Premiere Global Services' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Premiere Global (PGI)

Premiere Global Services, Inc. (NYSE:PGI)

Q3 2013 Earnings Call

October 30, 2013 5:00 PM ET

Executives

Sean O’Brien – EVP, Strategy and Communications

Boland Jones – Founder, Chairman and CEO

Ted Schrafft – President

Analysts

Tavis McCourt – Raymond James

Brad Henry – Stephens Incorporated

Operator

Good day, everyone, and welcome to the Premiere Global Services Incorporated Third 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 8:00 p.m. Eastern Time today through Friday, November 8, at midnight. The replay numbers are 1-888-203-1112, again that’s 888-203-1112 within the United States and Canada, or at 1-719-457-0820, again that’s 719-457-0820 worldwide. The passcode to access the replay is 3967635, again that’s 3967635. 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 Executive Vice President of Strategy and Communications for PGi, Mr. Sean O’Brien. Please go ahead, sir.

Sean O’Brien

Thank you, and good afternoon, everyone. If you have not received a copy of our third quarter 2013 earnings release, please visit our website at pgi.com, where it is available in 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, and assumptions made by management 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, 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 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.

Now at this point, I’ll turn the call over to Boland.

Boland Jones

Thanks, Sean, and good afternoon, everyone. This is Boland Jones again, the Chairman and CEO of PGi. And I’d like to once again welcome everyone to our third quarter 2013 earnings call. Let me begin by saying that we’re pleased with our third quarter performance as we continue to move closer to our goal of establishing PGi as a global leader in business collaboration software.

Our strategy is to create the very best collaboration products in the world, products that give us enterprise customer a collaborative advantage, helping them to innovate faster, operate more efficiently and be more competitive by enabling their people to connect and collaborate anywhere, anytime and from any device.

We like to say that we build our products from the user up, which means that we spend a ton of time researching and analyzing user needs, their pain points and challenges, their design preferences and their nurture points. And we build our products specifically around these findings.

In my opinion, we continue to get better and better at designing and developing highly differentiated user-forward collaboration products which we believe is one of PGi’s clear advantages in the marketplace. And will result in us driving higher growth and market share gains over time.

Our goal is to transition our current customers to these, high-value, high-margin collaboration products on our new SaaS platform, while at the same time continuing to invest in go-to-market strategies that enable us to win new SaaS customers and to increase our share of the large and growing collaboration marketplace worldwide.

This is our single focus. And we believe that the transition in our business will position PGi for the next wave of profitable growth in collaboration.

I’m pleased to report that we are generating meaningful success towards this important objective. In fact, the third quarter was our strongest sales quarter of our SaaS based collaboration products so far with revenue from these products growing more than 65% year-over-year.

Further, we’ve added a record $4 million in annualized run rate revenue from these high-margin PGi products during this quarter. A good portion of our record sales came from the closing of new deals and our acquisition pipelines. But the majority of our success has come from transitioning our traditional audio conferencing customers to these higher value products.

While there may be an initial near term revenue decrease, as a result of transitioning in existing customer, we believe of course that the long-term value of getting a customer converted from our current business to our new SaaS platform is substantial. For example, products on our new SaaS platform support significantly higher margins with average gross margins of 85% or higher.

Our typical SaaS contracts are longer as well, currently approaching slightly over two years average contract lines. And perhaps most importantly, our SaaS platform enables us to readily integrate and bundle other features and capabilities that are closely related to real-time collaborations that will make PGi products a more meaningful part of our user’s day, while also positioning PGi to compete in a much larger, faster growing, totally addressable market opportunity beyond the traditional conferencing industry.

At the same time, we work to transition our customers to our new SaaS platform, we believe we have good opportunities to continue to grow our share of traditional audio conferencing market worldwide through our singular focus on collaboration, our scale and global capabilities and our sales and service expertise.

To supplement our organic growth, we plan to continue to pursue accretive tuck-in acquisitions like ACT Conferencing, which we closed last month that will bring PGi a new customer base to sell our SaaS products to as well as new cash flow to invest in accelerating our SaaS performance.

