Premiere Global Services' (PGI) CEO Boland Jones on Q2 2014 Results - Earnings Call Transcript

Jul.17.14 | About: Premiere Global (PGI)

Premiere Global Services (NYSE:PGI)

Q2 2014 Results Earnings Conference Call

July 17, 2014, 5:00 p.m. ET

Executives

Sean O'Brien - Executive Vice President, Strategy and Communications

Boland Jones - Chairman and CEO

Ted Schrafft - President

David Trine - Chief Financial Officer

Analysts

Barry McCarver - Stephens

Tavis McCourt - Raymond James

Mike Lattimore - Northland Capital

Operator

Good day, everyone, and welcome to the Premiere Global Services Incorporated second quarter 2014 financial results conference call. [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 second quarter 2014 earnings release, please visit our website at pgi.com, where it is available in the Investor Relations section.

Joining me on the call this afternoon are Boland Jones, Chairman and CEO of Premiere Global Services; Ted Schrafft, President of PGI; and David Trine, our CFO. Following some brief comments by management, we'll open the call to your questions, but before I turn the call over to Boland, I'd like to remind everyone that statements made in this conference call, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties.

Such forward-looking statements are based on management's beliefs, 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 on our annual report on Form 10-K for the year ended December 31, 2013 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.

And at this point, I'll turn the call over to Boland.

Boland Jones

Thanks, Sean, and good afternoon everyone. This is Boland Jones, chairman and CEO of PGI, and I’d like to welcome you all to our second quarter 2014 earnings call. Let me begin by saying that we’re very pleased with the trends in our business and our continuing strong performance on all fronts.

During the second quarter, we continued to execute our focused strategy to transform PGI into a global leader in collaboration software, while at the same time continuing to grow our key financial metrics.

For example, during the quarter, we grew revenue from our SaaS based products by greater than 50% year over year. We generated the largest sequential increase in our SaaS revenue ever, and we exited the quarter with a revenue run rate of approximately $48 million from these products.

While we are winning an increasing number of new customer opportunities, we’re also continuing to have great success in transitioning our traditional conferencing customers to our high-value, high-margin SaaS products, with over 70% of our new sales coming from our existing customers during the quarter.

The increasing momentum in our SaaS based business and our overall solid business trends helped us generate robust financial results again during the second quarter, including total revenue growth of over 9%, an increase in first half cash flows from continuing operations of greater than 30%, and our highest reported gross margin in three years.

While we are still early in transitioning our model to SaaS, we are delighted to see both continued validation of our strategy in the market and the positive impact our strategy is already having on our overall business results.

We continue to believe that there is a large void in the market for user-friendly collaboration products that leverage the cloud, mobility, video, and emerging technologies to help business users collaborate from anywhere, accelerate their business results, grow their revenue, and succeed and thrive in the global marketplace.

We continue to believe that as the world’s largest solely focused cloud collaboration provider, PGI is uniquely positioned to address this void and to lead the market in its transition from traditional phone-based conferencing to richer, more meaningful cloud-based collaboration from a desktop, table, or mobile device.

To help us extend our market lead and capitalize on the growing opportunities in our pipeline, we are accelerating our investments in our SaaS business this year. For example, this year we plan to add more than 100 new professionals to PGI, predominantly quota carrying sales people and new software developers.

We are launching our first-ever drivetime radio and outdoor advertising programs in key U.S. markets to drive broader awareness of our award winning products, and we will further expand our SaaS product suite and featured capabilities to include new PGI products that target the large and growing markets for webinars, webcasting, large web conferencing events, asynchronous team workspaces, and other areas closely related to our core expertise and real time business collaboration.

We believe these investments will enable us to further differentiate PGI in our existing markets while at the same time positioning us to compete in the new, expanded market opportunities as well.

Finally, as I did last quarter, let me again mention that our foundational audio conferencing business remains very solid, with meaningful new growth opportunities available to us in the market. This integral part of our business continues to generate significant cash flows, which we believe will support our continuing investment in transitioning our model and growing our business as well as our ongoing acquisition program.

And we’re confident that transitioning our company toward a SaaS business model will position PGI to deliver higher value to our customers, strategic partners, and shareholders around the world, and we look forward to updating you on our progress on future calls.

So, in closing, let me again thank all of our associates worldwide for their hard work and dedication to our 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?

