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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

Michael Latimore - Northland Capital Markets, Research Division

Premiere Global Services (PGI) Q1 2013 Earnings Call April 18, 2013 5:00 PM ET

Operator

Good day, everyone, and welcome to the Premiere Global Services, Inc. First Quarter 2013 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 p.m. Eastern Time today through Friday, April 26, at midnight. The replay numbers are (888) 203-1112 within the United States and Canada, or at (719) 457-0820, worldwide. The passcode to access the replay is 3488268. [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 first quarter 2013 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, as well as 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, 2012, as well as 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 first quarter 2013 earnings call. Since we spoke to you last about 2 months ago, our vision and direction have not changed. But during this time, we've made great progress on both the strategic and financial fronts, as well as we continued to move closer to our goal of establishing PGi as a global leader in business collaboration software.

As you may know, PGi has a long and proud heritage as an innovator in the collaboration space. We were early pioneers of many groundbreaking technologies like automated, reservationless conferencing, browser-based videoconferencing and advanced mobile collaboration technologies. Today, PGi is the only pure play collaboration company in the world that has its own global IT cloud with hybrid audio capabilities available to all our customers and partners around the world.

Our innovative lead has accelerated in recent years with our fanatical focus on user-driven product design, mobile application development and many other first-to-market features that we at PGi had developed and launched in both iMeet and GlobalMeet.

We'd love the fact that PGi continues to be recognized by the market analysts and influencers alike for our commitment to innovation. For example, in this first quarter, PGi was named one of TAG's Top 10 Most Innovative Technology Companies in Georgia, and we were included in the Visionaries quadrant in the Gartner Magic Quadrant for web conferencing in both 2011 in 2012. And also, our products, people and company have been honored with more than 25 industry awards and accolades in just the last 2 years alone.

Today, PGi continues to lead the market in anywhere, anytime collaboration products that are built around the individual user. Our goal is to enable enterprise collaboration that's as easy and effortless as browsing the web or launching an app. To achieve this goal, we continue to drive significant changes throughout our business. For example, we've built expertise in software design and development, which we believe is among the best in the collaboration industry. We have evolved and elevated our sales professionals with a focus on value-added applications selling, solving real-world mission-critical business problems for a line of business managers across companies in virtually every industry and in every region of the world. And we continue to transition our pricing model away from the traditional telecom per meter pricing towards easy-to-understand, easy-to-budget, Software-as-a-Service license-based pricing model.

Today, we're generating many new customer sales opportunities with our best-in-class collaboration applications. For example, during the first quarter, we nearly doubled our revenue from iMeet and GlobalMeet year-over-year, and we exited the quarter with an annual run rate of nearly $26 million from these products in only their second year on the market. With our effort showing clear market and customer acceptance of our PGi collaboration solutions, we plan to continue to invest in significant new product design and development advancements again this year. For example, during the first quarter, we launched iMeet, integrated with Plantronics Voyager Legend UC headset, partnering with the world's leading provider of enterprise headsets. By combining Plantronics contextual intelligence technology with iMeet's award-winning user interface and experience, PGi continues to blaze new trails in the collaboration space, bringing more natural and intuitive virtual meeting experience to users around the world.

In the first quarter, we also released a new iMeet app for Android-powered smartphones. This native Android application, which is available in the Google Play Store, enables users to start and manage their meetings from anywhere in the world, solidifying iMeet's position as an anywhere collaboration product for businesses of all sizes. We firmly believe that continuing to build out our collaboration software product portfolio and transitioning our company towards a SaaS model will position PGi to deliver higher value to our customers, partners and shareholders around the world. We look forward to updating you on our progress on future calls.

And now in closing, let me again thank all of our associates around the world for their hard work and dedication to our success, and let me also thank our customers and our shareholders for their continued support of PGi.

And at this point, I'll turn the call over to our President, Ted Schrafft. Ted?

Theodore P. Schrafft

Good afternoon, everyone, and thank you for joining our first quarter 2013 earnings call. As Boland mentioned, not much has changed since we last spoke other than our continued focus on and advancement of each of our key operating priorities for 2013 as we continue to implement our strategies for accelerated growth and higher profitability for PGi.

