McLean, Virginia – (The Hosting News) – November 16, 2006 –
Integrated communications services, hosting and VoIP provider, PRIMUS Telecommunications Group, has reported continued sequential quarterly improvement in operating results revenue from broadband, local, wireless and VoIP services.
The Company reported net income for the quarter of $0.1 million, compared to a net loss of ($220) million in the prior quarter and a net loss of ($51) million in the third quarter 2005. As a result, the Company reported basic and diluted income per common share of $0.00 in the third quarter 2006, as compared to a basic and diluted loss per common share of ($0.51) in the year-ago quarter.
K. Paul Singh, Chairman and Chief Executive Officer of PRIMUS explained, ”We are pleased to report the fourth consecutive quarter of steady improvement in our recurring Adjusted EBITDA trajectory. Our improved performance is driven by continuing implementation of our previously announced strategy of maximizing cash flow from operations by driving down costs while focusing our available resources on high margin products and services. Execution of this strategy has resulted in the continued shedding of low margin retail revenue and its associated costs, while continued growth in new services and other high margin products has resulted in improved operating margins. That progress, together with aggressive management of SG and A expense, has enabled us to increase Adjusted EBITDA. Ã¢â‚¬Å“Our performance in recent quarters has re-established a stable base of EBITDA generation from operations. While such progress is encouraging, we must build on this success by continuing to increase the margin contribution from new products and by reducing our interest expense in order to generate adequate levels of cash flow to realize the full growth potential of PRIMUS and meet our future debt maturity obligations. We are actively pursuing initiatives to become Free Cash Flow breakeven on an operating basis through a combination of improved EBITDA performance and reduced interest expense.”
The Company’s improved operating performance has resulted from continued execution of the four-pronged PRIMUS Action Plan: Prioritize revenue growth in new services, while concentrating available resources for optimum effectiveness Ã¢â‚¬â€œ Revenue from broadband, local, wireless and VOIP initiatives grew to $35 million in the quarter, an increase of 35% from the third quarter 2005. In addition to consistent quarterly revenue growth from new services, profitability from these services is also increasing, providing clear support for the CompanyÃ¢â‚¬â„¢s Action Plan. Enhance margins by increasing scale on the new initiatives, adding broadband infrastructure in high density locations and migrating customers onto the PRIMUS network Ã¢â‚¬â€œ PRIMUS now has over 183,000 DSL customers in Australia and Canada.
The Australian and Canadian DSLAM networks are comprised of 181 and 65 nodes, respectively. There are now over 88,000 services (local and broadband) provisioned directly on the CompanyÃ¢â‚¬â„¢s DSLAM facilities in Australia and Canada. Margins from these on-net services are almost double those of off-net services. To capitalize on the recent completion of the Canadian DSLAM network, the Company elected to increase advertising to accelerate growth in on-net services.
After four consecutive quarters of reduced SG and A expense, the Company reported a third quarter total of $72 million, essentially flat with the prior quarter despite a $1 million increase in advertising, but down over $20 million from the prior year quarter. PrimusÃ¢â‚¬â„¢s aggressive expense reduction efforts have also focused on a range of cost of revenue reductions in the current quarter and such efforts are continuing. Additionally, the Australian regulatory commission issued an Interim Determination Letter lowering charges for on-net local loop services paid to Telstra, which is one of the regulatory matters currently under review. If this interim ruling is affirmed, it is estimated that PRIMUS’s annual expense for these services will be reduced by approximately $2 million. Strengthen the balance sheet opportunistically through potential deleveraging and equity capital infusion.
During the first three quarters of 2006 Primus successfully: (1) exchanged $27 million principal amount of the 5.75% Convertible Subordinated Debentures due 2007 for $27 million of newly created Step-Up Convertible Debentures due 2009; (2) exchanged $3 million principal amount of its 12.75% Senior Notes for 1.8 million shares of common stock; (3) exchanged $32 million principal amount of 5% Exchangeable Senior Notes for $55 million principal amount of 3.75% Convertible Senior Notes due 2010; (4) issued $24 million principal amount of 5% Exchangeable Senior Notes for $18 million in cash (net of issuance costs); (5) raised $13 million cash proceeds from the sale of its Indian subsidiary; and (6) sold $5 million of newly issued common stock to a private investor. To attain the targeted levels of Free Cash Flow it is imperative that substantial further progress be made in reducing overall debt and interest expenses – an area that is a priority.
Third Quarter 2006 Financial Results The Company sold its India-based operations at the end of the second quarter 2006. From an accounting perspective, the sale has been treated as a ”discontinued operation” and, therefore, those operating results are excluded from the individual line items of the statement of operations in all prior period results, and the income is shown as a separate line item on the statement of operations. Third quarter 2006 revenue was $248 million, down 2% sequentially from $252 million in the prior quarter and down 15% from $290 million in the third quarter 2005.
Thomas R. Kloster, Chief Financial Officer of PRIMUS added, ”The $4 million sequential revenue decline was driven largely by a $4 million reduction in low-margin prepaid services revenue, representing the continued shedding of unprofitable revenue as part of our previously announced restructuring of the prepaid business. The balance of the sequential revenue decline was comprised of a $2 million decrease in high-margin retail services, including legacy voice and dial-up Internet services. These decreases were partially offset by an increase of $2 million as a result of the weakening United States dollar. While we are pleased by the continued growth of our high margin initiatives such as broadband, local, wireless and VOIP services — which generated $35 million of revenue and improved margins in the third quarter 2006 — we need to accelerate this growth in order to compensate fully for the margin loss from the revenue decline in legacy services.”
