Innovate Corp (VATE) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PRIMUS Telecommunications Group first quarter 2006 financial earnings conference call. [OPERATOR INSTRUCTIONS] I would like to turn the conference over to your host, Mr. John DePodesta, Executive Vice President. Mr. DePodesta, you may begin.

Thank you. I was hoping there for a moment I was going to get a promotion from you. Ladies and gentlemen, good afternoon and welcome to PRIMUS's first quarter 2006 financial results conference call and webcast. I'm John DePodesta, Executive Vice President of 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. Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer; and Tom Kloster, Chief Financial Officer. We will begin with formal remarks from management regarding the Company's first quarter performance and recent developments. This will be followed by a question and answer session.

Before we begin, however, 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 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.

Last quarter we reported our 2005 results, laid out our primary objectives for 2006, and provided financial guidance. While we were only one quarter into the year, I thought it would be instructive at this point to provide an interim assessment on how we are delivering on the objectives we set. We emphasize that our primary objective for 2006 was to maximize cash flow in order to help fully fund our 2006 operating plan. Coming off of fourth quarter 2005 where we posted a negative 22 million in free cash flow, I suspect we had a number of healthy skeptics in the audience. One quarter later I am pleased to report that we achieved break even free cash flow in the first quarter. This was accomplished through a combination of strategies we told you we were going to pursue.

We continue to improve our cost structure through cost reductions, process improvements, and pruning unprofitable revenue streams. In fact, the 10 million SG&A reduction in the prior quarter was followed by an additional 7 million this quarter. Even more significantly, our SG&A was 28 million lower this quarter than the comparable quarter last year. We also said we would continue to pursue balance sheet deleveraging opportunities. During the quarter, we exchanged 27 million of new step up debentures for 27 million face amount of 5.75 debentures which effectively extended the maturity on that debt for two and a half years. We also retired 2.5 million of debt in exchange for equity. We also said we would opportunistically seek capital infusions. During the quarter, we raised 5 million in cash through a sale of common stock to an existing investor.

We also said that we would focus on improving the profitability of our U.S. and European operations. As we report today, in Europe substantial progress has already been made to improve the profitability of the prepaid card business and more work is in progress. In the United States, through process improvements, further automation, modulating customer growth and marketing span, our LINGO, retail VOIP business is approaching a break even performance at its current nominal level of marketing spend. Many of you probably know that the metrics for Vonage's IPO have recently been revealed. With valuations per subscriber in the range of approximately $1400 to $2000. Applying those metrics would place an indicative value of LINGO of between 110 million to $160 million. Finally, with $15 million of adjusted EBITDA in the first quarter even absorbing Telstra's price increases we are on trajectory to meet or exceed our targeted goal of 60 million adjusted EBITDA for the year. On balance, the Company has made great progress in meeting its objectives and we expect further progress going forward.

Canada continues to generate record results. And with its DSLAM infrastructure of 66 nodes scheduled to be completed this quarter, should help expand margins from provisioning new local and DSL customers onto our network. The on net margins are expected to be almost double what we have today from off net services. And in Australia where adverse pricing decisions by the once and future monopolist, Telstra, impacted our profitability, we are cautiously opportunistic that pro competitive regulatory decisions will soon roll back the unjustified price increases which should lead to profitable growth.

We still face the challenge of growing our new initiatives faster and increasing the margins from these initiatives in order to compensate for margin decline in our core long distance voice and dial-up ISP businesses. This requires balancing the marketing investments and new initiatives with meeting our adjusted EBITDA objectives. The good news is that we have seen margin expansion in the first quarter over the prior quarter, and we expect to see more margin expansion as a utilization of our new DSLAM networks increases.

In closing, I would like to take this opportunity to lobby for your vote at the upcoming annual shareholders meeting on May 30. Hopefully you may have received your proxy materials by this point. In addition to the election of directors, the shareholders are being asked to vote for two other propositions. One would increase the amount of authorized shares of capital stock from 150 million to 300 million shares. The other would authorize a one for ten reverse stock split. While the proxy materials discuss in in-depth the basis for the Board's recommendations that shareholders vote in favor of both proposals, and I urge you to read those materials closely, there are a number of basic reasons for the recommended actions. In order to provide the Company flexibility to raise equity and to deleverage the balance sheet, indeed even to reserve adequate shares for the new step-up debentures, we need to increase the authorized number of shares. Both proposals would provide the Company sufficient flexibility in this regard.

