Innovate Corp (VATE) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PRIMUS Telecommunications Group Inc. second quarter 2005 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, zero on your touchtone telephone. I would now like to introduce your host for today's conference, Mr. John DePodesta. Sir, you may begin.

Thank you, Sahib [ph], and good afternoon ladies and gentlemen and welcome to PRIMUS' second quarter 2005 financial results conference call and Web cast. I'm John DePodesta, Executive Vice President at PRIMUS. For those who have not yet had a chance to review the earnings release it has been posted and can be viewed on our Web site at www.primustel.com. Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer, and Tom Kloster, Chief Financial Officer, Neil Hazard, our Executive Vice President and Chief Operating Officer, who normally participates in our calls is traveling on Company business in Europe. We will begin with formal remarks from management regarding the Company's second quarter performance and recent developments. This will be followed by a 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 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 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 10K and 10Q and other periodic filings with the Securities and Exchange Commission. These filings may be obtained from our Web site 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.

Eighteen months ago we announced our intention to reposition PRIMUS to participate in the growth areas of telecom, namely broadband, VoIP local and wireless services. Up to that point the primary revenue sources for PRIMUS were long distance voice and dial-up ISP services and we had been quite successful in growing those businesses into major contributors of adjusted EBITDA. However, emerging market forces began to threaten these high-margin core retail businesses. The introduction of higher speed broadband and DSL began displacing dial-up Internet services. Increased use of wireless services now being sold in buckets together with e-mail and other electronic messaging systems are substituting for prior reliance on fixed line voice services and new marketing strategies, where incumbents bundled multiple service offerings into triple-plays, threatened to make standalone long-distance voice services obsolete. Thus, the challenges to our core businesses were real and substantial and our response had to meet them head on. Beginning in 2004 we developed and brought to market competitive broadband, VoIP, local and wireless products and services.

We also invested in essential infrastructure, primarily the deployment of our own DSL infrastructure in Australia. Not only were these demanding and costly undertakings, they were occurring simultaneously with the decline of our margin rich core long-distance voice and dial-up ISP businesses. Despite the challenge of managing fundamental change in such a difficult environment, we knew that our future was dependent upon our ability to work through the transition successfully. With today's announcements of the second quarter's results we have provided substantial detail on some of the critical business metrics for our most developed new initiatives. Our broadband business in Australia and our local business in Canada have now progressed to the point where we have a more solid basis to project new development as well as their revenue and margin contribution. We are also quite pleased that our Canadian local business seems poised to accomplish a key inflection point during the second half of 2005. The revenue growth in the new local business is on track to exceed the revenue decline in our long-distance voice business in Canada. We have been waiting for this moment.

While we are pleased with the progress to date of our new initiatives, the Company has expended and will continue the need to expend substantial resources to support the growth of these businesses at a time when our historic business contributors of cash are in a state of decline. Under these circumstances achievement of our major objective of creating a long-term shareholder value must be predicated on our return to being free cash flow positive. That is why we have developed our four-pronged action plan consisting of the following critical elements; one, drive growth in our broadband VoIP and local initiatives and concentrate our resources on the most promising initiatives likely to enhance franchise values; two, to invest in critical broadband infrastructure and migrate customers onto the network to enhance margins; three, continue cost-cutting measures to offset in part the continued decline in core retail revenues and four, reduce interest expense by de-levering the balance sheet.

Our report today demonstrates that we are already executing on this plan. We have seen strong customer growth in our new initiatives. Our DSL network implementation is well advanced in Australia and margin enhancing customer migrations are occurring there and in Canada. We have already hit our previously announced goal of at least 20 million in annualized cost reductions and we plan to accomplish more. And just since the last quarter we have opportunistically reduced the outstanding principal balance on our 5 3/4 notes due in February 2007 from 67 million to 50 million today, a decline of over 25% in the outstanding balances. Hopefully, in subsequent quarters we will be able to report further progress on our goal to return to free cash flow positive in 2006. If we are able to demonstrate that we are clearly on that path, we believe the capital markets will respond accordingly. I will now ask Tom Kloster to comment on the operating and financial results of the quarter. Tom?

