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APAC Customer Services, Inc. (NASDAQ:APAC)

Q3 2010 Earnings Call Transcript

November 10, 2010 11:00 am ET

Executives

Jody Burfening – IR, Lippert/Heilshorn & Associates

Kevin Keleghan – President and CEO

Andrew Szafran – SVP and CFO

Analysts

Tim Wojs – Robert W. Baird

Howard Smith – First Analysis

Matt McCormack – BGB Securities

Robert Riggs – William Blair & Company

Michael Kim – Imperial Capital

David Cohen – Midwood Capital

Josh Vogel – Sidoti & Company

Mark Cooper – Pacific Ridge Capital

Operator

Good morning and welcome to APAC's third quarter 2010 earnings conference call and webcast. This call is being recorded.

At this time, I would like to turn the conference over to Ms. Jody Burfening of LHA. Please go ahead, ma'am.

Jody Burfening

Thank you, Mimi. Good morning. Thank you everyone for joining us for the third quarter 2010 conference call for APAC Customer Services. The company issued a press release yesterday afternoon containing financial results for the third quarter of 2010. This press release is available on APAC’s website, as well as on various financial websites.

Company representatives on today's call are Kevin Keleghan, President and Chief Executive Officer; and Andrew Szafran, Senior Vice President and 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 3rd, 2010 and its quarterly reports on Form 10-Q for the fiscal quarters ended April 4th, July 4th, and October 3rd, 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 certain measures defined as non-GAAP financial measures by the SEC, EBITDA and adjusted EBITDA. 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 3rd, 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 IR website by clicking on the link shown under the title of today's event. It will also be posted under Investor Relations after this call.

With that, I would now like to turn the call over to Kevin. Good morning, Kevin.

Kevin Keleghan

Good morning, Jody and thank you. And I also want to thank everyone else for joining us on the third quarter conference call. Although this is only my second month as CEO of APAC, I'm no stranger to the company, having served on the Board for the prior year.

Since joining as CEO, I have been spending as much time as possible trying to our key clients, visiting our call centers, and while there spending as much time with the management team as possible. This is validated observations that I made while I was on the Board that APAC has a very talented that is focused on exceeding the expectations of our clients.

Our clients have told me that they hold us in very high regard as one of their most trusted partners. Specifically, they have told me what they like about APAC is our excellence in execution, our flexibility in customized solutions to meet their needs, and the engagement at levels of the company from the associate all the way up to the CEO. All of these differentiate us, especially when compared to our largest competitors.

They also shared what they'd like to see from us next in the future. They want to see an expansion of our global footprint and they want us to continue development of our complementary services that support our best-in-class call center management. For the first initiative, they have been very pleased with our expansion in the Philippines, our growing presence in the Dominican Republic and jointly exploring new delivery locations in locations like Latin America.

As far as the second initiative, we've been piloting adjacent non-voice and back-office services with a number of new and existing clients. And although it's early in our development cycle for these services, we feel very optimistic about growing these areas in the future.

As we noted in our press release, we had a strong quarter and have continued our trend for a good year. While we continue to expect revenue to be in the range of our original guidance of $320 million to $330 million, we anticipate that it will be at the lower end of the range. Furthermore, we expect our full year EPS to be $0.41. This modification is chiefly being driven by the expenses associated with transitioning the CEO.

I am now going to turn the call over to Andrew Szafran, our Chief Financial Officer, to provide additional detail on the results for the quarter. Following Andrew's discussion, I will add some additional comments, and then after that we will open it up to questions. Andrew?

Andrew Szafran

Thank you, Kevin. We posted another solid quarter and I'd like to walk through the results. My discussion begins on Page 6 of the presentation.

Third quarter of 2010 revenue of $76.9 million was up 12.5% from $68.4 million in the second quarter [ph] of 2009. As in the first half of this year, our growth came both organically from existing clients, as well as from new clients signed up in the back half of last year, plus some revenue from new clients commenced earlier this year.

Gross profit in Q3 registered $14.85 million with a gross margin of 19.3% compared to gross profit of $14.2 million or a 20.7% gross margin in the prior year's quarter. Gross margins continue to pace a little lower than prior year, reflecting the increased costs of bringing new facilities online and the ramping up of new business.

