StarTek, Inc.

Q4 2022 Earnings Conference Call

3/27/2023

spk00: Good day, everyone, and thank you for participating in today's conference call to discuss the StarTech financial results for the fourth quarter and full year, ended December 31st, 2022. Joining us today are StarTech Global CEO Bharat Rao and the company's Global CFO Nishit Shah. 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 10-K posted on its website for a summary of these risks and uncertainties. StarTech does not undertake the responsibility to update any forward-looking statements. 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. The reconciliations can be found in the earnings release on the investor section of their website. I would 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.startech.com. Additionally, the company has included a presentation which can be found via the webcast link and on the investor section of the company's website to coincide with the call. Now, I would like to turn the call over to StarTech Global CEO, Bharat Rao. Bharat, please proceed.
spk03: Thank you, Joe.
spk02: Good afternoon, everyone, and thank you all for joining. I'd like to take you to slide three and recap the highlights for the quarter. Trust all of you had the presentation. As we wrapped up for the year, we made significant progress during the fourth quarter, expanding our presence in key geographies, strengthening our existing service offering, building a robust sales pipeline, and improving the health of our balance sheet. Another highlight of this quarter was the stabilization of our gross margins, driven by lower pressure from wage inflation, and our ability to recover expenses associated with onboarding new agents earlier in the year. Throughout 2022, we focused heavily on making strategic investments to optimize our platform to meet our clients' needs, while positioning StarTech for top-line growth and margin improvement. We also made significant progress in our offshoring initiatives as a softening macroeconomic climate has allowed many of our clients to re-evaluate their operations and consider near-shore and offshore delivery options to drive cost savings within their business. As a result of this trend, we have received an increased amount of interest in our near and offshore delivery locations, leading to engaging and productive site visits from potential clients. I'd like to provide you a brief summary of our client's win and performance across different geographies and industry verticals during the quarter. We were pleased to secure two new high-value clients during the quarter that we believe will contribute significantly to our overall revenue mix in the future. The clients won are primarily in the utilities and cable verticals. Services will be delivered both onshore and offshore, with the majority of onshore delivery being delivered under the work-at-home model, utilizing the proprietary StarTech cloud platform, which presents a higher margin than our traditional onshore model. These strong new wins are a testament to the hard work and persistence of our sales team, which we believe will begin to bear fruit in terms of top-line growth beginning next year. We continue to see growth in our core telecom and travel and hospitality and renewed activity in business service. Operations in our travel clients are quickly returning to the pre-pandemic level, and we have expanded our wallet share with some of our key strategic clients in these verticals. I'd like to turn to slide four and walk you through some strategic decisions that we made to strengthen our balance sheet and align our efforts to focus on our score business. The first step that we took was monetizing our stake in MoVate, formerly known as CFO Score. In December 2022, our board began weighing options, and given the tightening environment in the financing world, concluded that it was best for StarTech to monetize its stake and not pursue exercising the call option. The monetization resulted in a one and a half return on our investment in less than two years. We continue to collaborate with the excellent team at Movate on an arm's length basis as part of our efforts to continually bolster our service offerings. The proceeds were used to prepay debt by 41.3 million US dollars. We entered into an agreement to exit our stake in the Saudi joint venture entity, CCC. We have obtained the necessary regulatory approvals and the transaction is expected to close soon. We expect to generate approximately $55 million in net proceeds and this will be used to further prepaid debt. Continuing our focus on prioritizing our core business, we made the decision to explore options to exit our operations in South America, which are limited to only Argentina. For context, Argentina has been facing economic difficulties and elevated inflation levels, which combined with the stringent exchange controls makes it a very challenging operating environment. On revaluation of our capital allocation strategy and geographic priorities, we have decided to initiate a strategic process to identify the right partner to take over our operations in the country. We will provide further update on this in the next quarter. In the meantime, our Argentinian operations are being accounted for underheld for sale accounting policies in accordance with the U.S. GAAP standards. As you will see on slide five, these divestitures have contributed to reducing our pro forma net leverage to 1.3x following the close of the CCC deal, which we expect to result in the strongest balance sheet we've had in five years. This is a significant improvement from where our debt level has decided during the past several years, and given the current interest rate scenarios, these couldn't have come at a better time. Improving our debt leverage ratio will give us more flexibility to invest in our strategic pillar and pursue inorganic opportunities. Overall, these strategic moves demonstrate our commitment to deleveraging our balance sheet and sharpening our focus on our core operations to position us for sustained success in the future. In addition to adding two significant logos and spearheading several critical strategic moves through the quarter, we continue to receive positive recognition for our outstanding leadership and the value we deliver to our clients, which you can see from the summary of the awards and recognition we recently received on slide six. We are especially honored by the recognitions we've received from Comparably throughout the year, including the Best Company for Diversity and the Best CEOs for Diversity Awards as these ratings directly reflect the pulse of our associates. Comparably is a leading workplace culture site and corporate brand reputation platform with widely respected views. And over the span of the last three quarters, We improved our culture score uncomparably