Innovate Corp (VATE) 2013 Q1 法說會逐字稿

Welcome to the PTGI first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following Management's prepared remarks, we'll hold a Q&A session.

(Operator Instructions)

As a reminder, this conference is being recorded today, May 13, 2013. I would now like the to turn the conference over to Mr Richard Ramlall, Senior Vice President of Corporate Development and Chief Communications Officer. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. With me today on the call are Andy Day, President and Chief Executive Officer and Jim Keeley, Chief Financial Officer. This call is being webcast with an accompanying slide presentation that can be accessed in the Investor Relations section of our website at investor.PTGI.com, under the main Investor Overview page. Once you have registered for the webcast, a PDF version of the slides will be available for download through that link. Please note that, the consolidated results we're presenting today for first quarter 2013 include BLACKIRON Data and North America Telecom, as both the sale of BLACKIRON and the signing of an agreement to sell North America Telecom occurred subsequent to quarter-end.

This call's prepared remarks focus on results from North America Telecom segment, since it is a continuing operation until the closing of the sale. BLACKIRON Data results are contained in the press release issued today. Results from the Australian operations as well as from PTGI international carrier services segment are classified as discontinued for all periods presented.

Before we begin our call, we'd like to remind you the statements made by the Company during this call that are not historical facts are forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors and risks which are more fully described in our annual reports, quarterly reports or other filings with the Securities and Exchange Commission. Although we believe that the expectations reflected in the forward-looking statements are reasonable and represent our views as of today, there can be no assurance that any of the estimated or projected results will be realized. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

In addition, we are not soliciting proxies for the North America Telecom transaction in this call. We will be preparing proxy materials separately that will be filed with the SEC and made available for your review through the SEC website or from us. We encourage PTGI investors to review these materials carefully when they are available.

During this call, we may also refer to certain non-GAAP financial measures. A discussion of any non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are available on the Investor Relations page of the PTGI website. Now, I would like to turn the call over to Andy Day. Andy?

Thanks, Richard. Good morning, everyone. Thank you for joining our first quarter 2013 earnings call. Beginning on Slide 4, I will start the call with an overview of recent strategic events, including the completed sale of BLACKIRON Data and the definitive agreement to sell our North America Telecom segment announced this past Friday. I'll then comment on our continuing operations during the first quarter. Jim Keeley, our CFO, will walk us through consolidated results, after which we will take questions.

As you're aware, we have announced two major outcomes of our strategic process in 2013. The first was a sale of our Canadian data center unit, BLACKIRON Data, for approximately CAD200 million to Rogers Communications. The sale was signed and closed on April 17. The funds were converted into US dollars within 24 hours to provide certainty with respect to proceeds. The second announcement is the purchase agreement to sell our remaining continuing operating segment, North America Telecom, for $129 million, to affiliates of York Capital Management. The sale is expected to close in its entirety by the third or fourth quarter of this year, conditional upon stockholder and regulatory approvals

Our Board of Directors is evaluating options for the deployment from the proceeds from sale of BLACKIRON and upon completion, the proceeds from the sale of North America Telecom. We ask for your continued understanding as we cannot comment about any further elements of our review. In April, Peter Aquino departed his role and Board seat as Executive Chairman. Neil Subin, a Board member since 2009, was named PTGI's new Chairman. We again thank Pete for his contributions over the past two plus years. I and the Management team look forward to working with Neil and the rest of the Board as we move forward.

Let's start our operational discussion on Slide 5. The first quarter reflects our continued commitment to improving our overall efficiency results and investing in growth businesses, while managing continued declines in traditional telecom services. At a high level and on a consolidated basis, which includes BLACKIRON Data, total first quarter revenue was $60.9 million and total PTGI normalized adjusted EBITDA of $11 million was achieved. Total PTGI normalized adjusted EBITDA margin at 18.1% of net revenue was 240 basis points better year-over-year.

Let's turn to Slide 6 to look at our North America Telecom segment. As the purchase agreement for the sale of North America Telecom still requires stockholder and regulatory approvals, we will provide insight into the results for the first quarter. Our North America Telecom unit serving Canada and the US provides voice and data services including local and long distance, as well as Next Generation growth services such as voice-over-IP, high speed Internet access, hosted phone and Ethernet over copper and fiber. In US dollars, Q1 revenue was $51.3 million, with a gross margin of 51.1%. Through a continued focus on revenue mix and expense control, normalized adjusted EBITDA was $10.3 million. At 20.1% of revenue, normalized adjusted EBITDA was 230 basis points higher year-over-year. Inside our consumer unit, which really bears the brunt of declining traditional service revenues, as do all carriers worldwide, our high speed Internet revenue was up 7% year-over-year. Now represents just under 25% of our Canadian consumer revenue mix.

