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Premiere Global Services, Inc. (NYSE:PGI)

Q1 2008 Earnings Call

April 17, 2008 5:00 pm ET

Executives

Sean O’Brien – Senior Vice President, Strategic Planning & Investor Relations

Boland T. Jones - Chairman of the Board & Chief Executive Officer

Theodore P. Schrafft - President

Michael E. Havener - Chief Financial Officer

Analysts

Tavis Mccourt – Morgan, Keegan & Company, Inc.

Rodney Ratliff – Stanford Group Company

Operator

Welcome to the Premiere Global Services, Inc. first quarter 2008 conference call. (Operator Instructions)

You can go to our website at www.PremiereGlobal.com and go to our Press section. Alternatively you may listen to the re-broadcast from your telephone beginning at 8:00 pm Eastern time today through midnight Friday, April 25. The replay numbers are 1-888-203-1112, again that’s 888-203-1112 within the United States and Canada or at 1-719-457-0820, again that’s 719-457-0820 outside of North America. The confirmation code to access the replay is 7877684, again that’s 7877684.

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.

Sean O’Brien

If you’ve not received a copy of the first quarter earnings release, please visit our website at www.PGIConnect.com where it is available in our Investor Relations section. Joining me on the call this afternoon are Boland Jones, our Chairman and CEO; Ted Schrafft, President of Premiere Global Services; and Mike Havener, our CFO. Following some brief comments by management we’ll open the call to your questions.

Before I turn it 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 variety of factors including those we identified in our annual report on Form 10-K for the year ended December 31, 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 our press release and Form 8-K filings of this afternoon for reconciliations of these non-GAAP financial measures to the most comparable GAAP measures. These materials are also available at our website at www.PGIConnect.com.

At this point I’ll turn the call over to Boland.

Boland T. Jones

This is Boland Jones, Chairman and Chief Executive Officer of Premiere Global Services. Welcome and thank you for joining our first quarter’s earnings call.

I’m pleased to report another solid quarter for our company this afternoon. As reported today our revenues were up 13% to $153 million and our pro forma earnings were up 32% to $0.25 per share. It was another very positive quarter on all of our key indicators. As many of you know Premiere Global Services is the leader in the innovation and application of communication technologies.

Today our communication technologies helped more than 50,000 companies worldwide including 95% of the Fortune 500 to automate, simply and improve their critical daily business processes. More than ever before companies are looking to communication technologies to help drive efficiencies in their business processes and to make them more competitive. Our goal is to be the leader in this market, to apply our technologies into as many business processes for as many companies as possible around the world.

For those of you that may be new to our company and our strategy we have undertaken a major evolution in our business over the last several years to position us to achieve our goal. First, we assembled a broad array of communication technologies on a single on-demand platform which we call the Premiere Global Communications Operating System or PGiCOS for short. Then we transitioned our sales focus from selling communication services and competing on price to selling business solutions and selling enhanced value and return on investments. And over the next 12 to 18 months we’re taking another significant turn to help secure our spot as the leading provider of communication technologies that improve business processes.

Specifically we’re moving from solutions to a more focused application approach. We’re transitioning our usage base or our per drink pricing model to new and innovative subscription based pricing strategies and we’re continuing to move to the web throughout all aspects of our business from marketing and sales to service and support. While significant in scope, we believe these initiatives will position us to better capitalize on three large and growing market opportunities ahead of us. We also believe that this vision and strategy which many of you have heard me talk about for several quarters now are being validated and reinforced in the market today. For example we believe our financial results have improved in recent quarters largely because our sales force and our customers understand the true value we offer with our communications operating system.

In the first quarter we set volume records, processing greater than 2.6 billion transactions on behalf of our customers worldwide. We grew consolidated net revenues more than $17 million representing nearly 13% year-over-year growth and we generated 32% growth in pro forma diluted EPS as detailed and defined in our earnings release this afternoon.

We’re also seeing our strategy validated by the research community as our market opportunity is beginning to be formally recognized and defined as a specific category. In recent months this category referred to as Communication Enabled Business Processes or CEBP for short was covered in new research reports from Gardner Group, Forrester Research, Frost & Sullivan and an introductory article in Information Week Magazine and in the marketing collateral of several hardware and software providers.

