Innovate Corp (VATE) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the PRIMUS telecommunications first quarter earnings release conference call.

Good day, ladies and gentlemen, and welcome to the PRIMUS Telecommunications first quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will be conducting a question-and-answer session with instructions to follow at that time. A reminder, this call is being recorded. I will now introduce your host for today's conference call, Mr. Jordan Darrow. Go ahead, sir.

Thank you. Good afternoon, welcome to PRIMUS's first quarter 2003 financial results conference call and webcast. I'm Jordan Darrow, Vice President of Investor Relations for PRIMUS. For those who have not had a chance to review the earnings release, it's posted and can be viewed on our website at www.PRIMUSTEL.com.

To summarize our results in the first quarter and other information provided in the release, we had revenue of $3 million, which is up 12% sequentially and 23 percent year-over-year, record income of $12 million, positive net income of $11 million or 13 cents per fully diluted share, record positive cash from operating activities of $20 million, further reduced debt in the first and second quarters of 2003, and we raised our 2003 goals for revenue and positive net income. Management will review these highlights in greater detail during the formal remarks and question-and-answer session of the conference call. Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer; John DePodesta, Executive Vice President,; and Neil Hazard, Executive Vice President and Chief Operating Officer. We will begin with formal remarks from management regarding the company's first quarter 2003 performance and other recent developments. This will be followed by the question-and-answer session.

Before we begin, please be advised that statements made by the company during this presentation that are not historical facts are forward-looking statements for purposes of safe harbor provisions before under the Private Securities Litigation Reform Act of 1995. These statements may include but are not limited to revenue and earnings prejections, statements of business plans and objectives and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors causing forward-lookingings statements in this presentation to differ from results are discussed in the company's form 10-K and 10-Q filings with the Securities and Exchange Commission. These filings may be obtained from our website at no cost. The company is not necessarily obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.

I now have the pleasure of turning the call over to John DePodesta.

Thank you, Jordan. Good afternoon, ladies and gentlemen. After reviewing the results of this quarter I was tempted to refrain from providing any comments and allow the results to speak for themselves. You may be distressed to learn that temptation passed. Management's remarks, however, will be brief, since we want to allow adequate time for your questions during this crowded reporting period. What I think is important to observe is that with this quarter's results, PRIMUS has evolved to a different stage. Survival, which had been our primary focus over the last two years, has been assured. Now, our focus is on profitable growth and expanding our net income and earnings per share.

I can assure you that management has been relishing this moment and is energized by the new challenge. Our evolution also coincides with new financial reporting requirements, mandated by the FCC. No longer will PRIMUS be reporting EBITDA, since that non-GAAP measure is now restricted by FCC dictates. Also, the new accounting rules require that our gains or losses from debt retirements be treated in normal operating results, since the frequency of such transactions can no longer be deemed extraordinary. Also, gains and losses from currency exchange are required to be treated in normal operating results. In certain respects, this should reinforce for investors that PRIMUS should be viewed as a multi-national company as some 75% of our revenues are derived in markets outside the United States.

Thus, as we experienced in the first quarter, a weakening U.S. dollar will enhance PRIMUS' overall financial performance. Please allow us to savor this circumstance as we have suffered over the last four years under a strengthening U.S. dollar regime. Our published financials will be supplying new metrics going forward. Let me suggest that the key metrics for management will be growth and revenues and income from operations, improving cash from operating activities and the ultimate metric for profitable companies, earnings per share. We have come a long way to reach this point, but I suspect it will take a few quarters for all of us to become accustomed to new metrics and for PRIMUS to develop a track record of performance under the new standards. To talk further would strain my commitment to be brief, therefore, I will now turn to over to Neil who will now comment specifically on the quarter.

Thank you, John. As John said, we're very pleased to report absolutely excellent results for PRIMUS for the first quarter of 2003. Revenue was $300 million, which is the third highest quarterly revenue on record. This represented 23% annual growth rate from Q1 of last year and a 12% increase sequentially from last quarter. Income from operations hit a new record high of $12 million in the quarter and we achieved net income of $11 million.

A few other comments on our results. First off, included in this quarter's results is a change dictated by a new accounting rule in the reporting of our gains we achieved on reducing our debt in terms of our high-yield bonds. These gains are now included as part of our net income and no longer counted as an extraordinary item below the line. This quarter we achieved a $7 million gain from the re-purchase of our high-yield bonds in the open market, which is included as part of our net income. In Q1 of last year, we had a $27 million gain, which is now included as part of our income from continuing operations for Q1 of 2002.

