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WSTC > SEC Filings for WSTC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for WEST CORP

Form 10-Q for WEST CORP


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements (unaudited) and the Notes thereto.

Business Overview

We are a leading provider of technology-driven, communication services. We offer a broad portfolio of services, including conferencing and collaboration, unified communications, alerts and notifications, emergency communications, business process outsourcing and telephony / interconnect services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.


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Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex and changing communications needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified and platform-based, technology-driven voice and data services.

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and our value proposition. In 2012, we managed approximately 28 billion telephony minutes and approximately 134 million conference calls, facilitated over 260 million 9-1-1 calls, and delivered over 1.2 billion notification calls and data messages. With approximately 750,000 telephony ports to handle conference calls, 9-1-1 public safety calls, alerts and notifications and customer service at June 30, 2013, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new offerings. These ports include approximately 440,000 IP ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our technology-driven platforms allow us to provide a broad range of complementary platform and agent-based service offerings to our diverse client base.

Financial Operations Overview

Revenue

In our Unified Communications segment, our conferencing and collaboration services, event services and IP-based unified communication solutions are generally billed on a per participant minute or per seat basis and our alerts and notifications services are generally billed on a per message or per minute basis. Billing rates for these services vary depending on participant geographic location, type of service (such as audio, video or web conferencing) and type of message (such as voice, text, email or fax). We also charge clients for additional features, such as conference call recording, transcription services or professional services. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends. We expect this trend to continue for the foreseeable future.

In our Communication Services segment, our emergency communications solutions are generally billed per month based on the number of billing telephone numbers or cell towers covered under each client contract. We also bill monthly for our premise-based database solution. In addition, we bill for sales, installation and maintenance of our communication equipment technology solutions. Our platform-based and agent-based customer service solutions are generally billed on a per minute or per hour basis. We are generally paid on a contingent fee basis for our receivables management and overpayment identification and recovery services as well as for certain other agent-based services. Our telephony / interconnect services are generally billed based on usage of toll-free origination services.

Cost of Services

The principal component of cost of services for our Unified Communications segment is our variable telephone expense. Significant components of our cost of services in this segment also include labor expense, primarily related to commissions for our sales force. Because the services we provide in this segment are largely platform-based, labor expense is less significant than the labor expense we experience in our Communication Services segment.

The principal component of cost of services for our Communication Services segment is labor expense. Labor expense in costs of services primarily reflects compensation and benefits for the agents providing our agent-based services, but also includes compensation for personnel dedicated to emergency communications database management, manufacturing and development of our premise-based public safety solution as well as commissions for our sales professionals. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients. A significant component of our cost of services in this segment also includes variable telephone expense.


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Selling, General and Administrative Expenses

The principal component of our selling, general and administrative expenses ("SG&A") is salary and benefits for our sales force, client support staff, technology and development personnel, senior management and other personnel involved in business support functions. SG&A also includes certain fixed telephone costs as well as other expenses that support the ongoing operation of our business, such as facilities costs, certain service contract costs, equipment depreciation and maintenance, impairment charges and amortization of finite-lived intangible assets.

Key Drivers Affecting Our Results of Operations

Factors Related to Our Indebtedness.

On March 27, 2013, we completed an initial public offering ("IPO") of 21,275,000 shares of our common stock, par value $0.001 per share, registered pursuant to a Registration Statement on Form S-1 (File No. 333-162292). Proceeds received from the IPO, net of the underwriter's discount were $401.0 million. The Company paid $2.0 million in Sponsor management fees in the six months ended June 30, 2013 and an additional $23.0 million on July 1, 2013, to an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the "Sponsors") pursuant to that certain management agreement, dated October 24, 2006, and that certain management letter agreement, dated March 8, 2013. The management agreement terminated in accordance with its terms immediately prior to completion of the IPO.

On April 26, 2013, we redeemed our 11% $450.0 million principal amount senior subordinated notes due 2016. The redemption price was equal to 103.667% of the principal amount of the senior subordinated notes. During the six months ended June 30, 2013, we recorded a $16.5 million subordinated debt call premium and $6.6 million accelerated amortization of deferred financing costs as a non-operating expense. In addition, we paid accrued and unpaid interest on the redeemed senior subordinated notes up to April 26, 2013. Following this redemption, none of the senior subordinated notes remain outstanding.

On February 20, 2013, West, certain domestic subsidiaries of West, as subsidiary borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the various lenders party thereto modified our senior secured credit facilities ("Senior Secured Credit Facilities") by entering into Amendment No. 3 to Amended and Restated Credit Agreement (the "Third Amendment"), amending our Amended and Restated Credit Agreement, dated as of October 5, 2010, by and among West, Wells Fargo, as administrative agent, and the various lenders party thereto, as lenders (as amended by Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 15, 2012, and Amendment No. 2 to Amended and Restated Credit Agreement, dated as of October 24, 2012, and with the Third Amendment, the "Amended Credit Agreement").

