Kirk LaughlinBY CHRISTEN CARTER
This year brings a number of beginnings for APAC Customer Services Inc. – it’s opening a new call center in Uruguay. A new CEO is at the helm and the company is expanding into the technology and financial services industries. Will the company be able to carry last year’s growth into a new year replete with changes?
“I think it’ll be a good year,” said David J. Koning, an analyst with Robert W. Baird & Co. Inc. He predicts that APAC will start the year with slower growth because of start-up costs associated with a new customer, but he sees a stronger second half that will allow APAC to finish the year with better-than-industry growth rates.
APAC handles customer call centers for a variety of industries ranging from retail to healthcare. Two of its largest clients include United Parcel Service Inc. and Verizon Communications Inc. When customers of Verizon or UPS call for assistance, they may be speaking with an APAC employee without knowing it.
“In general, the fundamentals of the business remain industry leading,” wrote Matthew J. McCormack, an analyst at BGB Securities Inc., in a research note. He currently has a buy recommendation on APAC’s stock.
APAC shareholders got good news when the company announced earnings Feb. 17. Revenue rose by 1.1 percent to $86.4 million from $85.5 million in the year-earlier quarter.
Currently, no analysts recommend selling APAC stock, which was priced at $5.85 per share at the close of trading Tuesday, and the majority recommend buying. The stock’s trailing price-earnings ratio is 13.93 compared with the S&P 500 ratio of 15.36.
While optimistic about the company, Koning maintains a neutral rating on the company’s stock. “They’ve done a great job of growing right at the top end of what most of the public companies are growing at,” Koning said. “The main reason for the neutral rating is valuation.”
It would be difficult for APAC to expand its margins because they are already high.
The fourth quarter of 2010 was the first full quarter for APAC’s new CEO. In September 2010, former Sears, Roebuck & Co. executive Kevin Keleghan replaced Michael Marrow. It was an indication that the company would be turning its focus from operations to strategy, boosting efforts in mergers and acquisitions, analysts said.
However, this decision left many analysts and investors with questions because Marrow had transformed APAC from a company operating in the red to one of the fastest growing in the business process outsourcing industry. “We are somewhat surprised at the board’s decision given these recent results,” McCormick wrote.
APAC discussed its mergers and acquisitions strategy further in its fourth-quarter earnings conference call Feb. 18.
“On the potential M&A-type activity, we did some planning in Q4 to really understand where we want to take the company based on a lot of input from our clients,” said Keleghan. He mentioned expanding APAC’s global footprint, adding new industries and identifying fast-growth companies as criteria for acquisitions.
“Increasing our global footprint is very critical,” Keleghan said.
APAC already has locations in the Philippines and the Dominican Republic, and the company just announced the opening of a new call center in Uruguay with a new client in the technology security industry.
“That’s a good way to do it,” McCormack said in an interview. However, he wondered about Uruguay being “off the beaten path.” He added that he had not heard of any other companies locating their outsourcing business there, though that was not to say it wouldn’t work.
In a report released in October 2009 analyzing Uruguay as an offshore services location, Gartner Inc. wrote, “Although workers are generally well-educated, the relatively small labor pool means that educated resources, especially in the IT area, are limited.”
However, the report praised Uruguay’s technology infrastructure, identifying it as one of the best in Latin America and noting that the country was one of the first in the region to set up a 100-percent digital telecommunications network.
“Montevideo will be a great location for APAC,” Keleghan said on the conference call. “It has a very stable government, a great workforce with multilingual capabilities and will be a cost-effective solution for our clients.”
APAC plans to initiate the call center with 650 seats, although the number could grow. “We would not be surprised to see more capacity added down the road if the location proves to be successful,” wrote Robert Riggs, an analyst for William Blair & Co. LLC, in a research report.
During the fourth quarter, APAC increased its number of international workstations by nearly 7 percent, ending the year at 4,573. The number of domestic workstations decreased slightly to 6,274. APAC anticipates continued growth in both its top and bottom lines. The company expects to generate revenue between $346 million and $350 million, up from $326 million in 2010. The company is projecting earnings between 47 and 49 cents per diluted share in 2011, up from 42 cents last year.
“I think that the growth rate given its size could end up being higher than that,” McCormack said. He added that the reason for the company’s success was not only its ability to sign new clients and ramp up business, but also its strong performance for existing clients.
In addition, the business process outsourcing industry is growing in general. According to report released by Global Industry Analysts Inc. earlier this month, opportunities emerged for outsourcing companies during the recession because businesses were focused on cost-saving measures. GIA expects the market to exceed $930 billion by 2015 with growth driven by continued expense reduction efforts by businesses.
APAC signed eight new deals in 2010. Such additions dampen profitability due to ramp-up costs, but analysts expect the company to manage the process well.
“We expect APAC to maintain a disciplined approach to capacity additions, which should help to mitigate the impact on profitability moving forward and allow the company to continue to post leading margins among the BPO peer group,” Riggs wrote.
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