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Premiere Global Services, Inc. (NYSE:PGI)

Q2 2008 Earnings Call

July 21, 2008 5:00 pm ET

Executives

Sean O’Brien – Senior Vice President of 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

Rodney Ratliff – Stanford Group Company

John Emrich – Ironworks Capital

Unidentified Analyst

[Vin Mackovic – Rivanna Capital]

Andrew Tuttle – [Kroll Point Partners]

Operator

Welcome to the Premiere Global Services, Inc. second quarter 2008 conference call. (Operator Instructions) 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, Sean O’Brien.

Sean O’Brien

If you’ve not received a copy of our second 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, Ed 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 a variety of factors including those we identified in our annual report on Form 10-K for the year ended December 31, 2007, our quarterly report on Form 10Q for the quarter ended March 31, 2008 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 8K filings of 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 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. Welcome and thank you for joining our second quarter earnings call. I’m pleased to announce another solid quarter for our company this afternoon. As reported, our consolidated revenues in the second quarter grew greater than 17% to $161.6 million, our highest percentage revenue growth in three years. As defined in detail on our earnings release, our pro forma diluted EPS increased nearly 29% in the second quarter to $0.27 per share versus $0.21 in the second quarter last year and we continue to generate solid cash flows with net cash provided by operating activities increasing 34% to $23.7 million during the quarter.

We’re proud of our solid financial performance this quarter, especially in light of the difficult economy. We’re also pleased with the significant strategic and operational progress we made during the quarter as we continue to take advantage of our leadership and the innovation and application of communication technologies. As I stated on our last call, we are finding that today, more than ever before, companies are looking to PGI communication technology to help drive efficiencies in their business processes. We believe our continuing strong financial performance and business momentum reflect this powerful trend. Just as importantly, we believe our performance also reflects the significant progress we’ve made in positioning PGI as the leader in on-demand communication technologies.

Most notably, over the last few years, we have assembled a broad array of communication technologies on a single on-demand platform, the PGI communication operating system. And, we packaged these communication technologies into a powerful solution to enable our global sales force to sell enhanced customer value and returns on investments instead of competing on product features and price alone.

As we have discussed in our last few calls, our strategy is to further evolve our products from a solutions focus to an applications focus. We believe we’re continuing to make great progress towards that goal. We have a long history and reputation as innovators of new communications technologies. As we look ahead, we think we can accelerate our pace of innovation to further differentiate ourselves from our competitors, grow our market share and increase our growth.

In order to do this, we are currently in the early stages of building the next generation of our own PGI communication operating system platform. This new platform is being created as a virtual network of IP platforms located around the world. We anticipate this new network of platforms will enable us to deploy new technologies and applications much more quickly and efficiently. It will also provide the foundation for our plans to convert to a subscription based product strategy in the future. You’ll be hearing a lot more about this virtual Premiere communication operating system network as we get closer to its launch in early 2009.

At the same time, we’re deploying our next generation platforms, we’re also advancing our application development strategy, specifically to address the user experience. We believe the user experience in business applications is years behind where it is in the areas like gaming and social networking. Looking ahead, the user experience is the next place we will differentiate ourselves from our competitors. We’re focusing massive amounts of attention on the users’ interfaces of our applications. Our goal is to make these UIs more compelling and intuitive to make it a truly immersive experience for our users. We are working with outside brand and design experts to assist in this effort and we will be talking more about this important strategy in the near months.

We’ve always believed the potential market size for applied communication technology is boundless and with these refinements to our network and application strategies, we are positioning Premiere Global to continue to expand and lead this exciting market. In conclusion, let me say again how proud we are of our performance this quarter as we continue to make measurable progress on all fronts: strategic, operational; and financial. It’s an exciting time for our company and our vision and strategy are being validated everyday in the marketplace and reflected in these financial statements. We remain committed to increasing both our customer value and our shareholder value and I’d like to thank each of our associates around the world for their personal contribution to our success towards these important goals.

At this point, I’ll turn the call over to our President Ted Schrafft, for more detail of our quarterly results.

Theodore P. Schrafft

Let me begin by saying that I too am pleased with our second quarter performance as we continue to execute on our strategic plans. As reported this afternoon, we grew consolidated revenues in the quarter by more than 17% to $161.6 million compared to $138 million in Q2 last year. This performance is ahead of our initial 2008 plan and as a result, we have increased our revenue outlook for the year. As included in our release this afternoon, we now project 2008 consolidated revenues will increase by greater than 13% compared to 2007 totals. Our revenue growth was driven by a number of factors including our success against our primary corporate initiatives which we have discussed on our last few calls.

