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Premiere Global Services, Inc. (NYSE:PGI)

Q3 2009 Earnings Call Transcript

October 22, 2009 5:00 pm ET

Executives

Sean O'Brien – SVP, Strategic Planning and IR

Boland Jones – Founder, Chairman and CEO

Ted Schrafft – President

David Trine – CFO

Analysts

Shyam Patil – Raymond James & Associates

Tavis McCourt – Morgan Keegan

Mike Latimore – Northland Securities

Sri Anantha – Oppenheimer

Richard Todaro – Kennedy Capital

Bill Sutherland – Boenning & Scattergood

Operator

Good day and welcome everyone to the Premiere Global Services Incorporated Third Quarter 2009 Conference Call. Today’s call is being recorded. This call is also being simultaneously broadcast over the Internet. You can go to our website, www.premiereglobal.com and go to our Press section.

Alternatively, you may listen to the rebroadcast from your telephone beginning at 8.00 PM Eastern Time today through midnight Friday, October 30th. The replay numbers are 1-888-203-1112 within the United States and Canada or 1-719-457-0820 worldwide. The confirmation code to access the replay is 1432472. All lines will be muted throughout the presentation until the question-and-answer period begins.

At this time, I would like to turn the conference over to the Senior Vice President of Strategic Planning and Investor Relations for Premiere Global Services, Mr. Sean O’Brien. Please go ahead, sir.

Sean O’Brien

Thank you and good afternoon everyone. If you’ve not received a copy of our third quarter earnings release, please visit our website at premiereglobal.com, where it is available in our Investor Relations section.

Joining me on the call today are Boland Jones, our Chairman and CEO, Ted Schrafft, President of PGI, and David Trine, our CFO. Following some brief comments by management, we’ll open the call to your questions.

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 in our Annual Report on Form 10-K for the year ended December 31, 2008, our quarterly report on Form 10-Q for the quarter ended June 30, 2009, 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 premiereglobal.com.

At this point, I’d like to turn the call over to Boland.

Boland Jones

Thanks, Sean and good afternoon, everyone. This is Boland Jones, Chairman and Chief Executive Officer of PGI. Welcome and thank you all for joining our third quarter earnings call. I’m very pleased that our company continues to make meaningful strategic and operational progress this year despite a very challenging economy that is weighing on our financial results.

Today, our results are largely driven by our conferencing and collaboration solutions, what we refer to as our meeting business. As I mentioned on our last call, we are focusing our corporate strategy and our strength in the meeting business. As it represents the vast majority of our revenues, we believe that it also provides very high value to our customers and is proven to be very scalable and continues to drive solid margins. And lastly, we believe it offers great growth opportunities for us now and into the future.

PGI has a long record of success in the meeting business. We've grown from around $50 million in conferencing 10 years ago to approaching $0.5 billion in annual revenue today, representing compound annual growth of nearly 24%. Over the last five year, we’ve helped about 400 million people meet more than a 100 million times on our global platforms. And in the third quarter alone, we connected nearly 34 million people from around 60 countries worldwide in nearly 9 million virtual meetings.

This last time last year, when almost every other business was being affected by this global financial crisis, we were continuing to generating around 15% organic growth in our meeting business. Today, many of those companies are beginning to see stabilization in their trends, but we are containing to feel the lagging effects of today's economic slowdown and lower business activity and lower business activity and higher global unemployment that puts pressure on our trends.

People power meetings and there are a lot fewer people in the workforce today than they were last year and ever last quarter. The U.S. economy has lost nearly 6 million jobs compared to this time last year and estimates of the global job loss during this financial crisis maybe up to 50 million jobs, representing a tremendous number of people taken out of potential meetings all around the world. As a result, we remain cautious in our near-term outlook. Although we are reluctant to forecast a rebound in our business trends just yet, recently our own internal and external indicators are causing us to be more optimistic.

For example, we’ve seen a modest stabilization in sequential volume trends in our meeting business over the past few weeks. Our new customer acquisitions remain very strong and at the upper end of our historic ranges. On a macro level, we believe improving jobless claims, an uptick in small business confidence and analyst forecast for return to growth in IT spending, all suggest elements of future economic stabilization. But we are not waiting around necessarily for the economy to improve. We are actively investing, expanding our reach to take additional market share during this industry reset.

We can’t forecast when the economy will fully rebound, but we will continue to create new opportunities for this company to grow through innovative products and good marketing strategies. The great news is that virtual meetings are on the mind of a lot more companies today than ever before.

With tighter budgets and reduced headcount, it’s becoming extremely critical for businesses to unlock and harness the collective intelligence of their workforces through collaborative meetings, and we know meetings. PGI is a leading expert in understanding how and why people meet. We've been in this business directly for more than a decade and through an acquisition for more than 25 years. We understand people’s changing preferences, their frustration points and their habits in meetings.

Today, we largely serve a single market. Group meetings is that market and it takes place in a business environment. It’s a great market; analysts peg this market at nearly $6 billion a year. When we look at ways we grow in the future, we will clearly continue to aggressively compete in this space. But we will also look to expand our universe to take share in other types of meetings that are currently outside of our scope more and more because the advancement of communication technologies and changing user habits.