Our operating expenses increased this quarter to $8.1 million from $7.5 million a year ago. Looking at our operating expenses as a percentage of revenues shows 10.6%, which is an improvement over the comparable 11% in Q3 of '09. I'd also like to point out a few specific charges included in this past quarter.

First, there was a $1.27 million charge related to a severance payment for our former CEO. Secondly, within our operating expenses there was also a $262,000 expense item recorded for the acceleration of stock options, also directly related to the CEO transition. Third charge, we reversed $550,000 of our legal settlement reserve based upon a lower opt-in rate by eligible participants. Adjusting for these CEO transition related impacts, plus removing the favorable legal reversal would yield operating expenses of $7.2 million for the third quarter for a percentage of revenue of 9.3%.

Our IBT was $7 million for Q3 compared to $6.7 million a year ago. As a percentage of sales, our IBT or pretax profit was 9.1% and at the low end of our expected operating range of 9% to 13%. Adjusting for the CEO transition related impacts improves our IBT to $8.5 million or 11.1%, which is the midpoint of our expected operating range.

Our results from operations yielded net income for the third quarter of $4.6 million or $0.085 per fully diluted share compared to net income of $6.6 million or $0.12 per fully diluted share in the third quarter of 2009. The impact of the CEO transition related charges on our EPS was $0.02. Also, keep in mind that we recorded income tax expense in this quarter of $2.3 million versus $0.1 million last year.

Looking at our adjusted EBITDA, we were up by $1.1 million at $10.7 million from $9.6 million in Q3 of '09. On a percentage of sales basis, adjusted EBITDA was 13.9%, which again demonstrates APAC is one of the top performers in the industry.

As I've mentioned in our earlier reviews this year, the company continued to invest in the business and generate positive cash flow during the quarter. We spent $1.6 million in net capital expenditures related to new business on our IT infrastructure versus $2.5 million in the third quarter of 2009. We also had $49.7 million of cash on hand versus $16.2 million a year ago and versus $45.4 million at the end of Q1. That's an improvement of $33.5 million from a year ago and just over $4 million since last quarter.

Our DSO was 49 days for the quarter, which is on the high side of our expectation of running in the mid to high-40s. Regarding taxes, our book effective tax rate for the quarter was 33.4%, slightly favorable to the 34.5% we have been previously and we expect to be at 34.2% for the year. Cash taxes ran at a lower rate of 3.4% due to our NOL carryforward and other tax credits, as we have also explained previously.

I'd like to quickly review how APAC has performed on a year-to-date basis, which you will find on Page 7 of the accompanying PowerPoint.

Our top line was up 15.3%. Our gross margin was down 1.6%, reflective of our growth. We generated net income of $16.5 million versus $24.9 million when we were not booking tax expense. Our IBT or pretax profit is 10.5% of sales as reported and 12% excluding the litigation settlement, the severance, and options acceleration compared to our expected range of 9% to 13%.

EPS on a diluted basis was $0.30. This includes the full impact of the litigation settlement and the CEO transition. Adjusted EBITDA of $37.6 million is a 15.7% return on sales. We also have a $33.5 million improvement in our cash position from a year ago and up $29 million since year-end.

So with my review of the numbers completed, I'll now turn the call back over to Kevin.

Kevin Keleghan

Thank you, Andrew. On our last call, Art DiBari partnered with Andrew to deliver on our results for the earning call. I'd like to thank Art for the excellent job he did as Interim CEO and continues to do as our Chief Operating Officer. During the last two-and-a-half years, Art's leadership has contributed to an outstanding turnaround by focusing on the clients, operations excellence, and continuous improvement.

So, while we started this call talking about some of the new things that we are working on for areas of growth, I want you rest assure that our primary focus remains on daily execution for our clients.

Personally, I have spent a significant portion of my career in operations with great companies. I was the senior operator at AT&T Universal Card when we won the Malcolm Baldrige National Quality Award. I also had a similar role at GE Capital during the initial implementation of Six Sigma. I know firsthand that we will only grow with our clients and win new clients by continuing to deliver with excellence.

As you can see, there is ongoing positive momentum at APAC. The Board is very pleased with the results for the third quarter and is very proud of how our team continues to perform despite the challenges present in the economy.

