Innovate Corp (VATE) 2009 Q4 法說會逐字稿

Welcome to the PRIMUS fourth quarter 2009 conference call. At this time, all participation are in a listen-only mode. Following management's prepared remarks, there will be a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, March 4, 2010.

I would now like to turn the conference over to John DePodesta, Executive Vice President of PRIMUS. Please go ahead, sir.

Thank you, Operator, and good afternoon, ladies and gentlemen. We appreciate your joining us today for PRIMUS Telecommunications' fourth quarter 2009 conference call.

I'm John DePodesta, and with me today are Paul Singh, Chairman and Chief Executive Officer, and Tom Kloster, Chief Financial Officer. We will provide remarks on the year 2009 highlights, fourth quarter performance, and the Company's strategy for 2010. Then we will open the lines for a question-and-answer session.

This call is being webcast with an accompanying slide presentation that can be accessed at our website at www.primustel.com, by clicking on the webcast link located in the In The News box on the lower left-hand corner of our home page. Once you have registered, a PDF version of the slides is also available for download through that link.

Let me repeat those instructions. In order to access the slide presentation, go to our website, www.primustel.com, click on the webcast link located in the In The News box in the lower left-hand corner of the home page. And again, once you have registered, a PDF version of the slides should be available for download through that link.

Please be advised that statements made by the Company during this call that are not historical facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to, revenue and earnings projections, statements of business plans and objectives, and capital structure and other financial matters.

Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Form 10-K and 10-Q, and other periodic filings with the Securities and Exchange Commission. 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.

To begin our presentation, please turn to slide three to review major highlights of 2009.

Last year, we accomplished our most important objectives -- restructuring our balance sheet by reducing debt levels and cash interest expense by over 50%; preserving operating stability through the expedited restructuring process, which maintained our ability to generate a consistent level of adjusted EBITDA throughout the year and significant free cash flow; refinancing our 2011 debt maturities with new secured notes due 2016; implementing a $10 million annual cost reduction program; and concentrating our capital expenditures to support growth service initiatives, including broadband, data, data center, retail VoIP, on net local, and wireless services in our primary markets of Canada and Australia.

For 2009, we reported revenues of $816 million, a 9% decline from the prior year that reflects the impact of currency and anticipated declines in traditional long-distance voice and dial-up ISP services. Adjusted EBITDA, however, was $84.3 million, a 28% increase over the prior year. Exclusive of foreign currency effects, revenue and adjusted EBITDA have shown progressive stabilization, with slowing rates of retail revenue decline, partially offset by revenue increases in growth services in Canada and Australia.

For the year, we generated free cash flow of $27.9 million, with $11.8 million being generated in the latter half of 2009, which we believe is a more representative period.

In summary, 2009 was an eventful year highlighted with positive events, positioning PRIMUS on solid footing for the upcoming year, despite continuing concerns over the state of the global economy.

On slide four, we present the highlights of our fourth quarter financial and operational performance. For the quarter, we reported revenues of $216.4 million; adjusted EBITDA of $23.1 million; and free cash flow of $2.7 million. Significantly, growth services increased to 43% of retail revenue, which is up from 42% in the prior quarter and from 38% in the fourth quarter of last year. This is evidence that our growth product strategies and investments are bearing fruit.

In addition, on a currency-neutral basis, the rate of decline in retail revenue continued to slow. Tom will discuss these important trends in greater detail.

Now I'll ask Paul to review the results of our operating units for the fourth quarter and their objectives for 2010.

Thanks, John, and good afternoon, everyone. Let's begin with slide five to discuss our Australian business. For the full year of 2009, Primus Australia's revenue in local currency declined 5% year-over-year, primarily driven by losses in the long-distance voice and dial-up Internet services; whereas its adjusted EBITDA grew by 38% during the same period. Due to (inaudible) -- that was due to operational improvements, aggressive cost management, and growth in business data and hosting services.

In the fourth quarter of 2009, in which demand is seasonally weakest starting in mid-December, Primus Australia generated net revenue of AUD75.9 million, a sequential decline of just under 1% from the third quarter. Commercial data revenue grew by a strong 9% quarter-over-quarter, while the quarterly rate of decline in our standalone long-distance voice and dial-up Internet services continued to improve.

