SRT - StarTek Inc

[APG12]

Omar,

 

I agree, solid quarter. I was a bit disappointed by the lack of new contract wins in Q4 like I was hoping but I recognize it's going to be lumpy and the thesis doesn't require new contract wins. I also agree with you regarding management's poor communication. It looks like they are trying to improve this though: http://www.sec.gov/Archives/edgar/data/1031029/000103102914000010/srtirfinalpresentation.htm

[babysamalot]

Heartland just increased their position to 10% after having the same position size for years.

[no_thanks]

https://www.hvst.com/posts/13734-startek-srt-a-turnaround-that-is-turning

 

 

Write up by Doug Ott at Andvari Associates. 

[babysamalot]

reported .08 cent non-gaap gain for Q3 vs analysts estimates of -.04 cent loss

Adj EBITDA of $5m for the quarter, highest in 5 years...it would have been $6.5m (10.6% EBITDA margin) but for growth investment expenses

 

things are looking real good...I expect results to get even better going forward.

also, there were 54k shares short as of 10/31, so I would expect the stock price to get over $8 very soon. Other analysts will have no choice but to upgrade the shares in the next few days as they increase their earnings estimates.

 

this has now graduated from a value/turnaround story to a cheap growth stock. I see close to a double within the next 12 to 18 months....worth taking a look!

[apparat]

Thanks to your reports I've been following SRT as well, Omar. Very nice call.

[yader]

Would love to see some commentary.

 

Since last post the stock has declined more than 50%.

 

I've tracked company filings, no real insider buying or selling, just continued stock compensation to directors/officers.

[bemidji]

There has been insider buying on the dip. 

 

Privet filed an updated 13D, having acquired more shares in the wake of the earnings announcement:

http://www.sec.gov/Archives/edgar/data/1031029/000095013815000354/privetfundstarteksch13da.htm

 

Insiders would be blacked out from acquiring shares on this latest dip given upcoming earnings.

[apparat]

Now at $3 -- a little surprised it sold off this drastically given the last Q and added verticals. At this point, it's priced such that SRT is losing the majority of its TelCom business.

[babysamalot]

I strongly believe SRT is at a turning point and we should see the beginning of improving results when they report Q4'15 next month. Keep a close eye on SRT. There is an activist investor already in the BOD, Arnaud Ajdler, with a significant 7% position. Board members represent close to 40% of the outstanding shares of the company...I can't say I have seen that often.

 

Take a look at my last report (here attached)...not only do I think we should see the start of much improved operating performance from Q4'15 earnings onwards, I also think they will reach sustained profitability in Q1'16 and positive free cash flow in Q2'16. In the end, I believe SRT will become a ripe takeover candidate in late 2017. in my opinion, this is a classic case of a management sacrificing short term profits for a long term positioning. I have stuck with them for 3 years plus now....and it is about to start showing the progress.

 

I also find SRT to be somewhat shielded from the current market concerns (mostly telecom, healthcare, financial sector exposure and all mostly domestic) as long as they show that their model works. Once they show a sustainable model, I think the current market rotation, I believe is happening, from the high flyers into value stocks may also become a boost.

StarTeK_AnalysisReport_Q3Sep2015_Dec2015.pdf

[dmnouri]

According to this 8k they agreed to a minimum EBITDA of $2.1m for Q4'15 with their bank....but for last quarter (Q3) they actually had negative ebitda, which would be quite a reversal. And since this amendment is dated 1/20, then them achieving at least that minimum for Q4 is a given, Am I understanding this right?

 

also noticing a bump in volume so maybe the market is also seeing what I'm seeing?

 

[babysamalot]

I think I gave you a short reply on the yahoo board, but I can expand a bit here:

 

I believe the 8k released a couple of days ago describing amendments to their Credit Line covenants contained some confirming information regarding their progress. The amendment essentially reaffirms the minimum EBITDA amount they had to achieve for Q4'15 and also sets minimum EBITDA amounts for 2016.

