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Premiere Global Services, Inc. (NYSE:PGI)

Q2 2010 Earnings Conference Call

July 22, 2010 5:00 pm ET

Executives

Sean O' Brien - IR

Boland Jones - Chairman & CEO

Ted Schrafft - President

David Trine - CFO

Analysts

Shyam Patil - Raymond James & Associates

Tavis McCourt - Morgan Keegan &Co.

Ian Kell - Northland Securities

Sri Anantha - Oppenheimer & Co.

Operator

Good day and welcome everyone to the Premiere Global Services Incorporated second quarter fiscal 2010 conference call. Today's call is being recorded. This call is also being simultaneously broadcasted 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 8.00 PM Eastern Time today till midnight, Friday, July 30th. The replay numbers are 1-888-203-1112 within the United States and Canada or 1-719-457-0820 worldwide. The confirmation code to access the replay is 114-5876. All lines will be muted throughout the presentation until the question-and-answer session begins.

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. Please go ahead, sir.

Sean O' Brien

Thank you and good afternoon everyone. If you have 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 would 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 Form10-K for the year ended December 31, 2009 and our 10-Q filing for the quarter ended March 31, 2010.

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 would 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. And welcome and thank you for joining our second quarter 2010 earnings call. Before Ted updates you on specifics of our second quarter performance, I'd like to spend a few minutes talking to you about where we are today, and in the process of transitioning our business against the backdrop of a very challenging global economy.

Specifically, I want to talk about the online meetings company that we are building here at PGI. We have been in the business of innovating and applying technology that brings people together when they are a part for nearly 20 years. And today, we are recognized as the top global player in the meeting business.

We have seen a lot of change during this time. PGI started when conferencing was done exclusively by phone, and we have witnessed an amazing transition in our space from a hardwired, human operator-based cottage industry to a very highly automated, vibrant global market backed on by the web.

Through our innovations, PGI has helped lead and expand the industry to transition. From where we sit today, the industry is changing again. We want to be and we believe we will be at the forefront of this change. Today, companies are more dispersed and more mobile than at any time in history. As a result, the tools and technologies that enable collaboration are more important to them than ever before. In fact, according to a recent study by IBM, collaboration which used to be an afterthought for many organizations has become one of the top five strategic technology investments for many large companies.

At the same time, newer technologies like social networking, peer-to-peer technologies and video technologies are advancing at an exponential rate. These technologies offer new venues for people to meet and collaborate. And in fact, there is another industry exploding around us that is beginning to merge with and in many ways compete with our traditional services.

My point is that we believe we are addressing an extremely large market opportunity, that is expanding and scope every single day as these and other technologies and habits change the way people can and want to connect and do business.

Now over the past decade, we've grown PGI's meeting business from less than $75 million to nearly $500 million annually. Over this time, we've built a global presence, created a scalable next generation collaboration platform and earned a base of customers that includes some of the biggest brands in the world. We believe these are tremendous assets for our company that can provide a strong platform and large path for our future growth.

However, because we've been in this phase so long and has been a leader and acquiring market share over this time, much of our industry today is grounded in current rather than future technologies, specifically audio conferencing. We love the audio business and we are good at it, and there's no denying the value that delivers to our customers. Around $4 billion, audio conferencing is now part of largest segment today of the collaboration market and analysts expected to continue to grow for many years.

But today, buyers of our services are moving beyond just audio. They are moving online. And most of the future growth in this industry is expected to be online and online technologies. For example, companies desire the enhanced productivity delivered by web conferencing. Productivity comes when people truly collaborate.

Now talking about the documents they are working on in real time rather than emailing advance to discuss them later. But even beyond web conferencing, customers are looking to leverage other online services. They are looking to stream audio and video content over the web for training, education and informational purposes. They are looking to facilitate video chat, multi-party video meetings, and increasingly they are looking for users to have audio only calls online as well as moving from the traditional phone networks to calling 'on net' by leveraging the robust data networks in infrastructures that they deployed in their companies over the past five years.