The reverse stock split proposal, however, seeks to also address another concern. The potential Nasdaq delisting if our common stock does not maintain a minimum $1 per share trading level for the required period. We continue to hold out hope that our improved operating and financial performance will be timely reflected in an enhanced share price to meet listing requirements. In the event that does not occur, the Board would like the option to consider implementing the reverse stock split. That is why shareholders are being requested to vote in favor of both proposals and I urge you to do so. Well, that's enough campaigning. Now let's hear from Tom Kloster.

John, thank you and good afternoon. Well, it is certainly been a busy quarter at PRIMUS. And one in which the Company has delivered on a number of major objectives that we set for ourselves. First, improved free cash flow. Free cash flow was break even in this quarter. And helped result in a March 31 unrestricted cash balance of 59 million. Up from 43 million as of December 31, 2005. Second, improved liquidity through successful completion of both debt and equity transactions during the quarter. Third, stability in our adjusted EBITDA performance. Adjusted EBITDA was 15 million, up slightly from the prior quarter. Fourth, improvement in our retail operating results both in Europe and the United States. And fifth, continued company-wide cost reconstructions. We are certainly not done yet -- or we are certainly not yet where we want to be, but I think it's safe to say that we are making substantial progress.

First quarter net revenue was 272 million as compared to 287 million in the prior quarter. The 15 million sequential decline is comprised of 12 million reduction in our low margin European based prepaid services business. As a result of increased focus on profitable revenue. The remaining 3 million reflects a 5 million decline in retail revenue primarily in Australia and the United States. Partially offset by an increase of 1 million in wholesale revenue and an increase of 1 million from foreign currency movements. This quarter's decline in prepaid services revenue is a reflective of changes we have made to our product pricing in an effort to reduce losses.

Effective in the second quarter, we expect the further improve the profitability of the prepaid services business by including a wholesale business model option whereby PRIMUS will provide to service providers use of its prepaid services platform and infrastructure on a managed basis along with wholesale minute terminations. As a result of different accounting for the prepaid services revenue provided under a wholesale model, as well as further pruning of unprofitable revenue, the prepaid services revenue will likely decline in Q2 without adversely impacting our expected recurring EBITDA. As part of this planned restructuring, we expect to take a one-time non-cash charge of between 3 and $5 million in the second quarter. The 5 million decline in retail revenue was primarily as a result of having two fewer days in the first quarter as compared to the fourth quarter. Together with continued softness in our legacy standalone, long distance, and dial-up ISP services in Australia and the United States. The continued revenue growth from our new initiatives, a 2 million increase in the quarter has helped to mitigate this decline.

Going forward, we were focused on generating steady revenue growth from our new initiatives. Driven mainly by new Broadband, VoIP and local customers in Australia and Canada and VoIP in enterprise IP services in the U.S. and Europe. Net revenue, less cost of revenue as a percentage of net revenue was 33.8% as compared to 34.4% in the prior quarter. The primary cause of the decline was a local line price increase implemented by Telstra in December 2005 which resulted in a 2 million increase to our cost of services for the quarter. This increase has been challenged as anti-competitive by PRIMUS and other carriers and is currently under review by the ACCC. In the interim, we are absorbing the increase in cost and expensing it in our income statement.

Our SG&A expense continues to decline. And with 77 million, our 28.4% of net revenue in the first quarter as compared to $84 million and 29.2% of net revenue in the prior quarter. The 7 million sequential decline was driven by a 5 million decline in prepaid services commissions consistent with the revenue decline and a 2 million decline in various other SG&A line items. Included in the first quarter SG&A was 1 million for severance expense. We continue to be very encouraged by the progress we have made to date in lowering our cost structure and we will continue our sustained focus on reducing both costs of revenue and SG&A expenses. A substantial portion of our cost adjustments this quarter were realized in our European and U.S. retail operations. As previously stated, one of our goals is to return these operations to profitability in the short-term. We have begun to see material progress with these operations losing 3 million in Q1 as compared to a loss of 9 million in the prior quarter. And we expect to see further improvements in Q2.

