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Premiere Global Services (NYSE:PGI)

Q1 2010 Earnings Call

April 22, 2010 05:00 p.m. ET

Executives

Sean O'Brien - SVP, Strategic Planning, IR

Boland Jones - Chairman and CEO

Ted Schrafft - President

David Trine - CFO

Analysts

Shyam Patil - Raymond James

Mike Latimore - Northland Securities

Tavis McCourt - Morgan Keegan

Sri Anantha - Oppenheimer

Operator

Good day everyone, and welcome to the Premiere Global Incorporated fourth quarter and fiscal 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.pgi.com and go to our press section. Alternatively, you may listen to the rebroadcast from your telephone beginning at 8 pm Eastern Time today through midnight, Friday, March the 5th.

The replay numbers are 1888-203-1112. Again, that's (888) 203-1112 within the United States and Canada, or at 1719-457-0820. Again, that's (719) 457-0820 worldwide. The confirmation codes to access the replay is 3997824. Again, that's 3997824. (Operator Instructions)

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. Mr. O'Brien, please go ahead sir.

Sean O'Brien

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

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

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

Our actual results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors, including those we identified in our annual report on Form 10-K for the year ended December 31, 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 pgi.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 Premiere Global Services. Welcome, and thanks everyone for joining our first quarter 2010 earnings call.

I'm super pleased to announce a good quarter performance by our company this afternoon. Despite continuing pressure from high global unemployment and lower business activity, we have achieved our financial targets for this first quarter while also advancing a number of our key strategic initiatives.

In the first quarter we grew consolidated net revenues by nearly $2 million from the fourth quarter of 2009 despite headwinds from a strengthening dollar. We also drove a 130 basis point sequential improvement in our gross margin in this first quarter and we realized the full benefit of the restructuring initiatives we completed just last year.

Importantly, the first quarter marked a return to a more normal seasonal usage trend in our customer base, which we believe confirms that our business trends troughed last September, as we indicated to each of you on our last call. Today, we have a healthy pipeline of new business opportunities and we continue to win and ramp meaningful new customer accounts, which we believe underscores the value of our meeting and collaboration solutions during all economic times, good or bad.

We're encouraged by the improving trend in our customer base and our new business momentum. But we continue to believe it will definitely take a broader sustained pick up in global business activity and employment to get our revenue growth back to its historic double digit levels. Regardless, we continue to implement our plans and strategies to position PGI for accelerated growth and profitability.

I'm extremely pleased and very proud at the progress our team has made during the year in turning challenges of our current economic environment into opportunities for PGI. As result of our efforts, we entered 2010 with a more streamlined organization and with a focused and simplified strategy of becoming the best meetings company in the world. It's an exciting time for PGI, and it's an exciting for our industry.

In our decades of experience in this space I cannot remember a time when collaboration was more visible and more important than anytime it is today. Collaboration has moved beyond just a cost effective alternative to business travel.

It's becoming a critical part of day-to-day business culture, as companies become increasingly aware that their very competitiveness relies on their ability to unlock and seamlessly share the information expertise held by the individuals and knowledge workers across organizations. To take full advantage of this heightened enterprise attention to collaboration and to further our market lead, we remain focused on a few key market strategies.

First, we're continuing our transition to a more consultative solutions based sales approach. Our conversation with enterprises today revolve around some of the most critical business decisions; how them make their people more productive, more efficient, more connected, how they speed up critical processes like innovation, how they get their products to market faster and ultimately how they accelerate their time to revenue.

This is particularly true of the enterprise accounts we're increasingly targeting in our sales efforts. For many of these companies, collaboration has evolved into one of their top strategic business investments. As a result, our sales professionals are required to have different skills than in the past, when conferencing was more of a product sale.

This year, we're driving our sales personal to become true experts in all the way companies want to meet, and should meet, so they can help our customers make better sense of the available options and ultimately impact their business performances positively.

Our goal is to help our customers earn the highest possible returns on their investment in collaboration, whether in our traditional software as a service model or with our newer managed services or dedicated hosting options. And our global direct sales force and channel partners remain our strongest assets in advancing this goal.

Another of our key market strategies is to deliver higher value to our customer by selling them more integrated online meetings. By studying our customer base, which includes companies of all sizes, from almost every industry vertical and every region of the world, we have found that companies can have much more productive and effective meetings online using our integrated web and audio solutions, rather than our audio solutions alone.