Ted Schrafft

Good afternoon everyone, and thank you for joining our second quarter 2014 earnings call. Like Boland, I too am pleased with our second quarter performance, and I’m also very pleased with the continuing progress we are making against the plans and strategies we laid out three years ago to build PGI into a global leader in collaboration software applications and using that strategy to transition our company toward a SaaS business model.

Based on the strength of our recent results, and the continuing momentum in our global business, we believe our strategy is working, and we remain confident in both our near term and long term outlooks for PGI.

Now let me turn to our second quarter financial performance, beginning with revenues. As reported, net revenues grew 9.2% in the second quarter, totaling $144.3 million, up from $132.2 million in the same quarter last year.

During the second quarter, we continued to generate strong momentum in sales of our PGI SaaS based products. Revenue from our SaaS products totaled approximately $12 million in the quarter, representing more than 50% growth year over year and the highest sequential quarterly increase in our SaaS revenue ever.

During the quarter, we generated approximately $4 million of new revenue run rate from our SaaS based products, and we exited the period with an annual SaaS revenue run rate of approximately $48 million.

Based on current business trends and current foreign currency exchange rates, and assuming no additional acquisitions, we continue to project that net revenues in 2014 will be in the range of $565 million to $575 million.

Turning to profitability, our gross margin increased meaningful during the second quarter, totaling 59.1% of revenues, an increase of approximately 70 basis points from the first quarter of 2014, and our highest reported level in three years.

Our gross margin increase was driven in large part by continuing growth in revenue from our SaaS applications, which generate gross margins that are significantly higher than our corporate average. We anticipate that gross margins will decline modestly in the current, seasonally slower third quarter, and we further project that gross margins will remain within recent ranges for the remainder of 2014.

Non-GAAP diluted EPS from continuing operations was $0.23 in the second quarter, up from $0.20 in the second quarter 2013. 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 will be in the range of $0.85 to $0.88.

As we have stated in past calls, our strategic priority is to continue to demonstrate operating leverage in our business while at the same time reinvesting excess earnings and product sales and marketing initiatives designed to accelerate sales of our SaaS based products and the transition of PGI to a SaaS model.

For example, we plan to add more than 100 new employees this year, weighted toward quota carrying sales people and additional software developers. We believe these near term investments will drive meaningful corporate performance and therefore shareholder value over time.

As a final note on profitability, as we anticipated, we incurred acquisition related expenses during the second quarter, 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, with net cash provided by operating activities from continuing operations totaling $39.1 million in the first six months of 2014, an increase of over 30% from the same period last year.

Capital expenditures totaled approximately $15.5 million in the first half of 2014, which is down about 10% from the comparable period in 2013.

During the second quarter, we repurchased over 1.2 million shares of our common stock in the open market, under our board-approved share repurchase plan. We ended the second quarter with significant liquidity, with cash and equivalents and room on our credit facility including the accordion feature totaling over $250 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 as well as continuing to be opportunistic buyers of our common stock.

In conclusion, let me say again that we are very pleased with our performance during the second quarter, as we continue to implement our objective to increase PGI’s value to our customers, our associates, and our shareholders, and to transform our business.

Based on our continuing solid results, we believe our plan is working, and we look forward to updating you on our continuing 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, Incorporated.

Barry McCarver - Stephens

Next generation, can you kind of talk about the adoption there, and what you kind of expect for the rest of the year?

Boland Jones

On the SaaS products? Well, the adoption rate, as we said in our remarks, and as you see in the numbers, the adoption rate is very good. We had our biggest sequential increase from Q to Q, and the adoption rate is picking up and getting wider.

Our pipeline, in all the new modern CRM systems we’re using, our pipeline is huge. It’s healthier than it’s ever been. There’s more deals, there’s not just one or two big ones. There’s a wide range of deals in the pipe that are very good. It seems like we’re really picking up speed in our sales force and our sales velocity.

And as you saw in also the remarks or saw in the press release, we wanted to make sure people knew that we were adding literally 100 heads between this quarter and next quarter, whether they be in sales for SaaS or product development, or product architecture, product design heads. Just really doubling down to increase the speed even more in the coming quarters. So we’re pretty excited about how fast it’s moving, and how it’s picking up some speed.

Barry McCarver - Stephens

How far along are you in that 100 people?

