STARTEK, INC. The following discussion and analysis of the results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . All dollar amounts are presented in thousands other than per share data.
BUSINESS DESCRIPTION AND OVERVIEW
Startek is a leading global provider of technology-enabled business process management solutions. The Company provides omni-channel customer experience, digital transformation and technology services to some of the finest brands globally. Startek is committed to impacting clients' business outcomes by focusing on enhancing customer experience and digital enablement across all touch points and channels. Startek has more than 40,000 CX experts globally spread across 46 delivery campuses in 13 countries. The Company services over 250 clients across a range of industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel & Hospitality, Consumer Goods, Retail, and Energy & Utilities. Startek manages over half a billion customer moments of truth each year for the world's finest brands. We help these brands increase their revenues by enabling better experiences for their customers across multiple channels. As a leading provider of technology-enabled business process management solutions for major global brands-we drive business value through omni-channel customer experiences, digital transformation, and technology services.
We manage programs using a variety of multi-channel customer interactions, including voice, chat, email, social media and back-office support.
SIGNIFICANT DEVELOPMENTS Coronavirus The global spread of the novel coronavirus (COVID-19) has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets, and resulted in significant travel restrictions, mandated facility closures and shelter-in-place and social distancing orders in numerous jurisdictions around the world. Certain of our customer engagement centers have been impacted by local government actions restricting facility access or are operating at lower capacity utilization levels. In response to COVID-19, we have prioritized the safety and well-being of our employees, business continuity for our clients and supporting the efforts of governments around the world to contain the spread of the virus. In light of our commitment to help our clients as they navigate unprecedented business challenges while protecting the safety of our employees, we have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. We continue to work closely with our clients to support them as they implemented their contingency plans, helping them access our services and solutions remotely. In discussion with our clients, we continue to maintain many of our employees on a work-at-home model. We continue to monitor the COVID-19 situation and its impacts globally. Out of an abundance of caution for the health of our employees and to support local government initiatives to stem the spread of the virus, we implemented several precautions at various centers around the world at all times in compliance with local government requirements andCenters for Disease Control and Prevention ("CDC") guidelines.
Considering the uncertainties, the current results and financial condition discussed herein may not be indicative of future operating results and trends.
RESULTS OF OPERATIONS - three months ended
Revenue Our gross revenues for the three months endedSeptember 30, 2020 decreased by 0.93% to$163,097 as compared to$164,630 for the three months endedSeptember 30, 2019 .
Our net revenue for the quarter ended
For the Three For the Three
Months Ended Months Ended
September 30, 2020 September 30, 2019
Revenues $ 163,097 $ 164,630
Warrant Contra Revenue (410 ) -
Net Revenue $ 162,687 $ 164,630
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Our net revenues adjusted for warrant contra revenue for the three months endedSeptember 30, 2020 was lower at$162,687 compared to$164,630 for the three months endedSeptember 30, 2019 . The breakdown of our net revenues from various industry verticals for three months endedSeptember 30, 2020 and 2019 is as follows: For the Three For the Three Months Ended Months Ended September 30, September 30, 2020 2019 Verticals: Telecom 34 % 37 % E-commerce & Consumer 14 % 17 % Financial & Business Services 8 % 8 % Media & Cable 16 % 14 % Travel & Hospitality 9 % 11 % Healthcare & Education 8 % 7 % Technology, IT & Related Services 3 % 2 % Others 8 % 4 %
Our concentration to Telecom revenues decreased to 34% for the three months
ended
During the earlier part of the current quarter, we witnessed softness in the e-commerce and consumer vertical due to lower demand in the underlying industry vertical due to lockdowns and movement restrictions across multiple geographies. However, this eased considerably during the quarter as restrictions eased and there was an increased adoption to e-commerce platforms from end consumers.
The Company has seen growth in other verticals including media and cable, healthcare & education and others which have helped offset the reduction in telecom revenues.