from 2.5 to 4.6 on a scale of 5 and have been designated as a choice employer. We continue to be encouraged by the many great recognitions that we receive quarter after quarter, and we believe these are a testament to our commitment to delivering world-class TX services to our clients and outpacing our competitors. Whilst we always enjoy being recognized for our achievements, we are also committed to working behind the scenes to promote diversity, equity, and inclusion at startups. Because of this, we chose to partner with Plurio Digital Therapeutics to provide postpartum mental health support for our US-based associates. We are committed to creating a vibrant workplace for all our 43,000 people around the globe. Implementing region-specific benefits programs in one way, in which we do this, and Curio is a great example. CDC data reveals that postpartum depression affects as many as one in eight mothers in the U.S. and can lead to women leaving the workplace. By introducing the Curio platform, we are able to ensure that new mothers at StarTech have easy access to personalized and flexible postpartum mental health programs they need to thrive both at home and in their professional lives. In this way, we are supporting our team members and the retention of women in our business during this important time in their lives. In summary, This quarter was marked by meaningful progress, attracting two sizable new logo wins, making significant progress towards deleveraging our balance sheet, stabilizing our margins, and undergoing several strategic operational changes made to better align our operations and our core business. Looking ahead, we remain optimistic about the shift to remote work, which presents an opportunity for us to transition more of our customer base towards nearshore and or offshore delivery, further optimizing our operations and increasing efficiency. We are especially encouraged by the numerous near and offshore opportunities within our expanding sales pipeline, which underscores the strength of our business model and our ability to capitalize on emerging trends in the industry. Looking ahead to the new year, we remain committed to executing on our strategic pillars that have served as our guiding principles throughout the past several quarters. As detailed on slide seven, these pillars encompass several key areas, including providing industry-specific solutions, enhancing our technology platform through unique digital partnerships, investing in our workforce to incentivize engagement, and ensuring that our IP infrastructure and security measures are unmatched by competitors and provide a safe experience for us and our clients. During the past quarter, we continue to invest heavily in our people, making improvements in quality, training, reporting, and automation. As a result of these efforts, our associate engagement score reached a record high of 82%. Additionally, we have increased our investment in IT security to protect against data breaches and cyber attacks, especially as we adapt to a sustained hybrid work model. One of our products that serves a good demonstration of the high importance that we placed on security is our award-winning StarTech Cloud, which utilizes spatial recognition systems, voice biometrics, end-to-end data encryption, and ai to aid remote and home-based specialists and improve the business agility real-time looking at slide 8 we remain committed to aligning our digital solutions with our clients strategic goals when we think about how we expand our digital solutions we first make sure that we are aligning our service solutions with our clients strategic goals to do this We utilize a combined agent, customer, and channel-centric approach to offer a wide range of value-added capabilities that can be applied in almost any customer setting. By focusing on engaging and incentivizing agents by leveraging AI to streamline repetitive processes across different channels and ensuring that our versatile service solutions are highly adaptive to our client needs, In one of our partner case studies, for instance, we were able to reduce customer contact by approximately 50%, improve customer satisfaction by 25%, and lower attrition by 30%, all while generating a better average handling time and higher sales conversion. One of the key elements to aligning our digital solution with the needs of our customers and their customers is our partner-driven strategy. We have now proven case studies around some key digital interventions, including StarTech AI Coach and StarTech Gamification that have delivered significant benefits in lowering the overall cost of delivery to our clients while improving service delivery metrics. We recently received a Bronze TV Award in the Best Use of Technology in Customer Service category at the annual CV Awards for Sales and Customer Service for our work in gamification. During 2023, we will be dedicating more effort in transitioning these pilots to become central elements of our ongoing operations, whilst simultaneously looking for new value-added ways to enhance our existing digital partnerships.
spk03: Turning to slide 10,
spk02: which describes the structure and success of our sales approach. We have seen significant traction from our revised sales efforts, which has led to addition of 12 new robots throughout the year. Our approach leverages seven experienced sales professionals in the US and four regional sales team members. To aid our sales leadership in becoming more effective, we are investing in utilizing data-driven marketing to proactively generate new deals across our core verticals, including cable, media, and telecoms, retail and e-commerce, travel and hospitality, financial services, and healthcare. So far, we have been encouraged with the results we are seeing from our reinvigorated approach, and we will continue to prioritize our current sales approach to drive top-line growth, expand our global footprint, and strengthen our presence within our core verticals. Going forward, as we begin to see the return on investment from our sales and offshoring initiatives, we expect these benefits along with the strategic operational moves we made during the quarter to flow through to our results in the coming quarter and position us for incremental margin expansion and top-line growth in 2023 and beyond. As always, we remain committed to pursue sustainable growth while maximizing value to our shareholders, and we are eager to continue executing our strategic growth roadmap for many years to come. I'd now like to turn over the call to Nishit Shah to provide further details on our fourth quarter and the full year financial results, of which you can see a brief snapshot on slides 11 and 12. Thank you all for joining us, and I'll be available to answer any questions you may have during the Q&A session at the end of this call.
