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PTGI > SEC Filings for PTGI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for PRIMUS TELECOMMUNICATIONS GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PRIMUS TELECOMMUNICATIONS GROUP INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the notes thereto included herein, as well as our audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011. You should review the "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2011 and in Part II, Item 1A of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, "PTGi" means Primus Telecommunications Group, Incorporated and "Primus," the "Company," "we" and "our" mean PTGi together with its subsidiaries.

Introduction and Overview of Operations

We are an integrated facilities-based communications services provider offering a portfolio of international and domestic voice, wireless, Internet, VoIP, data, colocation and data center services to customers located primarily in Canada and the United States. Our primary market is Canada, where we have deployed significant network infrastructure. We currently classify our services into three categories: Growth Services, Traditional Services and International Carrier Services ("ICS"). Our focus is on expanding our Growth Services, which includes our broadband, SME VoIP, data, and data center services, to fulfill the demand for high quality, competitively priced communications services. This demand is being driven, in part, by the globalization of the world's economies, the global trend toward telecommunications deregulation and the migration of communications traffic to the Internet. We manage our Traditional Services, which includes our domestic and international long-distance voice, local landline services, including wireless, residential VoIP services, prepaid cards, and dial-up Internet services, for cash flow generation that we reinvest to develop and market our Growth Services, particularly in our primary market of Canada. We also provide our ICS voice termination services to other telecommunications carriers and resellers requiring IP or time-division multiplexing access. However, as discussed below under "Recent Developments-Pursuit of Divestiture of ICS Business Unit," the Company is currently pursuing a sale or other disposition or disposal of its ICS segment, which has been classified as a discontinued operation as a result of being held for sale.

Generally, we price our services competitively with the major carriers and service providers operating in our principal service regions. We seek to generate net revenue through sales and marketing efforts focused on customers with significant communications needs, including small and medium enterprises ("SMEs"), multinational corporations, residential customers, and other telecommunications carriers and resellers.

Industry trends have shown that the overall market for domestic and international long-distance voice, prepaid cards and dial-up Internet services has declined in favor of Internet-based, wireless and broadband communications. Our challenge concerning net revenue in recent years has been to overcome declines in long-distance voice minutes of use per customer as more customers are using wireless devices and the Internet as alternatives to the use of wireline phones. Also, product substitution (e.g., wireless/Internet for fixed line voice) has resulted in revenue declines in our long-distance voice services. Additionally, we believe that because deregulatory influences have begun to affect telecommunications markets outside the United States, the deregulatory trend is resulting in greater competition from the existing wireline and wireless competitors and from more recent entrants, such as cable companies and VoIP companies, which could continue to affect adversely our net revenue per minute, as well as minutes of use. More recently, adverse global economic conditions have resulted in a contraction of spending by business and residential customers generally which, we believe, has had an adverse effect on our net revenues.


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In order to manage our network transmission costs, we pursue a flexible approach with respect to the management of our network capacity. In most instances, we
(1) optimize the cost of traffic by using the least expensive cost routing,
(2) negotiate lower variable usage-based costs with domestic and foreign service providers, (3) negotiate additional and lower cost foreign carrier agreements with the foreign incumbent carriers and others, and (4) continue to expand or reduce the capacity of our network when traffic volumes justify such actions.

Our overall margin may fluctuate based on the relative volumes of international versus domestic long-distance services; prepaid services versus traditional post-paid voice services; Internet, VoIP and data services versus fixed line voice services; the amount of services that are resold; and the proportion of traffic carried on our network versus resale of other carriers' services. Our margin is also affected by customer transfer and migration fees. We generally pay a charge to install and transfer a new customer onto our network and to migrate broadband and local customers. However, installing and migrating customers to our network infrastructure enables us to increase our margin on such services as compared to resale of services using other carriers' networks.

Selling, general and administrative expenses are comprised primarily of salaries and benefits, commissions, occupancy costs, sales and marketing expenses, advertising, professional fees, and other administrative costs. All selling, general and administrative expenses are expensed when incurred. Emphasis on cost containment and the shift of expenditures from non-revenue producing expenses to sales and marketing expenses has been heightened since growth in net revenue has been under pressure.

