Innovate Corp (VATE) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Primus Telecommunications second quarter 2006 financial results call. [OPERATOR INSTRUCTIONS]. I would like to introduce your host for today’s conference, Mr. John DePodesta, EVP and Co-Founder. Sir, you may begin.

Thank you very much, Patty. Good afternoon, ladies and gentlemen, and welcome to Primus' financial results conference call and web cast for the second quarter of 2006. I'm John DePodesta, EVP 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. Joining me from Primus on today's conference call are Paul Singh, Chairman and CEO; and Tom Kloster, CFO. We will begin with formal remarks from management regarding the Company's second quarter and 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 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 Form 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 management’s remarks.

Our efforts over the last several quarters have succeeded in moving us to a new plateau. After a difficult 2005, we have attained a stabilized level of EBITDA which, we believe, will serve as a platform for further improvement. The second quarter also delivered another major accomplishment, the generation of sufficient cash liquidity through an asset sale and a debt issuance transaction to insure the full funding of our business plan for 2006 as well as to satisfy our $23 million debt maturity in February, 2007. The overhang of that debt maturity has now been dissipated. But we cannot pause to rest as a formidable task lies ahead. Namely, the achievement of free cash flow. With our stabilized performance, the dimensions of that challenge are now in focus. We believe that we can attain free cash flow breakeven at an annual adjusted EBITDA run rate, assuming stable working capital, of approximately $80 million. That means on average we need to generate approximately 20 million of adjusted EBITDA per quarter, or approximately 5 million more than our current run rate. Note, those are averages to compensate for the fact that our quarterly cash interest obligations fluctuate with the first and third quarters requiring larger payments.

If we were to also include scheduled amortization of debt, which normally is excluded from free cash flow calculations, another 2 million per quarter would be added. Thus, our gap today is approximately 7 million of adjusted EBITDA per quarter. We recognize that bridging that gap is a very challenging task, particularly in light of the continuing pressure on our legacy, high margin long distance voice and dial up ISP businesses. But we believe we have charted a roadmap to guide us to our objective. Having sized the target, we have identified a number of initiatives to close the gap. Reduction of cash interest is a prime area of opportunity. Further debt restructurings are possible and we now have available capacity to issue 144 million of 5% exchangeable notes, par [indiscernible] with existing 8% senior notes. In addition, we can accomplish debt retirement with the proceeds from possible selective sales of assets and minority equity interests in operating subsidiaries.

In an effort to increase margins, further focus will be given to accelerating sales of higher margin new products as well as reducing cost of sales. While we have made tremendous strides in reducing SG&A expense over the last year, additional expense declines will also be targeted. Again, the goal is that through a combination of these initiatives, sufficient and steady progress will be made over the next several quarters to close the gap and attain free cash flow breakeven.

This quarter also witnessed our conversion from a NASDAQ listing to trading on the over the counter bulletin board. As you know, the shareholders recently approved alternative proposals to insure that the company had sufficient authorized shares of common stock. One proposal increased the authorized shares from 150 million to 300 million shares. The other proposal, a 1 for 10 reverse stock split, would have also expanded the amount of authorized shares. The shareholder vote, reserved for our board of directors in its discretion to select which alternative was in the best interest of the company and its shareholders. Suffice it to say after extensive deliberation and with the input of many investors, the board determined that the increase in authorized shares was, under the circumstances, the better course. While the company’s common stock met all NASDAQ listing requirements except for the $1 minimum bid, NASDAQ was unwilling to grant us an extension. This left little choice for the board. Consequently, effective last Friday morning, our common stock began trading on the over the country bulletin board market. The early returns suggest that liquidity on that market has been robust with an average of approximately 2.25 million shares trading during the first 3 days.

The prospects of returning to NASDAQ are still available, but as studies have shown, that is best done in the context of a positive, catalytic event. The most important thing is for us to continue to improve our underlying business and financial results. In the end, that is how value will be created for our investors. I will now ask Tom to review the results of the quarter.

