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APAC Customer Services, Inc. (NASDAQ:APAC)

Q2 2010 Earnings Call

August 12, 2010 11:00 am ET

Executives

Harriet Fried – Lippert, Heilshorn & Associates

Theodore G. Schwartz – Chairman, Board of Directors

Arthur D. DiBari – Interim Chief Executive Officer

Andrew B. Szafran – Chief Financial Officer & Director

Analysts

David J. Koning – Robert W. Baird & Company

Matthew J. McCormack – BGB Securities

Michael Kim – Imperial Capital, LLC

Robert Riggs – William Blair & Company

Howard Smith – First Analysis Securities Corp.

Josh Vogel – Sidoti and Company

Mark Cooper – Pacific Ridge Capital

David Cohen – Midwood Capital

Operator

Good day Ladies and Gentlemen. And welcome to the APAC Customer Service Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I’d now like to turn the conference over to your host, Ms. Harriet Fried from LHA. Please go ahead.

Harriet Fried

Good morning, and thanks for joining us for APAC Customer Services Second Quarter 2010 Conference Call.

The company issued a press release yesterday afternoon containing financial results for the second quarter. This release is available on APAC’s website as well as on various financial websites.

The company representatives on today's call are Ted Schwartz, Chairman of APAC’s Board of Directors; Art DiBari, Interim Chief Executive Officer; and Andrew Szafran, Chief Financial Officer.

Before opening the call, I’d like to remind you that statements about future operating and financial results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to various risks, uncertainties and other factors that could cause the company’s actual results to differ materially.

Yesterday’s earnings release and the company’s annual report on Form 10-K for the fiscal year ended January 3, 2010, and there’s quarterly reports on Form 10-Q for the fiscal quarters ended April 4, 2010 and July 4, 2010, discuss some of these factors.

The company’s forward-looking statements speak only as of today's date. To supplement the company’s consolidated financial statements, APAC uses EBITDA, a measure defined at a non-GAAP financial measure by the SEC.

A reconciliation of these results to GAAP is attached to yesterday’s earnings release and additional information can be found in APAC’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010, and in its subsequent filings on Form 10-Q.

The company has posted a downloadable presentation to accompany the webcast in the investor relations section of its website at www.apaccustomerservices.com. The presentation can be viewed in the webcast section of APAC’s investor relations website by clicking on the link shown under the title of today's event. It will also be posted under investor presentations after this call.

I’d now like to turn the call over to our Chairman, Ted Schwartz. Go ahead please, Ted.

Theodore G. Schwartz

Thank you, Harriet. And good morning, everyone. It’s my pleasure to kick off the APAC Second Quarter Earnings Call this quarter.

And I’d of course, like to start by saying most of you have probably heard by now, our CEO Mike Marrow has taken a medical leave of absence. Mike underwent a successful medical procedure a week ago and is now recovering with his wife, Irene.

We of course, wish Mike and Irene, the very, very best and look forward to his full recovery and return. While we understand that some of you may have further questions, in respect for Mike’s privacy, this is all we’re going to say about his leave of absence, or its duration, and his future plans at this time.

As part of our continuity planning and debt succession planning on the Board and management level, we are very, very fortunate and pleased to appoint Art DiBari APAC’s COO, as interim CEO.

Art is a critical part of our success, a seasoned veteran of the industry, and has been a part of APAC’s success for the last 2 ½ years, in charge of all of the aspects of our operations, including operations, IP, and account management functions.

The Board of Directors has the highest level of confidence in Art and the APAC management team. Under Art’s leadership, APAC will successfully continue to grow our business.

Thank you very much, and I’m going to turn over to – at this point Art DiBari to introduce himself.

Arthur D. DiBari

Thank you, Ted. I’d like to express my gratitude for the confidence that the Board has shown, both in me and the rest of the APAC team. We all wish Mike a speedy recovery.

I do want to say that my father once told me that when you borrow something, you have to give it back in better shape than when you received it. And that is exactly what we intend to do with the company.

And with that in mind, we will continue to delight our customers with best-in-class service, grow our revenues while expanding capabilities, improve our profitability through greater efficiency, and keep building our team for the future.