John, thank you and good afternoon. Our second quarter results reflect steady progress in our new initiatives offset as expected by the continued decline of our high margin retail core long distance and dial-up ISP businesses. Second quarter net revenue declined 21 million or 6% sequentially from the first quarter. The sequential change in net revenue is comprised of a 13 million decline in our European managed prepaid services revenue, an 8 million decline in retail long distance and dial-up ISP revenues and a 5 million decline as a result of the strengthening U.S. dollar. These declines were partially offset by a 5 million increase in revenue from our various new product initiatives.

As we mentioned in previous earnings releases expected decline in our prepaid services revenue is primarily a result of PRIMUS no longer operating a prepaid services business in the UK but rather now being engaged in support of other service providers through a wholesale relationship. In addition to PRIMUS initiating wholesale relationships with prepaid service providers in the UK, we have also launched prepaid services directly to service providers and distributors in new geographic markets including the U.S. during the quarter. We believe these actions will allow us to return to a position of prepaid services revenue growth in the third quarter. We continue to experience a decline in our core retail long distance revenue from those countries in which we operate as we see customer usage declining as a result of alternative solutions such as unlimited mobile calling plans, VoIP and various messaging solutions.

Our dial-up ISP revenue and customer levels, primarily in Australia, continue to decline as customers rapidly adopt broadband alternatives. As a result our core retail revenue declined approximately 8 million sequentially. This decline is less than the decline we experienced in the first quarter 2005 of 15 million. The sequential revenue gain of 5 million in excess of 30% sequentially from our new product initiatives including Australian broadband services, Canadian local lines and VoIP partially offset these revenue declines. With an improving revenue picture in the prepaid services and with continued momentum from the new initiatives, we are striving crossover to positive revenue growth in the near term.

Our mix of revenue on a geographic basis remained well balanced in the second quarter. Retail was 79% of total revenue in Q2, residential comprising 53% and business 26% while wholesale was 21%. Despite declining dial-up ISP revenues, our data, VoIP and Internet revenues remained at 70 million or 24% of total revenue for the quarter. Net revenue less cost of revenue as a percentage of net revenue was 33%, a sequential quarterly decline of 2.6 percentage points. Our margin this quarter was adversely affected by loss of high margin retail core long distance and dial-up ISP revenues, the loss of significant prepaid services revenue, the incurrence of 2 million of network transfer fees and by a $3 million write down of European prepaid services receivables in cardstock inventory.

SG&A expenses were 99 million for the second quarter, a sequential decline of $7 million. The sequential decline was driven largely by lower distributor commissions related to the decline in our prepaid services business. During the latter half of the second quarter the Company implemented a number of cost reductions actions, which are expected to result in annualized SG&A savings of in excess of $20 million. Based upon the timing of such actions, the second quarter SG&A expenses include a $2 million charge for severance expense but do not include a full quarterly benefit of the cost reduction actions. Additional costs reduction steps have been taken since June 30th and we intend to continue with cost management and cost reduction actions throughout the remainder of the year.

Adjusted EBITDA for Q2 was a loss of 2 million as compared to positive adjusted EBITDA of 6 million in Q1 of 2005. The $8 million sequential decline is a result of the following. One, reduced profitability of our European prepaid services operations accounted for 8 million of the decline as a result of a 3 million write off of receivables and cardstock inventory and initial offices as we expand in new geographic markets and the reduction of revenue from existing the UK prepaid services business; two, lower revenue from our high margin core retail businesses, which accounted for 2 million of the decline and a $2 million charge for severance. These figures are offset by a 4 million write down of wireless handset inventory and receivables incurred in Q1, which was not repeated in Q2. Below the adjusted EBITDA line the second quarter reflected a 3 million non-cash loss recognized on foreign currency transactions, a 2 million non-cash on early debt extinguishment and a 1 million non-cash asset impairment write down.

Net loss for the quarter was 44 million or a loss of $0.49 per basic and diluted share. We ended the quarter with a total cash balance of 105 million including 13 million in restricted cash. We utilized 2 million in cash for operating activities and spent 16 million on capital expenditures during the quarter. This resulted in negative free cash flow of 18 million for the quarter. During the quarter we reduced existing debt by 10 million through 5 million of scheduled debt payments and through exchanges of 5 million principal amount of our 5.75% convertible subordinated debentures due February 15th, 2007, for 2.8 million shares of PRIMUS' common stock. Additionally, since June 30th we have further reduced by 12 million our outstanding balance of the 5.75% convertible subordinated debentures through exchanges of 7 million shares of PRIMUS' common stock. As of today we have a remaining balance outstanding of our 5.75% notes of approximately 50 million. We ended the quarter with long-term debt of 646 million.

