Innovate Corp (VATE) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PRIMUS Telecommunications first quarter 2007 financial results. 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. (OPERATOR INSTRUCTIONS). I would now like to introduce your host for today's conference, Mr. John DePodesta, Executive Vice President. Mr. DePodesta, you may begin your conference.

Thank you very much, Patrick. And good afternoon, ladies and gentlemen, and welcome to PRIMUS' first quarter 2007 financial results conference call and webcast. I'm John DePodesta, Executive Vice President.

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'll begin with formal remarks from management regarding the Company's first quarter. 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 the management remarks. You should detect a different tone from PRIMUS management this afternoon. The reason is that our situation has dramatically and positively changed since the last quarter. As a result of our enhanced liquidity and lengthened runway for debt maturities, PRIMUS now has the financial flexibility and the time to pursue attractive high margin growth opportunities that can reshape the Company.

After having to play an essentially defensive strategy over the last several years, tightly balancing our business and marketing initiatives along with practical cash constraints, we can now add offense to our game plan. Today, Tom Kloster will discuss the material accomplishments in the first quarter. Then Paul Singh will describe, to the extent his sore throat permits, some of the near-term strategies we plan to execute.

As some of you know, Paul and I have been business colleagues for over 20 years. And I observe that his focus is shifting from financial restructuring issues to his natural entrepreneurial drive to increase the underlying value of PRIMUS' franchises through business restructuring and growth. I think I know why. Paul now has that magic mix of opportunity, resources, and time to apply against an existing business space that has the right products and infrastructure to maximize value for our investors. Paul has been impatiently waiting for this moment.

In the balance of my remarks, I would like to share with you our view of the horizon, where we see PRIMUS emerging after executing on the two-year transformation strategy we launched at the beginning of this year. We envision a company with a narrow product and geographic focus. Its revenues will be predominantly retail with a larger business component, principally small and medium-size enterprises. The major products will be broadband, data and hosting, local and IP-centric with mobile and traditional voice playing supporting roles. We expect sequential revenue growth from these products generating overall gross margins approaching 50% with EBITDA margins in the teens.

Overall, the vision is of a smaller, more focused, and more profitable enterprise performing in business segments that should attract higher valuations. This in turn will provide the Company even more flexibility going forward to refinance existing indebtedness and regain momentum in its equity to support continued growth. That is our vision and we believe that we now have the financial flexibility to pursue it.

I will now ask Tom to review the results of the quarter.

John, thank you and good afternoon. The first quarter was a busy quarter to say the least. We are quite pleased to have accomplished the number of liquidity enhancing transactions which have substantially improved our cash balance level, allowed us to comfortably repay a $23 million February 2007 debt maturity and which also extended certain remaining debt maturities resulting in the nearest significant maturity now being in mid-2009. These liquidity enhancing actions coupled with our expectation of generating additional funding through the opportunistic sale of several low-margin and low-growth businesses provide us with much more operational flexibility than we have experienced in the recent past. We now have the ability to prudently invest in areas of promising product growth.

First quarter net revenue was $228 million as compared to $241 million in the prior quarter. The $13 million sequential decline was driven largely by a $7 million decrease in low margin wholesale services and a $6 million reduction in retail revenue. As we have made clear in the past, wholesale revenue only has a minimal effect on adjusted EBITDA. The decline in retail revenue reflects the ongoing reduction in legacy voice and dialup Internet services which was only partially offset by modest growth from our high-margin broadband, VoIP, local, data, and hosting service initiatives.

Retail revenue was also affected by seasonality and pure business and total days in the first quarter relative to the prior quarter. On an overall basis, currency movements had little effect on revenue this quarter, although both the Canadian and Australian dollars as compared to the U.S. dollar moved significantly but in opposite directions, thus offsetting each other.

We continued to experience growth in the Internet services such as DSL and in hosting services, while local and VoIP services had slowed. We believe that in order to offset expected future declines in voice revenue, incremental investment in growth products such as broadband, VoIP, local, data, and hosting will be required. Now, unlike the recent past, we have sufficient resources to begin making those investments. Net revenue less cost of revenue as a percentage of net revenue was 36.3% as compared to 34.8% in the prior quarter as we continued our efforts to improve the efficiency in cost structure of our network.

Our SG&A expense was $69 million or 30.2% of net revenue in the first quarter as compared to $66 million and 27.3% of net revenue in the prior quarter. The first quarter SG&A includes $2 million of legal and other professional fees related to litigation and a $1 million write-off of a non-trade receivable. Advertising expense remained relatively flat from that of the fourth quarter. We continue to focus efforts in the area of offshoring certain administrative functions and centralizing other functions. We expect to realize financial and operational benefits from such actions in the second half of this year.

