Startek, Inc. (NYSE:SRT) Q3 2022 Results Conference Call November 9, 2022 5:00 PM ET
Company Participants
Bharat Rao – Global CEO
Nishit Shah – Global CFO
Ronald Gillette – Head, Business Transformation
Conference Call Participants
Zach Cummins – B. Riley Securities
Operator
Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Startek financial results for the third quarter ending September 30, 2022.
Joining us today are Startek’s Global CEO, Bharat Rao; the company’s Global CFO, Nishit Shah; and the company’s Head of Business Transformation, Ronald Gillette. Following the remarks, we’ll open the call for your questions.
Before we continue, we would like to remind that 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. Startek advises all those who are listening to this call to review the latest 10-Q and 10-K posted on its website for a summary of these risks and uncertainties. Startek 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 these 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 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 conference over to Startek’s Global CEO, Bharat Rao. Bharat, please begin.
Bharat Rao
Thank you. Good afternoon, everyone, and thank you all for joining. In the third quarter, we capitalized on the momentum from our sales pipeline, developed digital partnerships and focused on delivering a higher proportion of nearshore and offshore services to our clients. The continuing efforts from our sales and marketing teams and the investments we have made into our sales pipeline saw us secured 10 new clients during the quarter, expanding the static footprint across our core verticals and market segments.
Our sales and delivery teams continue to work closely to retain client accounts and make inroads into new business opportunities. Despite persistent macroeconomic headwinds, we have been able to add 28 new clients year-to-date, a significant proportion of service delivery for the 8 new logos won in this quarter will be delivered from nearshore or offshore centers, exhibiting our focus of driving growth to our bottom line through higher-margin offerings. Amongst the new client wins are a large cable operator in the U.S., a leading edge tech player in India, a large multinational e-commerce platform, a large Asia-based airline and a provider of global audio streaming services.
Despite facing headwinds in the broader economy, including a $5 million foreign exchange-related impact, resulting in year-over-year compression in our top line results, we expanded our margins and made progress in several strategic initiatives that we expect to flow into our P&L next year. Over the last 3 quarters, we have identified 3 strategic pillars to anchor our growth that we believe will position Startek on a sustained path of growth, profitability and delivering superior customer experience.
Our strategic pillars are strengthening our sales ecosystem, improving our technology platform through digital partnerships and delivering world-class service through close collaboration with our clients. We delivered strong segment performance during the quarter, with revenue growth in the Middle East, India and Australia. Growth in India was driven by continuing ramp-ups in operations with some of our largest digital clients in the region. We have replaced competitors within many client accounts and increased our wallet share on the back of our consistent track record of superior performance.
Revenue from the Americas region declined during the quarter due to the termination of operations with a client in the media vertical. We continue to perform well across each of our industry verticals in quarter 3, with continuing ramp-ups within existing telecom clients across the U.S. and South Africa and an improvement in volume within accounts in the travel and hospitality sector.
Within our financial and business services and travel and hospitality verticals, we entered into several expanded contracts with existing clients to grow our services. Our brand awareness campaigns over the past several quarters have been very well received with an increasing interest in our customer experience and our digital solutions supporting the growth of our pipeline.
We were delighted to be recognized as a leader in the Global and U.S. ISG Provider Lens Quadrant Report on Contact Center – Customer Experience Services 2022 for our transformative digital solution suite. We were also recognized as 1 of only 14 truly global CX solution providers by the Everest Group. I feel very positive about these developments and recognize the efforts of our teams across areas to provide best-in-class customer service solutions to our clients so that they can, in turn, deliver engaging experiences for their customers.
In our second pillar, we successfully fostered new digital partnerships to enhance our technology portfolio and value-added capabilities. Our digital capability and cutting-edge technology platform enable us to provide impactful insights to our clients. These insights ensure that we become trusted partners, creating measurable value that in turn results in additional business opportunities. What’s more, our digital solutions amplify the capabilities of our agents to deliver a superior service, ensuring effective brands [towards chip] for our clients and enabling us to optimize our delivery costs.