Based upon our operating results year-to-date and the challenges we continue to face in our core retail long distance and dial-up ISP businesses, it is unlikely that the Company will reach its previously communicated full-year adjusted EBITDA target of 35 million to 50 million. However, our priority remains to exit 2005 on a path to be free cash flow positive for 2006. While this is an aggressive goal, we believe we can accomplish this through our four-pronged strategy of driving strong revenue growth from our new initiatives and concentrating our resources on the most promising initiatives by achieving margin enhancement from the initiatives as a result of increased scale and investment in broadband infrastructure and the subsequent migration of our customers onto to such network, by continuing to aggressively reduce costs and by reducing interest expense through opportunities to deliver our balance sheet. I will now turn it back to the operator to open the call up for questions.

[Operator Instructions] Our first question comes from Chris Roberts from Tejas Securities Group.

I want to talk a little bit about Lingo and other possible assets that could be monetized. In the last several conference calls you've talked about such activities and specifically mentioned Lingo and then I note several months ago that Vonage raised capital at a valuation of somewhere around $1,500 per subscriber or possibly higher. With that type of valuation metric has there been any further thought about monetizing Lingo?

As we said I think towards a couple of quarters ago that that's one of the opportunities we have and because of the Vonage raising funding at -- yes, you're right, more than $1,500 per line-- it clearly has a lot of value in it and we are, as we said before, this is one of the options we have. And in the future we are going to explore the opportunities to see what valuation we can get and at the same time we are also trying to get to a critical mass so that when we do that funding we can raise enough funding to make a-- you know to really grow it substantially. So part of the reason has been to get it to sort of minimum scale that the funding that we raise can actually make a big difference. So that's where we are on that.

Okay, any other information you might be able to provide on other non-core assets? There has always been this hype about possibly IPO-ing Australia. Has there been any further discussion there?

Well I guess, Chris, I would respond I would not deem Australia as a non-core asset.

No, I didn't mean it that way, John.

No, I know. I understand but I think as we indicated in the Press Release I think one of the things that we're very encouraged by is the steps that we have taken in terms of investing in and growing these new initiatives in our judgment has clearly improved the competitive posture of some of our major entities as well as improving the franchise values of our principal operating subsidiaries. So I think the investments we've made and the progress we've made we think have the potential for creating opportunities going forward. They are stronger as a result of these initiatives.

And, Chris, I just wanted to follow up on Lingo to Paul's comments. We have taken some of the back office steps to segregate Lingo into its own legal entity, you know do some of the back office accounting separate from the PRIMUS accounting, put in place servicer agreements, those type of things so that if we do want to move forward with raising money for the Lingo initiative it is more segregated from the PRIMUS organization.

Okay good. Thank you very much.

Brent Brewer from APS Financial.

Just a couple questions-- I know on the VoIP side of the Lingo service there was this directive about if you see to get all these voice over IP services E91 compliant. I don't know if you can comment on how far along you are with that or if it's still in negotiations and when might we expect costs related to that to come in for that and if they would even be significant?

Yes, Brent, this is Paul. I think the costs in the big picture are not going to be that significant based on the discussions we have had with the potential suppliers. I think that it's-- we are pretty much-- I think every VoIP provider is pretty much in the same boat as to the timing and the implementation of what the FCC is requiring so we are in discussion with the suppliers. I think we along with the others, because the suppliers are sort of common to everybody so we all get in at the same point but the costs in the big picture are not that significant.

And was there a delay in the deadline? Did they provide an extension? I think initially it was only like 90 days or something, right?

Yes, I think it was 90 days and, frankly, I'm not sure if there was a postponement of that.

There was a recent extension in terms of the time needed to obtain acknowledgements from customers. They extended that for an additional 30 days.