Before I get to our first quarter financial results, I'd like to quickly review the operational priorities of our business for the year ahead. First, as Boland stated, we continue to enhance and expand our suite of PGi collaboration software applications with the goal of leveraging 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, we continue to invest in and expand our global distribution in support of higher growth, including the addition of a new strategic alliances such as TeliaSonera, which we announced during the first quarter, as well as through the addition of new direct sales professionals, sales agents, resellers and marketing alliances, all with the goal of driving increased sales opportunities and revenues for PGi.

And finally, we continue to focus on accelerating the financial performance of our company through increasing sales of our PGi collaboration software products, which supports our objectives of higher growth and increased profitability.

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

As reported, net revenues totaled $129.5 million in the first quarter. Excluding the impact of changes in foreign currency exchange rates during the period, first quarter organic revenues increased approximately 3% as compared to the first quarter of 2012. Since we provided our initial 2013 financial outlook in February, there's been significant movement in several key foreign currencies in countries where we do business, most notably the euro and the yen. To reflect the negative impact of these recent foreign currency exchange rate fluctuations, which we estimate to be approximately $5 million, we have updated our financial outlook for 2013. Based on current foreign currency exchange rates and assuming our current business trends remain the same, we project that net revenues in 2013 will be in the range of $520 million to $530 million.

Turning to profitability. Our gross margin increased slightly in the first quarter from fourth quarter levels, totaling approximately 57.1%. While recent gross margin trends have been negatively affected by high growth in our global accounts channel, we continue to anticipate that our gross margins will increase over time as we grow sales of our PGi collaboration software products, which carry higher gross margins than our current corporate average.

Non-GAAP diluted EPS from continuing operations was $0.19 in the first quarter, up from $0.18 in the first quarter of 2012. Based on current trends and current foreign currency exchange rates, we now project that non-GAAP diluted EPS from continuing operations in 2013 will be in the range of $0.80 to $0.84.

During the first quarter, we generated net cash provided by operating activities from continuing operations of $12.4 million, an increase of nearly 30% from the first quarter of 2012. Capital expenditures were approximately $8.8 million in the first quarter, and we continue to anticipate that capital expenditures will be approximately $33 million in 2013. We did not repurchase any shares of our common stock in the open market during the first quarter, as our stock hit a near 4-year high. However, consistent with our ongoing investment strategy, we anticipate that we will continue to be opportunistic buyers of our common stock this year.

In conclusion, let me say that we are pleased with our performance in the first quarter, and we remain excited about the market opportunity for PGi and our products, which we believe offer great value to PGi customers, our associates and our shareholders. We remain both eager and optimistic of our ability to continue to transition PGi to higher, more predictable revenue growth and greater profitability. 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

Ted, was there a business day difference between this quarter of this year versus last year?

Theodore P. Schrafft

Tavis, yes. As a matter of fact, there's probably about -- let me just give you a little bit of cover on the revenue, which is part of the heart of your question. We had -- on a GAAP basis, we had about a $700,000 kind of negative hit with FX on a GAAP basis. But on a business day basis, we probably had -- we had about, I'm going to say about 1.5 less business days this year in Q1. So when you're doing a little over $2 million a day, which is what we're doing, it probably comes out to a little bit more than $3 million. So if you normalize it on a pure business day, and I'm going to blame this on business days, but our organic would have been more up in the up in the 6% range. So again, just like I reiterated in my opening notes, with the exception of foreign exchange, that prompted us to change the guidance. We're totally solid and comfortable on our revenue projections this year as well as our EPS projections. So yes, you're absolutely right, it was kind of a business day impacting in the first quarter.

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

Yes. I figured, if IBM's going to use it as an excuse, you may as well as well. The other thing I wanted to get a little bit more color on, I think, last quarter, you talked about the -- some of the things you're doing, I guess, tactically to push the internal web solutions. And I'm wondering kind of where we are in that process, have you started some of those programs and kind of what are the early results?