 

Based on the amounts agreed upon with their Lender, I derive the following conclusions:

 

1) Given the date of this amendment of 1/20/16 and that the minimum EBITDA amount of $2.1m for Q4'15 did not change (this minimum EBITDA amount was first agreed upon on Nov 06, 2015 and released as an exhibit in their last 10Q), it is clear to me that that minimum was achieved. Given that the reported AEBITDA for Q3 was negative ($2.25m), the 8k confirms a reversal during Q4 giving Chad Carlson's optimism during the conference call some credence.

 

2) More importantly, the market has not caught up to this. Of the two street analysts that follow SRT, one estimates negative EBITDA for Q4'15 and Q1'16 and the other estimates EBITDA below the minimums agreed upon in the amendment. So both analysts will probably raise their estimates and stock price targets.

 

3) The minimum EBITDA agreed upon  for 2016 is $11.3m. The last time Startek reached these levels was in 2014 when the stock ended that year close to $10/share. Now, these are only EBITDA minimums, not what the Company expects to achieve. Based on what I know from this management and how conservative they are, I believe that they would not have agreed to minimum EBITDA levels they knew they couldn't comfortably achieve. My expectation is for them to at least double that minimum in 2016. 

 

In terms of the market figuring it out....maybe some are starting to. But this name remains well underfollowed.

 

hope this helps...if you have more questions, I will try to address them.

[dmnouri]

Thank you for that detail, makes sense.

 

So given that minimum ebitda, what's your take on how the eps results could look like for Q4?

 

Thanks.

[babysamalot]

it is hard to pinpoint exactly, but we can calculate a range based on the minimum consolidated EBITDA definition from the credit agreement.

 

using that definition, the maximum adjusted (non-gaap) eps loss should be somewhere within 12 to 16 cents. the variation in the range depends on the restructuring charges they take in Q4.

 

the consensus estimate is for a loss of 25 cents...so even at the maximum loss of 16 cents, it would be a beat of 11 cents vs the consensus.

 

in my analysis report, my expectation was for an adjusted eps loss of 10 cents

[dhsieg]

Omar,

Can you post a breakdown of your 2016 revenue growth forecast and how do you come up with these? And what are the other analyst missing in terms of ebidta estimates verses what you expect?

Your thoughts would be appreciated.

Thanks

[dhsieg]

I did notice that Arnaud Adjler one of the startek board members, owner of engine capital, accumulated over a million shares the last couple of years at over $6.00/share. What do you think his exit  stragedy will be?

Also another hedge fund privet, has a board seat and seem to be longtime shareholders. I noticed they were buying as late as may 2015 at much higher prices.

Do you think they will want to average down here at lower prices?

[babysamalot]

sure thing. I will tackle each question on a separate post. First I will tackle the 2016 revenue growth question:

 

A simple back of the envelope calculation for 2016 revenue:

 

2014 Revenue base: $250m

Less Loss of ATT Mobility line of business: ($15m)

Less Comcast/TMo/ATT volume loss during 2015: ($15m)

Plus Full year of Accent acquisition revenue: $65m

Subtotal: $285                    this should be the 2016 base

 

Plus Recovery of Comcast/TMo/ATT volume back to expected levels: $15m

Subtotal: $300

 

Plus Growth from new clients and new business from existing clients: $25m to $50m (this would represent about a 8% to 17% revenue growth over existing programs that are ongoing; i.e. $25m to $50m over $300m)

 

Total Assumed 2016 Rev: $350m

 

I would note that during the first 9 months of 2015, the Company announced $34.8 million in new business annual contract value. Now, it doesn't necessarily mean that they will see exactly that much (could be less/could be more) as it depends on actual call volume they receive....but it provides a good growth target. And there are also fluctuations (program switches, etc.) to take into account so I wouldn't just take the face value of new business wins and assume we would see that exact revenue growth....but again it is a good guide.

