Innovate Corp (VATE) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. If anyone should require assistance, during the conference call today, please press the star then zero on your touch-tone telephone. As a reminder this conference call is being recorded.

I would now like to introduce your host for the conference call, Executive Vice President, Mr. John DePodesta. You may begin, sir.

Thank you, Diana. Good afternoon and welcome to PRIMUS's third quarter 2003 financial results conference call and webcast. I'm John DePodesta, Executive Vice President at PRIMUS. For those who have not had a chance to review the earnings release, it has been posted and can be viewed on our website at www.primustel.com.

To summarize our results for the third quarter and other information provided in the release, we reported record $320 million net revenue in the third quarter, which grew 26% over the prior year. We also reported record gross margin of 40.4%, a 170 basis-point increase from the prior quarter. We had record net income from operations of $24 million, a 90% sequential growth from the prior quarter. Net income of $6 million and 6 cents per diluted income per share in the third quarter, and we also raised the 2003 goals. Revenue has been increased to grow in excess of 25% over the prior year. Income from operations has also been increased, from the $50 million to $60 million range, to $65 to $70 million, for the full year 2003. And finally, dilute income per share has been increased from the 38 cents to 42 cents range, to in excess of 46 cents for the full year 2003.

Management will review these highlights in greater detail during the formal remarks and questions and answer sessions of the conference call. Joining me from PRIMUS on today's call are Paul Singh, Chairman and Chief Executive Officer; and Neil Hazard, Chief Operating Officer. We'll begin with formal remarks from management regarding the Company's third quarter 2003 performance and recent developments. This will be followed by the questions 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 the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include but are not limited to revenue and earnings projections, 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 that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Form 10-K and 10-Q and other periodic 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 or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I will now begin the management remarks. Once again, PRIMUS has become a model for those telecom investors seeking growth companies with accelerating profits and cash flow. The operating and financial results for PRIMUS in the third quarter were, and here I use understatement, spectacular! Let's get behind the headlines of record revenues, gross margins, and income from operations to understand the true vigor of this enterprise.

I would now like Neil Hazard, our Chief Operating Officer, to discuss the results of the quarter.

Thank you, John, good afternoon.

The most important thing that we achieved this quarter was positive net income of $6 million. I say this because this milestone was achieved without the help of any gains on bond buybacks or retirements, nor any large foreign currency transaction gains that we have had in the last two quarters. Achievement of profitability without these factors is one quarter ahead of our stated goal of profitability by the end of this year. We also had a record quarter all the way around again. Revenue, gross margin, and operating income were all new record highs for PRIMUS. Our record high revenue of $328 million surpassed last quarter's record high of $320 million. This is a revenue growth rate of 26% over the prior year Q3, while other companies in our industry are declining. Gross margins set a new record in terms of dollars and percentage of net revenue. We broke the 40% of net revenue barrier. Many people in the past said it could not be done, but we achieved it this quarter.

As a result of our record revenue, and record margins, our operating income has doubled sequentially from last quarter, to a new record high of $24 million for Q3. We have revised and increase our outlook fort total year 2003, as John described, based on these tremendous results for Q3. And that's described in the press release.

In early September, we successfully raised $132 million in a new convertible bond offering which was priced at a three and three quarters percent interest rate with a $9 and 32-cent per share conversion price. The primary purpose of this offering, which was the first one that we've had in 3 1/2 years, was to pay off our August '04 maturing bonds, and other higher coupon debt. During Q3, we have already paid off $10 million of those August '04 bonds, as well as $66 million of our vendor debt, which was mostly GE capital, which by the way has also freed up many leans against our assets. Subsequent to the end of the quarter, in October, the balance of the August '04 bonds was paid, that was $34 million, as well as a portion of our accounts receivable financing debt. The balance of this will be paid down in the fourth quarter.

During the third quarter, we generated $10.5 million cash from operating activities, and spent $4.5 million on cap ex, leaving $6 million positive free cash flow for the quarter. This brings our year-to-date free cash flow through nine month to positive $34 million. In summary, another very strong quarter and we continue to be very optimistic about the future.

I would like to now turn the call back to John DePodesta.

Thank you, Neil.

On the financing front, a significant development this quarter was, as Neil described, our successful issuance of 132 million of convertible senior notes. Demonstrating that the public capital markets are again open for PRIMUS. And as Neil mentioned, we made good use of those proceeds, basically using three and three quarter percent money to retire debt with interest rates of between eight and 11.75%. I would make that trade any day. The result is $7 million annual savings and interest expense, a saving is that flows right to the bottom line, as well as improving our liquidity by retiring debt with earlier maturities.

Our deleveraging and refinancing activities, as well as the improved operating results, continue to impact favorably our publicly traded debt. Our high-yield bonds are now trading comfortably north of par and the yield to maturity on that debt is now down around 10%. Our key financial ratios involving debt and interest coverage continue to improve, indeed we are encouraged to learn a few weeks ago that Moody's plans to review PRIMUS's public debt with a possible upgrade in the offering. That would be great news.

