Chad Carlson - President and CEO Don Norsworthy - CFO

David Koning - Baird Mark Argento - Lake Street Capital

Good afternoon everyone and thank you for participating in today's conference call to discuss StarTek financial results for the first quarter ended March 31, 2017. Joining us today are 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'd like to remind all participants that the discussion today may contain certain statements which are forward looking in the 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 advices all those listening to this call to review the 2016 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 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 investor's page of their website. I'd 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, Nicole. Good afternoon and thank you all for joining. Earlier today we issued a press release announcing StarTek's financial results for the first quarter ended March 31 2017. Our first quarter was highlighted by a strong improvement in our bottom line as we've built sustainable profitable growth. Our focus is on operating efficiencies, winning new business, high grading revenue and improving capacity utilization to generate increases in margins, net income, adjusted EBITDA and free cash flow. In fact, the first quarter marked our sixth consecutive quarter of generating year-over-year gross margin expansion. We also made progress in paying down debt while posting one of the highest new bookings numbers of any quarter during my tenure. I remind investors that it can often take a few quarters to see our bookings flow through to revenue which is why we expect to return to some growth in Q2 before seeing the revenue strengthen later this year and beyond. This of course maybe impacted somewhat by our high grading efforts which will ultimately improve the quality of revenues. Central to our strategic plan is improving profitability. On the last call, I introduced the term high grading meaning to remove or repair programs with less than acceptable margins and this is certainly contributes to more total profit. Another facet of our strategic plan is to focus on customer centric clients who value the STARTEK Advantage System. This system is a differentiated customer engagement methodology that is guided by insights and analytics. Our growth in the healthcare vertical is also part of our strategy to increase profitability. I've been asked recently by some investors if we have any pricing power in this industry. The answer is yes, by going into new verticals where we have more pricing power. We can also create pricing power by differentiating ourselves with added value customer engagement solutions, out executing our competitors on client metrics and getting capacity utilization up while maintaining a robust pipeline and strong sales momentum. The last couple of quarters reflect some revenue growth headwind as a result of these high grading efforts. But the bottom line results are stronger. I'm unhappy with our continued sales momentum from both new and existing clients. This quarter we have reported bookings of 30 million in annual contract value of which almost 30% came from the healthcare vertical including three new clients. The pipeline continues to build and is roughly double what it was this time last year. Looking at margins more closely, our domestic segment margin was lower than desired. However, this segment incurred the vast majority of high grading transition impact as well as startup costs for new business ramps. Our objectives for the domestic segment have not changed and are trending toward more acceptable margin levels. As a reminder, our objective is to strike the right balance of capacity utilization and healthy revenue to attain a domestic gross margin in the mid-teens. Nearshore gross margin over the 20% threshold and offshore gross margins over 30%. These profit margin objectives combined with tight SG&A cost management and increasing revenue should produce double-digit EBITDA margins and solid earnings growth. We continue to work on achieving our objectives of generating double-digit sales growth, while increasing adjusted EBITDA by 25% on an annualized basis over the next couple of years. If not at these levels, we will make whatever changes necessary to get us there. Our bottom line remains the top priority. From a balance sheet perspective, we reduced debt by more than 20% to 20.1 million. As we shared on the last call, our CapEx planned for the year continues to be in the $8 million to $11 million range. We are pleased with the success in generating free cash flow and paying down debt. However, as we ramp the new business wins in the second half of this year, there may be a pause in debt reduction. I'd like to remind investors that some of the items we have added to the STARTEK Advantage System which is enabling this momentum and operating platform providing for efficiencies for our clients across multiple sites, geographies and vertical, now nine served. A unique customer engagement platform providing insights and analytics powered by the science of dialog, a cloud-based variable cost IP platform allowing for lower maintenance and CapEx, greater economies of scale as well as flexible and targeted solutions for our clients. A healthcare offering that spans payers, providers and med-tech as well as clinicians supporting the exciting area of telehealth. We also offer clients a receivables management solution now licensed in all 50 states. And finally, an electronic processing capability that is now being enhanced by robotic process automation. These added capabilities are all being facilitated and trained via an enterprise process library with inherent process improvement for clients and all functions across the company. And all of this is being fulfilled by a team of great people whom we call brand warriors. Nicole, Don and I will now open for questions.

[Operator Instructions] Our first question comes from the line of David Koning of Baird. Your line is now open.

Hey, guys. Great job on profitability. It's really solid. And I guess a couple of things both on kind of Q1 revenue and even Q2 revenue. Now, one is historically you've been down a little bit in Q1 sequentially. This Q1, you're actually up sequentially, which is encouraging. Maybe you can talk a little bit about that. And then historically Q2 is a seasonally weaker and just wondering if that's kind of the typical kind of expectation this year.

As you know, we don't think about the business a whole lot from a sequential standpoint, just because of its seasonal nature and lumpiness and been going through so much with the turnaround, but I think your callout is a good one and that first quarter actually did sequentially step up from where we were fourth quarter. And from a second quarter perspective, we believe we will show some growth on a year-over-year basis in second quarter as a lot of the strong bookings over the last few quarters, we've begun to realize some of that, understanding there is some headwinds from some of the high grading efforts we've been working through.

Got you. Thank you. And any callouts from kind of your top four clients, you give that data usually in the 10-Q filing, but anything, any of those accelerating, decelerating more meaningfully than others?

Couple are soft and our largest client is very strong.

Okay, great. And then I guess the other thing just how should we think about, is this kind of a new good level of SG&A going forward, I mean it was 10.2% in the quarter. You go back pretty much every year now for a few years in a row, you've been continuously kind of cutting that down a little bit. I mean are we in the low-10s now this year?

Yeah. I think that's actually a pretty aggressive number. We've been managing pretty tight with a significant pipeline we have and expected further growth. I think any time we're operating in the 10 to 11.5 range, it's pretty healthy for service business, David. And then, it will just depend a little bit on how we step up to handle growth and try to balance that as you know we'll manage that as well as we can.

[Operator Instructions] Our next question comes from the line of Mark Argento, Lake Street Capital. Your line is now open.

Yeah. Hey, guys. Congrats on a solid quarter. Just a quick question in terms of mix during the quarter in terms of segments served, any major changes in terms of segment mix and kind of any margin profile shifts as well?

Hey, Mark. Thank you. I think you'll see a jump in wireless, but some reduction in telecom and cable media versus prior year and then good growth in retail and healthcare bookings are solid and should prove well, but healthcare is kind of flattish from where we were last year.

Got it. And the retail piece, are you guys doing, is that e-commerce related or what kind of retail business you guys are in?

It is and we really think the retail side of things is the best place to play right now.

Great. And then obviously, you had a little bit of tailwind here, is the objective just to continue to generate cash and pay down the debt or I know we've talked before about M&A opportunities. Is it still premature in terms of looking at M&A or what's your thoughts there?

We're opportunistic and the board's always looking at opportunities with Don and I on ways to maximize shareholder value, but as I mentioned, we might have a pause in debt reduction second half as we handle some of these, some of the ramps and new bookings we've been announcing, but we'll continue to and we've been able to delever quite a bit and we'll continue to look at things as they come across our desk.

Thank you. At this time, this does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Carlson. Mr. Carlson, please proceed.

Thank you, everyone. I appreciate the continued interest and we'll get back to work. Talk to you next quarter.

Ladies and gentlemen, thank you for your participation on today's call. You may now disconnect. Everyone, have a great day.