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WSTC > SEC Filings for WSTC > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for WEST CORP

Form 10-Q for WEST CORP


2-May-2014

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, IP communications, interactive services, public safety services, business process outsourcing and telecom 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.

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex 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 delivering operational excellence. In 2013, we managed over 58 billion telecom minutes and approximately 148 million conference calls, facilitated over 290 million 9-1-1 calls, and our IVR, hosted contact center, and alerts and notifications platforms received and delivered over 2.8 billion calls and data messages. With approximately 755,000 telecom ports to handle conference calls, alerts and notifications and customer service calls at March 31, 2014, 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 465,000 IP ports, which we believe provide


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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 automated and agent service offerings to our diverse client base.

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 three months ended March 31, 2014 and our operating income from platform-based services has grown from 53% of total operating income to 92% 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 services or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent services and as a result to continue to increase as a percentage of our total revenue.

Financial Operations Overview

Revenue

In our Unified Communications segment, our interactive services are generally billed on a per minute or per message basis. Our conferencing and collaboration services and IP communications services are generally billed on a per participant minute or per seat 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 public safety services 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 agent services 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 services. Our telecom 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 services, but also includes compensation for personnel dedicated to public safety 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. Significant components of our cost of services in this segment also include variable telephone expense.

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 and amortization of finite-lived intangible assets.


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Key Drivers Affecting Our Financial Position and Results of Operations

Factors Related to Our Indebtedness. On each of February 20, 2013 and January 24, 2014, 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") and Amendment No. 4 to Amended and Restated Credit Agreement ("Fourth Amendment"), respectively, in each case 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, Amendment No. 2 to Amended and Restated Credit Agreement, dated as of October 24, 2012, the Third Amendment and the Fourth 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 under the Amended Credit Agreement upon satisfaction of certain conditions, which conditions were satisfied effective as of April 30, 2013, continued to apply as of December 31, 2013 and were removed as a condition pursuant to the Fourth Amendment.

The Fourth Amendment provided for a 25 basis point reduction in the applicable LIBOR interest rate margins and a 25 basis point reduction in the LIBOR interest rate floors of all Term Loans (as defined below). The Fourth Amendment also provided for interest rate floors applicable to the Term Loans. The interest rate floors effective March 31, 2014 were 0.75% for LIBOR rate loans and 1.75% for base rate loans.

As of March 31, 2014, we had outstanding the following senior secured term loans:

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 2.50% for LIBOR rate loans and 1.50% for base rate loans; and

Term loans in an aggregate principal amount of approximately $312.1 million (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 2.0% for LIBOR rate loans and 1.0% for base rate loans.

On August 26, 2013, our revolving trade accounts receivable financing facility was amended and extended. The amended and extended facility provides for $185.0 million in available financing an extension of the maturity date to June 30, 2018, a reduction of the unused commitment fee to 0.45% from 0.50% and a decrease in the LIBOR spread on borrowings to 135 basis points from 150 basis points. As of April 9, 2014, we amended the amended and extended facility to include additional originators.

Overview of 2014 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the three months ended March 31, 2014. This summary is not intended as a substitute for the detail provided elsewhere in this quarterly report or for our condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report.

Our revenue increased $15.9 million, or 2.4% during the three months ended March 31, 2014 compared to revenue during the three months ended March 31, 2013.


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Our operating income increased $28.6 million, or 30.6%, during the three months ended March 31, 2014 compared to operating income during the three months ended March 31, 2013. This increase in operating income is primarily the result of $28.0 million of expenses recorded in connection with our IPO during the first quarter of 2013.

On January 24, 2014, we amended our senior secured credit facilities which provided for a reduction in applicable margins and interest rate floors of all Term Loans.

Effective January 1, 2014, we implemented a revised organizational structure. Under the revised organizational structure, automated call processing services management and operations has been moved from the Communication Services segment to the Unified Communications segment and has been combined with alerts and notifications to form interactive services. Beginning in the first quarter of 2014, all prior period comparative information has been recast to reflect this change as if it had taken place in all periods presented.