Throughout the quarter, we secured several new partnerships and initiated pilot programs designed to continue to elevate the quality of our services. Our recently announced partnership with Avaya allows Startek to leverage the OneCloud platform to deliver a combined technology and CX service solution to our clients globally. Through our partnership with Avaya, we aim to support small- and medium-sized businesses as well as emerging enterprises with market-leading CX delivered through a bundled people, technology and data solutions.
We are evaluating a subscription-based model that allows us a faster rollout time and reduces the total cost of ownership, driving a better return on investment for our clients. By combining the Startek agent AI solution with our industry-leading CX technology platform partnerships, we have created a best-in-class modular and scalable platform for both our clients and associates. We will continue to invest in both our IP creation and tap into innovation ecosystem to continuously bring innovative next-gen solutions to market.
Lastly, as we grow globally, it is essential that we continue to collaborate closely with our clients to identify potential areas of optimization and provide actionable insights. Towards this goal, we partnered with the leading telecom providers to leverage an AI-based tool to reduce their speed to proficiency and significantly enhanced agent experience. With a large e-tailer in India, we piloted and designed the pilot to increase agent efficiency by providing agents with tools to manage their performance, celebrate achievement of goals and create a space for healthy competition. One of our primary objectives is to deliver tailor-made solutions, and we remain committed to this responsibility going forward.
As we look forward, our 3 carefully selected pillars of success will remain at the core of our strategic road map. As I mentioned earlier, we were able to improve our margins through our continued efforts to provide cost-efficient services and transition clients from onshore to nearshore and offshore delivery. Furthermore, prudent financial discipline strengthened our balance sheet during the quarter. We consolidated some of our brick-and-mortar sites as more of our agents transition to work from home. Recent upgrades to our platform enable our agents to perform equally regardless of whether they work from a brick-and-mortar site or as part of our at-home operation.
Optimizing our physical footprint has allowed us to increase our capacity by training and hiring additional agents while saving on rental and associated costs. We intend to divert the savings from our fixed costs to our continued investments in our sales, marketing and digital activities. We expect our newly enlarged client portfolio combined with our increased capacity to provide a meaningful uplift to our top line performance in 2023.
As we continue to generate new logos and transition to a higher mix of clients with solutions provided through offshore delivery, we will remain laser-focused on delivering world-class solutions to our clients. Although we incurred a minor setback to our top line, we are well positioned to capitalize on momentum from our sales pipeline and realize incremental margin expansion in the near future.
In summary, we continued to add new logos in this quarter on the back of a robust sales pipeline and foster innovative digital partnerships to strengthen our technology stack. Whilst a strengthening dollar did have a marginal impact, we expanded our footprint across all business segments and verticals with a focus on improving margins. Regarding the preliminary nonbinding proposal by Capital Square Partners to acquire the minority shares in Startek, that Capital Square Partners did not own. As most of you have seen from public announcements, Capital Square Partners has formally withdrawn its proposal after discussions with the Special Committee of the Board of Directors. The Special Committee has since been dissolved.
I would now like to turn the call over to Nishit Shah to provide further details on our third quarter financial results. After Nishit concludes his review of our financial performance, he will turn the call over to the Startek’s Head of Transformation, Ron Gillette, to provide more insight into our strategic initiatives for the remainder of the year and beyond.
Thank you all for joining us. I’ll be available to answer any questions you may have during the Q&A session at the end of this call. Nishit, I’ll now pass the call over to you. Thank you.
Nishit Shah
Thanks, Bharat. Starting on the top line. Net revenue in Q3 was $163.1 million compared to $172.8 million in the year ago quarter. The decrease was primarily driven by the strengthening of the U.S. dollar, the termination of our media client in our America segment, and continued normalization of revenue from one-off COVID-19 vaccination support program that we delivered in the previous period.
On a constant currency basis, net revenue decreased by 2.6% compared to the year ago quarter. The decline in revenue was partially offset by continued strength in our core verticals. Gross profit increased 7.4% to $23.1 million compared to $21.5 million in the year ago quarter. Gross margin increased 170 basis points to 14.2% compared to 12.5% in the year ago quarter. The increase was primarily due to change in business mix with increased delivery in the nearshore and offshore geographies, impact of price increases as contracts are renegotiated as well as lower rent costs following the consolidation of several of our brick-and-mortar sites.