People are meeting in numerous venues outside of the traditional conference calls and web meetings. They meet in places like social communities, blogs; they use peer-to-peer technologies, chat sessions and so on. There are a vast number of different meetings and different types of meetings occurring on desperate platforms that we currently don’t serve and we believe a number of meetings that happen in these fragment of platforms are many, many times the number of our traditional meetings that we currently serve today.

So we want to be the one to bring it all together. We want to help users of all types improve all their meetings and actions with one another and to open new growth opportunities for our company, PGI. Business people alone spend nearly a fifth of their weekend meetings. In fact, according to New York Times, 75% of these people think their meetings could be more effective.

So we’ve enlisted the help of experts in human communication and behavior and they’ve provided some thought-provoking ideas on how PGI can reinvent how people meet. These findings are the basis of our new meeting product, which we have discussed in our last few calls. This powerful new meeting platform that we have been talking about has been painstakingly and thoughtfully designed to be amongst the most intuitive and engaging technologies in this market today. When we release it to general availability early this next year, our goal will be to inspire users to make them view their meetings in a completely different light.

Up to this point, many of our competitors have used technology that was created for one specific application, to address every type of meeting. We think that has caused a lot of user confusion and dissatisfaction. Other competitors of ours have developed applications that are more about the technology than the people, about functionality and features, not the user experience. With these new technologies come new pain points for those users and in many cases, the technology compounds rather than alleviates their frustration.

Our goal is to absolutely change all that, to develop the technology to a point where people can just meet, meet without worrying about the tool or technology they are using, meet in an effortless, more powerful, and more natural way. We want to liberate you users from the technology to deliver and experience where the people are first and the technology is second. We don't think anyone is currently addressing this market in the way that we are speaking up today and that presents a great opportunity for us.

We aim to be a part of every meeting, every single meeting every single time everywhere. This is a huge and lofty dream and accomplishing it will take more than developing great products. It will take a different strategy all together. That is the reason we are zeroing in on our focus on meetings.

The PGI communication operating system drives everything we do and we will continue to leverage our other PGI communication operating system solutions to provide great value to our customers and to differentiate us from our competitors. But our primary corporate focus going forward will remain meetings and we are investing in the new market strategies that we believe will fully exploit our expertise in the meeting space to build a very solid foundation for our future and our growth.

Clearly, we have a lot on our plate and while the sluggish economy and high unemployment are affecting our current business trends, we believe we are continuing to make solid progress towards building a world-class growth company. Once again, most of all, I’d like to thank all of our valued customers and all of our associates around the world for all the hard work and all their support.

At this point, I’ll turn it over to our President, Ted Schrafft. Ted?

Ted Schrafft

Thank you, Boland and good afternoon, everyone. Let me begin by saying that it’s really been quite a year. As Boland discussed, we were late to the party so to speak in feeling the true impact of the global slowdown, which made it impossible to reach our original financial targets for the year. In spite of that, in my opinion, we have continued to make significant progress on a number of key strategic and operational fronts.

In fact, over the last couple of quarters, we have managed our business more aggressively than ever before from a more focused strategy, tighter operations and expense controls, strong cash generation, solid balance sheet oversight, and meaningful debt repayment. We remain confident and optimistic of a great future ahead of us and as I said on our last call, the mindset of our company is to take full advantage of this time to extend our reach, grow our market share, and build a solid foundation for future growth. In that regard, we believe that we will look back on 2009 as a defining year for our company.

Now, this afternoon, I’d like to spend a few minutes highlighting our corporate strategies before reviewing our third quarter performance. And prior to opening the call to your questions, I’ll take a moment to summarize our financial and business outlook.

Let me begin by explaining how we are approaching the market today. As Boland mentioned, we are continuing to focus our company around our expertise in the meeting space. While we are focusing our product strategies squarely on the user, we are continuing to align our corporate strategy around the buyers of our solutions.

Today, we are increasingly selling directly to enterprise technology buyers, often found in the office of the CIO or IT leader. This trend is particularly true in our meeting business where we were often asked to integrate our collaboration technologies with our customers’ global IT infrastructure, their HR platforms, and their company internets. It’s also true of our core Send solutions, which are the workforce, paper automation, and customer notification applications we offer. These solutions typically integrate into an operational or production environment within our customers’ backend systems.

However, our marketing solutions point to a different buyer of the customer. As a result, it is proven to be a very different sale for us. So we have made a strategic decision to divest this very small portion of our revenues as we announced this afternoon and have reflected in our financial statements as discontinued operations. We believe our streamline product suite focused on the technology buyer simplifies our customer value proposition.

Today, we are also investing in new go-to-market strategies to drive greater adoption of our products and to create new opportunities for growth. For example, we recently launched a new managed services offering to better serve our core technology buyers at large global enterprises. Collaboration is a top item on the minds of these CIO’s. Today, they typically manage a number of desperate internal and service-based offerings around collaboration.

Our new managed collaboration services team will help unify their fragmented platforms into a single, consolidated offering, with better monitoring and management tools and a more consistent user experience across the organization. Our goal is to move beyond just our traditional on-demand model in order to build a more strategic, higher value and ultimately, larger relationship with our top global customers around the area of collaboration.

At the same time, we are working to expand our relationships with large enterprise customers. We are also working to increase our acquisition of small and mid-sized customers. Earlier this month, we launched a preliminary test of a new multimedia advertising campaign, designed to generate increased leads to our website and inside sales team through offers at our meeting solutions, specifically designed to meet the needs of smaller businesses.