As we noted in our press release, we had a strong quarter and have continued our trend for a good year. We are reaffirming our guidance for 2010 and continue to expect revenue to be in the range of 320 million to 330 million. And our full-year EPS to be in the range of $0.44 to $0.46.

I am now going to turn over the call to Andrew Szafran, our Chief Financial Officer, and he’ll provide additional detail on our results for the quarter.

Following Andrew’s discussion, I will highlight some of the successes we have had in the second quarter. After that, we’ll open the floor to questions.

And now Andrew, you’ve got the ball.

Andrew B. Szafran

Thanks, Art. Our results for the quarter are a nice story, and I’m happy to walk through it.

For those of you following along via webcast, my commentary begins on Page 5.

Second Quarter 2010 revenue of $77.4 million was up 17.2% from $66 million in the second quarter in 2009. As in the first quarter, our growth came both organically from existing clients as well as from new clients signed up in the back half of last year.

Gross profit in Q2 was solid at $16.4 with a gross margin of 21.2% compared to a gross profit of $15.4 million or 23.3% gross margin in the prior year’s quarter. Gross margins are running a little lower than prior year, reflecting the increase cost of bringing new facilities online and the ramping up of new business.

Our operating expenses increased this quarter to $8.1 million from 7.6 million a year ago. Looking at our operating expenses as a percentage of revenue shows 10 1/2%, which is a nice improvement over the comparable 11 1/2% in Q2 of ‘09.

Our IBT was $8.1 million for Q2 compared to $7.9 million a year ago. As a percentage of sales, our IBT or pre-tax profit was 10 ½% and just below the midpoint of our expected operating range of 9 to 13%, and consistent with the growth we are experiencing.

Our results from operations yielded net income for the second quarter of $5.3 million or $0.10 per fully-diluted share compared to net income of $7.7 million or $0.14 per fully-diluted share in the second quarter of 2009.

Keep in mind that we recorded income tax expense in the quarter this year of $2.8 million versus 0.1 million last year.

Moving on EBITDA, we were up by $0.3 million at 11.1 million from $10.8 million in Q2 of 09.

On a percentage-of-sales basis, EBITDA was 14.3%, which keeps APAC as one of the top performers in the industry.

As I mentioned in Q1, the company continued to invest in the business and generated positive cash flow during the quarter. We spent $1.7 million in net capital expenditures related to new business and on our IT infrastructure versus $2.1 million in the second quarter of 2009.

We also had $45.4 million of cash-on-hand versus 9.6 million a year ago and versus 40.7 million at the end of Q1. That’s an improvement of $35.8 million from a year ago and almost $5 million since last quarter.

Our day sales outstanding, or DSO, was 43 days for the quarter, which is a little better than our expectation of running in the mid-to-high 40s.

Regarding taxes, our book effective tax rate for the quarter was once again 34.5% as we had indicated it would be. Cash taxes ran at a lower rate of 5% due to our NOL carry forward and other tax credits, also as we had explained previously.

I’d like to quickly review how APAC has performed on a year-to-date basis, which you will find on Page 6 of the accompanying PowerPoint.

Our top line was up 16.8%, our gross margin is down 1.8%, reflective of our growth. We generated net income of $11.9 million versus 18.4 million when we were not booking tax expense.

IBT or pre-tax profit was 11.2% of sales, just over the midpoint of our expected operating range of 9 to 13%. eps on a diluted basis was $0.22.

EBITDA of 24.2 million is a 14.9% return on sales, and a $36 million improvement in our cash position from a year ago, and up 25 million since year-end.

So with my review of the numbers completed, I will now turn the call back over to Art.

Arthur DiBari

Thank you very much, Andrew. On every earnings call we’ve had in the past two years, we’ve reminded everyone of our four priorities. These are ingrained in our culture and what we focus on every day. I would like to review these one more time, and you will find that on Page 7.

Our first priority is to continually enhance the quality, dependability and overall value of the services we provide for our clients.

Our second priority is to maintain a constant focus on eliminating waste and reducing overhead so we can operate as efficiently as possible.

Our third priority is to continue to win business with both new logo companies and existing clients.

And our fourth priority is to ensure we continue to develop and recruit talented people to operate the business and to serve the needs of our clients, both today and in the future.

