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Premiere Global Services, Inc. (NYSE:PGI)

Q3 2007 Earnings Call

October 18, 2007 - 17:00 p.m. ET

Executives

Mr. Theodore P. Schrafft - President

Mr. Boland T. Jones – Chairman and CEO

Mr. Michael E. Havener - Chief Financial Officer

Mr. Shawn O’Brien - Senior Vice President of Strategic Planning and Investor Relations

Analysts

Ratliff, Rodney - Stanford Group Company

Tavis Mccourt - Morgan, Keegan & Company, Inc.

Srinivas Anantha - CIBC World Markets

Monica Logani - Wall Street Access

Welcome to the Premiere Global Services, Inc. third quarter 2007 conference call. Today’s call is being recorded. This call is also being simultaneously broadcasted over the internet. You can go to our website at www.premiereglobal.com and go to our press section alternatively you may listen rebroadcast from your telephone and getting at 8 p.m. Eastern Time today through midnight Wednesday, October 31, 2007. The replay numbers are 888-203-1112 within United States and Canada or at 719-457-0820 outside of North America. The confirmation code to access the replay is 8418447. All lines will be muted throughout the presentation until the question and answer period 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. Shawn O’Brien. Mr. O’Brien, please go ahead sir.

Shawn O’Brien

Thank you and good afternoon everyone. If you have not received a copy of our third quarter earnings release please visit our website at pgiconnect.com where it is available in our investor relation section.

Joining the on call this afternoon are Boland Jones our Chairman and CEO, Ted Schrafft, President Premiere Global Services and Mike Havener our CFO. Following some brief comments by management, we will open the call to your questions.

Before I turn it 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 risk and uncertainties. These forward-looking statements are based on management beliefs, as well as assumptions made by information currently available to management pursuant to the Safe Harbour 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 that were identified in our annual report on Form 10K for the yearend of December 31, 2006, our Form 10Qs for the quarters ending March 31, 2007 and June 30, 2007, 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 of our press releases and form 8K filing this afternoon for reconciliation of these non-GAAP financial measures to the most comparable GAAP measures. These materials are also available at our website at pgiconnect.com.

At this point I will turn the call over to Boland.

Boland Jones

Thanks Shawn and good afternoon everyone. This is Boland Jones and welcome to our Q3 earnings call.

Let me begin by saying that we had another great quarter of double digit revenue growth. Our strong revenue performance in the period was driven by a record volume, the strongest of any quarter as our customers continue to use our communication operating system to improve their business processes.

Although the new trends and our efficiency initiatives result in a significant increase and our profitability year over year as well and as Ted Schrafft will detail in a moment, our revenues in the third quarter overcame what has historically been a seasonally weaker quarter.

Now let me tell you why I think we had such a strong quarter. Simply put, we believe our communication operating system is meeting a real need in the market and by positioning PGI as a unique provider of applied communication technology that improves business processes, we believe we have created and are the leader of a category that is growing in size, strength, and value.

We know what customers are looking for because we listen to what they are telling us and in most cases they want single vendor application suites. They want vendors to integrate with their existing IT infrastructure including their ERP or CRM systems, and more and more, they want to buy solutions in a subscription based or licensed pricing model.

Today, customers typically start by using one of our solutions, but they’re telling us that they see the value of being able to add multiple PGI solutions to improve a wide variety in their business processes. For example, if a financial institution wants to create and take a new product to market, we can help them. Making use the communication operating system to collaborate on the design of the new product launch it sell it, service it, bill it, collect it, and even to upgrade it and up sell it because we have all the solutions they need on this one platform, the PGI Communications Operating System.

During the third quarter, we made great progress in selling second and third solutions to our existing customers with wins in the entertainment, media, finance, real estate, and banking markets.

In fact, we closed more than 300 deals during the quarter that we project will result in more than $650,000.00 in monthly recurring revenue, which is three times greater than the incremental revenue we generate above selling additional solutions to other existing customers in Q2.