On the equity front, we have had a string of positive developments ever since AIG made its $42 million investment in convertible preferred stock at the end of the last year. When our stock closed at $2 per share. Since then, we have been relisted on the NASDAQ national market, added to the Russell 3,000 index and through nondeal road shows hosted by investment banking firms, and a market deal for our recent convertible offering we have been reintroduced and in many cases reintroduced to institutional investors. The results have been gratifying. While all the 13F filings have yet to be made for the third quarter, the trend is clear; PRIMUS has been a targeted investment for a broadening array of institutional investors. That demand is not only reflected in the rising stock price, but in the substantial increase in trading volume. NASDAQ reports there are average trading volume over the last 90 days has been over 1.2 million shares per day. And a large percentage of that volume is composed of block trades. This market liquidity is a very healthy sign.

After absorbing the results we post today, I only expect that the ranks of institutional investors will grow. It finally appears that we are having some success in our efforts to convert skeptics into believers. We were also delighted by AIG's voluntary decision to convert all of the series C preferred stock into common stock. That decision eliminates the liquidation preferences and other rights inherent in the preferred stock, helps bolster our balance sheet, and has added more than $200 million in value to our equity market calculation.

Today, we have filed a resale registration statement with the SEC, relating to the 22.6 million shares of common stock exchanged for the preferred stock. While the series C investors will be able to sell some some 9 million shares under an effective registration, the AIG-affiliated funds have agreed to an extended 270-day lockup period for 13 1/2 million shares. Or approximately 60% of the shares.

With our bond and stock prices rallying, and with the Capital Markets beginning to open up for telecom companies, we felt that this was an opportune time to file a shelf registration with the SEC to issue up to 200 million in debt and equity securities. We believe that the Company should have the flexibility to respond timely to market opportunities, further to improve our liquidity, profitability, and balance sheet, and also to accelerate our growth. An effective shelf registration would provide that needed flexibility.

As you can sense, these are exciting times for PRIMUS, while much has been accomplished over the past several years we believe that more opportunities lie ahead. And we are positioning ourselves to capture them. Stay tuned.

Diana, I would now like to open the floor for questions. Could you please review the polling process and start taking questions?

Certainly. Ladies and gentlemen, if you would like to ask a question, please press the 1 key on your touch-tone telephone. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. Once again, if you do have a question, please press the 1 at this time. One moment, please. Our first question will be from the line of Vik Grover from Needham & Company. Please go ahead.

Hi guys, great job getting the profitability, the revenue growth was very strong, especially considering the down take in wholesale. I guess the trophies are going to start stacking up, John. I guess my again goes to seasonality, maybe new product launches. There was some volatility in traffic, traffic was down in Europe, was that because of the summer or kind of the end of the summer, but it was way up in the Americas, international. What was the source of the large spikes, some sort of product change or seasonality? Anything you can talk about? Anything in terms of flowing through to the fourth quarter. Then getting down to the financials, looking at earnings, looks like if we back out the loss on early retirement of debt and I guess even the foreign currency gain, even tax-adjust that normalized pre-tax stream, did you do 9 cents recurring? And what tax assumption should we use for 2004? Thank you.

Hi, Vik. We did have seasonality on traffic, particularly in Europe. S a many of you know, there are a lot of vacations taken in Europe in the months of July and particularly August. So typically our European traffic is a whole -- as a whole goes down. The decrease in the traffic was really most pronounced on the wholesale side, and as you know, wholesale is our lowest gross margin product. So it actually didn't impact the overall results very much. But we're through that period now, and it's strong. And I think on the underground calculation, yes, that's correct. Because we did have some one-time losses in there. As well as you'll note our interest expenses were actually ticked up this quarter due to the early payoff of some of the vendor debt we mentioned. So we do expect interest expense to decrease significantly in Q4 and beyond.

So what was the nonrecurring, maybe you said this in the comments, what kind of nonrecurring interest expense was in the quarter?

It was in excess of $2 million.

Okay. And then last, what tax rate should we be thinking about for '04?

Well, as we've said, PRIMUS has been fortunate that we have not had to pay an income tax to anybody through the end of '03, and substantially ones, a little bit here and there but looking ahead to '04, we'll most likely be in a taxable position particularly in Australia and Canada and those jurisdictions because we have been so successful that both those franchises are very profitable, and now they're to the point of making back all of the money they lost from day one when they were starting operations. That in itself is a tremendous thing, and we're very pleased. But we'll have to start paying tax. On the next conference call we'll give more specific guidance about next year and earnings, but I think you should expect, you know, single digit tax rates to begin next year, and then slowly grow, slowly increase in the ensuing two, three years to the point where we use up all of our losses worldwide, and get to the normal 35% tax rate.

Thanks a lot, guys.

Thank you. Our next question will be from the line of [Richard Klugman] from Jeffries. Please go ahead.

Thanks a lot. These are good numbers. Could you -- there was a statement in the release, 2 1/2% sequential revenue increase is primarily organic. I was just wondering if you could just add a little clarity to that; how much is organic and how much of that is acquisition-related? And I had a follow-up.