Our customers are increasingly moving towards online technologies and we believe there is a huge opportunity for meaningful growth and higher profitability for PGI by being the company to deliver these services to them. Today marks a huge and important step for our company in capturing and owning the new online opportunity.

Today we announced our expanded public Beta of our new product iMeet. With iMeet, we set out to change the way people meet online and the way people do business. We think it will set PGI far apart from every competitor and lead the next generation of unified collaboration technology for the entire industry.

In iMeet we combine the best parts of video, web conferencing and audio conferencing, and what we believe is the simplest, most intuitive and elegant product on the market today. iMeet is the first application to seamlessly integrate business collaboration with newer technologies like social networking, video chatting, users want to bring from their home life into their work setting. iMeet is laser-focused on the user and usability, and it was designed to make the meeting experience more enjoyable, more intuitive, and thus much more productive.

We think we created something very special and unique in iMeet. The feedback we have received from users in our private Beta from customers that have experienced iMeet to this point has been outrageous. In fact, one of the most visible forward-thinking technology companies in the world commented to us just last week that the vision of our company and iMeet is the most important innovation and best forward-thinking they have seen in the collaboration industry ever.

We are thrilled that iMeet is now available to everyone in Beta. And I hope each of you will take the time today to register to participate in what we think will be an experience of your lifetime as far as your business life goes. iMeet is critically important to our transition to an online meetings company. But I want to make it very clear iMeet is not the only single thing that's moving our strategy forward although it is the largest thing.

Our strategy is much broader than just iMeet. We have a suite of additional new online meeting tools coming out later this year and our entire organization is moving in this direction with the singular goal of creating higher value for our customers and our shareholders.

In conclusion, let me say that despite the challenges and frustrations of managing through a very, very tough economy, it remains a very exciting time at our company. Our industry has never been more visible or vibrant. Our vision has never been more powerful and our path has never been clear. At this point, it's about execution, which in my opinion is one of the things our company does best.

We look forward to updating our progress for iMeet and the rest of our company on upcoming calls. Once again I'd like to thank all of our valued customers and associates around the world for their continuing support and patronage, and I'd also like to thank the specific people who made iMeet a reality for me in the last year and a half.

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

Ted Schrafft

Thank you Boland and good afternoon everyone. While it certainly is clear that we are excited about iMeet around here and I also want to share Boland's excitement and enthusiasm over what we believe is an opportunity that is just incredible for PGI, for our industry and certainly for our customers.

So that said, before I outline our second quarter financial results, I also want to establish an element of tone about how we view our mission of building and becoming the online meetings company that Boland outlined in his opening comments. While this entails many new and different operating initiatives, let me try to boil it down to two primary goals or objectives.

The first is to continue to transition every aspect of this company from an audio conferencing company and a successful audio conferencing company to an online meetings company. From the sales people we hire, to how we train them, to the conversations we have with customers, to the products we sell, to how we service and support them. And we are well on our way in this journey, well on our way with the global sales and support team, rapidly transforming itself into online meeting sales consultants and experts, already selling and supporting a rapidly increasing number of higher value online meetings. We are well on our way with a base of over 50,000 customers around the world that enjoy and value the services we provide them and support them on today. And we are well on our way with an exciting, expanded and rich portfolio of new online meeting products and services, clearly highlighted by iMeet, that are just around the corner.

The second objective is to run this company with tremendous focus and precision while we make this transition. This means prioritizing, scrutinizing and optimizing every area where we spend or invest our money, with tight operational head count and expense controls, and doing so, and on that front, strategic way that supports our vision and accelerates our strategy and progress. This task is understood and is being led by every employee in this company, committed to the objective of generating a clear and tangible return on every dollar investment and building our new online meetings company.

With that term said, let me state that the economy is currently helping us as Boland said, as we execute on these objectives. While it continues to overshadow the results we are achieving on these objectives, it is not slowing down our road-map, our progress, or our timeframes of achieving our goal of becoming the world's leader in online meetings.

While the economy is clearly a factor in our results, it does not deter our energy, our passion or the confidence we have in achieving our vision and our goals.

