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EasyLink Services International Corporation (NASDAQ:ESIC)

F3Q10 (Qtr End 04/30/2010) Earnings Call

June 4, 2010, 8:30 a.m. EDT

Executives

Andrew Kaminsky – Investor Relations

Thomas Stallings - Chief Executive Officer

Glen Shipley - Vice President, Chief Financial Officer and Secretary

Operator

Good morning, and welcome to the EasyLink Services International Corporation's fiscal 2010 third 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 Mary. 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. I refer you to the documents that EasyLink Services International Corporation files from time to time with the Securities and Exchange Commission, particularly the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2009, filed with the SEC on October 29, 2009, including the risk factor discussion in Item 1A of that report and the risk factor discussion in Part II, Item 1A of our subsequent quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections. EasyLink Services International Corporation undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results.

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 the third quarter results, we will open the lines for questions.

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

Thomas Stallings

Thank you, Andrew. Good morning and thank you for joining us today. I am going to provide an overview of our third quarter accomplishments and financial results, comment on our 2010 outlook and then Glen will make some brief remarks before we take any questions that you may have.

As many of you may have read, last month we redeemed our series E preferred shares. Glen will discuss the redemption in greater detail later in the call. However, I would note the continued support of Easylink demonstrated by SunTrust and our lender group as evidenced by their funding of an additional $5 million under the accordion feature of our term note, which was used to redeem the series E preferred.

Turning to the quarterly overview, we are very pleased with our third quarter results and continue to be enthusiastic about the rest of our fiscal year. Our sales and marketing team have continued to aggressively market our products and services around the world and are focusing our efforts on building our pipeline in a number of sectors such as healthcare and financial services. Additionally, we are taking advantage of the sale and consolidation of some of our larger EDI competitors and refocused our efforts on winning over new accounts.

During the third quarter we added twenty-one new names to our roster of premier clients with key customer wins at Commerzbank AG, Union Bank of California, Faurecia Services Group, Mizuno USA and Mrs. Fields Companies to name a few. These twenty-one new accounts represent $815,000 in additional annual recurring revenue.

As we mentioned last quarter, our continued focus on superior customer service has allowed us to expand our presence within our existing larger accounts with additional annual billings of $735,000 This further demonstrates our status as a trusted partner providing tangible value to our client’s businesses.

In order to build upon our product offerings, we signed a strategic agreement to become a private label reseller with DataMotion. This agreement will allow us to accelerate our deployment of a secure e-mail solution that automates the transmission of encrypted information without requiring additional capital investments by us or our clients.

As we have said previously, our software-as-a-service model is very compelling to companies as they strive to create more efficient operations and drive additional profitability within their own organizations. The continual increase in compliance and the necessity for security grow on a daily basis throughout the global enterprise. As a result, the value proposition of our products and services increase and become more integral for our clients to cost effectively and securely communicate with their customers, employees and trading partners.

This quarter we heightened our efforts in marketing to Wall Street and presented at two investor conferences meeting a significant number of new institutional investors. We are continuing to selectively present at conferences where we can demonstrate the value of EasyLink to investors that could be interested in our story. We will be presenting at the Noble Financial conference in Ft Lauderdale this coming Monday, June 7th at 9:30am and will have a live webcast available on our website if you would like to listen.

Turning to our financial performance, we reported $20.6 million of revenue this quarter bringing our total revenue for the first nine months to $61.5 million. Revenue in the third quarter for On Demand Messaging was $10.4 million and $10.2 million for Supply Chain Messaging. We believe that our quarterly revenue for the fourth quarter should keep us well within our previously announced guidance of low to mid $80 million of revenue.

Although we are still operating in a turbulent global business environment, I am very proud of our team for holding revenues steady while reducing costs and expenses. Our focus on operations has allowed us to generate significantly higher margins compared to the third quarter of fiscal 2009. Our gross margin for the third quarter was 73.2% up just over 400 basis points from a year ago, which included a onetime telecom credit of approximately 1%. Our Adjusted EBITDA margin was 28.6% this quarter up 350 basis points compared to the third quarter of 2009.

Adjusted EBITDA for the quarter was $5.9 million bringing the nine month total to approximately $15.9 million. Net income to common shareholders for the quarter was $1.8 million or $.06 per share. Our nine month total was approximately $4.0 million or $.15 per share.

As I have mentioned before, we continue to evaluate M&A opportunities on a proactive and opportunistic basis and believe that they are a key component to the growth and future of EasyLink.

All things being considered, we believe that our results for the third quarter were exceptional and we look forward to continuing our performance for the remainder of fiscal 2010 and into fiscal 2011. Glen joins me and the rest of the management team in thanking our team of 290 colleagues around the world for their continued dedication and hard work, especially during these volatile times.

At this point, I would like to turn the call over to Glen for some quick comments on some of the factors influencing our financial statements.

Glen Shipley

Thanks Tom. Good morning all. As Tom mentioned, I wanted to briefly update you on a few items that will impact our financial statements over the coming quarters.

As we discussed before, through the first three quarters of this fiscal year, we have been recognizing estimated tax expense on our earnings using the existing statutory tax rates. We continue to evaluate the release of some or all of the valuation allowance of approximately $27 million currently held against the tax assets on our books. Under GAAP, the valuation allowance should be released when it is more likely than not that the Company can utilize the tax loss carryforwards. As we have reported taxable income for the last 13 quarters and continue to project future taxable income, we believe a release of the reserve may in order. This release may result in the onetime recognition of significant income.

In addition, approximately 25% of our revenue is from foreign sources and is principally measured in the British pound and the Euro. The exchange rates of these currencies against the dollar have again become quite volatile with the dollar strengthening significantly over a short period of time. If this pattern holds, our revenue may be negatively impacted. However, in that expenses will also be reduced by the same percentage, we should be able to maintain our margins.

Finally, as Tom briefly mentioned, on May 19, we redeemed our series E preferred shares. Over the last 12 months the shares had been outstanding and paid a 10% dividend as compared to less than a 4% interest rate on our current credit facility. The dividend rate was scheduled to increase by 2% per annum over the next three years. We therefore felt it was prudent to redeem the shares at this time. As noted, we used the accordion feature of our credit facility to draw down $5 million. These proceeds along with $2.2 million of cash on hand were used to redeem these shares. The aggregate effect of the redemption will add approximately $.03 a share to our diluted EPS on over the next twelve months.

Before Tom and I take questions, I would like to reiterate that our management team is extremely focused on efficiently running the business and building shareholder value.

At this point, I will turn the call back over to the operator for questions.

Question-and-Answer Session

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