Consistent with the last couple of years, our capital allocation strategy is and continues to be to invest the substantial cash flow generated by our audio conferencing business and developing and expanding our SaaS products and distribution. Specifically, we plan to continue to invest and adding to our SaaS sales force, simplifying and further focusing our go-to-market strategy and organization, as well as increase in the number of distribution partners that are reselling PGi SaaS products globally.

We also plan to continue to invest and expanding our SaaS products and capabilities through our internal development efforts and our technology partnership activities, to position PGi to compete in significant new growth markets like webinars and large events, IT Voice and Unified Communications as a service just to name a few.

These are topics and opportunities we plan to update you on in the coming months. We’re confident they’re continuing to build out our collaboration product portfolio and transitioning our company towards a SaaS business model, will position PGi to deliver high value to our customers, partners and shareholders around the world. And we look forward to updating you on our progress on future calls.

In closing, let me 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 shareholders for their continued support of PGi.

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

Ted Schrafft

Good afternoon, everyone. And thank you for joining our third quarter 2013 earnings call. To echo Boland’s opening remarks, we are pleased with the strategic and financial progress our company made during the third quarter.

The consistent strong cash flow we generate from our foundational audio conferencing business will continue to enable us to invest in and grow, one of the fastest growing SaaS businesses in the market today.

From an operational perspective, we continue to work to optimize our cost structure while at the same time leveraging our balance sheet to make accretive acquisition, in order to enable additional dollars to invest and accelerating our SaaS strategy.

We believe our strategy continues to be validated by higher sales of our PGI software products, consistent analyst and industry accolades, growing sales pipelines and customer trials and implementations with some of the world’s leading brands, making it a very exciting time at PGi.

Now, let me turn to our third quarter 2013 financial performance, beginning with revenues. As reported, net revenues totaled $130.6 million during the third quarter, up from $125.9 million in Q3 last year.

Third quarter revenues were affected by the typical seasonal slowdown our industry experiences during the summer holiday months. During the third quarter, we completed the acquisition of Denver based ACT Conferencing. Over the past two decades, ACT Conferencing has built a noteworthy base of leading enterprise customers and strategic partners worldwide, which combine with its well-run reputation for operational excellence and world-class customer service made it a very attractive acquisition for us.

As disclosed in our press release announcing the transaction, ACT Conferencing has a current revenue run rate of approximately $45 million. As included in our earnings release this afternoon, we have updated our financial outlook for 2013.

Based on current foreign currency exchange rates and assuming our current global business trends remain the same we project that net revenues in 2013 will be in the range of $523 million to $525 million. We currently plan to provide our financial outlook for 2014 in mid-December.

Turning to profitability, our gross margin was 57% in Q3, in-line with recent quarters. I’d like to note that ACT Conferencing has a gross margin that is significantly lower than PGi’s core business. Excluding the diluted gross margin impact from the acquisition of ACT, the PGi gross margin improved sequentially from the second quarter.

We anticipate that it will take several quarters to position the ACT conferencing business to generate gross margins in line with our corporate average as we migrate these customers onto PGi’s higher scale, lower cost, global delivery platform.

Non-GAAP diluted EPS from continuing operations was $0.20 in the third quarter, up from $0.18 in the third quarter of 2012. Based on current business trends and current foreign currency exchange rates, we project that non-GAAP diluted EPS from continuing operations in 2013 will be in the range of $0.78 to $0.79.

As a final note on ACT Conferencing, we incurred acquisition related expenses during the quarter which are detailed in the financial statements included in both our earnings release and our 8-K filings this afternoon. We expect to incur additional acquisition related expenses during the coming quarters as we execute the integration plan associated with the ACT acquisition.

In addition, our ongoing efforts to streamline and optimize our expense structure will lead to restructuring charges in the fourth quarter, which we currently anticipate will be in the range of $3 million to $4 million.

Continuing with our third quarter results; we generated strong cash flows during the period with net cash provided by operating activities from continuing operations totaling $26.6 million, nearly double from the third quarter of 2012.

Capital expenditures were approximately $7.5 million in the quarter and we continue to anticipate that capital expenditures will total approximately $33 million in 2013.

Despite our acquisition activities, we ended the third quarter with significant liquidity. At quarter end, we had cash and equivalents and room on our credit facility totaling over $200 million.