Boland T. Jones

Well, we have been -- yes, I mean, in terms of pushing the web solutions, we have turned up, I mean, we have turned up commissions. And we had our -- as we probably talked about on the last call, we had an awesome kick off this year with our entire global sales and marketing team. We have increased and put out a number of different sales and marketing incentives. We have done some really, I think, creative and very aggressive turns to the commission plan around total -- what we call, around a concept call, total contract value. We have added about almost 80 to 90 sales folks in the organization over the past year. We have done a lot of, I'll say, retooling -- training and retooling of the sales organization at the same point in time, so we've done a number -- in addition to the sales incentives, we're also -- we've put together and announced really over the past month or 2 a number of customer promotions because we're very focused on aligning both the sales incentives and the customer incentives at the same time to make it win-win. So we're seeing -- I want to say we're seeing -- we continue to see solid growth. We continue to see, I want to say, great traction. We're also getting a number of multi-year deals in, which I'm excited to see as well. And we're also seeing, I'd want to say good progress in what we're calling these bundles, Tavis, which is more of the subscription-based versus the per minute, so for $49 or $39 you're getting both the web and a certain amount of audio minutes. So all of these things are -- and we did a very, very thorough Salesforce.com CRM implementation last year, so we got really good data on pipelines, which we're looking at to give us good forward-looking information as well. So -- and we're seeing, I think we saw about a 30%, 40% growth in kind of the qualified opportunity pipeline between January and the end of March. So we got a lot of stuff that's still new that hasn't really had effect yet, but we got a lot of excitement, a lot of retooling and a lot of, I want to say, momentum that's also showing up kind of in data-driven form as well through sales pipeline. So we were comfortable about -- that's why I said we had the business day hit in the first quarter, but we're projecting organic growth to pop back up in the second quarter, and again, with the exception of foreign exchange, we feel good about our revenue guidance.

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

Great. And then a final question, I guess, this one's more macro, but have you noticed anything in terms of volumes globally in terms of change in trend that would kind of indicate any kind of slowing anywhere? And kind of a corollary to that, Boland, if this kind of slowdown in the economy that we appear to be witnessing in Q1 kind of gets worse, how can we expect you to kind of react to that? Would you be cutting expenses in that environment, or would you be investing through a downturn? I know it's probably premature to talk about that, but just in case recent earnings releases from other companies becomes a precursor, it would be nice to kind of get your thought process on how you manage the business in a slower growth or even slightly declining environment.

Boland T. Jones

It's a great question. Our meeting volume was just under the normal meeting volume, it was -- it didn't pass the meeting volume per quarter that we normally -- it didn't get to the meeting volume that we see normally in a quarter. It was just under the meeting volume, and that was all over the world. So maybe there was a slight business activity decrease, but nothing material at this point. I'd like to think that, and we're pretty close to our business tech now. I'd like to think we have some headroom in our numbers today where we can spend some extra dollars doing things between now and the end of the second quarter, and more headroom between now and the end of the third quarter. We try to run in a pretty conservative nature, taking opportunities where we see that opportunities are really good. Otherwise, we don't run our business so close that we can't adjust. So if there's an adjustment to be made, we can definitely make the adjustment. We saw what happened in '09 and '10, and we're very aware of that. If there's a downturn like that in the future, which dear God, I hope there isn't, I don't see that -- I don't see the kind of bubble activity where we saw an '08 and '09 where meeting volume went to skyrocketing levels. Actually, different from that now, the meeting volume are just slightly off, and they're just a little bit a wee bit off. So it doesn't feel like that same economy, it doesn't feel like a bubbling economy. So I'm not an economist, but I think our business is in good shape, and I think we're in good shape to make adjustments if we need to. We've got some headroom in the model today. And we hope to use that for opportunities, maybe from marketing advertising, maybe for more sales headcount so forth and so on. So -- but if we need to, we'll use that headroom to adjust.

Operator

And we go next to Barry McCarver with Stephens Inc.

Barry McCarver - Stephens Inc., Research Division

So I guess, first question, I'm thinking about the iMeet and the GlobalMeet revenues. And I know you're talking about selling into larger enterprise customers. When we think about the balance of revenue growth, are you expecting to see some cannibalization of the traditional services in favor of the next gen this year?