So at this point, we will open up the call for questions. Operator, please proceed.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Tim Wojs of Baird. Your line is open.

Tim Wojs – Robert W. Baird

Yes. Hi, guys and welcome, Kevin.

Kevin Keleghan

Thank you.

Tim Wojs – Robert W. Baird

I guess, first question just – I know you've been with – in the CEO position for only a couple of months now. But is there anything that you've noticed that you might like to change going forward or is it really just business as usual?

Kevin Keleghan

Well, I don't think it's ever business as usual. The mindset and the culture of the company is continuous improvement and it is for myself also. So clearly, I don't see anything broken, but there is always room for improvement. We are clearly going to focus – continue focus on the client-first, focusing on execution, probably add some more quality principles to the organization because I think what's critical to our client is consistency in performance and not seeing variation in performance.

So putting in some quality tools to make sure we continue to do that. And then clearly, a lot of focus on the sales process in driving new logos into the company. I'd say a lot of the growth we've had over the last couple of years has been more with our existing clients through great performance. And although we've had some very good success over the past year in delivering new logos to the company, there is still upside opportunity for us to do an even better job there.

Tim Wojs – Robert W. Baird

Okay. And then I guess, just looking at – you mentioned – you talked about expanding the global footprint. I know it's something that your clients were asking of you guys. I mean, is there any – in terms of capacity, I mean, how comfortable are you with your current capacity and when do you think you might need to start adding (inaudible)?

Kevin Keleghan

Well, we are doing fine with the offshore capacity in the markets we are today. So we've continued to grow in the Philippines, we will continue to look for expanding capacity there, because there is a great deal of capacity there. We've had some initial success in Dominican Republic, especially for bilingual language and we will continue, we have room for growth there.

What we are looking at now are new markets, based on feedback from our clients that they want to grow with us in other markets and Latin America does appeal to us quite a bit for a couple of reasons. First is the obvious bilingual capability. Second, the cost structure. And then third, we are also looking at markets where there is multilingual capabilities so that we can serve worldwide customers in other areas such as Europe.

So we are fine with capacity, we are just looking at new markets.

Tim Wojs – Robert W. Baird

Okay. And then I guess just on the revenue guidance, were there any big drivers behind maybe moving towards the lower end of guidance or is it generally just a little bit softness in a broad base within the client base?

Kevin Keleghan

Yes, I'd say the principal thing that we've seen is a little bit slower ramps from some of the new logos that we've signed over the past year. I think we were probably a little optimistic with how fast those accounts would ramp or were told that they would ramp and so we are – a couple of the logos we signed took a little bit longer through negotiation onboarding, whatever than what we originally in the plan. But they are signed and delivered now and then the ramps have been a little bit slower than we expected. But we are very optimistic – but we are out of the gate from a performance perspective with those clients and we are very optimistic for the long-term growth with those new clients.

Tim Wojs – Robert W. Baird

Okay. And then just, Andrew, a quick question on CapEx. What is your expectation for CapEx for the remainder of the year?

Andrew Szafran

I think, Tim, we will be between $12 million and $14 million.

Tim Wojs – Robert W. Baird

For the entire year?

Andrew Szafran

For the entire year.

Tim Wojs – Robert W. Baird

Okay. Cool. Well, thanks a lot.

Operator

Thank you. Our next question comes from Howard Smith of First Analysis. Your line is open.

Howard Smith – First Analysis

Good morning and Kevin, welcome as well from me.

Kevin Keleghan

Thank you, Howard.

Howard Smith – First Analysis

Hello, Andrew. I have some follow-up questions I guess from the last call regarding revenue. Kind of at the lower end of the range – it's a fairly wide range, but implied somewhere between 1% and say 7% growth year-over-year in Q4. Kind of a deceleration from the double digit you've been seeing. And I'm curious as we look maybe even beyond that, what type of industry or company run rate you feel is appropriate as a target in the medium term? And then I have a follow-up.

Andrew Szafran

Well, Howard, it really is dependent on exactly how we continue to ramp up in Q4, where we are exactly going to fall out. I would say – the other thing is that we had a very strong Q4 last year, which is – it's a tough comp for us. But an answer to your question, I would say that on a normalized basis, we are going to continue to push to be in the high-single to low-double digits growth.