Recent Developments

Repurchase of a Majority of 10% Senior Secured Notes due 2017

On September 17, 2012, Primus Telecommunications Holding, Inc. ("PTHI"), a subsidiary of PTGi, consummated the repurchase of $119,035,219 aggregate principal amount of PTHI's 10% Senior Secured Notes due 2017 (the "10% Notes") for a purchase price equal to 109% of the principal amount thereof, plus accrued but unpaid interest to the date of repurchase, pursuant to agreements with certain selling holders of 10% Notes, the form of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q. The sellers of the 10% Notes, representing a majority in principal amount of the outstanding 10% Notes, consented to amendments of the indenture governing the 10% Notes (the "10% Notes Indenture") to remove substantially all of the restrictive and reporting covenants under the 10% Notes Indenture, as well as certain events of default and related provisions. PTHI, each of the guarantors of the 10% Notes, including PTGi, and U.S. Bank National Association, as Trustee, entered into a Supplemental Indenture, dated as of September 17, 2012 (the "Supplemental Indenture"), to memorialize the 10% Notes Indenture amendments. Also on September 17, 2012, a complaint and motion for temporary restraining order were filed in the Court of Chancery of the State of Delaware (the "Court"), which complaint and motion were subsequently amended on September 19, 2012. The amended complaint alleges that the Supplemental Indenture was entered into in breach of certain covenants in the 10% Notes Indenture and seeks among other things to enjoin the Supplemental Indenture from becoming effective and to enjoin PTHI from acting in reliance upon it. On September 28, 2012, PTHI entered into a stipulation pursuant to which PTHI has agreed not to take any actions under the Supplemental Indenture that would not have otherwise been permitted by the 10% Notes Indenture (absent amendment by the Supplemental Indenture) until the matter is finally resolved on the merits or otherwise by the Court. A hearing on the relevant motions has been scheduled with the Court for Friday, January 4, 2013. See Note 6-"Commitments and Contingencies-Litigation" and Item 1 of Part II of this Quarterly Report on Form 10-Q-"Legal Proceedings" for further information on such litigation.

Pursuit of Divestiture of ICS Business Unit

On June 28, 2012, PTGi's Board of Directors committed to dispose of the Company's ICS business unit. As a result of holding the ICS business unit out for sale, such business unit has been classified as a discontinued


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operation. The Company continues to actively solicit a sale or other disposition of its ICS business unit. See Note 12-"Discontinued Operations" to the notes to our condensed consolidated financial statements included elsewhere in this report.

Reclassification of Data Center Costs

In order to conform to industry best practices, certain amounts in selling, general and administrative expense related to our Data Center operating segment were reclassified to cost of revenue as part of the Company's new operating segment structure discussed in Note 11-"Operating Segment and Related Information" to the notes to our condensed consolidated financial statements included elsewhere in this report.

Foreign Currency

Foreign currency can have a major impact on our financial results. During the nine months ended September 30, 2012, approximately 86% of our net revenue was derived from sales and operations outside the U.S. The reporting currency for our condensed consolidated financial statements is the United States dollar. The local currency of each country is the functional currency for each of our respective entities operating in that country. In the future, we expect to continue to derive the majority of our net revenue and incur a significant portion of our operating costs from outside the U.S., and therefore changes in exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the following exchange rates: US Dollar ("USD")/Canadian dollar ("CAD"), USD/British pound sterling ("GBP"), and USD/Euro ("EUR"). Due to the large percentage of our revenue derived outside of the U.S., changes in the USD relative to one or more of the foregoing currencies could have an adverse impact on our future results of operations. In addition, prior to the sale of the Company's Australia operations during the quarterly period ended June 30, 2012, we also experienced risk of loss regarding foreign currency exchange due to fluctuations in the USD/Australian dollar ("AUD") exchange rate. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain
(loss) on the condensed consolidated statements of operations. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the reported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. By way of example, when the USD strengthens compared to the CAD, there could be a negative or positive effect on the reported results for our Canadian operating segment, depending upon whether the business in our Canadian operating segment is operating profitably or at a loss. It takes more profits in CAD to generate the same amount of profits in USD and a greater loss in CAD to generate the same amount of loss in USD. The opposite is also true. For instance, when the USD weakens against the CAD, there is a positive effect on reported profits and a negative effect on the reported losses for our Canadian operating segment.


