Innovate Corp (VATE) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PRIMUS Telecommunications second quarter 2007 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Executive Vice President of PRIMUS Telecommunications, Mr. John DePodesta.

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

For those who have not had a chance to review the earnings release, it has been posted and can be viewed on our Web site at www.primustel.com. Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer; and Tom Kloster, Chief Financial Officer. We'll begin with formal remarks from management regarding the Company's second quarter. This will be followed by a question-and-answer session.

Before we begin, however, please be advised that statements made by the Company during this presentation that are not historical facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to, revenue and earnings projections, statements of business plans and objectives, and capital structure, and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk.

Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Forms 10-K and 10-Q and other periodic filings with the Securities and Exchange Commission. These filings may be obtained from our Web site at no cost. The Company is not necessarily obligated to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I will now begin the management remarks. My comments this quarter will be brief, as I believe the challenge and the corresponding opportunity facing the Company are coming into sharper focus. Over the last two quarters, our successful efforts in extending debt maturities and raising over $75 million in cash has provided the Company an extended runway through mid-2009 and the cash resources to address our primary challenge, namely to generate contributions from the growth in broadband, VoIP, data hosting and local services that more than offsets the systemic decline in legacy voice and dial-up ISP businesses, which historically had been major margin contributors.

As noted in today's press release, the revenue gap between our new growth services and the legacy businesses was still around $4 million in the second quarter. The good news, however, is that the revenue and margin contribution from those new services continues to grow steadily and as importantly, from a strengthening base. When we launched the new services in 2005, we literally at ground zero. Indeed, many of the services required necessary infrastructure such as a DSL network before we were able to sell high margin on net broadband services.

You may recall that our early progress reports noted that for each dollar of declining legacy business, we had to sell $2 of the new services to offset the loss in margin contribution from the legacy products. Now, with improving scale of over $200 million of revenue being generated by our new services and with critical infrastructure in place to permit us to sell high margin services on net, we have reached a milestone where each $1 of revenue from new services on average generates an equivalent amount of margin contribution for each $1 of lost legacy revenue. We have come a long way and we expect that trend line to continue to improve with further growth.

It bears emphasizing that our recent progress has been accomplished in a highly competitive marketplace in which the Company with limited cash resources was operating at a distinct disadvantage. Now, however, our enhanced liquidity provides us the opportunity to accelerate the growth of the high margin new services. As Tom will describe, decisions are now being implemented and resources allocated on both the capital expenditure and sales and marketing fronts to take optimum advantage of this opportunity.

While the fruits of these enhanced investments in the form of revenue and contribution growth are expected to lag the investment, we are confident we are placing our available chips on the best possible wager. Thus, our challenge is clear and we believe we now have the products, the resources and adequate time to seize the opportunity. It is now all about execution.

I will now ask Tom to comment on the quarter.

John, thank you and good afternoon. Since our last conference call, we have added to the array our liquidity enhancing actions we announced in Q1. In June, we exchanged $5 million principal amount of the 7% step-up debentures for 6 million shares of common stock. In July, we completed the sale of 22.5 million shares of common stock for $19 million in net proceeds. Together, these two transactions eliminated the accelerated maturity provisions of our 5% exchangeable senior notes, thereby establishing June 2010 as the stated maturity for the $56 million outstanding balance of these notes. Our nearest significant debt maturity continues to be in mid-2009.

Q2 also marked the decision making and initial implementation of initiatives to invest further and thereby accelerate the growth of our high margin broadband, VoIP, local, wireless, data and hosting products, all of which was made possible by our liquidity enhancing transactions. As part of that effort, we recently announced the expansion of data and hosting facilities in Canada, which includes two new hosting facilities and floor space expansion of certain existing facilities. Additionally, we have begun to expand our direct sales force in Canada and to focus their efforts on hosting and IP products.