Adjusted EBITDA for Q1 was $14.1 million in line with our expectations as compared to $18.2 million in the prior quarter. As mentioned in our yearend earnings release, the expected decline is primarily attributable to the previously mentioned $2 million of legal and other professional fees related to litigation, a $1 million write-off of the non-trade receivable, less calendar and business days in the first quarter, and holiday seasonality in Australia.

We ended the quarter with an unrestricted cash balance of $104 million as compared to $64 million as of December 31, 2006. From an operating standpoint, EBITDA produced $14 million offset by $19 million in cash interest, $6 million for capital expenditures, $1 million for cash taxes and $1 million for working capital. Non-operationally, we received $103 million of net proceeds from issuances of debt, $6 million from the sale of the -- our domain name business in Australia. And we spent $56 million on the repayment of debt including the $23 million retirement in full of the 5.75% convertible subordinated debentures and the $31 million repayment of the previously outstanding Canadian credit facilities.

The first quarter has historically been a very high cash interest payment quarter. This is further exaggerated in the current quarter with an additional $2 million of accrued interest paid as part of the 12.75% Senior Note exchange. I expect the second quarter cash interests will decrease to levels of approximately $12 million. Subsequent to the second quarter, quarterly cash interests will be relatively consistent at $15 million per quarter as a result of the timing of payments on the new Second Lien Notes.

Capital expenditures this quarter of $6 million are in line with our full year 2007 guidance of $25 million to $30 million. As noted, from a financing and liquidity standpoint, the first quarter was extremely busy. The process began when we obtained the consent of our term loan holders to issue up to $200 million of Second Lien Notes.

In February, we completed an exchange of $41 million of principal amount of our 12.75% Senior Notes for $33 million principal amount of the Second Lien Notes. Additionally, we sold 24 million of Second Lien Notes for net cash proceeds of $19 million after discounts and expenses. In March, we sold an additional $51 million principal amount of Second Lien Notes for net cash proceeds of $50 million. Also in March, our Canadian subsidiary closed the U.S. dollar $35 million Senior Secured Credit Agreement due 2012. And we concurrently repaid the existing Canadian dollar $35 million credit facilities due in April 2008.

Further, we sold our Australian domain name business for net cash proceeds of $6 million. As scheduled, in February we paid $23 million in cash to redeem fully our maturing 5.75 convertible subordinated debentures. And lastly, we amended the terms of an $8 million capital lease facility in Australia which was due in the first quarter of 2007 to amortize over 24 equal monthly payments. Quite a busy quarter indeed.

Although these actions increased our long-term debt obligations to $688 million at March 31, 2007, up from $640 million at December 31, 2006. They have provided us with greatly enhanced liquidity and no material debt maturities until mid-2009, thus allowing for much greater operating flexibility. I will now turn it over to Paul.

Good afternoon, ladies and gentlemen. As John and Tom described, it is indeed a refreshing change for the PRIMUS executive team to start assuming a sustainable offensive posture in the marketplace. We now have more $100 million in cash to fund organic growth and potential acquisitions. We are ready for that, a growing portfolio of high-growth high-margin services in broadband, Voice-over-IP, data, hosting, and local services with annualized revenues of $200 million. This figure included -- this figure includes our data hosting business which would be one of our most targeted growth opportunities and which deserves more visibility.

Our rate of quarterly revenue growth in some of these services have slowed in the last couple of quarters as our competitors have been vastly outspending us in sales and marketing. However, the opportunity is there, particularly with our new resources, to regain topline growth in these products by prudently investing in sales and marketing and in the supporting infrastructure.

In order to fund this growth and maintain a strong liquidity position moving in to 2009, PRIMUS management expects to generate between $50 million and $100 million in cash over the next 18 months by selling low-growth slow-margin business units that either will have minimum impact on our current EBITDA and/or do not have the potential to help expand the Company's overall enterprise valuation metrics. The current cash position has given us the flexibility to start investing in growth opportunities while positioning select business units for sale at the right price and at opportune times.

Our current focus is to accelerate growth in data hosting and enterprise IP services targeted at small to medium-size enterprises in Canada. Our current thinking is to begin deploying 50 new field sales reps in 2007 to sell these two services. In Canada, we already have an established fast growing data hosting business unit that generates incremental EBITDA margins in excess of 50%. The hosting revenues also bring in an equal amount of high-margin data revenue from the same customers. The churn rate for this business is also extremely low.

In addition to our existing data centers in Toronto, Ottawa, and Vancouver, we plan to invest in two new data centers in two additional cities in Canada. We also believe that we can get an early mover's marketing advantage by aggressively launching enterprise IP services targeted at small to medium-size enterprises. Our beta tests in Canada for this service are proving to be quite successful. We already have a network infrastructure in place and the expected gross margin from this business should be in the range of 60% to 70% with incremental EBITDA margin of 30% or more. We are also evaluating other select business sector growth opportunities to build scale in our major franchises. And we will keep you updated as our plans develop.