We continue to grow our on-net Internet subscriber base, as virtually all our sales and marketing spending is focused on marketing vehicles within our on-net territory. Subsequent to quarter end, we announced an on-net network expansion, which will add just over 15% more households to our on-net serviceable footprint. We can now offer on-net services to 25% of Canadian households supported by one of the best cost structures in the industry. We also just announced a contract extension with Costco Canada, where we are their exclusive national consumer telecom marketing partner to their member base. The SMB market continues to be a focus area of growth for the segment. With an emphasis on our hosted phone and data access services, this unit is driving high margin, on-net strategic revenues.

Primus hosted phone service continues to offer a Best-in-Class service, leveraging the BroadWorks platform and offering industry-leading features to enable enhanced business functionality and efficiency. In Q1, the launch of our desktop software feature was quickly followed with our first ever mobile app launch, available in iTunes and Google Play app stores. A testament to the advanced technologies available to businesses with Primus hosted phones. Hosted phone service revenues grew 26% year-over-year, while we also saw a record number of new customers installed in the first quarter of 2013. Similarly, our Ethernet services continue to grow. First quarter installed circuits were over 100% higher than a year ago. The combined growth of the hosted phone service and on-net Ethernet portfolios continued to drive our SMB unit gross margin up. First quarter gross margin was a full 400 basis points higher year-over-year.

A just-announced network expansion will also benefit our SMB unit margins, as we will be offering on-net business Ethernet in the expanded network footprint. On the heels of our recent metro fiber ring launch in Ottawa, during Q1, we backed our commitment to Carrier Ethernet and worked with the Metro Ethernet Forum to certify 11 subject matter experts within our Company as Carrier Ethernet 2.0 certified professionals. We now have Carrier Ethernet 2.0 customers on our Ottawa ring. Over the coming weeks, we'll complete the final phase of our certification process. We've also begun the process of expanding our fiber footprint and are actively working towards our next ring installation in Vancouver.

Q1 capital expenditures in North America Telecom were $2.6 million. The investments was largely focused on success-based growth of our hosted phone and Internet services and the continued enhancement of our supporting network infrastructure. North America Telecom units normalized adjusted EBITDA, less capital expenditures, provided a strong $7.7 million of cash flow in the quarter. As our portfolio of assets has been successfully streamlined, we remain laser--focused on maintaining consistent results from our North America Telecom unit and continuing to reduce corporate overhead to a level representing our costs as a public Company. We will maintain this focus on execution and day-to-day performance as we work through the approval process toward the sale of North America Telecom's closing. I'll now turn the call over to Jim to go through consolidated results.

Thanks, Andy. Good morning, everyone. The financial results from discontinued operations, which include Australia, Brazil and ICS, have been removed from all current and prior periods unless otherwise noted. The consolidated results from continuing operations for the first quarter, include BLACKIRON Data and North America Telecom, as both the sale of BLACKIRON and the signing of an agreement to sell North America Telecom were subsequent to quarter-end.

Let's now move to Slide 7, entitled Consolidated Results, which provides four key consolidated financial metrics and their trends over the last five quarters. In the first quarter, net revenue decreased 10.5% year-over-year to $60.9 million, which includes a $300,000 decrease from foreign currency translation. On a constant currency basis, net revenue decreased 10% due primarily to a decline in local and long distance services, offset in part by a 7% growth in consumer Internet revenues. Adjusted EBITDA as reported was $9.4 million, or 15.4% of net revenue in the first quarter of 2013, compared to $9 million or 13.3% of net revenue in the first quarter of 2012. Excluding severance and other nonrecurring costs, normalized adjusted EBITDA was $11 million or 18.1% of net revenue, compared to $10.7 million or 15.7% of net revenue in the first quarter of 2012. Normalized adjusted EBITDA grew 3.5% year-over-year. Our EBITDA margin expanded 240 basis points, due primarily to higher gross margin growth services revenue and the reduction of corporate overhead cost.

As for corporate expenses going forward, any further reductions will be considered as part of the Board's evaluation of strategic alternatives for the remaining business. Capital expenditures in the first quarter of 2013 were $6.5 million, compared to $8.1 million in the first quarter of 2012. Excluding discontinued operations, capital expenditures for continuing operations were $6.5 million in Q1 of 2013, compared to $5.1 million in 2012. Free cash flow for the first quarter of 2013 was a negative $7.9 million, compared to a positive $9.9 million in the first quarter of 2012. The primary contributors to the decrease in free cash flow over the prior year quarter were a $12 million decrease in adjusted EBITDA from discontinued ops, primarily Australia and an $8.7 million decrease in working capital, due largely to the timing of vendor payments, partially offset by a $1.6 million decrease in capital expenditures, a $1 million decrease in interest paid and a $400,000 increase in adjusted EBITDA from continuing operations.