Despite the continuing negative impact of COVID-19, the Company saw significant improvement sequentially as countries and states began to gradually re-open. The Company continues to operate its brick and mortar centers across the globe, adhering to social distance norms and in compliance with local regulations. However, the ultimate COVID-19 impact on sales in the near and medium term remain highly fluid and will continue to evolve with the virus waves.
As of the end of
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Table of Contents Cost of services Overall, cost of services as a percentage of revenue increased to 85.9% for the three months endedSeptember 30, 2020 as compared to 82.7% for the three months endedSeptember 30, 2019 . Employee expenses, rent costs and depreciation and amortization are the most significant costs for the Company, representing 75%, 5.4% and 4.0% of total cost of services, respectively. The breakdown of cost of services is listed in the table below: Three Months Ended September 30, As % of Revenue 2020 2019 2020 2019 Employee Benefit Expenses$ 104,881 $ 106,402 64.5 % 64.6 % Rent expense 7,548 6,898 4.6 % 4.2 % Depreciation and amortization 5,551 5,514 3.4 % 3.3 % Other 21,828 17,327 13.4 % 10.5 % Total$ 139,808 $ 136,142 Employee Benefit expenses: Our business heavily relies on our employees to provide professional services to our clients. Thus, our most significant costs are payments made to agents, supervisors, and trainers who are directly involved in delivering services to the clients.
Employee expenses as a percentage of revenues remained largely flat at 64.5% for the current period as compared to 64.6% for the previous period. With approximately 90% of our headcount now active, we were able to sequentially reverse the deleveraging impact seen in the earlier quarters.
Rent expense: Rent expense as a percentage of revenue increased to 4.6% for the current period as compared to 4.2% for previous period. On a year on year basis, the costs were higher due to new facility taken inJamaica which was partially offset by capacity rationalization inIndia and theUSA .
Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue for the current period was largely flat at 3.4% as compared 3.3% for the previous period.
. Other expense includes technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs increased from 10.5% to 13.4%. The increase was due to higher outsourcing/contract expenses and communication expenses partially offset by lower travelling and recruitment costs.
As a result, gross profit as a percentage of revenue for the current period decreased to 14.1% as compared to 17.3% for the previous period.
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) as a percentage of revenue decreased from 13.9% in the previous period to 9.1% in the current period. The decrease was driven by savings in rent, travelling expenses and recruitment expenses.
Impairment Losses and Restructuring/Exit Cost, Net
Impairment losses and restructuring costs, net totaled
Interest expense, net
Interest expense, net totaled
Income tax expense Income tax expense for the current period was$1,649 compared to$3,436 for the previous period. The movement in interest cost and the implied effective tax rate was primarily due to shifts in earnings among the various jurisdictions in which we operate. Additionally, movement of funds between various geographies primarily to service our debt facilities also attract withholding taxes. 24
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RESULTS OF OPERATIONS - Nine months ended
Revenue
Our gross revenues for the nine months endedSeptember 30, 2020 decreased by 4.13% to$466,926 as compared to$487,054 for the nine months endedSeptember 30, 2019 .