While a number of single product companies are competing in our general space none of them is approaching it with nearly the same comprehensive on-demand platform that we have or the drive to directly integrate and embed their technologies into customer’s business processes as we do. We believe our strategy is unique to the market and puts us ahead of our competition as we differentiate ourselves by helping companies solve more of their problems with our broad and diverse sets of solutions and applications.

Finally I believe our strategy is also being validated as we pursue and sign new partnerships with some of the biggest and most widely recognized technology brands in the world. In fact I’m very excited to mention today that we recently entered into a new multi-year agreement with SAP the world’s leading provider of business software which illustrates my point. Under this agreement SAP is using our Premiere Global Communications operating system to improve their own business processes.

Specifically they’re using conferencing and collaboration solutions to enable their over 43,000 employees in more than 50 countries around the world to better collaborate both internally and with their external partners and customers. SAP is also using other PGI [inaudible] technologies to successfully introduce and ramp the solution internally. For example they’re using our e-marketing solution to send new login information to users. Our web-based tools enabled SAP to create the user message, track the delivery and receipt of the information and send automated follow-ups to those who did not act upon the initial email to help ensure a successful deployment.

In addition SAP employees are being trained to use the new conferencing and collaboration solutions via PGI Learning Communication Center another of our PGI Communication Operating System applications. The virtual tutorial sessions we host are accessed in an always-available web environment that enables users to train at their convenience and at their individual pace for maximum effectiveness. We believe this is one of many new and significant customer relationships to come and the value of our PGI Communication Operating System continues to be recognized in the marketplace.

In conclusion let me say that this is an exciting time for Premiere Global Services as we continue to help define and lead this vibrant new category and further our mission of changing the ways companies view and manage their business processes. I’m very proud of the progress we’re making in increasing our customer value and our shareholder value as well and I thank each and everyone of our associates around the world for their personal contribution and for our continuing success.

At this point I’ll turn it over to Ted Schrafft, our President.

Theodore P. Schrafft

Let me begin by saying that I too am very proud of the progress we are making as a company as we pursue the very exciting vision Boland has laid out for us. On our last call I outlined our four primary business objectives that move us toward this vision. Let me take a few minutes to update you on these objectives and our progress toward them.

Our first objective is to grow our revenue and our value by selling additional PGICOS solutions to our existing customers. We believe that selling to our existing customers is easier than selling to new prospects and that by helping our customers solve more of their business problems we move up the value curve and are viewed more as a partner than simply a vendor leading to both greater customer wallet share and greater customer loyalty.

Toward this goal we sold second and third and in some cases fourth and fifth PGICOS solutions to 500 existing customers during the first quarter. In addition we sold more than 170 new customers multiple PGICOS solutions at the time of initial contract during the quarter. Collectively the success will result in several million dollars of estimated annual revenue opportunity for us. Selling multiple PGICOS solutions not only increases our revenue and our customer value we believe it also demonstrates in a meaningful way our unique capabilities as compared to our competition. With a base of over 50,000 customers this obviously will remain a top priority for us.

Our second objective is to accelerate the development and introduction of new PGICOS applications. As I said in our last call we believe taking our existing solutions and packaging them in vertical or horizontal applications that improve specific business processes will communicate more clearly to our customers both what we do and how we add value to their business.

We also believe that making our solutions more tangible through our application strategy will open new market opportunities for us as well. We made solid progress toward this initiative during the first quarter. For example we launched PGiNotifyMeds an application for the healthcare industry that has evolved from our notifications and reminders solution set. PGiNotifyMeds enables patients to receive automated reminders to take their medicine to ensure maximum efficacy. In the last 30 days we launched this vertical application with one of the world’s leading pharmaceutical companies.

In addition during the first quarter we deployed our accounts receivable management portal, a horizontal application based on our notifications and reminders solutions. This powerful application enables companies to automate and accelerate the collection of their past due accounts, drive down their DSOs and improve their cash flow. These are just the first of a number of new business applications we will bring to market this year across our solution sets that we believe will more clearly define and communicate our capabilities and enhance value to our customers.