John, thank you and good afternoon. It was another busy quarter at Primus, but it was one in which we accomplished a number of our important priorities. First, the combination of our improved operations and some very positive financing transactions, enabled us to fully fund our 2006 business plan and the February 2007 maturities of 23 million of the 5.75% subordinated debentures. A key factor in our success was our ability to raise net proceeds of 31 million through the issuance of new 5% notes and the sale of our India based subsidiary. As a result, we ended the quarter with 87 million of unrestricted cash, up from 59 million at March 31, 2006.

A second key to our success this quarter was improved EBITDA performance. Adjusted EBITDA for the quarter was 16 million, exclusive of a 4 million non cash charge for restructuring our prepaid business, up from 14 million in the prior quarter. Third, we continued to generate revenue growth and enhance profitability from our high margin broadband, local, wireless, and VoIP services. Second quarter revenue from these products was 33 million, up 8% sequentially. Fourth, our results benefited from improvement in retail operating results both in Europe and the United States. And finally, continued company-wide cost reductions again made a contribution to our improved EBITDA performance. Although we still have a great deal to accomplish, I think it is safe to say that we are clearly making progress.

The sale of our Indian subsidiary which occurred during the second quarter is treated as a discontinued operation from an accounting standpoint. Accordingly, the second quarter results and all prior period results from a comparative standpoint, exclude the Indiana operations from the individual line items in the income statement. Our Indian operations contributed approximately 3 million and 1 million of net revenue and EBITDA respectively for the first and second quarters of 2006. All of the following figures I mention will exclude the Indiana results as required by the accounting literature.

Second quarter net revenue was 252 million as compared to 270 million in the prior quarter. The 18 million sequential decline is comprised of a 15 million reduction in our low margin prepaid services business, resulting from the previously announced restructuring and shedding of unprofitable revenue as part of our shift to a wholesale model. The balance of the revenue decline was a 5 million decrease in low margin wholesale revenue and a decrease of 3 million in our high margin retail services. These decreases were partially offset by an increase of 5 million from foreign currency movements. As discussed on our last call, during the second quarter we completed the transition of a substantial portion of our prepaid services revenue to a wholesale business model. Under that model, Primus provides use of its prepaid services platform and infrastructure to service providers on a managed basis, along with wholesale minute terminations. Going forward, we believe this method of doing business will enhance our capability to control the profitability from this revenue stream. As part of the restructuring, we recorded a non cash charge of 4 million in the second quarter.

The 3 million decline of retail revenue results from the continuing softness of our legacy standalone long distance and dial-up ISP services, partially offset by an increase of revenue from our broadband, local, wireless, and VoIP products. We are encouraged by both the consistent growth in revenue growth from our new products and the degree to which profitability from these products improves as we build scale and bring services onto our own network.

Net revenue, less cost of revenue as a percentage of net revenue, was 33.2%, relatively flat with 33.6% posted in the prior quarter. We continue to incur the Telstra imposed local line price increases implemented in December 2005 which increased our cost of services by 2 million per quarter. This increase as well as other Telstra charges have been formally challenged as anti-competitive by Primus and other carriers and are currently under review by the ACCC. In the interim, we are absorbing the full increase in cost and expensing it in our income statement.

Our SG&A expense was 72 million or 28.7% of net revenue in the second quarter as compared to $77 million and 28.4% of net revenue in the prior quarter. The sequential decline was driven by a 3 million decline in prepaid services commissions consistent with the revenue decline, a 3 million decline in other SG&A line items including salaries and benefits and professional fees. These declines were partially offset by a 1 million increase in advertising expense in support of some of our most successful products. We are encouraged by the progress we have made to date in lowering our cost structure and we will continue our sustained focus on reducing SG&A expenses. Additionally, we have initiated efforts to reduce our cost of sales and we are already starting to see benefits.

Adjusted EBITDA for Q2 was 16 million before consideration of the previously mentioned 4 million non cash charge for restructuring the prepaid card business. This is up from 14 million in the prior quarter. As required by the existing accounting literature, the company performed an analysis of the expected future cash flow from its existing assets. Consistent with that analysis, Primus has recorded a 208 million non cash asset impairment write down. Also a 15 million loss on sale or disposal of assets charge was recorded in this quarter. These charges will result in the lowering of the net book value of fixed and intangible assets thereby reducing future levels of depreciation and amortization expense.