And then just to follow up on an unrelated issue, it sounded like you used some PRIMUS common to do different equity exchanges so I assume that means you still have the 5 million or so carve out available in your most restrictive indenture to do cash buybacks of debt?

That is true.

And just the last thing is will the quarterly be filed tomorrow?

Yes, I think it's due on Tuesday of next week so I would expect it roughly around that time frame.

Great, thanks, guys.

Mitch Reingold [ph] from Morgan Stanley.

Are you planning on-- you've kind of answered the question but planning on being much more aggressive on exchanging debt for equity possibly as time goes forward given the level of the debt in the markets?

Well, Mitch, I think as we reported today the debt for equity that we've really targeted is with respect to the 5.75, which is our nearest maturity in February of '07. We think that is probably the most opportune target for that particular device and, as you know looking at what we reported today that in effect the value of our equity in those debt transactions were about $1.70 a share so I think on balance retiring an obligation senior to the equity at that rate was opportune, particularly given maturity of that security. I think we will be open to consider additional debt for equity exchanges but that will be depending on market conditions and as we indicate, if we get to point of accomplishing our goals of being free cash flow positive in 2006, we think we're going to have a more valuable specie to deal with.

Do you see a major reorganization of the Company, not just these patchwork things? Could there be a total across the board reorganization?

Not currently contemplated at all, Mitch, and I think, in fact, if we're on trajectory to accomplish what our goal is being free cash flow positive in 2006, the necessity for that is not readily apparent.

David Scharf from Lehman Brothers.

I guess I was wondering if you can give us just a sense of what you're thinking for second half EBITDA at this point? I know you don't really have guidance out there other than to say below the 35 to 50 but a sense of what you're thinking about or just sort of around these levels in terms of just breakeven? And then I guess what you're expecting based on that in terms of end of year cash position?

David, on that in the EBITDA I mean we took the position on this call to not revise the guidance and state updated guidance but rather try and get more granular on some of the initiatives and some of the metrics in our business and we feel that was more useful to the investors to understand some of the intricate details. Actually on the guidance we had previously stated that we saw the first half of the year to be lower than the second half of the year and as we've seen the first half of the year has come down from say last year. I don't think our thought process on that has changed but I don't think we're-- you know based on how our business is evolving, the multiple things we have in the works with the new initiatives as well as our core business, our ability to change the resources we devote, we've kind of chosen to not necessarily put out revised EBITDA guidance.

I mean any sense in terms of expected liquidity or where you'd like to see that at the end of the year?

Well, we're at 91 million, 92 million of unrestricted cash and our goal, as we've stated, is that we'd like to kind of exit the year in a trajectory to be free cash flow positive. We expect the second half of the year, as we've said, to be better than the first half of the year so without kind of putting out exact cash numbers we are comfortable with where our cash position is right now. We are comfortable with where we'll be at the end of the year and assuming we accomplish our targets of being free cash flow positive, then the cash should be increasing.

I guess I was just trying to-- maybe just one other just free cash flow point, when you think about '06 and you're talking about free cash flow breakeven in '06, I mean what are you assuming in terms of cap ex and clearly you've done a lot of the heavy lifting this year and your 50 to 60 million number. Where can you cut that down to as you think about '06 and kind of what I guess then are you implying in terms of EBITDA because I mean on the interest expense saving side to the extent you clean up all the 67 million of 5.75 it's about 4 million of cash interest doesn't move the needle that much but I mean what are your thinking about in terms of cap ex and maybe some initial thoughts on EBITDA really to get to that goal?

David, I think the way we are thinking of it the-- in our four pronged approach if you notice that all components would make a difference of how much cash we need to be cash flow positive. This is the reason we are focusing in on all four of them. One is the growing the revenues from the new initiatives because the more revenues to grow new initiatives the gross margins expand and, therefore, it is less use of EBITDA in those initiatives and that makes a positive contribution. Similarly on the network we did invest cap ex and I think the results are going to show that the investments of a payback of 2.5 to 3 years on the net worth plus a lot of additional benefit where we can bring new customers right on net and not have to pay the migration fees two times. The third part of it is on the cap ex again we have to manage the cap ex within our cash means. Rather than to say we need $40 million we are going to look at what is our cash? How much cash do we have and how do we manage our cap ex within that goal. And lastly, which is a big component which is the interest component, again by trying to find ways to reduce debt that's another way to again cut the cost of-- cut the need of cash that we would have. So rather than saying this the cap ex and we need, must have you know $90 to $100 million if you did the addition in the traditional way of interest of I think roughly low $50 million range, some taxes and then add in the cap ex, you end up $90 to $100 million range. What we are trying to do is to not just accept all the line items but see how we can reduce them so that we can be free cash flow positive even at lesser amount of EBITDA but that's what we are trying to manage. It's not just one item.