With respect to improving quality, dependability, and overall value for our clients, I can tell you that I travel frequently to personally attend business reviews with our clients. In fact, I was just with one of our largest clients yesterday.

While there is always room to improve, I am very pleased with our overall report card. The good news is that our high marks are generally the best indicator that we will continue to grow with our clients. We know this and we live it every day.

With respect to our second priority of operating as efficiently as possible, we know that as competitive market and we cannot rest on our past successes. And therefore, continually look at every aspect of our business to drive out expense and increasing efficiency.

Our third priority, winning new business, is the life blood of our enterprise. We’ve added business from both existing and new clients, domestically, near shore and offshore. We have a robust pipeline and expect to continue to close new business in the second half of the year.

Regarding our fourth priority, we continue to build an all-star team. Our ongoing success has had the natural affect of attracting the best to APAC. We are very pleased with how we continue to develop the team, as this is the most important investment in our future.

Now if you’d move to Page 8, I’d like to review some operational highlights from Q2.

First I’d like to cover some selective recent new logo wins that are just beginning to show in our results.

We recently signed Postmedia Network, Inc, which is Canada’s largest publisher of paid English-language daily newspapers. We will be performing the customer services for them in our newest near shore location and are currently training our reps.

We are in the mists of implementing for a leading provider of business solutions. This company is a corporate household name, which was a very important strategic win for APAC. We will be servicing them in one of our Philippines offshore locations.

We are starting up back-office and provisioning services for an important and growing regional bill operating company, and will be utilizing our center in Unica, New York.

And we are commencing services for a leader in satellite def-base network communications; services for this high-tech client will be performed in our Davenport, Iowa site.

What are the takeaways from these wins? Great verticals that we know well and perform with excellence; media, business services and communications, customer care, and BPO services, domestic, near shore, and offshore delivery.

On Page 9 is some more color for our mid-year report card. We are successfully ramping up new logos that were announced in the back-half of last year.

We moved from being pilot into production mode for the world’s most innovated technology and digital media company. We are providing non-voice support for a leader in social networking, and we are growing nicely with our leading media and entertainment provider, both domestically and offshore.

At the same time, we experienced strong organic growth along with our new logos in our traditional vertical markets.

Communications is up 14.6%, Healthcare is up 6.2%, Business Services up 17.4% and Media and Publication is up over 60%.

So Ted, would you please conclude with your thoughts?

Theodore G. Schwartz

Sure, Art. As you can see, there is strong ongoing momentum at APAC. And we feel very, very good about that momentum in the future.

The Board is very pleased with the results for the second quarter and is very proud of how our team performed during the quarter and how it’s performed recently.

Despite the challenges present in the economy, we continue to stay focused and stay aligned with our goals and our guidance.

So at this point, we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dave Koning of Baird. Please go ahead.

David J. Koning – Robert W. Baird & Company

Yeah. Hey, guys. Congrats. You know, very good results in contrast with the group. And what I thought was particularly encouraging I think, in your Q you mentioned 7 out of 8 of your verticals were in gross mode. So it looks very broad based.

And I guess my question is, with such broad-based growth and new signings, you know, kind of what’s your insight into next year? Do you already have enough signed up, you know, that you’d at least expect growth into next year? Can you give us any kind of ideas at least into how you’re starting to think about next year?

Arthur D. DiBari

Yeah, David. Thank you for the question. This is Art DiBari and you know, I believe that we are cautiously optimistic of what we’re going to do next year. You know, we’re going to continue to move forward with our plan and our plan has this growth.

David J. Koning – Robert W. Baird & Company

Okay, great. And just a couple others. Last year gross margin was down each quarter of the year. So it started out with the high point in Q1. This year it looks like we’re starting to follow that same pattern, and I totally understand that, you know, a lot of the reason is as you ramp up clients or open new centers, you know, that can happen. How do you see the rest of this year? It looks like for your guidance you need gross margins to start picking up again. Is that kind of how you’re looking at it this year?

Arthur D. DiBari

Dave, you know, we expect gross margins to be, first of all, not as severe of a drop as last year. So we expect them to be stable to where, you know, they ran in Q2. And then as we hit Q4 where volumes will pick up to start improving in line with the guidance.