In the past few quarters, we have expanded our data services portfolio and made adjustments in our marketing strategy in order to start winning larger business accounts. I'm pleased that in the fourth quarter, our Primus Australia team was successful in winning 12 new strategic accounts expected to generate about 137,000 of revenue on a monthly basis. Strategic accounts, which we define as accounts with order value of 5,000 per month or more, represented nearly one-third of our new business wins in the fourth quarter.

In the second half of 2010, we will start competing for government business as well. And this is a part of our strategy to grow the commercial revenues.

As I mentioned on our last conference call, the first quarter of every year is a seasonally weak quarter for Primus Australia, as commercial usage in Australia falls off significantly from mid-December until the end of the third week of January because of holidays and summer vacation. Residential usage also slows during the same period, but to a lesser extent because many of our services are now subscription-based.

In the fourth quarter, we increased our advertising spend in the residential segment. And as a result, we are seeing an improvement in the number of new residential service sign-ups in February.

In the fourth quarter, we completed an initiative to reduce annual cost of sales by AUD2.5 million, the benefits of which will accrue in the years 2010. The cost reduction will help us absorb the margin loss from the expected revenue decline in the voice and dial-up Internet services.

Our business objective for Australia in the year 2010 are threefold. Number one, grow business sales by focusing on selling broadband, data hosting and hosted IP PBX services. Number two, improve over IP networks data carrying speeds by 50% to meet the growing data usage as well as customer preference for higher data speeds.

And number three, improve on the broadband coverage footprint by 15% by the year-end, and that will drive margin expansion by putting more existing and new customers on Net.

Let's move to slide six to discuss Canada. For the full year 2009, in local currency, Canada revenue declined by 7.5% year-over-year, primarily driven by losses in the residential long-distance voice business; whereas its adjusted EBITDA grew by 5.3% due to operational improvement, aggressive cost management, and growth in business and residential data revenues.

In the fourth quarter, PRIMUS Canada generated net revenues of CAD62.1 million, which decreased 1.6% from the third quarter. Once again, we saw steady improvement in our growth services, up 1.5% versus third quarter. But our traditional services, primarily long-distance voice, declined in the fourth quarter by 3.8% versus the third quarter. However, this fourth quarter decline in LD revenues, or long-distance services, was less than the third quarter sequential decline of 5%.

On the business side, we saw 5.7% quarterly growth in data center and hosted IP PBX revenues in the fourth quarter.

We recently announced the expansion of our Ottawa data hosting center, bringing the total combined data center space of PRIMUS facilities in the Ottawa market to approximately 30,000 gross and 15,000 net square feet in the second quarter of 2010. This expansion can accommodate an additional 150 revenue-producing scalable and flexible Cabinet designs. In the hosted IP PBX arena, we continue to see a robust demand and we have a very competitive offering that is selling well. Notably, in the beginning of 2010, we sold 300 plus line customers as a result of our sales effort to move up-market in the SME sector.

On the residential side, despite a seasonal reduction in advertising spend during the month of December, we maintained the same level of growth customer acquisitions as in the third quarter, driven by performance improvements in our online sales channel, as well as continued effectiveness of our home phone and broadband bundled product TV campaign.

We also saw month-over-month churn improvement during the quarter. We are now preparing for the rollout of an enhanced wireless voice and data services, including smart phone offerings late in the second quarter this year. And that will be under an expanded MVNO agreement with Aegis Communications.

In 2010, our business objectives in Canada are to move further up-market in the SME segment by strengthening our competitive positioning in the data space, building brand awareness in the business community, and increasing sales productivity. We plan to expand our broadband on net service coverage, service coverage for Sprint by 20% in order to achieve margin expansion. We plan to expand our business service offerings in managed data center and hosted services, including offerings in the cloud computing, data storage, and disaster recovery services.

In Canada, we believe that we can achieve double-digit year-over-year growth from the following services -- consumer home phone, broadband, and triple play services for the residential sector; and data hosting and hosted IP PBX services for the business segment. We expect our standalone residential long-distance revenue to continue declining at an annual rate in the mid to high teens per year. We are continuing to make operational improvements that will benefit revenue and profit margins to offset the margin loss resulting from an expected decline in the wireline long-distance revenues.

