Chad Carlson - President, CEO Don Norsworthy - CFO

Mark Argento - Lake Street Capital Markets

Good morning, everyone, and thank you for participating in today's Conference Call to discuss StarTek's Strategic Transaction and Financial Results for the Fourth Quarter and Full Year ended December 31, 2017. 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 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 amounts back to the closest GAAP-based measurements. The reconciliations can be found in the earnings release on the Investor page of their website, along with a supplemental slide presentation for today's call. 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 and CEO, Chad Carlson. Sir, please proceed.

Thank you, Gigi. Good morning. And thank you all for joining. As announced early this morning, we entered into a strategic transaction with Aegis, a leading global business service provider of customer experience management. This transaction is a culmination of a comprehensive process to identify the best outcome for shareholders, and I am confident we have structured a meaningful combination with an ideal partner. We believe we have substantially derisked the business, while simultaneously creating a platform for long-term shareholder value creation enabling current StarTek shareholders to participate in the meaningful upside that this combination can create going forward. I'm very excited for the StarTek and Aegis employees, who will soon be a force in the global BPO industry, in what I am certain will be a fun and rewarding family environment; for the clients of both StarTek and Aegis, who will now have a global customer engagement partner to support their customers' journey; and for the combined shareholders of Aegis and StarTek. I'm especially happy for the StarTek shareholders, who have been patient throughout this journey as we have worked to differentiate, diversify and grow your company. It gives me great comfort that StarTek shareholders will now have the opportunity for their patience to be rewarded with an investment in a global player with differentiation, scale and almost unparalleled diversification in the BPO industry. In summary, StarTek will issue 20.6 million shares of its common stock to Capital Square Partners, who I will call CSP, the primary shareholder of Aegis, to acquire all of the outstanding common stock of Aegis. Concurrently, CSP will purchase approximately 833,000 primary shares of StarTek common stock at $12 per share, representing a $10 million investment in StarTek. Post closing, this will result in StarTek shareholders owning about 45% of the combined business and CSP owning about 55%. Aegis operates out of eighth countries, with a very diverse revenue base and last year had approximately $400 million of revenue and just under $40 million of EBITDA. Within the eight countries are some very interesting growth markets. For example, Aegis has over 20 sites in India, where more than 2 million smartphones are getting sold every month, and we are seeing an explosive investment in e-commerce. India is a great consumer market, and it would be hard for us to find a BPO player with a better platform to service the India domestic market. Aegis also has a very unique joint venture in Saudi Arabia where Aegis manages the consumer experience as a differentiator in the kingdom. Aegis also has developed some unique technology solutions for clients, which are great complements to StarTek's omnichannel solutions and technology platform. These are just a few examples of the value creation opportunity that Aegis provides. As can be seen in the presentation for today's call, the complementary nature of this transaction and the level of diversification accomplished is almost unparalleled in the industry. First, this combination creates a business with global scale. Together with Aegis, we will establish a global enterprise with over 50,000 employees and operations in 13 countries, serving clients from six continents. The combined revenue and EBITDA of the business in 2017 would have been $700 million and $50 million, respectively. The combined company will also create a business with significant client revenue diversification as we have virtually zero client overlap. Aegis has a strong practice with travel and financial services companies and virtually no clients in the health care industry, which is a vertical StarTek has been growing. Their top three clients also only account for 33% of their total revenue compared to 53% for StarTek, enhancing our revenue diversification significantly. As a combined entity, our top three clients would only account for less than 30% of revenue. We also have zero overlap in our infrastructure. Aegis has approximately 44 delivery centers in eight countries across the globe, with a particularly strong presence in India and Asia, as well as South America, South Africa and the Middle East, regions where we have no facilities. As I mentioned earlier, the combined entity will have operations in 13 countries, with over 60 global locations and over 50,000 full time employees. Both companies have clients needing services in markets where the other has a strong presence and expertise. We see the opportunity to capture a meaningful cross-selling and the associated margin uplift as we can bring existing clients to new geographies and utilize space in existing facilities. In fact, we expect to realize over $30 million annual benefit to EBITDA from revenue and cost synergies by 2020. On Page 6 of the presentation, you can see the financials of both companies and a breakdown of the revenue and adjusted EBITDA contributions, as well as a relative comparison of the pro forma enterprise and equity values. As you can see, both parties believe that our 2017 EBITDA is not fully representative of the value that StarTek brings to the combined enterprise. And we feel that the deal has been structured accordingly. The next page fully lays out our respective geographic footprints and illustrates the extent of the global reach of the combined business. We will truly be a scale global player, capable of serving clients in nearly every region. From the services perspective, we can leverage Aegis' multilingual focus and social media solutions, while they can utilize our omnichannel expertise and differentiated customer engagement methodology, enabling both