Boland T. Jones

I think they're -- I think that's inevitable. This is Boland, Barry. We're going to our base customers, our audio conferencing customers, our base customers, and we're being careful about it. But we're inviting a lot of our base customers. We've got some great base management in our company throughout the world right now. Just had a good all-site management meeting with all of those folks. And going to those base customers with good offers where they climb into bundles versus their per minute, so it's not as radical as a Netflix model conversion maybe. But we're inspired by those kind of conversion models, where we'll take a $50- or $60-customer or $70-customer and convert them to a $49-bundle. But they'll use some services outside the bundle typically or over the bundle, and we'll actually, selling them a bundle with breakage will actually almost get back to the gross revenue, not quite the gross revenue. But as we convert customers in our base, there's no doubt they'll be and there was this quarter. We're given up a little bit of top line in those regards, but we're getting promised revenue for 1 to 2 years as Ted said, sometimes even 3, sometimes we're even getting it prepaid. We're getting a Software-as-a-Service customer versus a permanent telco customer that we had. So we're very excited about that and very excited about those opportunities. So there definitely is some cannibalization in our model. We went over with our Board last year, and -- but we think it's -- we think short and long term, it's the right thing for our business.

Barry McCarver - Stephens Inc., Research Division

Yes, of course. And then secondly, I think you mentioned that you added between 80 and 90 sales heads. I think that probably started back in 4Q, if I'm not mistaken. Can you give us a little idea of how you feel those guys are doing at this point? And I think you've mentioned before that you could continue to add throughout the year as they ramp up and sort of what expectations for additional salespeople during 2Q?

Boland T. Jones

Well, let me just start up by saying, we're a direct sales and partner-driven model. So we value 2 ways to go to market: Our partners and our direct salespeople. We're not an advertising model, and we're not even a hybrid of an advertising model yet. Maybe one day we will aspire to that. We certainly tried some awareness campaigns, as you know, in the past. So we're very dedicated to going direct to the customer with a direct relationship either with a partner or our own direct salespeople. And so, therefore, if we grow, if we want to grow, it's like anything. We're going to have to increase the number of partners and increase the number of direct salespeople. And so each and every year, we're trying to look at it. We're really trying to bear down on it as we get this bundled model and the SaaS model down with iMeet and GlobalMeet. We're excited about a model that we can really drive new salespeople through that model. Now last year, we tried more of a younger, more tech-savvy individual, and while some of that worked out, less of it worked out than we wanted it to. And so what we've done is we substituted a lot of those for some more senior experienced SaaS-type salespeople, and so there's a good mixture out there now. So we'll be adding those people both in a younger and more tenured fashion as long -- as well as we're adding and mixing into our business a lot of sales engineers and sales experts throughout the field in all the countries we do business in. So we're finding that, that's something new for us. It's very necessary, but when you get to do software sales and you're dealing with proxy settings and firewalls and so forth, we're having to have sales experts and sales engineers in the field with the salespeople, so we're trying to balance out that as well. So we're definitely adding -- if we come out at the end of each year, we need to be adding to our sales force substantially to expect the growth and add to our partnerships to expect the growth, and so we have to.

Barry McCarver - Stephens Inc., Research Division

Okay. And then you led me into my last question on your channel partners. Could give us a little color on how some of the partners have driven revenue? I think you've had a few on for a couple of quarters and obviously you signed a new one during the quarter. An idea for what those relationships will look like and maybe what the margins look like for some of that revenue?

Boland T. Jones

Well, I don't want to call out our partners individually because in some cases -- in a lot of cases, we're in a nondisclosure.

Barry McCarver - Stephens Inc., Research Division

Sure, sure. I'm just talking in general.