Okay, David, in the cap ex number in our 50 to 60 million for this year I think we've said previously that somewhere in the neighborhood of half of that is devoted to the build out of our DSLAM network in Australia so our expectation is that that build out will be complete in 2005 so that will be a big difference if you look at 2005 to 2006 cap ex that is not an item that repeats. And then we also have had a fairly significant cap ex to launch some of the new initiatives such as Lingo in the way of back offices and support systems so some of that is not repeating as well so I mean you can see that that-- assuming we don't try builder-- you can see that that changes the number substantially year-over-year.

And in that equation, David, I think we are always looking at what Tom said makes-- he made a good point. Part of it investing in the network as we did in Australia and the new initiatives we are also mindful of how much impact it would have on the franchise value of Australia. Similarly we are looking at if we do things in Canada and increase the EBITDA on an ongoing basis, how much impact it would have again if in the future we were to do an IPO or any capital transaction. And to us those investments made a lot of sense when we made a decision to do that and going forward the results of what we have already done in Australia, those numbers should start showing up towards the end of that year and that will tell us how good an investment it is. We are expecting, like I said, 2.5 to 3 years payback or less, plus it does position us in the fastest growing market in Australia and I know that this will have positive impact on the franchise value. So it's a lot of equations, all the balancing factors that we have considered and we'll continue to do that as we go into 2006.

Let me just two last questions-- the first is just in terms of your liquidity position have you thought more about equipment financing and the carve out of $50 million that you have for some of your, some of this equipment in Australia? And then secondly, on your cost cuts you said most of them are in place. Just if it's 20 million a year, 5 million a quarter, how much of that 5 million did we see in the second quarter and what you look for in the third and if you have any additional color on areas you are planning to cut as you expand that 20 million and kind of where you think you can get that number grown to from a 20 million figure?

Yes, David, on the carve out for capital lease financing yes, we are working on transactions in that area in multiple regions so we are looking at that and whether we can put in place some financing for some of our capital purchases. We don't have anything to announce today but we are pursuing certain things. On the cost cuts we did take significant cost cuts in our mind during the second quarter. However, most of it occurred toward the tail end of the second quarter so there was not much effect to the SG&A numbers in the second quarter. Matter of fact, probably negatively as it results to booking the severance expense of $2 million so most of the benefit of the actions we have taken will be seen in Q3 and more fully in Q4. Then we continue to take further actions here in Q3 that will probably have the full benefit in Q4. Areas that we have focused on obviously are head count being one and just reducing the staffing levels, really across the board with the exception possibly in the sales area. We tried not to affect the customer facing activities and then we've gone really across the board, whether it's professional fees, consulting fees, occupancy costs down to much smaller items such as courier charges and so on.

What is head count today versus the beginning of the year and where do you think you can get that to by the end of the year?

On the head count numbers?

Yes.

Well, some of the numbers are over the course of the second quarter of what we reduced we had both terminations and then we did not fill positions from resignations. Now, however, in the early part of the year whether it's the first quarter or early part of the second quarter we were staffing up in certain areas in customer care and customer service to support some of our new products so that-- I'm not sure what our head count numbers were at the beginning of the year versus where they'll be at June 30th but from where they were say middle of the second quarter to where they are at the end of the second quarter they're down relatively substantially.

Anna Dosco [ph] from Banc of America Securities.

A couple of questions on the Lingo product, let me just tick them down. Churn on that product, do you measure that? And secondly, you gave some new information here on the acquisition costs and on the gross margin per sub. I'm wondering, this acquisition cost of 170 per sub, is that purely a variable cost or is there some fixed component there that you're amortizing over the-- or not amortizing but spreading over your net ad so as you ramp will that number come down naturally? And then finally, I haven't worked out this math through yet but you've said in the past that you believe that you needed to get to 200,000 subs on your VoIP product to get to EBITDA breakeven. I'm wondering if that still holds and on this-- on your net adds for the quarter it was 15,000. Is that a pace that you believe is kind of sustainable and a sort of steady state at this point or should we see that kind of ramping up or ramping down?