companies to gain additional wallet share from the existing client base. As I mentioned, the opportunity is to realize over a $30 million annual benefit to EBITDA from the revenue and cost synergies by 2020, further reflecting the benefits of scale and complementary services. One significant efficiency lever will be to improve capacity utilization by leveraging geographic markets, which have different time zone requirements so that we can better utilize existing assets. Overall, considering culture and service capabilities, along with an entrepreneurial spirit, I could not have drawn up a better partner to join in our next evolution of growth. To say we're excited about our growth prospects with this deal would be an understatement, especially when considering the opportunity with Amazon that we announced in January. For those who may not have seen the news, this past January we entered into a multiyear strategic alignment with one of the most innovative and customer-focused companies in the world, Amazon. We granted Amazon warrants to acquire up to 4 million shares of StarTek common stock at a price of $9.96 per share. Vesting of the warrants is tied to future StarTek revenues generated from providing our services to this client with full vesting tied to future cumulative revenues of $600 million or more over a contracted time frame of 8 years. For context, in 2017, revenue from Amazon was in the low to mid-single digits as a percentage of StarTek's total revenue. We've been providing services to them for a little over two years now. The fact that they've entrusted us with this opportunity speaks to our level of differentiation, and most importantly, consistency of execution, reliability, culture and trust. This relationship is a critical win to expedite the diversification of revenue and reduce vertical concentration. We're very excited to have such a strong relationship and anchor client to help guide our strategic growth plans for many years to come. I mentioned reliability. StarTek's IT platform, for the first full year since implemented, finished 2017 with an industry-leading 99.999% uptime, five nines. We track this from the carrier to the desktop application level and have received many client accolades for our stability. We have developed some unique tools, which allow for industry-leading uptimes and greatly reduced mean time to repair. We have examples where we have been able to alert a client of an impending issue, even in their network before any service impact has occurred. The announcement of both of these strategic agreements has been timely given the headwinds we're seeing in the business today with clients in the wireless industry. As you likely noted from our Q4 results, it was a very challenging quarter for us and certainly not up to our expectations. The U.S. wireless industry, a vertical which accounted for 42% of revenue in 2017, is experiencing heavy disruption. You may have heard some of our industry peers discuss similar challenges from their major wireless customers. We believe the lower contact volumes from this vertical are largely a result of increased automation and contact avoidance, as well as high penetration rates of smart devices in the U.S. population. In fact, softness from the iPhone 10 launch was one of the large negative drivers for the fourth quarter, especially when compared to the robust contact volumes we received from the iPhone 7 launch in 2016. The shortage of volume to expectations created a challenge as we also experienced delays in ramping some of our new business wins from earlier in the year. These delays were related to client volume and handover as well as some difficulty in certain labor markets to achieve our hiring needs. We are actively working with these clients to get them on track by the end of Q2. Subsequent to the quarter, our second largest wireless client in 2017, which has been a significant part of our high-grading initiative, made the decision to discontinue a call type which we were performing well. This business will wind down through the second quarter and end by July 1, ending any current business we have with this client. We are confident the two options, which the team is working on to mitigate this loss, will actually result in performance that is accretive to gross margin this year. Aside from this client transition, the high-grading initiative that we discussed throughout last year is beginning to materialize and should show meaningful improvement, particularly in our domestic market in the second half of this year. We also booked approximately $9 million in new business in Q4. Because of the recent softness in revenue and the aforementioned client transition, we have just completed some selective rightsizing in our business to get our cost structure back in line. We are working to have better margins in Q1, but the benefit of these actions won't be clearly evident until Q2 and later in the year as our expected client ramps continue to improve capacity utilization. Over the past several years, we have added clients who are growing globally and this has caused us to take a fresh look at our footprint to determine where we may need new capacity to support their strategic growth. That is certainly one of the things that makes the combination – excuse me, with Aegis so attractive. Their footprint gives us a significant leap globally, but we will be looking at targeted areas in our existing markets as well. Looking ahead, we will continue to build upon our strong pipeline and focus on revenue diversification, operating efficiencies and providing a high level of service to our clients. We will also work diligently to ramp our new business wins as we integrate with the Aegis team, especially given the opportunity with Amazon. We will be a truly global customer engagement solution provider with significant revenue diversification, market differentiation, culture differentiation and meaningful scale to service client needs globally. Our goal has always been to deliver sustainable, predictable, profitable growth for our shareholders. With our high-grading efforts enabled by a record amount of new business won in 2017 and the 2 transformational strategic developments announced this year, we are all the more confident in StarTek's position to execute and deliver on this goal. Gigi, Don and I will now open the call for questions.