Second, also included in our net income this quarter, are transaction gains and losses from foreign currency swings. A substantial portion of these are non cash items based upon the U.S. dollar equivalent of our intercompany loans between the PRIMUS parent company and our major foreign subsidiaries. For this quarter we recorded a gain of $10 million, which is included in our net income since the value of the U.S. dollar had a significant decline during Q1. This valuation of our intercompany loans to our foreign subsidiaries will affect our net income each quarter going forward plus or minus, whenever there is a significant movement up or down in the value of the U.S. dollar.

As John mentioned, we are no longer using the measure EBITDA in our published quarterly financial reports due to new SCC guidance, since EBITDA is a non-GAAP financial measure. Instead, from now on, we'll focus and report on our income from operations as a measure of how well the company's performing quarter by quarter and year by year. We have historically provided an EBITDA-type metric that was calculated as gross margin minus SG&A expenses. That calculation would yield $32.8 million for Q1 of 2003, which, in fact, is tracking higher than our previous guidance. And this is the last time we will speak to it. Thirdly, in terms of the number of shares for calculating earnings per share, we estimate that in the second quarter of 2003, the diluted number will be approximately 90 million shares, since the second installment of the series C preferred stock was sold right at the end of Q1.

Fourthly, our balance sheet continues to strengthen as we have continued to reduce our long-term debt. This stands at $561 million as of the end of March, and it was reduced a further $25 million during the month of April. Our accounts receiveable and payable have both increased in total dollar terms as of the end of Q1, primarily due to the increased value of the foreign currencies in relation to the U.S. dollar. However, our accounts receivable in terms of days outstanding is at an all-time low, reflecting exceptionally good cash collections. Our days outstanding and accounts payable has also decreased during this quarter, which means that we are paying our vendors on a more timely basis, which is also good.

Fifth, our cash from operating activities was positive $20 million in the first quarter, which is also a new record high for PRIMUS. We spent $5 million of it on Cap Ex in the quarter and another $41 million on reducing our long-term debt. We received $9 million from the sale of preferred stock, so net cash decreased for the quarter by $17 million, leaving us a balance of $87 million at the end of March.

And finally, I'm also pleased to report we have revised our guidance upwardly for the full year 2003. Our new full-year revenue goal is now 20% to 25% year-over-year growth, assuming stable foreign currency exchange rates from Q1. Our full year income from operations goal is now $50 to $60 million. This compares to a negative $3 million loss for the full-year 2002. And finally, we have now set a goal to be earnings per share positive for the full year 2003, again assuming stable foreign currency exchange rates.

So, with that, I'd like to open up the call for your questions.

Thank you, ladies and gentlemen, if you wish to ask a question at this time, press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from queue, press the pound key. Once again, if you would like to ask a question, please press the 1. One moment please. Once again, ladies and gentlemen, please press the 1 if you would like to ask a question. Our first question will be from the line of Vic Grover from Kaufman & Brothers. Go ahead.

This is Richard Fetyko for Vic Grover. Congrats on the quarter, guys.

Thanks, Richard.

Backing into the revenue per minute numbers -- looks like Europe and Asia were stronger quarter over quarter and markets continue to decline at say a 5% rate annually. What should we expect going forward? Why was Europe and Asia so strong? Was it because of the cable and wireless acquisition? Is their mix different from what you had originally?

Well, the Europe increase again, because you're looking in terms of U.S. dollars, so the Euro had increased significantly in value over the first quarter, so I think most of that is the effect of the better exchange rates for the Euro. You know, if I look at the overall company year-over-year, our you know, price and revenue per minute in Q1 of '03 versus Q1 of '02 has declined about 2%, and as we have experienced in the past, our cost per minute declined by about 6%, so you know, we've gained on the cost curve in terms of gross margin percentage year-over-year, and again, from our perspective, I think prices continue to decline in the telecom industry as they always have. You know, perhaps the rate of decline you know, certainly 2% is a lot lower decrease than has been in past years, and you know, we hope the rates are stabilizing, but I think in terms of what we expect, I think you can still expect continued declines in prices in the single-digit range for over the coming year, and our expectations, our costs will decrease at an even greater rate, so our net margin percentage will continue to expand going forward.