With this program, we are casting a broader net than ever before with the goal of driving significant new customer growth. As this new program proves itself, we anticipate ramping our spending later this year and into next.

And finally, we are investing and building our partner channel as well to help us achieve our goal of scalable growth. This strength includes all types of partners such as strategic technology partnerships, indirect resellers and agents, and soon to include strategic marketing alliances as well. The goal is simple; to leverage our core products, global presence and customer support and to reach a wider and broader audience through these channel relationships.

In summary, despite the challenges of the current economic environment, we continue to actively invest in our future through product and market strategies, designed to extend our market reach and growth opportunities.

Now, let me discuss our third quarter financial results. Before I begin, I want to note that in our earnings release and 8-K filing this afternoon, we reclassified operating results associated with the e-mail marketing assets we plan to divest into discontinued operations. As I review our Q3 performance, I will be discussing our results from continuing operations.

Let me begin with revenues. As reported, our third quarter consolidated net revenues totaled $148 million, which includes a modest negative impact of approximately $1.4 million from changes in foreign currency exchange rates during the period compared to the third quarter of 2008. Despite significant headwinds, revenue from our meeting business was flat year-over-year on a constant currency basis. As we communicated to our investors earlier this month, our meeting business continues to be affected by weak economic activity and high global unemployment.

Consistent with prior quarters, we believe our pace of new customer acquisitions and pipeline of new business opportunities remain robust. Pricing trends remain within recent historic ranges as well. We believe our fourth quarter guidance of $140 million to $144 million in consolidated net revenues reflects the continuation of these trends and the typical seasonality of the Q4 holiday periods.

Now, let me turn to our profitability. As a result of lower consolidated revenues, our margins declined sequentially from the second quarter. Margins have also been pressured by a shift in our revenue mix toward a higher weighting of large volume enterprise customers as we continue to have very good success in the upper end of the market. We believe our gross margin will improve in the current quarter as a result of the actions we have taken to better streamline our cost.

Further, we believe our cost structure can now support much higher revenues with limited incremental operating expenses, reflecting the scale, operating leverage, and earnings power we have built into our business.

As we noted our last call, we incurred severance and lease abandonment costs and asset impairment charges during Q3 as a result of our efforts to focus, realign, and streamline our business. These are all detailed in the financial statements attached to our earnings release.

Moving on to cash flows, we continue to generate strong cash flows despite pressures on our business trends and costs associated with our restructuring efforts. As reported this afternoon, net cash provided by operating activities from continuing operations totaled $70.6 million in the first nine months of the year. Consistent with our historical performance, we anticipate fourth quarter will be another strong cash flow quarter for us as well.

Capital expenditures remain in line with our projections. We continue to anticipate CapEx will decrease by greater than 10% this year as we continue to bring products we’ve developed into service and as we have completed the major elements and associated spend of our global IT infrastructure build-out.

As of September 30th, we had approximately $264 million in long-term debt and capital lease obligations. We anticipate ending the year with total debt minus cash and equivalents of less than $220 million. This will represent a decrease of greater than 10% from year-end 2008 and its lowest level in more than two years.

In conclusion, let me say that we are pleased with the strategic and operational progress we’ve made in the third quarter in spite of continuing economic pressure on our business. We believe the actions we have taken this year to streamline our company and focus on the meeting business have built significant leverage and earnings power into our model, which will begin to be reflected in our fourth quarter results. And we continue to produce strong cash flows that we are using to pay down debt, while at the same time investing for growth.

The thought I’d like to leave you all with this afternoon is that we are passively waiting on this economy to improve. We are actively managing, operating, and investing in our business to create growth opportunities while we operate toward a brighter future ahead.

I look forward to updating you on our progress on 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 in time, we will open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And we’ll take our first question from Shyam Patil with Raymond James & Associates.

Shyam Patil – Raymond James & Associates

Hi, good evening. On the call, you guys referenced stability a few times. And I’m just wondering if you could just comment on if you are seeing that stability of volume across the customer base or if any particular verticals that are driving that. And if you could also just talk about usage within the SMB base as well.

Boland Jones

Yes. It’s – this is Boland. How are you doing? I did mention that in my speech and we are seeing that pretty much after Labor Day, say, a week following Labor Day, we’ve seen a real different falling-off-the-earth trend of meeting users and so forth. And so we are encouraged by that.

It’s only been four or five weeks, we really don’t want to overemphasize that versus – let’s wait and see what the trend is. It’s spread across everything, it’s not just in a small user base or in a large user base. There are some larger customers that have been more steady throughout this and we have been hurt more in the small customer base than in the large customer base. There is no doubt about it, when that makes sense with the economy.

But to answer your question specifically, all meetings seem to be slightly up once everybody came back from Labor Day and so everything across the spectrum seems to be a little better.

Shyam Patil – Raymond James & Associates

Okay. And then on the 4Q guidance, I think, Ted, you mentioned that assumes some normal seasonality of fewer business days. But in terms of the trends within the conferencing business, are you assuming stability in volumes there as well are or you taking a more conservative approach in terms of assuming further deterioration?

Ted Schrafft

Shyam, hey, it’s Ted. Actually, I think we are taking a more conservative approach and basically, I’m going to, say kind of projecting or guiding toward a continuation of trends. So I think we are looking probably at mid-single digit declines in that business. So again, we certainly are working very hard in making the right investments and driving a lot initiatives to drive growth, but we don't want to be predictors here right now. So we are staying on the conservative side.