David J. Koning – Robert W. Baird & Company

Okay, good. And then finally the cash flow is obviously very strong and you’re building a nice balance. Is it fair to say, you know, that you start to look at buy backs? If you don’t see acquisitions that kind of fit your profile, on the teams like with the whole groups kind of in the penalty box right now that you know, you’re stock’s not reflecting maybe what a normalized valuation should be and it might be a good chance to buy back some stock.

Theodore G. Schwartz

Yeah, no, I think our mentality is just that. I think our mentality is first of all, we’re really happy to be in this position. You know, if somebody had told us three years ago we’d be in this position today, it would have been a long stretch for anybody other than, you know, our team to believe that at that time.

We’re not letting the money burn a hole in our pocket. We don’t feel there’s a gun to our head at this moment that we absolutely have to do something. However, we want to be opportunistic if the right situation comes along, but we want to maintain our discipline and our focus. Andrew, maybe you want to –

Andrew B. Szafran

There’s no doubt that, you know, when we look at how the industry is being valued and how APAC is being valued that we are looking very closely at doing a buy back or perhaps, you know, we’re also looking at acquisitions.

Arthur D. DiBari

Yeah, Dave, this is Art DiBari. You know, I’d like to say that, you know, the whole team is really focused in on really the core and the foundation of what we believe makes us successful and that’s, you know, serving our clients and their customers and providing a high-quality service. So we’ll be looking at opportunities, but I assure you that we will be focused in on our business as it should be in our minds.

Theodore G. Schwartz

We have a great situation here, and we want to make sure that we continue to progress and take advantage of the way we have things keyed up right now. We don’t want to snatch defeat from the jaws of victory.

David J. Koning – Robert W. Baird & Company

That’s great. Great answers, thank you.

Operator

Our next question comes from Matt McCormack of BGB Securities. Please go ahead.

Matthew J. McCormack – BGB Securities

Yeah, hi. So 17% growth, I mean, obviously you’re outperforming the broader industry. I mean, could you just give us your thoughts on why you’re able to grow the way you are, whereas your competitors all seem to be suffering? And then along those lines, in terms of the projections that your clients are giving you, have any of them started to fall short at all?

Theodore G. Schwartz

I think, you know, overall I have to say that we’re really working to our plan. I mean, the plan that’s been put together, the strategic plan, by the Board and management is really the foundation of our focus, really the foundation of what we’re doing on the new account acquisition and the organic growth side right now. It’s really starting to kick in on the new account acquisition side; some of the work we’ve done, some of the team that’s seasoning through and getting experience.

But we make it a point here really not to focus, overly focus on the competition. We don’t know all the gives and takes that are going on with the competition and everything that factors into their views of the industry. But I can tell you that our view is very positive and very optimistic as we look forward into 2011.

Arthur D. DiBari

Yeah, and I’d like to add that, you know, we, earlier I talked a little bit about our focus and you know, it remains constant and we continually drive the same message throughout our business. And you know, we make sure that we have the right processes in place and then we revisit those processes over and over again and keep refining them. You know, I said earlier that we continue to add good, strong-solid people to our organization and we’ll continue to do that.

And you know, when we look at our technology, I mean, we have solid technology and you know, we continue to focus in on making sure that we are able to provide services and we’ve got the right uptime to do that with. So you know, we’re just concentrating our business on our business, and you know, we’re relentless in our pursuit of excellence and I think that’s what helps us, you know, drive the growth engine and the financial results as well.

Matthew J. McCormack – BGB Securities

Okay. And before you talked about strategy buy backs, merging and acquisitions, deploying the capital. Is there going to be any sort of delay in the decision making with Mike’s absence?

Theodore G. Schwartz

I don’t think there will be any delays in our decision making. I think it’s, you know, business as usual and you know, we had a very productive board meeting, really – this past quarter, we really kept – everything just ran really just like the train was very much on track and everything went as usual, you know, in this last board meeting. So no, I don’t think Mike’s absence will delay any sort of decisions or things that we’re contemplating.