As the planned investment in our Canadian data hosting business suggest, while the cost of our new capital is relatively high, we intend to deploy it in areas where we can deliver investment returns far in excess of our incremental cost of capital. The other aspects of our business strategy including efforts to strengthen our balance sheet, improve our cost structure, and maintaining a disciplined investment approach remain unchanged. Our management team is energized to compete with a broader range of options and opportunities. We believe the steps we take in 2007 will start showing positive results in 2008 and beyond, and will improve our performance trajectory towards attaining the PRIMUS vision described by John.

Let me now open the floor for questions and answers.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Ana Goshko from Banc of America Securities. Your line is open.

Hi, thank you. I have a couple of things. My first question is on the pace of decline of the low margin, low growth stuff that you're shedding, it was 5% or $13 million this quarter. How do you see that trending in the next couple of quarters out, and then I have a follow-on on that question.

I think Ana, this is Paul. It's, I think, first quarter obviously had a couple of less days, so that has some impact on it. I don't -- obviously, it's only April so I can't tell you what the quarterly revenues are going to look like because the revenues can change quite a bit from month to month in the low margin business, especially in the wholesale business. I think the March and April numbers seem to be better, and -- but that's all I know on that one.

You know I think, Ana, on the wholesale businesses, we mentioned previously kind of from quarter to quarter, that's a tough one to gauge, because it's very dependent on what's happening in the marketplace, very dependent on specific routes, on minute pricing in a lot of foreign countries that change on a regular basis.

And that has very little effect to our EBITDA, so we focused, I would say, a little bit less on it. Its important business to us, but we focused a little bit less on it because from an EBITDA standpoint, it's not as material.

On the retail revenue side, which is at $6 million decline this quarter, as Paul mentioned, some of the days in the first quarter, the seasonality in the first quarter affect us as well as some slowing of the growth businesses which have historically offset some of the decline in the voice and dial-up ISP.

So, we'll continue to have decline in voice and dial-up ISP, it's just how much of that can be offset by new business growth.

Okay. And then my follow-up or one of them is, I want to verify if I'm thinking about this correctly. In your press release last quarter, you said that your growth revenue was annualized a $140 million.

Yes.

And this quarter you're saying that it's 200. So that means that you sold $15 million quarterly of growth revenue in the first quarter. You may not have realized all that because of timing, but that's what you've sold. Is that --

No, I think the discrepancy between those two numbers is what Paul alluded to Ana, and that is historically we have been including that number, just our growth initiatives, our so called new initiatives, which we began in 2005. However, it did not include our data and hosting revenues.

Okay.

And as we have re-evaluated the business, and where we'd like to project our business going forward, data and hosting is going to be one of our major drivers of growth and profitability. So we want to begin to include those revenues in a pool of revenues and products and services that we're going to be closely tracking here internally, and we expect our investors to do so as well, in terms of their future top line growth, margin contribution, and EBITDA contribution.

Okay, that's clear now. Then another question is, what are your DSL customers now? I think last quarter it was about a 150 in Australia, then about a 190 some thousand -- I mean it was 150,000 Australia, a 190 some thousand overall. Where are you now?

Total broadband customers spread out among all that countries is just under 200,000.

Okay. And then final question is -- aren't going to escape this one. With all the noise around Vonage and the Verizon ruling et cetera, and given that your Lingo product is similar in nature, any comments on how that impacts you or could potentially impact you; one, in terms of any sort of patent issues that you may have of similar nature, secondly, is there any opportunity for you to pick up customers that may not be comfortable with Vonage any longer?

I think, as a practical and general matter, we won't comment with respect to those hypothetical issues with respect to patents. But I will say this, our Lingo business represents, about on a run-rate basis of somewhere between $25 and $30 million of overall revenue. So, as a percentage of our overall business is relatively small, whereas in Vonage's circumstances, it is obviously their sole product.

Will there be opportunities for potential growth in that business, to the extent there is any disruption in Vonage's business going forward, I would expect the answer to that is yes.

Okay, great. Thank you very much.

Thank you. Our next question comes from Chris Roberts from Tejas Security Group. Your line is open.

Good afternoon guys, and thanks for taking my call. Just a couple of quick follow-up questions. The $50 million to a $100 million in cash proceeds from the divesture of certain businesses, you're certainly not starved for cash, why do this now? Is this something that over the last quarter came clear to you?