Results of Operations

Comparison of the Three Months Ended March 31, 2014 and 2013

Revenue: Total revenue for the three months ended March 31, 2014 increased approximately $15.9 million, or 2.4%, to $676.2 million from $660.2 million for the three months ended March 31, 2013. This increase during the three months ended March 31, 2014 was entirely attributable to organic growth.

For the three months ended March 31, 2014 and 2013, our largest 100 clients represented 54% of total revenue.

Revenue by segment:

                                                                 For the three months ended March 31,
                                                      % of Total                       % of Total
                                        2014           Revenue           2013           Revenue          Change        % Change
Revenue in thousands:
Unified Communications                $ 404,917              59.9 %    $ 395,054              59.8 %    $   9,863            2.5 %
Communication Services                  285,421              42.2 %      269,169              40.8 %       16,252            6.0 %
Intersegment eliminations               (14,186 )            -2.1 %       (3,999 )            -0.6 %      (10,187 )           NM

Total                                 $ 676,152             100.0 %    $ 660,224             100.0 %    $  15,928            2.4 %

NM-Not Meaningful

For the three months ended March 31, 2014, Unified Communications revenue increased $9.9 million, or 2.5%, to $404.9 million from $395.1 million for the three months ended March 31, 2013. The increase was attributable primarily to the addition of new customers as well as an increase in usage of our conferencing and collaboration services and IP communication 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 10.6%, for the three months ended March 31, 2014 over the three months ended March 31, 2013. For the three months ended March 31, 2014, the average rate per minute for reservationless conferencing services declined by approximately 6.4%. 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. Our Unified Communications international revenue grew to $123.0 million, an increase of 5.1% over the three months ended March 31, 2013.

For the three months ended March 31, 2014, Communication Services revenue increased $16.3 million, or 6.0%, to $285.4 million from $269.2 million for the three months ended March 31, 2013. Revenue from agent services for the three months ended March 31, 2014, increased $2.4 million compared with the three months ended March 31, 2013. Revenue from public safety and telecom services for the three months ended March 31, 2014 increased $13.8 million compared with the three months ended March 31, 2013. $10.0 million of the increase in public safety and telecom services revenue is internal with other West entities and eliminated in our consolidated results.


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Cost of services: Cost of services consists of direct labor, telephone expense, commissions and other costs directly related to providing services to our clients. Cost of services increased approximately $7.6 million, or 2.5%, in the three months ended March 31, 2014, to $316.7 million, from $309.1 million for the three months ended March 31, 2013. As a percentage of revenue, cost of services remained at 46.8% in the three months ended March 31, 2014, the same percentage during the three months ended March 31, 2013.

Cost of services by segment:

                                                                 For the three months ended March 31,
                                    2014           % of Revenue          2013           % of Revenue         Change         % Change
Cost of services in thousands:
Unified Communications            $ 167,020                 41.2 %     $ 163,553                 41.4 %     $   3,467             2.1 %
Communication Services              162,690                 57.0 %       148,427                 55.1 %        14,263             9.6 %
Intersegment eliminations           (13,028 )                 NM          (2,913 )                 NM         (10,115 )            NM

Total                             $ 316,682                 46.8 %     $ 309,067                 46.8 %     $   7,615             2.5 %

NM-Not meaningful

Unified Communications cost of services for the three months ended March 31, 2014 increased $3.5 million, or 2.1%, to $167.0 million from $163.6 million for the three months ended March 31, 2013. The increase is primarily driven by increased service volume. As a percentage of this segment's revenue, Unified Communications cost of services improved to 41.2% for the three months ended March 31, 2014 from 41.4% for the three months ended March 31, 2013. The decrease in cost of services as a percentage of revenue is due primarily to changes in the product mix.