Adjusted EBITDA for Q1 was 15 million. In line with our expectations and slightly up from the prior quarter despite a 2 million detrimental effect from the Telstra price increases. We ended the quarter with an increased total cash balance of 68 million. Including 9 million in restricted cash. As compared to 54 million including 11 million of restricted funds as of December 31, 2005. Significantly, free cash flow reached break even for the quarter. A substantial improvement from negative 22 million and negative 33 million in the past two quarters respectively.

We generated 9 million in cash from operating activities despite spending 17 million on interest. The first and third quarters are typically heavier interest payment quarters based on the timing of our debt interest payments. Additionally, we used 5 million during the quarter for scheduled principle reductions on debt obligations. We spent 9 million on CapEx this quarter, primarily for the Canadian DSLAM network build and the completion of the Australian DSLAM network build. We expect our CapEx spending to wind down over the balance of the year as our network builds are completed and we now expect full year CapEx to be at the low end of our previous range of 30 to 35 million. We continued to improve day sales outstanding in accounts receivable to record lows while also lowering accounts payable days outstanding to maintain strong commercial relationships with our strategic suppliers. The net effect of these efforts had a positive impact on our cash balances during Q1. We accomplished a major step toward addressing our near term liquidity needs through the successful exchange of 27 million face value of our 5.75% convertible subordinated debentures through February 15, 2007 for 27 million face value of the new step up convertible subordinated debenture due August 15, 2009. We now have remaining 23 million of our 5.75% notes due on February 15, 2007.

As previously mentioned, in January we drew the remaining available balance of 15 million on our Canadian secured nonrevolving term loan facility. Also on January, the covenant exchanged 2.5 million of principal amount of the 12.75% senior notes for 1.8 million shares. Additionally in March we raised 5 million in cash from the sale of 6.7 million newly issued common shares to an existing shareholder. Our primary focus for the remainder of 2006 continues to be fully funding our operating plan. Our full year 2006 operating obligations total approximately 100 million. Which includes 52 million of interest expense. 30 million of capital expenditures. 15 million of scheduled debt principle payments and 3 million for cash taxes.

Assuming our adjusted EBITDA is 60 million for the full year, coupled with the recent draw of 15 million on our Canadian loan facility and 5 million equity raise, we have an approximate shortfall of 20 million before we consider our 2006 operating plan to be fully funded. We believe this 20 million gap can be addressed through utilization of our existing unrestricted cash balance of 59 million. Or by any one or a combination of the following actions. Improved operating performance in excess of 60 million adjusted EBITDA. Continued aggressive nonmarketing cost reductions. Obtainment of CapEx financing. Further moderation of capital expenditures below the revised figure of 30 million. Reducing debt and associated interest expense through such means as debt for equity and debt for debt conversions. Further effective management of working capital, the sale of noncore assets in the pursuit of potential financing alternatives, including additional equity capital. I will now turn it back to the operator to open the call up for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from David Sharret of Lehman Brothers.

Good afternoon, guys. It's hard to start, on the SG&A side and then the significant reductions you've had in the past couple of quarters. Just if you could quantify what remaining opportunities you think you have in terms of the European prepaid card business that you talked about for the second quarter and in the other opportunities. Then on the other side it seems like you've slowed the pace of migrations in Australia and line growth in Canada due to local issues there. When you accelerate those again, potentially throughout this year what -- will that have a reverse impact and would you see some increases in SG&A there? That's I guess the first question.

The second is just with the currency moves since we have been in the second quarter, just, what is the impact on your potentially 2Q revenues and EBITDA in this quarterly revenues in EBITDA if it stayed at these levels, the FX for the rest of the year and then maybe lastly if you could, I know you gave some guidance around the cash burn in Europe and the U.S. just provide a EBITDA break down by your different markets if you have Canada broken out versus Australia. That's all I had. Thank you.