First, on the customer acquisition costs, no we do not amortize marketing costs so those would be the real costs because the write off whatever the marketing expenses are in the same quarter.

Okay, so is that-- so that's the box. What is in that 170?

170 cost, that is the cost of acquiring the customer. It does not include the cost of the box so this is the marketing spent that we do to get that customer signed on with PRIMUS.

And that's a variable cost?

That's a variable cost.

Per customer.

Yes.

But that's not any kind of equipment subsidy?

No, it does not include equipment. The one thing that you would notice is I think we probably have the best business metrics whether it's the RPU-- I think the margins and where they're going as compared to Vonage from what I know of the Vonage metrics I think our metrics probably are the best in the industry. Where the RPU is that I think is the best RPU we have because of our international plants. And churn, we are measuring churn, same definition basically Vonage has that the wireless companies use and the churn last month was excellent. We have not given out the churn numbers but that's-- at least I can tell you based on that month it was pretty much the same what I have heard that Vonage has.

In terms of the rate at which we are growing of 15,000 user net last quarter I think this is something that we are looking at each quarter just as I mentioned. We have several new initiatives going on and we are going to allocate the cash resources we have, which will maximize the value of the Company so I don't want to commit to each quarter 15,000. We are going to see which of the initiatives that we should invest in and we do moderate to the investment depending on other opportunities.

Okay if I could just follow up just on the churn. You don't disclose it.

Yes?

Does Vonage disclose it?

No, that's what I had heard while they were raising funding from the market. That's the feedback I had. I think they do talk about their churn.

Okay so if I go find out what theirs is, yours is similar?

Last-- I can only tell you about one month.

Okay and then just back to the customer acquisition costs, is there an equipment subsidy that you take on, which is not included in this 170?

We do-- yes, I think a part of the sign up. I believe it's about 50% so there may be like $25 or $28.

The box is somewhere of the neighborhood of $60 to $70 is what the box costs us and then we have a sign up fee or an installation fee of about with postage and everything of about $40 so the difference between the two is our subsidy.

We have a termination fee or the customers can return the box.

Okay and then I guess my final question was is this 200,000 kind of level to reach breakeven on the EBITDA, is that still in the ballpark of--

Well, if I remember it right I said it will take at least 200,000 customers. My sense would be it's going to be during $200,000 range so I think that's still good. I know it's going to be more than 200,000 but in that range.

Then one more question, I haven't heard you talk much about your wireless product recently, especially in Europe, if you can just give me an update on what's going on with that product?

As we said I think last time, the wireless business in Europe we had taken a write off on the handsets. We are trying to redirect it in the direction of services only because in Europe you don't have much of the [indiscernible]. Business has not taken off so the revenues from that was very insignificant so that's why we didn't talk about it.

Ethan Garver [ph] from Bear Stearns.

Yes, actually you answered-- Anna had a lot of good questions. I don't have anything.

Bill Heffron [ph] from Regiment Capital.

Yes, just getting back to the RPU for a second, can you talk about the trend in the Lingo RPU and also how much-- how long you think you can maintain that premium that you seem to think you have in that over your competitors?

So far the RPU has remained fairly constant over the last several months and part of it like I said has to do with the because we are the leader in offering international services and so a lot more international callers use our service so that's one of the reasons we have the highest RPU. And that is also something that differentiates us from Vonage and so so far it has been fairly stable.

And one other question on a different subject, in terms of working capital do you expect any trends one way or the other as to whether or not that's going to be a source of use of cash in the second half and also what is cash interest expense expected to be now in the next quarter?

On the working capital we-- in previous calls we've talked about some carrier settlement agreements so there's still a little runoff of some of the carrier settlement agreements in the second half, not significant enough to drive working capital materially one way or the other so no significant changes there. On cash interest expense you're asking what it is for the next quarter?

Yes, what's it going to be for the-- well the current third quarter?