I believe this is one of the primary reasons why we are generating the momentum that you see in our results today with a significant improvement in incremental application sales into our existing customers, a continuing trend of double-digit revenue growth, and improving operating leverage in our model.

To evolve and improve our position as a market leader, we remain focused on two initiatives going forward.

First, to further our transition to an online company, because it is clear that our applications are well suited for online sales and service. And second, to build our company into complete on-demand model.

Let me discuss these two initiatives in greater detail. We believe our online initiative is an extremely important component of our future growth. By bringing our company to the web, we make it easier for our existing customers to use our entire suite of solutions.

As I stated at the beginning of this year, we believe that majority of our customers will adopt our pgiconnect.com portal to interact with us on a regular basis, and in fact, they are.

In September, greater than 80% of North American customers of PGI utilized our web-based service and support tools on pgiconnect.com, a dramatic increase from just 5% in January.

This trend has resulted in a drop of greater than 40% in call volume into our client services department. And as importantly, we believe that it has improved our customer experience as well. The bigger opportunity and focus of our online initiative is to increase our ecommerce capability, or what we call our Web Channel sales.

We believe having a single powerful point of presence on the web increases our ability to sell multiple applications to new and existing customers by exposing them to the entire PGI communication operating system. It also greatly extends our reach to new geographies and to new customer segments that we simply were not able to reach before in a cost effective manner with our direct sales force.

Since launching pgiconnect.com last quarter, we’ve generated approximately 4,000 leads from the web, resulting in approximately 3,000 new customers, and projected monthly recurring revenue of approximately $150,000.00.

As I stated just last quarter, we believe that with our offline strategy in the past, and our online strategy coming in to position now, we have the opportunity with each to increase our growth and profitability even further than present day.

Now, for our second initiative, to enhance the on-demand characteristics of our model. The way I look at it on demand then comes these things like product development, access to our platform and solutions, and our pricing strategies. And in this initiative, we continue to focus our research and development efforts on innovating new applications and technologies that are highly automated that highlight the power and uniqueness of our communication operating systems.

In addition, we are continuing to drive our customers and partners to standard interaction with our platform and solutions via our robust API suite in order to minimize our customer development efforts and to accelerate our time to revenue.

And finally, we are continuing to build a community of third party developers and system integrators that leverage our platform capabilities along with their own to drive increased innovation and additional revenue opportunities.

These two initiatives are consistent with our ongoing efforts to refine and enhance our business model, which brings me to my final subject today, a look ahead.

As we finalize our internal planning process for 2008 and beyond, a key component of our continuing success will include the drive to be more focused on how we package, price, and take our solutions to market, to unlock even more value from our communication operating system. We look forward to sharing more of our initiative in these areas on our future calls.

In summary, our continuing strong financial performance reflects the hard work of the entire PGI team over the last 12 months to improve our unique market position in our business model. The power of PGI Communications Operating System, both in terms of the many benefits it provides our customers and the competitive advantage that provides our company gives us great confidence in our long-term growth capability.

We are confident that our leadership position in the new category combined with our existing world-class base of customers offer great potential for our future and our open market share repurchasing during the third quarter illustrates our continuing belief in our company.

Again, I would like to thank all of our associates worldwide for all their help and at this point I will turn the call over to our President Ted Schrafft who will discuss our third quarter performance and accomplishments in even greater detail.

Ted Schrafft

Thanks Boland and good afternoon everyone. Let me begin by saying that I too am very pleased with our performance during the third quarter as we continue to execute against our operating plan.

We have made a lot of progress this year in moving our company toward Boland’s vision and today we are more aligned, more precise, and more disciplined than ever. Our goal is to consistently deliver higher levels of value to our customers and to consistently deliver higher levels of performance to our shareholders, and I am pleased that we are accomplishing both with hard work and dedication on the part of all of our associates around the world.

Before getting to our third quarter financial performance, let me review some specifics of our strategy and operational focus.

As I’ve stated on our last call, I believe the PGI Communications operating system continues to gain traction in the market. Customers are recognizing the enhanced value that we provide by putting all of these powerful communication technology solutions together on a single enterprise class, on-demand platform. And this unique set of solutions is enabling us to have more successful and impactful conversations with our customers, prospects, and partners.

