StarTek, Inc.

Q1 2021 Earnings Conference Call

5/10/2021

spk00: Good afternoon everyone and thank you for participating in today's conference call to discuss StarTech's financial results for the first quarter ended March 31, 2021. Joining us today are StarTech's Executive Chairman and Global CEO, Aparabh Sengupta, and the company's CFO, Vikash Surekha. 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 based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially. StarTech advises all those listening to this call to review the latest 10Q and 10K posted on its website for a summary of these risks and uncertainties. StarTech does not undertake the responsibility to update any forward-looking statements. Further, the discussion today may include some non-GAAP measures in accordance with Regulation G. The company has reconciled the amounts back to the closest GAAP-based measurements. The reconciliations can be found in the earnings release on the Investors section 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.startech.com. Now, I would like to turn the call over to StarTech's Executive Chairman and Global CEO, Apartheid Sengupta. Sir, please go ahead.
spk04: Thank you, Chino. Good afternoon, everyone, and thank you all for joining. Before we discuss our first quarter performance, I'd like to share our deepest condolences to the families in India and around the world. They are still contending with the tragic consequences of the COVID-19 pandemic. These are difficult and heartbreaking times, and our thoughts are with everyone who's struggling with COVID-19 themselves or has lost a loved one to the virus, both over the past year and during the most recent outbreaks. With the pandemic resurging across certain geographies, we have focused on protecting the health and safety of our employees while flexibly addressing our clients' evolving needs. Access to the vaccine and the pace of broader recovery remains largely uneven worldwide, and the progress on both fronts is still very difficult to predict. About 65% of our global team is working remotely to date. We will continue making the necessary optimizations to our fully established StarTech cloud infrastructure and the proportions of a workforce remote or on campus to prioritize their safety and productivity. This focus on operational flexibility and efficiencies has underscored our work throughout 2021 so far. Even though the first quarter represents a seasonally soft period for our business, we had a record first quarter revenue since the culmination of StarTech and Aegis. We reported increased net revenues year over year and generated strong growth across gross profit, gross margin, and adjusted EBITDA. As we continue to prudently manage our costs and support our workforce and global client base, we are proud to have built a strong strategic and financial foundation from which to propel our progress through the remainder of the year. Tailwinds in our e-commerce verticals have remained strong, though they are not as elevated as they were during Q4 and the peak holiday seasons. As with this broader macroeconomic recovery I mentioned earlier, the recovery of brick-and-mortar retail, travel, and hospitality verticals are also uneven, and likely to remain so for the near future. The fact that we are still largely operating in an environment driven by remote and hybrid work has also properly demand strength in some of our key client verticals like healthcare, cable and media. Within healthcare in particular, we are especially honored to now be supporting the COVID-19 assistance programs throughout the United States. Our services have been instrumental in helping our clients and their end customers get across to the resources they need during these dynamic and difficult times. Over the coming months, we will continue working to ensure that this access becomes even more seamless and widespread. We are making strong progress with our strategic growth initiative so far in 2021, all while preserving the health, continuity, and productivity of our global workforce. Our team has demonstrated incredible resilience and adaptability since the onset of the pandemic both in servicing our customers and in how they have used and optimized our platform in support of our continued growth. I will have more to say on this a bit later in the call about some of our strategic and technological initiatives, including the progress we have made with our investment in CSS Corp. But before I discuss that further, I would like to turn the call to our CFO, Vikas Surekha, to walk you through the first quarter financial performance in greater detail. Vikas?