Now let me shift my comments to the review of our second quarter financial results. Beginning with revenues, as reported our consolidated net revenues totaled $144.6 million in the second quarter, essentially flat with the first quarter when adjusted for changes in foreign currency exchange rates as detailed in our earnings release.

Our second quarter revenues were slightly below plan due to lower than expected volumes in our customer base. Beginning in Q3 last year and through the early part of 2010, we experienced stable to modestly improving sequential usage trends in our same-store customers. However late in the second quarter, we saw a flattening of these trends. This occurred mostly in the SMB market segment where we are the most focused competition and where the economy is taking its greatest toll.

Even with several months of modestly improving trends in our base, it is clear that we are not out of the woods yet on this economy. Unemployment levels haven't budged here in the US, and that continue to rise in other regions of the world. And based on what we observe from our customers, business activity out in the economy remains spotty.

Throughout the first half of the year we continue to build a healthy pipeline of new customer opportunities and our pace of new customer acquisitions remain strong. But as I said on our last few calls, we believe it will take a healthier economy and then improved employment picture to generate trends that near our historic levels.

On a final note regarding revenue, foreign currency exchange rates are fluctuating meaningfully, since we initially provided our outlook for 2010. And based on our second quarter results, we are taking more conservative outlook on volume projections in our customer base for the remainder of the year.

As included in our release this afternoon, we have established to revise financial outlook for the year. We now anticipate revenues in 2010 will be in the range of $568 million to $576 million, based on current trends and foreign currency exchange rates.

Now turning to profitability, we continue to make the progress in controlling our cost as we actively scrutinize and optimize all of our expenditures. And we are pleased with some of the leverage points we are proving in operating expenses.

Our gross margin however continues to be a challenge for us. Gross margins declined in the second quarter from first quarter levels, primarily as a result of a change in the composition of our revenues, specifically a lower contribution from our SMB channel, coupled with the continuing revenue growth from our global accounts.

We continue to aggressively manage our network in direct cost and we are implementing a number of initiatives to improve our gross margin. Despite these efforts we anticipate gross margin will remain within recent ranges for the foreseeable future.

Overtime, as we transition to greater sales of our own online software applications like iMeet, we anticipate our gross margins will improve as these new products carry a very, very different margin profile.

Further on profitability, during the second quarter we had a number of non-recurring items as we continue to tightly manage expenses in our business. And we incurred structuring costs during the quarter as well as asset impairments associated with the discontinuation of one of our non-core email platforms, as we continue to advance our strategy and focusing on our meetings business. Please review the reconciliation tables included in our earnings release for an itemization of these charges.

Non-GAAP EPS from continuing operations was $0.20 in the second quarter, slightly higher than in the first quarter. During the second quarter, we did not expect any marketing or advertising costs associated with the upcoming release of our new iMeet platform.

For 2010, based on current trends in foreign currency exchange rates, we anticipate non-GAAP diluted EPS from continuing operations will be in the range of $0.68 to $0.71, with quarterly results influenced by the timing of the release and associate launch cost of iMeet and our other online applications. We currently expect our spend on the launch of iMeet and other collaboration applications this year, will be less than the $10 million we previously anticipated.

We continue to generate strong cash flows in the second quarter with net cash provided by operating activities from continuing operations totaling $20.6 million. These results include payments of approximately $2.2 million associated with our restructuring activity.

Consistent with our historical performance, we anticipate the majority of our 2010 cash flows will be earned in the second half of the year. Capital expenditures were inline with plan totaling approximately $10 million in the second quarter. We anticipate capital expenditures in the second half of the year will be similar to first half totals, but maybe affected by the ramping of new large customer account wins and incremental capacity spend associated with the iMeet launch.

We ended the second quarter with total debt minus cash and equivalence of approximately $224 million. At the end of the second quarter, we had greater than $108 million in cash and available liquidity under our new full year credit facility.

In conclusion, let me say again that we are excited about our future, excited about what we are doing and very pleased with the progress we are making in transitioning our business to provide higher value to our customers, our company and ultimately our shareholders. I look forward to updating you on our progress on future calls, and until then, let me join Boland in thanking our customers and all of our associates around the world for their continued 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) And we'll take our first question from Shyam Patil with Raymond James & Associates.