Before I go any further, let me take a moment to quickly recap our major initiatives of the last year since I assumed the role of a President of PGI with the primary goal of returning our company to consistent revenue growth and margin expansion.

Our first task in support of that goal is to pull our company together as one so that we can take full advantage of the benefits of our scale and our many assets including our sales distribution customer based technology platforms, global reach, financial strength, best practices, and our people.

We began by consolidating many of our back office functions such as finance, HR, and accounting. Then we quickly turned our attention to our market strategy. We segmented our direct sales professionals to make them specialists within one of our six solutions sets. And we implemented an activity-based sales model to generate an increased pipeline and to close new deals.

At the same time we unified our six solutions under the umbrella of the PGI Communications operating system. We tightly integrated our global technology platforms and we began opening access to them with a new suite of web services API.

And finally, we began consolidating our global service and support organization to provide customers with a more consistent experience around the world and to optimize our service delivery cost model.

Integral to all of this was instilling a culture of best practices and operating discipline across the company.

With all these in place we have established that we can produce double digit top line growth, and expanded margin.

Today, while we continue these important initiatives, we are now focused on ways to accelerate our positive financial trend.

As we have stated before, one way to accomplish this is by turning our attention to our existing customers which grows in numbers everyday as our activity-based sales model continues to win us the new customers. Today, the majority of our customers begin by using just one of our six solutions, and that is okay because it gives us a great opportunity to enhance our growth by signing them a second and a third PGI solution over time.

Selling our customers multiple solutions is important for a couple reasons. First our data indicates that customers using more than one of our solutions generate an average of four times the revenue of our single solution customers and second, we believe the value we provide customers goes up when we sell them multiple solution because we are improving more of their business processes leading to increased customer loyalty and revenues ticking in.

During the quarter we continued to make progress in selling second and third solutions to our existing customers as Boland just detailed.

Now we are looking at ways to refine and advance our solution’s packaging and pricing in an effort to further increase our value to the customers and accelerate the growth, profitability and predictability of Premiere. For example, we believe creating new applications and application bundles that are target at a specific vertical markets open new growth opportunities to us as these targeted solutions provide higher customer value and offering new subscription based or license pricing model will not only help our customers improve the predictability of their spend, but it will also help us increase the predictability of our revenues.

We will be talking more about our packaging and pricing initiatives in the coming quarters as we look to enhance our customer value, increase our growth and further differentiate ourselves from our competitors.

Now let me take a moment to discuss our online initiative which also supports our goal of accelerating our growth and profitability. As we’ve stated before, a major component of our market strategy is to create a significant web presence for Premiere Global Services, let me remind you of why we are pursuing this strategy.

As Boland mentioned, we believe our communication technology solutions are well suited for online sale. The web also enables us to greatly increase our geographical reach, and for the first time provides a cost effective means of reaching the millions of small and mid-sized businesses that are simply too expensive to target with our traditional direct sales force.

As you have already heard, we are beginning to generate success in selling our solutions both directly on the web and to lead into the sale force from the website and the web has also proven to be an excellent customer service and support vehicle for us as well.

Finally, the web offers an efficient test environment where we are able to very quickly and easily experiment with new solution’s packaging and pricing. We can take advantage of the near real time feedback garnered in a web-timed environment to test and refine our solution’s packaging and pricing offerings, to in effect see what works. Then we can take what we learn on the web and give it to our direct sales channel.

We are already experimenting today with new pricing and bundling options on the web and we expect to do much more of that in the future.

Clearly we are still in the early stages of recognizing the potential of our online opportunity and I am very pleased with our early progress. We remain confident that this channel will be a significant contributor of both our revenue growth and margin expansion in the quarters and years ahead.

While our goals and expectations remain high, it is important to note that we’ve been prudent and measured in our projections for contributions from the web channel for the remainder of this year and next.