Our third objective in 2008 is to introduce new subscription pricing options to our customers. As I said on our last call our first step toward this objective was to offer subscription priced pricing for all of the solutions we sell on the web which we did in the fourth quarter last year. Our next step is to introduce this pricing strategy into our direct sales channels. We have done and continue to do a tremendous amount of work in preparation for this very important transition in our market strategy. Our marketing and strategic pricing teams are laying the necessary groundwork to begin to introduce new subscription pricing options to our direct sales force in the current quarter and our goal is to have our entire global sales force selling these innovative new pricing options by the end of this year.

Our final objective is to continue to build a world-class website. In the first quarter we launched a new developer community that includes a new software development kit, knowledge base, sample code and developer testimonials all targeted at increasing our rate of innovation and broadening our distribution by making it easier for partners to develop and market new applications powered by our PGiCOS platform and technologies.

We also launched a new section on our website where our customers can contribute their own PGiCOS video testimonials with the goal of letting prospective customers hear directly from our current customers the many values and benefits of our PGiCOS solutions and applications. Looking ahead we will continue to invest in building our web presence with a particular focus on improving our customer experience through enhanced service and support tools. As I look at our business I continue to believe the web remains one of our greatest areas of opportunity.

In summary we believe we made good progress against our operational objectives during the first quarter and we look forward to continuing to build on our progress throughout the year. Now, before we open the call to your questions, let me quickly recap our first quarter 2008 financial performance.

As reported this afternoon we grew consolidated net revenues in the first quarter by nearly 13% to $152.9 million up from $135.6 million in Q1 last year. We continue to project double-digit revenue growth in 2008 as detailed in our release. Our gross margin totaled 59.7% of consolidated net revenues in the first quarter up modestly from the fourth quarter of 2007 and consistent with our expectations for the year of incremental gross margin expansion. For the first quarter GAAP diluted earnings per share was $0.20 and as defined and detailed in our release pro forma diluted EPS totaled $0.25 a 32% increase from the same quarter a year ago.

Looking ahead we continue to project diluted EPS growth of greater than 20% for the year. Net cash provided by operating activities totaled $15.9 million during the quarter. The first quarter is historically our slowest cash flow quarter as it’s burdened by a number of front-end loaded expenses and we are collecting receivables for the lower revenue holiday periods in December.

Consistent with our historical performance we expect cash flows to improve meaningfully in the second quarter and for the remainder of the year from first quarter levels. Capital expenditures in the first quarter were in line with our internal projections at $13.8 million representing investments in new growth capacity, application development and market expansion initiatives. We continue to project that capital expenditures will decline as a percentage of consolidated revenues in 2008 when compared to 2007.

In conclusion let me say again that I’m very pleased with our progress in the first quarter as we continue to take our company closer to our vision of being the world’s leading provider of communication technologies for business process improvement and let me end by thanking all of our associates for their continuing hard work and dedication and at this point in time we’ll open the call up to your questions.

Question-And-Answer Session

Operator

(Operator Instructions) And for our first question we go to Tavis Mccourt with Morgan, Keegan.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

A couple of questions, first I was wondering if you could give us any stats around or maybe just speak qualitatively around the materiality of the PGiConnect website at this point. Is it material from a revenue standpoint or can you give us any data points on numbers of customers that are using it, percentages or anything like that?

Boland T. Jones

Ted’s got some stats for you. It’s very material in that every day 95% of our customers are utilizing the portal to initiate and check service and to look at their account. They don’t totally use it for 100% of customer service yet, that’s still a goal. On the sales side I think Ted has some stats for you. It’s not material yet on the sales side but it’s picking up. Ted you have some stats on that don’t you?

Theodore P. Schrafft

I got a couple. That’s why I continue to say, listen I think it is a massive opportunity because everything we do and will do through the web is going to be additive to a number of different areas of our business, mostly sales and marketing but we’re generating I think in the release, Tavis, we also said we’re generating a ton of leads already through the web. I think we generated over 5,000 leads this particular quarter and that was up I think a bit from the leads we were generating last quarter. And we have people doing transactions on the web that a lot of those leads end up going to what we call our SMP, small medium business sales force who are closing those leads. So I think they actually converted over 1,000 of the 5,000 to sales in the quarter. It’s probably a little less than 5% of our revenue but it is definitely growing fast. It’s a smaller portion but it’s growing at a good percentage and a good clip and for me, I’m excited about it because it’s all upside performance and we’re continuing to put a lot of emphasis and development into that whole web program from the sales side and on the service side.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

And in terms of – I didn’t see in the press release any break out of the broadcast fax service line – I was just wondering given all the issues around the mortgage market right now, how is that service line holding up?