Shyam Patil - Raymond James & Associates

Hi. Good evening. Ted, you mentioned that you started to see the business trends kind of flatten out late in the quarter. Could you talk specifically about when you saw this and what have you seen this far in July? Have you seen further kind of weakness or is it stable? Was it driven by any specific geography? If you could just talk about that a little bit.

Ted Schrafft

Okay, Shyam. We saw late in the quarter, we were, like I say, I think we start to see, as we've said, slight uptick starting in the fourth quarter last year, kind of one through the first quarter of this year and we were, as we got through April and May, pretty solid fashionability, literally it was like mid-June that we began to see a little bit of softness in volume. That was really the initiation or whatever, discovery of that, and we did that really when we rolled up June.

Specifically, we saw it in the SMB space as I said in my opening comments. Also said, that's, I think market segment is getting hurt most with the economy. So, it was very, very late in the quarter, it was as we rolled up June and it was very, very specifically in the SMB space.

The global accounts, large accounts, which has also I think put some pressure on the margin this quarter, continues to be, I don't want to say it, a significant growth driver for us. But as we said, it's the success in the global accounts that also put some pressure on that margin. So, I think it's because of that but we rolled up, I think that's how we ended up, you know why we end up kind of recasting little bit this year.

Shyam Patil - Raymond James & Associates

Okay. And, when you look at the change in revenue guidance for the year, how much of that would you attribute to FX versus a change in say, pricing or volume assumption?

David Trine

Shyam, this is David. I would say majority of it is primarily with the FX. As you know, the euro, especially where we've got business over in Europe, has been, negatively impacted our results, and that's where a lot of the change is coming from.

Ted Schrafft

Hey Shyam, this is Ted. I also just want to make sure to the answer the back half year question and David can join me in this as well. On the back half of June again, when we rolled up June is where we saw some of that weakness. It's hard to know exactly. We still got some work to do there, but that could also be some of that summer softness that we begin to see. The volumes for July, you had asked that question, seemed to have evened out. Okay? So, I think we got some of that early summer break and vacation going on as well, but we're looking very, very closely at July volumes, and again they seem to have kind of leveled off. So, I just want to make sure that I answer that part of your question.

Shyam Patil - Raymond James & Associates

Okay, thanks. And then, the new EPS guidance, does that still assume $10 million in iMeet-related marketing cost and how do you expect those to flow in the back half of the year?

David Trine

Shyam, this is David. We do expect it to be less than $10 million at this point and the majority of it would be in Q4, but the timing is still uncertain. If you remember, it depends on how our beta goes and when we will actually expense some of those charges.

Operator

And we'll take our next question from Tavis McCourt with Morgan Keegan.

Tavis McCourt - Morgan Keegan &Co.

Thanks for taking my question. I've got a few of them. First, on the iMeet service, have you decided what the pricing mechanism is going to be for that? Is it going to be a license price? Is it going to be some kind of per-minute price, per desktop concurrent quarter, or is a lot of that still in the air?

Ted Schrafft

It's not in the air. I don't want to tell you exactly what the price is, although we have arrived at our pricing structure in our model but for competitive reasons. I'm not going to tell you but I will say it, it's a licensing model, it's not a per-minute model. As you know the product incorporates cell phone technology into it as an option for users. You can accessorize it with telephony, on top of the cell phone if you want. You can accessorize it, but all that's even flat-rate as well. Nothing is measured on the entire product, its flat rate, flat rate, flat rate, license is flat rate.

Tavis McCourt - Morgan Keegan &Co.

And in terms of the network scale needed, I know you've done a lot of capital investments over the last few years, but as this product scales, should we expect some CapEx pressure as well?

Ted Schrafft

Not yet. We have built an initial network that is specifically for iMeet, that can also, when people accessorize iMeet for the landline, we can access through APIs, we can access the PGi system, which is robust. We're good to go there with the excess that we carry. We have built initial capacity for cell phone usage and webcam usage and stuff, and I don't see any outrageous material increases this year. I hope to see some next year. I hope to see some towards the beginning of the year and the middle of the year, so we'll talk about that when we get to the end of this year. But, I don't see anything that we've done this year. All the money we spent this year is preparing for a nice beta and a nice beginning in the fourth quarter, so that's based into our current numbers.

