McClean, Virginia – (The Hosting News) – August 3, 2006 –
Integrated communications and hosting services provider, PRIMUS Telecommunications Group, Incorporated, has reported its financial results for the quarter ending June 30, 2006.
PRIMUS reported second quarter 2006 net revenue of $252 million, down from $270 million in the prior quarter and $291 million in the second quarter of 2005. The Company reported a net loss for the quarter of ($199) million, including ($223) million of non-cash asset impairment write-down and loss on sale or disposal of assets charges compared to a net loss of ($44) million in the second quarter 2005. As a result, the Company reported basic and diluted loss per common share of ($1.75) in the second quarter 2006, as compared to basic and diluted loss per common share of ($0.49) in the year-ago quarter.
Improved Operating Results include:
— Continued Growth in Broadband, Local, Wireless and VOIP Revenue – $33 Million, Up 8% Sequentially
— SG and A Expense Continued to Decline – Down $4 Million, 5% Sequentially
— $11 Million Adjusted EBITDA, After $4 Million Non-Cash PrePaid Business Restructuring Charge
— $228 Million Loss From Operations (After $223 Million Non-Cash Asset Impairment and Loss on Sale or Disposal of Assets Charges)
Transactions Strengthen Balance Sheet:
— Enhanced Liquidity By Raising $31 Million of Net Cash Proceeds Through Issuance of Notes and Sale of Subsidiary
— $96 Million Cash Balance at Quarter End
K. Paul Singh, Chairman and Chief Executive Officer of PRIMUS commented, ”This quarter marked the achievement of two critical near-term goals for the Company: stabilization of our EBITDA performance and successfully addressing our liquidity needs. For three successive quarters we have generated Adjusted EBITDA in the $15 million range, exclusive of non-cash business restructuring items, and believe a stable base has now been established. Equally significant, financing transactions consummated during the last quarter – particularly the sale of our subsidiary in India and the issuance of new 5% Exchangeable Senior Notes due 2009 (the ”5% Notes”) for cash – generated in excess of $31 million in net cash proceeds which enable us to fund fully our business plan for 2006 as well as to meet our debt maturities in February 2007. With adequate cash – we ended the quarter with $96 million – and a stable base for EBITDA generation from operations, we can set our sights on the next goal – generating adequate levels of Free Cash Flow, as calculated in the attached schedules, to meet our obligations.”
Mr. Singh continued,
”We currently estimate that, on a constant currency basis and assuming neutral working capital, PRIMUS needs to generate approximately $80 million in Adjusted EBITDA per year – an average increase of approximately $5 million per quarter from where we are today – to reach Free Cash Flow breakeven. In addition, scheduled principal amortization on debt obligations is approximately $2 million per quarter. The primary objective of our management team is to make sustainable progress over the next several quarters to close the approximate $7 million gap in quarterly Adjusted EBITDA.”
Mr. Singh concluded,
”We are actively pursuing initiatives to reach our Free Cash Flow breakeven target through a combination of interest expense reduction and improved EBITDA performance. A prime area of opportunity is cash interest expense, and our objective is to reduce cash interest expense by approximately $10 million annually. To reach this objective we will pursue a combination of continued debt restructuring opportunities, including utilization of the remaining capacity to issue $144 million of the 5% Notes pari passu with the existing 8% senior notes, and the reduction of debt through the application of cash proceeds from potential sale of assets and/or minority equity interests in our operating subsidiaries. Improved EBITDA performance is also expected to contribute to closing the gap to breakeven Free Cash Flow. While we have already materially reduced our selling, general and administrative (SG and A) costs to compensate for the decline in long distance voice and dial-up Internet revenue, the Company plans further reductions in SG and A expense. Management will also focus on generating more high-margin retail revenue and reducing cost of sales to expand margins. Our management team has successfully responded to many challenges over the years in a highly competitive and turbulent telecom sector. With the goal of Free Cash Flow breakeven in sight, I am confident that our team will intensify its efforts to produce a positive result for our employees and investors.”
Recent accomplishments have resulted from execution on our previously announced four-pronged PRIMUS Action Plan:
— Prioritize revenue growth in new services, while concentrating available resources for optimum effectiveness – Revenue from broadband, local, wireless and VOIP initiatives grew to $33 million in the quarter, up 8% from $31 million in the previous quarter. Retail VOIP services alone generated almost $10 million in revenue during the quarter, up 9% sequentially.
