Chad Carlson - President and CEO Don Norsworthy - CFO

John Godin - Lake Street Capital David Koning - Robert W. Baird Omar Samalot - Private Investor

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, 2017. Joining us today is StarTek's President and Chief Executive Officer, Chad Carlson; and the Company's Chief Financial Officer, 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 forward-looking 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 materially differ from these projections. StarTek advises 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, the discussion today may include some non-GAAP measures in accordance with Regulation G, the Company has reconciled these accounts back to the closest GAAP-based measurements. The reconciliations can be found in the earnings release on the Investor page of their website. I would now like to remind everyone that the 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 and Chief Executive Officer, Chad Carlson. Please proceed.

Thank you, Brian. Good afternoon, and thank you all for joining. Earlier today, we issued a press release announcing StarTek's financial results for the second quarter ended June 30, 2017. The second quarter was highlighted by our continued focus on operating efficiency and high-grading revenues to further improve our bottom line. I am happy with the team's performance as we generated the first profitable Q2 for StarTek since 2009. Overall, we continue to make progress, achieving sustainable, predictable, profitable growth. During the quarter, we managed through a transition of revenue for one client from offshore to onshore, which affected Q2 and will impact Q3 until returning to similar revenue levels later in the year. During the last couple of calls, I introduced the concept of high-grading revenue and what we are doing to create strength in a competitive industry. I believe one of the main contributors to success is providing operational excellence for our clients when compared to our peer group. We have built a very robust pipeline and are converting that pipeline into new orders, all with the objective of achieving greater capacity utilization with good margins. During the quarter, we booked $62.3 million of annual contract value from new and existing clients. This is the largest quarterly booking we have ever reported and makes new bookings over the past 12 months total approximately $135 million, 50% of which occurred over the past 90 days or just over $92 million year-to-date. This was well above our expectations heading into 2017. The pipeline has continued to build momentum and has increased since our last quarterly update. I am also pleased that approximately one third of the pipeline is now in the health care vertical. This is being accomplished by a strong client metric performance and a stronger and more enabled sales team. Due to this strong growth from new and existing clients, we have made a conscious decision to intensify our margin improvement initiative. We want to use all empty capacity to accommodate higher-margin clients before we spend more money on new capacity. It simply doesn't make sense to invest CapEx to expand capacity if there are assets in place not achieving an acceptable return on invested capital. Furthermore, during the second quarter, we closed the low-margin domestic site in Tell City, Indiana, which removed about 200 seats that was not meeting profitability objectives. Though we don't expect to remove any other seats in the near future, we will constantly assess the profitability of our sites and remain steadfast in making attractive profits on each part of our revenue stream. To give some perspective on our high grading efforts, during the past 18 months and over the rest of this year, we will have replaced approximately $86 million of revenue with higher-margin business. Based on the strength of our pipeline and the progress on margin improvement, we should begin to see improved revenue growth and a better bottom line in the fourth quarter and next year. Being able to work through this transition over a short period of time shows the increased strength and resiliency of StarTek. We do expect to see a benefit to our wireless customers from the iPhone 8 launch this year, which is scheduled to launch in September. The effect will most likely be greater in fourth quarter and not the third quarter, which has a tougher comparison with 2016. From a balance sheet perspective, we continue to reduce our leverage during the quarter, paying down debt by more than $1.8 million to $18.9 million. However, as we continue to ramp new business wins in the second half of this year, there may be a pause in debt reduction. Looking to the remainder of 2017, we will focus on key initiatives to enhance profitability and win and ramp new business. We will focus on customer-centric clients who value the StarTek Advantage System, which provides a differentiated customer engagement methodology, guided by insights and analytics. StarTek's uniqueness is being recognized in the industry, as evidenced by our winning the 2017 Frost & Sullivan North American Award for Competitive Strategy Innovation and Leadership. This was an addition to our recent addition to the Everest Group Contender Matrix. We believe these initiatives will best position StarTek for sustainable, profitable growth. Brian, Don and I will now open the line for questions.

[Operator Instructions] And our first question will come from the line of Mark Argento with Lake Street Capital. Please proceed.

Hey guys, this is John Godin on for Mark. Thanks for taking the question and congrats on the quarter. Just kind of wanted to drill in a little bit. I know, last quarter, you mentioned that a couple of your largest clients were a bit soft. If you can give us a little bit of an update on them and kind of how you see those going forward.

Yes. Right now, outside of the transition that I spoke about overall call volumes are fairly steady right now as we're coming out of the summer slow period in second quarter and looking forward to a strong peak season here moving into later in the third quarter, fourth quarter.

Cool. And with the TriageLogic agreement, do you still expect to kind of targeting 25 states? I guess how is that kind of partnership going? And maybe just some additional color there.

Yes. It's an important technology platform for the clinical care services that we want to provide and really helps streamline a lot of our desktop and workflows for our nurses. And this field is going to be a much more robust platform to take to the market. So really looking forward to seeing that enable our success and further growing those capabilities and services in the market.

Thank you very much guys.

Thank you.

Yes, hey guys, thanks for taking my question. And I guess, first of all, I know -- the wins are pretty dramatic late and it sounds like even some movement to onshore higher yielding seats. I know, since Q4 the revenues have been flatter, I guess, even in Q4 were down a little bit but I know the pipeline is big, and you have all these new wins. How soon does that translate into revenue growth kind of really picking up here again?