Tavis McCourt - Morgan Keegan &Co.

Got you. And then what is the, Ted, the mix currently of the conferencing business between small business and enterprise roughly?

Ted Schrafft

Tavis, I think and kind of in rough numbers, we've really kind of segmented into four different pieces. You can look at our large, global enterprise accounts about 30%, but we call our enterprise, which is more of our middle, middle-market is about 30% of our business. SMB represents about 30% and our channels or our partners, reseller partners is about 10%.

Tavis McCourt - Morgan Keegan &Co.

Okay. That's helpful. And then can you give us an update on what's going on in the trends in some of the other services you provide, faxing and email? It looks like they were relatively stable sequentially, but what are kind of some of the puts and takes happening there?

Ted Schrafft

Yes Tavis, we did a stability from Q1 to Q2. Broadcast, fax probably continues to be what I would say probably less than 7% of our overall revenues and we probably even had a little bit of stability on that in the first quarter. Probably the two in the second quarter, the two probably performers relative to that [spend] business is our fax-to-mail, continues to be a strong performer, our notification space, with both voice and SMS messaging and notifications as a strong player there, or continues to be. Let us just say it's a steady strong player there.

We also have a very, very good pipeline of fairly sizeable deals in that space as well, most of them in that fax-to-mail category but also some nice customer wins in the notification space that we expect, that we're ramping as well.

Tavis McCourt - Morgan Keegan &Co.

Okay and David, can you remind us what the debt covenants are on the debt you have now and to that in anyway inhibit kind of the timing of some of the spend on the iMeet platform?

David Trine

They are very consistent with what we had in our first revolver and that would include things like, I think the EBITDA ratios and so forth and there is some capital lease ratios, but the ratios and everything are exactly what they were in the previous facility, but we expect no problem in those covenants. Do you also need the terms of the new revolver?

Tavis McCourt - Morgan Keegan &Co.

If you've got them off the top of your head?

David Trine

$325 million total credit facility, of which 275 is the revolver, $50 million is the term loan and the pricing right now is LIBOR plus 275 basis points.

Tavis McCourt - Morgan Keegan & Co.

Great. And then final one, Ted, on kind of the cost structure, and I know it's kind of a quarterly challenge to try to get this right, but what can you do in terms of the fixed-cost portion of your cost of revenues to help these gross margins stabilize?

Ted Schrafft

Well Tavis, you are right. We've had, to peg this one specifically; we do have a number of different opportunities around automation of service around network. Listen just like you saw from Q4 to Q1 where you see the leverage in our model, you saw an uptick in revenues flow very nicely down to gross margin. I guess you and I had a little bit of the reverse of that in the second quarter. But as we move more towards the online products, our own online products, like iMeet et cetera, that probably is, I want to say, one of the biggest opportunities, that we have to see some real flow-through, some real, because as I said in my comments, those products have very, very different margin profile than some of the products that we have, some of the products that we have right now.

So, there's different ways that we can hear that. We are looking at selling, pricing, moving away from transport in our model. And one of the things that was also exciting about the second quarter, we certainly haven't ramped it but we expect to ramp it at the back half of the year. As we signed actually one of the biggest deals ever in our history, which is really more of an application deal only, we're not providing any of the network and transport. So those are the kind of deals that are going to; so there are things we can do with insight on our cost structure that we're doing but a lot of it also has to do with how we are selling, how we are moving to these online services, I'll say the advancement of our own products with higher margin and moving more towards that application layer and software layer and moving away from the transport business, which is really kind of what Boland was alluding to in his comment.

Tavis McCourt - Morgan Keegan & Co.

And as you kind of start to hit the market with iMeet, are you doing with a separate sales force or is it something that, a service that the existing sales force would be able to sell and kind of talk about the training for that and so forth?

