxed - I guess I don't want to say maxed out but at least are we at normalized levels now so that gross margin should be in the 20% to 25% range more sustainably in Asia Pacific and Latin America?

In Latin America it's kind of a combination of capacity and also margin optimization initiatives but I would say our Latin America market is more closely aligned with our optimal operating ranges and stay with Asia. I did had to do with capability utilization uptick but we still have rooms [indiscernible] in Asia until we get more optimal operating levels on capability utilization.

And then historically in Q4, if I look back you often grow $3 million to $5 million sequentially or something. Last year you grew 10 million sequentially and I guess I'm just trying to remember what exactly happened then, is that more than normal seasonality now with the acquisition or is it more $3 million to $5 million sequential. I guess just kind of as we think forward.

Yes really, I don't want to comment on sequential kind of guidance to give you that but we did have some very strong seasonal demand last year. So I would position that and I guess now you’re looking at you know with seasonality in our new business coming on probably be a little bit more normal than what occurred last year.

Okay. And then I guess my last question is just around you talked about really good volumes in some of your pure bigger clients, I'm sure the 10-Q will come out sooner, we will be able to see but you know anything to call out there and you know maybe if you give a couple your bigger clients like T-Mobile or Sprint or AT&T anything specific to call out?

Up on all three.

[Operator Instructions]. And our next question comes from Omar Samalot with Independent Analyst. Your line is open.

Could you give us a sense of how much of that of the new business wins came in early in the quarter versus maybe late in the quarter in order for us to get a sense of how much if any revenue from that new business won in Q3 we could potentially see in Q4?

You will see some of that business in Q4 but not the bulk of it.

And it sounded from your comments that maybe I misunderstood but were you able to upload some of that - some more capacity in your offshore segment during Q3?

We did. I did say we did remove some capacity.

All right. And are you guys in a position to say what is the capacity utilization rate as you excited the quarter?

No it's less than optimal both - and more so domestically as well as offshore as I mentioned to David it's a little bit getting closer to optimal ranges in offshore.

Okay. And last quarter I believe you mentioned or at least alluded to the fact that you maintained higher costs in general just five - a lower seasonal volume because you were getting prepared for a certain volume or new business growth. First is our first assumption, and second what will that foresight pay dividends in terms of shorter timing and taking business to market and potentially smoother ramping up.

I kind of don’t remember the exact comment that you’re speaking of but in general I will say that the excess capacity we're carrying has a lot to do with that cost that hanging on to knowing that we’re working a pretty robust pipeline right now and trying to strike the right balance there that. I think it's probably more associated with that and then certainly some management bandwidth and overhead to run with the higher run rate.

Okay. I saw that there was no pay down on the allowed credit balance but I see a repayment of around 2 million of debt, was that related to notes payable or capital leases payment?

A lot of credit actually went down to 1.3 million. So we were able to pay down debt and that's even with funding about a 2.4 million incremental investment and ARR [ph] for the quarter.

So I think I heard Mike kind of [indiscernible] I think when Don was speaking we generated 1.6 million of free cash flow in the quarter.

And paid down the ABL 1.3 million.

The margins and the offshore on the near shore surpassed at least my expectations. Great to see those I think that's a record for the near shore and closer to a normalization of the offshore, can you give us some color on what drove margins in those two segments?

Again getting back to some of the discussion there with David, offshore clearly around some of the capacity we were able to let off as well as improved capacity utilization and then near shore was a combination of added business as well as some margin optimization initiatives come to [indiscernible].

Okay. Anything at all that you can share with us in terms of gross margin expectations for Q4 per segment as utilization increases seasonally?

No but one can assume with the improved utilization, our margin shouldn’t reflect and improve results on gross margin. So maybe now fourth quarter so much as we bring in new business that we just discussed earlier, that’s going to help

At this time this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

Well thank you Liana. I appreciate everyone's interest and we will get back to work. We will talk to you next quarter.

Thank you ladies and gentlemen. You may now disconnect.