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EasyLink Services International Corporation (ESIC) F1Q10 Earnings Call Transcript December 4, 2009 8:45 AM ET

Executives

Andrew Kaminsky - Investor Relations Representative

Tom Stallings - Chief Executive Officer

Glen Shipley - Chief Financial Officer.

Presentation

Operator

Good morning, and welcome to the EasyLink Services International Corporation's fiscal 2010 first quarter conference call. If you do not have a copy of the earnings release, you may access it through the investor relations section of the Company's web site at Easylink.com.

This call is being recorded for future playback and will be available later today in the events and presentations tab in the investor relations portion of the Company's Web site.

I would now like to turn the call over to Andrew Kaminsky for opening remarks.

Andrew Kaminsky

Thank you. Good morning and thank you for joining us. Joining me today is Tom Stallings, EasyLink's Chief Executive Officer, and Glen Shipley, EasyLink's Chief Financial Officer.

Please note that during this conference call, we may make forward-looking statements regarding future events or financial performance and outlook that are based on information currently available to management. You are cautioned that any forward-looking statements are not a guarantee of future performance and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected.

For a more detailed description of factors that can cause such a difference, please see EasyLink's filings with the Securities and Exchange Commission. In providing forward-looking statements, the Company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise. Also note that all dollar figures and percentages are approximations and that the detailed reconciliations of GAAP to adjusted results can be found in the press release we issued yesterday that is posted on our Web site. After we review first quarter results, we will open the lines for questions.

At this time, I would like to turn the conference call over to Tom.

Tom Stallings

Thank you, Andrew. Good morning and thank you for joining us today. Since today’s call is taking place just over a month from our year end update at the end of October, I am going to make some very brief remarks regarding our first quarter accomplishments and financial results, discuss our 2010 outlook and then ask Glen to give a detailed overview of our first quarter’s results. After Glen's comments, we will have time for questions and answers.

We are very pleased with our first quarter results and are enthusiastic about the prospects for the rest of the year. We reported $20.5 million of revenue, adjusted EBITDA of $4.7 million and net income of $1.4 million or $.04 per share.

The continual improvements we have made in our operations over the last two years coupled with the refinancing of the York debt have allowed us to report solid net earnings for the quarter. The slight improvement we have seen in the economy gives us confidence that we will be able to achieve our previously discussed guidance for fiscal 2010 of revenue in the low to mid $80 million range and adjusted EBITDA of approximately $20 million. We believe the operational improvements we have made are starting to pay dividends as we now believe we will earn between $.27 - $32 cents per share as compared to our prior guidance of $.25 - $.30 per share.

In the first quarter, we continued to focus our energies on building the sales pipeline, finalizing the consolidation of our facilities and supporting our customers.

On the new product front, we rolled out the second release of our Managed File Transfer product which includes a number of new features that were recommended by our trial customers. This release has made our offering more robust and more competitive in the market. In addition, we are gaining traction with customers and currently have eight enterprises evaluating the MFT product.

We are also developing a new secure email service that will provide our clients with a production-based secure email solution for applications such as trade confirmations and other sensitive documents. We are planning on releasing this service to the market in our third fiscal quarter of 2010. This new service is part of the Email Security Boundary market that is estimated to be over $1.4 billion annually.

Additionally, our sales team enjoyed another successful quarter of building on our blue chip customer base by displacing a competitor at TRW Automotive where we are supporting their EDI needs in the United States and in the United Kingdom. Additionally, we are now working with Lexmark integrating our production fax service with their SAP system for supply chain related document handling and we recently completed a managed services consulting engagement for Mizuno.

From an operational perspective, our operations and development teams continue to work on strategic projects that both improve our operational execution and make us more efficient. We always believe we can run the business more efficiently and continue to focus on cost containment without sacrificing customer service or support.

As many of you know, we evaluate M&A opportunities on a proactive and opportunistic basis and believe they are a key component to the growth and future of EasyLink.