Arthur D. DiBari

Great question, Matt. And I’d like to say, you know, Mike and I have worked together for a long time. And you know, early in our tenure at APAC, you know, the entire executive team created our strategic plan. Each year we’ve updated this plan in partnership with our board of directors. It’s a well-constructed plan whose foundation rests upon providing service excellence, like I had said earlier, which will view our growth.

In addition, you know, there’s several strategic measures we must act upon in order to meet the expectations that we set in the plan, and our intention is to keep moving forward, and I think that we’ve got – I know that we’ve got the full support of the board.

Matthew J. McCormack – BGB Securities

Okay. And then just my last question. I guess some investors will argue that you’re selling program has been an overhang on the shares. Given the strength in the business and its current valuation, could you kind of update us on your thoughts on selling, and if you would withdraw that plan?

Theodore G. Schwartz

Yeah, I mean, I think that overall, you know, we’re going to look at the financial aspects of personal, my personal situation as just being that, my personal situation and really not comment on that. We’re going to leave this call about APAC and not about my situation. We made that decision as a team that that’s what we’re going to do today.

Matthew J. McCormack – BGB Securities

Okay. Thank you.

Operator

Our next question comes from Michael Kim of Imperial Capital. Please go ahead.

Michael Kim – Imperial Capital

Hi. Good morning, guys.

Arthur D. DiBari

Good morning.

Michael Kim – Imperial Capital

In looking at the growth in the quarter, can you talk about how much of that was driven by organic growth with existing clients versus new logo companies? Was it fairly balanced between the two, or was it did you see a little bit more strength with the new logo clients?

Theodore G. Schwartz

It’s balanced, Michael.

Michael Kim – Imperial Capital

And how do you see that for the remainder of the year with some of the new additions that you’ve signed?

Theodore G. Schwartz

You know, I would say it’s balanced to our plan. Right? You know, organically, you know, our strategy at APAC is to take our existing customers, you know, delight them with our service, and grow the business. And you know, when you take a look at I think just the mix between organic and new business, I think we always plan to grow organically at a little bit faster rate than we do new logos. But you know, once they become, you know, a logo, a part of our family, you know, we accelerate, you know, the growth cycle through delighting them with our service.

Michael Kim – Imperial Capital

And maybe breaking it down a little bit further with the existing clients, can you talk about expansion with additional programs of some of those clients? Are you taking share from some of your competitors? That’s maybe one reason why if you’re starting to see a little bit of a delta with the other comps in the area?

Theodore G. Schwartz

If you look at the four clients that we highlighted today, it’s a mixed bag. A couple of those are companies that are outsourcing for the first time. A couple of those are folks where, you know, they moved over to APAC due to service issues that they were having with somebody else.

So an answer to your question, it is a mixed result. And I think we see that as, you know, in the future, you know, we’ll be attacking the market in the same manner.

Michael Kim – Imperial Capital

Are you seeing any change in the pricing environments? I mean, your competitors are seeing some volume weakness.

Theodore G. Schwartz

You know, we are really blessed in terms of the diversity of our client base and our healthcare practice, you know. So that aspect of our business and that part of our business has been really, really strong.

There’s a couple segments of our business in the overall corporate, you know, transportation, delivery services, that we’re seeing a little bit of softness in that sector. Some of the telecom businesses have experienced a little bit. But we’ve had that offset by some strength and some growth in other parts of our business. So we’ve been very fortunate that where we’ve had that, our client diversity and our broadness of our base has really helped us.

Andrew B. Szafran

And Michael, I would add that, you know, I’ve seen a little bit of the press. I mean, I really do concentrate on our business, but you know, clients looking for a better value is not new to our industry. And you know, I think, you know, for now until the end of the time, you know, we’ll see that trend continuing. And I think that when you look at, you know, where we are today as an industry, from a pricing perspective, five years ago if you asked me about it I would say no, no we can’t do that. You know, but we’ve found a way and you know, we look at operational efficiencies, we look at execution efficiencies. We partner with our clients to find those, and you know, we unlock value.

Theodore G. Schwartz

I think that’s a noteworthy thing because, you know, I don’t think we’ve every comment, you know, on pricing, you know, as being a reason because we just assume that that’s always going to be something that’s going to be a challenge and it’s always going to be something that has to work in a win-win fashion. But clients are going to continue to look for better pricing, you know, and that will be a year from now, and that will be two years from now. So we have to adjust our operations, our efficiency and our processes to reflect that.