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In the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, the USD was stronger on average as compared to the CAD, AUD, GBP, and EUR. The following tables demonstrate the impact of currency fluctuations on our net revenue for the three and nine months ended September 30, 2012 and 2011:

Net Revenue by Location, including Discontinued Operations-in USD (in thousands)

                                       For the Three Months Ended September 30,                      For the Nine Months Ended September 30,
                                  2012            2011       Variance        Variance%         2012           2011         Variance        Variance%
Canada                             55,123         62,867        (7,744 )          -12.3 %      168,924        187,763        (18,839 )          -10.0 %
Australia                              -          71,684       (71,684 )         -100.0 %      114,860        217,098       (102,238 )          -47.1 %
United Kingdom                     50,040         71,511       (21,471 )          -30.0 %      156,651        193,629        (36,978 )          -19.1 %
Europe (1),(2)                         40             98           (58 )          -59.2 %         (193 )           87           (280 )         -321.8 %
Brazil (2)                             -           7,146        (7,146 )         -100.0 %           -          21,215        (21,215 )         -100.0 %

Net Revenue by Location, including Discontinued Operations-in Local Currencies
(in thousands)

                                         For the Three Months Ended September 30,                      For the Nine Months Ended September 30,
                                    2012            2011       Variance        Variance%         2012           2011        Variance        Variance%
Canada (in CAD)                      54,883         61,457        (6,574 )          -10.7 %      169,311        183,430       (14,119 )           -7.7 %
Australia (in AUD)                       -          68,159       (68,159 )         -100.0 %      110,408        208,875       (98,467 )          -47.1 %
United Kingdom (in GBP)              31,681         44,382       (12,701 )          -28.6 %       99,368        119,611       (20,243 )          -16.9 %
Europe (1),(2) (in EUR)                  32             71           (39 )          -54.9 %         (110 )           64          (174 )         -271.9 %
Brazil (2) (in BRL)                      -          11,602       (11,602 )         -100.0 %           -          34,510       (34,510 )         -100.0 %

(1) Europe includes only subsidiaries whose functional currency is the EUR.

(2) Table includes revenues from discontinued operations which are subject to currency risk.

Critical Accounting Policies

See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year ended December 31, 2011 for a detailed discussion of our critical accounting policies. These policies include revenue recognition, determining our allowance for doubtful accounts receivable, accounting for cost of revenue, valuation of long-lived assets, goodwill and other intangible assets, and accounting for income taxes.

No significant changes in our critical accounting policies have occurred since December 31, 2011.

Financial Presentation Background

In the following presentations and narratives within this Management's Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to accounting principles generally accepted in the United States of America ("US GAAP") and Securities and Exchange Commission ("SEC") disclosure rules, the Company's results of operations for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011.

We also present detailed changes in results, excluding currency impacts, since a large portion of our revenues is derived outside of the U.S., and currency changes can influence or mask underlying changes in foreign operating unit performance. For purposes of calculating constant currency rates between periods in connection with presentations that describe changes in values "excluding currency effects" herein, we have taken results from foreign operations for a given year (that were computed in accordance with US GAAP using local currency) and converted such amounts utilizing the same USD to applicable local currency exchange rates that were used for purposes of calculating corresponding preceding period US GAAP presentations.


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Discontinued Operations

During 2011, the Company sold its Brazilian segment. In the second quarter of 2012, the Company sold its Australian segment and committed to dispose of and is actively soliciting a sale or other disposition of its ICS business unit.

The Company has applied retrospective adjustments for the three and nine months ended September 30, 2011 to reflect the effects of the discontinued operations that occurred during 2012. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the condensed consolidated statements of operations. Additionally the assets and liabilities of ICS have been classified as held for sale assets and liabilities and removed from the specific line items on the condensed consolidated balance sheet as of September 30, 2012. See Note 12-"Discontinued Operations," for further information regarding these transactions.

Summarized operating results of the discontinued operations are as follows (in thousands):

                                                     Three Months Ended        Three Months Ended
                                                     September 30, 2012        September 30, 2011
Net revenue                                         $             71,049      $            180,303
Operating expenses                                                73,698                   176,885

Income (loss) from operations                                     (2,649 )                   3,418
Interest expense                                                      (2 )                  (2,370 )
Interest income and other income (expense)                            (7 )                  (1,982 )
Foreign currency transaction gain (loss)                             199                    (6,994 )

Income (loss) before income tax                                   (2,459 )                  (7,928 )
Income tax (expense) benefit                                          -                      3,046

Income (loss) from discontinued operations          $             (2,459 )    $             (4,882 )

                                                     Nine Months Ended          Nine Months Ended
                                                    September 30, 2012         September 30, 2011
Net revenue                                        $             355,019      $             539,325
Operating expenses                                               363,917                    547,412

Income (loss) from operations                                     (8,898 )                   (8,087 )
Interest expense                                                    (511 )                   (2,496 )
Interest income and other income (expense)                           288                     (1,095 )
Foreign currency transaction gain (loss)                          (2,546 )                   (3,078 )

Income (loss) before income tax                                  (11,667 )                  (14,756 )
Income tax (expense) benefit                                      (6,342 )                    1,907

Income (loss) from discontinued operations         $             (18,009 )    $             (12,849 )


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Results of Operations

Results of operations for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011

Net revenue: Net revenue, exclusive of the currency effect, decreased $9.4 million, or 12.6%, to $64.9 million for the three months ended September 30, 2012 from $74.3 million for the three months ended September 30, 2011. Inclusive of the currency effect which accounted for a decrease of $1.0 million, net revenue decreased $10.4 million to $63.9 million for the three months ended September 30, 2012 from $74.3 million for the three months ended September 30, 2011.