spk03: Nishit, I'll pass over the call to you. Thanks, Bharat.
spk01: Before I get started, I would like to note that as a result of our current and planned diversities, we have adjusted our financial statements to exclude the revenue from discontinued operations in the current and their prior year periods. For a full reconciliation of our fourth quarter and full year results, please see the financial tables listed in our quarterly earning release or 10K that will be posted on our investor relations section of our website. Starting on the top line, net revenue in Q4 was 93 million compared to 113.7 million in the year ago quarter. As you are aware, From our earlier calls, we had terminated operations with two large clients, one each in e-commerce and cable vertical in 2021. Adjusting for the high base in the year-ago quarter, the revenue in the current quarter declined by 7.3% year-over-year. The decline was partly due to Forex movement as US dollars strengthened. It related to emerging market currencies where we operate. Adjusting for forex movement, the decrease was 3.6% year over year. The decline was partially offset from a strong performance in our telecom, financial and business services, and travel and hospitality vertical. Gross profit in the fourth quarter was $16.8 million compared to $17.4 million in the ERGO quarter. Gross profit margin increased 280 basis points to 18.1% compared to 15.3% in the ERGO quarter. The increase was primarily due to relatively larger contribution of revenue from high margin near shore and offshore deliveries. This is also reflective of various cost optimization effort undertaken during the past few quarters, especially on the rationalization of our brick and mortar capacities. Adjusted EBITDA for the fourth quarter from continuing operation was $12.1 million compared to $12.8 million in the year-ago quarter. Adjusted EBITDA margin increased 170 basis points to 13% compared to 11.3% in the year-ago quarter. At consolidated level, including the discontinuing operations, adjusted EBITDA increased to 21.3 million compared to 18.9 million in the year-ago quarter. Adjusted net income attributable to startup shareholders from continuing operations increased to 12.6 million compared to 11.1 billion in the year-ago quarter. At a consolidated level, including discontinued operations, adjusted net income increased to 14.1 billion or 35 cents per diluted share compared to 12.9 billion or 32 cents per diluted share in the year-ago quarter. Please note that net income included capital gain from the monetization of stake in MOET. From a balance sheet perspective, as of December 31st, 2022, our cash and the stated cash balance is $72.4 million on December 31st, 2022. This included the proceeds from the redemption of our interest in Movet, which was used to prepay $41.3 million term loan in January 2023. Net debt on December 31st, 2022 was $103.5 million, compared to 141 million at September 30th, 2022. As Bharat discussed earlier, we expect our net debt to significantly decline as we make another prepayment from the CCC transaction proceeds. Now let's review the full year 2022 performance. From continuing operations, net revenue in 2022 was 385.1 million compared to 470.3 million in 2021. Adjusting for the high base of 2021, which included revenues from the COVID-19 support program and e-commerce and cable clients that terminated operations in 2021, our like-for-like revenue grew by 0.8% in 2022. On a constant currency basis, the growth was 4.8% year over year. This was driven by a growth in our core verticals of telecom, travel and hospitality, and business services. Gross margin increased 120 basis points to 15% compared to 13.8% in 2021. The margin expansion was driven by exit of low margin accounts and change in business mix towards near shore and offshore delivery. This also reflects the cost optimization effort undertaken through the last fiscal. Adjusted EBITDA in 2022 from continuing operation was 38.4 million compared to 47.3 million in 2021. Adjusting for the high base in 2021, as outlined earlier, adjusted EBITDA grew year over year while we delivered consistent margin at 10%. At the consolidated level, including the discontinuing operation, adjusted EBITDA was 63.1 million compared to 72.4 million in 2021. Adjusted lending income attributable to StarTech shareholders from continuing operations was 25.9 million compared to 24.8 million in 2021. At consolidated level, including discontinuing operations, Net income was 26.7 million or 66 cents per delta share compared to 27.3 million or 67 cents per delta share in 2021. We repurchased an aggregate of 426,445 shares of a common stock under a repurchase plan during the full year at an average cost of $4.29 per share. This was a testament of our continued confidence in our long-term growth prospects.
spk03: With that, we will now open the call for questions. We will now begin the question and answer session.
spk00: To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then 2. And should you need any operator assistance, please press star, then zero.
spk03: At this time, we will pause momentarily to assemble our roster. And again, if you have a question, that is star, then one to join the question queue.
spk00: At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Rao. Please proceed.
spk03: Hi.
spk02: Sorry, there was a bit of background noise in the background. Joe, thank you. So, thank you, Joe. 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 first quarter 2023 results.
spk03: Your OT. Thank you, ladies and gentlemen. You may now disconnect your lines and have a great day.
Disclaimer

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