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Premiere Global Services (NYSE:PGI)

Q4 2013 Earnings Call

February 20, 2014 5:00 pm ET

Executives

Sean O'Brien - Executive Vice President of Strategy & Communications

Boland T. Jones - Founder, Executive Chairman and Chief Executive Officer

Theodore P. Schrafft - President

David E. Trine - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Analysts

Barry McCarver - Stephens Inc., Research Division

Daniel Toomey

Michael Latimore - Northland Capital Markets, Research Division

Operator

Good day, everyone, and welcome to the Premiere Global Services, Inc. Fourth Quarter and Year-End 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, February 28, at midnight. The replay numbers are (888) 203-1112 within the United States and Canada, or at (719) 457-0820, worldwide. The passcode to access the replay is 5278333. [Operator Instructions] At this time, I would like to turn the conference over to the Executive Vice President of Strategy and Communications for PGi, Mr. Sean O'Brien. Mr. O'Brien, please go ahead, sir.

Sean O'Brien

Thank you, and good afternoon, everyone. If you have not received a copy of our fourth quarter and fiscal 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 concern historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs, assumptions made by and information currently available to management, pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors, including those we identified on our annual report on Form 10-K for the year ended December 31, 2012, and our other filings with the SEC. In addition, during this call, we will also present non-GAAP financial measures of our business. Please consult both our press release and Form 8-K filings of this afternoon for the reconciliation of these non-GAAP financial measures to the most comparable GAAP measures. These materials are also available on our website at PGi.com. At this point, I'll turn the call over to Boland.

Boland T. Jones

Thanks, Sean, and good afternoon, everyone. This is Boland Jones, Chairman and CEO of PGi. I'd like to welcome you all to our fourth quarter and fiscal year 2013 earnings call. Let me begin by saying that we are very pleased to report another year of solid performance by PGi on all fronts: strategic, operational and financial.

We entered the 2013 year with a clear set of priorities and objectives, designed to further establish PGi as the global leader in business collaboration software and in my opinion, we were very successful in operating towards our goals. For example, we've generated nearly 75% growth in our software applications, 2/3 of which came from our current audio conferencing customers upgrading to this PGi software. We completed 3 solid acquisitions, adding thousands of enterprise customers, more than a quarter of a million new business users and exciting new channels for growth. We released industry first innovations and upgrades to iMeet and GlobalMeet, resulting in growing accolades from leading research analysts, and a significant number of a new enterprise sales and trials of these award-winning products. And we continued to generate significant cash flow of almost $1 per share as defined and reconciled in our earnings release this afternoon.

As I stated on our last call, PGi's strategy is simple. We're working every day to create the very best collaboration products in the world. Products to give our enterprise customers our collaborative advantage, helping them to innovate faster, operate more efficiently and more competitive by enabling their people to connect and collaborate anywhere, any time and from any device. We believe that the need for our collaboration products is greater than ever before, because in today's global economy, companies need to work harder than ever to stay competitive. They need to invent more, sell more, recruit more in order to drive results and collaboration is at the core of each of these critical business activities. In our opinion, the value of collaboration to an enterprise is moving way beyond just an offset for travel expenses.

PGi's advanced collaboration applications can help companies, from the world's largest enterprises to its smallest businesses, advance ideas, accelerate innovation, improve productivity and drive meaningful business results. But in order to deliver on the full promise and potential of PGi collaboration solutions, we need customers using our software applications from their computer, tablet or smartphone. As a result, we've been working diligently to transition both our current and new customers away from the telephone into the high value, high margin collaboration products on our new SaaS platform. This is our single focus, and we believe that this transition in our business will position PGi for the next wave of profitable growth.

We continue to make meaningful progress in this transition. For example, in the fourth quarter, we added nearly $4 million in annualized run rate revenue from our collaboration software applications. And we ended 2013 with an annual run rate of approximately $37 million from these award-winning products in just our second full year of selling this. A good portion of our software sales continues to come from closing new deals in our acquisition pipeline, but the majority of our sales success is coming from the transitioning and upgrading of our traditional audio conferencing customers to these higher value SaaS products.

As I stated on our last call, while there may be an initial near-term revenue decrease, as a result of transitioning an existing customer, we believe the long-term value of getting a customer converted to our SaaS platform is substantial, as these products generate an average gross margin of as high as 85% or 90%, and they enable us to readily integrate and bundle other features and capabilities that will make PGi products an even more meaningful part of our user's day.