What do you think the long-term you know, sort of margin targets you guys can achieve on the gross margin?

Yeah, this is Paul. Like Neil said, I think the best guidance we can give you is we are expecting our gross margins to continue to expand, you know, for the next 12 months or four quarters. Beyond that one, I think we have to re-assess it each quarter. Hard to give a long-term guidance on that, but we are expecting our gross margins to continue to expand.

Okay, and the last question on the cable and wireless acquisition -- just wondering about the timing. Have we seen the full impacts of the acquisition or maybe you know, was it in the quarter only for maybe 2/3 of the quarter?

You've seen the full impact of the acquisition. Most of the customers were transitioned over in the end of December, early January. We've given guidance previously of $40 million annual run rate, sustainable revenue from those customer base. I am happy to report that our actual experience is that it is running somewhat higher than that, in the range of 30% more, and -- but it's all finished and the full impact's in Q1. The important thing about the acquisition is that we really did it to gain channels, and as a result of it, we did gain the customers that switched over, but more importantly, we gained all of their agent base that they had been working with as well as direct sales channels. So our intent now going forward is to continue to grow that base and grow the revenue, not only from existing customers, but using those channels to generate new customers. And as we've mentioned in our releases before, these are all business customers, small to mid-sized businesses.

Okay, very well. Thank you.

Thank you. Our next question will be from Romeo Reyes from Jeffries and Company. Please go ahead.

Yes, great job again, gentlemen.

Thanks.

Couple of questions -- can you try to break out the organic growth sequentially from the fourth quarter to the first quarter, Neil? It sounds like -- I don't know if that $52 million of CNW revenue -- can we just assume that $13 million of revenue for the first quarter was from the acquisition and then the remaining was organic?

Yes, I think you would be close in your assumption.

Okay. And speaking about the organic growth, where did you see the strength here? Because we were a little surprised with the revenue number, it was stronger than we had expected.

Approximately -- and this is overall -- approximately $12 million of the increase was due to the foreign currency rates increasing. The rest of it you know, we just had very good growth in our internet businesses and retail voice businesses. Our virtual mobile network product in Europe has really taken off, and that showed significant growth. That's in the first quarter, where we're capturing calls from mobile phones internationally from customers in Europe, and then surprise, surprise, the wholesale business, which we reported had been declining the last several quarters, that also grew in the first quarter, particularly. And we're particularly strong in Europe. So, a combination of a number of factors.

Great. You've given out some guidance, some guidance on revenues that is 20% to 25% as opposed to 6% to 8% previously. Do you care to give guidance on EBITDA. You previously said roughly 30% growth from last year. Given revenues will be stronger than initially anticipated when you gave out the guidance, can you perhaps update us on what you would expect for EBITDA in 2003 and if there have been any changes in the Cap Ex guidance, given it was probably lower than expected in the first quarter?

Romeo, you guys are gonna have to change! We're banned from mentioning the word EBITDA. So -- but if you took our -- if you took our gross margin minus the SG&A expenses for the first quarter, that was $32.8 million, which certainly is tracking higher. I believe in the last conference call we gave guidance that our gross margin minus SG&A expense would be in the range of 30% year-over-year growth for the entire year, and I think we can comfortably say it's 35% plus given our Q1 performance and again, we'll update it as we go forward.

Thanks very much.

Thank you --

will you still be covering us when our bonds get through par?

Certainly.

Great!

Just the second part of your question I forgot to answer was our Cap Ex. You know, I think we're sticking to our previous guidance of $30 to $35 million Cap Ex for the year. We did have a low Cap Ex quarter in Q1 where we only spent $5 million, so yeah, we're well within that number so far.

Let me throw one last question at you. Where was the change in working capital for the quarter?

We used approximately $3 million of working capital.

Okay, thanks.

Thank you. Our next question will be from the line of Kara [INAUDIBLE] from Q Investments. Go ahead.

Yes, thank you. Good afternoon Paul and John and very good results indeed. I have a few questions. First of all, maybe my accounting is not 100% accurate. The revenue that you reported, do we include the currency effects as you said, I believe that $12 million was due to just currency translations, right?

Yes.

Correct.

So what does in the press release you came out with, what does the $10 million of foreign currency transaction gain correspond to? That is below income from operation, what does that correspond to?

It is very confusing, so --

It is.