We ended the quarter with an increased total unrestricted cash balance of 87 million as compared to 59 million as of March 31, 2006. We generated 6 million in cash from operating activities. For the second consecutive quarter, we were roughly free cash flow breakeven, a substantial improvement from negative 33 million and negative 22 million in the last two quarters of 2005. We spent 7 million on cap ex during the quarter, primarily for the Canadian DSLAM network build. This network infrastructure of 60+ DSLAMs, now allows us to offer broadband and local services on net with margins in excess of 60%. Having a lower cost structure also allows us to compete more effectively through the bundling of services.

We expect our CapEx spending to decline slightly over the balance of the year as the majority of our network builds are completed and we continue to project full year CapEx to be 30 million or less. Additionally, we used 2 million during the quarter for scheduled principal reductions on debt obligations. I will now turn it back to the operator to open the call up for questions.

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

Good afternoon guys. I was wondering if you could maybe just spend a minute on the cost cut opportunities that you still see. Tom, I think you had talked about specifically on the cost of sales side that are already being implemented. Maybe you can just walk through what areas of the business you’re seeing those in and quantify maybe how much of the $7 million per quarter in EBITDA improvement you think can be generated just on the cost of sales on the SG&A side. My second question was, in terms of asset sales, what else are you considering with India completed now? What else is there on the block that you’re thinking about?

Okay, Dave, I’ll take the first one, I think on the cost cutting opportunities. I think over the last year or so, we’ve put a lot of effort in the SG&A area. Obviously reduction of headcount has been significant for us in a number of other areas within SG&A. We’re continuing to focus in that area but I think the opportunities for additional cost savings in that area are probably less than they were a year ago. So we’ve probably positioned ourselves more now to focus in the cost of sales area and that’s really comprised in 2 areas, what we call fixed cost of sales and then variable cost of sales. Fixed cost of sales is where we lease lines, fixed lines on a monthly basis. So we’ve started to delve into that in quite extensive detail in a number of the countries that we operate in and eliminate any unnecessary line rental costs or renegotiate existing charges for lower charges if we do need the capacity.

And then also from a variable standpoint, obviously within our positioning, trying to negotiate for better variable rates. That’s, I think, something we do as a matter of practice all the time. But I will say we’re trying to get a little bit more aggressive there. I would say the majority of the savings we expect to see is from the fixed line rental side of our cost of sales. As far as quantifying that and how much of the cost savings will come, or how much of the gap that we’re trying to close, will come from the cost savings, I think it’s a little premature to actually quantify that right now. We do think there is a reasonable amount of savings in the cost of sales and we’re continuing to work on it.

Yeah, I think, this is Paul Singh, Dave, some of the areas other than cost of sales that we would look at over the next several quarters which kind of functions normally we can do more into outsourcing. So that would be one of the areas looking at the business processes. Like Tom said, at some point you kind of run out of how much cost you can cut, then you really need to go to the next step which is improving of your processes, also doing things maybe globally rather than in each country doing the same task. So that’s one area but which will take some time but that will result, I think, in longer term and sustainable cost savings and also make us more competitive. We are looking, for example, in Europe to consolidate our network, some of the sites that the leases that are coming up, that could save us 1 to 2 million a year. That’s just in Europe. We’re looking at other places to see where we can consolidate the facilities with the new IT technology, the cost of operating those are much lesser. So it’s a range of initiatives that actually result in substantial savings, but it does take time. But that’s the right way for us to go to get more competitive on a longer term basis.

Okay, that’s helpful. And on the asset sales side, are there other things you’re considering?

Asset sales side is, again, I think there we kind of go with the cycle of objectives and then look for what do we have to do to achieve those objectives. I think the key objective for us to focus on is reducing our interest cost, because that’s the major cost that we have. It’s really constraining our operating flexibility in order to grow sales faster or to acquire companies, and so what we like to do is to find a way to reduce some interest expense potentially. To do that one, some of it we are expecting to come from some debt restructuring, some of it may come - - there’s an opportunity to get some cash into the company and pay off high interest rate debt. It’s going to be a combination of that. But it’s more opportunistic then we don’t have to today start [indiscernible].