Consistent with the last 2 years, our capital allocation strategy in 2014 will continue to focus on investing the substantial cash flow generated by our Audio Conferencing business in developing and expanding our SaaS products and distribution. This year, we plan to add to our SaaS sales force, increase the number of distribution partners that are reselling PGi software applications globally and invest more than ever before in the advertising and marketing programs to drive awareness and adoption of these products in the global marketplace.

We also plan to continue to invest in expanding our SaaS products and capabilities to position PGi to compete in significant new growth markets, like webinars, large events, asynchronous team workspaces and mobility productivity apps, to name a few. These are topics and opportunities we plan to update you on in the coming months. We are confident that continuing to build out our collaboration product portfolio and transitioning our company towards a SaaS business model will position PGi to deliver higher 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 again thank all of our associates around the world for all their hard work and dedication to our PGi success. Let me also thank our customers and shareholders for their continued support of PGi.

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

Theodore P. Schrafft

Good afternoon, everyone, and thank you for joining our fourth quarter and fiscal year 2013 earnings call. As Boland stated in his opening remarks, we are pleased with the progress our company made during the fourth quarter and throughout 2013, as we accelerated our progress toward our goal of establishing PGi as a global leader in collaboration software applications, while continuing to generate improved earnings and significant free cash flow, which have been a hallmark of our business model.

The strong cash flow we generate from our foundational Audio Conferencing business continues to support our investments in the development and growth of PGi's suite of award-winning collaboration software applications, as well as our continuing efforts to fund our ongoing acquisition program in order to expand our global reach, our scale, our product portfolio and our distribution channels. We believe the strong market adoption, solid growth and expanding sales pipelines of our unique collaboration software applications validates our vision and strategy, and as a result, we remain confident in both our near-term and long-term outlook for PGi. Now let me turn to our fourth quarter and fiscal year 2013 financial performance, beginning with revenues.

As reported, net revenues grew approximately 7% in the fourth quarter to $134.6 million, up from $125.8 million in Q4 last year. For the year 2013, we generated record revenues of $526.9 million compared to $505.3 million in 2012. During the fourth quarter, we continue to focus our go-to-market efforts on increasing sales of PGi's SaaS-based collaboration applications, and we generated approximately $4 million of new annualized revenue run rate from these high value, high margin products during the period.

As included in our earnings release this afternoon, we are reiterating our financial outlook for 2014. Based on current foreign currency exchange rates and business trends, and assuming no additional acquisitions, we project that net revenues in 2014 will be in the range of $560 million to $570 million. Further, we continue to project that sales of our SaaS-based products will grow more than 50% in 2014 compared to 2013, and will comprise an excess of 10% of our consolidated annual revenue run rate by the end of the year.

Turning to profitability. Our gross margin grew modestly in the fourth quarter, totaling 57.3% of revenues during the period, as compared to approximately 57% in Q3. We continue to anticipate that our gross margin will expand modestly this year as our higher margin SaaS products comprise a greater percentage of our total revenue and as we work to integrate and optimize the acquisitions we completed in 2013.

Non-GAAP diluted EPS from continuing operations was $0.20 in the fourth quarter, up from $0.18 from the fourth quarter of 2012. And non-GAAP diluted EPS from continuing operations in 2013 totaled $0.78, as compared to $0.73 in 2012. Based on current business trends and current foreign currency exchange rates, and assuming no additional acquisitions, we continue to anticipate that non-GAAP diluted EPS from continuing operations in 2014 would be in the range of $0.85 to $0.88.

As a final note on profitability, we incurred acquisition-related expenses during the fourth quarter and fiscal year 2013, which are detailed in the financial statements included in both our earnings release and our 8-K filing this afternoon. We expect to incur additional acquisition-related expenses during the coming quarters as we execute the integration plans associated with the acquisitions we completed last year.

We continue to generate strong cash flows in 2013, with net cash provided by operating activities from continuing operations totaling $75.9 million and significant free cash flow of $0.94 per share. Capital expenditures totaled $31.8 million in 2013, slightly below our guidance of $33 million. We anticipate that capital expenditures will increase modestly in 2014 as compared to 2013.