Chris, I don't think necessarily we're doing it now, I think we're telling our investors that we plan to do it over the next 18 months. Yes, these are not forced sales, sales under pressure, these are dispositions that we will make at opportune times, and at proper price levels. These are basically businesses or products that don't really fit into the vision of the Company as we articulated it earlier in the call. But these are business that have value, and we think it is best for us to recycle that value by monetizing those assets that will help us grow in the areas where we think we can grow profitably and attract higher enterprise value for the overall corporation, as well as potentially using some of those proceeds to reduce debt. So I think it's really redeploying assets that are not going to be part of our growth picture or the vision of the transformed company as we see it today, but transforming that into liquid assets that we can use to pursue the vision.

Chris to -- I think I just want to underline what John said. In terms of the enterprise value, there are lot of our businesses actually -- I guess now we have choices to make, choices that we have growth areas. If I generated the same EBITDA, just as an example from hosting business, it will actually be worth -- in the marketplace, would be worth at least two to two-and-a-half times, maybe two to three times, but the same EBITDA would capture the enterprise value two to three times.

So now we have the flexibility to actually look at that and say let's grow these businesses which have high valuation metrics. And all the growth areas are much higher valuation metrics than PRIMUS would get or in our valuations we get. So the idea is to start investing in it. That would require cash obviously. So, and -- so you don't want to find yourselves not having enough cash to be funding these projects. So if by necessity first you do it, it makes business sense to do it because for the same investment you get a much higher multiples, and much more sustainable business going forward.

So that's the underlying part of it. You see it in a portfolio and we are going to allocate our capital to it, it will maximize the enterprise value.

Okay. Yes, it certainly sounds like it's more of a strategic decision than financial.

Exactly.

It does make more sense to do it.

Listening to your comments, there's a lot of focus on DSL business and now the hosting business, and not as much talk about Lingo. And in the 10-K it states that the subscriber count has moderated or actually declined in the U.S., predominantly due to just lack of marketing support. Now that you've got significant liquidity and a timeframe, do you expect to increase marketing and spending on that business?

The -- when we look at allocation of capital, we look at the customer lifetime value and the return we would get by investing marketing money in different business units. Now, if you invest $1 in Lingo and you get a certain amount of return but the -- you will get the feedback immediately. You advertise, you get the customers, you get the revenue.

If I take the same dollar and I invest in enterprise IP customers, there you need salespeople. It takes 18 months for salespeople to start paying back, so it's a much longer horizon, but I believe the -- when you look at the customer lifetime value for that one and return on capital, it's actually quite high. So we sort of balanced it because you can't put all the money in one or the other.

So -- and the long way to answer your question is we do look at Lingo. The major change in Lingo is even though customer base have come down, the revenues are flat to a little bit up, and the reason is we have adjusted our fees, we have taken out a lot of costs, we are focused on reducing the -- actually the margins from the business, even with all the uncertainties surrounding that market, we are actually improving the bottom line of that business. And this month actually the customer base was -- we didn't lose -- there was no net less from the customers. But now we have the money so we will see where should we invest to get the best returns.

Yes, Chris, on the customer accounts on Lingo, I think they're really part of 2006. We've really tapered back the advertising investments and then in some cases completely eliminated it in the customer accounts, dropped somewhat, and they're really part of the year, the last -- the latter part of 2006 and into 2007. We have been spending a modest amount of advertising on Lingo and the customer accounts have stabilized or grown very slightly.

By the way, just Lingo business, our (inaudible) is the highest, the highest in the industry, it's running more like $33 now. The reason for decline in the customer base was because we increased our monthly price, if you remember, from $19.95 to $21.95. So we knew this would be increased churn, but net-to-net that was the right thing to do for us, and our gross margins are improving on that. So I think we are going in the right direction in terms of that business.

Okay, great. Well, thank you for answering my questions and congratulations on a good quarter.

Thank you, Chris.

Thank you.

Thank you.

Our next question comes from David Sharret from Lehman Brothers. Your line is open.

Good afternoon, guys.

David, I'm surprised you're behind in queue. You're normally the first one.

I know, I know; must have dialed in late. Well, I wanted to just sort of ask, it seems like from the tone of the call, obviously, a big focus on new initiative investments and sort of -- less on sort of the balance sheet side. And obviously you're coming off of a very busy first quarter and looking forward in terms of new initiatives. And I just want to make sure I understand kind of the direction you're taking right now.

Is it unfair to say that you are less focused in terms of some of the debt-for-debt exchanges and repurchases that you've done on the balance sheet side? Maybe because -- again the security prices are up a lot over the last few months since this process has begun. Maybe that's less attractive to you.