Consistent with our ongoing investment strategy, we plan to use this liquidity and our strong cash flow to fund an aggressive investment and acquisition strategy. Specifically, we plan to continue to pursue a number of potential accretive acquisition opportunities to enhance PGi’s market share, to accelerate our SaaS revenue and to broaden our technology portfolio. In addition, we anticipate that we will continue to be opportunistic buyers of our common stock.

In conclusion, let me say again that we’re pleased with our third quarter performance. We are making solid and measurable progress toward our key objective of transitioning our business to SaaS. We believe this strategy will over time deliver great value to PGi’s customers, our associates and our shareholders.

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

Thank you, sir. (Operator Instructions). And for our first question, we go to Tavis McCourt with Raymond James.

Tavis McCourt – Raymond James

Hi, thanks for taking my question. And I’m glad to see the margins improving and a little bit of acceleration on the SaaS business. I was wondering given all the puts and takes with ACT, if you could just kind of give us an internal growth figure for the core PGi business for Q4, what would that revenue – what are you assuming for internal growth in Q4 in the PGi business to get you to that full-year number?

And then, I suspect you’re not keeping all the ACT revenues or kind of – if it was a $45 million run rate business, what should we think of the size of the business as it’s right-sized?

Ted Schrafft

Hi Tavis, this is Ted. And let me give you an overall commentary on organic revenue. We did see and you’re right about ACT so let me give you some of the kind of the organic trends associated with it.

We did see in the third quarter, we did see – I want to say kind of the industry-wide phenomenon, associated with what we would call a sluggish economy, okay. So, we saw some slightly lower, we saw some volumes within our base, I think as Boland would comment, it’s a same-store sales that were lower than what we had originally – that were originally projected. So, as our summer season was slower than we had, I want to say, maybe slower than normal. And it was across the board, it was not in any one particular area etcetera.

So the other aspect of the guidance that we gave, okay, that helps you do the math is that – we are forecasting the fourth quarter, I call the partial loss of a large customer, all right. We saw, listen, we – I want to say we win more than we lose. But we win and lose. And in this case, we have a customer that is taking part of their business elsewhere. So, we’re forecasting the partial loss of a large customer. We saw little bit – we saw some of it go in Q3 we’re expecting the bulk of it to go in Q4.

So, we will see some challenges with organic growth in the fourth quarter, all right. But I also will say very positively, we are – and the answer about your ACT question is absolutely right. While it’s a wonderful accretive acquisition, we don’t expect that revenue – all that revenue to hold, all right. So you’ll see the impact of that.

So going, but I will say also, at the same point in time, as we kind of run through Q4, get into Q1, we’re working hard and we’re very – I want to say very positive about the opportunity to accelerate organic growth in this company.

And the reason is, is because of the strategy and the – basically the execution that we’ve been on with the SaaS products and our software products. So even with – having run significant of the quarter is even with the summer slowdown and some of the base issues. We still saw an acceleration of our SaaS revenue. So I view that.

We also saw an acceleration of that revenue in Europe and Asia, so they’re I want to say contributing more I’ll say to the overall performance there. So, listen, for us, listen, its goodness, I mean we got what we believe is a very, very differentiated product set. We’re only 10% of the market share – we got 10% of the market. So we believe with a very, very differentiated product set, we got a great opportunity to both build share and expand the overall market.

So, again, I’ll just say, we remain very, very positive and excited about the opportunity to grow organically and continue and stay on our strategy. And that’s really what – that’s probably the best commentary I can give you on that.

Tavis McCourt – Raymond James

Great. And then a follow-up on the SaaS business up, I think is it 65% year-over-year or something like that. Have the wholesale agreements or resale agreements become material at all or is most of this being done through the direct channels at this point?

Ted Schrafft

Being done through the direct channels and some of the indirect channels that aren’t the big carrier based reseller opportunities that you’re talking about. They are improving greatly.

And in fact we have a pipeline, a new pipeline that’s appeared in the last three or four months, a number of substantial infrastructure companies that are working with us and being very inquisitive on how they could become part of the SaaS platform that we’ve put out especially with the iMeet product that we’re really directing towards that channel in that indirect business.