Dave, one of the areas that we mentioned in our press release is it’s the potential of minority sales of stock in certain operating subsidiaries. Could be at the right pricing and the right valuations an attractive alternative, but to raise cash which we could then use to pay down debt and reduce interest expense.

Or grow our business.

Right. And just on the interest expense side, just one last question. On the $144 million carve out that you talked about, should we assume that you’re only talking about exchanges of existing notes, your 3.75 and 12.75 notes into the 4 new 5% notes under that carve out? Or would you attempt to raise new capital as you did with the recent transaction?

Dave, I think all those options would be available to us as well as just issuing that paper for cash.

Okay, thank you guys.

Our next question comes from Brent Brewer of APS Financial.

Hi, how are you doing, guys? Hey, just a few quick ones probably. I was noticing in this release we didn’t get the disclosure that we normally get, at least in all of the new service initiatives. I don’t know it that’s available. For example, the VoIP and lingo breakout for customers and then the local line in Canada?

Yeah, the reason I think we didn’t give it this time, we’re actually getting more focus now. For one year we have been giving that one because all the initiatives were new. But I think what we’re focusing on now is just the total, the revenue from the new initiatives so that in aggregate you know how the revenues are growing.

Okay, and just focusing a little more on the Australian piece, which was given the 144,000 DSL, I guess a number was given of 54,000 between both Australia and Canada that were on net? I didn’t have a chance to look back, but it seems like that was provided as well in prior quarters or maybe even the number of Australian DSLs that were on net. It seems like that was a number - - I don’t know if that’s something you have you can give in the context of these pick charges and how those may or may not be accelerated depending on the change in treatment there.

Brent, as you know on the pick charges, the final determination has not come out. So until the final determination comes out from ACCC, which is the regulatory body in Australia, it’s hard to assume what the number will be. So the preliminary one is available but the final determination has not been made. Now once it happens, then we have to look at it again and see if we want to accelerate it or grow at the pace that we are growing today.

Do you have an expected date for that ACCC ruling?

Last year. We keep on being told it will be this quarter, it will be this quarter. It just seems to take a long time.

Okay, and I guess I’m assuming to the extent they can make a decision on that at some point, that you could accelerate the migration pretty rapidly?

Depending on what the ultimate determination is, if the pricing is favorable, yes, we think that would well spur migration of customers.

And Brent, we still are somewhat dependent on Telstra, so we have to migrate the customers we still have to work with Telstra, so we always have the risk of them acting in an efficient fashion.. In the past we have not had a lot pf problems with that.

Yeah, you have that issue that is also Telstra is expected to submit a plan to the government on their fiber to node network which they have not done so far. So I think we are waiting for what that proposal is and what the - - how’s the DSLAM investment will fit into that one. So I think we need to have a clearer picture then before we start investing more into, moving customers on that. Hopefully it all clears up in the next, before the year end. But like I said, these things keep on getting delayed so it’s hard to give you a firm date on it.

Yeah, fortunately the regulators there and the government, I think, are quite sensitive to the fact that the lack of resolution of these critical regulator decisions is basically freezing investment decisions. The various companies that are involved in Australia need to have some clear guidance in terms of expectations of costs and returns.

Everything that Telstra wants.

Yeah. Which is - - so sooner those decisions are made I think the better off it will be for all concerned.

Yeah, after they move at a regulator’s pace. Understood. And then just related to the Telstra regulatory quagmire, what’s the next date to watch in regards to the ACCC’s actions against Telstra in the courts? Is there a next court date to keep an eye on there?

There’s not really a court date. There are a number of matters that are either pending before the ACCC or in which the ACCC is in consultation with Telstra. Paul eluded to the fact that Telstra has been meeting and discussing with the ACCC a proposal for them to develop a fiber to the node network. Telstra is seeking regulatory clarity. Otherwise interpreted - - how can we assure that we can keep this as a monopoly and not have others utilize our investment? But the ACCC, I think, is interested in preserving a competitive framework in Australia and those discussions are going back and forth between Telstra and the ACCC. And it’s, from the news reports that we read, that hopefully there’s going to be some resolution of that within the next month or two. But we’ve heard those projections before as well.

