Premiere Global Services Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.13.13 | About: Premiere Global (PGI)

Premiere Global Services (NYSE:PGI)

Q4 2012 Earnings Call

February 13, 2013 5:00 pm ET

Executives

Sean O'Brien - Executive Vice President of Strategy & Communications

Boland T. Jones - Founder, Executive Chairman and Chief Executive Officer

Theodore P. Schrafft - President

David E. Trine - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Analysts

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Barry McCarver - Stephens Inc., Research Division

Ryan Macdonald

Operator

Good day, everyone, and welcome to the Premiere Global Services, Inc. Fourth Quarter and Fiscal 2012 Financial Results Conference Call. Today's call is being recorded. This call is also being simultaneously broadcast over the Internet. For details, please visit our website at www.pgi.com, and go to the Investor Relations section. Alternatively, you may listen to the rebroadcast from your telephone beginning at 8:00 p.m. Eastern time today through Friday, February 22, at midnight. The replay numbers are (888) 203-1112. Again, that number is (888) 203-1112 within the United States and Canada, or at (719) 457-0820. Again, that number is (719) 457-0820 worldwide. The passcode to access the replay is 6488152. Again, that's 6488152. [Operator Instructions] At this time, I would like to turn the conference over to the Executive Vice President of Strategy and Communications for PGi, Mr. Sean O'Brien. Mr. O'Brien, please go ahead, sir.

Sean O'Brien

Thank you, and good afternoon, everyone. If you've not received a copy of our fourth quarter and fiscal 2012 earnings release, please visit our website at PGi.com, where it is available on the Investor Relations section.

Joining me on the call this afternoon are Boland Jones, Chairman and CEO of Premiere Global Services; Ted Schrafft, President of PGi; and David Trine, our CFO. Following some brief comments by management, we'll open the call to your questions.

But before I turn the call over to Boland, I'd like to remind everyone that statements made in this conference call, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs, assumptions made by and information currently available to management, pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors, including those we identified on our Annual Report, on Form 10-K for the year ended December 31, 2011, and our other filings with the SEC.

In addition, during this call, we will present non-GAAP financial measures of our business. Please consult both our press release and Form 8-K filings of this afternoon for reconciliation of these non-GAAP financial measures to the most comparable GAAP measures. These materials are also available on our website at pgi.com.

At this point, I'll turn the call over to Boland.

Boland T. Jones

Thanks, Sean, and good afternoon, everyone. This is Boland Jones, and I'd like to welcome everyone to our fourth quarter and fiscal 2012 earnings call. Let me begin by saying that 2012 was another year of great success for PGi. We entered into the year amid a focused and thoughtful transition in our business. Building on our deep roots in collaboration technology, we continued moving PGi towards our goal of becoming a global leader in business collaboration software. Our firm belief is that transitioning to a software model will position PGi to deliver higher value to our customers and shareholders, to gain share in both current and new markets and to evolve to a more favorable business model with more predictable, higher-margin software license revenue.

The PGi software products, iMeet and GlobalMeet, were developed specifically to address a large void in the market for meeting products that are highly usable and available anywhere, any time. And we've built these products on top of our global IP network, which we believe is the most advanced private cloud collaboration network in the industry.

2012 is the first full year that we offered our PGi software products in the market. It's clear to us that our emphasis on selling these highly differentiated solutions has already made a huge positive difference in our financial performance. For example, in 2012, we generated 7.5% organic revenue growth, our highest annual growth rate in 4 years. We grew sales of all of our PGi product lines and grew in all regions of the world. We generated nearly 18% growth in non-GAAP diluted earnings per share.

Throughout the year, we continued to take share in the global market for online meetings, winning many notable deals against more entrenched providers like Cisco WebEx, Citrix GoToMeeting, Adobe Connect and Microsoft Live. And as a result, in 2012, we more than doubled our revenue run rate for iMeet and GlobalMeet, exiting the year with an annual revenue run rate of nearly $23 million from these products.

Over 30% of our total year-over-year revenue growth came from iMeet and GlobalMeet, and importantly, our new products, iMeet and GlobalMeet, have reinvigorated our entire company to the point where virtual meetings for all of PGi worldwide grew nearly 30% in 2012 versus 2011.

We believe our progress in 2012 is proof of our ability to effectively compete in the market for business collaboration applications against more established software competitors that are not solely focused on this space and that lack PGi's commitment to innovation. Specifically, we believe we are winning in a couple of key areas. One area is our fanatical and disciplined focus on usability. We continue to develop iMeet and GlobalMeet with a goal of delighting users with the simplest, most elegant user experience in the market. That includes making the products intuitive to navigate and enjoyable to use.