Our total cash interest expense annually is in the neighborhood of just over 50 in kind of the 52 range. We tend to be heavy in the third quarter and the first quarter based on where our bond interest payments land. I don't the figure exactly but I believe in the third quarter it's in the high teens, the 18 million, 19 million cash interest.

All right so the new term loan obviously is quarterly pay?

It is quarterly pay.

Right. Okay and what's the interest expense on that right now?

About 9.75.

Michael Axon from CRT Capital.

I have a couple questions. First, you had talked previously about the cost of your new services and that you thought those would be around $50 million in 2005 split pretty evenly between cap ex and op ex and I was wondering if you could update me on those numbers?

Michael, I think what we said is that our new initiatives we were expecting in 2005 to have EBITDA dilution from the new initiatives in the neighborhood of 50 million, not necessarily tied into cap ex, but just EBITDA dilution.

Okay.

And that's based on the first half of the year we're tracking in accordance with our projections related to that.

Okay, so I think you're previous guidance of 35 to 50 and add 50 million of pressure on your EBITDA I would get-- back that out and get, like, 85 million to 100 million somewhere in that range. Has there been any change of in your expectations for what that cash flow is going to be for that non-new service EBITDA?

Non-new service EBITDA?

I'm trying to back out the costs of the new services from your EBITDA and I wanted-- I'm trying to figure out has there been any change and if so, how significant that change has been and what you're expecting for 2005?

I think the cap ex plan really has-- nothing much has changed. It is as we had planned in the beginning of the year.

50 to 60 million cap ex.

Yes, 50 to 60 million of cap ex.

Right, I'm talking about EBITDA right now, that you'd expected previously 2005 EBITDA of 35 to 50 million. You're saying that that was being pressured previously, or you expected that to be pressured by about $50 million. If you back out that pressure it would be $85 to $100 million would be your EBITDA before those-- that pressure from the new services. Is that still what you expect and if not, how much worse than that range are you now expecting?

So, that'd be the same as giving the guidance, which we are trying not to give, which-- yes, we are not projecting what that would be.

Okay. Well-- but let me try to put it a different way and that is I'm trying to figure-- you're now saying that you're-- you believe it's unlikely you're going to get to the 35 to 50 million, is that because the cost of the new services are now expected to be higher than you had previously thought or is it because of your cash flow not including the cost of the new services is now expected to be lower than you had previously thought?

I think it's more of the later Michael. Where we've seen some erosion in some of the core business, as well as what has occurred over the first half of the year with our prepaid services business in Europe and the EBITDA effect of that and now expanding that into some new geographic markets, so I would say it's more tied to the non-new initiates than anything else.

Okay. Okay, thank you.

Jason Bernstein from Imperial Capital.

Hi, yes. Anna already asked the question before regarding Lingo. Thank you.

Romeo Reyes from Jeffries.

A couple of questions, actually on Lingo one of the first questions was about where you stand on the investment but I don't believe I heard you say where you stand. At one point there was talk about you potentially raising $50 million to fund Lingo. Can you give us a sense of where that is right now? I mean are you at the preliminary stages? I mean it seems like it's been about six months or so since we first discussed this and with the data point that we had from Vonage that there probably would be even more interest now than there was six months ago. Maybe, I don't know if you can't answer it that's fine but I mean if you can perhaps give us a sense of what that-- where that-- where you are today? Secondly, with respect to the burn, you had 18 million of free cash flow-- negative free cash flow for the quarter. Can you give us a sense of-- I think it's following up on the previous question. I'm trying to figure out what percentage-- or how much of that burn was new initiatives versus the core business?

Let's go on the first question we have not formerly started exploring or talking with the outside parties. At first, you know, raising money for Lingo is concerned and do we want plan to do that and explore it? Yes, but I don't want to set up any time frame to do that one but I do believe there's a possibility to raise the capital, to grow that business even faster and but no, we have not gone to the market in any formal sense.

Okay.

Tom, do you want to add?