Shyam Patil – Raymond James & Associates

Okay. And this is my last question, is about the upcoming collaboration product. I know you guys aren’t talking too much about that. And you mentioned you are going to launch in early next year, so that’s going to be in 1Q. Just wanted to get a sense of – as to what you guys are hearing from your customers, those that maybe in beta launches and et cetera.

Boland Jones

Well, we are not – we are certainly going to beta it with people that we think will like it. So we are hearing all good things. I’m kidding. We have – we’ve gotten some good constructive comments about the intuitiveness of the product, mostly good, but some constructive, we’ve got an overwhelming comment that “never seen anything like this.” I hate to sound like this, but this is the God's honest truth. Gosh, this is the way it should have been all along. I – this is pretty neat, this is incredible, this is really going to help me.

In one case, we showed a demo and a sample of it and it said we have a ton of business that we'd like to offer you as a result of this product coming alive. The main thing people think is it’s just so simple and easy that there is no “I don’t know how to use it, I’m afraid of it, I don't know how to work certain things on it, I need somebody to come to my office and help me with it.” From high sea level, all the way down to the middle of the company in the betas we're hearing that this is probably the easiest thing they’ve ever used. No doubt about it.

Shyam Patil – Raymond James & Associates

Great. Thank you.

Operator

And we’ll take our next question from Tavis McCourt with Morgan Keegan.

Tavis McCourt – Morgan Keegan

Hey, guys. Thanks for taking my questions. First, I wondered if you could tell us a little bit about the e-mail marketing business, it’s now discontinued ops. Just want to confirm it’s not in the Q3 numbers in terms of revenues. And then it looks like on the cash flow statement, it was about negative $2 million impact to cash flow from operations and $2 million in CapEx to that unit as well. Is that a typical quarter for that unit or were there some one-time –?

David Trine

Tavis, this is David Trine.

Tavis McCourt – Morgan Keegan

Hey, David.

David Trine

You should have in – as part of the 8-K, there's a schedule that just shows the discontinued ops by itself and that’s exactly right. Revenues were less than $4 million on an annual basis and then you can see that on the cash flow statement, the amount of discontinued ops and so forth, we were spending maybe $3 million in CapEx on that product. But as Ted and Boland mentioned before, it’s just one of those products that we didn’t feel like was core to our long-term strategy. And so we decided to exit that.

Tavis McCourt – Morgan Keegan

And are there other areas you guys are looking to streamline as well or was this something that was kind of a unique product that just ended up not being the buyer within the organization that you thought it was going to be initially?

Boland Jones

I mean, that’s more – Tavis, this is Boland. We still have a pretty large e-mail presence in the Send business. So we are not necessarily stepping away from e-mail technology, but that particular product itself was more of a marketing department sale and is a more intricate sale in areas that we normally don't operate in these enterprises. And so we decided the strategy for us is to really concentrate mostly on the meeting business, also on the Send business, and this was just way out of character for us in that regards as we looked at it.

Tavis McCourt – Morgan Keegan

Okay. And Ted, you mentioned kind of reinvesting a little bit in kind of small and medium-sized business acquisitions where I think you guys have always done a very good at the high end of the market. You've probably been a little underrepresented in small and medium-sized business historically. But are those – is that is that marketing spend going to be big enough to notice, or is it all done kind of within the existing ad budget and shifting dollars around from other places to that SMB spend?

Ted Schrafft

Hey Tavis, as I said, it’s – we are starting out with a test and it is a – it’s a very integrated sales and marketing kind of multimedia advertising campaign. We are very excited about it and actually with Jackie Yeaney coming on about a little over a year ago, we got some I think some real marketing prowess in our portfolio here. So we just did it, we are doing tests, but we are clearly going to make them – they are clearly success-driven.

So I actually – I hope we spend a lot of money on it because that means it’s working. So I think launching it, we are being smart about it, we are doing a number of different kinds of test sells and campaigns to different types of small and mid-sized customers. But I – we are clearly going to feed the beast as we get traction on it. So I actually hope it’s a – I hope it’s a bigger number, we all hope it’s a bigger number and that’s clearly one of the investment areas and the market strategies that we were referring to in our opening comments.

Tavis McCourt – Morgan Keegan

And then in terms of the commentary about the stabilization, if I’m correct I think you guys always see a pretty robust recovery after Labor Day in your usage in late September and October and have you guys seen kind of normal seasonal trends or is it still weaker than normally seasonal, just better than it was in August?

Ted Schrafft

Yes, it was – when I talked about that earlier, I mean it’s – I don't want to over-exaggerate what it was. It was like getting the patient -- putting the paddles on the patient and finding a heartbeat again. It wasn’t exactly exuberance; it was detecting pulse, which was exciting for us at that time.

Tavis McCourt – Morgan Keegan

Got you. And then final – on the new product that will be out early next year, have you guys come to any conclusion in terms of the business model for that, the pricing or the marketing of it or anything related to that? Are you still kind of deep down into the product development?

Ted Schrafft

No, we are beyond the product development. We are doing some finishing development now, which we’ll probably continue to do throughout the beginning of next year and then we’ll – there will be different phases of it as we go forward that we’ll always work on to improve. This is a massive platform and software application that rides on it. So there is a lot going on here, but on the business model and the pricing and so forth, that’s exactly what we are in the middle of right now, it’s funny you should mention that.