Communication Services cost of services increased $14.3 million, or 9.6%, for the three months ended March 31, 2014 to $162.7 million from $148.4 million for the three months ended March 31, 2013. The increase in cost of services for the three months ended March 31, 2014 was driven by increased service volume primarily for internal platform-based services with other West entities and eliminated in our consolidated results. As a percentage of this segment's revenue, Communication Services cost of services increased to 57.0% for the three months ended March 31, 2014 from 55.1%, for the three months ended March 31, 2013. The increase in cost of services as a percentage of revenue for the three months ended March 31, 2014 was primarily due to an increase in internal platform-based services. For the three months ended March 31, 2014 the increase in internal platform-based cost of services had a 1.4% impact on Communication Services cost of services as a percentage of revenue.

Selling, general and administrative ("SG&A") expenses: SG&A expenses decreased by approximately $20.3 million, or 7.9%, to $237.6 million for the three months ended March 31, 2014 from $257.9 million for the three months ended March 31, 2013. SG&A expenses in the first quarter of 2013 included $25.0 million for Sponsor management fees and related termination of the management agreement in connection with the IPO and $3.0 million of IPO related bonuses (collectively, the "IPO Sponsor Fees and IPO Bonuses"). As a percentage of revenue, SG&A expenses improved to 35.1% for the three months ended March 31, 2014 from 39.1% for the three months ended March 31, 2013. For the three months ended March 31, 2013, the IPO Sponsor Fees and IPO Bonuses had a 4.3% impact on SG&A expenses as a percentage of revenue.

Selling, general and administrative expenses by segment:

                                                                  For the three months ended March 31,
                                       2014          % of Revenue         2013          % of Revenue        Change         % Change
Selling, general and
administrative expenses in
thousands:
Unified Communications               $ 137,202                33.9 %    $ 150,535                38.1 %    $ (13,333 )          -8.9 %
Communication Services                 101,569                35.6 %      108,418                40.3 %       (6,849 )          -6.3 %
Intersegment eliminations               (1,158 )                NM         (1,086 )                NM            (72 )            NM

Total                                $ 237,613                35.1 %    $ 257,867                39.1 %    $ (20,254 )          -7.9 %

NM-Not meaningful


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Unified Communications SG&A expenses for the three months ended March 31, 2014 decreased $13.3 million, or 8.9%, to $137.2 million from $150.5 million for the three months ended March 31, 2013. As a percentage of this segment's revenue, Unified Communications SG&A expenses was 33.9% for the three months ended March 31, 2014 compared to 38.1% for the three months ended March 31, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Unified Communications were $19.3 million for the three months ended March 31, 2013. Such allocated portion of the IPO Sponsor Fees and IPO Bonuses had a 4.9% impact on SG&A expenses as a percentage of revenue for Unified Communications. The remaining change in Unified Communications SG&A for the three months ended March 31, 2014, was primarily due to increases in compensation and benefits expenses in support of sales initiatives.

Communication Services SG&A expenses decreased $6.8 million, or 6.3%, to $101.6 million for the three months ended March 31, 2014 from $108.4 million for the three months ended March 31, 2013. As a percentage of this segment's revenue, Communication Services SG&A expenses decreased to 35.6% for the three months ended March 31, 2014 from 40.3% for the three months ended March 31, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Communication Services were $8.7 million for the three months ended March 31, 2013. Such allocated portion of the IPO Sponsor Fees and IPO Bonuses had a 3.2% impact on SG&A expenses as a percentage of revenue for Communication Services. The remaining change in Communication Services SG&A for the three months ended March 31, 2014, was primarily due to increases in compensation and benefits expenses in support of sales initiatives.

Operating income: Operating income increased $28.6 million, or 30.6%, to $121.9 million for the three months ended March 31, 2014 from $93.3 million for the three months ended March 31, 2013. As a percentage of revenue, operating income increased to 18.0% for the three months ended March 31, 2014 from 14.1% for the three months ended March 31, 2013. This increase in operating income was primarily the result of the IPO Sponsor Fees and IPO Bonuses recorded during the three months ended March 31, 2013. The IPO Sponsor Fees and IPO Bonuses had a 4.3% impact on operating income as a percentage of revenue.