Howard Smith – First Analysis

Okay. And then it looks like in this quarter, the communications vertical year-over-year saw some softness. And I'm curious if there's any specific client programs or would it be seasonality, because it's year-over-year, but maybe you could address that.

Kevin Keleghan

Yes. In general, I think there has been some softness over the past year in the communications vertical and I think a lot of our competition saw it before us. Clearly with one or two of our larger clients, given our top-level performance, we were the last ones to kind of feel the pinch in the falloff of their volume. That being said, now that that's pretty much behind us, we are ramping with our clients and with our largest telecom clients in all call centers and feel good about the future potential in that sector going forward.

Howard Smith – First Analysis

Okay. I'll leave it there. I may get back in the queue. Thank you very much.

Kevin Keleghan

Okay.

Operator

Thank you. I'm showing our next question comes from Matt McCormack of BGB Securities. Your line is open.

Matt McCormack – BGB Securities

Yes, hi. Good morning. Just going back to the fourth quarter revenue guidance, Andy, you did mention that the fourth quarter last year was very strong. It looked like it was up $17 million sequentially. I mean, was there any kind of bonus revenue or one-time project revenue that occurred in the fourth quarter of last year, and or anything that why wouldn't you expect that to happen in this fourth quarter?

Andrew Szafran

Well, the first part of your question is, no. There was no special project or bonus revenue last year. I think it was just the culmination of strong ramping from the midpoint in the year into the end of year. So that's the first part. And what was the second half of your question?

Matt McCormack – BGB Securities

Sure. Just why – I mean, why would – how come – what's different this – going into this fourth quarter than in the year-ago quarter?

Andrew Szafran

I don't think there – I think it's just the starting to the ending point. I would think that the revenues that we have stabilized on the business that we ran that we won last year and ramped up. And some of the potential upside is going to be how strong the holiday season is and how much lift we get on the health care side.

Matt McCormack – BGB Securities

Okay. And Kevin, you just mentioned the strength that you are expecting to see with your largest client. I guess, how much of that – or is there any way to kind of quantify the benefit from possibly that client starting to offer the iPhone [ph] at the beginning of next year?

Kevin Keleghan

I don't know if we can quantify it. I mean, clearly we are growing with the client as they are showing their forecast. And we expect to be in the mix as they grow next year, and that's one of the reasons why we've been ramping up. One of the things that we might get to the point where we run out of capacity in that client's call centers and may have to start discussing new markets with them if their growth comes through like they expect it to.

Matt McCormack – BGB Securities

Okay. And then you talked about complementary services and one thing you mentioned was non-voice services. I mean, what – I mean, non-voice, it seems like that's kind of not – I mean, it seems like most of the players are doing that in the industry. I mean, what other areas that APAC hasn't explored do you think would be complementary to your client base?

Kevin Keleghan

Yes, great question. The bottom line is highly related call center services like e-mail and chat that are highly complementary to the call center piece have been in place for quite some time.

What we've been getting more and more questions and inquiries about and people asking us to give them proposals on are other back-office functions. Sometimes, it's difficult to define them explicitly because in each client, it's different, but it would be things like claims processing, like mailroom operations, back-office functions, like image processing, fax processing, things of that nature. So, we are getting more and more demand for that.

We have clearly developed the expertise to deliver those capabilities, have hired people from the industry with those backgrounds to drive that for us. We – our expectation was that most of that business would come from existing clients, but we've actually been pleasantly surprised that a lot of it's actually coming from brand new logos this year. So, it's – the pleasant surprise is that the foot in the door was with back-office operation with some new people instead of call center, and then that could open up some new call center business.

Matt McCormack – BGB Securities

Okay. And then share buyback was announced, I guess, during the quarter. It looks like you've bought back 160,000 shares out of the $5 million authorization. It seems kind of small, considering the large amount of cash on the balance. Is that the kind of run rate we should expect or was it tabled [ph] because of the CEO transition? If you just kind of give us your thoughts on return of some of the capital to the shareholders?

Andrew Szafran

It's – hi, Matt, it's Andrew. Great question. But yes, your latter proposition there is what happened. We had to set aside the program for awhile while we were working through the CEO transition. And then once that was complete, our trading window was closed. But the program is still in effect and we are going to be executing on that based on market conditions.