Ted Schrafft

Initially it will be done through direct marketing. We're going to run through that beta. It's been done through direct marketing and its going to be done through partners. I'm going to let Boland maybe comment a little bit more specifically about, and its kind of go-to-market plan.

Boland Jones

And our direct sales force will be trained up on it. At the turn of year, our direct sales force will have the full power to sell it. They have already got deals, they want us to work on today but we're purposely trying to restrain ourselves, make sure this product is updated, make sure the CRM support mix and the selling system, everything is good to go. So we're purposefully saying, hold on just a sec, we're going to give it to some…

Eight years or so we're going to give it on a credit card basis to small businesses, just a little bit and then we're going to go to a billing system, full 30-day billing system and then we're going to cut it loose to our sales force. So it's a very planned and plotted course that we have over the next four or five months, but the sales force will have it beginning of the year.

Tavis McCourt - Morgan Keegan & Co.

Great. And then final question, Ted on the, kind of the volume trend you saw towards the end of the quarter, was that kind of ubiquitous across the globe or was that specifically a North American phenomena?

Ted Schrafft

Tavis, that was more North America.

Operator

And we'll take our next question from Mike Latimore with Northland Securities.

Ian Kell - Northland Securities

Yes. Hi, guys. Thanks for taking the call. This is actually Ian Kell sitting in for Mike today. Can you talk a little bit about Europe and what you're just seeing from a deal standpoint in terms of close rates, sales cycles and how that compares to three and six months ago?

Ted Schrafft

Ian, Europe is actually, and I know that Europe as a region too has certainly got its broader, macroeconomic issues there, so while we're cautious, we've actually seen a fairly steady Europe. It's actually been one of our consistent and top performing regions. The movement to, as we said, kind of our online products and capabilities have been, our growth in Europe continues to be extremely strong. Our acquisition of new customers in Europe is really across the board, and Europe continues to be very, very consistent and very strong. So, it's been probably a little bit more of a middle-market, stable performance there but we're also working very, very hard that unless they take some of successfully patent global accounts and extend that to Europe as well as Asia. So we're cautious but Europe has been a steady performer for us.

Ian Kell - Northland Securities

All right, good. Revenue per day, I assume that was down through the quarter. It sounded like maybe improved at the end, along with the volumes, but any color you can give there in terms of…

Ted Schrafft

It really was, it was down slightly but it was really down, the down is going to be more of the last couple of weeks, but it was more flat if you were looking at Q1 to Q2 in total.

Ian Kell - Northland Securities

Okay. All right. And then how about just between the various verticals, what do you see in tech and financial services, in particular, in terms of performance?

Ted Schrafft

Tech has been, continues to be a real strong performer for us. Financial services, we got some, I'll just say some very nice opportunities and deals that we're expanding and rolling out in financial services. But tech has been, listen we have great technology and the tech companies kind of recognize that. So I think tech is our biggest segment and it continues to be, I'd say one of our strongest verticals.

Ian Kell - Northland Securities

What about in government?

Ted Schrafft

Are you talking about federal governments, state, local government?

Ian Kell - Northland Securities

Yes.

Ted Schrafft

I think that's a really good question too. And historically, we haven't had a big market penetration and focus on government but that is one we're extremely excited about. We've had some great deals in state and local, and we are doing some, I think some good opportunities both with partners and directly into federal government. So it's not a big market for us today, but we definitely view it as an emerging and big market potential for us, and we are putting more investment and focus on it.

Ian Kell - Northland Securities

Okay, and the last one here, I'll get out of the way. Just how's the churn in the SMB space? Is it kind of like volumes? Has it improved at all at the end of the quarter and into this quarter, this Q3 right now? Can you just talk a little bit about that?

Ted Schrafft

If you look at our attrition or our churn, it's behaving very consistent with prior quarters from that standpoint, and also our new logo growth by the way is still very strong, and it's behaving the same way as previous quarters. The softness was not, it's not churned, it was not lost out, but the attrition of customers anything was really just softness within that same-store sale, that usage, just usage of our services within the existing base. Customers are still active, customers are using them, but we have done slightly less usage from those existing customers.

