Liberty Global Ltd (LBTYK) 2001 Q4 法說會逐字稿

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Good afternoon ladies and gentlemen and welcome to the Priority Telecom results 2001 conference call. I will now like to hand you over to Mr.

Please go ahead sir.

Good afternoon everybody.

My name is , Manager in Customer Relations at Priority Telecom and I would like to welcome the attendance to the Priority Telecom fourth quarter and full year 2001 results call. With me here are David Chadwick, CEO of the company and Steve Beebe the Chief Financial Officer.

Our intent is to provide you during this call with a strategic update, to highlight some of our key achievements in 2001 and Steve will add some flavor to the 2001 financial result. We have posted the presentation on our corporate site for your information and during this call we will refer to some of these slides. At the end of the presentation we will open up for questions you might have.

And with that said, I will now hand it over to David Chadwick the CEO of the company.

Thank you Mark. Good afternoon. Good evening everybody, ladies and gentlemen.

I appreciate everybody taking the time today to spend a little time understanding what we believe to be extremely successful results in year 2001 for Priority Telecom. As a quick matter of self-introduction, as many or most of you saw in the press release announced by the company back in January, I was appointed as the new Chief Executive, back in January, taking over the spot from , part of that having served as the Chief Operating Officer and having moved over here to The Netherlands in the June time frame of year 2000. It's my privilege to lead a really, good experienced team, myself and Steve Beebe my Chief Financial Officer will participate on today's call to walk you through where the company is.

As Mark highlighted, we have put a set of PowerPoint presentation slides out on our Web site and I know given the nature of the call, it's sometimes difficult to give a full presentation, so we're going to give a very abbreviated version of that right now. Spend about 15 minutes, maybe 20 minutes walking through the key highlights associated with our current 2001 results and, then, open the door up for all potential questions or issues for clarification.

For those who might not be, I'm on slide three. For those who might not be familiar with our company, let me just provide a very quick summary of what Priority Telecom is. As you all know, we were publicly listed on the here in Amsterdam back in September of last year. We are, therefore, a public, fully financed, independently financed telecommunication provider and our segment is the business market. We service the SME market, the small and medium enterprise market. We service the corporate enterprise market and we service the carrier market, principally in The Netherlands and all aspects of The Netherlands, in Vienna, Austria as well as Oslo, Norway. Our principal product portfolio covers data products such as lease lines and corporate Internet access. We provide IP products such as IP hosting, as well as Internet access and we provide, both, ISDN 30-voice services as well as call center services and we do that in metropolitan, national and cross border international domains and I'll talk about some actions that we've taken this past quarter and last year in cross border during a couple of slides down.

Our principal access technology is fiber. We consider fiber to be the strategic asset of the company. We have over 9,000 route kilometers of fiber optic cable in the three countries that I've identified, The Netherlands, Norway and Austria and we see that as the key strategic advantage of the company.

As you see on slide number three, we believe that we are the leading alternative telecommunication provider in the three markets that we service and I think it's important that we highlight why we take that position. In addition to the financial position associated with the company, which we think is unique we see the fiber infrastructure as our strategic advantage. Those two elements coupled are what we see as the pillars of our company. As you see on slide three, we ended year 2001 with over 147 million Euros in cash in our cash balance and a extremely small long-term debt position of less than 20 million Euros. We see having the fiber infrastructure coupled with that, allows us the flexibility to meet the demands of the future and we see demand challenges going forward, which we'll talk about in a couple slides but the fiber infrastructure provides us that end-to-end service, which ensures quality of service and it also provides us that scaleability.

On slide number four, highlighting some of the key differentiators of the company, our focus in 2002 and what we believe our fundamentals provide to us, is the assured path to net profitability in the near term. Now, that path requires managed growth and that's one of the key takeaways of today's session is our focus is not on revenue growth. Our focus is on attained profitability, built on the foundation that you see on this particular slide, leveraging our strong financial position, focusing on operational excellence and operational execution and leveraging the over 7600 customers that are directly connected to our infrastructure. That unto itself provides us the leveraging that we need to move forward.