Okay. And just one other final thought on that just maybe to get comments on. I did see that you , along with several other of Telstra’s competitors proposed a consortium to build your own network which I thought was a great idea. I just don’t recall what stage of the process that is. Is that a proposal that could be given to the ACCC already as an alternative to Telstra’s or what’s the status of that and kind of how serious are those?

It is a very serious proposal. It’s a very serious alternative, and some of the preliminary filings and submission have been made to the ACCC to consider that proposal along with Telstra.

Okay. Would this be a significant capital commitment on Primus’ part or is that just too preliminary to really tell?

It’s too preliminary, Brent, and one of the areas that our proposal wants to explore is whether or not we want to invite into that consortium a number of the major funding sources that have been investing in infrastructure around the world. And some of the most aggressive and creative of those infrastructure funders reside in Australia and the Farrie Bank has made quite a business out of investing in infrastructure around the world. So we think our proposal opens it up for multiple participants to participate in such a project.

And just one other quick kind of housekeeping is, do you happen to have cash interest at hand there, Tom, for the quarter?

Cash interest for the quarter is a little over 9 million, Brent.

Okay, thanks a lot.

Brent, I was just going to follow up on the cash interest. John touched on the quarters, the first quarter and third quarter typically being heavy cash interest quarters and the second quarter and fourth quarter being lighter. It’s just based primarily on where our public debt interest payments land. So it’s typically about 9 million in Q2 and Q4 and about 15 million a quarter in Q1 and Q3.

Okay, yeah, that’s pretty close to what I have here in the model, so I’ll update that. But thanks for that and thanks for answering the questions.

Our next question comes from Chris Roberts of Tejas Securities.

Hey, guys, thanks for taking my call. Tom, can you clarify EBITDA? The press release states 15 million which is the number I’m coming up with including the 4 million charge for the prepaid business, but I thought I heard you say 16 million. Is there something else you’re including in your calculation?

No, Chris, it’s just roughly rounding. In the press release, there’s a schedule attached that gets you to adjusted EBITDA and that schedule shows 11,457,000 and then the one time charge that we refer to of 4 million was actually 4.1 million, so that gets you to 15,557,000, rounds to 16.

Okay, so it’s fairly consistent with last quarter?

Yeah. Well, it’s up from the last quarter, because remember, we are excluding the Indian operations from it. So last quarter we reported about 15 million of adjusted EBITDA but that included our Indiana based operations which generates in the neighborhood of 1 million a quarter. So if you go back to that schedule in the press release I was just quoting, the first quarter adjusted EBITDA which is restated to exclude the Indiana operations was 14 million, just over 14 million, 14,005,000. So it is up a million and a half range when you exclude the 4 million charge.

Good, thanks. Then going back to the statement in the press release about the up to 144 million of 5% notes. Reviewing the language in that indenture at Primus Telecom Holdings Intermediary, would that full amount of 144 million assume that some of that new debt would go to the exchange with some of the holding company debt to maintaining the debt incurrence test? Or can you go ahead and issue a full 144 million as additional debt?

We believe we can issue 144 million. Some it will probably be in the nature of exchangeable debt and part of our strategy in terms of some of the recent new issuances, both the step up debentures and the 5% notes, were really to create securities that hopefully would have the potential of being equitized in the nearer term because of the conversion rates that were set in those securities. And that’s a strategy that we have pursued. I think we’re interested in continuing to pursue that approach.

Okay. The rest of my questions have been answered. Thanks guys, for taking my call.

Our next question comes from Anna Goshko of Banc of America

Hi, thanks very much. I have a big picture question on the revenue outlook and maybe it’s just I haven’t been able to put all these pieces together yet. But when do you expect the revenue to sort of flat line and then turn the corner so you can actually start seeing the growth on a top line basis from your new services? Or asked another way, if I look at the second quarter revenue base, what percentage of that is still at risk for coming off as we saw the prepaid and the wholesale sequential declines this quarter?