Let me summarize by saying that I am pleased with our accomplishments in the third quarter and for the year-to-date. I believe we’ve made great progress in simplifying and focusing our market strategy and we’ve been successful in setting and executing against many significant operating and financial goals.

But we have more work to do to realize the growth potential of each our solutions and the value of selling these solutions under the umbrella of the PGI Communications operating system.

As we finalize our plan for 2008, I remain very excited about our potential and our unique market position. We will continue to take a very pragmatic approach to executing against our plan while at the same time maintaining a real sense of urgency.

I remain confident that we have the right vision, the right plan and the right people for our success.

Now, before we open the call to questions, let me discuss our third quarter results in greater detail.

As reported this afternoon, we generated $139.8 million in consolidated revenues for the quarter, up nearly 15% from the third quarter of 2006. As Boland mentioned, this quarterly performance was particularly strong when compared to the slowest seasonal trend in customer usage we’ve typically experienced during the summer months.

Based on our solid year-to-date performance, we have raised our revenue outlook for 2007 and now project that revenues in 2007 will increase greater than 11% from 2006 levels.

Now let me address our profitability. Our gross margin improved sequentially from the second quarter levels as we began to realize efficiencies from our global reengineering project which continues to progress as planned. Our gross margin for the quarter was within the range we’ve provided for the year and we continue to anticipate incremental margin expansion for the remainder of this year and next.

For the third quarter, diluted EPS was $0.15 and as detailed and defined in the released Pro Forma Diluted EPS totalled $0.22. Once again, we generated meaningful cash flows during the quarter, with cash flows provided by operating activities more than doubling to $24.2 million compared to $10.3 million in Q3 last year.

And capital expenditures were in line with our expectations totalling $10.3 million during the quarter. Finally our liquidity remains strong with working capital of $37.9 million and cash and available borrowing capacity of greater than $70 million as of September 30,2007.

I’ll end by saying again that I am very pleased with our progress during the quarter both in terms of our financial performance and our accomplishments. I would like to personally thank all of our associates around the world for making all of these happen. I look forward to providing you future updates on our progress and at this time, we will open up the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions.)

And for our first question, we go to Monica Logani with Wall Street Access.

Monica Logani – Wall Street Access

Yes, hi, thank you very much. Great quarter! Just on the conferencing side, it looks like it was a very, very strong quarter. Now, I was just wondering if you can give us some more detail of where the pockets of strength were?

Ted Schrafft

Monica, I appreciate the question. I think as we’ve said in the past our growth in conferencing is fairly broad and fairly widespread. Let me first of all say that I am going to tie it back to the strategy and the vision because we’re not only getting new customers in conferencing, but we’re also selling our conferencing solution into the base of our other customers, again, under the umbrella of the communication operating system.

So we are getting a lift in new customers, we’re getting a lift in selling conferencing as the second or third solution into our customer base. And our domestic business has been strong. I’ll also say, our international business they have been exceptionally strong as well, so we on the outside fairly broad and widespread growth both selling as an individual solution and selling as part of the communication operating system.

Monica Logani – Wall Street Access

Okay great. Just on the broadcast fax side. Do you believe that we are at a stable level at this point?

Boland Jones

Yes, Monica. We’ve said in the past that we were on a project to go into that base and as Ted have said, and I gave Ted the credit. Don’t fire the customer for legacy technology or maybe inappropriate pricing of that technology, but get that customer squared away and so, what you’ve seen us do over the last year, year and a half, in a steady state way is, find those customers, get those customers priced appropriately and get them under longer term arrangements and add in possibly the second and even the third product along with that broadcast fax, and I think what you’re seeing here is the results of that.

I think as far as a trend, we have almost cut in half the decrease in the legacy business decline from one year to the next from 2006 to 2007, and I think it’s at a point now where it’s not going to be a harmful agent going forward just like it was two or three years ago. I think now you are seeing a trend that our organic growth can more than overcome anything happening in there, but I think that base is reaching a real stable point.

Monica Logani – Wall Street Access

Right, okay, well that’s good to hear, and then just in terms of the overall strengths geographically, it looks like Europe was a bit weaker than the US, and I was just wondering what your thoughts were about that market?