— Enhance margins by increasing scale on the new initiatives, adding broadband infrastructure in high density locations and migrating customers onto the PRIMUS network – 181 DSLAMs are deployed and fully operational in Australia. PRIMUS now has over 144,000 DSL customers in Australia, up 6% sequentially. The pace of on-net migration in Australia may quicken if, as expected, current customer transfer fees (PIC charges) are materially reduced. 65 DSLAM nodes have now been completed in Canada with deployment of an additional 5 nodes targeted in the third quarter. As a result, the Company expects both sales and margins from Canadian local and DSL services to increase.
There are now over 54,000 services provisioned directly on the Company’s DSLAM facilities in Australia and Canada. Margins from these on-net customers are almost double those of off-net customers.
— Continue to drive down expenses through aggressive cost reduction – SG and A expense declined an additional $4 million this quarter as compared to the prior quarter and has declined from $98 million in the second quarter 2005 to $72 million this quarter. In addition, increased efforts to reduce network costs have been successful and benefits are beginning to be realized in the current quarter.
— Strengthen the balance sheet opportunistically through potential deleveraging and equity capital infusion on a prudent basis – During the second quarter, $32.2 million principal amount of 5% Notes were exchanged for $54.8 million principal amount of 3.75% convertible senior notes due 2010. In addition, $24.1 million principal amount of 5% Notes were issued for $18 million in cash, net of issuance costs, and the Company raised $13 million cash proceeds from the sale of its Indian subsidiary.
The Company sold its India based operations at the end of the second quarter 2006. From an accounting perspective, the sale is treated as a ”discontinued operation” and, therefore, the operating results are excluded from the individual line item income statement results in the second quarter 2006, and all prior period results, and the income is shown as a separate line item on the income statement. Accordingly, all amounts related to continuing operations quoted for the second quarter 2006 and comparative periods exclude the operations of the India subsidiary. During both the first and second quarters of 2006, Primus India had net revenue and income from operations of $3 million and $1 million, respectively. Thus, the reported increase in Adjusted EBITDA for the second quarter 2006 does not reflect the results of the Company’s former operations in India.
Second quarter 2006 revenue was $252 million, down 6% sequentially from $270 million in the prior quarter and down 13% from $291 million in the second quarter 2005. Thomas R. Kloster, Chief Financial Officer of PRIMUS commented, ”The $18 million sequential revenue decline was comprised of an expected $15 million reduction in low-margin prepaid services revenue resulting from the previously announced restructuring and associated shedding of unprofitable revenue as part of our shift to a wholesale model. Both prepaid services revenue and the corresponding SG and A expense declined as expected but we anticipate profitability to improve and be more stable going forward. The balance of the sequential revenue decline was comprised of a $5 million decrease in low-margin wholesale revenue, and a decline of $3 million in high-margin retail services, including legacy voice and dial-up Internet services. These decreases were partially offset by an increase of $5 million as a result of the weakening United States dollar. We are pleased with the continued growth of our select initiatives such as broadband, VOIP, local and wireless services which generated $33 million of revenue in the second quarter 2006, up 8% from the prior quarter.”
Net revenue from data/Internet and VOIP services remained stable from the prior quarter at $75 million (29% of total net revenue for the quarter) and up 6% from the second quarter 2005. Geographic revenue mix changed slightly with 19% coming from the United States, 27% from Canada, 22% from Europe and 32% from Asia-Pacific. The mix of net revenue was 80% retail (53% residential and 27% business) and 20% wholesale.
SG and A expenses for the second quarter 2006 continued to decline. SG and A expense was $72 million (28.7% of net revenue), down from $77 million (28.4% of net revenue) in the prior quarter and down from $98 million (33.7% of net revenue) in the second quarter 2005. The sequential decline in SG and A expenses was driven largely by a $3 million decrease in commission expense primarily related to the prepaid services revenue decline, a $1 million decline in salaries and benefits, and a $1 million decline in professional fees, partially offset by a $1 million increase in advertising expense.