Another area where we are differentiating ourselves is the aggressive development of our software in the user's inertia. That simply means no matter what device, whether it be mobile, whether it be desktop, whether it be tablet, PGi's goal is to make iMeet and GlobalMeet instantly accessible in the user's inertia anywhere, any time.

It's not easy keeping up with today's complex, multiplatform, multidevice environment. But that's exactly what today's users want and expect from business applications. They want the same experience wherever they are, and we are working hard to give that to them with significant application development roadmaps and aggressive release cycles that we believe far surpass the competition. Our strategy to develop collaboration products that are simple, personal and available anytime, anywhere continues to capture the attention of thought leaders in the marketplace.

We are very proud that our best-in-class products continue to receive multiple awards and accolades again in the year 2012, including those that's highlighted in our press release this afternoon.

Now as we look ahead, our priorities for 2013 remain the same as they were last year. First, in the year ahead, we will continue our focus on growing PGi's share of both current, new emerging collaboration markets through our continued investment and product development. Towards this objective, we plan to launch significant feature enhancements and upgrades to both iMeet and GlobalMeet this year while at the same time, expanding our suite of PGi software products. Second, in 2013, we will continue to invest in building our global distribution to take our great products to market. We plan to continue to grow our direct sales headcount again this year and at the same time, we're working close to additional strategic alliances to Tier 1 network providers around the world, as well as other good opportunities to distribute our products.

In summary, let me say that we continue to be excited about the opportunity iMeet and GlobalMeet present for us to grow our addressable market and to provide higher value to our customers and shareholders, and we remain optimistic in our outlook for the future and for the year ahead.

Now in closing, I'd like to once again thank all of our customers and all of the PGi associates around the world for all their help and support. We'd also like to thank our shareholders for their continued support of PGi as well. And at this point, I'll turn the call over to our President, Ted Schrafft.

Theodore P. Schrafft

Thank you, Boland, and good afternoon, everyone. Before I get to our fourth quarter and fiscal 2012 financial results, I'd like to quickly review the progress we made last year, as well as outline our key areas of focus for the year ahead.

2012 was a very important and very successful year for our company as we continued to transition PGi toward becoming a leader in business collaboration software. We not only grew our organic revenues at their highest annual growth rate in 4 years, but we also continued to generate operating leverage in our business with nearly 18% non-GAAP earnings growth, all while continuing to invest in the future of our business.

For example, in 2012, we continued to enhance iMeet and GlobalMeet with many first-to-market capabilities. We expanded our global distribution through strategic alliances with leading network providers, including CenturyLink, Deutsche Telekom and eircom. We grew our direct sales and field marketing headcount by over 100 people and launched a new and improved corporate website. And we expanded our global presence in significant growth markets like China, India and South America with a new PGi direct sales strategy to complement our existing partners' activities in these regions.

These achievements made 2012 another notable year for PGi, and they helped lay the foundation for what we believe will be another solid year of performance in 2013. Now here are the top 3 things our company is focused on for the year ahead.

First, as Boland mentioned, we are focused on continuing to enhance and expand our suite of PGi software products. And our goal here is simple, to use these innovative products and the business problems they solve to grow our share in current markets while at the same time, using them to enter and win share in new growing markets as well.

Second, as Boland also mentioned, we are focused on continuing to invest and expanding our global distribution in support of higher growth. We believe our success with both our direct sales and carrier partner efforts in 2012 validates that iMeet and GlobalMeet are filling a real need in the market. And our 2013 plan calls for us to continue to add new PGi direct sales headcount, new agents and resellers, new marketing alliances and new strategic partners to greatly increase our global distribution and revenue in support of this objective.

And finally, we are focused on continuing to improve the financial performance of PGi. Specifically, we are focused on transitioning our model towards higher growth and increased profitability by emphasizing sales of our PGi software solutions in both new and existing customer opportunities. While it's too early to declare an inflection point in our current mid single digit growth trajectory, we are continuing to execute our plan to return PGi to double digit revenue growth and improved margins.

By focusing on these 3 key priorities, we believe 2013 will be another great year for PGi, our customers and our shareholders. Now let me turn to our fourth quarter and fiscal 2012 financial performance, beginning with revenues.

As reported, net revenues totaled $125.8 million in the fourth quarter. During the quarter, we generated organic revenue growth of over 6% despite approximately $1 million in revenue loss associated with Hurricane Sandy. Net revenues in 2012 totaled $505.3 million, an organic increase of 7.5% from 2011. Based on current trends in foreign currency exchange rates, we project that net revenues in 2013 will be in the range of $525 million to $535 million.