There is a lot of markets out there and as I mentioned in my speech, there is markets that are outside of the traditional group meeting markets. And so we are trying – we are going to pick – we are not going to try to boil the ocean day one, we are going to pick a market to pursue initially.

It’ll probably be a more boring small business type of traditional open market, but it’s going to expand quickly as we see the product being accepted or we see that it needs any adjustments for total acceptance to some new markets we've never been to before and we think we’ve shaped a product that I think once you see it and see the demo of it, we have shaped the product to fit different kind of genres of meetings that people have. So I thought I can really say right now, but we are right middle of the business model and the pricing as we speak.

Tavis McCourt – Morgan Keegan

Okay, great. And David, one final one. I haven't had a chance to read through the 8-K, but the operating costs that you reported this quarter for selling, marketing and R&D, that excludes anything from the disco-ops, correct?

David Trine

That’s correct.

Tavis McCourt – Morgan Keegan

Okay.

David Trine

So everything you see in the income statement is only continuing ops.

Tavis McCourt – Morgan Keegan

Great. That’s helpful. Thanks a lot guys.

Operator

And we’ll take our next question from Mike Latimore with Northland Securities.

Mike Latimore – Northland Securities

Hi, good afternoon. Just on the non-conferencing piece of the business, it’s been relatively stable for the last few quarters. Is it – do you attribute that to just sort of business transactions picking up or are you adding a lot of new large customers that causing to be stable?

Ted Schrafft

Hey Mike, it’s Ted. That – I would – we have actually added a number of customers in that area. I mean, I – we’ve got some trends still going against us in financial and some of the transactional areas that continue to be, I’ll just say, slower or somewhat depressed but we have also had some – we've had some nice wins in our Fax To Mail and our Send areas. So we are seeing – we are – we got some negative trends against us, but we got some pipeline and some deals that are certainly working against that. So a little bit of both.

Mike Latimore – Northland Securities

Is it fair to say that that – I mean, do you view that as generally a stable business at this point?

Boland Jones

I – this is Boland. How are you doing, Mike? I – everybody is trying to get us to tell – and I understand that you are trying to say, “How do I judge the business going forward.” That business over there was so steeped in the financial and travel business, it is incredible. If you look at our total business, we are maybe 20% in those two areas, but if you look at that business alone, that Send business, it maybe greater than 60%, 70%, 80% in those two industry sectors. And so – yes, it’s steady right now

Does that mean it’s going to stay there? We hope it will grow, we are too stupid to think we can’t grow it, but it’s been beat to death in the financial sector and the travel sector. So we’ll see – I hate to keep going back to where the economy is, but let’s see, we are going into Christmas season here, maybe travel picks and transactions go down, I don't know. So let – I just want to wait and see.

Mike Latimore – Northland Securities

And then on the Fax To Email application specifically, can you characterize that? Has that grown year-over-year for you guys?

Ted Schrafft

Absolutely.

Mike Latimore – Northland Securities

Okay, great.

Ted Schrafft

And that is a business that we love, we are behind, we are selling, we are – so we are – and investing in terms of products, et cetera. So that is a – that’s – that part of the Send space is a key –

Boland Jones

Real bright spot for us.

Ted Schrafft

Yes. And it’s been a double-digit grower for us.

Mike Latimore – Northland Securities

Got it. And then on the conferencing business, historically you – I think you had sort of said that new customers drove about I think a half of the growth and then growth from the installed base generated the other half of the growth in the quarter. Can you try to quantify or characterize how that new customer base is trending now? Is – you’ve just looked at that – is that a growth business that generating 5%, 7% growth nowadays?

Boland Jones

This is Boland. I’m trying to understand exactly what you are saying. You are talking about the newly acquired customers, are they growing or the business today after this summer? I didn’t understand exactly which new business you were talking about. I’m sorry.

Mike Latimore – Northland Securities

I – I guess, so is there some way to quantify just the help of the new customer business? Are you adding the same amount of, say, volume every quarter as you have in the last few quarters?

Boland Jones

Yes, I think Ted actually mentioned this in his speech, but our acquisition rates are at the high end right now of what they’ve been in historical ranges. I mean, our acquisition engine is working great. And so here is sort of – and I’m sure you can hear this with other vendors of these same services, other companies of these same services, but you’ve got a large portion of your growth coming from new customers, which we still have. You traditionally have a large growth spot from your current customers, which we’ve lost.

And in addition to losing the growth from the current customers in large part, we’ve also had current customers that of course want discounts in this terrible economy. So you don’t have the current customer growth plus you want – plus you’ve got everybody looking down their line items saying, “Well, we can save some money back on our vendor here or calling our person here and cutting price here.”

So we are part of that as well. So we’ve got a double whammy working against us. That activity was severe in the end of the first quarter, during the second quarter and on into the third quarter. Both of those activities – non – business activity was down and the need for help was high. Those things have subsided somewhat. And thus the trends that look a little steadier, as I spoke of earlier.

Mike Latimore – Northland Securities

Okay, great. Thanks. And then just on the gross margin, did you think you’ve seen the bottom there or is there a chance for it to trend a little bit lower here?