Let's turn to slide seven to discuss our (technical difficulty) wholesale [business].

For the year 2009, wholesale revenues in US dollars increased 8% from its 2008 level. On a constant currency basis, the year-over-year revenue growth was approximately 17%. Wholesale adjusted EBITDA increased by $3.8 million in 2009 over 2008. In addition, this business unit indirectly contributes approximately $4 million per year of gross margin benefit to the retail business units by lowering their (technical difficulty) [termination] costs -- and gross margin being defined as revenue less cost of revenue.

In the fourth quarter, that is seasonally strong for the wholesale business because of the holiday traffic, PRIMUS's wholesale business continued to deliver good topline performance in an otherwise very competitive market. Net revenue in US dollars on and as-converted basis was $54.9 million, representing a growth of 2.5% from the third quarter. On a constant currency basis, wholesale net revenue increased 1.5% sequentially. And during the quarter, we added high caliber dedicated business development staff in key strategic growth regions to drive high margin revenue mix during the current year.

Our primary business objective for this business in the year 2010 is to improve its gross margin and EBITDA profitability from current levels. We are focusing on the following drivers to achieve that goal. One, expand our sales presence in higher growth, higher margin markets in the Middle East, Africa, and Asian Pacific regions.

Number two, increase the proportion of high-margin US traffic termination as a percentage of overall traffic mix to improve margins.

Number three, increase sales to large cable companies, wireless carrier accounts, and alternative VoIP providers for revenue stability.

Let's turn to slide eight to discuss our businesses in the US, Europe, and Brazil. As we have discussed previously, our strategy with these businesses is to continue improving their operational performance and manage them for cash flow contribution.

Let's review them one by one.

PRIMUS US generated $15.3 million in net revenue in the fourth quarter, a sequential decline of 3.7%, resulting from declines in traditional business and residential voice, offset by increases in IP services. The business unit generated a healthy EBITDA margin of 18%.

Our US division is off to a good start in selling hosted IP services to business customers in the Chicago area, using a direct sales model. The current monthly [order rate is] approaching $10,000 per month, and we expect this to continue growing, as we add more salespeople and increase the productivity of the current sales staff. In the first quarter's 2010, we started and indirect agent sales channel to supplement the direct sales channel. The average ARPU is about $500 per month and service contracts are a one to three-year duration.

In Europe, PRIMUS generated net revenues of EUR9.6 million, a sequential increase of 2.3% over the third quarter. Fourth quarter EBITDA was slightly positive. Going forward, we are emphasizing Web-based sales channels to sign up new customers. We continue to focus on those countries and products in Europe that offer the highest near-term return on investment, while pruning less productive operations. As a result of an improved cost structure and a sharpened sales focus, we expect EBITDA to continue growing in Europe in the year 2010.

In Brazil, PRIMUS generated BRL7.6 million of revenue in the fourth quarter for a sequential decline of 1.1%, while adjusted EBITDA increased by 13.3% during the same periods. We won a number of new contracts of SME customers in the fourth quarter for both managed servers and co-location services. This is after adjusting our marketing strategy in late third quarter 2009.

VoIP revenues remained stable as we are managing their business for cash flow. For 2010, our priority in Brazil is to focus on growing data hosting revenue and expanding EBITDA margins. We plan to increase the revenue producing data hosting center capacity in our existing data center in Brazil by 50% in the year 2010 to accommodate the market demand.

Now let me have Tom Kloster, our CFO, review the financial performance of the Company. Tom?

Thank you, Paul. Good afternoon, everyone. Let's now turn to slide nine, entitled Financial Summary.

Here we have provided a snapshot of four key financial metrics and how they have trended over the past four quarters. I will focus my comments on the sequential comparison from the third quarter to the fourth quarter of 2009. The prior quarters are provided for reference.

Reported net revenue increased $8.4 million or 4.1% to $216.4 million in the fourth quarter versus $207.9 million in the third quarter. Sequential revenue growth was driven by our favorable foreign currency effect of $9.2 million. Exclusive of this favorable currency effect, net revenue decreased from the third quarter to the fourth quarter by $800,000 or [0.4%].