In Australia, we have begun the expansion of our DSLAM footprint by 100 sites, and an increase in our network capacity in overall effort to serve more customers on net and to provide higher speed services. Further, we are enhancing our direct sales forces and telemarketing capabilities in our primary operating regions to both bolster sales of our growth products and to improve customer retention. Although these actions will result in increased CapEx and SG&A expenditures and the resulting near-term negative impact on free cash flow, our future growth and profitability are dependent upon strong performance from these services.

As a result of these important revenue enhancing efforts, we now expect full year capital expenditures to be in the $40 million to $45 million range as compared to previous guidance of $25 million to $30 million. Including the impact of roughly $5 million of incremental costs associated with our growth acceleration efforts in the second half of 2007, we now expect full year adjusted EBITDA in the $60 million to $65 million range.

Second quarter net revenue was $227 million, stable from the prior quarter. As the U.S. dollar continued to weaken against foreign currencies during the quarter, our reported revenue was positively impacted by $9 million. Exclusive of the currency effect, the $9 million decline is comprised of $5 million from the low margin wholesale services, and Canadian and European prepaid services. We also experienced a $4 million net decline in our high margin retail services. The $4 million decline is comprised of a $7 million reduction in the legacy voice and dial-up Internet services, partially offset by a $3 million increase in our broadband, VoIP, local, wireless, data and hosting growth products.

Revenue from our growth products grew 5% sequentially and now exceeds $210 million annualized or 23% of our total revenue. The margin from these products is in the mid-40% range and growing. Our goal is to drive the growth of these products to first reduce and then eclipse the ongoing decline in legacy voice and dial-up revenue and to continue to enhance the margin contribution from our growth products.

Making sure this happens are key priorities for the Company. Net revenue less cost of revenue as a percentage of net revenue was 37.4%, as compared to 36.3% in the prior quarter, reflecting the continued success of our ongoing efforts to improve their efficiency and cost structure of our network.

Our SG&A expense was $69 million or 30.3% of net revenue in the second quarter, relatively stable with that reported in the first quarter. The current quarter included $1 million for the termination of a lease facility agreement and $1 million in professional fees related to the implementation of a new income tax accounting standard, FIN 48. Advertising and sales and marketing expense remained relatively flat with the first quarter. We continue to focus our cost reduction efforts in the area of offshoring certain administrative functions and centralizing others. We expect to see the financial and operational benefits of these actions in the latter half of this year and more fully into 2008.

Adjusted EBITDA for Q2 was $16.3 million, as compared to $14.1 million in the prior quarter. The increase was driven largely by the success of our efforts to improve cost of sales. We ended the quarter with an unrestricted cash balance of $105 million as compared to $104 million as of March 31, 2007. On July 3, 2007, the Company completed the sale of 22.5 million shares of common stock to existing and new qualified institutional buyers for net cash proceeds of $19 million, which is in addition to the $105 million cash balances as of June 30, 2007.

From an operating standpoint, adjusted EBITDA produced $16 million of cash, $8 million was generated from working capital, $1 million from a tax refund, and $1 million from currency improvements. These cash increases were partially offset by $11 million in cash interest, $11 million for capital expenditures, and $3 million for scheduled principal debt reduction. Based on the timing of our current debt interest payments, I expect future cash interest to be relatively consistent at $15 million per quarter.

I will now turn it back to the operator to open the call up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes to us from Ana Goshko of Banc of America.

Hi, how are you?

Good.

Couple of questions, just on the expansion activities, just a more concrete information on the data centers and on the DSL builds. So, the press release says that there is going to be an expansion or a build of a data center in Australia as well, and I didn't think that I heard in the comments. So, have you had a data center in Australia already or is this kind of a Greenfield opportunity for you there? And then secondly, on the 100 sites for the DSLAM in Australia, what percentage increase is that over your existing sites?

This is Paul, Ana. Today, we have 180 sites for our DSLAM network in Australia. So, we would be adding 100 more sites, and that would increase the footprint, the coverage -- footprint coverage of our services and that would allow us to put more of our customers online. It has a much higher gross margin versus putting them offline, I mean off network.

Okay. Are you expanding sort of contiguously or are you actually going into new markets?