This is Paul. On the prepaid side, I think the third quarter is the retail prepaid if you want to call it. That’s going to be a very small amount. In the second quarter we did about close to 5 million and the third quarter we’re expecting about a million just based on the run rate. So really the only place to go in the prepaid card business is up. So – but we want to do it in a profitable way and that’s the approach we are going to take on that. Keep in mind the wholesale and the prepaid card business are low EBITDA businesses and low EBITDA potential in terms of the percentage of revenue. Where this makes the most impact is on the retail revenue. As you know on the long distance part, that’s a business base that is under pricing pressure, the usage pressure. And that’s where the revenues have been declining. And the second component, a piece of the family component, long distance part of it combined with dial up internet business we have in Australia and a little bit in Canada. But those are the 2 main components. They are high margin businesses so as we lose revenue in those, it hurts us.

Several quarters ago we started investing in DSLAM so we can generate revenues from broadband and IP and local and those revenues have been going up. But just as important is their growth margins and incremental contribution has also been going up. Over last 2 quarters, 2 quarters ago, it was 20% gross margin. I think this quarter it’s 33% gross margin because as the number of customers grow, the impact of this charge is a little bit smaller. So those are the 2 dynamics. I think when those 2 lines cross, it’s really very hard to tell because part of it is going to be a function of how successful we are in getting our interest cost down and getting more flexibility to invest in growing sales factors. As you know, last year we grew quite fast, but we also lost, the EBITDA was very small. So given our cash constraints, this is the part that we manage to focus on high margin businesses and grow as fast as we can, staying within our financial goals. So that’s the plan and more, like I said, the more we can reduce our interest expenses and more marketing money and the sales drivers we can put in place. And that’s why we laid it out, the goals we’ve got to achieve so that we don’t lose as much high margin revenue every quarter.

Okay, great. So if I can just paraphrase then, so have the biggest declines in the revenue have obviously been in the prepaid, the lower margin stuff, and most of that is rolled off is what you’re saying?

Yes.

And Anna, just to clarify, I think you will see further decline in the prepaid card revenue Q2 to Q3. So the decline will be $3 to $4 million as opposed to what we’ve seen it in the past.

Okay, great. Thank you very much.

Our next question comes from Bill Heferan of Regiment.

Yeah, just a quick question on the 24 million of the 5% that was issued for 18 million cash. Was that done prior to the NASDAQ announcement?

Yes. When you say the NASDAQ announcement - -

Or the staff determination letter or whatever it was that actually forced you guys to - -

We’ve had consistent disclosure, Bill, over time with respect to the potential for that delisting. That staff determination matters have been going on since I believe January.

Yeah, I understand that. But I think there was also the hope was held out that maybe you could reverse stock split or whatever.

Interestingly, Bill, in talking with some of the holders of those securities and notes in terms of whether or not they had a preference in terms of our doing a reverse stock split or not, the basic consensus is that they were agnostic. They really didn’t care.

I guess another question - - can you tell us where the stock was trading at the time you did this exchange?

The price level?

Yeah, so we could figure out the range.

I think it was in the mid 60s, close to 70, something like that, or maybe a little lower. Maybe somewhere in the low to mid 60s I believe.

Okay. Just another question, and I know this is a difficult one, but if you don’t see the progress in generating additional free cash flow through the rest of the year, before you go ahead and pay off 23 million worth of subordinate debt, is there any chance you’d consider some type of restructuring where those subordinate bonds take a bit of a discount?

I don’t think we’ll be there.

I’m sorry?

I don’t think we’ll be there.

You don’t think you’ll be where?

At the point that you’re hypothecating.

Okay, I gotcha. All right, thanks.

Our next question comes from Steve Segal of JMS.

Hi, I missed a large part amount of the call. I don’t know if this was answered, but I did hear you say that you’ve been issuing some of the bonds or exchanging for some additional debt that can be, I think you said, can be converted into common stock. That would be a way to cut the debt level. And if that is correct, can you tell me the price that it is convertible into and if that changes or it has a set floor?