The Third Amendment provided for a reduction in the applicable margins and interest rate floors of all term loans, extended the maturity of a portion of the term loans due July 2016 to June 2018, and added a further step down to the applicable margins of all term loans upon satisfaction of certain conditions, which conditions were satisfied effective as of April 30, 2013 and continue to apply as of June 30, 2013. As of the effective date of the Third Amendment, we had the following senior secured term loans outstanding:

Term loans in an aggregate principal amount of approximately $2.1 billion (the "2018 Maturity Term Loans"). The 2018 Maturity Term Loans will mature on June 30, 2018, and the interest rate margins applicable to the 2018 Maturity Term Loans were 3.25%, for LIBOR rate loans, and 2.25%, for base rate loans; and

Term loans in an aggregate principal amount of approximately $317.7 million ($316.1 million at June 30, 2013) (the "2016 Maturity Term Loans"; and, together with the 2018 Maturity Term Loans, the "Term Loans"). The 2016 Maturity Term Loans will mature on July 15, 2016, and the interest rate margins applicable to the 2016 Maturity Term Loans were 2.75%, for LIBOR rate loans, and 1.75%, for base rate loans.


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The Amended Credit Agreement also provides for interest rate floors applicable to the Term Loans. The interest rate floors are 1.00% for LIBOR rate loans and 2.00% for base rate loans. The Term Loans are subject to an additional step down to the applicable margins by 0.50% conditioned upon our completion of an IPO and attaining and maintaining a total leverage ratio less than or equal to 4.75:1.00. Effective as of April 30, 2013, we certified that our total leverage ratio was less than 4.75:1.00 and, in accordance with the terms of the Amended Credit Agreement, the interest rate margins applicable to the 2018 Maturity Term Loans were reduced by 0.50% to 2.75% for LIBOR rate loans and 1.75% for base rate loans, and the interest rate margins applicable to the 2016 Maturity Term Loans were reduced by 0.50% to 2.25% for LIBOR rate loans and 1.25% for base rate loans. The reduced interest rate margins are subject to a 0.50% increase in the event our leverage ratio as of the end of our quarterly reporting period exceeds 4.75:1:00. Effective as of April 30, 2013, we certified that our total leverage ratio was less than 4.75:1.00, which conditions were satisfied as of April 30, 2013 and continue to apply as of June 30, 2013.

Evolution to Predominately Platform-based Solutions Business. We have evolved into a diversified and platform-based technology-driven service provider. Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 73% for the six months ended June 30, 2013 and our operating income from platform-based services has grown from 53% of total operating income to 93% over the same period. As in the past, we will continue to seek and invest in higher margin businesses, irrespective of whether the associated services are delivered to our customers through an agent-based or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent-based services and as a result will continue to increase as a percentage of our total revenue. However, many of our customers require an integrated service offering that incorporates both agent-based and platform-based services-for example, an automated voice response system with the option for the client's customer to speak to an agent. Accordingly, we expect agent-based services will continue to represent a meaningful portion of our service offerings for the foreseeable future.

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our business strategy. We will continue to seek opportunities to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2005, we have invested approximately $2.0 billion in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability.

Key Factors Related to Cash Flows

Our expectation is to return some portion of our free cash flow to shareholders each year through a regular quarterly dividend. We expect to use the remaining free cash flow to reduce leverage and fund acquisitions to accelerate growth. Our goal is to reduce net leverage to less than 4x adjusted EBITDA by the end of the first quarter of 2015 through free cash flow generation and EBITDA growth.

Our pro forma adjusted interest expense for the six months ended June 30, 2013 was $94.7 million compared to actual interest expense of $130.2 million. Pro forma adjusted interest expense reflects the impact of lower debt balances and lower interest rates applicable following our IPO. Approximately $15.8 million of the pro forma adjustment relates to the savings for the full six months ended June 30, 2013, from the redemption of the $450 million senior subordinated notes and the remaining $19.7 million relates to the savings associated with the pricing of the Third Amendment to our senior secured term loan facilities as if these transactions had been completed January 1, 2013. The amendment of the $2.4 billion senior secured term loan facilities and redemption of the 11% senior subordinated notes will reduce our annual cash interest expense by approximately $97.0 million. Further, the Third Amendment extended the maturity of $1.1 billion of term loans to June 2018.


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On April 26, 2013, we redeemed the entire outstanding $450.0 million principal amount of our 11% senior subordinated notes. The redemption price was 103.667% of the principal amount of the senior subordinated notes. This redemption will reduce our annual cash interest expense run rate by $49.5 million.