Operator

And we'll take our next question from Sri Anantha with Oppenheimer. Please go ahead.

Sri Anantha - Oppenheimer & Co.

Hi and good evening. Boland, looking back for the past couple of years, I know we've been going through a number of changes in general at PGI. You've talked about the change in strategy. So far, when we look at the volume growth or from a top-line perspective, we haven't really seen any kind of an improvement. So, if you were to look back, is there any one or two things that you could point to that you might have done differently? And when we look at iMeet now with your upcoming product, let's say three years from now, what do you expect, realistically expect the contribution from this product is? Clearly, you're very excited about this product based on your comments, and realistically, what do you think is going to be, because you're indicating this is going to be a big part of your strategy, iMeet, but from a revenue contribution, what do you think three years from now it is going to be?

Boland Jones

That's a great question. I don't think I am allowed to forecast. I got an answer to your comments and I think your comments are good. First of all, let's look back two years ago. Our strategies started two years ago on iMeet. It takes a while to create a product like this and I hope that's appreciated as the product rolls out and the success comes in. I don't want to put so much pressure on ourselves and iMeet that it has to be successful right away. But, I think it will be very successful long term. We are the ones that invented and started the automated cards, and when you go back and look at that industry, we started that, we are starting it.

Two years ago, we made comments two years ago about let's say, what about a flat-rate service, what about this, what about that. We really did. We were looking at those things and there was really no way to put the telephony transport part of this offering into a flat-rate service at that time, our variable costs, and there is no way to protect ourselves in any such way in the competition just like pricing in any other service like an airline service because that's what was competitive on the measured minutes.

We have not had in our company our own web-based, lets say, collaboration tool, that's been robust. We've had one but it was not robust. We haven't had one that differentiates us from a WebEx or a GoToMeeting. We haven't had one that really answers needs in the marketplace. And to build iMeet, literally took us, what our strategy is going to be online to build iMeet, and iMeet is not the only product that we fill, we'll come out with some other things that are more conforming products that we've also built in conjunction with iMeet.

But iMeet is first chance to really incorporate what the change has been in the last two years, which is cell phone technology, social networking technology, video cam technology. That's really what the user is asking for today at their desktops. You know and they are asking for it to be delivered in a certain way, in a light or no download clients, so forth and so on.

Look back two years ago; we didn't really have anything to get to a financial model like we have now within iMeet and the iMeet platform that can have other products come off of it. We didn't have an opportunity to get away from the landline business, technically, and we really didn't have a way to take the landline business we had at flat-rate.

Obviously, we understand math, we understand margins, but we hope we understand the user and the customer as well, and there is no way to trick a customer two years ago to flat-rate a landline service, without taking the risk of losing our (inaudible).

So we think we've done a pretty good job. This has been part of the strategy for the last two years and it's been a while. But going forward and looking at iMeet, potentially iMeet will become the company. If iMeet is successful, I can see iMeet being one of the two or three products we sell in this company period and iMeet will have all kind of derivations of itself, so it will be, peer-to-peer opportunities of iMeet. I don't want to get ahead of ourselves on this phone call. iMeet will incorporate video conferencing rooms in the near future.

You know iMeet, the platform and iMeet, the product, have a huge 10-year pathway to take in a much bigger business than the $6 billion collaboration conferencing business. You know it has an opportunity to infringe on the asynchronous business. It has an opportunity to infringe on the video business, and it has an opportunity to fringe in the other areas. So, if it's successful like we think it will be three years from now, iMeet will be the primary driver of the company and the derivation of product, that's the derivation of features and applications from iMeet will be the primary drivers of this company.

Sri Anantha - Oppenheimer & Co.

Given iMeet will give you this, flexibility on the cost front, when this product officially comes out of beta, would the company strategy be like proactively even migrating existing customers on to this platform, even if they are taking just audio conferencing or web conferencing?

Boland Jones

Great question and the answer is yes. You're going to see an additional announcement of another form of a product that comes off of iMeet that we're going to use specifically to target our current audio customers in a conversion. So we're going to have iMeet and we're going to have one other item to target those existing customers, to convert those audio customers into the subscription-based license fee desktop products, and that's exactly what we plan on doing along with capture new market share.