Boland Jones

You know, you can’t hire them all at once. It’s just too hard, and it takes too much, but we hired a good third of them this quarter. We’ll hopefully hire another maybe two thirds next quarter and maybe a few stragglers in the third quarter.

We seem to have a pipeline there of plenty of good people, but you’ve got to bring them on and train them. And you know, you can’t bring on too many at once, because then there’s negative economies there in those areas of SaaS sales and SaaS product people. But we’re bringing them on pretty quick.

Barry McCarver - Stephens

And then as far as activity in your traditional business, can you kind of talk about the number of minutes and the usage there?

Ted Schrafft

We’re seeing, I think, some real solid trends in the traditional business. I mean, in additional to selling the SaaS products and the software products, I think our base business has been solid. Our new logo growth continues to be solid. The minutes that we continue to generate each quarter and quarter over quarter year over year have been increasing. So we’re doing more and more meetings for customers, we’re bringing in new customers, and we’re obviously, as Boland reiterated earlier, migrating customers to our new SaaS products.

So all that combined, again, I think we’re seeing pretty stable trends in the base business. And again, that is important to us. We want to bring in more base business, because it’s more market for us to farm and migrate to the new products.

In addition, that business, as you guys probably know, drives a lot of significant cash flow. We had a very, very strong cash flow quarter, as you saw, so that base business is a big driver of that cash flow, which allows us to make the investments we’re making that Boland just talked about.

Barry McCarver - Stephens

Do you guys have any early indicators from the iMeet launch under Powwownow?

Boland Jones

That launch probably is going to happen around August-September. We’re pretty excited about the progress that we’ve made with our new associates at Powwownow, and they’re excited too. And we’ll keep you tuned in on that. But that will probably be brought to market in the August-September timeframe.

Operator

And for our next question, we go to Tavis McCourt of Raymond James.

Tavis McCourt - Raymond James

Help us frame the 100 new employees. Is that a gross number, or kind of a net number? And where did you enter the year, roughly, in terms of total headcount?

Boland Jones

It’s a net number. I want to understand what you mean by gross and net. That’s an empirical 100 added to what we already have, and that doesn’t include filling in anything that we lose. We’d add more to that.

And we may add more later in the third and fourth quarter. That’s just where we’re starting right

now. And it’s 100% for the new products. It’s 100% for the SaaS products. It’s either product designers, product architects, product developers, or sales people. It’s mostly sales people in the SaaS area.

Tavis McCourt - Raymond James

And then in terms of the M&A pipeline, I guess compare that now to how it’s looked over the last year. Is it skewing toward more traditional audio conferencing vendors or technology, or kind of a little of both?

Boland Jones

There’s a clear bias in the pipeline now that we’re actively working that is more in the SaaS business in the new generation products. In fact, it’s probably gone from 70% traditional and 30% SaaS to the opposite. It’s 70% SaaS and 30% good, traditional business.

And by the way, we like them both. When you can find them and you get the right cultures, and people come together, you can do some really good things. So we’re excited for the people that joined our company last year, and they’re paying huge dividends in all sorts of ways, not only from revenue and profitability contribution, but from cultural contribution. They’re showing us new ways to do things that we hadn’t tried before and so forth. So it’s all good, but we definitely have a bias in our pipeline right now toward more of the SaaS stuff.

Tavis McCourt - Raymond James

And then in terms of the SaaS revenue today, is that still heavily skewed toward GlobalMeet, or is iMeet…

Boland Jones

This quarter, 25% of all sales were iMeet sales. Last quarter, 10% were iMeet sales, so definitely had a lot of product advancement in iMeet, and as a result of, a lot of product sales pickup in iMeet.

We’re going to come out, as I said in my remarks, we’re going to show the market, between here and the end of the year, probably four or five new products that are meaningful, that have good vertical capability in the enterprises that we’re hunting, and that we have right now as customers. We’re lucky enough to have right now as customers.

And so there’ll be a smorgasbord of different forms of iMeet and GlobalMeet. And as the products themselves mature to fill a spot, you’ll see the sales pick up. iMeet fills a different spot than GlobalMeet. GlobalMeet, for webinars, these other products that we discussed that we’re coming out with, they’ll all fill a different void.

