Telegroup to Announce Global Multi-Service Transport Network Strategy
FAIRFIELD, Iowa
April 27, 199
Telegroup Expects First Quarter Revenues to Exceed $85 Million
Telegroup, Inc. (Nasdaq: TGRP) -- Chief Executive Officer Cliff Rees announced today that Telegroup will unveil its business plan for a new global multi-service transport network at the Company's shareholder meeting in New York City on May 19, 1998. This plan will position Telegroup for increased growth, profitability and continued innovation into the new millennium.
Mr. Rees commented: "Telegroup has always been a leading innovator in international telecommunications. We were the first to take advantage of the arbitrage opportunity created by the international settlements process to offer low-cost international long distance services. We were the first to deploy international call-through switches globally in a proprietary distributed intelligent network. Now, we are going to be the first telecom provider to deploy a truly global multi-service transport network."
Mr. Tom Brand, Telegroup's Chief Technology Officer, stated: "Retail and wholesale voice communications will continue to be significant components of our global strategy. However, we see circuit-switched voice communications rapidly becoming commoditized as high-bandwidth circuit capacity proliferates over the next two years. We are positioning Telegroup to be a leader in the international transport of packet-switched, digitized voice, data and video communications, areas where we see strong opportunities to provide value-added services at attractive margins. Our convergent, global ATM network will also allow Telegroup to cost-effectively service the rapidly growing data requirements of the international business market, which represents new market opportunities for Telegroup."
Mr. Brand continued: "Specifically, we intend to have a facilities-based, global multi-service transport network operational by the year 2000. The core transmission protocol of this high-bandwidth network will be ATM (Asynchronous Transfer Mode). We have chosen ATM for three reasons. First, we believe that it will quickly become the WAN technology of choice for most carriers and corporate users. Second, ATM is highly compatible with Frame Relay and IP in the LAN/WAN interface environment. Third, ATM will provide us with many opportunities to offer high-margin, value-added products and services to business customers."
"This strategy will emphasize the acquisition and deployment of owned fiber optic circuits and switching capacity," stated Mr. Rees. "However, our strategy is distinct from that of many of the so-called CLECs. Telegroup's strength has been and will continue to be in the international and, more specifically, the inter-regional transport markets. We do not see Telegroup becoming active in the local loop market or laying new fiber in a highly competitive market such as Europe. At the same time, we intend to aggressively pursue strategic partnerships with and acquisitions of regional network providers around the globe."
"In recent months," Mr. Rees continued, "we have made a few key management changes and additions to provide Telegroup with the skill sets and leadership critical to expand in this new area. The addition of Mr. Steve Baumgartner as President and COO brought us a senior executive from R.R. Donnelley & Sons having significant corporate re-engineering experience at the multi-national level. More recently, the addition of Mr. Tom Brand, who joined us from MCI, brought us an individual we believe to be one of the leading multi-service transport network implementers in the world."
"Our international, multi-service ATM network is an important step in the continuing evolution of Telegroup's global network," continued Rees. "Our existing global voice network plans already called for substantial investment in owned fiber optic circuit and switching capacity. In fact, by the third quarter, Telegroup will turn up an STM-1 (equivalent to 84 T-1 circuits) IRU on the Gemini cable connecting the U.S. and the UK At the same time, the Company will activate a new Nortel DMS-GSP switch in London to provide pan European carrier hubbing services. These facilities represent a ten-fold increase in Telegroup's cumulative capital investment in owned circuit capacity and significantly increase the Company's capacity to carry traffic on-net, thereby reducing costs."
According to Mr. Rees: "We expect the addition of the Gemini cable and an STM-1 on the UK to Germany fiber optic cable which we will activate in the fourth quarter to support our expectations of improved gross margins. Global owned facilities will be key to Telegroup increasing gross profit margins over the next 18 months."