I guess that would be the first thing as a company you're still looking at or -- and then just on the investment side, in terms of the new investments side, if you can just talk about what investments you have quantified -- being quantified for us, what you've already determined you're going to make at this point, like the two data centers, maybe what your spending would be there, and if you have maybe an aggregate number of what you've identified at this point in terms of investments on the new initiatives side. And lastly, could you talk about potential acquisitions as well, maybe what the M&A landscape looks like as you've started to think about acquisitions?

Okay, let me try on the first question about the debt exchanges. Your observation that the price of a lot of our debt securities have been rising is true. We'll only be satisfied when they're at par or above, quite frankly. But it was a busy quarter last quarter that was consumed with a lot of balance sheet activity and fundraising.

But we think we now have a different priority for the Company in terms of now deploying that capital in ways that are going to produce the kinds of returns that are going to present the right kind of profile that's going to attract the right kind of enterprise evaluations in the market over time.

This is not to say that we are going to push to the side continuing efforts to do exchanges or other balance sheet transactions that would be prudent and opportune for the Company. We'll always be alert and watchful for those opportunities, but I think for now there are other ways of creating value directly for the Company that's probably going to be the focus of our attention.

I think, to answer your last two questions, yes, I'm -- I think still exhausted from the first quarter activities of all the transactions, so I haven't tried to -- it has been only 2-3 weeks as we have focused in on what investments to make to what degree. I think a couple of them that we talked about in Canada were clear that by deploying the sales force because it takes a long time to hire salespeople, train them. I think that was an easier decision to make.

And so next quarter hopefully we'll have a better sense of where to invest how much and so on. So I don't have exact numbers to give you quarter by quarter.

On the M&A part, as you know, acquisitions, any company that's in the business that we talked about on the new growth initiatives, whether it's a hosting point, enterprise IP, broadband, DSL, data, all of those companies are trading, as you know, generally anywhere from 8 to 20 times the EBITDA and multiple -- huge multiples of revenues and that true in Canada, true in Australia, true here.

So I think -- and especially we don't have the currency at the same multiples that you could do acquisitions much quickly so we would have to pay by cash. It doesn't mean we are not looking at them, but I think they are quite expensive. That, compared to the organic growth, where again the paybacks for most of these things would be about 3 years, and the direct sales force generally have a payback -- it used about 12 months, but because of the employment nature and the salaries being paid, it's more like 14 to 18 months now.

That one seems like something we can afford and we can get going, and we hope in the next 18 months, some compelling acquisition opportunities will come for us. So it will be the combination that will help us grow.

I guess if -- if I could just ask on the data centers specifically.

Sure.

Do you know what you are expecting to spend there?

Pardon me?

How much you are expecting to spend on the two data centers.

Yes, the data centers, the strategy we have used in Canada is to build them incrementally. So generally what we will do is take a space of 15,000 square -- 10,000 to 15,000 square feet and we build them in stages of 1,500 to 2,000. This is how we have built the other one and that has been quite successful, instead of spending all the money upfront, because it kind of matches up investments and that -- closely.

Right now they have not actually finished the full estimate of how much it would cost to do the first stage of it. If I were to estimate it I would think they would range about $10 million.

$10 million in total for the two of them?

Right.

Okay.

And then David, in Canada as part of our previous plan and our CapEx, we have been expanding some of the floor space in our existing data centers.

Yes, yes, this is different than that. That's already in the plan.

Yes. That's in the plan [where] -- that will give us the ability to generate new revenue from the additional floor space. And then the additional item would be to go into two new data centers.

And we rank in the top, I believe, four of the data center companies in Canada, and so far the sales efforts and the results have been quite good. So this is a good area where we have traction and we have a good management team there, the sales team to grow business.

And as we mentioned earlier, this was a business that we have just not highlighted in the past. It really deserves a lot more visibility. So you'll be hearing us talk more about it going forward.

And it sounds like -- I mean, just to make sure I'm getting the right takeaway from your comments, you'll probably be back to us within the next quarter or two with some of what these investments are going to be, a more sense of what you'll be spending in terms of additional CapEx, salespeople added, different areas and geographies within the new initiatives. We'll probably get more details in the next quarter or two on that.

Yes. I think that we would have the overall plan. As you know, in these businesses, I wish I could just go find 60 salespeople and put them out there. Generally what happens is these things take a long time to hire, recruit and train the salespeople. So I think as we go through then we'll be able to see how successful we are to get the right people at the -- in the right city.

Okay.

This is why it takes a longer period of time to once you make a decision then to actually go through the execution part of it, it's a longer term process. So --

Okay. Thank you, guys.

You can expect that money to be gone next quarterly call the $10 million has been spent.

But I do think, to your question, I think each quarter we'll have a little clearer picture of the direction and the quantification of that direction.

All right. Thanks, guys.

Thank you. Our next comes from [Paul Arrouet] from Bear Stearns. Your line is open. Pardon me, Paul Arrouet, your line is open.