Yeah, Steve, and I’ll give you just sort of round numbers. Both the step up, 6% step ups that we issued as well as the 5% exchangeable notes, in aggregate I believe there’s about 80 odd million principal face amount of those outstanding. The conversion price is $1.20 for the 5% exchangeables and just slightly less for the step ups. But there’s a mandatory conversion feature at 150% of those numbers, so at about $1.80 a share, the company then has the ability to force a conversion.

Great. And I think you had said that the debt payment that was coming up possibly February of ’07 has now been taken care of. When is your next large debt payment going to be that you would have to make?

I believe it would be March of ’08.

The next significant, I guess, principal payment is, yeah April ’08, which is a credit facility we have in Canada. Not a public debt instrument, but a credit facility we have outstanding in Canada which is about 30 million which we have extended the maturity on a couple different times over the course of the last couple of years. As far as a public debt principal maturity, I think we’re out into fall of ’09.

Thank you.

Thank you. Our next question comes from Michael McNulty of Context Capital.

Hi everybody. Just wanted to follow up on the question that someone had asked, I think it was the lady from Banc of America when she was talking about what revenue is still at risk. And then you were talking about the prepaid side, retail will be 1 million in Q3 versus 5 million in Q2 ’06. And then, Tom, I think you said something after that where you said that the retail will go down 4 million more in Q3 versus Q2 and I was just trying to reconcile. I must have missed something because - -

We were both talking about the same thing.

I’ll try to reconcile and clarify for you. We were both talking about the same thing. Retail prepaid in Q2 generated about 5 million of revenue. It’s projected that that will only generate about 1 million in the next quarter, so there will be a decline, estimated decline in the retail prepaid from 5 million to 1 million.

Okay, and that’s the same 4 million? So there’s nothing else happening in that area.

And that happens to be also like I said as well, not much impact on EBITDA because of its low margin, low EBITDA.

Okay. And then you talked about the wholesale. When the previous analyst had asked, you said that there were 2 things. One was the prepaid retail and then you said something about the wholesale. Do you recall what you were referring to?

Yeah we - - a major activity that we did in the second quarter is we shifted a portion of our business that used to be retail prepaid business to a wholesale model. So that business now is very similar to any carrier buying minute terminations from us. They want to send us 1 million minutes to Vietnam for us to terminate, we do that and it’s typically a relatively low margin business compared to our retail businesses. So a portion of what was retail prepaid in the past, the minutes are still coming to us, but it’s no longer our responsibility to manage the prepaid platform, to consider what fees to charge on those cards, and worry about distribution of those cards. It’s only our role is to terminate whatever minutes come to us and to charge a fee for that. So that portion of the business now gets reported under our wholesale revenues.

And do you believe there will be more fall off in that area? Or do you believe that that area will keep growing?

Uncertain. We don’t have any reason to believe there’s going to be fall off in that business, and we’re actually trying to promote that business to other carriers that want to enter the prepaid market since we have the platform and we have the capability. So it’s a little premature to determine, but it could go the other way and potentially grow.

Okay, and then you talked about the long distance and dial up in Australia. You said your high margins that have come down obviously, that hurt your overall margin. Can you kind of give just a ballpark or a range of what those are now and what they could possibly be say in Q3?

I think even in Tom’s remarks and in the press release we have said the difference between, the gap was about 3 million for the quarter. So that’s basically the decline we had in long distance and dial up internet which are also high margin businesses for us. And it was minus the new initiatives or the on net type of services which are also high margin businesses because we are actually increasing in margin every quarter. So the gap was about 3 million for the quarter.

Okay, 3 million net of the increase on those? In other words, you talked about the DSLAMs. So long distance and dial up actually went down more than 3 million?

Yeah, the legacy business went down more than the increase in the new initiatives, yes.

Okay, so the delta was 3 million? All right, can you just talk in terms of qualification or quantification rather, on how big is your what we’ll call the legacy revenues right now?

It’s the vast majority of our revenue.

80% of our business is out of the wholesale business. The rest of it is primarily consists of - - primarily consists of VoIP and then out of that 80% you can take out 33 million of that plus the VoIP out also.

I’m sorry, can you run through that one more time please?

Let me try again. Figure our wholesale business represents slightly over 20% of overall revenues. We’ve indicated that our data internet and VoIP services represent another 29% of total revenue.