Net revenue from data/Internet and VOIP services was $73 million (29% of total net revenue for the quarter), up slightly from the prior quarter. Geographic revenue mix changed modestly with 20% coming from the United States, 28% from Canada, 21% from Europe and 31% from Asia-Pacific. The mix of net revenue was 78% retail (52% residential and 26% business) and 22% wholesale. SG and A expense was $72 million (29.3% of net revenue), consistent with $72 million in the prior quarter (28.7% of net revenue) and down from $93 million (32.0% of net revenue) in the third quarter 2005. As compared to the prior quarter, advertising expense increased by $1 million and the Company incurred a $1 million expense for European administrative taxes. These increases were offset by continued declines in commission expense primarily related to the prepaid services revenue decline. Income from operations was $10 million in the third quarter 2006 versus a loss of ($228) million (including a $223 million non-cash asset impairment write-down and loss on sale or disposal of assets, and a $4 million non-cash expense related to the restructuring of the prepaid services business) in the prior quarter and a loss of ($34) million in the third quarter 2005.
The prior quarterÃ¢â‚¬â„¢s asset impairment write-down reduced the level of depreciation and amortization expense to $7 million during the third quarter 2006 from $17 million in the prior quarter. Adjusted EBITDA of $16.6 million, as calculated in the attached schedules, compares with $11.5 million in the prior quarter (which included a $4.1 million non-cash prepaid services business restructuring charge) and $1.1 million in the third quarter 2005. Interest expense for the third quarter 2006 was $13 million, down from $14 million in both the prior and year-ago quarters. Net income was $0.1 million for the quarter (including a $4 million net gain on foreign currency transactions) compared to a net loss of ($220) million (including a $223 million asset impairment write-down and loss on sale or disposal of assets, $7 million of income from sale of discontinued operations, a $5 million gain on early extinguishment of debt, a $7 million net gain from foreign currency transactions and a $4 million non-cash expense related to restructuring the prepaid services business) in the prior quarter and a net loss of ($51) million (including a $13 million loss on disposal of assets, a $4 million loss on early extinguishment of debt and a $2 million net gain from foreign currency transactions) in the third quarter 2005. Basic and Diluted Income Per Common Share was $0.00 for the third quarter 2006, compared to Basic and Diluted Loss Per Common Share of ($1.93) for the second quarter 2006 and Basic and Diluted Loss Per Common Share of ($0.51) in the year-ago quarter. Liquidity and Capital Resources PRIMUS ended the third quarter 2006 with a cash balance of $80 million, including $9 million of restricted funds, as compared to $96 million, including $8 million of restricted funds, as of June 30, 2006.
For the quarter, a net $6 million in cash was used for operating activities. This total reflects $23 million in cash used in operating activities (including $16 million in cash interest payments, $2 million for tax payments, $2 million for fees related to the issuance of the 5% Exchangeable Senior Notes in the second quarter, $1 million being transferred to restricted cash and $2 million for working capital), partially offset by $17 million of Adjusted EBITDA. In addition, $8 million of cash was used for capital expenditures and $2 million for scheduled principal reductions on debt obligations. Free Cash Flow for the third quarter 2006, as calculated in the attached schedules, was negative $14 million as compared to negative $1 million in the prior quarter and a negative $33 million in the third quarter 2005. The first and third quarters have higher cash interest payments based on the timing of debt interest due dates. The $71 million unrestricted cash balance as of September 30, 2006 is expected to remain relatively stable as of December 31, 2006. However, first quarter 2007 scheduled principal maturities of $23 million of the 5.75% Convertible Subordinated Debentures and $8 million for a vendor financing will result in a significant decrease in unrestricted cash levels during the first quarter of 2007. As a result, PrimusÃ¢â‚¬â„¢s highest management priority is to explore potential means to reduce the cash outflow in the first quarter of 2007.
The principal amount of PRIMUS’s long-term debt obligations as of September 30, 2006 were $641 million, down from $643 million at June 30, 2006. The Company and/or its subsidiaries will evaluate and determine on a continuing basis, depending upon market conditions and the outcome of events and uncertainties described within any Ã¢â‚¬Å“forward-looking statementÃ¢â‚¬Â descriptions in this release and its SEC filings, the most efficient use of the CompanyÃ¢â‚¬â„¢s capital and resources, including investment in the CompanyÃ¢â‚¬â„¢s network, systems, and new product initiatives, purchasing, refinancing, exchanging, tendering for or retiring certain of the CompanyÃ¢â‚¬â„¢s outstanding debt securities in privately negotiated transactions, open market transactions or by other direct or indirect means or purchasing itÃ¢â‚¬â„¢s equity in the open market to the extent permitted by existing covenants.
Founded in 1994, PRIMUS Telecommunications Group, Incorporated, is based in McLean, Virginia and is an integrated communications services provider offering international and domestic voice, voice-over-Internet protocol (VOIP), Internet, wireless, data and hosting services to business and residential retail customers and other carriers located primarily in the United States, Canada, Australia, the United Kingdom and western Europe. PRIMUS provides services over its global network of owned and leased transmission facilities, including approximately 350 points-of-presence (POPs) throughout the world, ownership interests in undersea fiber optic cable systems, 16 carrier-grade international gateway and domestic switches, and a variety of operating relationships to provide delivery traffic worldwide.
To learn more about the conference call, please visit: www.primustel.com.