We ended 2013 with significant liquidity despite the acquisitions of Powwownow during the fourth quarter. At year end, we had cash and equivalents and room on our credit facility totaling nearly $170 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 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 are pleased with our fourth quarter and fiscal year 2013 performance. We are making solid and measurable progress toward our primary objective of transitioning our business to SaaS, a strategy that we continue to believe will deliver great value to PGi's customers, our associates at our shareholders. We look forward updating you on our progress in future calls. Until then, let me join Boland in thanking our customers and all of our associates for their continuing support and commitment to our success. And at this point, we will open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And for our first question, we go to Barry McCarver with Stephens Inc.

Barry McCarver - Stephens Inc., Research Division

A couple of questions. I guess, first off, occasionally in the past, you guys have commented on activity competition and pricing for the traditional services. I know you don't want to get too specific, and we certainly continue to focus on the new SaaS business, but that held up pretty well in 2013. I wonder if you can give us an idea of what activity looked like in the second half of the year.

Theodore P. Schrafft

Hey Barry, it's Ted. Yes, I mean, you just kind of, almost answered part of the question with your question. Obviously, the goal and the focus and where the ship is pointing is clearly at the SaaS business. But it does, it continues to get supported by a great, existing business. And it -- I don't think we're out of any bands. I think that we've commented in the past that competition is -- remains very, very tough out there. No doubt about it. But price points, I think have continued -- have not gotten out of band. I don't think they've gotten -- I think they're probably -- pricing is, I think remain relatively the same. We've talked about compression rates in the high single digits to low double-digit rates, and that's where we kind of continue to see the market. So obviously, as we migrate these customers and our existing customers over to our software products and get them on longer-term contracts, that's a key part of our goal to, kind of eliminate some of that competition out there.

Barry McCarver - Stephens Inc., Research Division

And I know you disclosed Powwownow, in the fourth -- late in the fourth quarter, but I believe that, that sales channel, you thought originally would be a great area to sell iMeet and GlobalMeet into. Have you seen any early success that you might be able to share with us?

Boland T. Jones

Too early now. We've got some integration projects going on, Barry. This is Boland. And probably, won't debut that integration work probably until April or May. At which time, we'll start to introduce some of the customer base over there to the iMeet, GlobalMeet products. We want to make sure we get it all integrated tightly, and that we don't denigrate the service at all to Powwownow, the good service that they're providing their customers. So few integration issues, some integrated billing issues, and so forth, and we should have it kicked off by April or May, and we'll keep you abreast of that. But we're excited about it, we think it's an excellent, excellent opportunity to sell those products through that channel.

Barry McCarver - Stephens Inc., Research Division

Is there any significant amount of CapEx that's going to go into the integration?

Boland T. Jones

No, no. Very insignificant.

Barry McCarver - Stephens Inc., Research Division

Okay. And then just lastly, and I'll let somebody else hop on. Pretty tough weather we've had so far in 1Q. I think you guys know exactly what I'm talking about. Any chance you've seen a pickup in activity on conferencing, because of that weather?

Boland T. Jones

I mean, not, if there was, maybe some, but I mean, our business is so dispersed, not everybody was having bad weather at the same time, so not really. I mean, our daily buy-ins have been pretty steady. I mean, maybe in a 1 or 2 day crunch we saw a little spike in our volume here or there, but nothing significant, no.

Operator

And for our next question, we go to Dan Toomey with Raymond James.

Daniel Toomey

Just as far as your acquisition strategy, and you've mentioned what parts of the business you're looking to target. But just wondering, geographically, can we expect more acquisitions targeting Europe and the continent in particular, or is there other areas you're thinking about?

Boland T. Jones

Well, we're looking everywhere. And we're going to be super inquisitive, we're trying to obviously steer our capital as best as we can towards the -- where our business is going, which is the SaaS businesses, and we're looking at synchronous businesses like our current business, and we're looking at asynchronous businesses. So if it's not a realtime conference meeting, it may be a near-time, as we call it, collaboration about a file, or some kind of group collaboration. And there's different parts of the world that have some of that more than others. So obviously, very competitive in the United States, but typically the values are a little bit -- the higher expectations are here in the United States, versus in other parts of the world that are less competitive, but we're looking everywhere. And we don't have any bias in that regards.

Daniel Toomey

Okay. And when you make an acquisition, if you could give me an idea, what is your thought process or how do you define success, as far as the time it takes from the acquisition or what percentage of the base you're able to convert to the iMeet, GlobalMeet products? Do you have a benchmark for success?

