APAC Customer Services (APAC)

Q1 2011 Earnings Call

May 12, 2011 11:00 am ET

Executives

Andrew Szafran - Chief Financial Officer and Senior Vice President

Kevin Keleghan - Chief Executive Officer, President and Director

Harriet Fried - Senior Vice President - New York Office

Analysts

Michael Kim - Sandler O'Neill & Partners

David Koning - Robert W. Baird & Co. Incorporated

Josh Vogel - Sidoti & Company, LLC

Howard Smith - First Analysis

Matthew McCormack - BGB Securities, Inc.

Robert Riggs - William Blair & Company L.L.C.

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Presentation

Operator

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Good morning, and welcome to APAC's First Quarter 2011 Earnings Conference and Webcast. This call is being recorded. At this time, I would like to turn the call over to Ms. Harriet Fried of LHA. Please go ahead, ma'am.

Harriet Fried

Good morning and thanks for joining us for the First Quarter 2011 Conference Call for APAC Customer Services. The company issued a press release yesterday afternoon containing financial results for the quarter. This 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 2, 2011 and its quarterly report on Form 10-Q for this fiscal quarter, ended April 3, 2011 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, including 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 2, 2011, and its quarterly report on Form 10-Q for the quarter ended April 3, 2011. The company has posted a downloadable presentation to accompany the webcast in the Investor Relations section of its website. The presentation can be viewed in the Webcast section of by clicking on the link shown under the title of today's event. It will also be posted under Investor Presentations after the call.

With that introduction, I'd like to turn the call over to Kevin Keleghan. Go ahead, please, Kevin.

Kevin Keleghan

Thank you, Harriet, and thank you to everyone for joining us on our First Quarter Conference Call. APAC had a strong performance in the first quarter generating $88 million in revenue and delivering earnings of $0.13 per share. We grew at a rate of 3.3% for the quarter but that really doesn't tell the whole story. Last quarter, we spoke at length about the headwinds we are facing in the communications vertical and that our hardest comps would come in the earlier part of the year. We are indeed down at communications vertical 25% for the quarter. At the same time, we are feeling cautiously optimistic about this part of the business for a few reasons.

First, the first quarter of 2010 is a particularly tough comp since it was our all-time peak in communications volume, which then declined throughout 2010. However, we're actually up sequentially from last quarter. Second, we are expecting growth coming from 2 new communications clients that were signed up late last year and early this year. Third, we are also seeing stabilization in our volumes with a major communications client that had overextended its outsourced capacity. They are taking excess capacity out of their network, and since every made a top performer for them, we feel confident that our volumes will increase from current levels as the year progresses. So while we were down in communications, we expect to rebound during the second half of 2011 in that vertical.

I'd also like to review our Healthcare vertical, which is showing that we were down 7.7% for the quarter. The driving factor behind this decline is simply the fact that one of our key clients sold a piece of their business. We also decided not to participate in a particular client's temporary program in 2011. Adjusting for these 2 exited clients, we actually grew our healthcare business 5.2% in the quarter on a same-store basis. Furthermore, as I mentioned on our last quarter's call, we renegotiated our contract with another very important healthcare client where we traded price reductions in exchange for increased volumes with less peaks and valleys throughout the year. As a result, although this has a negative impact on the first quarter, the annual program profit dollars will increase. Andrew will speak further to the margin impact shortly.

Healthcare remains one of our strongest markets and we possess unique know-how and capabilities for healthcard clients. We continue to have a very robust pipeline of opportunities in healthcare both with existing and new clients. At the same time, the revenue for the rest of our business verticals increased over 17%. We are especially pleased with an increase of almost 10% in our business services vertical and over 19% increase in our media vertical and we were up substantially in our smaller, but growing technology vertical. I will expand on our technology capabilities later in the call.

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