And so, that’s starting to stack up. And the ones that have been on here for a while, the ones we’ve announced previously are starting to pick-up steam substantially as the product matures. Remember, we’re pushing the iMeet products mostly through those areas and the iMeet product in its conception over the last year and half, two years has now become a product that’s a real product with real utility. It’s just coming up at large meetings, it’s got peer-to-peer functionality that we’re getting right at the debut just like a Skype for business type of deal or so forth.

So as those functionalities appear, we believe new deals will come in and that indirect channel for what you’re talking about and what you’re alluding to I believe, the infrastructure company is reselling it, positioning it to fight back on the Skype type of products.

And like you said, the other thing is, we’re getting lot of success in our base. For our SaaS business, we’re converting a considerable amount, at least half of our sales are coming from our base which we’re doing so on purpose. So we are taking customers from a – I don’t want to say older but a current platform and literally moving them to new platform with new product pricing and new product that works from every single device they could imagine and every browser they could imagine with our download. So we’re having a great deal of success there.

And we hope that that success really accelerates in our base next year. Now that comes up with other things too, like anybody just gone to the model conversion, what – when somebody was doing $60 they’re now doing $49 with us. So there is a bad guy on revenue there but there is a great guy on margin, there is a great guy on long-term agreements, two to three year agreements is what we’re averaging now.

And so, but we still feel like we can grow through all those issues. But that’s where we are with the base and that’s where we are with those channel partners I think you’re alluding to.

Tavis McCourt – Raymond James

And just to be clear on that on a transition example like you just laid out that the gross margin dollars would typically be higher under the new contract?

Ted Schrafft

20% to 30% higher, sometimes 40% higher. I mean, the contract looks like an 85% to 90% margin that they’re moving to. And the contract of moving away from is probably on the average more like 57% to 65% or 66% margins. So, and for our larger customers that’s even more dramatic.

For our larger customers that we’re excited about – we’re having the first opportunity to actually roll our SaaS products into some meaningful customers at the end of this year, the beginning of next year. And in those cases, it’s going from 30% or 40% to 85% or 90%. So, we’re pretty excited about it actually.

Tavis McCourt – Raymond James

Well, thanks Ted.

Operator

(Operator Instructions). And for our next question, we go to Barry McCarver with Stephens Incorporated.

Brad Henry – Stephens Incorporated

Good afternoon. This is Brad Henry in for Barry. Congratulations on a good quarter guys.

Boland Jones

Thanks Brad.

Brad Henry – Stephens Incorporated

I just got a question around kind of the integration of ACT. You mentioned that the ACT gross margins are a little smaller. And I’m just trying to thinking about the timelines for integration and then also desire to ramp sales and marketing and R&D in the SaaS area. How do you balance that in terms of still keeping eye on the bottom-line given guidance?

Ted Schrafft

Brad, this is Ted. First of all, we’re very, very pleased and very, very excited about that acquisition for PGi. ACT has been in this space for a long time and they have a tremendous reputation. And they have a tremendous set of customers. And they have, I want to say a tremendous kind of operating philosophy service level etcetera. So, they’re very, very nice kind of hand and glove complimentary acquisition for PGi.

So, obviously also, a main reason to go do this deal was it gives us an expanded base of customers to basically sell upgrade, migrate, to our SaaS products, okay. So we actually think as we really get going with this that we’re going to be able to I think – delight those customers with an opportunity kind of take them to the next set of products.

So, as I said in my opening comments their gross margin is, at this stage, obviously early stage, dilutive to PGi’s gross margin. So, our gross margin as I said in my opening comments would have actually bumped up further but again was impacted, I want to say at some level by the ACT dilutive gross margin numbers.

So we expect that to continue and that was basically about one month’s worth of impact in the third quarter. So, when you – I think for the next couple of quarters you’ll see a dilutive impact on gross margin. And probably I want to say, probably little more towards middle back half of next year you’ll actually start to see those margins return to very, very solid as we complete the integration and migrate customers to our SaaS products and IT global network, etcetera.

So, very, very solid accretive acquisition for us allows us to generate what we believe would be nice cash flows too that we can use to invest. And allows us to invest and into our SaaS products and our SaaS distribution.