Andrew B. Szafran

Yeah, we want to do things that make sure that we stay ahead of it, and we know that that’s part of the business in our plan.

Michael Kim – Imperial Capital

Okay, fair enough. And then just one quick housekeeping question. DSOs were pretty solid in the quarter, you know, do you expect to continue to maintain it kind of in this low-40s range, or would you expect it to sort of track back to the mid-to-high 40s with historical run rate?

Andrew B. Szafran

Michael, I’d say mid-to-high 40s is where we expect to be normally.

Michael Kim – Imperial Capital

Okay, great. Thank you very much.

Andrew B. Szafran

Thanks.

Arthur D. DiBari

Thank you.

Operator

Our next question comes from Robert Riggs of William Blair & Company. Please go ahead.

Robert Riggs – William Blair & Company

Good morning. Thanks for taking my question. Have you seen any change in the length of the sales cycle over the last quarter, or has that been pretty consistent?

Theodore G. Schwartz

You know, a slight change, but you know, again, historically in our business you see some – it dip quicker than other, and I don’t see anything where it’s like, you know, so far out of the norm where it’s concerning to us.

Robert Riggs – William Blair & Company

Okay, great. And you’ve been able to drive, you know, solid top-line growth with pretty minimal addition to your work station. Can you just comment on, you know, should that continue for the kind of next couple quarters, or just where you are in terms of maybe needing to add some capacity later this year or early next year?

Theodore G. Schwartz

Well, you know, first of all, you know, we continue to enhance our ability to deliver diverse services through, you know, our delivery locations. So I think that over the next year, you know, you’ll see a little bit more diversity in our system. Second, you know, we do have available capacity that we can grow into today. Based on our, you know, outlook, like I said earlier, you know, our plan is to continue to grow the company and you know with that, capacity is a natural occurrence. So increasing capacity is a natural occurrence.

We don’t have to spend a lot of CapEx to hit our plan in terms of new workstations.

Robert Riggs – William Blair & Company

Okay. Great. Thanks.

Operator

Our next question comes from Howard Smith of First Analysis. Please go ahead.

Howard Smith – First Analysis Securities Corp.

Yes, good morning, and congratulations on the solid results once again. I just wanted to follow up on that question. I had the same question regarding the seats only added 28 in the quarter. I know you have flexibility in Dominican Republic, but did you look at Utica, Davenport, some of these places are going to be servicing these new accounts, do you have to build more seats or are those seats already in existence and you just get better utilization out of them for this business announced today?

Arthur D. DiBari

Yeah, Howard, a little bit of everything. But I think within our existing capacity, you know, we do have the ability to grow seats within that capacity. There’s some, you know, reconfigurations that might have to take place. There’s, you know, available floor space that we haven’t built out. So it’s a little bit of everything.

But you know, one of the things that we do strategically is you know, we’ve got, you know, locations that we’ve identified as spots that we have to grow if needed. So it will always be a little bit of everything, but I do think within those segs we do have the capabilities to deliver on our plan and have a little bit of extension beyond that.

Howard Smith – First Analysis Securities Corp.

Okay. And also in regards to the four new accounts today, you usually try and get your nose under the tent, so to speak, and get a nice starter project and then wow them and expand fairly dramatically over time with the clients. Are there any of these where that kind of pattern is not the case?

Theodore G. Schwartz

Yeah. I think the media company we spoke about earlier is one of those that has sort of a finite, you know, group of folks that we’re working with them on. But beyond that, you know, I think that fits into the profile that you’ve described.

Howard Smith – First Analysis Securities Corp.

Great. Thank you much.

Operator

Our next question comes from Josh Vogel of Sidoti and Company. Please go ahead.

Josh Vogel – Sidoti and Company

Good morning. Thanks for taking my questions. Some of your competitors have been talking about their non-labor offerings and I was wondering, you know, what you’re offering on that front and you know, what percentage of your business today is generated through non-labor offerings?