Boland T. Jones

It's not always us, it's not always us converting their customers to our product, sometimes it's their products going to our customer set. There's several acquisitions we're looking at right now in our pipeline that we're pursuing as pipeline opportunity. It's normal that will be products that will become part of our product set versus our products becoming part of their product set. So it varies. I think you're speaking more to when we, in the past, as we've purchased some audio conferencing companies and we try to convert them to iMeet and GlobalMeet, and we did so in a couple instances last year. And in those cases, I think to answer to your question, hopefully, this helps, to answer your question is that, we measure it during our due diligence period so that we can satisfy our own hurdles that we have convertibility there and that we can convert, and those vary from customer base to customer base, and situation to situation, there's not really a set formula. We want to get the right value of it, we want to expand our customer base, and then we want to have the opportunity to convert them to our SaaS products. And so if we think they're not convertible for whatever reason, we stay away from it, and if we think they're convertible and everything lines up, then it becomes a deal.

Operator

And we go next to Mike Latimore with Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

With the SaaS business getting bigger and then your Powwownow acquisition, what kind of gross margins are you envisioning in this fiscal year?

Theodore P. Schrafft

Hey, this is Ted. Yes, I mean, obviously, we have said, I think Boland said in his opening remarks, that our SaaS businesses is running that 85% plus margin. So we absolutely love that business, and as that business grows, it has positive impact on our gross margins. I think I said in my opening comments that we expect gross margins to tick up modestly this year, and I'll blame it on 2 things. I'll blame it on the goodness of the SaaS business, and the gross margins associated with that as we grow it. And then as we integrate these acquisitions, the acquisitions we did in 2013, and we finalize the plans and the integrations of those acquisitions, we would see that, that should have a positive impact as well. So we're expecting gross margins to modestly improve fairly continuously through the year.

Michael Latimore - Northland Capital Markets, Research Division

Great. And then the G&A level in the fourth quarter, is that kind of a good run rate to work with, going forward here? Or how should we think about G&A?

David E. Trine

Yes, Mike, this is David. Yes, I would keep it in that 17% to 17.5% type range. And again, the increase from Q3 to Q4 is primarily due to the acquisitions.

Michael Latimore - Northland Capital Markets, Research Division

All right, great. And then just last, when you do convert a customer to your SaaS platform, what is -- I know that margins go up a lot, but what's generally the revenue offset? I know it comes down a little bit, but just kind of curious what's the order of magnitude there?

Boland T. Jones

I mean, again, I'm going to answer it 2 ways. In general, it comes down probably, 10%, maybe as much as 15%. But it depends on how many knowledge workers you get to sign up for that subscription-based pricing versus not. Typically, in most cases, when we convert customers, we can't convert all the professional workers in that organization. So we still have some professional workers that the company elects not to give them seat-based software. Now we're trying to improve our software and improve the usefulness of our software, so that the company is persuaded, the enterprise is persuaded to give everybody the software, but they'll still say typically, well these people don't need to share their screen, or these people don't need to share their file, these are just people that just need to get on audio conferencing calls, so we won't buy licenses for them, we'll just buy licenses for the people who need it. So that's a -- that may bring the account down 10%. There are some enterprises who say we want it for everybody, and we want everybody to go through the seat-based software or the mobile device software, and that can take it down as much as 20% to 25%. So as we grow the SaaS business, and we're growing as much from our current base converting, as we are from new accounts coming in, and we're continuing to grow the topline of our business, we actually have to -- we've digging pretty hard, because we're knocking down our current business materially, as we convert the customers there. So as you see our business growing in total, it means that we got a lot of new accounts coming in, because the current accounts we have, they're definitely getting smaller as we convert them. But we're getting huge margins and we're getting the long term commitments, and we've got the ability, once they get on the software to sell them. In our humble opinion, we believe we can sell them other useful functionality in that same software besides just web conferencing, if you will. And that's our goal in the future, is to continue to develop those opportunities.

Michael Latimore - Northland Capital Markets, Research Division

Great. Just a last question. What's the -- what tax rates are you using this year?

David E. Trine

I would use around 30%, 30% range. That's where we ended up, by the way, on our normalized rate for 2013.

Operator

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

Sean O'Brien

Thanks, Rufus. Thank you all for dialing-in today. If you have any follow-up questions, please direct them to my attention at (404) 262-8462. Have a great day.

Operator

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

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