Sri Anantha - Oppenheimer & Co.

And just as a clarification to an earlier question. If I were to understand, clearly I think the pricing for iMeet is going to be more subscription-based, it's going to be more [flat-rate] pricing, is that correct?

Boland Jones

It is not going to be more, it is going to be subscription-based, and it is going to be flat-rate.

Sri Anantha - Oppenheimer & Co.

Great. I wish you guys had done this a lot earlier but I'm glad you have.

Boland Jones

I wish we could have too and I appreciate that comment, I just, but there is no way to do it, reselling partner, web conferencing services and we couldn't figure out a good strategy or way to do it, like if smarter people could. We think we're pretty good in the meeting business. We've got a lot of good customers and we've been doing it for a while. But, we couldn't figure out a realistic strategy to flat-rate the audio business of past, but now we have a strategy. And now its here, now you know, the bridge from here to execution is short and I'm very confident and I think, go subscribe to the beta yourself, give us your comments.

We've got, as I said, iMeet's not the only product that we're going to have in subscription-based rate, plan and license fees. There will be another product announcement soon, and both products will be used in different ways to recapture our current customer base and our factory will be taking current customers and dropping them into this new financial model and then new customers attracted to this model from the rich feature functionality in the user interface of iMeet.

And then at some point, you hope that you get enough traction at some point. As you go and you gain confidence in traction then you can do chunks at once and get the conversion faster. Let's get this first step done first and then we'll discuss opportunities in there, that realm later.

Sri Anantha - Oppenheimer & Co.

Ted, one question. As of the past year or so, the company has gone through this restructuring. It would seem these charges, sometimes lumpy, sometimes from quarter-to-quarter. Especially this quarter, I see the biggest variation between the reported and operating EPS. Are we finally through this restructuring process? And if you have taken additional steps this quarter beyond what we have heard earlier, what do you think are the incremental cost benefit that we should expect for the remainder of this year and in 2011?

Ted Schrafft

Let me start and then turn it over to David. As I said in my comments, we are looking at every investment dollar; every dollar this company spends in making sure that it is being plowed directly into the new business model, the online business model that Boland referenced in his comments. So, I don't want to say that we are finished. I think we will continue to look to manage this cost as tightly as we can and make sure that we are bringing up the dollars from, you know I want to state maybe the existing business and investing it appropriately into the new business. So, I think with that, I'm going to ask maybe David to maybe talk specifically about some of those financials. I think its important to understand again that we're going to continue to really work through this thing in a very, very, we're going optimize every dollar and look at it, how we are spending every dollar, look at return on investment of every dollar, as we move and transition this company.

David Trine

As Ted mentioned, we are going to continue to look at this cost and the cost structure, and we can anticipate some additional severance probably in the next one or two quarters. And as far as the benefits, the benefits are somewhere around couple of million bucks for this year and about $4.5-5 million for next year for just the restructuring we did this, just recently.

Sri Anantha - Oppenheimer & Co.

It looks like it, at least, partially offsets some of the incremental marketing expenses that are needed for iMeet.

David Trine

That's right

Sri Anantha - Oppenheimer & Co.

And David, on the reconciliations, there was one small item required to exercise tax where you have itemized it separately. Is this related to the New York State that, I think a year ago you guys had this or…

David Trine

No, if you remember in prior years, we booked an estimated excise sales tax contingency for potential taxes in certain states and it was more than just New York, it was multiple states. And this additional expense was needed for a settlement of one of the states in the quarter.

Operator

(Operator Instructions) And at this time, there are no further questions. I would like to turn the conference back over to management for any additional or concluding remarks.

Sean O'Brien

Thanks Jamie. Thank you all for your interest this afternoon. If you have any follow-up questions, please call me directly on 404-262-8462. Thanks and have a great day.

Operator

That does conclude today's conference. Thank you for your participation.

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Source: Premiere Global Services, Inc. Q2 2010 Earnings Call Transcript
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