Oh, you know what, I actually -- my question was answered.

Thank you. Our next question comes from Matt Dundon from MTR Securities. Your line is on -- your line is open.

Thanks. Guys, I recall 3 years ago when you sort of last had sort of a major announcement that you were going to be pursuing some new initiatives. And the context was obviously different there. We were sort of seeing the beginning of decline in margin in some of your legacy businesses, and you talked about "Well, we have a choice between fading away or making a run at some new opportunities and we're going to make a run."

Some of those new opportunities weren't particularly successful and the Company had a hard run of some very marginal EBITDA quarters and you had to do some significant restructuring, a lot of which was done.

What were the lessons learned from those initiatives and the mixed record from those? How can we feel comfortable that what you're starting to do now is going to end better or at least feel a little more informed in terms of identifying your opportunities and picking your fights?

Matt, let me start with that and I'm sure Paul is going to want to pipe in. First of all, we're starting at a different point. As we indicated earlier in the call, we now have $200 million worth of revenues from these high-growth, high-margin products. We didn't have that 2 years ago.

At that point in time when we launched those new initiatives, the Company was basically a long distance voice dial-up ISP wholesale business. And the profile that we are showing today is significantly different than that and the profile that we are aspiring to over the next several years is substantially different yet.

So the difference between 2 years ago and today is we have $200 million of revenues. We have developed high-growth, high-profitability products. We've made the investment in the infrastructure to bring those products on net to attract higher margins. And now what we have which we haven't had over the last year is adequate liquid resources to put some muscle behind the marketing efforts for some of the higher profitability opportunities.

What are some of the lessons learned? Markets change. One of our major initiatives 2 years ago was launching the Lingo VoIP business and at the time, as we all recall, that was considered a very opportune and very hot market to get into. We think we developed one of the leading products.

We also recognized along the way it required significant amounts of marketing dollars. And in 2005 alone I think we estimated that about $25 million of EBITDA was put into the marketing of Lingo services. And as we entered into 2006, we knew there was -- that we could not sustain that level of investment to grow that business and also pursue some of the other products that we felt were necessary to the Company and to once again begin to generate the levels of EBITDA that were sufficient.

That market opportunity for the VoIP business has obviously been affected by the fate of some of the leading players, particularly Vonage. At one point in time we had hopes and expectations that its IPO would be successful and would lift all boats in the space and would enable us to attract similar levels of investment to grow that business. We all know the sorry history and passage that has occurred with that.

So that's one of the lessons, markets change, investor sentiments change, and -- but we think we have identified and taken out positions with products that are currently generating substantial margins and EBITDA contribution that we think we can grow and enhance those contributions. And that's where we are going to put our efforts. Paul?

Yes. I think the one lesson -- the first lesson was -- or the fact was we did the right thing. If we actually didn't do that one, we probably wouldn't be in business. We'd probably be in business but have no hope of getting our bonds up to par, for getting the equity value. We took that capital, if you remember, and we reinvested about $35 million of that in Lingo.

And at that time if you would have asked me, Lingo the voice-over-IP was the fastest growing and the biggest investment that you could make and we thought online IP is the right thing to do, which it turns out it's the right thing to do, except the valuation -- now with Vonage and all are not there anymore so -- but in general the $35 million investment that we make is still -- it's not a lost cause as such. I think we have those customers and we are going to have the opportunity to grow that.

But the amount of money we spent on that one, I think at that time, looking back, was probably maybe too much. But at that time we thought gaining market share was the right thing to do.

The rest of the funding went into DSL in Australia. If we didn't have the DSL part of it then all -- we didn't actually invest that money, there would be no way that we would be able to have really any customers, not from -- not any customers. But we would be having declining revenues in the dial-up business and others with no growth opportunity, and that's what DSL has provided. But also keep in mind that's where the future is as well. So we would be investing in that infrastructures is the right thing to do. DSL in Canada, local in Canada, hosting in Canada; if we didn't have those three things, I think the franchise value of Canada probably would be half of -- without this.

So to me I think we did the right thing. I wish we would have done that one 12 months earlier than 2005, but later -- better late than never.

The -- I think actually going to the new one is -- the other lesson probably was not to let -- that you make incremental and moderate investments, look at the results, take a little longer, but I think we would come up with better results. So we just -- we are -- under no conditions we plan to abandon our EBITDA that we were going into the growth opportunities, so don't worry about the EBITDA, it doesn't count. That's not going to be the case.

I think you need to watch it just as we have been, our cost, trying to restructure our cost structure if we can, do whatever we have to do to improve the profitability and just continue on that path. So this is not license that we got -- frankly even $100 million, it's not that much money that you can just change the world. but it's a lot more than what we had in the last several quarters where we really had to make -- change our strategies and decisions almost every quarter depending on what cash we needed. So it's a big change.