PGI has one of the broadest suites of online meeting tools in the market today. With our own internal web solution that is superior in the market backed up in a company by leading web partners. This year, we're making a big push to advance sales training and various incentive programs to have more of our sales professionals show more of our available online solutions to more of our customers. We believe this is a true win-win as these online meetings offer higher value to PGI as well, with higher revenue and higher profitability per meeting.

We've also found that customer retention and loyalty is higher, with customers that use our online meeting tools along with our audio solutions. We believe there is a large untapped market opportunity and high growth potential for PGI with these online meeting solutions.

And finally, one of our most important strategy this year that supports everything else we're towards is to truly differentiate PGI at the product level by simplifying and improving the user experience associated with these online virtual meetings.

As we discussed on prior calls, we have extensively studied the many collaboration tools available in the market today. And we've also studied the various user pain points that are standing in the way of their widespread adoption. What we found by listening to our users is that their primary frustrations revolve around usability; how counter intuitive, confusing and complex many of today's collaboration products really are.

We've also heard frustrations around the number of different tools that are needed to create a complete collaboration solution within an enterprise, which increases cost and results in inconsistent user experiences. Our new meeting and collaboration platform iMeet has been painstakingly designed and developed to address many of these pain point issues. Our goal with iMeet is to give users the simplest, most intuitive, and visually rich online meeting experience in the world.

We deliver it to the browser as a web application with no downloads or software, so that it is universally available regardless of the user’s device, network, or operating system. And most importantly, iMeet brings together the benefits of all the existing collaboration technologies, web, audio, and video into a single, unified conferencing product that provides a richer, more robust, and engaging collaborative experience.

We're pleased with how iMeet is progressing during the current internal beta. We plan to extend it to external beta customers over the next couple of months, and we're continuing to target our general release timeframe in September of this year. At the same time, the learnings and insights we have gained during the design and development of iMeet are being incorporated into our broad suite of existing meeting tools. For example, early this summer, we're planning to release a significantly enhanced version of our proprietary web conferencing application, Netspoke. We believe this all new application will bring a completely new look and fresh user experience to the web conferencing market.

It will be tightly integrated with our next generation global IP network, and it will further support our online strategy by integrating with our new toolbar which will enable users to readily schedule and manage their meetings directly from their desktop. Together, our enhanced suite of meeting solutions, PGiMeet, will enable our customers to meet and collaborate in more powerful, productive, and simpler ways than ever before.

In conclusion, let me say that we are very pleased with the current trends in our business against the backdrop of a continuing difficult economy. And we remain optimistic about the year ahead, as we continue to execute our strategies to increase our customer value and extend our lead in the marketplace.

Once again, thank you to all of our valued customers and associates around the world for their continuing support and patronage in our cause. At this point, I'll turn the call over to our President, Ted Schrafft. Ted?

Ted Schrafft

Thank you, Boland, and good afternoon everyone. Let me start by saying that I too am pleased with our first quarter performance, as we continue to make progress on our strategic, operational, and financial objectives and performance. As we discussed on prior calls, we spent the majority of 2009 rewriting our own playbook around our core strength, meetings, in response to the depressed global economy, and a reset in our business trends.

As a result of these efforts, we entered 2010 with a clear plan and roadmap for enhanced growth opportunities for PGI in support of delivering improved customer value and shareholder value. As Boland discussed, our plan is grounded in a few very important market strategies, designed to enhance our customer value and to steadily improve on the strengthening revenue trends we are seeing in our business.

At the same time, on the operational front, we continue to work hard to ensure that every dollar is optimally invested in furthering our strategy with tight operational headcount and expense controls, and diligent capital investment and balance sheet oversight, which we believe will result in continuing solid and improving margins and cash flows.

Now let me discuss our first quarter financial results in greater detail. Beginning with revenues, as reported, our consolidated net revenues totaled a $146.4 million in the first quarter. As Boland mentioned, this represents an increase of nearly $2 million from the fourth quarter of 2009. In the first quarter, and actually over the last six months, we've continued to see stable to modestly improving trends in our meeting business.