Don't feel bad! No, every quarter, since 75% of our business is overseas and foreign currencies every quarter, our revenues will go up or down with the exchange rates. Our cost will also go up and down with our exchange rates, and you know, to a lesser extent our EBITDA will fluctuate. So all of those are normal fluctuations and all of the current currency effects are included in that. The $10 million is an additional gain that's solely results from valuing our intercompany loans between PRIMUS parent and the foreign subs, particularly Canada and Australia, and this is -- Yes, it's a non-cash item, but according to the new rules, we have to reflect in our income statement every quarter. I mentioned, it's an unknown that will be a number plus or minus every single quarter based on changes in the exchange rates.

Okay. Due to intercompany loans, I guess the parent company basically the U.S. lent money to the subs in Canada and Australia, and as a result of the currency moves, you realize that gain, is that right?

Over the years as we were raising money and investing in network and starting up our businesses, we made those loans in foreign currency to the subsidiaries and then now that the -- when the foreign currency changes, you know, it is a paper gain or loss. It's not realized, it's unrealized. It's a non-cash unrealized gain or loss.

Yeah, but if you made -- okay, you made those in foreign currencies, which are increased and as a result, you will be paid off in dollars -- in more dollars than you would initially think?

Yes, and I guess the accounting theory is that if we got all those loans paid off all at one time as of March 31st, we would have a $10 million gain.

I see, thanks. Sorry for getting into the nitty gritty details. The SG&A line went up quite -- increased substantially, about $10 million. Can you elaborate on that? That seems quite significant indeed. In spite of the rising revenues. I mean, what does that represent? Did you hire more sales people? What's the story there?

Again, as I said, our SG&A costs that are denominated in the foreign currencies will jump up as the currency. So pay people in those countries, rent and everything else will cost more as the value of the foreign currencies increase. We also -- with the cable wireless, we picked up a large agent base, so our agents' commission expenses will go up as a result of that increased revenue, and the rest of the increases are primary sales and marketing as we continue to try to grow the revenues.

Okay. Just another real quick -- in the press release you say the cash balance is about $87 million I believe?

Yes, that's correct.

So on the balance sheet you come out with $75 -- you are $11 million of restricted cash? Has that gone up, is that right?

Yes, you have to add two numbers, as -- it's the cash and cash equivilent of $75 million, plus the restricted cash, which is down below current assets of $11.2 million.

Okay.

Totally $86.6 million cash.

Okay, just one last thing, which might be of interest to pretty much everybody on the call. Would you mind giving the breakdown between your notes of what's outstanding as of the end of March? Because even though I looked over it closely and still missing $10 million essentially.

I think that $10 million is probably the $10 million that were acquired in April. At the end of March there was approximately $397 million of senior debt and convertible debt outstanding. You had $43 1/2 million of the '04's, and they continue to remain outstanding.

Okay.

You have $71 million of the convertibles and they remain outstanding. $50 million of the 9 7/8 have now been reduced to $46.6 --

as of the end of March?

No, as of current. As of March they were at $50.2. Those were some of the bonds that were acquired in April. For 60-odd cents on the dollar.

Sure.

The 12 3/4, the outstanding principle amount is $116 million that remains. The case currently. And the 11 1/4 '09 notes which were 116 at the end of March are currently at 110. That's the other $6 million of bonds that were bought in April.

Okay. Thanks a lot. Just one very last thing, you mentioned in the press release that came across the wires that you are looking at potentially some financing or re-financing -- I don't really know what you meant by that -- can you elaborate a little bit on that?

I think all we did was wanted to point out the fact that you know, as our operating performance improves and as we continue to deliver, we are dramatically improving the financial metrics of the company in terms of net debt to EBITDA, as well as interest coverage ratios. And with continuing improvement in those areas, and given the current circumstances of debt markets, we think an appropriate time in the future, PRIMUS would be able to qualify to re-finance some of its outstanding indebtedness on rates and terms that would be more favorable than currently exist. We feel that you know, such a refinancing would improve our earnings situation and would dramatically improve our cash flow. So, that's why we continue to pursue the strategy of debt reduction along with improved operating performance and, hopefully, at the right time and the right place, we can take advantage of an opportunity to refinance.

Also, I think you may be referring to the comment of phrasing additional financing. As you know, in the past, our practice has been to be opportunistic and look for the sources of financing that may be reducing our overall cost, debt cost as well as increased liquidity. It's the same practice we have followed in the past.