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

Hey, guys. Congrats on the transaction, looks pretty transformational. So just wanted to drill down a little bit. From a management corporate governance perspective, are you guys going to be running the combined entity. Maybe you could talk a little bit about -- from a management team perspective putting the two businesses together. And then I also just wanted to talk on geography. It looks like it's pretty synergistic there as well?

Yes. Thank you, Mark, and good morning. From a leadership perspective, the leadership from both organizations will be certainly working through that over the coming days and announce some things very quickly and certainly in line with our proxy process as far as how the team will move forward. And as far as geographically, yes. I mean, there is zero overlap from the geographic perspective and extremely complementary, I would say, when you look at certainly, where most of our operations are run out of U.S., Philippines, near shore [ph] and then what Aegis brings to the - I mean, I really just couldn't have drawn up a better partner from that perspective.

And then in terms of the timings of the synergies, I know you guys talk to kind of an $80 million kind of adjusted EBITDA number with synergies. Is that - how quickly do you think you can realize those synergies? Is that over a year or multiple years?

It's going to take a while. We said, I believe, by 2020. But you also have obviously built-in growth within both organizations as well and the organic plans of both organizations coming together and the opportunities we have there as well.

In terms of the opportunity to do the cross-sell, now that you got the global footprint, I mean any initial thoughts on the increase in opportunity with your existing clients, in terms of being able to win some more of that business that you might not have been able to address previously?

I believe that will be one of the largest areas of success for this combination. The - we won several clients as we've worked to diversify over the past several years who are growing globally and are asking for needs in multilingual elements, certainly some of the Asian languages and things of that nature we've had discussions with clients about and that's not where StarTek was positioned to provide. And certainly, Aegis has great coverage in Asia, and the Malaysia operations offer significant multilingual capabilities to cover that entire region. So those are some of the really exciting opportunities about this combination. Another similar thing is just the opportunity to utilize off our assets. A great example there is Aegis is operating in Australia. They have clients that really look at offshore opportunities out of the Philippines. And so we see some nice opportunities there. So there are several examples like that, as well as just the leadership teams of both organizations have significant experience in client relationships that now with this footprint will certainly be a focus of the combined organizations going forward to look for those meaningful client relationships where we can be a great global partner for them.

Great. Thanks, guys. And again congratulations.

Thank you, Mark.

Thank you, Mark.

Thank you. 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, Gigi. I know it was early for a lot of folks, I'm sure we'll be following up throughout the day and wanted to get this exciting information out to all of you as soon as we possibly could. And I appreciate your interest, and we'll get back to work. Thank you.

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