The sequential decline, exclusive of currency, was comprised of $1.6 million decline in retail revenues and growth of $800,000 in wholesale revenue. The $1.6 million decline in retail revenue, exclusive of currency, reflects continued improvement from the $2.2 million and $5.3 million declines in retail revenue experienced in the third and second quarters of 2009, respectively.

As we saw last quarter, this improvement further demonstrates our success in expanding growth services through moderate enhancements and marketing spend, and sales performance improvements, while focusing on reducing the pace of decline in traditional services through bundling and other customer retention efforts.

Adjusted EBITDA was $23.1 million or 10.7% of net revenue compared to $21 million or 10.1% of net revenue in the third quarter. The $2.1 million sequential improvement in adjusted EBITDA benefited from a $1.3 million increase from currency translation, but also reflects a $1.7 million decrease in SG&A expenses, partially offset by the negative effect of the currency-adjusted revenue decline.

For 2009, adjusted EBITDA was $84.3 million or 10.3% of net revenue compared to $65.8 million and 7.3% for 2008.

Capital expenditures in the quarter were $5.5 million or 2.5% of total revenue, and 8% of growth services revenue, compared to $3.9 million or 1.9% of total revenue and 6.1% of growth services revenue in the third quarter. As planned, we focused our expenditures on data services in our primary markets, which included data center expansion in Canada and Australia; enhancing our IP network speeds; expanding our hosted IP PBX customer base; and related systems enhancements. Our full-year 2009 capital expenditures totaled $15.1 million.

In the fourth quarter, we generated free cash flow of $2.7 million, bringing full-year free cash flow to $27.9 million. However, we view our second half 2009 free cash flow of $11.8 million, which is post-reorganization, as a more appropriate approximation of our future free cash flow potential.

Let's now turn to slide 10 to discuss free cash flow a bit further. The illustration on slide 10 reflects our current annual cash interest expense after consideration of the December 2009 13% note refinancing transaction; ranges for capital expenditures, cash taxes, and working capital, and our last 12 months of adjusted EBITDA to arrive at an illustrative annual free cash flow range of approximately $20 million to $25 million.

Quarterly free cash flow will vary as a result of the semi-annual interest payments occurring in the second and fourth quarters of the year on both the 13% senior secured notes and the 14.25% senior subordinated secured notes. As reflected here, PRIMUS continues to be well-positioned to generate strong levels of positive free cash flow.

Let's now move to slide 11 to discuss foreign currency. This slide shows that after strong currency movements in the prior quarters, including Q4 '09, currency levels for the Australian and Canadian dollars have remained relatively stable post year-end. The European currencies have weakened. However, that is a region from which we derive little cash flow. As noted in the past, PRIMUS, in a sense, experiences a natural in-country hedge in that our operating units collect revenue and incur expenses in local currency.

The most important effect currency movements have on PRIMUS relates to the transfer of foreign cash to US dollars for use in servicing our US dollar-denominated debt. Our annual cash interest commitments are approximately 34 million. Thus, for example, a 5% movement in currency rates has roughly a 1.7 million annual effect on our US dollar cash needs.

Let's now move to slide 12 for an update on our capital expenditure strategy. In the fourth quarter, we spent 5.5 million on capital expenditures for a full year total of 15.1 million. As you can see from the pie charts on the slide, over 90% of our spend was directed through our primary markets of Canada and Australia, and into projects where we could identify a clear return on investment -- data center expansion, broadband infrastructure, IP PBX services, system enhancements for productivity improvements, and necessary maintenance Capex.

In 2010, our Capex strategy will remain focused on investments in growth services, including data center capacity and capability expansion; on-net local and broadband footprint expansion; broadband network speed upgrades; and hosted IP PBX capabilities. We expect our 2010 capital expenditures to stay in the same range as our spend in Q4 '09 or approximately in the low 20 million range.

Let's move to slide 13. In December, the Company completed a 130 million unit offering consisting of senior secured notes of Primus Telecommunications Holding Inc. and Primus Telecommunications Canada Inc. due 2016. Proceeds of the offering were used to retire the existing 94.8 million senior secured term loan facility and the 27 million Canadian credit facility due February and May 2011, respectively.