Selling, general and administrative SG&A expenses for the third quarter were $16.5 million compared to $13.1 million in the year ago quarter. As a percentage of revenue, SG&A was 10.1% compared to 7.6% in the year ago quarter. The increase was primarily due to our ongoing investments in sales and marketing initiatives as well as costs related to take-private transaction. The expense is related to take-private transactions are our nonoperating expenses and onetime in nature are added back into adjusted EBITDA.
Our adjusted net income attributable to Startek’s shareholders for Q3 increased by 48.3% to $4.3 million or $0.11 per diluted share compared to $2.9 million or $0.07 per diluted share in a year ago quarter. Adjusted EBITDA in the third quarter increased to $16 million compared to $15.9 million in the year ago quarter. As a percentage of revenue, adjusted EBITDA increased 60 basis points to 9.8% compared to 9.2% in the year ago quarter.
From a balance sheet perspective, as of September 30, 2022, our cash and restricted cash balances increased to $61.3 million compared to $55.8 million on June 30, 2022. Total debt on September 30, 2022, was $169.6 million compared to $170.7 million on June 30, 2022. Net debt, excluding restricted cash on September 30, 2022, was $117.9 million compared to $123.5 million at June 30, 2022.
This concludes my prepared remarks, I will now turn the call over to Ron.
Ronald Gillette
Thanks, Nishit, and thank you all for joining us today. Let’s discuss our strategic focus going forward.
Looking towards the end of the year and into the next, we are focused on taking advantage of the momentum from our sales pipeline to drive new logos and strengthen client portfolio, identifying value-accretive digital partnerships to strengthen our platform and transitioning a greater mix of our customer portfolio with nearshore and offshore delivery to drive higher margins through a more cost-efficient labor approach.
As part of our sales team directive, we will continue to dedicate a number of resources to expand our footprint in the United States. We see this as a breeding ground for opportunity where the cost-efficient solutions we provide are a must-have. Our lean and efficient approach continues to drive our shift towards hybrid and remote work structures decreasing our physical infrastructure across the U.S. and other geographies.
In the market today, we have identified an increasing number of companies willing to offshore their in-house customer experience solutions to cut costs. These are key opportunities that our sales team will be focused on capitalizing and converting upon. Given the transaction — the traction we are seeing, we are proactively expanding our capacity in nearshore and offshore locations to provide state-of-the-art facilities to our customers.
We will continue to leverage our digital partnerships to expand our solution set and carefully utilize marketing dollars to increase our brand awareness across all industries and core segments. In order to transform into a truly digital-first CX organization, we will continue to develop strategic partnerships, giving us access to the latest digital tool set. Ultimately, our innovations and digital partnerships aim to allow our agents to deliver world-class services to our clients.
With the Avaya partnership, we now have the capability to offer CX in a box to our clients at scale. We are making a concerted effort to improve our offshore, nearshore mix. Our near-term strategy is to move current clients from onshore to nearshore services then ultimately transitioning them to the offshore. As we gain digital partnerships, and additional tools to our platform, we will leverage our improved capabilities and technologies to enhance our agents and the quality of customer service they deliver.
Our near-shore and offshore services are improving every quarter, and we believe we have built a strong platform for our customers to feel comfortable transitioning into nearshore and offshore services. Overall, we expect the strategic investments we’ve made in our sales pipeline and marketing initiatives to pave the way for top line growth and meaningful margin expansion in 2023.
We are beginning to see the return on our investments and are optimistic in our ability to convert new and future logos into revenue in the coming quarters. By leveraging our expanded capacity to provide world-class service to our new and future clients, we will be able to service a broadened global customer base and capture incremental increases across our top and bottom line beginning next year. As always, our priority is sustainably growing our company to return value back to our shareholders, and we look forward to executing on our strategic growth road map for many years to come.
With that, we’ll now open the call for questions. Operator, over to you.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question today will come from Zach Cummins with B. Riley Securities.