Let's move to Slide 8, to discuss our balance sheet. Cash and cash equivalents as of March 31, 2013 was $13.8 million, down from $23.2 million at December 31, 2012. Cash was used during the first quarter for $6.5 million of capital expenditures, $4 million for 2012 performance bonuses, $3.6 million due to the timing of vendor payments and $4.7 million used for other working capital, offset in part by $9.4 million of adjusted EBITDA. Our long-term debt, including current obligations at the end of Q1 was $127.8 million, unchanged from year-end. Net debt at the end of Q1 was $114 million. After the sale of BLACKIRON in April and the anticipated closing of North America Telecom sale, the pro forma net cash before tax and excluding funds in escrow would be $168 million. This assumes we payoff all of our outstanding debt on or prior to closing of the North America Telecom deal, which is required under our indenture. The Board and Management are currently evaluating potential uses of the excess proceeds to maximize shareholder value and will communicate our intentions when that evaluation is complete. This concludes my prepared remarks. Operator, we're now ready for questions.

(Operator Instructions)

Barry Sine, Drexel Hamilton.

A lot going on, but it looks like a good quarter underlying everything. If you guys could just remind us of what your tax situation is as relates to NOLs? How we can think about those as we start to do our own analysis on the taxability of the proceeds from the transaction?

As far as our tax NOLs, at year-end, we had $75 million of NOLs for the Corporate -- Company. We have good tax bases in all our assets. Other than that, I mean, we're contemplated several tax scenarios that result in a favorable outcome. Right now at this time, it would be premature to announce any specific tax impact from the transactions, until they've been closed and we fully vetted the treatment.

The $75 million, is that all US or is some of that in Canada?

That's all US. Canada has separate NOLs, as well as capital gain -- or capital loss carry-overs.

Have you disclosed those numbers in the past?

Not the specific to Canada, just the consolidated ones.

Okay. If you could walk us through on the North America Telecom sale, you mentioned we need regulatory approval, that includes operations in both US and Canada. What regulatory approvals are required?

Hi, Barry. It's Richard. As we mentioned in the FAQ, it's expected to close by the third quarter with the exception to the PTX subsidiaries. They are both FCC and state approval, if they are required.

There's no regulatory approvals required in Canada.

That's correct, Andy. There is no regulatory approval that's required in Canada or for the sale of the subsidiaries of Lingo or iPrimus given they are VoIP and not subject to the regulatory approvals.

With these announced sales, what are you left with? What's still remaining in terms of operational businesses (inaudible)?

What we're left with is ICS, which is currently in discontinued ops. We're still evaluating the strategic alternatives for the remaining business and once that determination has been made, we'll communicate that.

Okay. So there is one small remaining business left after these sales?

Yes. It's the ICS business in discontinued ops.

Lastly, I suspect you're not going to want to answer this. But is there anything we can think about ruling out in terms of use of proceeds? You're going to have a lot of cash. You've exited most of the operating businesses. Would you consider doing something like getting into a whole new business with the proceeds or?

There's nothing we can comment further there.

Okay. Well, we can't rule that out at this point. Thank you. All right, those are my questions.

(Operator Instructions)

Daniel Baldini, Oberon.

First off, thanks for all the hard work. My first question is, what gave rise to this loss from discontinued operations during the quarter?

The loss from discontinued operations is primarily ICS.

Okay.

But you also have some scattered pieces of Europe retail that were left over in there.

Okay. My second question is, to the extent that this North America Telecoms business generates free cash flow, for whose account is that cash flow? Will it stay with Primus or does it go with the business when it's sold?

When North America Telecom is sold, it goes to the buyer.

Okay. So, the profits from the day that you signed the agreement until the day it closes, go to the buyer?

No, no. It's business as usual until we have stockholder and regulatory approval. So there will be a transaction closing date at which point North America Telecom will move to the buyer.

Okay. So let me just confirm this. So in the instance that North American Telecom generates free cash flow over the next couple of months.

That remains with PTGI.

Okay. Wonderful. All right. That's it, thank you.

Daniel [Warsh], Warburg Asset Management.

Are there any -- in the $168 million, are there any material cash items coming out of that in the foreseeable future like bonuses or anything?

There will be severance that will be pulled out of that. There will be money that we have to hold back as part of the North America Telecom deal that will require the minimum cash balance on a go-forward. We'll need to keep money aside for operations and anything that comes up until the remaining business is resolved as to what we're going to do with that. So there's a portion of that, that will come out.

Okay. The $168 million does not include the approximate $35 million in escrow.

Correct.

So that should come back to you? Plus the cash flow that the recent question related to?

Yes. That's correct.

Okay. One more question, guys. The CVRs and the B-warrants, is there any fundamental transaction item in there that we should be aware of?

As far as the CVRs, on closing of the North America Telecom deal, that is a sale of substantially all of our assets. With that, these CVRs, they don't expire at that point, but we're required to do a valuation of the entity at that point just before the sale. If that sale is above the strike price, then we would exercise the CVRs. If it's below, then those CVRs will expire at that point in time.

Okay. The same thing with the B-warrants, is that --

The warrants, I'm sure -- I'm not sure that they expire. There is no adjustment to the stock price for this sale.

I will now turn the conference back over to Mr Day for any closing remarks.

Thanks, operator. Thank you, everyone, for joining our call this morning. We will speak with you again with our second quarter 2013 results report. Thank you.

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