Operating income by segment:

                                                              For the three months ended March 31,
                                     2014         % of Revenue         2013        % of Revenue        Change       % Change
Operating income in thousands:
Unified Communications             $ 100,695               24.9 %    $ 80,966               20.5 %    $ 19,729           24.4 %
Communication Services                21,162                7.4 %      12,324                4.6 %       8,838           71.7 %

Total                              $ 121,857               18.0 %    $ 93,290               14.1 %    $ 28,567           30.6 %

Unified Communications operating income for the three months ended March 31, 2014 increased approximately $19.7 million, or 24.4% to $100.7 million from $81.0 million for the three months ended March 31, 2013. As a percentage of this segment's revenue, Unified Communications operating income increased to 24.9% for the three months ended March 31, 2014 from 20.5% for the three months ended March 31, 2014. The IPO Sponsor Fees and IPO Bonuses, recorded during the three months ended March 31, 2013 and allocated to Unified Communications had a 4.9% impact on operating income as a percentage of revenue for Unified Communications.

Communication Services operating income increased $8.8 million, or 71.7%, to $21.2 million for the three months ended March 31, 2014 from $12.3 million for the three months ended March 31, 2013. As a percentage of this segment's revenue, Communication Services operating income increased to 7.4% for the three months ended March 31, 2014 from 4.6% for the three months ended March 31, 2013. The IPO Sponsor Fees and IPO Bonuses, recorded during the three months ended March 31, 2013 and allocated to Communication Services had a 3.2% impact on operating income as a percentage of revenue for Communication Services.

Other income (expense): Other income (expense) includes interest expense from borrowings under credit facilities and outstanding notes, the aggregate foreign exchange gain (loss) on affiliate transactions denominated in currencies other than the functional currency and interest income from short-term investments. For the three months ended March 31, 2013, other income (expense) also included the $16.5 million call premium on the redemption of our 11% senior subordinated notes. Other income (expense) for the three months ended March 31, 2014 was ($48.3) million compared to ($88.4) million for the three months ended March 31, 2013. Interest expense for the three months ended March 31, 2014 was ($49.1) million compared to ($72.9) million during the three months ended March 31, 2013. This decrease in interest expense is due to lower effective interest rates on our variable rate senior secured term loan facilities, primarily a result of Third and Fourth Amendments and the effect of redeeming our $450 million principal amount of 11%, senior subordinated notes in April of 2013.


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Net income - Net income increased $43.2 million for the three months ended March 31, 2014 to $46.3 million from $3.1 million for the three months ended March 31, 2013. The increase in net income was driven primarily by $28.6 million higher operating income, $23.8 million lower interest expense, $16.5 million of subordinated debt call premium recorded during the three months ended March 31, 2013 and a lower effective tax rate. Net income includes a provision for income tax expense at an effective rate of approximately 37.1% for the three months ended March 31, 2014, compared to 37.5% for the three months ended March 31, 2013. During the three months ended March 31, 2013, the IPO Sponsor Fees and IPO Bonuses and subordinated debt call premium had a $27.8 million negative impact on net income.

Earnings per common share: Earnings per common share-basic and diluted for the three months ended March 31, 2014 were $0.55 and $0.54, respectively. Earnings per common share-basic and diluted for the three months ended March 31, 2013 were $0.05. During the three months ended March 31, 2013, the IPO Sponsor Fees and IPO Bonuses and subordinated debt call premium had an aggregate impact of $0.43 and $0.42 on earnings per common share-basic and diluted, respectively.

Liquidity and Capital Resources

We have historically financed our operations and capital expenditures primarily through cash flows from operations supplemented by borrowings under our senior secured credit facilities, revolving credit facilities and asset securitization facilities.

Our current and anticipated uses of our cash, cash equivalents and marketable securities are to fund operating expenses, acquisitions, capital expenditures, interest payments, tax payments, quarterly dividends and the repayment of principal on debt.

The following table summarizes our net cash flows by category for the periods presented (dollars in thousands):

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