Okay. Thank you very much for answering those questions and congratulations again.

Thanks.

Thank you. Our next question will be from the line of David Mackey from TRI Corporation. Go ahead.

First of all, congratulations on three accounts, great quarter, re-addition to the Nasdaq and I guess you won an award yesterday. Congratulations on that.

Thank you, David.

Three quick questions and maybe -- I know this topic has fallen off the screen for a lot of people from a WorldCom situation, but are we finally starting to see the fallout from WorldCom's demise? That's my first question. Second question, what is your ultimate mix you're looking for between the retail and the carrier -- I understand your carrier composition is down to about 20%. What is your ultimate mix for PRIMUS? And the third and last question is, I'm curious on your criteria as far as you've commented many times from an Australian spinoff perspective. What is your criteria that you're using to evaluate -- I mean, other than the marketplace has gotten a little bit better. What is your criteria for deciding to spin that off? I'll just listen. Thank you.

You know, David, I didn't get the first part of it --

I can.

Okay, the second part, I think the ultimate mix of wholesale and retail -- I think a good mix would be to keeping wholesale in the range of you know, 20% is a good number, but quarter to quarter, it's going to change. So I think in the past we have said 15% to 25% as the overall mix is a good range for the wholesale mix in our portfolio.

Okay.

Want to address --

The first question about the fallout from WorldCom's demise -- you know, from what they say in the published reports, they're losing revenue, losing customers, so somebody's gotta pick up those minutes and those customers, so we stand ready to do that. As you know, WorldCom had a very large agent channel which is apparently part of the losses. I think you know, some of our gains certainly may be attributed to, you know, their losses from that channel. Going forward, they will emerge from bankruptcy at some point and be a stronger company, but you know, from our perspective, we've been competing with not only WorldCom, but AT&T and Sprint. Very large companies, for seven years now. So, to us it's really no difference from the past. They dropped off the radar screen for a year or two, then they'll come back, but we keep doing the same things, which are focusing on niches within the market and products that we can do better than they can and we'll pursue those and ones that we can make money off of.

Also, again, for us as we said, 75% of our revenues are derived overseas, so the U.S. is only about 25% of our business, so WorldCom's presence in the market affects a quarter of our business. And then your third question on the Australian spinoff. Again, no announced plans on that, but you know, we think that there is a lot of value with our Australia company, which the market has not realized, and in terms of the overall PRIMUS stock price, and this has been the case for years and years, particularly so now. And you know, when -- we'll do it on an opportunistic basis. If there's a chance to raise money, equity money in Australia via an IPO, we're certainly not adverse to do that and we'll pursue that if the valuation is good, and we can drive a significant amount of cash, and if and when the marketing conditions are ripe and the price is right, that could be a very large source of future potential cash that could pay off significant portion of our debt at the parent level.

Great, I'm not sure if I'm still on the call, but a follow-up question -- I remember a comment from Greg Wilson about making an acquisition within the Australian realm, somewhere along the lines of making a top 10 acquisition. Is that still a viable option? Are you still considering all those sources or not?

Well, we're always on the lookout for acquisitions, both large and small. And you know, Australia included. Again, our focus right now on acquisitions are that we have to have a very short cash pay-back, so I think the days of just, you know, acquiring revenues and having losses just for the sake of getting bigger are over to the extent we can acquire a company where, you know, where the cash gets paid back in a relatively short period of time and it will be accretive to a EBITDA and now earnings per share, we'll certainly pursue it, and we've got some small ones on the radar screen and some larger ones. But it's an opportunistic basis, when the right opportunity and price come along.

Great. Again, congratulations on an excellent job. Thanks very much.

Thanks.

Once again, ladies and gentlemen, if you would like to ask a question, please press the 1 key. Our next question will be from the line of Robert Kleimcheck, a private investor. Go ahead.

Hi, how are you doing? Simple question for you guys. If you are successful in reducing your long-term debt by re-negotiating it, how many millions of dollars per year do you hope to save by re-negotiating the debt?