Let me take the first one and then maybe I will pass it over for the second part of that. As far as SG&A and the fact that we have continued to reduce SG&A over the past several quarter, we still expect to further reduce SG&A costs and our further aggressively going after cost reductions and it's really not just in SG&A. We also see opportunities within our cost of revenue line item and within cost of sales. That's a big number that includes a number of network infrastructure-type items, whether it's leasing circuits. Whether it's O&M on some fiber that may not be fully utilized. Whether it's hardware and software maintenance costs. Reducing our rates that we purchased from other vendors. We see a lot of opportunity there in addition to the SG&A.

As far as the SG&A associated with the prepaid services, we are more focused in the prepaid services of turning that business profitable from a pricing standpoint and from the model that we sell our services than we really are in reducing any further SG&A. The majority of that SG&A really comes from the commissions that you pay to distributors. As we go to what we will call a wholesale model and what we refer to as a wholesale model in that business, the accounting will change somewhat. And then accounting is rather than showing agent commissions in SG&A, there no longer will be agent commissions. We will rather receive a lower revenue because it will just be wholesale minutes that we are selling versus the face value of the cards. So you will see SG&A reduction just as the nature of the change in that accounting. But outside of that we will continue to see further SG&A savings throughout our organization.

Tom, just to follow-up, despite then ramping up growth potentially in Australia and Canada throughout the rest of the year you still expect on an absolute basis declines in SG&A?

We do. We feel like there is more actions to be taken and there's more savings out there, yes.

And then on the FX impact of some of the moves recently?

I think the FX impacts at least is what they have done for the first month and few days here of the second quarter are going to be favorable to us, obviously. So converting our Canadian and Australian revenue to U.S. dollars is going to result in higher U.S. dollars than it would previously and most of our cash flow comes from those organizations. So from a EBITDA standpoint and from a cash standpoint, it will help us having the currencies go up. We haven't quantified that or forecasted it out for the quarter, but assuming it stays even at levels that it's currently at it will have a significant positive impact for us.

Then lastly had you broken out EBITDA maybe in your Canada business versus maybe Australia and Asia-Pac?

That we have not done, or we haven't typically broken down our operating results to that level. We do within the Q and the Q will be filed next week break it down to income and loss from operations.

Great. Just one last question. On the working capital side, obviously a positive movement in the first quarter. Do you expect there will be any reversal of that as we go throughout the year and more just the payable side and the growing concern qualification. Do you think you've seen whatever negative reaction you're going to see in terms of tightening up on days payable thus far in the first quarter. Is there any more tightening you'd expect there?

I think we've -- to compliment ourselves, we have done a good job in reducing or -- reducing the day's sales outstanding and accounts receivable. So we have shortened some of the payment terms on our customers in both Canada and the U.S. We more aggressively chased up collections and it's had a quite noticeable effect in this quarter. I think we have done a good job from that standpoint. Whether we can -- whether we can generate further enhancement in that area is questionable or certainly not to the extent that we have been able to generate recently. We've also shortened our days payable outstanding. And that has been the last several quarters of focus for us to maintain good supplier relationships.

As a result to the going concern opinion and other matters. We have seen some small effects and some I would say non-key suppliers have gotten a little bit more aggressive with us. I think this quarter will help with that. So it's always hard to judge and hard to determine but I don't think we are going to see any significant effect from that.

Working capital for the rest of the year not a material source or use of cash?

That's our current belief, yes.

Great. Thanks, Tom.

Thank you. Our next question or comment comes from Brent Brewer of APS Financial. Your line is open.

Thanks, operator. Good afternoon guys and congratulations on a good quarter. Can you hear me?

Thank you very much.

Yes. Okay. I just was looking for a little more clarity, if you could, on the Australia situation and sort of -- there was an article about possibly joining other carriers in taking Telstra to court, I don't know if you can talk about those, and if this just affects, I assume this just affects your off net customers and not the on net?