To quickly recap, these initiatives include increasing our customer value and loyalty through deeper penetration of our existing accounts, accelerating our development, marketing and sales of targeted business applications, introducing new strategic pricing models including subscription based pricing; and maximizing our sales and service opportunities on the web. During the quarter we added nearly 400 new enterprise customers and acquired over 4,000 new customers either directly on the web or through leads generated on the web. In addition, we sold second and third and in some case fourth and fifth PGI [Cos] to more than 500 customers during the second quarter and, an additional 150 new customers began using more than one PGI [Cos] solution at the time of initial contract with us. To measure our success at deeper penetration of our existing customer base another way, the number of multiple PGI [Cos] solution customers increased by nearly 25% in the second quarter of 2008 versus Q2 of 2007.

Today, our top 5,000 customers us an average of 1.3 solutions each leaving us plenty of additional growth opportunity within these customer accounts due to our broad portfolio of five PGI [Cos] solutions sets. Our applications strategy is also a critical growth driver for us and remains a top priority for our company. A great example of our application strategy is the new pilot notification service we recently launched with Delta Airlines. Powered by our notifications and reminder solutions, this new application enables Delta to automatically notify replacement pilots when they are needed due to situations like inclement weather or illness. Delta replaced a manual call center based process with this new highly automated web application that enables them to lower cost, increase efficiency and minimize flight cancelations and delays.

Delta Airlines, a valued customer in their own right is also a great example of our PGI [Cos] strategy in action. Delta started with us three years ago as an emarketing customer. Now they also use our entire suit of accompanying and collaboration solutions as well as this new application of our notification remainder solutions that I just mentioned. And today, we jointly announced an expanded relationship with Delta involving our desktop document solutions. Specifically Delta is introducing our fax to mail mobile application for its Crown Room Club members enabling them to conveniently print documents from their laptops or handheld devices at any of Delta’s Crown Room locations around the world.

To conclude on our revenue, let me say that while we were pleased with our recent performance we believe we still have a lot of growth opportunities ahead and we remain focused on accelerating this growth through the successful execution of our operating plans. Now, let me turn to the rest of our income statement.

Our gross margin in the second quarter totaled 59% of consolidated revenues slightly below plan. This margin decline was primarily related to the strategic one-time contract renegotiation with one of our largest customers. To be clear, I believe our margin performance in Q2 is not indicative of future trends and we fully expect gross margins to improve beginning in the current third quarter. Moving to our sales and marketing expenses in the second quarter, this remains an area of continuing investment for our company as we continue to believe in our significant growth opportunities.

During the quarter we added 35 new sales professionals. We also added several new senior marketing professionals to help accelerate our application and strategic pricing initiatives. Finally, we are continuing to add to our strategic partner channel to drive exciting new business opportunities like the SAP relationship we discussed on our last call. Even with all these investments we continue to generate significant operating leverage in our business with consolidated revenues growing at a faster rate than operating expenses over the last six quarters.

Our true operating margin in the second quarter was masked by a few non-recurring items. Specifically during the second quarter we incurred restructuring costs of approximately $3.3 million resulting from severance costs related to the three areas of leadership and organization refinements we made during the period. Specifically, we consolidated our technology development and network operation teams under singular leadership. We consolidated service and support for our entire suite of PGI [Cos] solutions and applications in to a unified customer care organization and we migrated our corporate communications function to our marketing department.

All these moves were made proactively with the goal of streamlining our organization in order to accelerate our business. We expect to generate meaningful returns from the changes and currently do not anticipate any additional restructuring costs. In addition, during the quarter we incurred a reserve in the amount of $4 million related to an excise tax matter. Approximately $2.9 million of which is included in our operating income and approximately $1.1 million which is reflected in our interest line. We were notified earlier this month of this potential excise tax liability and we believe we are now appropriately reserved based on all the information available to us at this time.

Finally, during the second quarter we settled outstanding litigation including our previously announced settlement of the patient infringement suit brought against us by Ronald A. Katz technology licensing resulting in a one-time net legal settlements and related expenses of approximately $1.6 million. We believe these settlements are positive for our shareholders. We continue to generate solid cash flows during the second quarter with net cash provided by operating activities increasing 34% to $23.7 million compared to $17.7 million in the second quarter last year. Consistent with our historical performance, we expect cash flows to improve meaningfully in the second half of 2008 compared to first half levels.

Capital expenditures totaled $13.1 million in the second quarter in line with our projections and we continue to project capital expenditures in 2008 to decline as a percentage of revenues compared to 2007. And, we believe our balance sheet remains strong with better than $122 million in cash and liquidity available under our current credit facility. During the second quarter we continued to pursue our investment strategy with the repurchase of 500,000 shares of our common stock in the open market, underscoring our continued belief in the future growth prospects and the undervalued nature of our stock. We have nearly 4.3 million shares remaining under our board approved share repurchase plan and we plan to continue to be opportunistic buyers of our shares.