spk03: Thank you, Aproop, and good afternoon, everyone. I'm jumping right into our results. Net revenue in Q1 increased to $163.1 million compared to $164.9 million in the year-ago quarter. This year-over-year growth reflects continued client demand strength, particularly within our e-commerce, healthcare, cable, and media verticals. As Aproop just mentioned, Q4 represents a seasonally strong period for us while Q1 is one of our stop-step periods. On a constant currency basis, net revenue increased by 2.3% compared to the year-ago quarter. Gross profit for Q1 increased 23% to 24.7 million compared to 20.1 million in the year-ago quarter. Gross margin increased 250 basis points to 15.1% compared to 12.5% in the year-ago quarter. Similar to our top line, The year-over-year increase in gross profit and margin reflect strong growth within a client base and a greater revenue mix of higher margin verticals. Our Q1 gross profit includes benefits from government grants of about $2 million. SG&A, which is selling general and administrative expenses for Q1, was $14.2 million, representing a sequential and year-over-year decrease compared to $15.3 million in Q4, and 17.3 million in the year-ago quarter. As a percentage of revenue, SG&A improved to 8.7% compared to 10.7% in the year-ago quarter. This reflects the ongoing benefits of the cost reduction we have implemented over the last 12 months, and we expect SG&A to remain at current levels going forward. Net loss attributable to startup shareholders for Q1 improved to or a loss of 30 cents per share compared to a net loss attributable to Carthage shareholders of 26.6 million or a loss of 69 cents per share in the year-ago quarter. Our net loss this quarter reflects a one-time charge related to expenses associated with the debt refinancing we completed in Feb of this year. We also had a few one-off tax treatments in this quarter. In the year-ago quarter, net loss included an approximate 22.7 million goodwill impairments, primarily due to COVID-19-related forecasted declines in some of our geographies. Adjusted EBITDA in Q1 increased 72% to 18 million compared to 10.5 million in the year-ago quarter. As a percentage of revenue, adjusted EBITDA increased to 11.1%, which was up 460 basis points compared to 6.5% in the year-ago quarter. The increase was primarily driven by our year-over-year revenue growth, margin expansion, and cost reduction, as well as government grants that we received in certain regions. From a balance sheet perspective, at March 31, 2021, our cash and restricted cash increased to $64.6 million compared to $50.6 million at December 31, 2020 with the increase due to working capital improvements during the quarter. Total debt at March 31, 2021 was 172.8 million compared to 136 million at December 31, 2020. Net debt at March 31, 2021 was 108.1 million compared to 85.4 million at December 31, 2020. The increase primarily reflects the use of proceeds of a recent debt refinancing to repay our previous senior debt facility in full, as well as making the strategic investment in CSX. Even after an increased gross debt after the refinancing, our net leverage on a trailing 12-month basis continues to remain at well under 2x. We continue to remain comfortable with our liquidity positions, as it stands today and are focused on prudently managing non-essential expenses and other costs to preserve the optimal efficiency of our operations. This concludes my prepared remarks. I will now hand over the call back to Aproop. Aproop, over to you. Aproop?
spk04: Hi. Sorry. Thank you, Vikash. Before we open to the call for questions, I'd like to spend some time briefly reviewing our progress with both our existing StarTech Cloud platform and our recent investment in CSS. We have continued to drive success with both and we view that they're key drivers for our growth objectives for the year ahead. Having established StarTech Cloud as a remote work infrastructure over the past 12 months, we have continued to optimize this platform through implementing additional cloud computing, IT service management, and automation services, further enhancing the seamlessness of our operations. These efforts include integration with Microsoft Azure and the AWS capabilities, which have ensured that our platform has the most efficient and up-to-date interface for both agents' back-end work and our platform's customer-facing operations. Through this added functionality and the work we have done on the platform to date, we have achieved elasticity in our StarTech cloud service. we have established a secure and high-tech-enabled platform with video monitoring, strong data connections among agent desktops, and other key elements that ensure optimal productivity and connectivity among our workforce. In addition, we recently entered into a partnership with Automation Anywhere, a leader in robotic process automation, that will help us strengthen our AI-powered RPA capabilities across our customer experience value chain. This enhanced functionality will provide technical guidance, testing, development of software bots, and complementary RPA training and support across our global customer business processes. In turn, this will allow us to drive increased productivity for both our platform and our agents, all while more effectively managing costs and turnaround time. As a quick note, on our overall hybrid and remote work plans, We continue to view the long-term proportion of agents we have on campus versus agents who we work remotely as a 75% and 25% split, respectively. Especially given ongoing struggles with the pandemic in certain key geographies, visibility on when we can reach these numbers on a sustained basis remains challenged. And as I stated earlier in the call, providing the balance and the resources necessary to keep our workforce safe and productive remains our top priority. We have started engagement and discussion with CSS to find areas of collaboration and leverage each other's physical reach and technology prowess to enhance our services to our clients in a mutually beneficial manner. We will continue to share more about our progress in the coming months. As we look ahead in the rest of 2021, I am proud of our team's hard work to continue advancing our operational momentum and drive additional efficiencies throughout our organization. And we will remain focused on further progressing our growth in the months ahead. We have remained resilient through some of the most difficult macroeconomic conditions we have ever faced. And we will continue to support our team and the clients and customers we serve as we collectively work towards recovery. So I think, Chino, this will be now for us to open a call for questions.