Well, I think it might be helpful for me to give a little extended background what is happening in Australia. It is significant and it's consuming a lot of our attention over the last several months. For those who haven't been keeping tabs, Telstra's antisocial behavior has become the most watched reality show in Australia. Telstra, I described as the once and future monopolist but several years ago in the interest of getting the government another private enterprise and encouraging competition, the Australian government began selling off its 100% ownership interest in Telstra, and after two successful tranches, 51% ownership remains which the incumbent Howard government would like to sell off later this year. But not wanting to face the cold winds of competition, Telstra is seeking to exploit the situation by basically telling the government that if it wishes to maximize its return on the stock sale it should give Telstra free regulatory pass. With breathtaking arrogance, Telstra has sought unilaterally to raise wholesale rates, access charges, really with a motive to harm competitors and the independent regulatory body there, the ACCC has not been spared the venom of Telstra's wrath as they dare stand in Telstra's way.

What we were faced with beginning in December, Tom talked about price increases which had a negative $2 million impact on us. And some other pricing activities by Telstra which we estimate in aggregate if they were to stand would have a negative $8 million impact on us for 2006. However, as you have alluded, Brent, the ACCC is not standing idly by. A few weeks ago they issued a competition notice against Telstra which is basically an interim determination that they felt the price increases that Telstra put into effect in December were anti-competitive and they have now initiated a proceeding to reach a conclusion. In addition, one of the other major carriers in Australia, Optus, filed suit in Federal Court's in Australia alleging harm from that anti-competitive conduct. So there are a number of forums in which those issues are going to be addressed.

In addition, we are hopeful, as I mentioned in my remarks, cautiously optimistic, that the ACCC will rule, hopefully in the near future on some pending matters before it involving PIC charges and if they rule to reduce those charges, it will not only benefit us in terms of a retroactive award for payments in the past, but could also set a lower cost structure going forward which could help us accelerate the migration of customers onto our network. There are a lot of moving balls in play in Australia that PRIMUS is very engaged in the process, but at the end of the day we are hopeful that there is going to be some positive regulatory developments that will create a pro competitive environment. Paul, do you have anything to add?

Yes, I just wanted to emphasize two things. One, in assumptions now again like John said, if these price increases are not turned back, it will have about $8 million impact on our income. On our EBITDA. And we have sort of taken that into account and we believe we can still meet our expectation of $50 million for the full year. That's one point.

And the second one is that retroactive nature of the decisions that are made by ACCC. So if they find -- if they turn back the price increases that we benefit from the date that they make the determination is anti-competitive. So we may get large amount of cash depending on how long it took them in making the decision. That assumes it would be a favorable decision. So with those two things, it could be an upside as we go in the future but generally it can take a long time before this decision gets made.

Thanks for that, Paul and John. And that's what I was curious about. That last point you made that decision would be retroactive, I guess, if historical precedent is any indication and assuming it's a favorable ruling and that it looks like Telstra is going to try to tie this up as long as possible?

That's where the retroactivity feature, Brent, has a bite to it. We've been there before with them in the past. We have had some of these controversies that were ultimately determined in our favor and we did receive substantial retroactive awards.

Just so I understand, it does just affect your customers that go through their network not the ones that have been migrated to on that?

The different price increases that they have announced they can impact both of them the off net as well as on net. So when I said that would be the impact about $8 dollars for the full year it kind of based on all of the announcements that Telstra has made about price increases as kind of a proximate impact.

And just two quick housekeeping items. I'm looking at the number in the press release for the retail or global Voice over IP customers and it's $109,000. That's consistent treatment with how it's been talked about in previous -- 104,000 in the previous quarter it's the same apples and apples, if there's nothing else included in here?

Yes.

Brent, and that's a -- we always have a little confusion on it, because it's a number being reported as of the date of our earnings release, as of today as opposed to a quarter end figure.

And the only other item I had was if you had cash interest in the quarter? I have got the GAAP number here but I don't have cash.

The cash interest for the first quarter was a little over 17 million.

All right. That's all I had. Thanks a lot, guys.

Thank you. Our next question or comment comes from Chris Roberts of Dainhas Securities Group. Your line is open.

This is actually Anderson Price, Chris is out right now. How you all doing?

Very good, Anderson.

On the last call you all discussed approaching the bondholders about changing the covenant language to allow you to raise external funding for LINGO. Is there any status update on that?

Let me address that, Anderson. Actually, I think it's broader than that. i think we did state our willingness and desire to meet with bondholders in an effort to hopefully deleverage our balance sheet as well as facilitate our ability to raise funding and our operating subsidiaries. And during the first quarter actually we did have a major transaction that Tom summarized involving the exchange of $27 million of the 5.75 for the new step-ups which include the liquidity of the Company. And we believe that opportunities may exist for additional debt exchanges and other deleveraging activities and we are going to continue to explore them.