It's out of 100, majority of them would be actually new markets, the new pop locations. On the existing one, which becomes mostly success based, and so as we have more customers, we are going to expand the capacity of those. Yes, go ahead.

Yes, I was just going to answer it. Ana, your first question on the data center in Australia, we do have an existing data center in Australia and we are increasing the footprint of that data center a few thousand feet. So, I think it was mentioned in our earnings release, that's accurate, we are expanding that one. I think the bigger expansions and the new data centers that we have acquired are in the Canadian marketplace.

Okay. So, you have had three existing in Canada, adding two, and then you are expanding an existing one in Australia, is that's right?

I believe there are two new ones and expanding two.

In Canada.

In Canada.

Two, okay, you are starting with two, okay, and then expanding an existing in Australia.

Right.

Okay. So, it seems like a lot and frankly not a lot more CapEx versus what your guidance was. I think the increase is $15 million. So, is this just sort of the first phase and we're going to see the continuation of the spend in 2008?

Yes. For the data centers, in the operating sites, you obviously take a much bigger space, and then you furnish it as you see the demand coming in. So, for example, in Australia, our data center has been full force in about eight months, almost a year. So, it takes a long time to finish up the data center expansion. So, it will be coming online towards the end of this quarter, or maybe earlier fourth quarter. Canada, I think those expansions are being done. So, pretty much a big chunk of it is going to get down by the end of this year and early 2008. But, in some of the data centers, we have lot of additional capacity. For example, if we took all the real estate, for which we are paying the operating expenses and so on, and it was all turned into a data center, the capacity of all data -- in Canada would be almost ten times what we are billing today. This is after these are all finished. But, today, the CapEx we are putting in would take the capacity about 150% more than what we are billing today.

Okay. And then, what are your DSL subscriber metrics at the end of the quarter in Australia and in Canada?

I don't want to give you a specific number for competitive reasons in each country, but I could tell you, the DSL customers exceed 200,000 in Australia and Canada.

Okay.

Australia, Canada and some in Brazil, but that is a small amount.

Okay, great. Okay, thanks very much.

Thank you. Our next question comes to us from Chris Roberts of Tejas Securities Group.

Good afternoon guys. Thanks for taking my call.

Hi, Chris.

Just had a couple of questions about EBITDA. It looks like the EBITDA guidance is a little lighter than what you said previously of at least 10% growth rate for 2007. Could you provide a little bit of color there? Is it more of a topline issue or are operating expenses coming in higher than expected?

I think the EBITDA that we reported for 2006, there's a number of things going on. So, I think we were in the neighborhood of $61 million, $62 million of EBITDA. And then, we have certain discontinued operations, as we are calling them, we are -- in the first half of 2006, we had sold our Indian operations. In the first quarter of this year, we sold our domain name business in Australia. So, when we adjust for those items, you kind of get more in the neighborhood of about $59 million EBITDA for the prior year and then 10% on top of that kind of puts you in that mid-60s range, and then we are correcting for the enhanced investments from these new initiatives. There's a lot of things going on in that number, but Chris, I think we are still in the general guidance of that 10% from prior year.

Okay. So, I guess after you adjust for the asset sales of the India based business and so forth, it probably nets out to about the same?

That's correct.

Yes.

Okay. And then, in this quarter's reported EBITDA, it looks like it includes $2 million relating to a lease termination and an increase in professional fees, it sounds like both of those are one-time items?

Yes, yes, they are. And in last quarter, we had some of those as well. I don't know if you remember that last quarter we had about $2 million related to litigation cost for bondholders suite of events.

Right.

So, I wanted to highlight those in earnings release because those two specifically were relatively significant that should not be recurring, but it seems like, the trend is, we always have something hit us in a quarter that's unexpected or not recurring.

And we have stopped calling them one-time items. But, I think it's fair to say, the first half, we had more than usual share of unexpected. The legal expenses like you have with the bondholder lawsuit that cost us a lot of money and this one. So, I would say probably $1 million to $2 million was unexpected, some of which you have to expect because you don't know something is going to come up.