Rick, we haven't had any significant acquisitions since Q4 of last year. I think our point to that statement was that in past quarters, Q1 and Q2, the value of the U.S. dollar has gone down, the value of the foreign currencies has gone up tremendously, a good chunk of the revenue growth sequential quarter-to-quarter was due to currencies. Things pretty much stabilized this quarter if you take our four major currencies, Euro, Canadian dollar, Australian dollar and they sort of averaged out. The currency impact from Q3 to -- Q2 to Q3 was sequentially pretty much flat. This is noncurrency-related real growth in revenues.

I'm sorry, I thought there were a couple of Canadian acquisitions halfway through the second quarter, wouldn't that have some impact in the third quarter being the first full quarter of that?

It would have a small impact. Those were very small companies in the overall scheme of things things.

Great. As a follow-up, on Europe, the virtual mobile has been a big driver of growth for you in recent quarters. And it sounded like in your answer to the last question that that was not the factor in the third quarter. And maybe I'm miss-- I'm not thinking about this correctly. But wouldn't more travel, even fits vacation travel, translate into more virtual mobile traffic? So wouldn't there continue to be some spike in that regardless of the seasonality?

There was some growth. I think most of the growth came from our fixed line services to both businesses and consumers. As well as data internet during the third quarter. There was a little bit of growth from the virtual mobile network business.

In Europe?

In Europe. We do expect it to continue to grow in Q4, and beyond.

Okay. So in other words, what was -- the seasonality impacted -- did not impact virtual mobile or it did?

Well, it did in terms of it slowed down the growth rate. We've had tremendous growth rate for that last year and this year so far. It took -- it was slowed down, took a breather in Q3, impacted it from that perspective but it still grew.

Okay. Great, thanks a lot.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press the 1 key. Our next question will be from [Alan Strider] from McMan securities. Please go ahead.

One quick follow-up on the interest expense, you said there was I believe 2 million of nonrecurring interest expense, should we sort of look at a number of going-forward basis of a little bit below 15 million a quarter for next year?

I think that's a good number, yes.

Okay. And then on the mixed shelf filing, I was curious, if you have any kind of leanings toward equity with the nice run your stock had or if you're thinking you would tap the high-yield markets?

We remain open to all ranges of potential investments.

Are you thinking that you have the 11 quarters, I think callable in March and the 12-something's in October, are you thinking that cash on hand in new financings will take that out or would you like to sort of keep the cash, is there sort of a minimum cash that you want to keep? And then take out those other, you know, higher-cost debt with new financing?

Again, all we can say, we're exploring all options and we'll see what the opportunistic outcome would be for us.

Any thoughts on share repurchases, is there any I understand -- kind of authorization already out there?

Under our existing covenants, that's extremely limited in terms of a prospect.

Okay, great. Thanks.

Okay.

Thank you. Our next question will be from the line of Mark Bishop from Boston Company. Please go ahead.

Hi. A couple of things. First of all, what was the capex in the quarter?

It was approximately a little less than $5 million.

Okay. And just looking at your -- I was wondering if you could go through on your converts that you have now, you have two different ones, it looks like, like what's the interest rate on them, you know, the total outstanding, I guess you list the total outstanding in your release here, but of the 71 million convertible debentures that you had at the end of the quarter, what do those convert at?

Convert about $49 a share.

At 49.

I don't consider them out of the money.

Okay. You had some other preferred that converts at 185. Is that what just was converted?

That's the -- referred to as the AIG.

Series C.

Series C investment. That's what we were announcing today and they have convert the that all to common equity. That line item, amount will go away in our statement --

Is that listed -- was that listed under debt at the end of the quarter?

No it's listed under equity.

So it was converted prior to the end of the quarter?

We've already shown it as a separate line item as preferred equity. We never counted its a debt.

So it's -- is it in the complete under preferred? It just says stockholders' deficit, grouped in with that?

That's correct.

That's all been converted?

Yeah.

And what did that pay?

That paid zero. There was no -- no effective coupon on that since we were able to accomplish some performance objectives early in the tenor of that security, so there really was no --

There was no dividend on it?

No.

Ever?

For about 45 days.

45 days there was a dividend that we met the performance.

But it's not in your income statement there's no dividend on it?

Correct.

That changes going forward. Okay. That's all my questions. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press the 1 key. One moment, please. One moment, please. Our next question will be from [Steven Pakowitz] from CIBC World Markets. Please go ahead.

Good afternoon, nice quarter. Just from an accounting treatment standpoint, I wasn't clear, the conversion of the AIG shares, will that bolster the shareholder deficit? From an organic standpoint?

No, because again we had taken that in at the $1.80 a share purchase price, and it has always been shoes a equity. So when we show -- on the balance sheet, stockholders' equity is already in there.

So there's not going to be any adjustment in terms of stockholders' deficit?

Correct, moving it from one -- same dollar amount moving from one line item to the other.

Understood. Thank you.

Thank you. Our next question, once again, ladies and gentlemen f you do have a question, please press the 1. We have no further questions in the queue at this time. Please continue.

Well, thank you very much, ladies and gentlemen. This will conclude PRIMUS's third quarter 2003 financial results conference call. Replay information can be found on our website at www.primustel.com. The replay should be available within about an hour. Thank you again for joining us today and good evening.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation. You may now disconnect and have a good day.