You know, our feeling is our bond prices have been going up quite significantly and from what I understand is that the bonds are now audit par and the other bonds are getting close to par. So the idea of -- we are pretty opportunistic in taking advantage of the discount that the market had on our bonds, but that opportunity's gonna disappear fast. So, I think the comment we had made in the term sheet in the press release is that now the next opportunity -- there may be still some discount opportunities, but I don't expect them to be any big discounts -- but the next opportunity for us is as we improve our total debt to EBITDA ratios, the interest coverage ratios, we're going to have an opportunity in the future to re-finance all of our debt or most of it at much lesser interest rates. That's the opportunity we are looking for. The timing of that will come as those ratios improve, as well as the market, you know, is available at that time. And that's an opportunity to reduce the interest cost, which will come to the bottom line and therefore would have a positive impact --

Your interest rate is currently around 9% and 11% if I remember correctly?

Different -- we have different kind of loans, each one ranges anywhere from 8% to 12.57%. If you take our average, I would say it would be about 11% or so.

What do you hope to renegotiate to is the last question?

Again, it's not re-negotiating, it will be whatever the market will be at the time. We can go -- you know, we can go to the market and our performance and the capital markets will determine what is interest rate. But we would only do it when we think that there's a significant savings. Plus, remember, it also has a huge impact on our cash flow to the extent we refinance it, we don't have to pay down the principle payment each year. And therefore, we would have more cash flow for growth opportunities and others. So those are the two key benefits.

One final point out of this, we're under no time constraints. There is no pressure for us to rush this at all. We will control the timing.

Okay, thank you very much.

Thank you. Our next question is from Anton [INAUDIBLE] from Morgan Stanley.

I have more of a customer base kinda oriented question. I guess it's about $240 million or some-odd retail revenues you generated in Q1 '03. Can you give us a sense for either you know, total customer count or average revenue per customer. I'm sure it will vary by region as well, but just trying to get a sense for what are some of the metrics there and what frankly the trajectory has been, and if you could comment on [INAUDIBLE] that would be helpful. Secondly again, to follow up on the capital structure questions, if you could comment on kind of what in your mind is the tradeoff between minimizing the coupon and perhaps issuing some subordinated convertible debt that can be diluted to the equity at a later date, versus tapping the straight debt markets with cash interest rates lower than what some of the 11-handle type coupons you currently have, but perhaps not as advantageous as the current market would be to authorize them.

Thanks. Anton, the customer count -- and you'll see this as we put the numbers in the 10-Q in a couple weeks -- we had reported a customer base at the end of Q4 of 3.1 million customers. That has now grown to approximately 3.5 million customers at the end of March. So we are doing a very good job of adding retail customers, both residential and business, and particularly in date internet. As you know, in Australia, we're the second largest DSL provider to telecom Australia, who's the PTT, so we've made good inroads on penetration of customers, particularly updating the internet.

Anton, on your first question, I think it's a little too early to start talking about the mix of you know, the debt securities and so-on. I think that opportunity's going to come in the next several quarters, so I think at some time in the future we will have a much better indication. We have some way to go to improving our total debt to EBITDA ratios interest, interest ratios to benefit from there, and we believe time is in our favor. Like John said, we have no time tables, we are not rushing into it, so that discussion I think will have -- we'll have at some future time.

One other point of guidance in terms of as far as the management team. We have a new set of standards that we are approaching all of our decisions with, and any decision with respect to any kind of financing we would have to be satisfied there would be accretive DPS.

Sure. So, it doesn't sound like you're seriously considering using equity as currency right now? You're nicely free --

We are fortunate. We have a pretty good track record of doing the right things.

It has to be compelling to us in terms of being accretive to DPS. And with respect to converts, I've got $71 million more than I want to have right today. [ LAUGHTER ]

I hear you, thanks so much.

Thank you, ladies and gentlemen, we have time for one final question, coming from the line of Brian Horey from Equity Gross Management. Please go ahead.

Hi, I have two questions. Can you just briefly talk about the terms of the preferred stock? What's the conversion price? How many shares? And I think you referenced an additional traunch of stock being issued. How many shares might be issued in total on that.

I think there will be about 22 million shares. That would be converted. And I think right now in terms of what we've reported here in the quarter, we take account of those in the fully-diluted count for the first quarter. There's some waiting in there because the last 9 million on the investment came in at the end of March, but we're pretty close to what we think would be the fully diluted number we think. With respect to the terms, there really is no -- any interest coupon any longer in the first quarter. You'll see one entry there for a dividend payment, but we have met performance adjustments under the terms of the series C, such that those dividends will no longer be paid. There's a mandatory conversion price on the converts, which is three times the benefective price. So that would be somewhere in the 550 range. The company could effect the mandatory conversion.