Boland T. Jones

We’re trying to break away, that business will be less than 10% of our business, it’s right at 10% of our business this quarter, it’s at $16 million. It’s going to be less than 10% of our business this year so we have worked hard on this and we’re pretty excited about the fact that we’re growing through the fact that we’re switching these people to either other solutions in our system or if they don’t accept the solutions in our system we’re encouraging them on a marketing basis, on a positive basis to climb into plans that are 12 and 20 month plans which we’ve been very successful at and we’ve managed that number down to where we believe – this was an issue in our business two years ago and we just don’t think it’s an issue to really talk about anymore but we’re happy to give the information and happy to answer any questions about it.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

I was just wondering more I guess specifically because I know that serves a financial services vertical but –

Boland T. Jones

Okay for the mortgage, I apologize. The mortgage business definitely we got hurt, the fourth quarter and the first quarter. Probably half-and-half each or maybe a little bit more, maybe 60% in the fourth quarter. We can’t escape it and even across other financial companies that utilize some of that legacy technology that are having problems as well. We’ve been affected by that.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

And then in terms of the seasonality to this year, normally Q1 is kind of a high watermark for your sales and marketing. Should we expect that to trend down in Q2 as it normally does or are you ramping up sales force that would undermine the normal seasonal trends?

Theodore P. Schrafft

No, we’re projecting I just want to say continued acceleration of revenue and sales so as we continue to develop and sell this communication operation system story that everybody will – we’re building up a good head of steam on that so as we look out we’re projecting to continue to have positive growth through the year.

Tavis Mccourt – Morgan, Keegan & Company, Inc.

I was actually asking about the sales and marketing expense. I apologize.

Theodore P. Schrafft

I’m sorry. I thought you were actually talking about on the revenue line. No, the sales and marketing expense, yeah you know there are basically three things on the sales and marketing expense and let me just hit all three of them. First of all yeah it was up $4 million from the fourth quarter and those are three things. Number one as I think most people know we invest in our global sales kickoff meetings and this past year we ran three of I’ll say some of the best kickoff meetings you could ever want and those are a big deal for us because we do them in Europe, we do them in Asia Pac, we do them in North America and we bring everybody together, the entire sales and marketing force along with service and operations and some of the back office people and we bring everybody and get everybody on theme so that is a very, very important expense I think that people know that we typically hit on in the first quarter. We’ve also obviously continued to increase our sales headcount is the second area for the sales and marketing expense and the third area for the jump is our continued investment in the web, in the marketing side on the website as three key areas for us. So you’ll see I think Q2 kind of either be flat or tick down a little bit but then you’ll see it continue to increment up as we continue to invest in that sales headcount and the web.

Operator

And we go next to Rod Ratliff with the Stanford Group.

Rodney Ratliff – Stanford Group Company

The gross margins, not quite as much expansion there as I would have expected with about a 5% sequential revenue increase. Is this a level we should model or was something extraordinary at work here?

Michael E. Havener

We’ve been saying all along that we’re going to be in that 59.5 to 60.5 range. There’s not going to be a lot of extraordinary movement from quarter to quarter. We would like to see slow steady growth in that line item but it’s not going to deviate. There was nothing material in the quarter that affected it.

Rodney Ratliff – Stanford Group Company

The tax benefit, what’s the specifics there?

Theodore P. Schrafft

What happened is in the first quarter we began consolidating some foreign subsidiaries together under one PGi legal entity. We’ll be continuing to do that down the road and we were able to realize some tax benefits, it’s a one-time thing and we normalized now. Our real rate should be around 33.5 for the first quarter.

Operator

We have no further questions on our roster.

Sean O’Brien

Thank you all for your interest in Premiere Global Services. If you have any follow up questions you can reach me on my direct number. That number is 404-262-8462. We look forward to updating you on our progress on our next call. Thanks very much.

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