Our net revenue for the nine months ended
For the Nine For the Nine
Months Ended Months Ended
September 30, 2020 September 30, 2019
Revenues $ 466,926 $ 487,054
Warrant Contra Revenue (1,173 ) (730 )
Net Revenue $ 465,753 $ 486,324
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Our net revenues adjusted for warrant contra revenue for the nine months endedSeptember 30, 2020 was lower at$465,753 compared to$486,324 for the nine months endedSeptember 30, 2019 . The breakdown of our net revenues from various industry verticals for nine months endedSeptember 30, 2020 and 2019 is as follows: For the Nine For the Nine Months Ended Months Ended September 30, September 30, 2020 2019 Verticals: Telecom 34 % 39 % E-commerce & Consumer 15 % 16 % Financial & Business Services 8 % 8 % Media & Cable 15 % 14 % Travel & Hospitality 10 % 11 % Healthcare & Education 8 % 6 % Technology, IT & Related Services 3 % 2 % Others 7 % 4 % Our concentration to telecom revenue decreased to 34% of our revenue for the nine months endedSeptember 30, 2020 as compared to 39% for the comparable nine months endedSeptember 30, 2019 . The Company has partially offset this contraction in revenue percentage from telecom vertical with expansion in revenues from other verticals. While our net revenues in the nine months were negatively impacted by COVID-19, primarily related to lockdowns and lower active workforce, the Company did see improvement throughout the current quarter as countries and states began to gradually re-open. 26
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Table of Contents Cost of services Overall, cost of services as a percentage of revenue increased to 87.4% for the nine months endedSeptember 30, 2020 as compared to 82.9% for the nine months endedSeptember 30, 2019 . Employee expenses, rent costs and depreciation and amortization are the most significant costs for the Company, representing 76.1%, 5.7% and 4.2% of total cost of services, respectively. The breakdown of cost of services is listed in the table below: Nine Months Ended September 30, As % of Revenue 2020 2019 2020 2019 Employee Benefit Expenses$ 309,849 $ 308,664 66.5 % 63.5 % Rent expense 23,146 22,591 5.0 % 4.6 % Depreciation and amortization 16,926 16,380 3.6 % 3.4 % Other 57,082 55,429 12.3 % 11.4 % Total$ 407,003 $ 403,064 Employee Benefit expenses: Our business heavily relies on our employees to provide professional services to our clients. Thus, our most significant costs are payments made to agents, supervisors, and trainers who are directly involved in delivering services to the clients. Employee expenses as a percentage of revenues increased to 66.5% for the current period as compared to 63.5% for the previous period. The increase in employee costs, as a percentage of revenues, was largely attributable to deleveraging resulting from COVID 19 negative impact on revenues. The Company also had to incur higher costs on ensuring employees had a safe and secure work environment and following all the protocols and guidelines issued by various local authorities across the geographies we operate in. Rent expense:Rent expense as a percentage of revenue increased to 5.0% for the current period as compared to 4.6% for previous period. Rent expense increased as a percentage of sales driven by deleveraging resulting from the COVID-19 negative impact on revenues.
Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue for the current period was marginally higher at 3.6% as compared 3.4% for the previous period.
Other expense includes technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs marginally increased from 11.4% to 12.3%. The increase was due to higher outsourcing expenses and communications expense partially offset by lower recruitment and travelling costs.
As a result, gross profit as a percentage of revenue for the current period decreased to 12.6% as compared to 17.1% for the previous period.
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) as a percentage of revenue decreased from 14.8% in the previous period to 10% in the current period. The reduction is as a result of various measures implemented to rationalize costs and leading to sequential decline in selling, general and administrative expenses.
Impairment Losses and Restructuring/Exit Cost, Net
Impairment losses and restructuring costs, net totaled$24,545 for the current period as compared to$2,069 for the previous period. The expense for the current period primarily relates to goodwill impairment loss of$22,708 and restructuring expenses of$1,837 . As a result of the recent global economic disruption and uncertainty due to the novel coronavirus ("COVID-19") pandemic the Company had during the first quarter of the current period, taken a goodwill impairment charge of$15,820 ,$4,332 and$2,556 , forIndia ,South Africa andAustralia reporting units, respectively. Interest expense, net
Interest expense, net totaled
Income tax expense Income tax expense for the current period was$5,808 compared to$4,550 for the previous period. The movement in interest cost and the implied effective tax rate was primarily due to shifts in earnings among the various jurisdictions in which we operate. Additionally, movement of funds between various geographies primarily to service our debt facilities also attract withholding taxes. 27
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Table of Contents RELATED PARTY DISCLOSURE In 2018, a transaction bonus was payable to Mr.Aparup Sengupta (Chairman & Global CEO) for the successful completion of the Startek-Aegis merger. This was accrued in the financial statements for the year ended31 December 2018 as "Acquisition related cost". An amount of$500 has been paid during the quarter to Mr.Aparup Sengupta with the remaining balance payable in due course.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows generated by operating activities, our working capital facilities and term debt. We have historically utilized these resources to finance our operations and make capital expenditures associated with capacity expansion, upgrades of information technologies and service offerings, and business acquisitions. Due to the timing of our collections of receivables due from our major customers, we have historically needed to draw on our working capital facilities periodically for ongoing working capital needs. The Company expects to meet all its debt obligations in a timely manner. Considering recent market conditions and the on-going COVID-19 crisis, the Company has re-evaluated its operating cash flows and liquidity profile and does not foresee any significant incremental risk. We continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Additionally, we continue to limit discretionary spending across the organization and re-prioritizing our capital projects amid the COVID-19 pandemic.