From preferred to common stock.

Correct.

Just to clarify on the number of shares. When we calculate diluted shares at the end of March, we've included all of those shares as converted to common, and that number is 84 million shares. As I mentioned earlier, if you take the waiting of projecting what we think would be in Q2, you know, assuming the steady state, the number is approximately 90 million shares total for the company.

That's based on how long they've been outstanding?

Yes, that would include fully all of this preferred and everything, it's 90 million the number to use.

And there's a floor on the conversion price. That doesn't adjust up or down?

Correct, the floor was at $1.75.

Okay.

Here it is. It is $1.87 and the four was $1.75.

The second question I had is -- I'm relatively new to your story, and I was curious if you could you know, kinda briefly summarize why you think you know, you're so much more successful than the average telecom company out there. It sounds like your international focus has a lot to do with that, but just expand a bit on what you think you're doing better than everybody else?

I think the key things we believe for our success are we have a strategy that has been in place for a few years and the first differentiation as you said, we have a nice global footprint and a customer base that is diversified. So 75% of our revenues come from these markets. And the second part is, in each of these countries we do have a scale and scope that we have built. Because of the scale and scope and having a global network, that gives us a cost structure which is much superior than most of the second-tier carriers. And that helps us to keep a competitive position in all these countries. Thirdly, is we are very focused on our core confidence. We are not trying to introduce all kinds of state-of-the-art future products which customers are not buying at this time. So other focus actually, products, services match with our customer base, which is looking for value-type of services.

So, even though we offer a full portfolio of services, but they're all fine-tuned to what our customers need and want. And lastly, I think which is always the most important part, is our management team. You know, we do believe we have a lot of experience in this business, and our focus on costs, our focus on customers, and it has done well for us. And our employees, as you know, the bigger strength we are going to have if somebody asks about MCI WorldCom, our company has you know, has gone through a difficult time the last two years when the capital market shut down. Other employees have demonstrated just tremendous capability to survive through this and stay focused on customers and revenues and profit margins, and now I think our whole team has a huge confidence that will carry us now in our world prosperity stage.

Can you just -- you mentioned Australia. What are the other kind of top two or three countries where you operate in from a revenue standpoint?

We have Australia, that's ranked number four. We rank number three as an ISP and number two as a DSL carrier. In Canada, we have the second largest alternative carriers, consumer carriers, and we are the most profitable company next to the incumbent, more profitable in Canada. And in Europe, we have about $300 million-plus business, one of the largest new entrant -- even though it has been out for a few years -- new entrant in Europe; and then, of course, in the U.S. now we have the critical scale that we need to start growing into the business market. So, those are the four key areas. And you should expect us to again continue -- expect to continue focus on those markets and just build more scale and scope.

Okay. Just one last question. You mentioned $30 to $35 million in Cap Ex for the year. Is that kinda a maintenance number or does that add capacity to the network as well?

Brian, as you said, you're new to our story. If we go back a few years, in 1999 and 2000, we spent $200 million a year on Cap Ex to build out our network and buy fiber switches-related equipment. So I think what we're seeing now is we already went over that hump. We raised the money, made all the investments, and that work was billed out and completed. Our international, you know, IP and data frame really network was built. So you know, now, we're just reaping the benefits of putting more and more traffic on that network. So, the $30 or $35 million again is maintenance and just to support revenue growth as we add new customers. So we're not trying to expand it or go to new places, but really to supporting the increased revenue.

Okay, and is there -- do you have any kind of estimate as to what percent of the capacity your backbone you're using at this point?

We're somewhere around you know, in the 50% range. So, there's -- should say 50% of our revenue is on net. 50% is off our network. In terms of actual capacity in the backbone network, that number is in the 70% to 80% range.

All right, thanks very much.

Okay.

Ladies and gentlemen, that concludes PRIMUS's first quarter 2003 financial results conference call. Replay information can be found at www.PRIMUSTEL.com. The replay will be available in about an hour. Until next quarter's conference call, we look forward to meeting you at our meeting in Virginia on June 17th, 2003. Thank you for joining us and have a good night.

Thank you, ladies and gentlemen, that concludes your conference for today. Thank you for your participation. You may now disconnect at this time and have a good day.