Yes, I'll just add one other comment. It's a long-winded answer here for your question, but one other comment on the lessons learned. We went into VoIP and local and broadband services, and I think those are totally different services from our former business of voice businesses. So the idea of provisioning those customers and the challenge of provisioning those customers or migrating those customers onto our network, I think, was a lesson learned. And we had to build all of those systems and do those type of things in customer care for those type of customers, totally new and totally different.

Now, I think we've experienced that. And now what we're talking about is adding to that growth. And we don't have to start from scratch and go through the growing pains of figuring out how to provision and doing that effectively, and instead, we're really just adding marketing strength onto the existing framework that we've built.

Okay, I appreciate that. Just one totally unrelated quick question. Given the, as you talk about these new initiatives, ever more strategic focus on Canada and presumably the continued strategic focus on Australia, and we're talking about asset sales which might unwind some of your non-Canada, non-Australia involvements. Have you given some thought to putting the headquarters in Toronto, or Sydney, or doing something that sort of places the corporate finance and executive operation more geographically lined up where your strategic emphasis is?

You may be hearing some silent applause from Toronto and Melbourne as we speak.

That's the other lesson to learn. The other lesson to learn is you focus on the markets and not get carried away because one franchise is doing great. Things change in every country. Just look at Australia three years ago. You know how much EBITDA we were generating, and the regulatory environment. I think keeping a balanced approach is the right thing to do.

And you may have -- I have not actually given up on our Europe, which we are -- is a much, much improved operation. Two yeas ago, I could have actually closed it. If I closed that European operation, I probably had to spend $20-$30 million just to close it. Today, I think and in next couple of years that entity could be worth a lot of money if we were to put it on A.M. Exchange or something.

So we are looking at it much different than I think -- at least in my viewpoint is now we got European operations. We've got into IP-related services, focus more on business customers. And if it is a 50-$100 million business growing EBITDA each year, the companies are being listed on A.M. Exchange with a lot of valuation. So why wouldn't we want to do that one?

And same thing in the U.S. U.S. general performance is much improved from last year. It's the biggest growth opportunity in enterprise IP. A similar product, just keep in mind now what you're seeing in PRIMUS is to -- these are the four-five areas taking the same platform and similar approaches and focusing in on four -- Canada, Australia, U.S., and U.K., those are the four main areas. And I think each one of them is going to be -- could be worth a lot of -- lot more money to pay down our debt in 2009-2010 than from the normal calculations of EBITDA multiples will reflect.

That's the -- I think that's the thinking we are going with because otherwise just based on EBITDA, free cash flow from the operation, that's not the only way to generate value. The enterprise value itself would be -- I think would take care of some of these issues in the long run.

Yes, I --

You have a relative in the corporate relocation business?

I would also point out that from a corporate standpoint, we like staying close to you guys --

But I love Toronto. I would go there. So --

But we like staying close to you guys for the capital that is here in the U.S. market.

That's very comforting. Okay, that's all. Thanks from the bank and thanks from me.

Thank you. Our next question comes from Bob Konefal from Imperial. Your line is open.

All right, thank you. Couple of questions. And I just wanted a clarification on your growth initiatives, the $200 million versus 140 number you said was -- the difference was mostly data and hosting initiatives. If you stripped out data and hosting, would the remaining businesses have been up or down for the quarter?

Secondly, on the cost side, a couple of different questions there. One, any update on the Australia access cost issue? Any sense of when the offshoring might start to kick in? And then on the selling side, should we expect to see more advertising spend, more sales personnel, or some combination of the two? And then last question on the $50 to $100 million of asset sales, is it safe to assume that that excludes Lingo? Thank you.

I can take the first one there. The data and hosting business is the new amount of revenue that we added in to get up to the $200 million. Exclusive of that, I touched on in my remarks, we had some nice growth in our broadband products, in DSL. And then we had modest growth, modest improvements in some of the other areas. So, overall, the revenue in what we formerly were quoting and termed as new initiatives was up quite modestly from quarter to quarter, but it was up. So, hopefully, that helps.

The margins in those business again showed sequential increase.

The profitability of those initiatives has had a very nice trend over the last several quarters as we've built some scale and done a number of things as Paul mentioned on Lingo, where we've adjusted rates and improved the cost structure. So the profitability on them has continued to improve.

Okay. How about on the cost side? Any update on Australia or the -- the offshoring timing?

I think on the offshoring part -- I think offshoring on a larger scale is a long-term process for us. I think, right now, UK is taking or PRIMUS Europe is taking the first initiative. And I believe by the end of third quarter we are expecting about 18% to 20% of the workforce to work from India.