Cash and cash equivalents and restricted cash
As atSeptember 30, 2020 , cash, cash equivalents and restricted cash held by the Company and all its foreign subsidiaries increased by$23,958 to$56,585 as compared to$32,626 onDecember 31 , 2019.The restricted cash balance as atSeptember 30, 2020 stood at$8,122 as compared to$12,162 as atDecember 31, 2019 . The restricted cash pertains to debt service reserve account (DSRA) that we have to maintain in accordance with the Senior Term Agreement and also for certain term deposits that need to be maintained in accordance with some of our lease and client agreements. As part of the negotiated amendment and restated facilities agreement, the existing cash balance in the DSRA shall be temporarily released in phases and can be utilized to meet interest payment obligations towards the senior term facilities. The Company will have to restore DSRA byMay 2021 .
Cash flows from operating activities
For the nine months endedSeptember 30, 2020 andSeptember 30, 2019 we reported net cash flows generated from operating activities of$64,297 and$6,621 respectively. The$57,676 increase in net cash flows from operating activities was due to a net increase of$53,452 in cash flows from assets and liabilities, a$24,921 increase in non-cash reconciling items such as goodwill impairment, deferred tax expense, depreciation and amortization and warrant contra revenue, and a decrease of$(20,697) in net income. The increase in cash flows from assets and liabilities was driven primarily by sale of certain accounts receivables under a non-recourse factoring arrangement.
Cash flows used in investing activities
For the nine months endedSeptember 30, 2020 , andSeptember 30, 2019 we reported net cash used in investing activities of$9,712 and$7,710 respectively. Net cash used in investing activities for both the periods primarily consisted of capital expenditures.
Cash flows generated from financing activities
For the nine months endedSeptember 30, 2020 andSeptember 30, 2019 we reported net cash flows used in financing activities of$30,370 and generated from financing activities of$5,394 , respectively. During the nine months endedSeptember 30, 2020 our net borrowings decreased by$38,749 mainly due to full repayment of asset-backed line of credit facility in theUSA from the proceeds of the non- recourse factoring arrangement. Additionally, the Company was also able to lower its working capital and revolver drawdowns. The Company collected$8,379 from the issuance of common stock out of which$7,500 was from the issue of common stock to an affiliate ofCapital Square Partners , the principal shareholder of the Company. Debt
For more information, refer to Note 9, "Debt," to our unaudited condensed consolidated financial statements included in Item 1, "Financial Statements."
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Table of Contents CONTRACTUAL OBLIGATIONS
Smaller reporting companies are not required to provide the information required by this item.
OFF-BALANCE SHEET ARRANGEMENTS
Apart from certain non-recourse receivables factoring as mentioned in the note 9 of the notes to the consolidated financial statements, we have no other material off-balance sheet transactions, unconditional purchase obligations or similar instruments, and we are not a guarantor of any other entities' debt or other financial obligations.
VARIABILITY OF OPERATING RESULTS
We have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control, including: (i) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients; (ii) changes in the volume of services provided to clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal nature of certain clients' businesses; and (vi) variability in demand for our services by our clients depending on demand for their products or services, and/or depending on our performance; (vii) Due to COVID- 19 pandemic.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in conformity with US-GAAP, management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions upon which accounting estimates are based. Management applies its best judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results may vary significantly from the estimates we have applied. Please refer to Note 2 of the Notes to the Consolidated Financial Statements in our Form 10-K for the year endedDecember 31, 2019 for a complete description of our critical accounting policies and estimates.
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