Boland Jones

I am sorry Monica could you repeat that again.

Monica Logani – Wall Street Access

Just looking geographically, if I remember correctly, Europe was the weakest in terms of versus the US and Asia? Correct?

Boland Jones

Yes, that’s correct.

Monica Logani – Wall Street Access

And I was just wondering if you could just explain what’s going on with that market and what you see going forward.

Ted Schrafft

Europe represents an absolutely tremendous market for us and we’ve done a lot in the last year and I think in some of our prior calls we’ve said we kind of started some of these new initiatives in North America, then we take them over to Europe and Asia which is what we are in the midst of right now. We are saying again, I think the opportunity for us to expand our revenue streams, sell all the solution sets both in Europe and Asia. I’m actually very excited about those, the international market as being growth markets. Plus, because we do so well and have such a large global account base, so that gives us great opportunities in those markets as well.

Boland Jones

Yes, but particular weakness from one period to another especially in the third quarter in Europe is the direct reflect of the seasonality over there. We’ve normally, as you’ll look at our numbers, this is by far and away the best quarter we’ve had in five years as far as seasonality and overcoming the seasonality drop, which normally haunts us from second to third quarter. If you look at our past second to third quarter jump off, our revenue does not go up, it normally goes down, so the weakness is all in Europe primarily in the summer.

We’ve got a strong base over there as Ted said, a widespread base, but in August that continent basically leaves and goes somewhere else for holiday and returns to work in mid September, so on a business state basis, that is our weakest quarter you will see in the European area.

Monica Logani – Wall Street Access

Okay, very good. And then just finally, looking at your growth margin, as you look at your business where do you see that going in ’08 and in ‘09?

Ted Schrafft

You saw in the results, Monica. We saw an uptake in the gross margin from the second quarter. A lot of that or some of that is due to the focused, we talked about the reengineering effort in the second quarter that we’ve undertaken. We began to see some of the savings associated over that reengineering effort in the third quarter and we expect to see continued incremental margin improvement through the rest of year and next.

Monica Logani – Wall Street Access

With that, what kind is the goal if you had one of what you eventually hope to be in the gross margin front?

Ted P. Schrafft

I think we had said in our earlier call that we expected a big growth, up one to two points from earlier levels and we are very comfortable. I think we’re probably in the 59.5 to 60% range, but that’s what we had stated on prior calls, so we’re comfortable with that.

Monica Logani – Wall Street Access

As being your goal? The 59.5 to 60%?

Ted P. Schrafft

That was our end of the year statement that we made in our earlier quarters, Monica. We haven’t given any guidance yet for next year yet.

Monica Logani – Wall Street Access

Okay, got you, okay. Okay, good, well thank you so much, I appreciate it.

Ted Schrafft

No problem.

Operator

We go next to Srinivas Anantha with CIBC.

Srinivas Anantha - CIBC World Markets

Yeah, good evening. Thanks for taking my question. Thanks. Good quarter guys. A couple of questions. Looking at your 2000 guidance, it appears like you are implying sequential drop in 4Q revenues. Any reason why that would be the case given the strong trends you’d been seeing? And secondly, on the conferencing side, could you guys talk about what percentage of that growth is coming from voice communications or all of the growth and conferencing is just coming from web conferencing services? Thank you.

Boland Jones

Yes. I’m sorry to make you repeat that. Can you speak up a little bit and I can try to address it. I got part of your first question and then you kind of faded off.

Srinivas Anantha - CIBC World Markets

Sure. The first one is with respect to your guidance. If I am just doing the math, it looks like you are guiding to a sequential decline in revenue from 3Q to 4Q. Any reason why that would be the case given the strong trends you’ve been seeing in your business? And the second one is you mentioned part of the growth is driven by the strong growth in conferencing. How much of that growth is coming from voice as opposed to web? Thank you.

Boland Jones

I’ll take your first question. We are not projecting any decline at all. In all honesty, I mean, we’ve given you better than mid-teen double digit growth for the last three quarters, so we do not expect any sequential or year-over-year obvious decline, but no sequential decline either.