As you'll see and as you have seen in our press release, we had a very successful in 2001. In our core markets, our core business, we obtained a 49 percent annual growth rate. As you saw in our Q4, we actually grew our customer base by eight percent across The Netherlands, Norway and Austria. We have excellent up sell opportunities because of the multiple fiber drops across those properties, which allow us to minimize the incremental capital investments, leaves us with a very strong position for the company.

In order to obtain that very strong position, though, as we highlight in slide number five, we had to take some fairly significant steps for the company. We announced the first element of that during our Q3 results, which was the discontinuation of our international wholesale operations in Asia and in North America, as well as wholesale voice on a global basis.

During the fourth quarter, we extended that to the last element of our international wholesale operations, which was the data infrastructure that the company possessed and is in the midst of discontinuing. To put that into context, during 2001 and, as you see in our results, the gross margin associated with wholesale operations, voice and data, eroded to approximately 17 percent at the gross margin level. Where as we look at our underlying core business, we were able to obtain and we enjoyed a 54 percent gross margin. That consolidation between international wholesale operations and local put us in the situation where we believe as we focus on net profitability and as we focus on conserving cash, it made intimate sense for the company to sever itself from the international business. Those markets are eroding and continue to erode. We see it as a very prudent step for the company to move away from international.

On slide number six, is really just a quick summary of what you've each seen in the press report. We see 2001 as an extremely successful year for the company and you can see the various performance measures as we highlight here, core business revenue grew by 49 percent, our consolidated revenue of 167 is significant but I believe more significant is that we were able to grow our core business to 109 million Euros last year. We see our strong competitive cash position linked with that revenue base, lined with the cost control measures associated with the functional organization that we established during the early part of Q4 as building the framework for the company on a moving forward basis.

On slide number seven, we highlight specific Q4 results. I know everybody has read that, for the purposes of time I'll move forward.

One of the key actions that we have taken as we move in to discontinuing our international data infrastructure is we had on our balance sheet a number of indivisible rights of use, fiber based IRUs, supporting both our Transatlantic and our Pan-European infrastructure. We, over the course of Q4, negotiated with our underlying suppliers to remove that total net liability of approximately 140 million by means of a cash settlement, the cash payment that we execute during Q1 of 2002, which we have already executed of 28.2. What this does, therefore, is allows to be relieved of all IRU payments on principal, as well as all future annual operations and maintenance costs associated with those IRUs. A significant step for the company and one that we see as absolutely in the right direction as we attempt to conserve our cash and focus it on our core capabilities our three principal markets.

As I highlight on slide number nine, market conditions we see as extremely volatile. We see that those volatile conditions are resulting in a protracted sales closure cycle across our corporate customers and our carrier customers. We are seeing the beginnings of severe price erosion and stronger competition than we faced in year 2001 in The Netherlands and in Austria and in Norway.

Because of that, we anticipate a slightly growth rate on a quarter-by-quarter basis than we enjoyed during 2001. However, we do firmly believe that our focus allows us to obtain the profitability goals that we've established for the company, even given that slight reduction in revenue growth for Priority Telecom.

Here's a three-pronged strategy I'd like to quickly review and then I'll hand off the microphone to Steve Beebe to walk through our financials and then your Q&A.

To obtain profitability in year 2002, first the company needs to focus on those products and those new customer orders that are profitable. Let me define profitability from a new order perspective. For our company, profitability in year 2002 and this is a practice that we have established, is that our capital investment must be recouped on net cash positive position following gross margin within 12 calendar months. That focuses us on our fiber infrastructure. That focuses on our value added services and that focuses us on our three country bookmark.

We have put in place very robust and very strict cost control measures that allow us to focus specifically on transitioning our cost phase from a large fixed cost base to a variable cost base. Our principle focus is to take our capital investments and by the end of year 2002 our capital investment portfolio is uniquely associated with the variable capital investment required to support increased revenue growth. We think that gives us the leveraging that's needed given the volatility of the current market.

In order to accomplish that, we put in place and we did this last year, a set of customer focused economics that look at the actual per order economics of each of the individual orders we bring across the company. By putting those things in place, we are absolute committed and we are on the path to obtain EBITDA positive position during the second half of year 2002.