The completion of our senior term loan amendment on February 20, 2013 and redemption of the senior subordinated notes on April 26, 2013, provides us with annual run rate interest savings of $96.5 million and further benefits us with an improved capital structure, reduced leverage and greater overall financial flexibility.

Overview of 2013 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the three and six months ended June 30, 2013. This summary is not intended as a substitute for the detail provided elsewhere in this quarterly report or for our consolidated financial statements and notes thereto included elsewhere in this quarterly report.

Our revenue increased $10.8 million, or 1.6% during the three months ended June 30, 2013 compared to revenue during the three months ended June 30, 2012.

Our revenue increased $32.0 million, or 2.5% during the six months ended June 30, 2013 compared to revenue during the six months ended June 30, 2012.

Our operating income increased $13.2 million, or 10.9% during the three months ended June 30, 2013 compared to revenue during the three months ended June 30, 2012.

Our operating income decreased $7.7 million, or 3.3%, during the six months ended June 30, 2013 compared to operating income during the six months ended June 30, 2012. This decrease in operating income is primarily the result of $28.0 million of expenses recorded in connection with our IPO.

Our cash flows from operating activities increased $58.3 million, or 43.1%, during the six months ended June 30, 2013 compared to cash flows from operating activities during the six months ended June 30, 2012.

On February 20, 2013, we amended our senior secured term loan facilities. The Amended Credit Agreement provided for a reduction in the applicable margins and interest rate floors of all term loans and extends the maturity of a portion of the term loans due July 2016 to June 2018. The applicable margins for each of the term loan tranches reflect a further step down of 0.50% based upon our initial public offering completed in March 2013 and the Company maintaining a total leverage ratio less than or equal to 4.75:1.00, which conditions were satisfied effective as of April 30, 2013 and continue to apply as of June 30, 2013.

On March 8, 2013, we completed a 1-for-8 reverse stock split and amended our Amended and Restated Certificate of Incorporation by filing an amendment with the Delaware Secretary of State. We also adjusted the share amounts under our Executive Incentive Plan and Nonqualified Deferred Compensation Plan as a result of the 1-for-8 reverse stock split.

On March 27, 2013, we completed our IPO of 21,275,000 shares of common stock. Proceeds from the offering, net of the underwriting discounts and commissions were $401.0 million.

On April 26, 2013, we redeemed our $450.0 million 11% senior subordinated notes. The redemption price was 103.667% of the principal amount of the senior subordinated notes. These notes were paid in full.

On May 16, 2013, we paid a $0.225 per common share quarterly dividend. The total dividend was $18.8 million paid to shareholders of record as of the close of business on May 6, 2013.


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On April 26, 2013, Moody's Investors Service upgraded West Corporation's corporate family rating to B1 from B2.

On June 19, 2013, Standard & Poors Ratings Services upgraded West Corporation's corporate credit rating to BB- from B+ and raised the senior secured issue-level rating to BB from B+.

Comparison of the Three and Six Months Ended June 30, 2013 and 2012

Revenue: Total revenue for the three months ended June 30, 2013 increased $10.8 million, or 1.6%, to $672.7 million from $661.9 million for the three months ended June 30, 2012. This increase was entirely attributable to organic growth.

For the six months ended June 30, 2013, total revenue increased $32.0 million, or 2.5%, to $1,332.9 million from $1,301.0 million for the six months ended June 30, 2012. This increase during the six months ended June 30, 2013 included acquisition revenue of $20.9 million from the acquisition of HyperCube. The HyperCube acquisition closed on March 23, 2012. HyperCube's results have been included in the Communication Services segment since that date. The remaining $11.1 million increase in revenue for the six months ended June 30, 2013 was due to organic growth.

For the three months ended June 30, 2013 and 2012, our largest 100 clients represented 56% of our total revenue. For the six months ended June 30, 2013 and 2012, our largest 100 clients represented 55% of our total revenue.

Revenue by business segment:

                                       For the three months ended June 30,                                 For the six months ended June 30,
                                      2013               2012           Change        % Change           2013              2012            Change        % Change
Revenue in thousands:
Unified Communications            $    382,869        $  369,527       $ 13,342             3.6 %     $   750,437       $   729,174       $ 21,263             2.9 %
Communication Services                 296,778           295,227          1,551             0.5 %         593,229           576,964         16,265             2.8 %
Intersegment eliminations               (6,952 )          (2,859 )       (4,093 )            NM           (10,747 )          (5,181 )       (5,566 )            NM

Total                             $    672,695        $  661,895       $ 10,800             1.6 %     $ 1,332,919       $ 1,300,957       $ 31,962             2.5 %

NM-Not Meaningful

For the three months ended June 30, 2013, Unified Communications revenue increased $13.3 million, or 3.6%, to $382.9 million from $369.5 million for the three months ended June 30, 2012. The increase in revenue for the three months ended June 30, 2013 was entirely attributable to organic growth, which resulted primarily from the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless conferencing services, which accounts for the majority of our conferencing revenue, grew approximately 13.9% for the three months ended June 30, 2013 over the three months ended June 30, 2012, while the average rate per minute for reservationless services declined by approximately 8.4% for the three months ended June 30, 2013 over the three months ended June 30, 2012.