Loss from operations was ($228) million in the second quarter 2006 (including a $208 million non-cash asset impairment write-down, a $15 million loss on sale or disposal of assets, and a $4 million non-cash expense related to the restructuring of the prepaid services business) versus a loss of ($5) million in the prior quarter and a loss of ($25) million in the second quarter of 2005. As required by current accounting literature, the Company performed an analysis of the expected future cash flow from its existing assets. Consistent with that analysis the Company recorded a $208 million non-cash asset impairment write-down during this quarter. This charge results in a lowering of the net book value of fixed and intangible assets, thereby reducing future levels of depreciation and amortization expense.
The Company is currently assessing whether its exchange of $32 million principal amount of its 5% Notes for $55 million principal amount of its 3.75% Convertible Senior Notes due 2010 is properly reflected on the attached June 30, 2006 balance sheet. Therefore, certain figures presented in this press release, including the $26 million gain on early extinguishment of debt, may, depending on the outcome of the assessment, differ from those presented in the Company’s Form 10-Q for the quarter ended June 30, 2006. Any potential revisions to the carrying value of the Company’s debt instruments, related gains or expenses recorded in the statement of operations would be non-cash items.
Adjusted EBITDA of $11 million, as calculated in the attached schedules, includes a $4 million non-cash prepaid services business restructuring charge. This compares with $14 million in the prior quarter and a loss of ($3) million in the second quarter 2005. The Adjusted EBITDA figures for the current and prior quarter exclude $1 million per quarter generated from our India operation which is now treated as a discontinued operation from an accounting perspective.
Interest expense for the second quarter 2006 was $14 million, flat from the prior and year-ago quarters.
Net loss for the quarter was ($199) 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 $26 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) compared to a net loss of ($16) million (including a $3 million gain on early extinguishment of debt and $2 million loss on foreign currency transactions) in the first quarter 2006 and a net loss of ($44) million (including a $2 million loss on early extinguishment of debt and a $3 million net loss from foreign currency transactions) in the second quarter 2005.
Adjusted Net Loss, as calculated in the attached schedules, for the second quarter 2006 was a loss of ($17) million, as compared to a loss of ($16) million in the prior quarter and of ($39) million for the year-ago quarter. Adjusted Diluted Loss Per Common Share, as calculated in the attached schedules, was a loss of ($0.15) for the second quarter 2006, compared to Adjusted Diluted Loss Per Common Share of ($0.15) for the first quarter 2006 and Adjusted Diluted Loss Per Common Share of ($0.43) in the year-ago quarter.
PRIMUS ended the second quarter 2006 with an increased cash balance of $96 million, including $8 million of restricted funds, as compared to $68 million, including $9 million of restricted funds, as of March 31, 2006. During the quarter, $6 million in cash was generated from operating activities, $7 million was used for capital expenditures, $18 million was generated in net proceeds from the issuance of the 5% Notes, $13 million was generated from the sale of the Company’s Indian subsidiary and $2 million was used for scheduled principal reductions on debt obligations.
Free Cash Flow for the second quarter 2006, as calculated in the attached schedules, was a negative $1 million as compared to break-even in the prior quarter and a negative $18 million in the second quarter of 2005. The second and fourth quarters are typically lighter interest payment quarters based on the timing of our debt interest payments.
PRIMUS’s long-term debt obligations as of June 30, 2006, exclusive of recorded discount, were $643 million, up from $642 million from March 31, 2006. During the second quarter 2006, the Company exchanged $32.2 million principal amount of new 5% Notes for $54.8 million principal amount of 3.75% convertible senior notes and issued $24.1 million principal amount of 5% Notes for cash proceeds.
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 ”forward-looking statement” descriptions in this release and its SEC filings, the most efficient use of the Company’s capital and resources, including investment in the Company’s network, systems, and new product initiatives, purchasing, refinancing, exchanging, tendering for or retiring certain of the Company’s outstanding debt securities in privately negotiated transactions, open market transactions or by other direct or indirect means or purchasing it’s equity in the open market to the extent permitted by existing covenants.
PRIMUS Telecommunications Group, Incorporated (OTCBB:PRTL) 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 that allow it to deliver traffic worldwide. Founded in 1994, PRIMUS is based in McLean, Virginia.
The management of PRIMUS Telecommunications Group, Incorporated will replay information from its conference call from the live broadcasts on the Company’s web site.
To learn more, please visit: www.primustel.com