Matt McCormack – BGB Securities

Okay. Thank you so much.

Operator

Thank you. Our next question comes from Robert Riggs of William Blair & Company. Your line is open.

Robert Riggs – William Blair & Company

Hi, thanks for taking my question. Just a quick follow-up on the use of cash. As you think about expanding into more kind of back-office processes, any acquisition opportunities out there that you would consider?

Kevin Keleghan

Absolutely, in the future. Clearly, what we are doing right now is going through our planning process for 2011 and longer term and identifying what are the right opportunities for us. Once again, when I have a lot of conversations with our clients, where do they give us permission to be, what they think that we could be very strong at, and then you go through the build-versus-buy type conversations. If it's directly related to what we do and we have the skills in-house, I'm going to look to build before I buy, because it's potentially cheaper. But clearly, acquisitions in the future are something that we are going to consider strongly.

Robert Riggs – William Blair & Company

Great. And then one quick follow-up. Just in terms of the sales force, as you are looking to do kind of more of those back-office work, is that a pretty easy sale for your existing sales force or is there any additions that you need to make there?

Kevin Keleghan

It is. The difficult part a lot of times is it happens through detective work. So what we've done a very good job of saying here are the types of services that we offer today and can offer in the future as part of the sales pitch, and I mentioned a bunch of those services before.

The really good salespeople are finding them good detective work. They are in with a client or they are in with a prospect, talking about call center first and then asking them about their other business challenges and what works for them and what doesn't work for them and that's we've uncovered a couple of our opportunities in the past, is by knowing our customer and looking to come at them with customized solutions.

So I think to (Multiple Speakers) – direct answer is, do we have the salespeople that can sell the service? Yes.

Robert Riggs – William Blair & Company

Okay. Thank you.

Operator

Thank you. Our next question comes from Michael Kim of Imperial Capital. Your line is open.

Michael Kim – Imperial Capital

Hi, good morning guys. Just talking about third quarter again, how much of the growth was driven by new logos versus existing and then also, can you comment on the pricing environment, especially as you pursue more new logo clients and adding other additional verticals?

Andrew Szafran

Hi, Michael, it's Andrew. The split was mixed, pretty balanced between both organic and new logo really. So we calculate new logo as the first year of revenue with a new name, so balance between the two. And you want to comment on the pricing environment?

Kevin Keleghan

Yes. I mean, as far as – just to follow up on Andrew's comment, I mean, clearly anyone that we booked last year in 2009, just the way we'd define it would be organic growth. So given the fact that new logos take a little while to ramp up, you are always going to have a little bit heavier mix on the organic side and the people that you book this year are more growth for next year.

And as far as pricing is concerned, we see it as still very competitive, but rational and reasonable. So, we have to continually focus on our cost structure and make sure that we are competitive and maintain the margins we have. But it's competitive, but rational right now.

Michael Kim – Imperial Capital

And as you pursue other verticals outside of maybe some of your core areas that you have a lot of familiarity with, are you finding the pricing environment similar to your existing verticals?

Kevin Keleghan

It really depends client by client. The fact of the matter is that I think a lot of our growth – future growth could potentially come out of health care and financial services and depending on the service, they are going to be better than some of the verticals of clients we have today, but it really comes down to client by client. It's hard to generalize for all verticals.

Michael Kim – Imperial Capital

Okay. And then just going back to the fourth quarter implied guidance then, is there any change in pricing or the pricing environment that you are anticipating this year versus last year or is it your sense that it should be fairly comparable?

Kevin Keleghan

I think it's fairly comparable.

Michael Kim – Imperial Capital

Okay. And then regarding the cash and looking at adding some of the adjacent non-voice services, what level of leverage would be comfortable given your fairly consistent EBITDA and cash flow generation? It does seem like you could lever by, I don't know, two, three times or more. What level would you be comfortable with?

Andrew Szafran

We – Michael, we could definitely lever up. We've got lots of borrowing capacity, we have a lot of financial institutions that would love to lend to us for the right type of either acquisition deal or internal investment. But – I mean, certainly we could lever up to two times without feeling any pressure. That said, we have no plans to do so in the immediate future.

Michael Kim – Imperial Capital

Okay. And then just lastly on the complementary services, do you have a target or an objective in mind in terms of mix of voice versus non-voice services?