David Trine

Mike, this is David. Yes, as Ted mentioned, we feel like we are going to see an uplift in Q4. Lot of it is the restructuring that took place in Q3, was near the latter parts of Q3. And so we anticipate a modest increase going into Q4.

Boland Jones

Yes, even on lower revenues.

David Trine

Yes, even on lower revenues that we are expecting. If you remember, the press release said we are going to have a range of somewhere between $140 million and $144 million.

Boland Jones

Yes. I mean, the layoffs we've done, I don't -- not to interrupt, but the restructuring we’ve done, the re-jiggering that Ted and Dave and everybody have done, has created a ton of leverage in our model right now, leverage that we haven’t had in the past and we’ve done things through technology and we’ve done things by deciding to focus and get out of certain things. And so those things combined have, David, you can add on to it, but I mean – they’ve added a ton of leverage to this model for the next –

David Trine

That's right. And there's certain costs that you see in our income statement, for example, G&A, where we are expecting to be somewhere around $65 million for the year. I mean, I feel like we've got significant leverage there, we can add a tremendous amount of revenue to our company and still see very little change in that line item.

Ted Schrafft

And Mike, this is Ted. Just even a follow-on to actually both your questions too, because even though we’ve seen – even though we are seeing, I’ll say, historic highs of new customer acquisition and it’s related to gross margin too, we are not happy with that. I mean, we are making the right moves and the right investments, no doubt, to really push on growth. As Boland said, we are too stupid to think we can’t grow regardless of this economy with products and go-to-market strategies.

So we are investing and we are going to figure out how to grow this thing and we – again, then you go back to the leverage we’ve built into the model. We think there is – it’s very positive. So I could say we know how to grow, we’ve grown this business over a long period of time very, very consistently. So we’ve got the leverage in the model and we got, no doubt, a very, very stringent focus, growth strategy and investment strategy to do that.

David Trine

Yes, we – this economy is like, if you looked at our business’ same-store sales, this economy has killed our same-store sales. It’s an anomaly hope I think. And so – it’s just – it’s like if you took everything and just reset everything down a little bit and then said, okay, start from here. It's sort of like a reset with sort of new rules. So we'll adapt to it. People still need to meet, and we're going to be the premier in that area.

Mike Latimore – Northland Securities

Great, great. Thank you.

Operator

And we’ll take our next question from Sri Anantha with Oppenheimer.

Sri Anantha – Oppenheimer

Yes, thank you. Ted or Boland, when I’m looking at your revenue geographically, especially on a sequential basis whether it’s North America or Europe, could you guys maybe quantify how much of that decline is coming from volumes versus pricing? I know, I think – I don't know if this was Ted or Boland mentioned part of it is because of the exposure to the travel and financial verticals. What is the total revenue coming from both of those verticals and how much as a decline year-over-year? Thank you.

Boland Jones

Yes, this is Boland. I’m going to answer the first part and let Ted take a part. But we haven't broken out what vertical represents what revenue on our model ever. So I don't think we have that information available to you today and I’m not sure, on a competitive basis, if we would choose to really give that information out. I don't know that’s it’s important in determining the strength of our company other than we are spread well over a lot of different sectors and a lot of different industries.

So we feel like we are well balanced. I can’t tell you that the technology industry vertical has been a great industry vertical for us this year. And it’s a new star in our verticals as opposed to previous years of financial and prior to that financial, travel and even health care. So – but we feel like we got a lot of way to go in all of those verticals.

On the details though, of the second part of your question of your question, I’ll let Ted take a look at that on minutes and so forth.

David Trine

Yes. Well, Sri, this is David Trine. We are going to have a lot more of the segment information in the 10-Q that comes out. So you’ll get the typical information in a couple of weeks to that.

Sri Anantha – Oppenheimer

Got it. And Boland, I know you talked about launching new products, you guys are still trialing out various pricing schemes for that. Could you at least give us some flavor whether it’s going to be similar to usage-based pricing or flat-rate pricing?

And secondarily, I know you have selectively been offering a flat-rate pricing to new customers. What is the risk now just to go aggressively and offer flat-rate pricing to all of your customers? From an investor perspective, I don't think – I think I don't see any risk given where your evaluation of the stock is. And longer term, when you at flat-rate pricing model, they’ve always been positive for the company longer term whether it’s from a volume or a margin perspective. I know you guys want to take it in a gradual fashion. What you see is the risk just to go and aggressively launch flatter pricing here?

Boland Jones

Well, first of all, some of the risk is my customers right now are my kind, right? And they always are my king, my customers and my associates that I work with. I really wouldn't do anything according stock price, high or low, just to start there. But I think the major consideration in flat-rate pricing is do people want it, right?

And so we have tested it, we’ve done a great job, we’ve got a lot of SMB business that is not only using flat-rate pricing, but sort of subscription based pricing, which is different from flat-rate pricing in that you pay me like a cell phone plan on just audio minutes. So you pay me 50 bucks, it’s a flat rate for so many minutes, just like your cell phone plan and then you pay me for overage.

And that’s where we found in tests over those last year, year and a quarter, that we’ve done really well in it. And we’ve advanced a lot in it and that creates a breakage opportunity, which is really what I think you are hinting towards in a flat rate. There is some – there is a lot of customers that don't want a flat rate and there is a lot of customers that do. One thing that I look at all the time is we have a variable expense in our gross margin, which is our line costs and more and more we can get away from that line costs with our VoIP technology and our VoIP infrastructure that we’ve been deploying so hard for two years.