spk00: All right. So at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Should anyone need assistance at any time, please press star zero and an operator will assist you. First question comes from the line of Zach Cummins from B. Riley. You are now live.
spk06: Yeah, hi. Thanks for taking my questions. I may have missed this commentary, but, Vikesh, can you tell me kind of the benefit that you got from the government grant in this quarter going down to the adjusted EBITDA line?
spk03: Yeah, hi, Zach. For this quarter, we were benefited by about $2 million that came from government grants.
spk06: Understood. And is it anticipated for that to continue in the coming quarters, or is this viewed as more of kind of a one-off thing?
spk03: Look, that is hard to predict at this stage. For example, in Q4, we did receive some grants from the government. We continue to get these grants as and when we create employment in certain regions. We do get these grants in regions like Saudi, Malaysia, Australia, etc., While the concept is difficult to predict, but we expect some of this to flow through as we move forward as well. But yeah, again, like I said, the concept is difficult to predict.
spk06: Understood. And Aparoop, just given some of the challenges we've seen in India here in the recent months, especially with the rising COVID cases, have you seen any impacts to your business or ability to conduct operations with having your hybrid model in place?
spk04: It's a very good question and I will give a guarded answer because as you know, I'm in the mood in the nation is very somber in the sense that there has been rising COVID cases. But the good news is that our operating team have done a phenomenal job on two fronts. One is to ensure that the morale of the employees are high and we have given them that you can get the best of both worlds, which means that even if you are unable to come to office, we have a technology by virtue of which You can work from your home and at the same time you can support your clients. So we have been able to provide this elasticity to the workforce and therefore today we clearly believe that with almost 60%, 65% of our workforce at home, we are in a position to continue to serve our customers. Now the question is what happens if there is more severity? So from a technology standpoint, we are ready. we have enabled ourselves to go as much as one wants into a work-from-home infrastructure. But currently, the way I'm seeing is that there is less likelihood that the government would do kind of carte blanche lockdown, which will impact our agents' ability to come to work. And the other thing I also wanted to point out is that we are considered as one of the essential services. So even hypothetically, if everything is shut down, and in some of the places it is, public transport is shut down, our employees are able to come to work because they have a special pass called the essential services pass. So that kind of helps for us to continue to work in the manner in which we are working.
spk06: Got it. That's helpful. And then in terms of just looking at the demand across your different verticals in the quarter, I mean, can you go through and see, I guess, or outline some of the areas where you're seeing opportunities and continued strength versus maybe some verticals that have been impacted by the changing environment here in recent weeks?
spk04: See, there is behavior on the verticals that is always there, but I don't predict on a quarter-on-quarter basis as to how those verticals because we have been working with some of these verticals, especially some of these customers, for a long period of time, and some of them for more than a decade. But in terms of call-out, I can clearly tell you that e-commerce, definitely there is a lot of tailwind that we see, not as heightened as what it was during the holiday season, but that is something we are very bullish, and we believe that there is a possibility for us to gain momentum with some of our clients. We're clearly seeing there's a lot of uptake on the healthcare, especially the COVID assistance program, which is kind of a federal work that we have got. So that is also a possibility for us to see growth ahead. So clearly I'm seeing that in pandemic situation, what has happened is while some of the sectors have remained muted, for example, the brick and mortar and the hospitality and the travel and airlines verticals, but in some of the stuff like transportation, e-commerce and anything to do with cloud-based stuff, even IT and some of the technology-related services and some of the new wins that we are having, they are showing momentum of growth. So therefore, what we have done is we've been able to create an organization that is on the one hand elastic in nature and is having the ability to service the sectors that are in the growth mode. So we are on both fronts. At the same time, we are keeping a high watch on some of the sectors that are seeing some softness. But clearly, we believe that we are prepared and much better than what we were last year, if I may just summarize.