For the six months ended June 30, 2013, Unified Communications revenue increased $21.3 million, or 2.9%, to $750.4 million from $729.2 million for the six months ended June 30, 2012. The $21.3 million of Unified Communications revenue growth was entirely due to organic growth. The increase was attributable primarily to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless conferencing services, which accounts for the majority of our conferencing revenue, grew approximately 9.6% for the six months ended June 30, 2013 over the six months ended June 30, 2012, while the average rate per minute for reservationless services declined by approximately 7.3% .


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Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends which we expect to continue for the foreseeable future.

During the three months ended June 30, 2013, Unified Communication's revenue in the Asia Pacific ("APAC") and Europe, Middle East and Africa ("EMEA") regions was $121.3 million, an increase of 6.8% over the three months ended June 30, 2012. During the six months ended June 30, 2013, Unified Communication's revenue in APAC and EMEA regions grew to $238.4 million, an increase of 4.7% over the six months ended June 30, 2012.

For the three months ended June 30, 2013, Communication Services revenue increased $1.6 million, or 0.5%, to $296.8 million from $295.2 million for the three months ended June 30, 2012. The increase in revenue for the three months ended June 30, 2013 was entirely organic growth. Revenue from agent-based services for the three months ended June 30, 2013, increased $1.4 million compared with the three months ended June 30, 2012. This increase included a $1.7 million decline in direct response revenue. During the three months ended June 30, 2013, revenue from platform-based services within Communication Services increased $0.2 million compared with the three months ended June 30, 2012.

For the six months ended June 30, 2013, Communication Services revenue increased $16.3 million, or 2.8%, to $593.2 million from $577.0 million for the six months ended June 30, 2012. This increase during the six months ended June 30, 2013 included acquisition revenue of $20.9 million from the acquisition of HyperCube. The HyperCube acquisition closed on March 23, 2012 and its results have been included in the Communication Services segment since that date. Revenue from agent-based services for the six months ended June 30, 2013, decreased $10.1 million compared with the six months ended June 30, 2012. This decrease included a $6.9 million decline in direct response revenue. During the six months ended June 30, 2013, revenue from platform-based services within Communication Services increased $26.4 million compared with the six months ended June 30, 2012.

Cost of services: Cost of services consists of direct labor, telephone expense, sales commissions and other costs directly related to providing services to clients. Cost of services for the three months ended June 30, 2013 increased $4.7 million, or 1.5%, to $311.9 million, from $307.3 million for the three months ended June 30, 2012. As a percentage of revenue, cost of services was 46.4% for the three months ended June 30, 2013 and 2012. Cost of services for the six months ended June 30, 2013 increased $22.0 million, or 3.7%, to $621.0 million from $599.0 million for the six months ended June 30, 2012. As a percentage of revenue, cost of services increased to 46.6% for the six months ended June 30, 2013, compared to 46.0% for the six months ended June 30, 2012.

Cost of services by business segment:

                                                                  For the three months ended June 30,                                                      For the six months ended June 30,
                                                                          % of                          % of                          %                           % of                          % of                          %
                                                           2013          Revenue         2012          Revenue        Change        Change         2013          Revenue         2012          Revenue        Change        Change
In thousands:
Unified Communications                                   $ 162,546           42.5 %    $ 156,550           42.4 %    $  5,996           3.8 %    $ 319,652           42.6 %    $ 305,291           41.9 %    $ 14,361           4.7 %
Communication Services                                     155,710           52.5 %      153,053           51.8 %       2,657           1.7 %      311,100           52.4 %      297,796           51.6 %      13,304           4.5 %
Intersegment eliminations                                   (6,317 )           NM         (2,317 )           NM        (4,000 )          NM         (9,746 )           NM         (4,099 )           NM        (5,647 )          NM

Total                                                    $ 311,939           46.4 %    $ 307,286           46.4 %    $  4,653           1.5 %    $ 621,006           46.6 %    $ 598,988           46.0 %    $ 22,018           3.7 %

NM-Not Meaningful

Unified Communications cost of services for the three months ended June 30, 2013 increased $6.0 million, or 3.8%, to $162.5 million from $156.6 million for the three months ended June 30, 2012. The increase is primarily driven by increased service volume. As a percentage of this segment's revenue, Unified . . .

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