We really see that -- and in my statements there if you read them, right now, we -- our goal would be to start seeing that significantly improve in the fourth quarter and onward. One of the reasons you point out the last few quarters being flattish a bit on revenue. And if you recall, it was a few quarters ago that I introduced the phrase high-grading, and that's really when we started that effort in looking back on year-over-year comps. So once we get through the rest of this transition you'll begin to see the strength of that pipeline and conversions play out in our results a lot more.

Got you. And can you see...

Although you can see the effects on our bottom line performance in the last few quarters when you're comparing year-over-year and you're high-grading, which kind of shows you what we're doing there.

Yes. That's a really good point because -- right. And do you expect I mean, it's been kind of just last year a 5% EBITDA. You're tracking more like 6% EBITDA this year. I mean, does that -- is this still kind of on that 25% EBITDA growth a year trajectory for a while?

Yes, that's certainly be over the next couple of years. We should be able to average that.

Okay. And then, I guess, the last...

It's a miracle.

Yes. No, that's great. And the last thing, just I'm sure we'll see it in the 10-Q coming up here too. But a couple of your bigger clients, like maybe if you could just give what rough levels of growth like AT&T, T-Mobile and Sprint?

Well, I can tell you, when you look at the Q, you're looking for the three months ended June 30. AT&T was down versus the prior year quarter. Sprint is going to show down, and T-Mobile will be up by a healthy percent.

Great. Well thanks guys, nice job.

Thank you.

Hey guys, how are you doing?

Hye, Omar, welcome back.

Thank you. Wonderful, wonderful to see that the bookings win. That's really, really amazing. Very, very nice to see. So congratulations on that, and also congratulations on a profitable Q2. That -- those are rarely seen. I wanted to ask about the small impairment charge of around $400,000. Is that related to the Tell City location that was shut down?

Yes, it is.

Okay. So I'm guessing, when you exclude that, your earnings per share was actually $0.06. So it's very nice to see for a Q2. In reviewing the revenue per segment, domestic came in a little bit lighter than what I had expected, but nearshore was pretty strong. Could you add some color to the dynamics going on there?

Yes. It really speaks to some of the things and the dynamics that I spoke to in the script, Omar with some of the high grading initiatives and the transition of work from offshore to onshore and how we're working through that process.

Okay, got it. Okay. And the offshore margin, I also saw what came in a bit lower than the target. Is that -- does that reflect the strong ramps going on there?

Yes. It reflects that a lot of the move to onshore that I spoke about and coming off of the first quarter kind of season highs with some of our retail clientele, but -- and with that shift you'll see the offshore segment in third quarter will be a little soft until we get the new business ramped up that we're bringing on over in those markets.

Okay. And some of your competitors have cited that a challenging hiring environment in the U.S. specifically, but they've described it as, nothing to lose sleep over, is that how would you describe your situation?

No, I wouldn't say nothing to lose sleep over. I will say that I am pleased with the attack plan that our team has put into play. We're seeing good results from those initiatives. We've attacked our ramps and hiring recruiting needs through more variable pay programs that are structured in such a way that they'll be self funded in nature, given that it drives the right behaviors. And so far we're seeing pretty positive results from those initiatives, and that's certainly something that we're watching closely and continue to work on and tweak as a leadership team.

And obviously I mean, that has to mean maybe a little bit of a wage pressure or higher cost. Are you able to pass that along to your clients to try to maintain that minimum margin requirement that you need?

Well, like I said, at this stage, we've addressed it through variable cost, which will be self-funding in nature so it hasn't occurred as a wage pressure item to us yet. And whether you're able to get those costs shared or not, that's to be determined, if in fact we have to address that in that manner.

Got it. Okay. All right. Is there a focus within the company or are you seeing that the new clients that you're booking are taking advantage of more than one of the services that you provide? Or is it usually, they start with one and then they might move into another?

Yes, it varies by client. I will say one of the new clients, one of the new entertainment -- communications/entertainment clients we just landed is a very comprehensive, very strategic alignment and could cover multiple services that we provide. And so I look forward to seeing more and more of those types of engagements as we continue to show our uniqueness and differentiation there.

Okay. Last quarter, you mentioned that in Q3, we should start seeing a larger part of last year's bookings flowing to revenue. Obviously, you're going through some regrading, but I was wondering if you've got to add a little more color in terms of last year's bookings into when it would show on to revenue, given the fact that those were higher-margin business.

Yes. I think, just because that transition we're working through that I spoke about and some of the high grading also involved in that process because of our intense -- being able to intensify our effort around margin improvement, you're probably not going to see in the results the growth in revenue more evident until we get into fourth quarter.

Okay. Understood. But we -- but there should be a larger part of the higher margin business already flowing into the revenue from Q3 onwards. Is that a fair...

To some extent, yes.

Okay. Got it. All right. And now as you guys continue to maintain and grow profitability and knowing that you have accumulated NOLs in the U.S. and enjoyed tax holidays in many locations outside the U.S., can you help us narrow down a tax grade or a range that we should use for our models going forward?

I think the closer we get to that inflection point we'll be able to better communicate information like that.

Okay, sounds good. All right, guys. Well, listen, congratulations on a profitable Q2, which I haven't seen since 2009. So congratulations.

Thank you, Omar. Thank you.

Thanks, Omar.

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.

Okay. Well, I appreciate everyone’s interest. We’ll go, get back to work and look forward to speaking with you next quarter.

Thank you, ladies and gentlemen. You may now disconnect.