So I think, when we put that in our statement that we released earlier today, it was more of a here or above is what our guidance change was, in fact, we fully expect an increase sequentially from third quarter to fourth quarter.

On the conference question, I was trying to understand what you said. Again, I am so sorry that we must have a bad connection between you and our service, but I was trying to understand your conferencing question and I couldn’t quite hear your question on the type of conferencing that you’re asking me to analyze from what to what?

Srinivas Anantha - CIBC World Markets

Voice conferencing versus web conferencing.

Boland Jones

Yeah, voice versus web conferencing.

Srinivas Anantha - CIBC World Markets

Yes.

Boland Jones

And what is your question? Sort of what is the difference is or ?

Srinivas Anantha - CIBC World Markets

No, no. Where is the growth coming from? Is there’s lot of growth being driven by voice conferencing services or the web conferencing service?

Boland Jones

And Ted answered that earlier and I will hit it back again. We aren’t getting any growth from any certain particular area. We’re getting growth across the board. We’re getting growth from current customers. We’re getting growth from penetrating current customers with the new service called conferencing.

Our web conferencing is growing very nicely. Our VoIP conferencing is growing very nicely. Our VoIP conferencing, I think, I don’t know what each of the big telephone companies report, but we maybe one of the biggest growth areas in the conferencing industry with the VoIP based conferencing minutes.

So, that is the VoIP area, the web area, the audio area, and that traditional TMA, the middle market, the global market. We see a large growth rate over all those areas. We don’t see a particular area that is growing more or less.

Srinivas Anantha - CIBC World Markets

And lastly, what is the contribution from budget conferencing this quarter?

Ted Schrafft

Two and a half million.

Srinivas Anantha - CIBC World Markets

Two and a half million. Okay, thanks.

Operator

We go next to Rod Ratliff with Stanford Group.

Rod Ratliff – Stanford Group Company

Well done guys, nice quarter.

Ted Schrafft

Thanks Rod.

Rod Ratliff – Stanford Group Company

Given the strength in conferencing, how is pricing these days? Clearly there has been a good deal of consolidation in the space, but are you seeing fairly stable pricing quarter on quarter, Boland? Are you seeing good ability to lay your own ancillary services sort of a way to sweeten our food, for a lack of a better term?

Boland Jones

I mean you hit it and that is what I am going to hit.

We are going in to customers as Ted said, and back to answering Sri’s question about where growth is coming from, new growth that we haven’t seen in the past year or two is coming from the fact that we’ve armed our sales people with this communication operating system story.

We have tweaked our compensation with our sales people across the world so that they can earn as much money or sometimes even more at selling a second solution in term of existing customer, so you’ve got a lot of conferencing salesman poaching into, if you will, document management accounts, e-mail accounts and so forth and people invite them in there because the salesman that control those other accounts gets paid as well, so there’s a lot of growth in that area.

The compression issue or the pricing issue again that is held as you just said to me that’s held steadier by the second and the third product.

We continue to fight the fire like all service providers do in that area, the global accounts drive, I would say, more than 70% of the price battle. We have got a huge middle market area, we have got a huge FME area and growing with our online strategy and then we’ve also got licensing strategies and subscription pricing strategies that we’ve actually started experimenting through the direct sales force now before we release them to the general public through our online presence, as well as the rest of our sales force.

So, we’ve got a different ways to go at it and I think if you look across the board to our competitors or the rest of the market providers we have got more ways to go at it than most and so we probably hold a steadier line there. It’s flattening out for us as opposed to the accelerated or the decline rate it was looking at a year ago or even two years ago.

Rod Ratliff – Stanford Group Company

Segwaying off of one of the more recent comments that you made there, talking about progress toward a on demand model, are there any customer wins you might highlight as sort of being models for that transition or can you talk about it yet?