So, a very good question about how we’re going to balance that. So, I think we’ll see a couple of quarters of challenged gross margin associated with the acquisition but returning back, mid-back half of next year as we get further through and complete the integration.

Brad Henry – Stephens Incorporated

Okay. And just so I understand the timing. Do you think that that you can begin to ramp the sales and marketing and the R&D given the next few quarters gross margin will be a little challenged?

Ted Schrafft

I would say yes. Well, here is where we – yes, I guess it’s your question kind of degree of ramp.

Brad Henry – Stephens Incorporated

Yes.

Ted Schrafft

While they bring some wonderful talent to our company, okay. So, even in the R&D area etcetera as we’re looking, we’re starting to looking at all the assets associated with ACT and figure out how do we both balance the integration side it, the accretion side of it and really taking advantage of the talent and the customer base that they bring to us.

So, we’re going to continue, listen, our strategy has always been to continue to grow our investments in R&D and in sales and distribution and in marketing, all right. So, we’re going to continue to look for ways obviously as we run through this integration.

We want to make sure that we maximize the revenue associated with it and maximize that customer base because it gives us an expanded market to sell our new products to, all right. But we’re always going to be looking at ways to invest in R&D and then sales and marketing and distribution.

Brad Henry – Stephens Incorporated

Sure.

Boland Jones

I mean, to further that, this is Boland. To further that, the contribution margin obviously is less there until we gracefully merge it into our operations, into our networks and so forth. And we’re going to work with them and their customers and get that done in a great way for everybody.

So that’s going to put more contribution money down below. But unfortunately the realities of mergers, is not everybody is going to make it. And so when you put the two companies together there is some headcount that goes away sometimes in both companies or sometimes in the acquired company.

And so, there is some room there to increase headcount once we filter through the headcount, it’s going to stay and the headcount is going to go on both sides of the equation where we have duplicates, we take the best player and so forth. But then after that there will be some headroom for us to invest in research and development dollars and in sales dollars, even before the gross margin contribution dollars come to bear.

Brad Henry – Stephens Incorporated

Okay, thanks. And then, just one other question on the buybacks and potential acquisitions, I was just curious how you think about balancing those two in terms of – if you have acquisitions that are – you have an opportunity to look at versus buybacks in terms of strategy, how you expect to be able to balance those in the 2014?

Boland Jones

Well, we’re not going to discuss our acquisition pipeline, although it’s healthy and we’re excited about it. We’re not going to discuss because first of all we don’t know if we can get deals done that we have in the pipeline. So we’re never going to do that. But let me just say that there is room for both. We’re not – again, we’re not doing acquisitions that are bad performers.

You heard earlier that Ted has told, so we got $200 million worth of available spending room right this second. We’re having a bumper crop on cash flow this year a little bit. And so we’re generating extra cash flow and that’s prior to the ACT synergies. And so I suspect by the time, the year turns, especially second quarter will have another bunch of cash-in.

And as we said right now, we have plenty of room right now to do both to affect the situation. So we’re going to do what’s best. If we’re going to allocate capital, the best we can to grow our SaaS business. We’re going to use available capital, as Ted said, not to repeat them on but we’re going to use capital where we can for tuck-ins and just smart accretive acquisitions like we just announced.

And in between all that we also have room to be opportunistic buyers of our own stock, if that’s the best use for – and for the allocation of that capital at the time. So we’ll take a look at our – and there is a cost to capital computation on all that as you know, you can do. And so we look at that and we look at how. The bottom-line is, we want to grow the company.

And so, that’s the most exciting thing to us. But if we feel like we’re terribly undervalued and we feel like we’re not being dealt with value we’ll do that too. But remember, for not doing that it could be because we’re in a quiet period because we are talking to the deals. So we’ve got all those things to deal with other public companies.

Brad Henry – Stephens Incorporated

Sure. Okay, thanks.

Operator

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

Sean O’Brien

Thanks Rufus, and thank you all for listening in. We appreciate your interest in PGi. If you have any follow-up questions, please feel free to call on my direct line at 404-262-8462 or you can stop by my iMeet room at imeet.com/sean. Thanks and have a great day.

Operator

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

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