spk06: Understood. And just a final question for me. In terms of your early initiatives with CSS, you just give us an update in terms of how things are progressing, just very early stages on your collaborative efforts with them.
spk04: Yeah, I think just to repeat what I said last time, CSS has a very unique capability of doing what you call is a technology support for some of the finest companies who are largely cloud-based and with some of the customers, they are almost sole source provider. So that actually brings in the deep expertise of doing tech support, both onshore as well as offshore. So tech support is, as you know, in the customer experience value chain is increasingly going to increase and you and I talking or doing Microsoft team meetings or Zoom calls or we are trying to automate things. These are all being driven by deep tech companies and these deep tech companies are consumer facing at times and therefore there is obviously a natural need for a lot of support services. So that's what CSS does. So our collaborative effort is to take the advantage of that expertise that they have, and they in turn can collaborate with us to see the deep expertise we have of our understanding and the depth of the consumer experience area. So on these two fronts, I think we have joined ourselves at a front end to go to some of the customers and work with them deeply. And we are clearly seeing that there is a huge amount of opportunity to take this collaboration ahead of us. We are very excited. So this is the very prized capability that we have right now. And the capability that is now in motion is the front end of collaborating in some of the specific deals or in some of the market-facing activities that we are doing in terms of gaining more traction with customers.
spk06: Understood. Well, thanks for taking my questions, and best of luck in the coming quarter. Thanks, Zach.
spk00: Next question comes from the line of Omar Samalat from StarTech. Your line is now open.
spk02: Hey, guys. How are you?
spk04: Hi, Omar. How are you doing?
spk02: I'm good. Thank you. Okay. The first question I had is I noticed, and I think Prakash might have touched on it, but it's a little bit hard to to hear him. The tax expense seemed much higher than usual. I was wondering if you could provide a little color there.
spk03: Yeah. Hi, Omar. How are you? Hi, Gitesh. So you're right. The tax expense for this quarter is higher compared to typically we've seen every quarter we have a tax expense of anywhere between $2.5 to $3 million range, right? And this quarter, we had a higher tax charge because some of the deferred tax assets that we had created for some of the regions, we now believe that the deferred tax assets may not be necessary to carry forward. And therefore, we have had to reverse that provision. So that was one of the big chunks that we took. You know, our non-controlling interest that we have in our JV also reported a higher profit this year, this quarter. And therefore, we had to make additional provision towards that. So these two factors kind of give a one-off charge on our P&L, which we don't expect to continue as we move forward. Okay, understood. And this will be back to the $2.5 million levels of tax charge on the P&L.
spk02: Okay, good deal. Okay. Okay, and then I wanted to congratulate you guys on this is a really great EBITDA number that you achieved on this quarter and EBITDA margin. at 11%. To the extent that you can, Aparu, can you talk about how you see capacity utilization rates evolve throughout this year and maybe why? And what would that mean in terms of EBITDA and cash flow?
spk04: See, this capacity utilization now suddenly got a new definition. What capacity are we talking of? Are we talking of the chairs in the living room? Are we talking of the chairs in our centers? So everybody is grappling with that. But to give you a very precise answer, we clearly are now almost at a capacity agnostic model. We are thinking ourselves that we have an asset which is a capacity which the customers can use. But at the same time, we now have the whole world in which we can really go ahead and spread our wings in terms of the processes that we have put in place. The entire hire-to-retire process, our touchless activities of hiring and executing training, these are game-changing stuff that we have done in terms of deploying the StarTech cloud platform. And we are adding some more capabilities on that front. So we clearly see that the entire functionality of our progress will be how do we manage and effectively manage these customer experience moments of truth. At the same time, how we are growing with our existing customers and how we are onboarding new deals. So on that front, we have clearly seen that we have grown. And at the same time, we have been able to optimize the journey which we embarked more than 12 months ago. So they have kind of fructified and we are seeing the results of that. So I am clearly seeing that in such times, it is very important for us to understand that Some of the elements that drive value for all organizations is how do you manage consumer experience? Are you at the forefront of empathetically managing your consumer experience? We operate in that value chain. Therefore, there is an element of non-discretionary spend and more focus in the areas where our customers are working and we are right at that platform, at that intersection. So I clearly see that we are in the right spot, though the times are very bad.