Zach Cummins
First one for me, Bharat, is just really around the momentum that you’ve seen with new logos. Nice to see that continue here in Q3. How should we think about just revenue contribution from these new logos? Is it starting to ramp here in Q4? Is that more of a 2023 objective?
Bharat Rao
Zach, thanks for the question. I think we’ll see some part in Q4, but most of it essentially the ramp we would see materializing in 2023. Typically, what happens is by the time we in contract get all equipments into — all the related equipment circuits. But all that is completed, it takes almost a quarter or so, which is why we feel that if you want to actually see the ramp and the full benefits of these new logos, you’ll actually see them coming through from 2023. Some of the revenues that we have of the logos won in the first half of the year have actually started translating into revenues in this quarter as well. But to answer your question in terms of most of the impact, you would see that starting from ’23.
Zach Cummins
Understood. That’s helpful. And also encouraging to see the improvement in gross margin here in the quarter just shifting more of your deliveries to the lower-cost nearshore and offshore delivery centers. I mean can you talk about the opportunity that’s still available to you to continue that positive mix shift? It sounds like an increasing number of customers are now open to idea to at least nearshoring or potentially offshoring some of their operations.
Bharat Rao
I think, yes, see, most of our customers, I mean, we’ve got — and we are very happy to be able to support customers that are very large. But equally, there are a number of customers of ours in the mid-market space were clearly feeling the pinch of inflationary trends challenges with being able to attract and retain people. All those are putting a lot of pressure on their being able to perform, provide consistent delivery and support and also do that at a sensible margin. So what we see is, especially in the mid-market space, and Ron alluded to that in his comments, we see a lot of mid-market players who hadn’t really thought about outsourcing, now becoming open to outsourcing. People whose preference to stay onshore, now being quite open to nearshore and offshore opportunities. So we’ve seen a lot more.
I think that trend is clearly here to stay because that will mean without compromising with all the technology we have today, frankly, doing that nearshore and offshore at a fraction of your cost of delivery, onshore, clearly is a very compelling proposition so that the businesses can continue to focus there and focus their priorities on really customer acquisition, getting into product development areas that are really core to their existence. I hope that answer your questions.
Zach Cummins
Yes. Absolutely. That’s very helpful. And final question for me is just right around some of the rent savings that you’ve recognized. I know you consolidated many of your delivery centers. I mean is there additional savings that can be extracted from this? Or how are you thinking about your overall necessary physical footprint versus your kind of hybrid delivery model going forward?
Bharat Rao
We’ll continue to explore that as we — I mean equally, what we are doing is there are a couple of — there are few initiatives we’re looking into. One is, of course, consolidating our overall brick-and-mortar facilities to ensure proper utilization. I think utilization of space is not just important from a cost perspective. But equally, proper utilization also enables us to provide those centers, which are — where we are having — where we have a good capacity utilization with the kind of support from a nonagent staffing perspective because as people want the flexibility to be able to work from home, you equally have people who can come in typically in a hub-and-spoke model.
If you look at [the government], our programs start and they make support. They would like to have the option of being able to come and get the support, get trained and be able to go back. So I think we will continue our efforts on looking at consolidating not just centers but also floors typically within centers. As long as, of course, subject to ensuring that we maintain our the requirements and our contractual obligations from a spacing perspective. But equally, what we are doing is we are also critically looking at our facilities and ensuring that we have the state-of-art infrastructure. So whilst we consolidate space on the one hand, we will continue to invest and invest into building our centers refurbishing them, getting — ensuring that we have very good and provide really good agent experience, especially in centers where you’ve got good occupancy. And because people are working — in many of our geographies, people have come back to work from site. So I think that combination of rightsizing and equally ensuring that we invest in centers where people have started coming back to work from site will continue.
Operator
[Operator Instructions] And at this time, this will conclude our question-and-answer session. I would like to turn the call back over to Mr. Rao. Please proceed.
Bharat Rao
Thank you, operator, and thank you all for joining us this afternoon and for your continued support of Startek. I look forward to speaking with you next when we report our fourth quarter and 2022 full year results.
Operator
Thank you. Ladies and gentlemen, this concludes the conference. And at this time, you may now disconnect.
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