Yes, on that question about the free cash flow, so there's 18 million negative free cash flow. That's really comprised of about 16 million of cap ex and then 2 million from operations, so the-- we've stated on the new initiatives that there'll be about 50 million of EBITDA dilutions so roughly if that's proportional you've got a good chunk of negative free cash flow associated with the new initiatives in that 18 million. And then again, of the cap ex I don't have the breakout specifically but the lions share of the cap ex is going toward the new initiatives, especially in Q2 and Q3 for the Australian DSLAM, so-- I mean that, that pieces you together that well in excess of 18 million as new initiatives.

So, now as that cap ex tails off I guess the DSL network in Australia was supposed to be about $25 to $30 million if I recall correctly. As that tails off and we start looking at say late '06-- I mean rather late '05 and 2006, should the recurring cap ex be in the $20 to $30 million range? In the past you've been able to maintain, I guess, the network at least when things were difficult three, four years ago with $10 to $20 million in cap ex. Where do you think that, that cap ex ends up settling at the end of the day?

I think you put it the right way depending on the circumstances and our cash position. I think we told him we can do it in $20, $25 million but what the opportunities would be and what our cash position would be would also depend on how many of those opportunities we implement on [inaudible] and remember to say, it also gets traded off with how much increase in the franchise value of Canada and Australia that would generate in the short run, so we're always trying to balancing it out. But the key priority for us is to be free cash flow positive next year and cap ex is going to stay as a variable in that picture.

All right and I mean I just wanted to clarify something on this free cash flow objective, that you were indicating that you hope to be on track to generate free cash flow positive in '06 by the end of this year. Are you telling us that Q4 you're-- on a run rate basis you're going to be close to being free cash flow positive?

Now, I think in order to be free cash flow positive in 2006 we have to show significant progress on the EBITDA line because if the EBITDA line stays the current level I don't think that would be trajectory to be cash flow positive so we clearly have to see in the fourth quarter significant improvement in the EBITDA level.

Okay, let me see if I have one more question here. Debt repayments, the last estimate I had for this year was roughly $17 million. Does that sound about right, or are some of the cap lease payments and capacity payments that you make every quarter-- I mean it was something around $4 million a quarter?

Yes. That's right Romeo.

That's correct, so what's the outstanding balance now on those obligations?

I-- sorry Tom-- flipping through pages here. It's in the neighborhood of about 33 million.

$33 million. Thanks, very much, okay.

Matthew Dutton from Miller, Tavik, Roberts [ph].

A couple of granular questions, first on the Lingo product what is the uptake looking like on the sort of differentiated international calling and international number offerings there, for things beside price you're offering your customers? And then on a similar theme with your Australian facilities based DSL rollout, how promotional is your pricing vis-à-vis alternative broadband? You know what kind of contract terms are you getting and how do you expect to bring that up to generating EBITDA contributing RPU?

Just on the Australian part we worked up the contracts, are two year contracts on the DSL and I think your other question was on-- as for the pricing is concerned. Our pricing is quite competitive. I think compared to Telstra it would be a slightly lower than Telstra, obviously, because they are the market leader but what we do-- the way we've promote it sometime to-- these are the promotions, for example, say free modem that we may give for a limited period of time. So I don't believe we taken, like the one-month free type of promotion, but generally they revolve around getting a free modem.

Okay. Thanks and the take up of--

On Lingo?

On Lingo, the penetration of the differentiating services that you have that, for instance, you couldn't get from Vonage?

Actually I think from whether you can use that international services but because we as a Company have focused more on the international caller market I think the customers that we get do make more international calls as compared to the other VoIP service provider company and that's the reason why we're-- also I believe it's generally significantly higher, keeping in mind our basic plan is the 19.99, which is the best price in the industry. So from there to close to $28, so that's a pretty good powerful increase because of international components.

Are you getting many customers who are U.S. customers by billing address who are electing foreign phone numbers, which I understand is something you are offering?

Yes, and that's again one of the differentiation we offer international DID numbers and there's a good take up on that and it's a pretty unique feature because we offer in lot more countries than any of our competitors.

Okay, thank you very much.

At this time I would now like to turn the conference back over to Mr. John DePodesta. Sir, you may proceed with any further remarks.

Thank you, Sahib. Ladies and gentlemen, that concludes PRIMUS' second quarter 2005 financial results conference call. Replay information can be found on our Web site at www.primustel.com. The replay will be available in about an hour. Thank you, again, for joining us this evening. Good night.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.