Turning to profitability. Our gross margin in the fourth quarter was slightly below third quarter levels, totaling approximately 57%. While recent gross margin trends have continued to be negatively affected by strong growth in our global accounts channel, we anticipate that our gross margins will increase in 2013 as compared to 2012.

Non-GAAP diluted EPS from continuing operations was $0.18 in the fourth quarter. For the year 2012, non-GAAP diluted EPS from continuing operations was $0.73, an increase of nearly 18% from 2011.

Looking ahead, despite the continuing growth investments we are making in new product development and expanded distribution, we anticipate that we will continue to show operating leverage in our business, with our non-GAAP diluted earnings per share expected to grow at a faster rate than revenues again in 2013. Based on current trends and foreign currency exchange rates, we project that non-GAAP diluted EPS from continuing operations in 2013 will be in the range of $0.81 to $0.85.

During the fourth quarter, we generated net cash provided by operating activities from continuing operations of $27.6 million. Net cash provided by operating activities totaled $70.6 million in 2012, an increase of over 20% from 2011. Capital expenditures were approximately $8.2 million in the fourth quarter and $32.3 million for 2012. Looking ahead, we anticipate capital expenditures will be approximately $33 million in 2013.

During the fourth quarter, we repurchased nearly 1.2 million shares of our common stock in the open market, bringing our total stock repurchases in 2012 to nearly 3.2 million shares. Also during the fourth quarter, we announced that our Board of Directors approved a new open market Stock Repurchase Program for up to 5 million shares or nearly 11% of our total shares outstanding. We currently have an aggregate total of approximately 5.6 million shares available to repurchase under both our prior and new stock repurchase programs. Consistent with our ongoing investment strategy, we anticipate that we will continue to be opportunistic buyers of our common stock.

In conclusion, let me reiterate that we are pleased with our performance in the fourth quarter and for the year. We're excited about the market opportunity for PGi software solutions, which we believe offer great value to PGi customers, our associates and our shareholders. We're eager to continue to transition our model to one of higher, more predictable revenue growth and higher profitability, and we look forward to updating you on our progress in future calls. Until then, let me join Boland in thanking our customers and all of our associates for their continuing support and commitment to our success.

And at this point, we will open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And for our first question, we go to Tavis McCourt with Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Nice quarter and especially on the free cash flow generation. Somebody's noticing. So a couple of questions, Ted. You kind of said with veracity, you expect gross margins to be up in 2013, but obviously, we've heard that before. Why are you confident now relative to kind of some of the commentary you've made in the past? And then my second question is on the guidance. I know you guys would have done 7% internal growth this quarter. We'll see what our currencies turn out, but I think for most of the year next year, you'll actually have a little currency benefit. Gross margin is going to be up. I would imagine -- to get to your earnings numbers, you probably will have a little more operating cost increase in 2013 baked into the budget than you did in 2012. Is that kind of a correct assessment?

Theodore P. Schrafft

Tavis, it's Ted. Yes and yes and yes. On the gross margin, listen, we continue to work extremely hard on gross margin. And I'll -- all I have to -- and I'll say that for gross margin, we got -- I think Boland even refers to it as a math problem. I got a -- we got a mix challenge here. And, I guess, the good news and the good news is as we continue to drive a ton of growth in these large global accounts that have lower margin that are corporate average, so we continue to get pressure there. It's a product mix issue. We're seeing very good growth with the new products. And the percentage of growth each year, each quarter -- successive quarter gets greater and greater associated with the growth of our new products. I was -- I think we even -- I think 40% or over 40% of our growth in the fourth quarter came from the new PGi products again that are carrying 80%, 90% kind of gross margins. So for us, it's a mix issue. And so I continue to be optimistic that we're going to -- as we continue to build volume of revenue with the new products, it's a math problem. Again, I got the mix and right now, the overall number of the new products isn't enough to hit the inflection point of a $500 million plus company. So that's the margin story. The growth, to make sure I'm answering your question correctly on 2013 growth, you saw the guidance we put out there on $525 million to $535 million, and you've already been working through the percentages on it, the turn we're making, and again this is associated with the new products as well and our focus on the PGi products is incorporated in our guidance is consideration of deemphasizing, at some level, the third party partner, web partner products that we've been selling and aggressively selling over the past couple of years, it's been a big, big part of our growth. So as we're -- again, you got a company in transition, moving from the resell of products that, again, have some level of value but not anywhere near the value of our new products. So we think our new products are superior. And our new products carry significantly higher margin than the resold services we've been selling in the past. So we're incorporating, I guess, consideration of that deemphasis in our guidance this year because we're not going to see the same level of growth in those third-party products as we've seen in the past.