To answer your question on our new product, our new product could possibly range all the way from advertising paid model to fixed fee flat price. And in between there is per meeting, per minute, all sorts of stuff. I’m not going to say on this phone call today exactly what our pricing strategy is. I will say though, that our approach to the market is to meet the market where it is for that meeting.

So if the market is somewhere in the realm of what people are used to paying or expect to pay or would like to pay or are frustrated from what they were paying and they want some new way to pay, we’ll meet the market there. And so that’s how we are looking at it. There is – it’s not an easy answer because there is going to be several ways that you can use this product. It'd be like saying what do you use your iPhone for when there is 80,000 apps. So – and those apps are all priced differently and so forth.

This product will be very similar to the capability and extensibility of that. This product will have opportunity for customers to build their meeting device, their meeting room, or their meeting system, the way they want to build it. And so that’s what they’ll pay for as they build it. It will have all the modern technology in it so that we can get further away from the line costs in our growth margin. It will have the cell phone technologies in it and the streaming technologies in it, it will have everything in it. And where people want to drive their meetings on those ideas and those opportunities, we’ll look to capitalize on that with flat rates or easier-to-understand meeting expense rates.

But it’s not as easy as just going to say, “Everybody pay me 50 bucks and let’s all go home.” One is the customer is not ready to do that. Otherwise, I would have already gone there, regardless of the stock price. So I got to pay attention where that is and where the market is.

Sri Anantha – Oppenheimer

Got it, appreciate it. I know you guys haven't talked about broadcast fax. Have the declines pretty much stabilized there or is – longer term, do you think broadcast fax is core to your strategy of conferencing and collaboration?

Boland Jones

No. Our broadcast fax is not core to our strategy. It’s getting in the realms of less than 5% and so of the whole, entire company. And the declines are still there. It’s an aging technology in the application it’s being used for in some cases in that broadcast method. It’s a wonderful technology when it’s put in the light of other applications like Fax To Mail. So is fax going away? No. Is broadcast fax declining? Yes.

Sri Anantha – Oppenheimer

Got it.

David Trine

Sri, this is David. The broadcast fax is about a little under $11 million now for the quarter.

Sri Anantha – Oppenheimer

$11 million [ph]. And David, one question. I was just wondering could you give some details on those restructuring costs of $13.3 million. It seems relatively high relative to the e-mail business or is there something else also included in that restructuring costs?

David Trine

The restructuring is broken down to two components. About $7 million is severance and then –

Boland Jones

From our general business.

David Trine

That’s right.

Boland Jones

From everything.

David Trine

Yes. This severance is across both the conferencing and non-conferencing. And then about $6 million is leasehold abandonment that we booked also this quarter. So again, across both spectrums.

Sri Anantha – Oppenheimer

Thanks a lot guys.

Operator

And we’ll take our next question from Richard Todaro with Kennedy Capital.

Richard Todaro – Kennedy Capital

Hi guys.

Ted Schrafft

Hi, Richard.

Richard Todaro – Kennedy Capital

Have you guys talked about currency and given where the dollar is at today, how that affects your business going forward or how it affected your guidance?

David Trine

Well, as far as – this is David, Richard. If you look at Q2 – I mean Q3, it had an impact of $1.4 million and Q4 – yes, and Q4 assumes the same FX rate that we currently see.

Richard Todaro – Kennedy Capital

Okay. The restructuring costs, when you guys reported the second quarter are – I think you guys talked about like a $5 million charge and then I think you just said that it was in the $7 million. There is – maybe this is minor details, but decent variance there. What was the variance?

Boland Jones

I’m sorry.

Richard Todaro – Kennedy Capital

I believe you guys had talked about the restructuring charge being similar to second quarter at $5 million. I think the actual restructuring part came in at around $7 million.

Boland Jones

Right. That’s right. The severance piece was $7 million, there were a few more – we looked at some more – we took the opportunity to look at other operations and so forth. So we came in at $7 million. The big delta though, between Q2 and Q3 was the leasehold abandonment though.

Richard Todaro – Kennedy Capital

in the leasehold, what all did you guys actually stop leasing or what happened there?

David Trine

Basically what we did – with fewer people, there was opportunity now to collapse some of the associates into different locations and so as a result, we are able to take the ongoing charge now instead of over the two, three year period time.

Richard Todaro – Kennedy Capital

And then how much total was – is the cash charge of your charge this quarter? How much?

David Trine

Probably $5 million – $4 million or $5 million, somewhere around that range.

Richard Todaro – Kennedy Capital

Okay. Then as it relates to the e-mail business, you guys wrote that down. Can you talk about roughly what is on the books at now?

David Trine

Well, first of all, the e-mail business was so immaterial. It’s only $3.8 million last year and less than that this year. So we just wrote it down to immaterial amount compared to our balance sheet.

Richard Todaro – Kennedy Capital

So now it’s basically on the books at zero or something like that?

David Trine

It’s north of that. But again, the whole thing was it’s – we refocused on our strategy and did not see that this was a core asset. So therefore we want to refocus more on the meeting business.

Richard Todaro – Kennedy Capital

Okay, no problem. And then just as far as – there was that $2 million on the cash flow from the discontinued operations, does that mean through nine months that that e-mail business lost on $3.8 million in revenues or less – lost roughly $2 million or how should I think about that?