With respect to particular covenant relief under the existing indentures to provide more flexibility particularly with respect to raising capital at the operating subsidiaries. This again is an area that we would intend to pursue at the appropriate time. The best example for that is if we were to consider trying to raise money at one of our restricted operating -- restricted subsidiaries in the terms of the indenture at one of our principal operating subsidiaries.

Under the terms of the indentures you face some complications. If you were to sell 100% of the subsidiary there would be no concern. If you were to sell a majority of the subsidiary in the transaction, that would be permissible so long as the new majority owner would be willing to survive and live under the terms of the indenture. If we were to sell a minority interest in the restricted subsidiary. I'm sorry. I confused that. If we were to sell a minority interest in a restricted subsidiary, it raises an issue whether or not that investor would be comfortable having that investment in an entity that has to operate under the regime of our indentures and may desire more flexibility. If we were to sell a majority interest, then the question is whether or not the remaining minority interest we have would be a permitted investment under the indentures.

So it's a complicated answer to a question, but it's a very practical dilemma that we face as we try to evaluate opportunities to raise investment through our operating subsidiaries. I think in trying to clear that brush is where we would have to engage with the bond holders to see if we can come up with a solution that is win/win for both sides.

I think it could be fair to say that as you talk to investors whether it's investment in LINGO, that becomes a major issue for you investors and many of you investors are willing to engage and spend a couple months in working out a deal only to be subject to negotiations at the bond holders. As you know, that's not something the debenture folks or the funds want to spend their time on and they came up with if you were to do say Canada IPO, then obviously you have to share majority of it to make it convenient. IPO is generally the reservations depend on what percentage you have to sell. These are practical constraints. For us to maximize value I think it would be beneficial for us to have a relief on those covenants. That's why I said didn't mention it last time. Same logic, still applicable.

Then one more question. During the last quarter and as you mentioned you received proceeds of about $5 million. Was there any particular rationale for this? Or is this -- do you have something set aside with where this money will go?

It's for general corporate purposes. In fact, we were delighted to receive the expression of interest by an existing investor who wanted to have a larger position in the Company and rather than buying the stock on the open market, said why don't I buy it from treasury so the Company would have use of the proceeds. A very enlightened approach, Anderson. We were very grateful for it.

It shows a lot of faith in you guys. All right, thanks. Thank you very much.

Thank you, sir. Our next question or comment comes from Bill Heferan of Regiment Capital. Your line is open.

Sure. Just quickly on the Vonage IPO, potential IPO valuation, obviously they have much more scale than you guys and you guys have obviously had some discussions or apparently had discussions regarding LINGO with other people. Can you just talk a little bit about the importance of that scale that they have vis-a-vis the valuation that could be assigned to LINGO.

I think it's a question of if you compare the parameters if it's the [Inaudible] or acquisition costs for customers, I think all of them compare quite favorably with Vonage. Clearly they have much better scale, but we have the advantage of shared cost so that we can take advantage of a scale in other businesses. So I think on that front when you look at the economics of the business LINGO business economics are getting favorable as we are trying to streamline the processes. Automate more of the functions and then it becomes a question of how much money we spend in marketing and we can start growing at similar economics.

Don't you think that there is a personal advantage here that they do have in terms of getting out scale and as people take a long time to grow, they are going to miss those valuations or the benefit of those valuations?

Again, I think this is a market, scale definitely helps so it's obviously the largest scale versus some other IP who has a smaller scale, investors will look at either the profitability of this one versus the smaller one. There could be some difference. Also they know how the model works. They are looking at a lot of money and they want to put it in growth. The other model could be we want to grow slower but we want to grow it faster in this market for both of them. But there could be a discount for smaller ones. This all depends when you are actually in the market then you find out. Our approach, like I said, we don't have that kind of funding to put it in marketing. So our approach is going to be deliver it in other means and try to grow it profitably. That's what we are trying to do. In terms of ideas, even if you applied a discount, no matter which way you did, it's quite a valuable asset for us.