Theodore G. Schwartz

What we’re providing today as a percentage is probably not a large percentage. Maybe a couple of percent, maybe, of our overall revenue. However, we have put a lot of focus on that area, and we have a couple of projects coming up with some very well-regarded strategic accounts that will be non-voice type of related projects, or minimal-voice type related projects in the near future. So we’re looking to obviously optimize our capacity and everybody in the industry is probably trying to do that. We have our own approach as to how we’re doing it, but we have an individual who’s heading that up for us and has made significant progress. Art?

Arthur D. DiBari

Yeah, I agree. Josh, was your question more pointed at without the, you know, non-human, more technology type –

Josh Vogel – Sidoti and Company

Yeah, more tech based.

Arthur D. DiBari

Yeah. You know, we don’t look at that as core to our business, that particular piece of it. But you know, we’re always looking at, you know, new technologies. We’ve got, you know, partners that we work with. So we really feel from an offerings perspective, you know, we pretty much touch all the areas and the capabilities that our current and future clients will need. But we don’t see that as a big piece of our business today. But that will change as, you know, we research and uncover new technologies to drive towards that type of business.

Andrew B. Szafran

And I think as Ted was pointing out, Josh, you know, we’re more focused on other applications with labor, you know, such as BPO.

Josh Vogel – Sidoti and Company

Right. Okay. And just sort of the –

Theodore G. Schwartz

Can I just say one thing. That doesn’t mean, to Art’s point, we don’t see ourselves as the experts in technology solutions that can make our plans more efficient in some of the new things that are coming down the pike in terms of artificial intelligence, recognition, things of that nature. However, it doesn’t mean we’re not out there talking to who the experts are and figuring out ways we can partner with them. But we would probably take more of a partnership approach than try to cast ourselves as the experts in that area, to Art’s point.

Arthur D. DiBari

Agree.

Josh Vogel – Sidoti and Company

Okay, that’s helpful.

Theodore G. Schwartz

We want to be competitive and be there for our clients.

Josh Vogel – Sidoti and Company

Right. Okay. And of the non-voice projects you were talking about, would that be handled domestically or offshore?

Theodore G. Schwartz

Well, you know, it would be both. You know, actually it would be domestic, offshore, near shore. In all of our locations today, we do that work and we’ll continue to expand that footprint based on our client’s needs. You know, some of that stuff is sort of regulated and has to be done in the States, and we’ll do that work. And there’s some other stuff that can be offshore or right shored and we’ll do that as well.

Josh Vogel – Sidoti and Company

Okay. And just one last question. I may have missed it. I apologize. But in the Dominican Republic, I know you had the ability to scale up to about 800 seats. I was curious how many seats you had up and running today?

Theodore G. Schwartz

You mean just in the DR?

Josh Vogel – Sidoti and Company

Yeah, just in the DR.

Theodore G. Schwartz

Yeah, right now we’re at approximately, you know, 20 percent of the capacity that you mentioned. You know, about 150 – 200 seats. And you know, each quarter that’s growing. So you know, we’ll continue to take that site and understand, you know, what our client’s needs are and match them with that location as far as the delivery, a delivery vehicle.

Josh Vogel – Sidoti and Company

Okay. Great, thank you very much.

Operator

(Operator Instructions) Our next question comes from Mark Cooper of Pacific Ridge Capital. Please go ahead.

Mark Cooper – Pacific Ridge Capital

Great, thank you for taking the call. I think Matt asked this question earlier and I’d like to get your perspective, Ted, on, since you’ve been in the industry, on the capitalization of the industry right now. It seems like it’s fairly well over capitalized when you look at the balance sheet of some of these companies. Do you think that’s a transitory thing, or do you think that’s going to be the way the industry is going to be going forward?

Theodore G. Schwartz

Well, that’s a great question. And it’s kind of what I was speaking to before, you know, about the cash, particularly component for balance sheets, you know, burning a hole, you know, in somebody’s pockets, you know.

You know, we’re comfortable right here, you know, we’re going to obviously look at everything that we talked about earlier. But you know, we don’t know. To be honest with you, I don’t know. You know, it’s – you can always find something to do, you know. We think our stock price right now is obviously very – you know, we’re trading in the four and change, right, times EBITDA.

Arthur DiBari

Right.