As Boland said, we have also seen a return to more normal seasonal usage patterns in our existing customer base. This is a metric we are closely monitoring, as our challenges last year were predominantly related to lower usage in our customer base resulting from accelerating corporate layoffs and a global slowdown in business activity.

While we continue to maintain a healthy pipeline of qualified new customer opportunities, and our pace of new customer acquisitions remain strong, we believe that meaningful improvements in our trends will be dependent on a more robust rebound in economic activity, and an increase in global employment levels. We continue to anticipate revenues for the full year 2010 will be in the range of $585 to $600 million based on current trends and foreign currency exchange rates.

Further, we anticipate second quarter revenues will improve modestly from first quarter results, and our year-over-year comparisons will continue to get stronger as we progress through the year.

Now turning to profitability, we continue to make good progress toward improving our margins. Our first quarter gross margin improved by 70 basis points from the first quarter last year, and as Boland stated, by more than a 130 basis points from fourth quarter levels. Since the third quarter last year, it has improved by more than 2 to 4 percentage points through the actions we took to reduce our cost structure and build additional leverage into our model.

We continue to anticipate gross margins will remain strong throughout this year within the 58% to 58.5% range. Though, as I reiterated on our last call, our continued success in closing and ramping large global enterprise customers may put some pressure on this range.

Non-GAAP EPS from continuing operations was $0.19 in the first quarter, in line with plan. These results include higher sales and marketing expenses related to our global sales kick-off meeting in January. Despite our ongoing investments in new market initiatives, we anticipate sales and marketing expense would decline in the second quarter from first quarter levels.

During the first quarter, we did not incur any marketing or advertising cost associated with the upcoming release of our new iMeet platform, nor do we expect to incur meaningful expenses in Q2. We currently project the majority of iMeet launch cost, which we still anticipate will be up to $10 million to be incurred during the third and fourth quarters of this year.

For 2010, based on current trends and foreign currency exchange rates, we continue to anticipate non-GAAP diluted EPS from continuing operations will be in the range of $0.72 to $0.75%, with quarterly results influenced by the timing of the release and associated launch costs of iMeet.

Now moving on to cash flows, we continue to generate strong cash flows in the first quarter with net cash provided by operating activities from continuing operations totaling $12.1 million. These results include payments of approximately $3.6 million associated with our restructuring activities in 2009.

Despite our ongoing investments in product development, sales and marketing, we continue to anticipate that we will generate significant cash flows for the remainder of the year. Capital expenditures were in line with plan, totaling $9.2 million in the first quarter. We continue to anticipate CapEx would decrease in 2010 from 2009 totals, though winning and ramping significant new large enterprise accounts may increase our current CapEx projections.

We ended the first quarter with total debt minus cash and equivalents of approximately $227 million, and cash and available liquidity under our current credit facility of nearly $156 million. As I mentioned on our last call, we are in the late stages of establishing a new bank credit facility. While not yet finalized, we believe this new facility will have a full year term and will provide sufficient liquidity for us to continue to invest in and grow our business.

Pricing under this new facility is looking to be more favorable than we originally anticipated when we began the process last year. We currently anticipate new borrowings under the facility will be at a rate of LIBOR plus 275 basis points, based on our current leverage ratio with no LIBOR floor. We anticipate closing the new facility prior to filing our first quarter 10-Q, and we will release additional details at that time.

Now in conclusion, let me say again that we are pleased with the improvements we are seeing in our business trends. We are pleased with the progress we continue to make toward our strategic operational and financial goals, and we are excited about our meeting business strategies and the opportunities ahead for PGI.

I look forward to updating you on our progress on future calls. But until then, let me join Boland in thanking all of 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

(Operator Instructions) For our first question, we go to Shyam Patil with Raymond James.

Shyam Patil - Raymond James

This is B.J. Corey [ph] running for Shyam Patil. Talking about trend and revenue per business day over the past three months, has it improved, and if so, what is? And is it due to more employment or the activity?

David Trine

We saw a stabilization in Q4 of our revenue, and then Q1, we've actually seen some increase, and both the business activity and the number of moderators. So we've been very pleased and we're very optimistic of the trends we're looking at right now.

Shyam Patil - Raymond James

What do you think about the organic rate for the conferencing business longer term?

David Trine

First for us, the organic growth sequentially from Q4 to Q1, we saw some significant increase. In fact it was up 5.2% in our meeting business, and we're projecting to see improvement in the organic growth each quarter from here on out.