Just one more quick question. Could you get a net cash impact from those receivable and payable date changes? Basically was the cash generated from working capital?

I don't have that exact figure in front of me, but it's several million dollars that were generated there as a result of the favorable days sales and receivable.

Thank you.

Sure.

Thank you. Our next question or comment comes from Jack Buey of Context Capital.

I just wanted to touch on LINGO again with respect to the reduced marketing spend. How much are you -- how much growth are you sacrificing by reducing some of that spend and has churn asked increased and has there been any other negative impact from the reduced G&A expenses? Thanks.

Well, clearly the growth is directly related to the market spend. Obviously when you spend less money, your customer acquisition cost, at least our customer acquisition costs have improved even though the growth adds have been small. We have been doing more than covering the churn. Churn numbers have not gone up. Actually have gone down a bit and some of it has to do with the value of the service from the existing customers. Some we follow and the brand name is pretty good so that helps to have customers still signing up. But clearly the growth rate will depend directly proportional to the marketing spend we have and that's going to be a function of how much money we can save on SG&A that we can reallocate more into marketing to grow the business. But the model, it is looking a lot more attractive at -- after having the cost improvement.

Thank you. We have one final question. From Steve Segal of Janney Montgomery. Your line is open.

I came in a little bit late, but I did hear that if you are going to sell off any of the divisions or things that of that nature the bond holders may be able to block that. But if you had said that you sold close to $5 million or shares of stock in PRTL. So does that mean you that you could basically an sell much stock as you want on PRTL, but you're unable to take one of the other divisions whether it's the VOIP part or it's the Canadian more normal telephone company with the cash flow and just do an IPO even though you are not selling part of the business. You just sell shares and let individual investors buy you piece instead of a spin-off of the actual asset.

Steven, number one we can sell stock of the parent company, PRTL, and there aren't any restrictions on that under the indentures. I apologize if you heard my explanation to say that under the indentures we are blocked from selling interest in the subsidiaries. That's not the case. It's quite clear that if we wanted to sell 100% of our whole interest in the subsidiaries we are free to do so and we could sell it all the way down to a majority interest or minority interest. But what I'm suggesting in the practical marketplace, having an investor, for instance, who would like 51% of a company, we would then have to evaluate whether or not our remaining interest in that company satisfies the permitted investment test on the indentures so that's an issue. If we were to sell a minority interest in that company while we are permitted to do so under the indentures. There I think we face the practical test would an investor want to invest in a company that is subject to the indentures? And that creates a practical issue. So the short answer is, yes, we can sell interest in the Company all the way from 1% to 100%. But the indentures create some practical constraints depending on the nature and circumstances of how much we are selling and to whom we were selling.

There are a number of other companies over the years. They are significantly bigger than you, that have actually issued tracking stock. I'm sure they had a lot of debt and many people said who is going to buy that it's just tracking stock, yet individual investors didn't seem to be too concerned about it. And maybe I don't understand you correctly, but if there was demand for the investors and an investment bank could do an IPO, individual investors who may have much less of a concern people who are buying a thousand shares at a pop or whatever it might be, are you saying that they can block that depending on how many shares or not? Or are you just saying you don't think you will be able to find anybody who will take it public?

No. I think we can do an IPO. The question is not whether anybody would buy it or not. You never maximize the value of an asset when you're not going to -- like John said, it depends how much you sell. If you find yourself that you must sell majority, you must 70, 80% to meet the covenant, you are basically putting an artificial restriction imposed on the IPO and will never going to get the value that you would get if you didn't have that and you have full flexibility. It's not an issue can we do it or not. We can. We are trying to maximize the value of any sales we make or valuation of the Company when we invite investors in. That's the purpose.

Okay. So -- I understand. Thanks.

Okay.

Thank you.

All right.

Was that the last question?

Yes, sir. At this time I would like to turn the conference back over to you, Mr. DePodesta.

Thank you very much. Ladies and gentlemen, this concludes PRIMUS's first quarter 2006 financial results conference call. Replay information can be found on our website at www.PRIMUStel.com. And that replay will be available in about an hour. Thank you very much for joining us today and have a good evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.