In order to walk you through the base line that allows us to make that statement, I turn over the mike to Steve Beebe to walk through our year 2001 financials.

Thank you David and good afternoon.

Starting on slide eleven, it's a summary of our 2000 to 2001 financial performance and the left hand side of that slide shows the consolidated performance for the group and the right hand of the slide shows as our core business. The core business is what we're going to concentrate on, talk about and is the basis for our future of the company.

And as David said, the revenue growth is excellent, 49 percent for the year. You see that we have margins of 54 percent. EBITDA loss is 47 million compared to the 67 million in the prior year.

Moving on to the next slide, slide 12. Slide 12 is a representation of our operation and our discontinued operation. It shows you for the first nine months of the year, that we did 133 million Euros in revenue. At that time, we told you 52 million was from our discontinued businesses, that was our wholesale voice business and our data business in Asia and the U.S. and our continuing business at that time was the 77.1 million and the four million that you see in that slide. That four million sliver was the international European data business in Europe.

As we move on to the total year slide, it shows 167.7 million. The 52 million of the discontinued business in the third quarter didn't grow at all, we had phased out of that business by the end of the third quarter. The European data business grew to 6.7 million. And, as you can see in our press release, we have declared that as part of our discontinued operation and the remaining is the 109 million that we continue into 2000 as our core business.

The next slide, slide 13 shows you the development of the core business as a percent of our total revenue over the four quarters in 2001. At the beginning of the year, the first quarter, our total revenue was just over 45 million and at that time our business was really broken into two parts of equal weight. What we have now determined to be our discontinued business was 22.8 million and our core business was about the same level at 22.7 million. As we've gone through the year, we have shut down that discontinued business, so that in the fourth quarter the revenue is only 2.7 coming from the discontinued business and our core business has grown to almost 32 million.

Our next slide, slide 14 is a look at our quarterly revenue of our core business but broken down into our three major product groupings and the message here is that we've had good growth in all three of these product groups and the weighing of our products is about the same for all four quarters and that the growth has been across all our product lines.

Slide 15, talks about the development of our margin and as David said earlier, if you look on right hand side of this slide, the gross margin for the year for our core business was 54 percent and the gross margin on the discontinued business was 17 percent for consolidated margin for the year of 41 percent. On the left hand half of this schedule you see that the margin has progressed throughout the year and we really have two underlying reasons here. As we have eliminated what we call the discontinued business, just the mix alone has given us much improved margin and, at the same time, we have been able to up sell our products, sell more value added products and that also has improved the margin so in the fourth quarter we're looking at a consolidated margin of 51 percent and, as you can see from the previous slide, the discontinued part of that is very small so our continued margin was running slightly above that 51 percent figure.

Our next slide, slide 16 shows our four-quarter development of our operating EBITDA loss and, again, we have broken this information into two components, the discontinued business and the core business. The message here is our core business EBITDA loss is being reduced each quarter. We're down coming out of the fourth quarter of 2001 at an 8.5 Euro loss, EBITDA loss, significant earlier in the year, as we have gone and discontinued that product obviously a very insignificant part of the total picture in the fourth quarter.

Next slide talks about our capital expenditures. I think we told you in the first quarter, before our funding in the third quarter, was minimum. We put some more into business, really some of our support systems in the third quarter. In the fourth quarter, I was a little higher than we originally estimated, we were able to negotiate some very good contracts with some of our suppliers who we were actually in negotiating for first half 2001 buys but they wanted to book their revenue in the fourth quarter, so they gave us substantial discounts and couple that with the preferred payment schedule, so our cash was, actually our cash flow was a actually improved by these negotiations. But we did sign contracts in the fourth quarter and that we show there as about 6.3 million, was really with three vendors.

The next slide, slide 18 shows that our results for the year were basically in line and the guidance we gave at the end of the third quarter revenue all aspects were basically in line with the guidance and what we had estimated.