spk02: Okay. In terms of the telecom segment specifically, you know, lately when it comes to BPO business, it's kind of seen as a stagnant or declining business. I was wondering if you could, you know, tell us how you see this sector going forward for StarTech specifically.
spk04: We have a lot of telecom customers and obviously there is a little bit of volatility there. But I have a very contrarian thinking that today if you look at the entire nation, if you look at the country, the entire nation is running on the telecom backbone with the remote work. So when you have more customers, say the average time that we are spending on either our home network, on our phones, has at least gone up between five to six times. So the more usage happens, it leads to more encounters of problem and therefore additional calls and additional opportunities for customers to be helped. So therefore clearly I am seeing that while there will be volatility on a quarterly basis, technology and telecom especially, telecom companies will continue to have a very critical element in our lives today. And I always see and I always predict in addition to the numbers, as to what is happening in the marketplace is that we have clearly seen that now telecom sector, while it was softening, but now it has got a lease of life and now there's a lot of activity happening. Many of the telecom providers are not only working on voice, they're working on data and some of them are rolling out 5G. So I clearly see that there is an opportunity. To give you a long story short, I mean, we have by and large stabilized our revenues. And from there on, we clearly see that there is a possibility of growth.
spk02: Very good. Good to hear. Okay. I could not help but notice a sentence in your press release that basically said the strong start to the year has positioned us to deliver robust growth in the current fiscal year. I was wondering if you were willing to define robust for us in terms of a type of range, or I don't know if there's anything that you can add in terms of that color.
spk04: See, robust is, I will again just go back to what I said last time, and if you want more color, I'll just give you that color. I said last time in the quarterly call that I can only talk about that we believe, we behave, and we become. So I'll just reiterate that. By believe, I mean that we are focusing on the central pillar of customer experience, and it is actually having multiple wings, a wing of digitization on the one front. The other front is about globalization, how do you manage consumer experience across the globe, citizens serving citizens, offshore foreigners serving citizens, and variability and elasticity. So that's the central pillar that we are focusing, and we believe in that, and that's going to grow. And, of course, the behavior that we are talking of is the focus on growth, focus on optimization, focus on efficiency. Become is the result. So if I have to use the word robust, it means that we have a very strong will as a management team. And where there is a will, there is a way. So if I can use very loosely will as a synonym for robust, I think that's the best I can say.
spk02: Okay, good enough. Okay. All right, and then my last question is, I would like to ask you about your thoughts regarding the stock valuation. You have now shown three pretty solid quarters in a row in terms of EBITDA and cash flow, yet the stock trades at a very low six times trailing 12-month EBITDA multiple, and an even lower four times next 12 months estimated EBITDA multiple. you know, with a very positive commentary that at least I'm hearing regarding revenue growth, margin expansion. So, you know, your thoughts on the sharp, I guess in my mind, undervaluation of the stock and how do you get potential investors to appreciate the story, the hidden value, and the potential returns going forward?