Mr. Rees continued, "While we are pleased that our global voice switch deployment plan, which now has 21 switches installed in 11 countries, is on target and on schedule, the deployment of owned fiber optic circuits has taken longer than anticipated. During the first quarter of 1998, we also experienced delays in implementing centralized marketing and promotional campaigns in Europe and elsewhere, and encountered delays in implementing interconnect agreements with the European PTTs due to the heavy demand for circuits and interconnects as a result of recent deregulation in Europe. Interconnect agreements will allow Telegroup to provide national as well as international long distance in key markets such as France and Germany."
Douglas Neish, Telegroup's Chief Financial Officer, stated: "As a result of these delays, we now expect 1998 first quarter revenues to be approximately $85.3 million. This represents a 15% increase over the first quarter of 1997, but falls below current expectations by approximately 2%. Retail revenues, which comprised two-thirds of the Company's sales, accounted for the shortfall. The shortfall was particularly attributable to capacity constraints with the interconnection with the Dutch PTT that limited usage by our new and existing Netherlands customers, and to delays in the integration of our recently acquired operations in Australia and New Zealand. We expect the Dutch capacity constraint to be alleviated by the third quarter when additional circuits will become available from the Netherlands PTT."
Mr. Neish continued: "The implementation of our new accounting system is on schedule and expected to be fully implemented by the fourth quarter. We now expect our new billing system to be fully implemented by the second quarter of 1999, having slipped one quarter. The Company has taken measures to upgrade existing systems to ensure that current and planned product and service offerings will be fully supported from a revenue systems standpoint until the new systems are operational. Since reporting our year-end results, we have introduced new reporting initiatives to gain better visibility into our operating performance. Interim reporting measures will be instituted by the third quarter to provide greater visibility into gross profit composition."
"For these reasons, as well as well as a late start in implementing centralized marketing and promotional campaigns in Europe and elsewhere, and encountered delays in implementing interconnect agreements which would allow us to provide national long distance in key markets such as France and Germany, we are more cautious in our forecasts for the second quarter and the remainder of 1998. However, we expect to see strong growth during the second half of the year and forecast EBITDA break-even by year-end 1998."
Cliff Rees, Telegroup's CEO, commented: "In the first quarter, we initiated a full review of our retail marketing and business plans to implement steps necessary to achieve anticipated retail revenue growth. These include agent promotions, aggressive marketing campaigns in Australia, Europe and North America, and the introduction of new service offerings made possible by interconnection agreements and network expansions."
Mr. Rees continued: "We have taken the steps necessary to rectify the dampening effects of the delays in circuit acquisition, interconnect implementation, and marketing plan implementation. Nonetheless, we are taking a cautious posture towards our second quarter results and the balance of 1998. Our new business initiatives will take the second quarter to take hold and should start to produce the expected growth and profitability in the third quarter. As a result, we expect to be in a much stronger competitive position during the second half of 1998, and should post 27% revenue growth for the year."
Rees stated: "Our medium and long term prospects are fundamentally strong. We have taken the immediate actions necessary to revitalize retail growth and profitability including: intensive focus on establishing interconnection agreements throughout the remainder of 1998 in key European markets; opening of direct sales offices in six countries, including a pan-European direct sales office in the Netherlands; and the budgeted expenditure of $10 million on marketing and promotional campaigns in core markets during 1998. The initial results of our marketing campaign in the Netherlands, which served as our trial market, have been excellent. During the second quarter of 1998 we are also greatly increasing our direct sales force numbers, hiring a total of 30 salespersons who are based in the UK, the Netherlands, Australia, New Zealand, France and Germany. These numbers will double by year-end."
"We are also successfully pursuing strategic acquisition opportunities around the globe. We are currently in discussions with possible acquisition candidates on four continents. We recently concluded an agreement to acquire the stock of Corporate Networks, Ltd., a UK-based switchless reseller which serves a corporate customer base. In addition, we expect to close the acquisition of Newsnet Pty. Ltd., a Sydney-based global provider of fax-over-data services, by the end of May. We intend to increase our market share and achieve internal expansion in 1998 while continuing to evaluate acquisitions and consolidations. In each case, our growth strategies are being developed and implemented consistent with our overall objective of implementing a global ATM backbone network during the next two years."
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