I'll finish that off, Paul. Paul is coughing. But I think we have taken steps. We've opened an office in India. We've started to employ people in India. We have folks going to our European offices training for certain positions. And then they will do those positions from our Indian location. So it's underway. It's much farther than just an idea. It's certainly underway.

I don't think you'll see any appreciable financial benefits from it until the second half of the year and maybe even the latter part of the second half of the year. But we're intrigued by it. We believe it's the right thing to do in certain functions, not in all functions, but in certain functions. And we're doing it in a judicious way. I think, Bob, you're going to have to -- you ask a question -- you had hit us with too many questions here. So I'm not sure --

[All right].

I think you asked about Australia and the regulatory environment?

Yes, any update there?

-- no.

No update.

No updates on that.

And then the last one was asset sales, this $50 to $100 million number you're -- you put in your release. Any granularity you can provide in terms of which businesses are included in those? Does it -- and more specifically does it exclude Lingo?

I think that's a very sly way to try to back into our -- revealing what we think a valuation of Lingo may be. Let me answer your question this way without being specific. I think one of the whole efforts of the divestiture plan is to narrow our geographic and our product focus. So I think that probably gives you some sense of areas that we may be identifying as opportunities for potential sales over the next 18 to 24 months.

Okay, thank you.

Okay, thank you.

Thanks.

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

Yes, thank you, Operator. And good afternoon, guys.

Hi, Brent.

Well, most of my questions have been answered, so just a quick, sort of, I don't know, almost like a housekeeping question. Just looking at the -- well, first, can the 3 million or so of unusual items for the professional fees, and the AR write-off is that all to be considered in the SG&A line?

Yes, that all was run through SG&A.

Okay, and so I'm just -- I was trying to maybe reverse that out and analyze the margins. Now, was there any sort of a minor expense reclassification from the last quarter between gross margin or between the cost of goods line and then into SG&A? It looks like gross margin adjusting for that was up more than 1%. But then the SG&A was also up when you take into consideration that $3 million or so. So I don't know -- I don't know if there is some kind of offset there or is this just the way the numbers came out this quarter.

Yes, I mean, those items that we identified are the largest items. So we didn't change any accounting methodologies between what we classify in cost of sales versus SG&A. In any given quarter, fourth quarter or first quarter, or any other quarter for that matter, you have periodic adjustment, and true-ups and things like that. So it is hard to highlight everything.

But the ones that we highlighted were the more material items. So exclusive of those, I would think it is a comparable trend.

Okay. All right. Well, congratulations guys. That's all I had.

Thanks, Brent.

Okay, thanks, Brent.

Thank you. We have time for one more question. Our final question comes from Sean George from Drake Management. Your line is open.

Yes, hi. I entered the call late, I missed the CapEx. I think you gave you some CapEx guidance for '07 and '08.

Yes, Sean. We did. We didn't give anything for '08, but previously we had said that our CapEx for 2007 will be between 25 and $30 million, and first quarter CapEx was $6 million. So we are tracking in line with what we expected to for 2007.

Okay. And that's all -- that's all the Canadian data centers and expanding capacity in other areas. Where else like geographically?

No, this is excluding the new -- excluding the things we talked about today.

Now, what it does is that included in that CapEx is the planned expansion of the existing facilities in Canada. What it does not include, Sean, is the two new additional data centers in two new locations in Canada --

Okay. So that's another $10 million?

That could be up to around $10 million. I --

Okay.

Yes, we will confirm it next time.

Okay. And how -- on the new data centers, how long does it take to get those ramped up?

Six to 12 months.

Six to 12 months. And what did you say, was that 30% EBITDA margins on those?

I think on the -- generally, the gross margins are about 80% to 90% and the incremental EBITDA should be about 50%.

50%?

More than 50%. But it does take a long time to build them. Once you get a customer, then the churn rates are very, very low. So you have a good sustainable business going forward.

But again in -- hopefully, we'll have more color on this in the next quarter, Sean. The capital expenditures are normally staged to match up with our growth and fill out all those spaces. So not all the capital expenditures will be necessarily incurred upfront before you turn the key in the door.

Okay. And then on the divestitures, what's the priority -- say, you were able to make some asset sales and have some extra cash lying around. What's the, kind of, the priorities there?

I think we would -- the same discipline we have today. We are going to look at where we get the best returns, which then generate sustainables, maximize the enterprise value. And then, of course, in 2009, 2010, we have payments coming due. So, a combination of those.

Okay, great. Thanks.

Thank you.

Thank you. Mr. DePodesta, you may proceed.

Well, thank you very much, Patrick. Ladies and gentlemen that concludes PRIMUS' first quarter 2007 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 very much 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.