Now, I would like to turn the call over to Glen to discuss the details of our financial performance.

Glen Shipley

Thank you, Tom, and good morning to all.

As Tom mentioned, our first quarter fiscal 2010 revenue was $20.5 million compared to $22.8 million in the first quarter of fiscal 2009 and $20.7 million on a sequential basis in the fourth quarter of fiscal 2009. The affects of the recession and foreign currency fluctuations on our revenue which we have discussed multiple times in the past, has settled into a manageable range. Without an economic recovery, we believe that our repeatable quarterly revenue will continue to be between $20 million to $21 million.

Gross margin increased 200 basis points in the first quarter of fiscal 2010 to 70.3% from 68.3% in the fourth quarter of fiscal 2009, but were almost unchanged from the first quarter of 2009.

Due to our hard work over the last year on cost reductions, our operating expenses dropped $2.7 million to a total of $12.4 million in the first quarter of fiscal 2010 compared to total operating expenses in the first quarter of 2009. Operating expenses in the first quarter were $357,000 more than the total operating expenses in the fourth quarter of 2009 due to approximately $500,000 of one-time expenses that will not be repeated in future fiscal 2010 quarters. We expect to continue to focus on our operations and plan on seeing further reductions in our operating expenses in future quarters.

The reduction of operating expenses translated to an increase in operating income of just over $1 million in the first quarter of fiscal 2010 to $2.1 million compared to the first quarter of fiscal 2009.

The refinancing of our debt, as well as the reduction in the principal amount outstanding has reduced our interest expense by $4.5 million in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.

GAAP net income was $1.1 million or $.04 per basic and diluted share in the first quarter of 2010 compared to a net loss of $4.4 million or $.18 per basic and diluted share in the first quarter of 2009 and compared to a net loss of $3.2 million in the fourth quarter of fiscal 2009 or $.13 per basic and diluted share

As a result of the accounting affects from the refinancing of our debt in the fourth quarter of fiscal 2009, we believe net income, in addition to adjusted EBITDA, will once again be a relevant metric in assessing the Company’s success.

Adjusted EBITDA for the first quarter of fiscal 2010 was $4.7 million compared to $3.7 million in the first quarter of fiscal 2009 and $3.9 million in the fourth quarter of fiscal 2009.

On a segment basis, first quarter revenue for supply chain messaging, which includes our EDI products and services, as well as Telex, was $10.6 million, or approximately 51.7% of revenue Supply chain messaging gross margin was 73.6% in the first quarter of fiscal 2010.

Looking at our on–demand messaging segment, which includes fax and production messaging, document capture and management, and e-mail services revenue for the first quarter of fiscal 2010 was $9.9 million or about 48.3% of total revenue. On-demand messaging gross margin was 66.8% for the first quarter of fiscal 2010.

We finished the first quarter with $14.9 million in cash which is up almost $4 million from the fourth quarter of 2009. Our working capital at the end of the first quarter was slightly higher than the fourth quarter of fiscal 2009 at $5.8 million. Cash generated from operations in the first quarter of fiscal 2010 was $4.3 million as compared to cash used in operations of $1.2 million in the first quarter of fiscal 2009 and cash generated from operations of $3.7 million in the fourth quarter of fiscal 2009.

All things being considered, we believe that our results for Q1 are outstanding and position us well for a productive fiscal year. The credit for our performance belongs to the 280 hard working EasyLink employees around the world.

At this point, I will turn the call back over to Tom for some final comments before we take questions.

Tom Stallings

Thank you, Glen.As all of us know, we have not fully emerged from the current economic crisis, but we are starting to see some trends that indicate a small recovery in the business cycle. We continue to add customers to our already large and diverse global customer base and believe more than ever, that our products and services can help our customers achieve their near term business plans and long-term goals. Our management team is extremely focused on efficiently running the business and building shareholder value.

Operator, we would like to open the call for questions.

Question-and-Answer Session

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