Right. But, it sounds like maybe, as you get to the second half, it might be a little bit more cleaner?

We are hopeful of that. We are hopeful of that.

This one was not fair. One thing to lawsuit, those are not things we can expect.

Well, we'll hope for a boring quarter then.

Then we just won't accept any service or process.

Okay, guys. Well, congrats on the solid quarter and thanks for taking my call.

Thank you.

Thank you. Our next question comes from [Graham Peck], Private Investor.

Congratulations on a great quarter, gentlemen. Three quick questions, I am wondering if you can comment on the situation in Australia with Telstra. There has been mention of the price decreases impacting I think about $8 million or something like that, and I am wondering if you can comment on that situation. Second question is whether you anticipate any change in the rate of the attrition you are experiencing in your legacy products? And last question, whether you can comment on current VoIP customer count?

Graham, this is John DePodesta. Let me try the first one in terms of the outstanding regulatory matters in Australia. We have been waiting for about a year now of an outstanding proceeding there involving access cost, in a significant regulatory matter, and we have given up prognosticating when the decision may be reached. However, let me say that we are cautiously optimistic that hopefully a final adjudication of those long pending matters will happen. And it's still early to anticipate what the financial impact would be, but we are cautiously optimistic we will get a resolution in a not too distant future.

And that should be an upside to our numbers we just --

We have not factored anything in our forecast.

Okay.

Nothing in our guidance that assumes there will be a favorable outcome.

And is it still the presumption that any outcome would, let's say, be retroactive, if you will?

In the normal course of events, given the nature of those proceedings, historically the ACCC has had a retroactive feature to the award as well as a prospective impact. So, again, part of our cautious optimism is to assume that a bulk of those elements would adhere in any final adjudication.

Okay.

In terms of the VoIP customers, we have in total, this includes now U.S., Canada, Australia, Brazil, but our Lingo brand being the dominant one there, it exceeds 100,000. I have to tell you in terms of our Lingo business, we're doing about $30 million [on rate]. That business runs with some marketing money in it, it's a positive EBITDA business, and that has been our primary goal versus put lot of money into that business. So, more focus has been to increase the gross margins, to fine tune the cost structures, to improve the customer service, and those efforts have been quite successful. And we continue to grow in Canada and in Australia. So, our total number is more than 100,000.

I'm confused though. Are you saying that the existing customer count is generating a positive EBITDA?

For Lingo business unit, yes.

Okay.

This is just for U.S. Lingo unit.

Yes, I think I had understood previously that you had thought that there would not be a contribution until you got to over 200,000.

Yes. The reason for 200,000 was at that time we were trying to put in enough marketing money to get to $200,000.

I see.

The action we have taken is, instead of focusing on how to get to 200,000, which will take a long time, a lot of money to get there, in our current portfolio we have decided to -- that we are okay with improving the ARPU of the customers, which for Lingo is running about $34 plus, which is the highest ARPU of any VoIP competitor, because of our international focus in that. And the revenues are running about $30 million, the gross margins have improved significantly, and so I think on a stable basis, the marketing money we have to put in to keep it sort of stable at current rate, yes, it has begun to produce -- it's nominal positive contribution.

I think, Graham, on the Lingo business as well, back when we were quoting those numbers, the pricing was different, the marketplace was different and we were selling our service at $19.95. We have increased that price, we have modified our cost of sales on the product. So, the ARPU, as Paul quoted, of $32 is much higher than what we originally had in our models when we were quoting those higher subscriber numbers to breakeven. And then, without the advertising spend on a monthly basis to the levels it was, which we expensed in full, those numbers have come down quite a bit.

And would it be fair to say then with the change in emergence to that, the VoIP business is no longer considered a non-strategic asset?