In conclusion, let me say again, that we are very pleased with our progress in the second quarter as we continue to execute our plan to get closer and closer to our vision of becoming the world’s leading provider of communication technologies for business process improvement. Let me end by thanking all of our associates around the world for their continuing hard work and commitment to our future success. At this point in time we will open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rodney Ratliff – Stanford Group Company.

Rodney Ratliff – Stanford Group Company

Ted, would you repeat how many web leads and did you give us that for how much monthly recurring revenue from the new customers?

Sean O’Brien

Between the web leads and the actual web transactional customers that we closed directly on the website is about 5,000.

Rodney Ratliff – Stanford Group Company

5,000 leads and how many wins Sean?

Sean O’Brien

That’s 5,000 leads and wins on the net.

Rodney Ratliff – Stanford Group Company

And you didn’t give an MRR figure from that?

Sean O’Brien

No.

Rodney Ratliff – Stanford Group Company

The CapEx guidance was kind of general, are we calling for a precipitous fall off or just to get back to the old PGI 6.5 percentage points of revenue by 09?

Theodore P. Schrafft

You’re going to see it’s in line with our initial projections so it’s basically going to be on an absolute dollar basis you’ll see it basically flat. By year end you’ll see it flat with 07 so it will continue to drop as a percentage of revenue probably in line a little bit more with our historical performance.

Rodney Ratliff – Stanford Group Company

In terms of conferencing and collaboration it looks like continued pretty strong trends there. Any indication of price pressure or is the fact that we’re seeing the stagnant economy, is that impacting you positively as it’s always been anticipated that it would.

Theodore P. Schrafft

I think with conferencing, a stagnant economy puts pressure on dollars and expenses and we benefit from that, there’s no doubt about it. Bud, I’d also say that the conferencing growth that we continue to get is also I’ll say intertwined very, very tightly with the communication operation system strategy so we’re in there selling conferencing to our other solutions accounts and we’re getting good lift on that really across all regions.

Rodney Ratliff – Stanford Group Company

The fact that you gave about Delta a little while ago getting in there an e-marketing win, I’m going to assume that they came in with that acquisition a couple of years ago and you’ve seen pretty good success cross selling the other product lines to them.

Theodore P. Schrafft

We put that out there and Delta is a wonderful customer but it’s a perfect example of the strategy in action. It’s where we didn’t have any marketing base in there, I think conference was the next solution we sold to Delta and then you heard us announce earlier that they have a new pilot notification application as well as the partnership we’re doing with their Crown Room locations worldwide with our document delivery and desktop fax applications. So, we put that out there again because that’s really what is driving us and that’s really where we’re heading. It’s a perfect example of our strategy.

Operator

Your next question is from John Emrich – Ironworks Capital.

John Emrich – Ironworks Capital

A few unrelated questions, if I could ask them separately. What was the tax rate you all used to calculate the pro forma EPS number?

Michael E. Havener

The tax rate we used there was 34%.

John Emrich – Ironworks Capital

And that’s a good number to use going forward?

Michael E. Havener

That is a very good number going forward.

John Emrich – Ironworks Capital

What was unbilled AR in the quarter?

Michael E. Havener

The unbilled AR typically runs anywhere between $5 to $7 million on our balance sheet quarter-to-quarter. This particular junction was $7 million.

John Emrich – Ironworks Capital

Do you know what did foreign exchange contribute to the top line in the quarter?

Michael E. Havener

Foreign exchange was roughly $1.4 million from a sequential basis Q1 to Q2.

John Emrich – Ironworks Capital

Do you know year-over-year by any chance?

Michael E. Havener

Year-over-year was approximately –

Theodore P. Schrafft

John, I don’t have that number here, its several million dollars. We will definitely have that in our 10Q.

John Emrich – Ironworks Capital

It might be the same answer, I don’t know but what about acquired businesses since last year, what they contributed to revenue?

Michael E. Havener

Year-over-year basis on our acquired businesses contributed about $8 million of revenue.

John Emrich – Ironworks Capital

Just a general question, I don’t know the company that well, I’m very new to the story and I’m a generalist so I don’t focus on software or technology or anything like that. But, allowance for [doubtful] accounts has been down in absolute dollars four quarters in a row and I just started putting together a model this morning and as a percentage of gross accounts receivable, my model only goes back year but it’s the lowest in that time frame. Was something changed in the last four or five quarters from years past that require a change in the calculation of allowance for [doubtful] accounts.

