Does Bad News at StarTek Mean Bad News for Microsoft?

In the scheme of the world StarTek (SRT:NYSE - news - boards), with around $200 million in annual revenue, is penny ante. But just because it's penny ante doesn't mean its relationships with its big, well-known customers can't provide clues about how its biz is. Of special note is its relationship with Microsoft (MSFT:Nasdaq - news - boards), its biggest customer, which hires StarTek to stuff such things as Windows software and instructions into cardboard boxes.

In recent quarters, Microsoft has become a smaller percent of StarTek's biz. Much of that decline, the company has said, has been the result of StarTek's efforts to generate more business from non-Microsoft customers. But in the past two quarters, in addition to the percentage decline, the dollar amount of revenue from Microsoft has also tumbled. And the slide hasn't been insignificant: After peaking at $51 million in the fourth quarter, based on analysts estimates, it fell to $35 million in the first quarter and to around $28 million in the quarter reported Friday.

That leads to the question: Is there any correlation between the slide in Microsoft's biz at StarTek and Microsoft's earnings? (After all, the overall PC market isn't exactly on fire!) Last quarter, as it turns out, the cutback in Microsoft biz at StarTek was a clear signal that Microsoft's revenue growth was slowing. It wasn't long after the StarTek news that Goldman Sachs analyst (and longtime Microsoft bull) Rick Sherlund shocked the software world by lowering his Microsoft guidance. Now, with Microsoft's biz once again down at StarTek, there are rumblings in some investment circles that last quarter's story could repeat itself.

What's more, while not mentioning Microsoft, StarTek blamed an unexpected shortfall in its own second-quarter revenue on a delayed "product launch" by an unidentified customer. "When they move one project from one time frame to another it has a potential impact on us, because we're so much smaller," StarTek CEO Emmet Stephenson says.

StarTek itself has been the focus of short-sellers, who think that a company that outsources workers to handle order fulfillment and related mundane chores for other companies is overvalued when it trades at around 33 times this year's expected earnings. (Its customers may be high tech, they argue, but StarTek isn't.) What's really troubling, the shorts say, is that despite the fall in revenue, StarTek's earnings zoomed past analyst estimates. Stephenson attributes the rise to customers, themselves fast-growing, signing up for StarTek's highest margin services.

Short-sellers had little to go on to figure out what might really be going on because StarTek released a skimpy income statement and balance sheet. But this much they do know, from what StarTek told analysts (and me, when I called): Interest income and the income from the sale of stocks was $300,000 higher than analysts had expected. That amounts to around 2 cents after taxes, or lower than three of the four analysts who follow the company had been expecting.

Might be why, despite the earnings gain, StarTek slipped 2 3/16 Friday to close at 47 1/2.

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Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at [e-mail]. Greenberg also writes a monthly column for Fortune.