Boland Jones

We’ve got some model customers, we’re not ready to talk about it yet, neither from their end or from our end, but we’ve got some excellent model customers that we hope to be able to talk to you about, but are on the system that look like what you’re talking about and look like the dream that we’re trying to mould here. But we’re not yet ready to talk about those things on a particular basis yet.

Rod Ratliff – Stanford Group Company

Okay, look forward to it then. Boland, I think you said 300 new deals, would you clarify that for me because I wasn’t typing quite fast enough.

Boland Jones

That’s correct, since we put up that web presence, we’ve made a lot of progress in those deals and as far as the second solution being sold in into the accounts as well, so there’s two areas that we’ve really accelerated since we last spoke to you and obviously the deals that we’re talking about, that I’ve mentioned in my speech was more than 650 in monthly recurring revenue. It’s selling that second and third solution as I was talking about earlier is the poaching in to different accounts with a tweaked compensations system for our sales force. So that’s taking hold as well as the online presence is taking hold of those effects as well.

Rod Ratliff – Stanford Group Company

I think you said at point you had generated some 4000 leads or something like that.

Ted Schrafft

That’s correct.

Boland Jones

So there are three things going on, right? So there’s the online presence which will increase cross-selling, if you will, of our second and third solutions itself because.

Rod Ratliff – Stanford Group Company

That was the 650 MRR, right.

Boland Jones

That’s correct and that’s from taking 5% of our customer base and moving that to 80% of our existing customers coming through that web presence and certainly we have other solutions, and that’s also, that 650 is also the sales force starting to sell the second and third solutions, so it’s both.

And then the third thing is just the online selling outright of new logos and buying one, two, three solutions after the first solution. So it’s a start. It’s not where we want to be, but it’s a good start for us.

Rod Ratliff – Stanford Group Company

Okay, so the 4000 number that you gave, that was self service sales, basically coming online?

Ted Schrafft

It was self-service and search optimization. That was either closed on an automated basis, the self-service basis or is closed out of our inside sales team.

Rod Ratliff – Stanford Group Company

And you gave an MRR figure for that as well, right?

Boland Jones

That’s correct, that’s 150.

Rod Ratliff –Stanford Group Company

150. Alright, I promise, I have only got a couple more here.

Ted Schrafft

It’s not all the way there yet, but it’s a good start.

Rod Ratliff –Stanford Group Company

Glad you clarified the European market performance relative to the third calendar quarter over there. Confidence in the fourth quarter sequential increase, I’m sure that’s probably supported by the typical seasonal trends in conferencing in other parts of your business as well, right? Because normally, it picks up in the fourth quarter after the third being weak.

Boland Jones

That’s correct. I mean, all parts of our business and this is a run rate business and it’s a run rate sales efforts, so it’s all of those things.

Rod Ratliff – Stanford Group Company

Okay, one last one, and this is kind of housekeeping, maybe for Havener, if he is in the room. G&A was a little bit lower than I had modelled, just kind of a function of returning normal levels after the second quarter and likewise R&D was a little higher than I expected, also performing to plan there I’m taking it?

Michael E. Havener

Yes, what we’ve got going on in this quarter is no proxy costs that you saw in the first and second quarter. So it’s a clean porter. That G&A number now is pure, and on ago forward basis, the R&D pick up is simply, we’re investing more in the R&D area, and you’re going to continue to see that pickup.

Rod Ratliff –Stanford Group Company

That’s a high class problem. Okay, guys, I’ll step up of the way, thanks again.

Operator

And for our next question, we go to Tavis Mccourt with Morgan, Keegan.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Hey, guys, thanks for taking my questions. I’ve just got a couple ones. I’ve got the gross margin, basically flat this quarter, maybe up a little bit, but I suspect you guys would like to do better than that. I’ve always thought about cutting your cost of goods sold, is being really in two pieces and that network piece and then the people piece. Where do you expect the leverage to come from? Is it just fewer call center folks or are you seeing improvements in network cost again?

Ted Schrafft

We continue obviously to continue to push on improvements and network cost. We expect we’ll see those as part of the margin expansion opportunity as well. Along the margin expansion too, we expect to see it’s going to come from the savings we’re going to generate through the reengineering effort that we’ve talked about on the last call. So we really just began to see the saving. As a matter of fact, the third quarter was the first quarter that we experienced savings off that effort because it just started a few months ago.