We never said it was non-strategic, we had said the -- to the extent the Lingo business, at one time, as you remember before Vonage went public, I said that it would be a good opportunity to seize that asset, we could take it, spin it off, and raise more money and grow it much faster. Unfortunately, Vonage IPO didn't go as expected. And in today's environment, we realized that opportunity or that plan just won't work, we won't get the consideration that we would desire. So, we have basically looked at the business and said, let's try to make it profitable, stabilize it, and that is what we have done. And so, primarily for the PRIMUS U.S. business, which has improved very significantly year-over-year, Lingo and our enterprise IP, which by the way ride on the same platform, become our core focus to actually grow, but more on the business side, and trying to keep Lingo be stabilized or grow slowly, but do so profitably.

Thank you. And I'll hop off the phone, if you could comment on any expected change in the rate of attrition on your legacy products. Thanks for taking my call.

Yes, no problem. Rate of attrition is very unpredictable. As you know, every quarter we are trying to bundle our services with the legacy business to lower that churn rate. But, thus far, with the last few quarters, the reduction in our legacy revenues continues to run around $4 million to $5 million. So, yes, we are making efforts, but so far haven't had too much success when you look at the numbers. But, we do have a lot of initiatives in place, I think I will let the numbers do the talking when we see lesser attrition; I think the numbers will tell it. And that's one of the frustration for us, but at the same time, we are facing the reality and working on our cost to create, continue to create margin from legacy business to fund our growth business.

Thank you. Our next question comes to us from David Sharret of Lehman Brothers.

Hey guys, thanks for taking the question.

Hello, David.

If I can ask on the data center site first, in terms of your expansion, just what is the current utilization rate of your existing data center space? And then, can you give any color on early discussions you have had with potential customers for the space that you're adding and your confidence in filling that space and the pricing environment there?

In Canada, it changes from data center to data center. Some of them, like I said, in -- or with Melbourne data center, our Toronto data center, one of them, they are pretty much 100%, and this is why we are expanding it, the capacity in these. So, it changes from data center to data center. But, if I added up the total, in Canada, right now it's about -- roughly about 40%. Now, this is -- remember it's the aggregate amount. It is about 40% is utilized today. But, because the data centers take a long time to build, so the construction on the new one and expansion capacity has started. In Melbourne, that is 100% used. So, we decided to grow that one, and that capacity again would be coming online either the end of this quarter or later in the fourth quarter.

David, kind of some specifics, one of the data centers that we are acquired years ago in Canada is based in Ottawa, and that one, to Paul's comment, is 100% full and has been for sometime. And we have purchased recently another data center in Ottawa marketplace and are fitting that out and starting to sell into the data center. So, the second one is probably less than 10% full, and has some upside capacity there. Toronto, we have more in the -- kind of in the 30% to 40% range full. Back in the second half of 2006, we purchased a data center in Vancouver. That is now about a third full. So, it just --

(inaudible) it was Ottawa that's 100%.

So, it just takes a little bit of time and amount (inaudible) have been selling to the data centers, but we are very confident they will fill that.

We also started in Canada, we started initially from more of the [co-lo] part and over last one year, we have been moving up more and more value-added, which actually has more demand and that demand is growing pretty fast, growing in every country. So, we have actually moved up from, towards the high end of the value added range for the data hosting centers. And then it requires a ready-trained sales force and technical support. So, in addition to starting building these two new data centers and expanding the current one, we have also started hiring sales people, technical support people. And as you know, in new cities, that's another process of 6 to 18 months payback period once you -- if you are able to get a successful sales force. So, we are confident that our Canada team does a wonderful job to get the right sales people, and they have started the process. That's the investment in EBITDA.

So, I mean, as you have this additional space, I mean it seems like you still have some space in some of your existing centers. If you complete the expansion in the second half of this year, over what timeframe would you expect to fill the new space that you're adding?

Normally, for planning purposes, the added space, we look at 18 to 24 months.

Okay.

And then once that gets closer to fill, then we will build some more, but that's our operating assumption.

Okay. And then, the other sort of your investments in terms of the DSLAM side, I guess just focusing on Australia, where will that take you to in terms of percentage of the population covered with your DSLAM network, where is it now, where will it be after this expansion?

I am going to ask, Tim [take it], so I don't have the exact numbers in front of me. I think that is going to take us closer to 50%, but I could be off by a few percent either way.