Kevin Keleghan

Yes, not – sometimes it gets hard to define what those are, because somebody could say that e-mail and chat, which is a decent percent today, is non-voice. But we kind of throw it in the voice bucket since a lot of the same associates might perform the service. So, we don't have a mix goal right now. Once again, we are focused on the client first and if a client would rather focus on voice, then we will go there. So we are just trying to grow both as quickly as possible.

Michael Kim – Imperial Capital

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from David Cohen of Midwood Capital. Your line is open.

David Cohen – Midwood Capital

Hi. You guys referenced some – I mean, what's hard to sort discern in your numbers quarter to quarter is the amount of investment that you are making in training and you see the decline in the gross margins, the lowest gross margin for any quarter of the year. But what's not seen is effectively what capacity you are building and what revenue you expect to support that investment. And can you give us a sense of – I mean, the fact that you've made short-term trade-off for some presumably growth over the next few quarters and maybe you can give us a sense of the – what that payoff looks like?

Andrew Szafran

It's a good question, Dave. We are always making those investment decisions and often the startup costs are something that we have to absorb in our gross profit. I think we've spoken before to the larger group about how the gross margins are going to fluctuate and this would be on the lower end, which is indicative of making that type of investment in training and bringing on new business.

So I think we've demonstrated in the past that we are smart about that. We make good decisions and we see the benefits of that in terms of future growth, accretive EBITDA, accretive earnings, and I think what we are asking is folks to continue to believe that we are making the right decisions in that regard.

David Cohen – Midwood Capital

And the – would the fourth quarter – how would you characterize your expectation of similar investments in the fourth quarter? More or the less the same as you made in the third quarter?

Andrew Szafran

Less.

David Cohen – Midwood Capital

Yes.

Andrew Szafran

Yes, we are seeing – we are going to see more of the – those efforts bearing fruit in Q4 and into Q1.

David Cohen – Midwood Capital

Okay. Do you have visibility on what kind of basically capacity addition – investments around capacity additions you need to make in Q1 or is that still remains to be seen?

Andrew Szafran

Yes, it's not so much capacity. This is on personnel.

David Cohen – Midwood Capital

That's what I mean; not in terms of physical seats, but in terms of the people in those seats, that's what I mean. So I mean, the – so personnel – the training investment, the P&L impact that you normally incur to bring these people on board. Do you already have that sense of what the first quarter of next year looks like?

Andrew Szafran

Not really. I mean, what we are going to – if you are asking in terms of our gross margin, we expect that to kind of follow the pattern that we've had in the past where Q4 and Q1 are stronger quarters and also stronger margin quarters.

David Cohen – Midwood Capital

Okay. All right. Thanks, guys.

Operator

Thank you. Our next question comes from Josh Vogel of Sidoti & Company. Your line is open.

Josh Vogel – Sidoti & Company

Good morning. Thank you. I'm sorry, I hoped on a couple of minutes late. But I was just – with your guidance – your EPS guidance for Q4 versus expectations you had three months ago, I'm just trying to get a sense of where the margin pressure is coming from. Is this more on the cost of service line or SG&A and what's driving that?

Andrew Szafran

Well, I think there is a couple of impacts. First is, Josh, this is on a fully impacted EPS, which includes the legal settlement that we incurred earlier this year, the CEO transition, and specifically in the quarter, that was worth about $0.02 on our EPS. And when we gave our original guidance, it was – a lot of it hinged upon exactly how much upside we'd be seeing in Q4 in terms of revenue.

Earlier in the call, we talked about how we've signed up a number of new logos that we feel very good about and great opportunity going into next year, but that have ramped up more slowly than we would have expected earlier in the year. So I think that's what's driving our slightly reduced outlook.

Josh Vogel – Sidoti & Company

Okay. Now, I know you don't give out capacity utilization metrics. But do you have any target utilization that you have for next year? How many basis points you are expecting to drive out of your current seats on board?

Andrew Szafran

Not really. I mean, we run pretty high utilization compared to, I think the industry, which is evident in our EBITDA as a percentage of sales, and we will carefully add capacity along with new programs that we win.

Josh Vogel – Sidoti & Company

Okay.

Andrew Szafran

We've got a certain amount of capacity in our existing infrastructure and we have new delivery locations in mind should we bring on additional wins.