                                                                                                                                        Currency              Inclusive of
                                                                   Exclusive of Currency Effect                                          Effect              Currency Effect
                                                       Quarter Ended                                   Quarter-over-Quarter                                   Quarter Ended
                                    September 30, 2012              September 30, 2011                                                                     September 30, 2012
                                     Net            % of             Net            % of                                                                    Net            % of
(in thousands)                     Revenue         Total           Revenue         Total          Variance           Variance %                           Revenue         Total
Data Center                            8,620          13.3 %           7,697          10.4 %             923                 12.0 %          (137 )           8,483          13.3 %
North America Telecom                 56,303          86.7 %          66,417          89.4 %         (10,114 )              -15.2 %          (875 )          55,428          86.7 %
Other                                     -            0.0 %             194           0.2 %            (194 )             -100.0 %            -                 -            0.0 %

Total Net Revenue                     64,923         100.0 %          74,308         100.0 %          (9,385 )              -12.6 %        (1,012 )          63,911         100.0 %

Data Center: Data Center net revenue, exclusive of the currency effect, increased $0.9 million, or 12.0%, to $8.6 million for the three months ended September 30, 2012 from $7.7 million for the three months ended September 30, 2011. Inclusive of the currency effect which accounted for a $0.1 million decrease, net revenue increased $0.8 million to $8.5 million for the three months ended September 30, 2012 from $7.7 million for the three months ended September 30, 2011.

North America Telecom: North America Telecom net revenue, exclusive of the currency effect, decreased $10.1 million, or 15.2%, to $56.3 million for the three months ended September 30, 2012 from $66.4 million for the three months ended September 30, 2011. The net revenue decrease is primarily attributable to a decrease of $4.4 million in retail voice services, a decrease of $1.9 million in local services, a decrease of $1.5 million in prepaid voice services, a decrease of $0.3 million in wireless services, a decrease of $0.3 million in VoIP services, a decrease of $0.1 million in data and hosting services, and a decrease of $2.2 million in other services offset, in part, by an increase of $0.6 million in Internet services. Inclusive of the currency effect which accounted for a $0.9 million decrease, net revenue decreased $11.0 million to $55.4 million for the three months ended September 30, 2012 from $66.4 million for the three months ended September 30, 2011.

Cost of revenue: Cost of revenue, exclusive of the currency effect, decreased $4.8 million to $32.0 million, or 49.3% of net revenue, for the three months ended September 30, 2012 from $36.8 million, or 49.5% of net revenue, for the three months ended September 30, 2011. Inclusive of the currency effect, which accounted for a $0.5 million decrease, cost of revenue decreased $5.3 million to $31.5 million for the three months ended September 30, 2012 from $36.8 million for the three months ended September 30, 2011.

                                                                                                                                               Currency               Inclusive of
                                                                          Exclusive of Currency Effect                                          Effect              Currency Effect
                                                               Quarter Ended                                   Quarter-over-Quarter                                  Quarter Ended
                                            September 30, 2012               September 30, 2011                                                                    September 30, 2012
                                          Cost of         % of Net         Cost of         % of Net                                                             Cost of          % of Net
(in thousands)                            Revenue         Revenue          Revenue         Revenue         Variance          Variance %                         Revenue          Revenue
Data Center                                   3,794            44.0 %          3,243            42.1 %            551               17.0 %           (59 )           3,735            44.0 %
North America Telecom                        28,225            50.1 %         33,565            50.5 %         (5,340 )            -15.9 %          (449 )          27,776            50.1 %
Other                                            -              0.0 %             -              0.0 %             -                 0.0 %            -                 -              0.0 %

Total Cost of Revenue                        32,019            49.3 %         36,808            49.5 %         (4,789 )            -13.0 %          (508 )          31,511            49.3 %


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Data Center: Data Center cost of revenue, exclusive of the currency effect, increased $0.6 million to $3.8 million, or 44.0% of net revenue, for the three months ended September 30, 2012 from $3.2 million, or 42.1% of net revenue, for the three months ended September 30, 2011. The increase is primarily . . .

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