And where are you at right now?

Anyway, that's my estimate. What did you say, I'm sorry?

Where are you currently in terms of population coverage with the existing network?

I think in the last one, we had roughly about I remember like 38%.

Okay, great.

And the other -- I don't know the key benefit of the two things we are doing in Australia. One is the expansion of the footprint, which is very important because one, we can sell in more areas and second, they can come on net. And so, you have not only the -- we can sell more, but also the gross margins would go up, as you are more on net. The second, which is very important in the broadband business is higher speeds of data, because DSL as in the U.S. and other countries, customers want to have more and more data speeds. So, two steps have been taking place. One, as with all the DSLAM network that is capable of handling very high data speeds to compete with any other player in Australia. But then, in the connectivity part of the network, we are also putting in more dark fiber connections. So, there is ample capacity of IP data transmission. So, those two projects are sort of going together.

Understood, thank you.

Okay.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes to us from Pat Dyson of Credit Suisse.

Good afternoon guys.

Hello, Pat.

I guess just two questions. First, on the asset sales, you provided a little bit of just summary information on, or updated us on the asset sales and the numbers really haven't changed, and the dialog didn't change in the press release. I was wondering if you can give us a little bit of color I guess specifically on timing. Should we expect that there should be some asset sales execute in 2007 or are these all largely 2008 events? And then, second question would be to Tom, on the -- you talked about cost saving opportunities, and I was wondering if you can just give a little bit of sense as to the magnitude of cost saving opportunities as we look out to the balance of '07 and into '08?

I think on the asset sales timing point of view, there is no fixed timing that we have set for ourselves so much has to be done in 2007, so much in 2008. [Think] right now is to increase the value of those assets that are candidates for disposal, and we have said before the end of 2008, we will have $50 million to $100 million in asset sales. So, I think that's where we are.

Just to underscore that, Pat, I think the asset sales are in various stages of development. As Paul indicated, there have been some candidates that we have identified that we are spending some time to really get them better equipped for sale and to maximize the price. [Forcing] from our standpoint, we are under no time pressures to have to sell. So, we want to approach this opportunistically and for some of these assets, we are going to improve their economic performance in the hopes of maximizing an economic return for us. So, there is no set timetable and our targeted opportunities are in various stages of evolution, some we might think of selling out of the box, others we are going to want to manage to get them to the value levels that we desire.

Okay, great. Then, Tom, on the cost savings?

Right, Pat, I mean a number of things we are doing. We mentioned in the release and we have spoken about in the past the idea of offshoring some of our administrative functions, and that's in full force. We have an entity in India that we have established. We have probably in the neighborhood of 40 employees currently there. A number of those employees have been to other regions of our operations such as the U.K. and some in the U.S. and have gone through training, and have returned to India. It's a -- it's not a quick process and initially, it actually results in duplicate costs for a period of time, and I think we are in that stage right now where it's actually some duplicate costs and that we then subsequently hope to kind of cut those pies and have the offshore situation functioning and then really enhancing it and moving more and more offshore site. I think financial benefit to us is kind of the latter part of this year and really more effective into 2008. Other cost saving things we are doing is we were trying to centralize functions, we have really been more of a decentralized Company and we operate in geographic regions. And to the extent it makes sense for trying to centralize certain functions, and such things our billing platforms, if we can centralize billing platforms, we think there is a lot of efficiencies throughout the organization to do that. And we have spoken about in the past, in Europe, we are in a number of countries and we have tried to centralize the back office functions of the European countries into one location in London. So, those efforts are ongoing. And then, I think the other big thing from a cost savings standpoint is really in the cost of sales and the network operations. We are installing softswitch platforms, distributed switch platforms, both in Canada and in the European marketplace. Those platforms should be in service the second half of the year. Some are in right now, but fully in service by the second half of the year, and I think that will allow us to garner even further cost savings in the network operation that we will see come through in 2008.

Okay, great. Thank you.

Sure.

