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Friday, July 10, 1998
APAC Teleservices, Inc.
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Phone: 847-374-4980
Website: http://www.apacteleservices.com
Price (7/9/98): $5 21/32
HOW DID IT FIND TROUBLE?
Ever want to disconnect the telemarketer on the other end of that come-on from AT&T? Well, investors have done it for you.
APAC Teleservices is a leading call center operator that claims Ma Bell as a major client. But after soaring to $59 a share in the fall of 1996 when Wall Street was still gaga over teleservices outfits, APAC's plug has been pulled.
The latest call for help followed profit warnings. On March 30, APAC said first quarter results would come in around $91 million, $4 million short of projections, leaving EPS three or four cents short of the $0.14 a share target. The company blamed the "timing of client initiatives" but said it expected to "recapture these volumes throughout the remainder of 1998." Actual EPS came in a few weeks later at $0.10 versus $0.18 in the first quarter of '97.
Then, on June 25, APAC announced second quarter EPS would be just $0.04, well shy of the $0.11 analysts had been expecting. That also didn't count a $9 million ($0.11 per share) restructuring charge associated with APAC's $159 million acquisition ($79 million in cash plus the assumption of $78 million in debt) of ITI Marketing Services, a customer capture firm.
To top it off, APAC said it now expects the second half of FY98 to bring just $0.16 to $0.18 per share in earnings, below the $0.22 revised analyst estimates. The stock plunged 24% to $5 7/8 on that news.
BUSINESS DESCRIPTION
With headquarters just outside Chicago, APAC is a leading operator of call centers for customer service and marketing. The recent acquisition of ITI Marketing means the firm now operates 14,000 workstations in 90 call centers in 19 states and employs over 25,000 people.
Once dependent on outbound sales calls (classic telemarketing) for three-quarters of its revenue, the firm now derives half its revenue from sales and half from providing services such as help line support and customer order processing for inbound calls. Service sales got a boost from the August '97 acquisition of Paragren Technologies, a firm specializing in using information in data warehouses to support one-on-one marketing.
In FY97, package delivery giant UPS accounted for 25.3% of APAC's revenues while AT&T connected for another 16.8%. Combined, these two customers made up 36.1% of first quarter sales (down from 52.8% in the year-ago period). Mass Marketing Insurance Group and Canadian National Bancorp accounted for 7.5% and 6.1% of total FY97 sales, respectively.
Competitors include former Daily Trouble ATC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATCT)") else Response.Write("(Nasdaq: ATCT)") end if %>, ICT Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICTG)") else Response.Write("(Nasdaq: ICTG)") end if %>, Sitel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWW)") else Response.Write("(NYSE: SWW)") end if %>, and Trouble Teletech Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TTEC)") else Response.Write("(Nasdaq: TTEC)") end if %>. Insiders own 41% of the stock, with nearly all held by Chair/CEO Theodore Schwartz.
FINANCIAL FACTS
Income Statement*
12-month sales: $357.6 million
12-month income: $19.2 million
12-month EPS: $0.39
Profit margins: 5.4%
Capitalization: $281.7 million
(*Excludes non-recurring charges as well as ITI Marketing revenues.)
Balance Sheet*
Cash: $1.0 million
Current Assets: $70.6 million
Current Liabilities: $42.7 million
Long-term Debt: $1.8 million
(*Prior to the ITI acquisition.)
Ratios
Price-to-earnings: 14.5
Price-to-sales: 0.79
HOW COULD YOU HAVE SEEN IT COMING?
The teleservices industry was riding high two years ago before virtually all players felt the sting of competitive pressures. Although APAC was one of the largest players, one had to figure it would continue to be hurt by overcapacity chasing after business that could always disappear on short notice. A related problem was APAC's tremendous reliance on just a handful of customers who could demand better prices or simply walk.
In addition, the whole idea of outsourcing is to cut a company's costs and provide flexibility in an area outside its core competency. The UPS strike late last summer was instructive. Faced with a slowdown, UPS simply cut by 20% the number of billable positions provided by APAC to the UPS-owned call centers. But APAC still had to pay these personnel.
This strike wasn't just an isolated problem, though. Even before the second quarter profit warning, APAC had issued a profit warning in four out of the last five quarters. Business always seemed to be falling into the next quarter. Heck, first quarter results even came in at the low end of the pre-announcement range. When companies in a highly competitive industry repeatedly fail to deliver, investors really have fair warning.
WHERE TO FROM HERE?
CEO Schwartz keeps talking about the firm's "very strong" business prospects and the nearly $100 billion spent each year on all teleservices, but companies eventually have to turn promise into solid results or expect to get a big fat raspberry from investors.
Current earnings estimates will no doubt be revised down. Bloomberg noted, for instance, that Needham & Co. analyst Ken Winston now expects APAC to earn $0.50 share for FY99. That compares to $0.64 a share in FY96 and $0.47 last year, excluding special charges.
Though the stock now trades at just 12 times that FY99 guesstimate (and just 0.54 times the combined $500 million in FY97 sales, including ITI), APAC's massive topline expansion in recent years has failed to translate into increased profits. Indeed, attaining scale seems to have been the prerequisite simply for surviving in this highly competitive field.
Could APAC eventually deliver strong profits from its move toward value-added inbound services and long-sought improvements in capacity utilization? Possibly. But at this point, APAC has no credibility and the stock price reflects that. While APAC's price-to-sales ratio suggests a possible value, investors should play hard to get until the company starts meeting earnings targets.
-- Louis Corrigan
([email protected])
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