David Trine

Yes. Yes, that discontinued ops line is the e-mail marketing business.

Richard Todaro – Kennedy Capital

Okay. Okay and then – let’s see if I have anything else. I think that that’s most of it. I appreciate you guys doing the hard work in a tough environment to do what you can for shareholders. So keep it up.

Boland Jones

All right. Thank you, Rick.

Operator

And we’ll go next to Bill Sutherland with Boenning & Scattergood.

Bill Sutherland – Boenning & Scattergood

Hey, thanks. David, so with the – all the restructuring I guess done, rather than look at this as trying to quantify the savings you generated, we should just look at the scalability that’s created. Is that what you are – ?

David Trine

That’s exactly right. That’s exactly right.

Bill Sutherland – Boenning & Scattergood

And any further steps for Q4 do you think?

David Trine

Pardon?

Bill Sutherland – Boenning & Scattergood

Any other steps required in Q4?

David Trine

We are going to have – as far as the restructuring, we will have a little bit that carries over from Q3, especially on the leasehold abandonment side. But it’s going to be nothing compared to what we had in Q3.

Bill Sutherland – Boenning & Scattergood

Okay.

David Trine

Again, some of that – like I said, a lot of the restructuring that you will see in Q3 will get the benefit in Q4 because a lot of that restructuring took place at the latter part of Q3.

Bill Sutherland – Boenning & Scattergood

Right, right. Looking at the – looking at the geographic split, it seems like Europe was pretty stable sequentially and I’m not looking at it on a constant currency basis, but is that a fair read or maybe a little color?

David Trine

Bill, that’s exactly – Bill, that’s exactly right. From a organic standpoint, excluding the FX, it was very stable compared to North – we had – we saw more of a change in North America and Asia, but Europe was more stable.

Bill Sutherland – Boenning & Scattergood

What’s your takeaway on that just in terms of kind of what that economy is going through?

David Trine

Well, we just – when you look at the new customer growth, it’s still very, very significant. The – I don't know, we just – it’s interesting, the price compression is not as great as what we’ve seen in the other regions. And so as a result, it’s had more of a stable environment.

Boland Jones

They didn’t, they didn’t. It just seems like they – when we looked at our active meeting hosts and so forth and so on, they have a much better continuance of active meeting hosts in Europe, much better than all of North America and all of Asia. It’s almost like countries that employ people through government and so forth and so on in other places. They just did not have nearly the rift, the size of rift that we suffered in our conferencing business – as it relates to the conferencing business, they didn’t have the nearly the size of the risk for the people that host meetings over there as we suffered in Europe – I mean, in the United States and Asia for some reason.

Bill Sutherland – Boenning & Scattergood

Interesting. What – the last question is just on acquisition, kind of little color on how guys are looking at the potential targets out there and how – how closely you are kind of watching that now? Thanks.

Boland Jones

Yes. In fact, we looked at a couple of deals in the mid-summer this year and we looked at our data. Their data was tracking similarly and as you can imagine, value was an issue and there is no reason for us right now. We are pretty confident in what we are doing with our growth engine and we for the first time in 14 years, as Ted described, have started this multimedia advertising concept. It’s got the e-mailing and the social media and the radio ads and the – everything else. And we plan on that being a big piece of our success going forward, especially in that small-business market.

We normally look at deals that are small-business market. It’s tuck-ins in the acquisition places of the meeting business. And so we just – we didn’t see where the value was in any of those things today for money versus putting it behind our own vehicle. There are things available out there if you are willing to go out there and pay for them, but not being sure of the future and looking at the ideas that we have of our own, I’m not sure that’s money well spent right now.

Bill Sutherland – Boenning & Scattergood

Makes sense. Thanks.

Operator

And we’ll return to Tavis McCourt with Morgan Keegan.

Tavis McCourt – Morgan Keegan

Hey guys, just had a follow-up on the debt. Obviously, the net debt is coming down pretty rapidly this year and I guess that’s going to continue to next year if you don't make acquisitions. But can you remind us kind of what the interest rate you are paying now and when you ultimately refinance, which I think you said before, you would try to do sometime next year. Should we expect any kind of change, positive or negative to the interest rate or should it stay relatively stable?

David Trine

Well, if you remember Tavis, we had two swaps. One came off in August and we’ve got another one that comes off next August, but our effective tax rate – I mean, effective interest rate will be similar in that 4% for Q4 and we are expecting interest expense somewhere in the $2.6 million to $2.8 million.

As we look to refinance, what I’m seeing right now the market is, first of all, you got a LIBOR floor that’s being introduced to the credit world over the last 12 months. So that’s probably about 200 basis points. And then you’ll have spreads of 300 to 400 basis points. So you are looking at 5% to 6% going once we refinance.

Tavis McCourt – Morgan Keegan

Great, that’s helpful. Thanks a lot.

Operator

That does conclude our question-and-answer session. At this time, I’d like to turn the conference back to you, Mr. O'Brien for any additional and closing remarks.

Sean O’Brien

Thank you and thank you all for listening in this afternoon. If you have any follow-up questions, feel free to give me a call on my direct line. That’s 404-262-8462. Thanks and have a great day.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: Premiere Global Services, Inc. Q3 2009 Earnings Call Transcript
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