Thank you. Our next question comes to us from [Chris Carney of Intrinsic].

Hi, would you be able to break out to some extent your -- what portion of your SG&A line is attributable to your wholesale business?

SG&A is about --

I got to look that one up.

It's about --

Maybe we want to address that in the Q, Tom.

Yes, the annualized run rate of that one is in middle to high single digit millions of dollars.

I am sorry, million to --

I said to -- middle to high single digit millions of dollars. So, some will be -- it ranges between $5 million to $7 million.

Okay, for the wholesale business.

For the wholesale business.

And just in general, for your legacy, if you were looking at your legacy operations, what -- where does -- what percentage of SG&A do they represent?

That one is just very, very hard, I mean, just taking the numbers because you see in our business or even wholesale for that matter, it just depends what functions I will kind of put it in the wholesale part and which functions I allocate to others. I think when we look at our business, it's very hard to break out. Some are very clear like if we are selling a business or say I have 30 people working this for Lingo and then those are very easy to just say, "Okay, these people are in this group." So, if I sold Lingo business, they would go with that, for example. It's very hard to say how many of network people would go here and there because network is quite integrated. Now, the good thing about this one would be -- we grow like Tom was saying, we have $200 million of new initiatives. As those grow and, say, your gross margin is 45%, on an incremental basis, our SG&A is not going to go at the rate we have today at 27%, 28%. So, lot of that gross margin should come to EBITDA because in our SG&A, it's all fully integrated. We don't add that many more people and especially through these investments, once you have a data center, for example, we have leased that site, people are operating it whether it's 1000 square feet more or 1000 square feet less doesn't change the cost all that much. Network people are not going to change all that much. But, today, we are in the phase of building those things, like Tom said, we are moving things to India, so there are quite a few double costs, but I think some of them are going to continue for few quarters. Like in India right now, we are looking at U.K., some U.S., and if you looked at Australia, it takes 12 to 18 months to actually start recovering the money back.

Got you. Well, if you were to going to look at the $50 million to $100 million of, say, would that represent the assets you are going to look to sell? How -- if you -- what SG&A would follow with that or what -- how much SG&A do you think you could sort of rid yourself off by disposing of those assets in that range -- those $50 million to $100 million of assets?

I think what we have been looking at is if we sold those assets, how much EBITDA we would lose. So, same question just another way to look at it. That depends so much on which assets we sell, and again, like John said, we have a target list of them, depending on which one will sell will change actually how much EBITDA would go with it. And what we are trying to do is improve the economic performance of that. So, when we sell it, we will recover more from the sale. That's all I can tell you right now.

Okay.

And Chris, if I jump back kind of to your wholesale question or our carrier question, in our 10-Q, we are breaking out wholesale now. So, you will get a little bit more color on the numbers there. As Paul mentioned, we applied direct SG&A to our business units. So, there is a sales rep in wholesale, he is in charge for that. But, we don't apply indirect SG&A, so the finance group that does billing or the network team or the IT team. So, it's a little difficult question to answer exactly how much SG&A is there. But, you will get a little better flavor from the Q.

Okay, thanks again.

Okay.

Thank you. We have time for one final question. Our final question comes from Michael Specter of Scoggin Capital.

Hi, I had a couple of questions. Given the lag between hiring sales people and actually generating your revenue from those new sales people that you guys have just recently hired, is it fair to assume on the new initiative revenue that it's going to grow at least for the next couple of quarters similarly as it grew sequentially from Q2 -- from Q1 to Q2?

Yes, I think the new sales -- but first of all, we are in the process of hiring sales people. As you know, that doesn't go all that quickly. So, we have authorized the expenses, this is why we have a range of EBITDA depending on how much money gets invested. We want to be prudent in hiring the people that we like. So, sales people recruitment has started, so has the construction of some of these assets. As I said last time, it takes a while for new sales people to go to the ramp up time. So, I think that you are going to see the benefit of these things in 2008, and then normally for direct sales force, for them to break even to start contributing to EBITDA in general is 12 to 18 months process, when they start paying their salary and they have generated enough new orders. Those are the two metrics we could apply, but the revenues we would expect to start growing faster than Q1 and Q2 because we are adding similar to sales. So, we do expect that growth to be more in 2008. But, next quarter, it's basically the same. The sales channels and the number of sales people are pretty much the same.