Boland T. Jones

I want to just add something. It's Boland. Listen, we don't make this public. But the way we look at our business is we look at each product line. So you have the automated conferencing, then you have the automated conferencing for globals and you have the operator-assisted conferencing, you have the resold web conferencing of the people we resell then you have our own products. And if you just look at the weighted average, the mix determines whether it's 57% or 58%, and I know you understand that, but that's how we look at it every day. But we've miscalculated in the past few quarters, as you said, yes, we've heard that before. What we've miscalculated is the growth in certain product segments that's larger and more powerful in the weight of it in the weighted average. So it's a high class problem, right? So we miscalculated how much the big accounts would grow, and so it keeps moving the bar on how much we need in our new products, right? So we're just trying to figure out where that flux is. So it's miscalculated to the point where we've underestimated the growth of some of the lower margin stuff. Now we're working on growing higher margin stuff, but at a point, you say, "Well, wait a minute. What's the margin mean?" And if you look at our numbers and you look at our projections, in 2011 to 2012, if you look at the empirical dollars, we're growing. On the gross margin contribution, we're growing $10 million or $11 million or $12 million there. And then going from 2012 to 2013, you can calculate the imputed growth there, but I think it's twice what it was from 2011 to 2012 in the forecast contribution margin. So the important number is -- the important facts that I'd take away are 2 things. One is we have new products that we know can handle any meeting, okay? And we just got those in the last 1.5 years, and we're working on teaching our people to sell them, we're working on new releases to meet customers' one-off demands here and there and maturing those products. Those products are selling, they sold it 125% last -- this 2012 versus '11. They'll probably keep that same growth rate going forward. As we do that and as we convert some of our third-party resold services to our own products, we're going to hit a tipping point here shortly where that growth of that margin product will significantly outpace the growth of those larger companies with the smaller margin. And we thought it would happen in the third and fourth quarter last year, hadn't quite got there yet. But I think you're to see it in the first few quarters of this year very evidently and we're banking on it. So this a little bit more color on how we look at that.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

And my follow-up question was related to operating cost. You got them pretty tight through most of '12. I think for the full year, they were up like 2.5% year-over-year. Is that something that you can manage in 2013 as well or you release some little more sales in marketing this year than you did last year?

David E. Trine

Tavis, this is David. Yes, when you look at things like G&A, for example, I think next year's going to have the same Q4 type number, the $16.3 million type range also looking at R&D will say somewhere around the $3.5 million a quarter. And then sales and marketing, you'll see increase a little bit in Q1 like we normally do in Q1. And it will be kind of like what we had in Q1 of 2012 about the $34 million.

Theodore P. Schrafft

Even if there's any -- Tavis, this is Ted. If there's any, I'm going to say, upside on the SG&A, it's going to be more likely in sales and marketing. We're transitioning a sales force to move from more the traditional conferencing products to the software products. So we added and invested there in 2012. We're planning to add again in 2013. But again, we're also going to make sure it's success based and that people are hitting new sales books, we're hitting productivity ramps, et cetera, that we're measuring. And as they do, then we'll obviously continue to invest there.

Operator

[Operator Instructions] We will go next to Barry McCarver with Stephens Inc.

Barry McCarver - Stephens Inc., Research Division

I guess, first off, any details you can give us on -- I guess, further details of the effects that Hurricane Sandy may have had in 4Q?

Theodore P. Schrafft

Tavis, it's -- I'm sorry. Barry, it's Ted. No. I mean, probably not a lot of what we put out there. I think we had about -- I want to say, we estimated about $1 million revenue impact in the fourth quarter. So I think we it still came in reasonably strong on kind of estimates and guidance, even with that impact. But that was -- our best estimate was around $1 million in revenue.

Barry McCarver - Stephens Inc., Research Division

Okay. And then, I guess, secondly, I'm wondering if you can give us a little bit more color on any of that success that the channel partners that you've signed up during the year for next generation services. How did they do and kind of what type of revenue ramp did you see from them in 4Q and what you might expect in 2013?

Theodore P. Schrafft

I don't know how much detail I want to get into each of one of those things because in some of those cases, we don't -- we need their permission to talk to it in great detail and that for competitive reasons, I don't want to give too much information there. But we've talked -- this year, we've puffed and puffed about distribution and we're working on distribution, working on resellers and so forth and so on, teleco companies, big infrastructure companies, we're still doing it, we're still working on it, the companies that we have distributing from the Deutsche Telekom to the CenturyLink, to all those companies, Orange and so forth, we're super happy where they're at. We wish it was more, but we're super happy where they're at. They sell all of our products, our audio products, our -- most of them do -- our audio products and our software products, and they're all gaining ground. They're all growing, they're all improving. We'd hope to have one more significant announcement that we said last quarter for -- right now, we're close to it, but we don't have it quite done yet, so -- and we've got more prospects. So I mean, we're super pleased with that area of the business right now.