The last slide, slide 19 really talks about our position for 2002. Phasing out the international wholesale operations at a very favorable negotiated rate with some of our vendors allows us to go into 2002 concentrating on our core business with a very strong financial position. Unlike a lot of the other companies in our industries, we are not worried about the restructuring of our balance sheet. We have the cash on our balance sheet that will allow us to carry out our business plan. We have very low long-term debt as David pointed out so a strong position to operate from for 2002. We have seen that the revenue growth in the industry is slow. That we recognize that our revenue will be growing a little slower than we saw in 2001. We talk about our margins little less favorable than 2001. We see some pricing declines in the marketplace. We see that some targeted marketing of our customers, some up selling to this customer base will allow us to minimize that loss and we will continue to focus on our cost management, both looking at our cost as they are constructed in our business and looking at the structuring of our cost profile will allow us to make our target of EBITDA positive in the second half of the year, which is consistent with our business plan. So, with that I turn it back to you David for questions.

Thanks Steve.

I appreciate everybody's patience in allowing us to walk through the structured presentation. Perhaps would now be a good time to transition to a Q&A period.

Thank you sir.

If any participant would like to ask a question, please press the star, followed by the one on your telephone. To cancel this request, please press the star, followed by the two. If you are using speaker equipment, please lift the handset before making your selection.

First question comes from Mr. Please state your company name followed by your question.

calling from Merrill Lynch.

Just a couple questions. One, I was wondering, you know, back of the envelope, it looks like your customers generate about 1300 Euros per month, I was wondering if you can give any sense of our concentrated your revenues are, whether there are a few customers that generate, you know, sort of 10 percent of your revenues, you know a few large behemoths or whether it's fairly evenly distributed. Maybe you can give us sort of the number of lines per customer and my second question is, where does cap ex go from here? Can we expect, sort of an 80 million Euro year run rate or when you get this down to a more variable base what can we expect?

Sure. Thank you Mr. , let me try to respond to both of your questions.

With respect to the revenue per customer, I think it's dangerous in our business to attempt to come up with one size fits all in terms of a revenue base per product, per customer because the nature of our product portfolio is everything from the very low end where we would sell a coax-based Internet access product for, maybe, just slightly less than a hundred Euros per month all the way up to an SDM 4, an SDM 16 lease line, which would run multiple, multiple orders in magnitude times that. So, I think it's very difficult to draw a generality associated with the revenue per individual customer.

I think the key thrust of your question was do we have a predominance of our revenue targeted at a very thin level of the customer base. Of the 7600 customers, I think what's important is that over 70 percent of that customer count is on our coax infrastructure, which tends to be the lower revenue. The remaining customers, the fiber customers, tend to be the higher revenue based customers and they run the gamut of companies from approximately 25 to 50 employees, all the way over to major banking institutions or hospital institutions or grocery chains across the multiple sectors.

As you saw in our Q3 results, we have a number of marquis customers, the grocery chain in Vienna, for example, or , the major banking exchange here in Amsterdam. They tend to be on the very high end in terms of revenue but the revenues, the better split is really not so much on a customer base but on an access technology base.

Which, I guess, gets me to the last point of your question and if I haven't answered, please push back. In terms of cap ex for 2002 and beyond, as we've said in our pitch, we're on the path today to meet the first profitability goal for the company, which is to be EBITDA positive in the second half of this year. In order to get to that point, once we've attained that, we'll be in a position where our capital expenditures are directly linked to the investment costs associated with customer premise kit, fiber optic drops and backbone build. So, all of our cap ex from EBITDA positive forward, it's our targeting that will all be associated with the unique cap ex, unique to revenue growth, unique to a customer install. That allows us to tweak cap ex to be mapped to the revenue growth path. We think we need that level of flexibility given the nature of the market, given the volatility of the market. Between now and EBITDA positive, we have three general areas we're making capital investments. The ones I already talked about, which would be those things associated with revenue variable based cap ex, CBEs, drops and backbone, additionally, we are making a modest investment in our operational support systems data and we're making a modest investment in our product portfolio as we build up our value added services, both in terms of our voice, our IP, our hosting, our application service providing tools.

