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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good morning, and welcome to the APAC first quarter 2007 earnings conference call. This call is being recorded. At this time, I would like to turn the call over to Ms. Jody Burfening of LHA. Please go ahead.
JODY BURFENING, INVESTOR RELATIONS, LHA: Thank you, operator. Good morning, and welcome to the 2007 first quarter conference call for APAC Customer Services. We have previously sent copies of our earnings release to the call participants. If you have not yet received a copy, please call Lippert/Heilshorn at area code 212-838-3777.
Company representatives on today's call are Bob Keller, President and Chief Executive Officer, and George Hepburn, Senior Vice President and Chief Financial Officer. The agenda for today's call will include a business update by Mr. Keller, a financial review by Mr. Hepburn, and a Q&A session.
Before opening the conference call, I would like to remind you that certain statements including statements about future operating and financial results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about the beliefs and expectations of the Company and its management, are forward-looking statements. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions about future events and they are subject to known and unknown risks and uncertainties and other factors which can cause actual events and results to differ materially from historical results in the future results expressed or implied by the forward-looking statements.
The Company's forward-looking statements speak only as of today's date. Please refer to the Company's annual report on Form 10-K for the year ended December 31, 2006 and today's earnings release for a description of reasons that may cause actual results to differ from those expressed or implied in the forward-looking statements.
To supplement the Company's consolidated financial statements presented in accordance with GAAP, the Company uses certain measures defined as non-GAAP financial measures by the SEC. For more information on these non-GAAP financial measures, please see the reconciliations that are attached to today's earnings release and the Company's annual report on Form 10-K for the year ended December 31, 2006.
Copies of the Company's public filings are available on the website maintained by the SEC at www.sec.gov and today's press release has been posted to our website at www.apacustomerservices.com.
With that, I would now like to turn the call over to Bob. Good morning, Bob.
BOB KELLER, PRESIDENT AND CEO, APAC CUSTOMER SERVICES: Good morning, Jody. Thank you. Good morning, everyone, and thanks for joining us on our first quarter earnings call. Our operating results in the quarter largely reflect the anticipated ramp down of the Medicare Part D business, the impact both on the revenue and expense side of the delayed opening of our third permanent facility in Manila, and our inability to add any more capacity to our temporary site there.
As you know, the improvement in our financial performance will largely be driven by our ability to grow off-shore revenue. On a sequential basis, we grew a modest 7% in Manila. That growth reflected the last training classes we had in our temporary site moving into production.
On the expense side, we carried, and will continue to carry, expenses throughout the second quarter for both our temporary and permanent facilities. In addition, we've made a conscious decision to continue to invest in management development and infrastructure in advance of our anticipated revenue growth in the Philippines.
All that said, we continue to make progress against our strategic objectives and the underlying fundamentals of our business strategy are unchanged. We're excited to have finally opened our third facility in the Philippines and have begun the orderly transition of our clients out of our temporary facility in Eastwood and into our new site in Cubao. The difference in the operating characteristics of these two facilities is dramatic. Based on the feedback we received from clients and prospects who have visited our new site, we believe that it is best in class and that it will improve our ability to attract and retain talent and ultimately that it will enable us to deliver an even higher level of quality and performance to our clients.
We expect to have transitioned all 600 plus employees into Cubao by June 1. Concurrently, we've also begun training employees on incremental opportunities and will have over 300 seats in training throughout the quarter. I should mention that much of this training is unpaid, so we don't expect significant revenue from these activities in the second quarter. As frustrating as the delays have been, we did grow our offshore business by 61% on a year-over-year basis driven largely by new business from our healthcare and publishing verticals.
On the domestic front, last week we took over the Tampa UPS facility that had been awarded to us in February. We've had a multi-functional team dedicated to the transition of that site for the past 60 days and are thrilled to have the opportunity to extend our relationship with such a world class client. They are tough and demanding, but they recognize and reward outstanding performance. We continue to believe that if we can bring this site up to the performance standards of our Newport News site, we'll have even more opportunity to grow with UPS in the future.
Beyond UPS, we continue to focus on improving our domestic efficiency. Given the ongoing service requirements of the Medicare Part D business and the planned exit of one client, we've decided to relocate our Corpus Christi facility to a smaller footprint and to downsize our Tucson site. We expect to take a $1 to $2 million restructuring charge in the second quarter primarily related to the capacity reduction in Tucson. In total, we're going to reduce domestic capacity by about 1,200 seats over the next two quarters and expect to run domestic utilization at 90+% by the fourth quarter of this year. These changes are expected to save us $4 to $5 million in annualized operating costs.
Finally, I'd like to highlight a significant development in our ongoing appeal to the IRS regarding the deduction we took in 2002 when we wrote off our remaining investment in ITI Holdings for tax purposes. This quarter we were notified that the IRS appeals officer has recommended to the joint committee on taxation that we be allowed the full deduction we had originally claimed. As a result, we believe it is more likely than not that this matter will be favorably resolved and we've reversed the previously accrued liability resulting in a $17.6 million income tax benefit. Given the recent changes in the IRS' position, we are highly confident that the deduction will be allowed in full and expect a final resolution by year end. Ultimately, the favorable resolution of this matter will eliminate a significant contingency for the Company and increase borrowing availability under our existing revolving loan facility.
In closing, the demand for our services remains strong. We believe that there is a pent up demand in our healthcare vertical for our offshore capabilities and that we have significant opportunities, both domestically and offshore to grow our publishing business. The classified test we started last quarter is going exceptionally well and we're adding two new properties to that test ahead of schedule. We continue to believe that the classified area represents an excellent opportunity for us to significantly increase the existing business we have in the publishing industry.
To sum up, the impact of our delayed opening in Cubao will be felt throughout the year and, as a result, we don't expect to generate operating profits for the full-year 2007. The fundamentals of our business haven't changed though -- our ability to leverage our offshore growth into improved financial performance, the strength of our two core industries, healthcare and publishing, our relationship with UPS as the cornerstone of our domestic business, our footprint in the Philippines as the premier location worldwide to provide interactive voice services, and our commitment as a management team to deliver the highest quality service experience to our clients' customers.
We remain confident in our longer term guidance of low compounded, double-digit revenue growth and double-digit EBITDA margins. I'll turn the call over now to George to provide more details on our numbers and current financial guidance. George?
GEORGE HEPBURN, SVP AND CFO, APAC CUSTOMER SERVICES: Thanks, Bob. With the perspective Bob has already given us on the overall direction of the quarter, I'm going to move right into the discussion of our numbers. First, I'll go through the results on a year-over-year basis, then I'll discuss our sequential performance, and after that, I'll update our guidance for 2007.
For the first quarter 2007, net revenue totaled $52.4 million, which was...
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