Michael E. Havener

Nothing to change on the calculation for the allowance of [doubtful] accounts from five years back. So, what’s really changed is we’re using an application in our [Cos] called accounts receivable management tool and its actually had a large impact in us collecting really receivables that we had written off, fully reserved for, didn’t think we could get and we’ve gone in to that, basically the middle market and the [inaudible] market with that application and have had great luck. My long term range would be, I challenged my own internal organization to get to a 1% of gross AR because I don’t believe with the tools we have and the five people we have around the world there doing collections for us and our customer base profile that we ought to be running anything more than 1%. So, we’re really cleaning up historical from one year back, two years back with these new tools.

John Emrich – Ironworks Capital

So it was just expensing less than you wrote off but not reversing anything in to income.

Michael E. Havener

Well, to the extent I collected so some of it does come in to income and then to the extent that we’ve just been able to penetrate across the base but not get anything in response then we just write it off to the reserve so both things are contributing to the reduction there.

John Emrich – Ironworks Capital

Second to last, the capitalized software in the quarter?

Michael E. Havener

I believe the capitalized software in the quarter was approximately $4.5 million.

John Emrich – Ironworks Capital

And EPS guidance remains unchanged, right? You changed the revenue but the EPS is the same?

Michael E. Havener

That’s correct.

Operator

Your next question comes from Unidentified Analyst.

Unidentified Analyst

Just a couple of questions, could you go in to a little bit more detail on that excise tax by way of the book and why weren’t we accruing that previously? And then another one after that.

Theodore P. Schrafft

We actually were just notified, we weren’t accruing it because we didn’t know about it. We got notified early this month of, I’ll say apparent liability that apparently one of the states feel that we owe them. So, we’re going through the right process and working with the state tax authority to resolve the matter as quickly as we possibly can and we believe we’ve put together certainly an adequate reserve to deal with it and we’ll deal with it as quickly as possible.

Boland T. Jones

But, just a note, we have not paid excise tax. We pay excise tax to the network providers that provide us data network but we don’t pay excise tax or have ever paid excise tax on a product base.

John Emrich – Ironworks Capital

Is that the reason why that’s flowing through as an operating expense as opposed to a tax expense?

Michael E. Havener

There’s accounting guides with regards to that particular matter that requires you to have it as an operating expense. The theory is that you would historically been billing for it under the end user.

John Emrich – Ironworks Capital

And it looks like we bought back a little bit of stock in the second quarter and we had our debt balance go up slightly. The business is generating fairly good operating cash flow and free cash flow, how do we think about that pay down versus share repurchases and also keeping in mind the share price has actually performed very well.

Boland T. Jones

In opportunistic times we will concern what our value is and we’ll consider where our company is and then we’ll take advantage from time-to-time of our stock thinking we’re being undervalued; we’ll do that. We’ll look at that in a discretionary manner just like we look at acquiring companies for either market segment growth, geographic expansion or technology expansion and then we’ll look at it as far as paying down our debt. But, I think overall maybe one of the questions you’re getting to is we’re not in a hurry to pay down the debt and we’re not in a hurry to increase the debt. We want to make sure the business grows and captures the markets and the market advantages that we should be capturing. Then, any money extra to that is looked at in a discerning way between repaying debt and purchasing shares in a moment where we feel like either the company is fairly valued or undervalued.

Operator

Your next question is from [Vin Mackovic – Rivanna Capital].

[Vin Mackovic – Rivanna Capital]

Just to clarify, you bought 500,000 shares back?

Theodore P. Schrafft

That’s correct.

[Vin Mackovic – Rivanna Capital]

And do you have an average price?

Michael E. Havener

It was in the upper 13s, I think around $13.85 all in.

Operator

Your next question is from Rodney Ratliff – Stanford Group Company.

Rodney Ratliff – Stanford Group Company

It’s been a long time since I thought about the internally developed AR platform. I’m just wondering Mike, as the improved collections already paid for itself in terms of development troughs on the platform?

Michael E. Havener

It has basically paid for itself in the first quarter we used it.

Operator

Your next question is from Andrew Tuttle – [Kroll Point Partners].

Andrew Tuttle – [Kroll Point Partners]

You had mentioned the excise tax, I just wanted to follow up on that quickly. That was billed to you by one state?

Theodore P. Schrafft

That’s correct.

Andrew Tuttle – [Kroll Point Partners]

Can you name the state?

Michael E. Havener

Well, it wasn’t billed and it’s still in the very early stages. We’re no more than three weeks removed from a preliminary discussion. So, this isn’t something that was developed.

Andrew Tuttle – [Kroll Point Partners]

What’s the chance of other states doing something like this?

Michael E. Havener

At this time we are evaluating whether states may actually have a somewhat unique rule. We don’t know right now.

Operator

We have no further questions on our roster.

Sean O’Brien

Thank you all for your interest and participation on the call. If you have any follow up questions, please direct them to my attention. My direct number is 404-262-8462. Have a great day.

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