Accordingly, we now have no material debt maturities until 2013, as is depicted on slide 14. However, the 13% notes do have a springing maturity to January 2013 in the event the Company has not refinanced the 14.25% notes. The 13% notes allow parity lean debt incurrence to retire the 14.25% notes, so long as the Company's secured leverage ratio does not exceed 2.25 times plus an additional dollar for each dollar of equity raised and used to retire the 14.25% notes. Additionally, the 13% notes require the Company to annually offer the noteholders 50% of the excess cash flows to retire the notes at par.

As noted on slide 13, that Company's leverage and interest cover ratios have improved dramatically from a year ago, which was pre-organization, and from the prior quarter, pre-refinancing.

I would also like to discuss briefly our cash position. We ended -- (technical difficulty)

This is the Operator. We are experiencing some technical difficulties. Please remain online. Your lines will be placed on music hold. Thank you for your patience.

Please proceed with your conference, sir.

Yes. We apologize for the interruption. We don't know what the technical problem was, and we apologize to the attendees on the call. And we were informed that the call was cut off during the latter part of Tom's presentation, and I'm going to ask Tom to pick up where we believe the call was dropped because there was some, I think, important information.

So, Tom, if you could start again with the capital expenditures slide and pick it up from there.

Great. I'll be happy to. So folks, why don't we return to slide 12 for an update on our capital expenditure strategy.

In the fourth quarter, we spent 5.5 million on capital expenditures for a full year total of 15.1 million. As you can see from the pie charts on this slide, over 90% of our spend was directed to our primary markets of Canada and Australia, and into projects where we could clearly identify a return on investment -- data center expansion, broadband infrastructure, IP PBX services, system enhancements for productivity improvements, and necessary maintenance Capex.

In 2010, our Capex strategy will remain focused on investments in growth services, including data center capacity and capability expansion, on-Net local and broadband footprint expansion, broadband network speed upgrades, and hosted IP PBX capabilities.

We expect our 2010 capital expenditures to stay in the same range as our spend in Q4 '09 or approximately into the low 20 million range.

Let's move to slide 13. In December, the Company completed a 130 million unit offering consisting of senior secured notes of Primus Telecommunications Holding Inc. and Primus Telecommunications Canada Inc., due 2016. Proceeds of the offering were used to retire the existing 94.8 million senior secured term loan facility and the CAD27 million credit facility due February and May 2011, respectively.

Accordingly, we now have no material debt maturities until 2013, as is depicted on slide 14. However, the 13% notes do have a springing maturity to January 2013 in the event the Company has not refinanced the 14.25% notes. The 13% notes allow parity lean debt incurrence to retire the 14.25% notes, so long as the Company's secured leverage ratio does not exceed 2.25 times plus an additional dollar for each dollar of equity raised and used to retire the 14.25% notes. Additionally, the 13% notes require the Company to annually offer the noteholders 50% of the excess cash flows to retire the notes at par.

As noted on slide 13, the Company's leverage and interest ratio -- and interest coverage ratios have improved dramatically from a year ago, pre-reorganization and from the prior quarter, pre-refinancing.

I would also like to discuss briefly our cash position. We ended the fourth quarter with 42.5 million in unrestricted cash and cash equivalents compared to 41.9 million at September 30, 2009. The quarterly cash increase is comprised of 23.1 million of adjusted EBITDA and an increase of 1 million from currency movements. These increases were partially offset by cash uses of 10.6 million for interest; 5.5 million in capital expenditures; 3.5 million for debt refinancing and capital lease amortization payments; 2.4 million for working capital; and 1.5 million for previously accrued reorganization costs.

In the first quarter of 2010, we expect to pay approximately 2.5 million in final payments of previously accrued reorganization and refinancing costs.

That concludes my prepared remarks. I will now ask the Operator to open the call for questions and answers.

(Operator Instructions). Joe Stauff, CRT Capital.

Two questions, please. Your cash on-hand, 42.5 million at year-end, was that after all professional fees were paid? For instance, were there any one-time items that occurred soon after year-end that would have deflated that number at all?

Yes, Joe, we still do have some professional fees accrued as of year-end that will get paid in the first quarter or have been paid in the first quarter. A little bit related to the reorganization and some more significantly related to the refinancing. So there's about 2.5 million of professional fees to be paid in Q1, related to those matters.