Shyam Patil - Raymond James

How should we think about cash for this year, and do you think can provide more granularity for CapEx?

David Trine

On CapEx, before we said we would have somewhere around 37 million; we expect to be somewhere in that range. If we have some large clients deals come in, that might put a little bit of pressure on the CapEx, but we still expect to be in that $37 million range.

Operator

For our next question, we go to Mike Latimore with Northland Securities.

Mike Latimore - Northland Securities

You gave a year-over-year effect of OpEx. What was the OpEx headwind in the quarter on a sequential basis? Do we have that?

David Trine

It was 1.5 million by (inaudible) again.

Mike Latimore - Northland Securities

And you mentioned the sales and marketing probably comes down a little bit in the second quarter. Is it back to what it was in the fourth quarter or what kind of level do you think second quarter?

David Trine

We've been saying over the last three, four months that our sales and marketing would be up in Q1 as a result of a global sales meeting, and that took place in the first quarter. And so, second quarter, you should see more of a historical trend, which is in the Q4 range that we saw last year.

Michael Latimore - Northland Securities

The non-conferencing dropped a little bit more than I was expecting, can you maybe talk a little bit about what you're seeing in the non-conferencing business.

Ted Schrafft

Mike, this is Ted. Let me comment on that. First of all, part of that was foreign exchange, so that's probably about $0.5 million of impact sequentially with foreign exchange. The other probably major impact as we said, we went through the restructuring process in Q3 and Q4 last year. And that really did us some streamlining into that business. We're consolidating platforms there. And that was all the work that we did, obviously to see the impact and the uptick in the gross margin, so obviously we had, what we believe is a pretty solid gross margin quarter. But some of that consolidation etcetera, we knew that there was some platforms we were going to consolidate and we knew we'd probably see have some impact on customer attrition.

But that was also contemplated in our plan, so we actually feel pretty good about what we've done there and the parts of that business, the non-conferencing business that have grown historically (inaudible) notification. We're still seeing good solid momentum pipeline and deals being closed in those areas along with revenue growth.

Operator

For our next question, we go to Tavis McCourt with Morgan, Keegan.

Tavis McCourt - Morgan Keegan

Hey, guys, thanks for taking my question and bringing me the answer, Dave. But in terms of the refinancing of the new credit facility, how do expect that to impact the income statements relative to Q1, will it be roughly the same, or just expand slightly higher or slightly lower?

David Trine

Tavis, this is David Trine. We're very close by the way on getting the new credit facility in. And you'll see some uptick in interest because our current facility. We have pricing grid of a liable plus 150 basis points and the new credit facility will start out as liable plus 275. So there will be a slight increase in the interest expense going from Q1 to Q2. And then what you'll see, as the year goes along, especially in Q4 you'll see the interest expense drop down a little bit because of the last swap expiring in August.

Tavis McCourt - Morgan Keegan

Okay. That's helpful. And then now, once that gets the new credit facilities in line, talk about kind of the usage of cash going forward. Do you expect to get more aggressive on acquisitions or still buying back stock and paying down debt?

David Trine

The first probably objective is to continue to pay down debt, but we'll continue to look at acquisitions; we want to make sure that they are in our sweet spot, so to speak in the meeting side. From a stock standpoint, it's not one of our key strategic items, but we'll always look at potentially buying back some stock. But that will not be one of the key motivators of our debt.

Tavis McCourt - Morgan Keegan

Boland, I'm sure you mentioned this in the prepared comments, but any change to the amount you expect to spend in the second half of the year on the marketing campaign for iMeet?

Boland Jones

No, it's where it is right now. Hopefully, the change will be positive. There is a change going out of the fourth quarter into the first quarter next year. (inaudible) hopefully it will grow and increase, but that'll change for the 2010 year right now.

Operator

(Operator Instructions) We go next to Sri Anantha with Oppenheimer.

Sri Anantha - Oppenheimer

Boland, we could certainly sense the excitement about the business in your prepared remarks. I was just curious, when you say the business momentum is stabilizing, is it that the rate of decline, the usage of your existing customers beginning to moderate or you are really beginning to see growth beginning to come back, especially from a usage level?