The guidance we provided at Q3, overstates the amount of cap ex that we'll spend this year. At this point, however, I don't think it prudent for us to specifically quantify the amount of capital expenditure we'll spend this year, Dick, except to say that it will be less than we placed in our guidance for Q3.

Did I answer your question, sir?

Yes. Thanks.

The next question comes from Mr. Please state your company name followed by your question.

Hi, it's , J.P. Morgan here.

You're discussing this increase competition in the market, is that coming from the incumbents, presumably mostly all you are, I'm having some problems and, in particular, how you compete against Versatel in The Netherlands?

Thanks for your question, .

Let me talk a little bit about the nature of the competition space and where we see heading based on that. There's no question, that in The Netherlands and in Norway and in Austria, the principal competitor is the incumbent. That's who we're finding dominates the market and that's where we see the principal competition to come from.

In terms of price erosion, it's based on tiers. The first element of price erosion that we're seeing tends to be on the lower capacity, fiber based data products. We're seeing it on 2-meg lease lines and we're seeing it on low ISDN 30 services. What we do see, however, is although those and that price pressure is applying about an eight to 10 percent price reduction and it's very regionally dependent, so it's difficult for me to put a specific number on it but if you look at the Amsterdam, Rotterdam area as compared to overland area as compared to Vienna, in that mix somewhere between eight and 10 percent price reduction for those low capacity lease lines is what we're seeing.

What we are seeing, however, is that our customers are looking for greater capacity so that tends to be a counterbalancing force in each of these markets, although the per bit rate on an E1 on a 2-meg service, that price is going down. People are asking for 34-meg services but at a lower rate than they would have paid a year ago. The bottom line for us, though, is that the direct cost to those two products is roughly the same, so we see one countermands the other. So, I would say on the average across the portfolio, we're seeing a price erosion in the low single digits to mid single digits on a going forward basis.

As I said before, our principal competitor is the incumbent, KPN here in the Netherlands, depending upon which of the three markets we're focused on and that seems to be who we're going head-to-head on for the market that we're servicing. The market being fiber based access focused on national sales, carrier sales or the high-end market.

In terms of the coax market, I'd say the direct competitor in the coax market tends to be the DSL providers and there's obviously multiple DSL providers about. That is not our core competency, sir. Our core competency is fiber based access, so we don't see ourselves on a head-to-head in the DSL space.

Did that answer your question, sir?

Yes, that's lovely. Thanks very much indeed.

Once again, if any participant would like to ask a question, please press the star, followed by the one on your telephone. To cancel this request, please press the star, followed by the two.

Once again, if any participant would like to ask a question, please press the star, followed by the one on your telephone.

There appear to be no further questions at this time, sir. Please continue with any points you wish to raise.

Well, I certainly appreciate the good questions we've been asked so far.

I think there's always three elements. We tend to work on a rule of three. I think there are three elements that are the real take-aways for Priority Telecom at this point. The first, as both Steve and I have highlighted is the very strong financial position of the company. That strong financial position really provides us the leverage where our management team is not into restructuring or other types of financial transactions. We've got the solid financial resource and allows our management team to focus on operational execution and the core competencies of our company, which would be sales, delivery and cash collection with billing.

The second major take-away is the fiber metropolitan area network that we are the beneficiaries of. I think what's very important there is that fiber infrastructure is on our balance sheet. Those are Priority Telecom assets that we own, that we operate and that provide us the ability to minimize our variable cap ex. We have the 9000 roughly fiber optic, excuse me, the 9000 route kilometers of fiber optic cable allows us to service our addressable market within 150 meters of the nearest fiber access point, which is a fundamental reduction in the capital investment associated with hooking up customers.

And the last key point is the commitment that we have made in terms of net profitability and with the constraint of managed growth, focusing on being EBITDA positive in the second half of this calendar year.

Those are the three major take-aways that I'd like to leave the audience with today. If there are any other questions we'd be certainly happy to take them on at this point.

If there are no further questions then I would like to thank you for your attendance here in this call. Should you have any questions at a later stage, please do not hesitate to contact us and we will keep you posted on our site.

Thank you very much.

This concludes today's conference call.

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