Josh Vogel – Sidoti & Company

Okay. I guess, I was just trying to get a sense of if you are busting at the seams here where – given current volume demands are you going to need to start building out significant amounts of seats in the near term.

Andrew Szafran

We are not busting at the seams, but we are running at very nice capacity and we have locations in mind – I mean, Kevin talked earlier about how we are looking at other locations in Latin America. We have a good capacity in the Dominican, we are looking elsewhere in the Philippines potentially and we are looking also at a couple of domestic sites.

Josh Vogel – Sidoti & Company

Okay. Now, I also just wanted to get a sense here on visibility and client volume demand. How often do you communicate with your clients and get their volume forecast, and are you seeing any notable trends developing here?

Kevin Keleghan

It depends at the level and the client. But somebody at APAC is probably talking to the client every day just about. As far as myself, I – my efforts have been to meet with as many of our clients as possible, especially the larger ones and have met with them all either in person or on phone. And I only do it on the phone when their calendar doesn't allow. I'm more than willing to get on a plane and spend some time with them. And so – I'm sorry, what was the second part of your question?

Josh Vogel – Sidoti & Company

I was – are you seeing any notable trends with volume forecast from your clients? Are they starting to pick up a little bit or they still – are they stable like quarter-over-quarter, month-to-month?

Kevin Keleghan

It – clearly stable and of course it depends on the client and we are hearing some cautious optimism from a lot of the clients. So we are hoping that they are a little conservative with their forecast which might cause some conservatism on ours.

Josh Vogel – Sidoti & Company

Okay.

Kevin Keleghan

But we hope that they exceed their volume so we can exceed ours.

Josh Vogel – Sidoti & Company

Okay. And just lastly, what percent of your cash is located in the international operations?

Andrew Szafran

All of our cash is – or virtually all of our cash is here. We don't have any trapped abroad (Multiple Speakers) –

Josh Vogel – Sidoti & Company

Okay, great.

Andrew Szafran

There are some statutory requirements that are local, but it really is de minimis.

Josh Vogel – Sidoti & Company

Okay, great. Thank you very much.

Operator

Thank you. (Operator instructions) Our next question comes from Mark Cooper of Pacific Ridge Capital. Your line is open.

Mark Cooper – Pacific Ridge Capital

Hi, good morning.

Kevin Keleghan

Hi, Mark.

Mark Cooper – Pacific Ridge Capital

I have just a question about the – on the gross margin line. One of the things that's not entirely clear to me is the sort of the pickup in the line that you called the other costs. It looks like that's grown pretty substantially in the last several quarters, certainly off the trend line from a percentage of revenues. What – but you haven’t added any facilities or the seat growth hasn't been that dramatic sequentially. What drives that expenditure?

Andrew Szafran

Okay. Good question. That would be the – really personnel expense that's non-agent, but directly in our center. So, things like workforce administration and regional management and there is no doubt that we invested in that personnel infrastructure to be a much larger company than we are today. And part of that is to just ensure that we don't stumble with any of the client ramps that we are bringing on. So, investing ahead of the curve as you would think. And then we intend to be able to leverage that as we grow into the future.

Mark Cooper – Pacific Ridge Capital

Okay. And then one of the questions somebody asked earlier, to understand how you report organic growth versus new logos, just still unclear, was there any new business or new logos added this quarter compared to last quarter?

Andrew Szafran

Not material amounts of dollars in the results.

Mark Cooper – Pacific Ridge Capital

So when you describe that kind of growth, those are year-over-year numbers, is that correct?

Andrew Szafran

Year-over-year numbers, yes.

Mark Cooper – Pacific Ridge Capital

Okay. All right. Thank you.

Andrew Szafran

Okay.

Operator

Thank you. I'm showing no further questions in the queue.

Kevin Keleghan

Okay. Well, thank you, operator. We will close once again by saying thanks to everyone for joining us this morning. APAC is a results-oriented company and we are focused on delivering excellent service to our clients and great results for our shareholders. We are especially grateful for the work our clients trust to us to perform and with the dedication of the people that comprise the APAC family.

We thank you for your pacification and interest. We look forward to our next call where we will be sharing the results for the fourth quarter and the full year.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.

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