Boland Jones

Growth is starting to come back. Like (inaudible) economy is we're excited. We are probably more excited than we would have been three years ago about this rate of growth, but in the face of what we said last year was real good stuff. You can see as you graph it out the number of meetings that we're hosting is not only climbing, but the number of participants in meetings are starting to climb as well.

Last year we saw not only decline in the number of meetings, but we saw decline in the number of participants in meetings. And if you look at the graph, it correlates directly with where the economy is expected at, beginning end of the first quarter last year all the way until the third quarter where we saw the trough and where in my prepared comments we saw the trough. As we projected, it's just steadily making that turn and picking up again, which was very well sustained.

Sri Anantha - Oppenheimer

Is it possible in any way to quantify what the rate of growth is from a volume perspective, from the install base?

Boland Jones

I don't have that right this second, I don't believe Ted has that either. We've grafted, we've looked at it but we haven't quantified it for an answer here today.

David Trine

The bottom line is, the volume growth is more than what we saw in the fourth quarter. So it's definitely not the volume growth that we saw in the first quarter of last year, or second quarter, but it's definitely better than the fourth quarter and starting to get good in third quarter.

Boland Jones

Yes it correlates unbelievably. So, it correlates back to not only the mood of the market but as people (inaudible) people go, a little bit of the activity in the M&A has started picking up according to the financial sectors and so forth. I mean, it correlates exactly with it, where number of meetings that we’re hosting and number of people on those meetings and times of those meetings are all increasing.

Sri Anantha - Oppenheimer

And, Boland, I know you mentioned about Netspoke. I'm just curious, how that particular acquisition had been tracking since you guys acquired. I know you guys have never really talked about it. What's the contribution from that particular web conferencing business has been growing, because you know whenever we looked at you guys, you primarily focused on reselling at the WebEx or PlaceWare. Maybe if you can give us a little more color on that.

Ted Schrafft

This is Ted. First, we don’t comment or break out the specific performance of the different Web products, but what I will say though is that we really like our Web strategy. Because we are working with partners as well as having our own technology, and I think what Boland alluded to in his opening or his prepared comments, was some really significant new enhancements to our Netspoke product, combined with other products that help us with the strategy to move online.

So this online concept and this online strategy is very, very important to us because there's a lot audio meetings that don't use web but there's very few web meetings that don’t use audio.

So, it really brings us up the value curve. And it positions us really more as off site meeting experts that you've heard us talk about, as opposed to product experts. So our integrated strategy and advancement on those tools such as the toolbar I think that Boland mentioned and the advances we're going make with Netspoke and deliver the summer.

And then beyond that iMeet et cetera are really, really key to what Boland also referred to as our product differentiation. So we're very excited about where we are headed with our strategy and our product, in that whole area.

Sri Anantha - Oppenheimer

Got it, and in the iMeet, are you guys incorporating the Netspoke solution as the web conferencing or your partner solutions?

Boland Jones

Neither actually. We've redesigned from scratch on new platforms, utilizing all the flash technology that's available out there today and incorporated some of the web side technologies out there today for webcams and cell phones and so forth. So we started over. We've learned lessons from the web conferencing market in general. But iMeet is clearly positioned to be a whole new way of getting together, and so we approached this from the ground up and started over from scratch.

But we're excited about iMeet, iMeet's going to incorporate video, audio and web conferencing as well as social networking across the [ph] market. I promise you have never seen it. The product's available; if you get with Sean or somebody else on the executive team, you can get his iMeet from him and experience it at your convenience, and it’s beta form and hopefully you would be as excited about as we are. We are ecstatic about it so are the customers that are working with us.

Sri Anantha - Oppenheimer

One last question; and David in your last quarter you guys guided to gross margins of 58 to 55. You are already coming up behind of the range. Should we expect that to continue going forward, or should we expect maybe one or two quarters it's going to moderate and then pick back up?

David Trine

Well, I think, Sri, it's going to continue to fluctuate each quarter and it'll depend of course on things like mix of business volume, price compression and so forth. But I still think it's going to be in that range of 58 to 58.5.

Operator

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

Sean O'Brien

Thanks, Rufus, and thank you all for your participation this afternoon. If you have any follow up questions, please feel free to give me a call. My direct line is 404-262-8462. We look forward to updating you on our status on our next call. Have a great day. Thank you.

Operator

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

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