So the balance is what you call the more legacy oriented type business?

70% is going to be legacy and 30% is - - just say 2/3 is legacy, 1/3 is - -

It’s either wholesale or new products. The reason why it’s not a precise allocation is because within that revenue from data internet and VoIP services which represents 29%, you have imbedded in that number both the new internet broadband businesses as well as the old dial up ISP businesses.

Ok, okay.

So that’s why we give you a rougher cut at it than the precision that you’re looking for.

Okay, so the way we should look at it, is that 70% of that business is for the traditional or older business and 30% is more of the newer - - it sounds like 10ish percent is the newer business and 20% is the wholesale business.

2/3, 1/3 is a good number.

Okay. And then do you expect a similar decline then going forward where you’ve got - - what I’m trying to understand is, does the $3 million increase, decrease going forward? And I was actually then pleasantly surprised that you were able to hold the margins steady and I was just trying to figure out how you did that if these long distance and the older dial up business is so profitable.

I think if you had been looking at the press release in the last 2 or 3 quarters, in general in several quarters we had where the decline is higher than the new ones. The compensating part has been, as I mentioned to you, on the new initiatives, the 33 million over last 2 quarters, the gross margin from those have gone up from 20% to 33% and the potential of that gross margin is really more than 50%. Okay? So what is happening is actually the quicker we grow that on net revenue, the faster the gross margin grows, because when those services come on line, then you have the big charges. So that really depresses your gross margin in the first line. So as you add more and more customer base then your total gross margin increases. But the - - for us, we have been saying this for the last I guess 6 or 8 quarters, it is a challenge for us to have the flexibility to invest more money to grow the top line from new initiatives faster. And that will actually accelerate the EBITDA part because so far, some of it, the savings we have does get [indiscernible] because we had the legacy revenue drop faster than the new ones. So this is the reason why we are looking at fixing the gap. Some of it has to come from just the cost cutting part of it or growing faster. So interest cost becomes a big thing. If we can do that, one, it gives us more cash flexibility to invest into sales drivers for these new initiatives.

Okay. And then just to finish up the question, the 3 million, the delta there, do you think that grows or stays steady going forward? And do you expect it to have an impact on EBITDA going forward?

Well our job is obviously, that’s one of the things we spend most of our time on, how to close that gap. Quarter by quarter it is very hard to tell because it depends on in different countries how the long distance prices go. But it has been, I think narrowing some over the quarters because some quarters were much higher But it is narrowing. Obviously we like to get it narrowed to zero as quickly as possible. But this is something, you know, work in progress.

And Michael, I think the other thing to consider in that regard is how well positioned are we to grow these businesses? Well, in Canada now at the end of the second quarter, we have fairly extensive DSLAM network deployed. So we are now in a position of selling broadband services and bringing customers onto our own network which would be higher margin opportunities. In Australia, once we get some favorable resolution in terms of these pick charges, hopefully those activities can be accelerated and bring customers on net, again, at higher margins. So Paul’s point is that 3 million delta, we’d like to see that shrink very quickly and we’d like to see the lines cross so we can start telling a different story.

And, Michael, I’ll just add the 3 million delta is the key. And managing that we’ve been successful in controlling the levels of our adjusted EBITDA through controlling our costs. So even though we have that delta, that negative delta which implies higher margin revenue loss, we’ve been able to control that through cost decreases and managing our SG&A so that our EBITDA has remained stable or slightly increasing this quarter.

Ladies and gentlemen, unfortunately we have run out of the time allotted for questions. I would like to turn the call back over to Mr. John DePodesta for any closing remarks.

Thank you very much, Patty. Before closing, I would like to announce that Primus is scheduled to participate in the following upcoming investor conferences. First is the Jeffries Fourth Annual Communications Conference which will be held on the 11th and 12th of September. And on the 19th of September, we’ll be participating in the Tejas Securities Investment Conference. Both of those will be held in New York City. That concludes Primus’ second quarter 2006 financial results conference call. Replay information can be found on our website at www.primustel.com. The replay should be available in about an hour. Thank you for joining us today and good evening.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day.