And so it’s just a matter of what the enterprise, either in the verticals or the functionality is looking for. But iMeet is gaining on our total sales quickly, because of the new functionality that’s embedded in it.

Tavis McCourt - Raymond James

And in terms of the distribution strategy, as you hire these sales folks, does that mean it’s still going to be skewed more toward kind of an enterprise sale, or are you doing anything related to kind of small, medium business market?

Boland Jones

Well, I think we’ve discussed this before, but let me just recap it real quick. Sort of the 500 to 3,000 company is our sweet spot for what we call our middle size enterprise. And then 3,000 employees up is our large enterprise business. Both sectors are flourishing.

Obviously, the 500 to 3,000 are quicker adopters. We’ve got the bars, we’ve got the strategic partners in the infrastructure companies around the world that are selling our products. So you know, we segment the market in those type of ways for our channels.

And each one of them is sucking down the SaaS products. Obviously, the fastest adopters of the SaaS products are the partners, the infrastructure companies, and the 500 to 3,000, sort of middle enterprise, area. But when the large enterprise takes down the SaaS products, they take them down in such volumes that it sort of catches up and makes up for it.

Tavis McCourt - Raymond James

What should we think of for a tax rate for the full year?

David Trine

I would use a normalized rate of 31% for the year right now.

Operator

And we’ll go next to Mike Lattimore with Northland Capital.

Mike Lattimore - Northland Capital

In terms of the new sales headcount here, is there a way to quantify what percent increase that is to your SaaS sales force?

Boland Jones

You know, we haven’t cut up those numbers and talked about those before. It’s a decent increase. It may be a 15% increase in the total sales force. And the sales force is not segmented now SaaS versus traditional conferencing. They’re talking to similar decision makers most of the time now. And so everybody is carrying a collaboration product that’s either a real time 1-800 passcode or a SaaS product.

Now, in the future, that may change, but for now, it’s staying where it is there, and this is probably, for the people that are the high producers of the SaaS products, if you take those on a standalone basis, the standout or so forth, is just probably a 20% increase or a 25% increase. It’s probably a 15% overall.

But it’s probably easier to understand for us, but one product begets the other, so when we get a traditional conferencing customer, we go right back at them with the SaaS products. It usually works pretty good. Approximately 70% of our sales last quarter from SaaS are that. Walking in and just getting a SaaS product to begin with, without a relationship existing, was 30% of the cases this quarter.

So there’s a mixture of both. That’s why having the customers already there is important, as well as getting new customers.

Mike Lattimore - Northland Capital

And then in terms of the SaaS revenue growth, I assume most of the new growth comes from your bookings. But is there a separate revenue bucket that isn’t reflected in the bookings number? Maybe just kind of a usage number or something that might grow? Or is it all really bookings driven?

Boland Jones

I’m not sure what you mean by bookings. I mean, this is a pretty quick cash register to implementation product. There’s not a lot of lag or delay. You know, 60 days max, since they’re cloud based. So we can deploy and distribute these products when they’re acquired by the customer, pretty quickly and pretty efficiently. So there’s not a big lag. So what you see is what you get.

Now, as far as bookings goes, our average contract length is nearing, in this last quarter, as high as 21 months, 20 to 21 months. So you know, what we sold this quarter obviously has a bigger booking number than the sales we’re reporting. So there is bookings that are far out into the future that we can count on right now, which is great.

Mike Lattimore - Northland Capital

So basically the $4 million of new revenue sold, that encompasses everything new in the quarter?

Boland Jones

That’s right.

Mike Lattimore - Northland Capital

And then when you sell GlobalMeet web conferencing to a current customer, are you typically replacing a web conferencing service that somebody else has sold to that customer? Or are you replacing like a WebX that will still be useful to that customer.

Boland Jones

Typically the former.

Mike Lattimore - Northland Capital

And then in terms of your overall customer base, where are you, do you think, in terms of percent penetration of your SaaS products into the current customer base?

Boland Jones

If you look at the global total customer base, we’ve penetrated around 15% of our accounts with SaaS products. That doesn’t mean the entire account went total SaaS, that just means in that account there’s some of our SaaS products. But that’s building pretty quickly. So that’s where we are today.

Operator

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

Sean O’Brien

Thanks, operator. Thank you all for dialing in today. If you have any follow up questions, please try me on my direct number, which is 404-262-8462. Thanks, and have a great day.

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