Barry McCarver - Stephens Inc., Research Division

And I guess, it's fair to say they're performing like you expected? That's what I was really asking.

Theodore P. Schrafft

Yes, that's correct.

Barry McCarver - Stephens Inc., Research Division

Okay. And then just lastly, occasionally, in the quarters, you'll give us information in kind of regarding number of seats or rooms for GlobalMeet and iMeet, would you care to share any of that?

Theodore P. Schrafft

Yes, we're just going to stick with the revenue right now. We're getting signals of how many people are tracking all this information and so forth. We got to figure out a good way to give you guys that progress. Both are up significantly. Obviously, the revenue of the combined products grew 125% last year, so you know they're up.

David E. Trine

Yes. We also -- Barry, this is David. We also talked about our jumpoff in Q4. It's $23 million, so up from $11 million from...

Theodore P. Schrafft

Yes, GlobalMeet is still outselling iMeet 10-1 because GlobalMeet facilitates 125 seat meeting, and we've we identified that as a weakness of iMeet, although iMeet is progressing quickly and the distribution through our distribution partners that I mentioned just a second ago that we just talked about, as well as to certain verticals like recruiters, HR, markets, things like that, is doing okay. But I think really, for iMeet to step into this sales force and to step into distribution the way it really needs to, it's going to continue to do well, but it's going to really do well once we add a couple of more features to it like the capacity for 125 people in the meeting. And then I think you have a sales force that's selling a ton of both. But that hasn't stopped us or impeded or slowed us down competitively at all because we got GlobalMeet. That's a superior product to all that other stuff out there. But the combined iMeet and GlobalMeet have risen the profile of this company, which was described as a commoditizing audio conferencing business. And those 2 products, the mobile applications of them, the tablet applications of them and stuff, I cannot tell you how lucky we are that we did those products and how much we're benefiting from it throughout our entire business. We're selling more of everything because of those things. So we're pleased with where we're at.

Operator

[Operator Instructions]

We go next to Michael Latimore with Northland Capital Markets.

Ryan Macdonald

This Ryan Macdonald on for Michael Latimore. How did revenue per business day trend during the quarter?

David E. Trine

If you look at -- this is David, Raymond. If you look between Q3 and Q4, there were 3.5 less days in Q4. And if you adjust the business days, it still grew to 5.5%. And then Q4 over Q4, it was less than 1 day difference. So very little difference between quarters.

Ryan Macdonald

Okay. And has the profile of iMeet customers changed over the past years, such as more -- I mean, more weighted towards enterprise customers at all?

Theodore P. Schrafft

Well, it's only been enterprise customers so far. Everybody has their own definition of this. We've got Fortune 1000 companies using iMeet, and then we've got very small companies using iMeet. So we don't have -- we don't have Fortune 10 companies using iMeet yet, but we've got some pilots in those companies right now. So I expect it's a paid for service, it's not a free service. As of right now, maybe we'll get into some of that other stuff later, but as of right now, it's a paid for service, put through the existing channels of our company, which are used to selling paid-for services in exchange for commissions or revenue shares, whatever the channel is that we're putting it through. And so it's going to be sold to bigger than small, upper small businesses, medium-sized enterprises, and we're going to try to sell to larger enterprises. We think the product eventually will sell to larger enterprises.

Ryan Macdonald

And then do you see GlobalMeet and iMeet revenue growth continuing at a similar rate for 2013?

Theodore P. Schrafft

Yes. Probably slightly accelerating actually, Raymond.

Ryan Macdonald

Accelerating? Okay.

Theodore P. Schrafft

Yes.

Operator

And with a follow-up question, we return to Tavis McCourt with Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Wonder if you could talk, David, about what we should expect for a tax rate going forward.

David E. Trine

Somewhere around the 29.3% where we ended up on a normalized rate for 2012 to about 30%. It all depends on the country's pre-tax income, the mix of that. But probably -- 29.5% is probably a good number.

Operator

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. O'Brien, I will turn the conference back over to you for any closing remarks.

Sean O'Brien

Thanks, Rufus. Thank you all for your participation. If you have any follow-up questions, please try me on my direct line at (404) 262-8462. Thanks and have a great day.

Operator

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation.

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Premiere Global Services (PGI): Q4 EPS of $0.18 in-line. Revenue of $125.8M (+6% Y/Y) beats by $1.19M. (PR)