Okay. And as you assess your portfolio, at least on a segment basis -- you know, Canada, Australia, wholesale, and so forth -- I mean, clearly, the biggest growth engine is Brazil, albeit it's small in terms of the organic revenue growth that occurred in fourth quarter on a year-over-year basis, versus the other units. How do you allocate capital?

Like you said, I mean, you're primarily Canada and Australia. Is all the incremental that is Capex, project-based Capex, is that going to be deployed primarily in Canada and Australia? Or maybe a little bit in Brazil? And I would imagine that, again, that growth Capex would not be deployed at all in the various -- in the US, European and wholesale business. Is that accurate?

Yes, Joe. I think I actually said over 90% of the Capex spending has gone to Canada and Australia. In Brazil, for example, as they -- those are more success-based. [Also, first] so if you get a customer that requires the server, we would invest money to put in that server. And as that flow space, for example, for the data center gets filled, we would generally develop more space, which normally you develop in incremental 5,000 or 10,000 square feet.

So same thing applies in Canada as well as in Australia. So in the -- and most of the Capex has gone into three areas -- so one is the data centers. Again, once you build a data center, you after build in increments of 5,000 square feet or so. And the success based one, as we get customers, you put in the Cabinet and you get long-term contracts.

The second one is going to hosted IP services. And there is mostly of the CPE and success-based investment. And the third one is the underlying network. Because of all the data services, broadband, IP, hosted IP and hosting centers, we invest in the network so that the data speeds could be higher, because as you know, in broadband, the data speeds are going higher; the data usage is going up. And also, we want to make sure that our coverage increases so we can have more on-Net coverage, which is much higher gross margin than off-Net.

So -- and that's how we allocate our capital. But it does go to growth services.

Great. Thank you.

(Operator Instructions). Jeff Salinzki, private investor.

My question is about the additional common stock offering that you might be bringing forward in the next perhaps 60 days. Anything that will shed light on to that?

Let me try to place some perspective on that point. To go back, we issued the notice on December 1 of last year of intention to file a registration statement for common stock offering within six months. That notice was filed at the same time we announced that we were going to market with our 130 million bond deal.

And I think, as Tom described, there is a relationship between that particular offering and the potential for an equity offering. And it's embedded in a major provision that we were able to negotiate in the indenture for [the] (technical difficulty) 13% notes. And that is, that we could issue additional parity lean debt to refinance the 14.25% debt, so long as we could do so within the confines of a secured leverage ratio of 2.25 times.

As a practical matter, what that meant, in order for the Company to access that parity lean basket to refinance the 14.25%, it would probably have to do it in combinations with equity and the proceeds from equity. So in combination, the Company had the ability to potentially refinance the 14.25%.

We went forward with the 130 million offering and we decided to close on that basis. And as a result of that, as Tom also indicated, we do not really face a maturity until January of 2013, where if we don't refinance the 14.25% by then, there is a springing maturity for the 13%.

But suffice it to say, at this point in time, we don't currently consider that that six-month timing is really an imperative. There is time for the Company to consider means and methods by which the 14.25% can be refinance. But again, to access the flexibility we have in the 13% indenture, depending on how much of the debt is outstanding, it could be done in combination with an equity offering. But we don't have any current plans to have an equity offering within that six-month time frame that we announced our intention in December of last year.

One last question. The impact of the warrant and the CBRs that are being accounted for in the new accounting, what kind of impact will that have in bringing anything to market relative to a stock offering or any -- I mean, have you made any assumptions on that debt?

Well, I think in terms of the pricing, I believe the first tier of warrants have a 12.22 price. And then the subsequent, the Class B and the Class C's are struck at somewhat higher levels. And obviously, that is something that one would evaluate when, as, if you were to be going to market.

And in the CBRs, I think would trigger [giving] above those warrant levels.

Okay. Good enough. Thank you.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

We have no further remarks. We want to, again, thank everyone for participating, and we regret that we were delayed in the presentation through some technical difficulties. And thank you for participating in the call and we look forward to presenting our first quarter in the upcoming months. Thank you very much.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation and ask that you please disconnect your lines.