Boland T. Jones

But in general, when you start with a partner, some partners get it quicker than others. But when you start with some of the big infrastructure partners that we have, it's a super huge opportunity. And I can tell you, the one we just signed up, the one we just talked about over in Europe were super excited. They're going to come out very strong towards the end of this year right away. They get it, the other partners we signed up, we talked about in the past, they get it, but there's a couple of particularly strong, very large partners that not only have done incredible job selling GlobalMeet, a little bit of iMeet, mostly GlobalMeet because they have larger customers. So to start out with, they started with GlobalMeet. They're now starting to look at programs where they're going to take to 1 million small business customers or 0.5 million small business customers, several of them have programs and plans where they're going to take either iMeet or GlobalMeet into different segments of their customer bases. And so after the last 1.5 years of having these early partners out there, we've had some success with most of them. And they're starting to introduce our products and our bundles in other parts of their business, other channels of their business. So I think it's going extremely well. We're pretty fortunate to have those partners that we have.

Operator

[Operator Instructions] We go next to Mike Latimore with Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

Just on the software products -- as you look forward, what's going to be the biggest driver of that category? Is it the telco channel? Is it winning new GlobalMeet deals, is it some of these small business activities? What's the most influential, I guess, going forward?

Boland T. Jones

The meat and potatoes -- this is Boland, by the way, the meat and potatoes is going to be our direct sales force day-in and day-out. But what we hope happens and what really needs to happen if we want a real moon shot, it's going to be a combination of our own direct sales engine, as well as our partners' engines. We've got tons of partners, wholesalers and resellers, they're coming up with ways to sell it that we didn't think of, sell the bundles and sell the SaaS software. They're coming up with things that combine them with. I mean, it's a real combination, a real collaboration of ideas. But to really hit it out of the park, we're going to have to have the whole system working. We're going to have the partners and the direct sales working. And one or two of these very large partners that we have, if one of them gets wind behind their back on some of the programs that they're trying now, or some of the programs they're contemplating, it could be a moonshot for us. And that's what everybody that partners with people on either side are hoping, and so that's what we're looking for as well.

Michael Latimore - Northland Capital Markets, Research Division

And then what kind of run rate do you need on software business where you can sort of comfortably say that that's going to counter the growth in the global account so that it affects gross margin?

Boland T. Jones

A great question we only talk about it every day. But we're already starting to see, as small as the number is right now, we're already starting to see some influence, very little, but we're seeing it and it's demonstrable. But when we get -- if this time next year, we believe we can continue our growth rate of doubling year-over-year, quarter-over-quarter, so this time next year, if we're exiting Q1 and going into Q2, we hope to be more than double the number this quarter. So if we can be between $12 million and $15 million for that first quarter, I think that's a real tipping point that we've talked about in our numbers that will really start counterbalancing the entire gross margin of the other business. And in the meantime, by the way, PS, we're working on bettering the margin of the other business. We have deployed a ton of cellphone in downloadable plug-ins on Outlook email toolbars, we've done a lot of work in the mobile area, where at least 20% to 25% of the participants on all our meetings are getting on, on mobile devices. And so we're starting to penetrate our customers with the mobile apps of these things as well, where they come in on the board connection. So all of the effort is getting there.

Michael Latimore - Northland Capital Markets, Research Division

Okay, great. And then you're obviously focused on selling your own products, but I assume a percent of revenue comes from selling or from legacy customers that bought third party technology. I guess, what percent of revenues is coming from where you really resold third party technology?

Boland T. Jones

I don't know that we've ever broken that out. And I don't know if we want to break that out right now. Let me say this about that, and Ted's going to give you a comment, too. But the bottom line is this. We will do what the customer needs to do in order for them to forward their business with the right collaboration tools. So obviously, we want to sell our products. But we partner with people and technology all the time, and there's never probably a big account or a medium account that we don't look to partner with some technology, whether it's an Adobe or WebEx or even a Plantronics. I mean, we have countless number of partners. We value their partnerships and their technology partnerships like crazy, and the bottom line is get the customer what they need and get them the right answer, and that's the way we look at the business.

Michael Latimore - Northland Capital Markets, Research Division

Last, just what kind of tax rate are you expecting for the year roughly?

David E. Trine

Mike, this is David. 29.5% to the 30% range. Our normalized rate for the Q1 was 29.5% though.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. 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 today. If you have any follow-up questions, please feel free to give me a call. My direct line is (404) 262-8462. Have a great day.

Operator

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

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