Primus Telecommunications
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thetelecommanalyst.com
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K. Paul Singh, Chairman, President and Chief Executive Officer
Interviewed by George S. Mack
PRIMUS TELECOMMUNICATIONS (PRTL) is a global total service provider of data, Internet and voice. Its extensive fiber network now connects 29 countries and passes through approximately 80% of the world's markets. The McLean, Virginia-based company bundles hosting, Internet access, voice and data services targeted to multi-national business customers, including J.P. MORGAN (JPM), FORD MOTOR (F), BMW (BAMXF), CITIGROUP (C), Fidelity Investments, VOLKSWAGEN (VLKAY) and GENERAL ELECTRIC's (GE) NBC division.
In the second quarter, PRIMUS had revenue of $300.1 million, an increase of 62% from the 1999 period. The company has now achieved records for both revenue and gross margin for 13 consecutive quarters. The company revenue will grow to a projected $1.28 billion this year from only $1 million in 1995. It has been profitable on an EBITDA basis for five consecutive quarters. Still, like most of the telecom service providers, PRIMUS shares have been under pressure. The stock, which closed at $9.81 on Sept. 28, is down 74% in the year to date.
[THE TELECOMM ANALYST — GEORGE S. MACK] You are both a wholesaler and a retailer, is that correct?
[K. PAUL SINGH] We are primarily a retailer, but a smaller part of our business is targeted to selling wholesale to other Internet and voice carriers.
[GSM] You own your own network — you're a facilities-based company. Why is that good for your investors?
[KPS] It does three things for us. Number one, it gives us a lower cost structure to compete with the larger players, which own and operate their networks. Number two, having our own infrastructure gives us faster time to market, so we're not dependent on other players that we would lease capacity from. That would be the lowest common denominator. Third, we design our network to increase the reliability and quality of services, which, again, is very hard when somebody else is operating the network and the customer is counting on you to give service-level guarantees. Those are the three reasons you want to own the facilities — the cost benefits, the speed to market, and the reliability and quality.
[GSM] You've grown your business from $1 million in sales in 1995 to an expected $1.28 billion this year. Without being too philosophical, could you tell me how you did this?
[KPS] Basically, there are three drivers to the business expansion: One, we are participating in a pretty large market — eight developed countries that we targeted from the very beginning. They are Australia, Japan, the United States, Canada, the United Kingdom, France, Germany and Italy. Just by being in those countries, we knew we could grow to over $1 billion because of the size of the market. Two, we became a total service provider and we own the network. That means we are not just a sales office in those countries, but we have full operations serving the full portfolio of services. Third, we wanted a balance of acquisitions and internal growth, which has been approximately 50-50 for us. So it's the combination of the three. That's how we got there.
[GSM] Do you think a company could start today and get that kind of growth?
[KPS] No. I think these things are windows of opportunity. If you don't start them at the right time, then it gets difficult. The timing was right because deregulation was just beginning in 1995. We were not the first entrant, but the first entrants had to pay lots of costs to open up business. We got into the market when deregulation was firmly in place, and we spent our time increasing revenues rather than fighting regulators.
[GSM] What are your fastest growing segments, both geographically and product-wise?
[KPS] Our fastest growing geographic market is Europe, and in terms of product services it would be Internet/data.
[GSM] What about your partnerships?
[KPS] HEWLETT-PACKARD (HWP) has committed to a $50 million investment. We are data center partners with HP outside the U.S. COMPAQ COMPUTER (CPQ) is our partner in the U.S. for hosting. INKTOMI (INKT) has committed a $10 million investment for content distribution. Then we have CISCO SYSTEMS (CSCO) and LUCENT TECHNOLOGIES (LU) as partners on our ATM + IP (asynchronous transfer mode and Internet protocol) network. So we have world-class partners with leading edge technology who can support us on a global basis. That strategy has been key to our success.
[GSM] Your stock's market cap is about a third of this year's forecast revenue of $1.27 billion. You're trading at a discount to cash as well as to stockholders' equity. What happened to your stock?
[KPS] It's an opportunity for investors. We have been attached to the voice sector, and many of them began as wholesale companies that have not done very well. In investors' minds, PRIMUS is still attached to these others that have very low valuations. To be a global company, you've got to have over $1 billion in revenue. Our strategy has always been to build up to scale and once we got to $1 billion in revenue aggressively move into data and Internet. And that's exactly what we have done. Now today, just our data and Internet revenues, based on last quarter, are in excess of $100 million annually and growing very fast. If we had just that — forgetting our cash balance, forgetting our scale, forgetting our distribution channels, forgetting our network — our valuation would probably be higher than all of PRIMUS today.
[GSM] Why do investors fear the voice carriers so much?
[KPS] The biggest fear is that prices are coming down faster than costs. But PRIMUS has had 13 quarters of gross margin expansion.
[GSM] Your gross margin was 28% last quarter versus 23% the same quarter a year ago.
Vital Statistics
Primus Telecommunications (PRTL)
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Market Cap $395 million
Shares Outstanding 40.2 million
Recent Stock Price $9.81 (9/28/00)
52-Week Range $51.75 — $9.43
Price to Est. 2000 Revenue 0.3 times
Price to Est. 2001 Revenue 0.2 times
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Years end
December EPS Revenue
(millions)
1999A ($3.72) $833
2000E ($5.31) $1,276
2001E ($4.31) $1,597
Source: Thomas Weisel Partners
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[KPS] And if you go to November 1996, gross margin was 6% to 7%. So as prices have come down, our margins have gone up. And now with the data-Internet mix, and as we fill up our ATM + IP network, margins will go up even more.
[GSM] How big is your addressable market?
[KPS] It's over $200 billion.
[GSM] You've already gotten a half of one percent of that. How much can you penetrate?
[KPS] You're going to see the big players, the incumbents — AT&T (T), WORLDCOM (WCOM) and SPRINT (FON), the Tier-1 companies — achieve a combined 65% to 75% market share. We are on the top layer of Tier 2 — the facilities-based total service providers that would have 15% to 20% of the market. Normally there would be three or four of these, which would each have a 3% to 4% market share.
[GSM] So being on the top layer of Tier 2, you could penetrate 4% to 5% of this total market by yourself, right?
[KPS] Potentially, that's what we should be able to do in the long term.
[GSM] That would make you 10-times the size you are in revenue today.
[KPS] Yes. In this market you see companies like WORLDCOM that have grown to multi-billion levels. |