Okay. And on the new initiatives side, you are expecting -- I mean, what is your kind of target goal for EBITDA margins? Have you given that?

Sorry, say that again please?

On the new initiatives side, I mean, what is your target for EBITDA margin? And the subsequent question is what sort of revenue do you need to get to, to get to those -- to whatever that EBITDA level your target is?

Our expectation is the gross margins from new initiative, which over the last two years, I remember few -- several quarters ago, you said they were in 25% range, so we had to generate $2 of revenue from new initiatives to compensate for gross margin from $1 of the legacy business. Now, they are -- both are around 45%, so we have -- so at least from gross margin percentage point, it is the same. The potential for new initiative is north of 50%, this is weighted average of all new initiatives, and my expectation should be that we incrementally again, just from incremental EBITDA from these should be in about 30% or north of 30% range.

And to get to the gross margin north of 50%, what sort of revenue do you actually need to sort of generating to get to that level?

It's really more of -- as we put in more infrastructure, so it's some of the business that come/goes on net, because on net margins generally are sometimes are twice as high and sometimes more than 50% of off-net. So, to the extent you are putting DSL on to your network, you are going to end up with 50% plus margin. If you are off net, you are going to end up 30% something. So, once you have the infrastructure, so more on net you put, it takes you towards 50% plus rather than just the volume. It's more if the on net. Obviously more volume, if more on net, higher margins you would get.

And following the data centers, Michael, would even accelerate the margin improvement.

That's even much higher.

Okay, and I just had final question. You guys are expanding your data centers in several different -- in Australia and Canada, and I was just kind of wondering if you could go -- I don't know if you can do this on a city-by-city basis, I mean, are other people building new data centers in those areas and like what are your thoughts as far as -- I know somebody previously asked about pricing, and if other people are building new centers in this kind of -- is that growth outpacing the actual growth of demand? That's my -- both in Canada and Australia, if you can address those markets, that would be great. Thank you.

Yes, the data centers are in very high demand, especially the higher end ones, because it takes a lot of technical expertise, lot of network and -- to actually accommodate those kinds of customers. So, it depends what you are looking at. If it's just getting a domain name, there are quite a few data centers and you don't need all that much space. But, the underlying reasons for demand is the software industry is going towards hosted model. Pretty much the businesses are going towards hosted model, so there is lot of demand coming from there and from the finance sectors. So, today, it's a -- even in some countries, there is a real shortage and because of the long building cycles, you won't -- once you get a customer, the churn rates are very, very low, less than 1%. So, the idea is, once you have a customer, then you get customers for a long period of time. If you miss that opportunity, then somebody else would have it and these customers generally expand with the same data center. And the capacity we are putting in, in the big picture is not that much capacity. So, it's not like we are going to -- we are adding 50% of the capacity that's going into the data centers. So, right now, that's actually least of the concern that how much capacity we are adding.

Okay.

Thank you. I would now like to return the call to Mr. DePodesta for any concluding remarks.

Thank you, Mathew. Before concluding, I would like to inform you that PRIMUS is scheduled to participate in the following upcoming investor conferences. The 10th Annual Kaufman Brothers Investor Conference to be held on September 5th and 6th in New York City, the Jefferies 5th Annual Communications Conference, which will also be held in New York on September 10th and 11th, and Pat Dyson and Credit Suisse, it will hosting us at their High Yield Media and Telecom Conference scheduled for November 15th and 16th in New York. And finally, Ana will be hosting us and the Banc of America at their 2007 Credit Conference, which will be held December 2nd through 4th in Orlando, Florida.

This concludes PRIMUS' second quarter 2007 financial results conference call. Replay information can be found on our Web site at www.primustel.com. The replay will be available in about an hour. Thank you very much for joining us today and good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.