So we expect those savings to increase and it is on track and that project will run through too 2008, so expect to see a continued uptake in margin associated with both networks, as well as the web as Boland said, in terms of looking at efficiencies and cost of service delivery as well as the reengineering effort.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Got you. And I know kind of beat the horse of sales force account last quarter Ted, and I think you kind of told me to focus more on kind of quality of the sales force and the total number of sales force, but roughly speaking, I mean, on a yearly basis, what are you looking to grow kind of total quota of sales reps.

Ted P. Schrafft

I think year over year we were flat in the third quarter because we hired, we’ve invested. We hired a pretty, I think reasonable uptick year over year. I don’t have that exact number of incremental heads. But what we are going to do is we are going to continue to invest in sales and marketing and that is where we’ve put a lot of our focus and we’re going to continue to put a lot of our spend.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Got you. And the 80% number you referenced for customers using pgiconnect, strikes me as a pretty high number. I don’t know what your internal targets were but I assume you must have done some kind of specific incentive with the sales force or something to get kind of number that high. What are you guys doing to really incent the customers to be serviced through that website?

Boland Jones

We’ve made a super big deal out of the web interface, right. So there are people receiving input everyday from customers. This is not something that has happened over the last quarter. It has been working for probably three quarters. So we’ve warmed up the customer. We’ve obviously communicated to them in a creative marketing way through their electronic invoicing, through their sales rep, through customer-client services that exist today, a shrinking number because of this issue. But we’ve really worked on it, incentivizing about in the customer. It is easy to do business this way and we certainly incentives the sales rep to sell them this way so we are on track for what we think should probably be a 90% effort and then there’ll probably be a 10% or so stub of customers that will always be high touch customers that will always take extra care and that is where we are going to want it.

You cannot get to fully automated, it’d be great if you could, but I don’t think you’d have the quality of service that we deliver and get fully automated.

So I think we got just small ways to go, but it is an effort that has been on the way for some time and when we made the site in the present available to finally use, there were some pent up marketing that actually performed so that is why the big fold-in all of a sudden.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Right, and Boland, when you look at kind of the forthcoming, hopefully kind of revenue benefit from that site. Should we be thinking about as a much better way to get to the kind of small business market which is tough to get to with the direct sales force or there are also opportunities with the enterprise customers making it easier for them to kind of realize the other services that you guys offer.

Boland Jones

I think it is both. I think it is primarily, in your hypothetic question earlier and I think we answered it well, I mean, it’s both. We’ll spend money more than we’ve spent ever in our past on the online effort this next year in 2008, as well as a direct sales force. So we’re sort of looking at our business now as going to market two way, either direct or online. And it is primarily that middle market to small market sale that we’re looking for, there we’re not unrealistic in thinking that a large customer is going to come find us on the web one day and do back cartwheels because of that, but the fact that they are going through that front door everyday, 80% of those customers is going through that front door, it’s certainly going to help us. We hope it’s going to lead to more awareness of the communication operating system. We’ve already seen some pay off from that, and we’re going to continue to try to drive that awareness for that category.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Great, and then just a financial question for Have, is the debt fixed or variable? I forget?

Michael Havener

The debt is variable, but we’ve hedged about 75% of our outstanding debt, so in essence it is fixed.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

75% fixed, okay.

Michael Havener

At 5% interest rate now that we’ve hedged.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Great, thanks a lot.

Operator

And with that, ladies and gentleman. 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.

Shawn O’Brien

Thanks, and thank you all for your participation, if you have any follow up questions, please direct them to my attention at 404-262-8462. Have a great day.

Operator

And ladies gentlemen, that does concludes the Premiere Global Services Incorporated, Third Quarter 2007 conference call. We do appreciate your participation and you may disconnect at this time.

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Source: Premiere Global Services, Inc. Q3 2007 Earnings Call Transcript
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