Theodore G. Schwartz

Somewhere in that area. But I really don’t know. You know, I don’t know. I do see it being a good cash-generation business. A number of the companies are generating cash and I think some of them will obviously try to embrace other companies in the business, or strategic initiatives to try to get into this business and expand along specialized lines. But I think the cash component of the business is real. It is going to be an accumulating scenario.

Mark Cooper – Pacific Ridge Capital

So you don’t see the capital investments going forward of the scope and size that they were say ten years ago when this industry was really growing? Do you see that as changed?

Theodore G. Schwartz

No, no I don’t see the capital needs to bring up capacity being dramatically different from what they were ten years ago as far as what’s required. There’s certainly some efficiencies in some areas and some things have gotten a little more efficient. I think the willingness for companies to go out ahead of the curve as they did ten years ago and put up, you know, 2,000 seats and say, you know, if you build it they will come, or you know, we’re going to wait around a little bit. I don’t see that right now. I really don’t see that. I think everybody’s still being much more careful and much more respectful, you know, of the capital requirements of the business. If that’s what you’re asking?

Mark Cooper – Pacific Ridge Capital

Well, that is. Thanks for answering that.

Operator

Our next question comes from the David Cohen of Midwood Capital. Please go ahead.

David Cohen – Midwood Capital

Hi, guys. I got on the call late. Maybe Andrew, perhaps you could just give me a little bit more depth on the factors that caused some deleveraging in terms of your gross margin this quarter, and how that plays out over the balance of the year.

Andrew B. Szafran

Yeah, David, we talked about how that function of the growth, we brought a couple centers on line. You know, we’re still, in a year-over-year basis, we’ve added our second center in Tucson, we’re bring up down in the Dominican Republic, and we’re also ramping new business. So that’s always going to add to our expense, put a little pressure on our efficiency as we’re experiencing this kind of growth.

Theodore G. Schwartz

I think the other thing is, as prescribed and as per agreed to, you know, with management and the Board, the management’s made some investments in the future. And I think they’ve been outstanding investments. I think they’ve been very, very careful.

But they made investments in people as well. And recently in the last nine months, would you say, Art, the company’s gone on a really phenomenal talent acquisition program where we’ve added some very outstanding talent in a number of key areas of the business; in the operations, in the account management, and the technology area, to really be prepared for next year and beyond.

Arthur D. DiBari

Yeah, there’s no doubt that the talent we’ve added can handle it; a much larger company than we are today.

David Cohen – Midwood Capital

And those, [inaudible], like technology and account management, are the areas that you just mentioned, some of those sound like they would be in cost of services, but some of them are in your SG&A. Is that correct?

Andrew Szafran

Yes. Some of it is in our SG&A and some of it’s in our indirect costs that hit our cost of goods.

David Cohen – Midwood Capital

Okay.

Theodore G. Schwartz

Yeah. And we, you know, I think Mike has said all along that we’re going to operate somewhere between 9 and 13. And that’s going to [inaudible] when we’re in a period where we’re either building capacity as Andrew alluded to, or ramping up some of our talent. Some of this talent, we think, is really special and when we have an opportunity to bring it in, especially in anticipation of revenue growth in the future, you know, I think management is doing the right thing, absolutely.

Andrew Szafran

And I think if you look at us, David, on a year-to-date basis, you know, we’re right in that midpoint of, you know, where we think we’re going to be over the long haul.

David Cohen – Midwood Capital

Okay. Thank, guys.

Andrew Szafran

Okay.

Operator

I’m showing no further questions and would like to turn the call back over to Art DiBari.

Arthur D. DiBari

Thank you, Ali. We’ll close again by saying thanks to everyone for joining us this morning. We really appreciated your attendance and your questions. You know, APAC is a results-orientated company focused on delivering excellent service for our clients and great results for our shareholders. We’re especially grateful for the work our clients trust us to perform and for the dedication of all the people who comprise the APAC team.

We thank you for your participation and interest. We look forward to our next call, where we will be sharing the results of the third quarter.

Operator

Ladies and Gentlemen, that does conclude today’s conference. You may all disconnect, and have a wonderful day.

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Source: APAC Customer Services, Inc. Q2 2010 Earnings Call Transcript

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