 

However, this is NOT how I arrive at my revenue estimates. I follow each facility and try to estimate an FTE count for very quarter based on hiring announcements and job ads. See Exhibit C of my report. Revenues are derived by call volume and it is a function of the FTE count. So my assumption comes from the FTE count of each site during 2016 and the assumption that they will increase their current capacity utilization from around 65% to 75% as the volumes return from their big clients and they ramp new business wins.

 

I will tackle your other questions as soon as I can tomorrow...hope this helps.

[babysamalot]

in terms of your EBITDA question and how my estimates differ from the two analysts that follow the stock, first I would say that they don't have much incentive in getting it right and, since the company does not offer guidance, their estimates are based on mostly historical assumptions. on the other hand, I have skin in the game (a lot of skin).

 

Main discrepancies:

1) I expect a faster recovery from big 3 client volumes that got hit during 2015.

2) I expect a higher gross margin by about 300 basis points; as capacity utilization increases so does the gross margin and my assumptions are in-line with their potential financial model disclosed in their last investor presentation.

3) the EBITDA margin the analysts show is way too low for the revenue level they expect. See slide 24 of the last investor presentation: http://www.sec.gov/Archives/edgar/data/1031029/000103102915000057/srtcorporatepresentation.htm

4) Their SGA line is just a bit higher than mine, but that's more conservative...nothing wrong with that.

5) Analysts showing eps losses with over $300m in estimated revenue does not give SRT credit for all of the repositioning, new IT platform, Accent synergies and client diversification they have already put in place to achieve a higher gross margin.

[dhsieg]

I can see you have done a fair amount of research and I respect the fact that you have put your money where your mouth is. Your answer makes sense. Thanks

[babysamalot]

you are welcomed.

 

to answer your last question about Arnaud Adjler, he accumulated a 7% position in the company and successfully sought a board seat in last year's shareholder meeting. based on his past activism (and pretty successful track record), his goal is to get the company sold. Startek's size and BPO industry's fragmentation calls for a sale of the company. the question is when....my opinion is that pressure to sell will come as soon as they get close to their targeted EBITDA margin levels. I believe there will be both private and public suitors once they stabilize their performance and show sustainable profitability.

 

Privet actually has 2 board seats and they are backed by the founder of the company who still owns about 22%. They have been very opportunistic in accumulating shares....we shall soon find out if they have continued to increase their stake once 13Ds start to come out over the next few weeks.

[dhsieg]

Do you think the uncertainty in the market and economy will derail startek's efforts at meeting capacity utilization and margin expansion?

[babysamalot]

well lets look at the concerns.

 

Effect of China or other emerging market slowdown: None. Revenue is almost entirely US domestic.

 

Potential US economy recession: Marginal. Lower economic activity would effect overall volumes only on a marginal basis; meaning, it would probably affect a company more if their capacity were fully utilized. In Startek's case, yes there could be a marginal effect from existing lines of business, but that would be mitigated by increasing their client diversity and wining new business.

 

Also, the clients they serve are mostly in the telecom, cable, healthcare, insurance and financial sectors that are considered defensive or consumer staples. They do have a small exposure to online retail.

 

As potential clients look to lower their own customer service costs, they will look to BPO companies like SRT to outsource that activity; so in some cases, an economic slowdown could actually bring new business. 

[dhsieg]

I noticed last week sprint was cutting jobs at some their call centers. I know the accent business they bought contracts some with sprint, do you think this will negatively effect startek?

[babysamalot]

given that management has said that the Accent acquisition has been performing at or above expectations and that cost synergies are ahead of schedule, I see the Sprint call center layoffs announcement as a potential positive. It seems Startek has positioned itself well to grab more business from Sprint; so, given that these layoffs are from Sprint's in-house centers, this poses an opportunity for their current vendors like Startek. 

[dhsieg]

Omar,

Congratulations on your startek recommendation. They surpassed expectations after the bell this evening. Sustained and profitable growth is what they are looking for in 2016.

[bargainhunter]

Omar, I've been watching this one silently for a while (and also have a small position). Congratulations on your analysis. A very strong quarter -- just as you forecast. In fact, even better given the unexpected return to net profitability. I'm curious - does this change your 2016 estimates at all?