spk04: It's a hard question for me to answer because I cannot have a commentary on an effect, but we are doing whatever is required to be done in terms of taking our story out to a larger set of people. We are hiring an investor relationship person directly who is going to take the narrative and the stories to a larger audience. So I think those are the stuff of work that we can do in terms of what are the elements of telling our stories and more than telling our stories, doing it right and narrating that whatever we have planned, we have done that and that is unfolding. After that, how the market reacts is a function of how the stock goes and what is the level of float, what is the level of volatility that is there. I mean, I'm not... having the wherewithal to answer that question to be very honest but uh because i mean i'm saying i mean honestly you are you asked a question and at times do i not ask that question i ask that question but i have resolved myself that keep on doing your hard work continue to build a great company someday sometime and maybe soon or maybe a little later people will appreciate that uh We wear an unpolished diamond, and we are now sparkling like a star. And we are aiming for the star. We'll land up in the moon. How we do that is not in my hands. It's in the hands of the investors. But we have to passionately take our story, our thesis, our strategy out to the marketplace. And we are putting all efforts on that front.
spk02: Okay, well, yeah, I appreciate the answer. I'm sorry to put you on the spot a little bit. But I appreciate it, and I wish you guys the best of luck going forward.
spk04: Thank you, Omar.
spk00: All right. Again, if you would like to ask a question, please press star 1 on your telephone. Next question comes from the line of Robbie Bamberger from Beard. Your line is now open.
spk01: Yeah, thanks for taking my question. So is there any way to really think about the sequential revenue growth throughout the year? Any reason to think that it shouldn't be similar to recent history of maybe a little minor sequential Q2 decline and then a sequential bounce back in Q3 and Q4?
spk04: Yeah, I can take that and then Vikas can give you some color. Yeah, we have always seen the phenomena of our companies like a camel hump. I mean, you start with a quarter one and then it dips a little bit in quarter two and then quarter three, quarter four, it goes up and then again dips. So that's the wave in this ocean and it goes up. But I think Q2 is generally softer than Q1. So that has been the trend that we have seen so far. However, I can only say that we have put together a lot of growth momentum in the organization. I can only say that there is a lot of will, there is a lot of hard work that has gone behind, so the company is now on a momentum. How soft or how big or how less it would be, we will not be able to give any guidance at this point in time, but we are feeling very comfortable as we see the next year ahead of us.
spk01: Yeah, that makes sense. Thank you. And then just on any one-off potential revenue, would you consider any revenue that you got in the quarter maybe one-off or unsustainable? And I guess how much came from the COVID assistance program, if you'd be able to kind of parse that out?
spk04: We have not got any specific one-off program yet. I mean, it is Even if a one-off program has come, that's probably less than 1%.
spk01: Okay, great. Very helpful. And then just on the overall pricing environment, are clients trying to lower prices now that I guess you have a higher mix of at-home employees, or do they really understand that employees can't go to the office and then they aren't really trying to squeeze on price at all?
spk04: No, I think, frankly speaking, that's not how customers think. Please remember... We work with tier one customers and also please remember that they are giving their most precious asset in our hands, which is their customers. So I always say that this is non-core, but it's critical. We manage a critical process for a customer. So in the value chain of any of our clients, if you take, they are paranoid about that their customers are handled right. It is like giving your baby to a boarding school. You will not squeeze the boarding house with what the rates they are charging. What they want from us is that they want us to have the assurance, they want us to have the ability to perform, they want us to have the equal amount of passion or more in terms of ensuring that there is continuity of business. The kind of work, the heroic work that we did in creating this entire work-from-home model and giving birth to this StarTech cloud, these are something incredible. In fact, some of the customers have paid us more during the pandemic time than the normal rate. I mean, we got calls from customers saying that, hey, you know what, can you do this for us at least because volumes are going up and I know that you have been really working with us so closely. We'll be more than happy to pay you more. So those are some of the conversations that we have seen. So I do not see that customers are going to come back to us with pricing pressure. Of course, I mean, there are volume discounts and stuff like that, which is in a non-pandemic situation. Those are very valid commercial conversations, but I have not seen anybody taking advantage of the situation in terms of squeezing price. Great. Thank you.
spk00: At this time, this concludes our question and answer session. I would like to send a call over back to Mr. Sengupta. Please proceed.
spk04: Thank you, Chino. Really appreciate your help and thank you all for joining us this afternoon and for your continued support of StarTech. I look forward to speaking with you next when we report our second quarter results.
spk00: Thank you, ladies and gentlemen. You may now disconnect.
Disclaimer

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