For Subscribers

Get the complete article now!

TWST: On the international level, you group the Emerging Multinational Carriers (EMCs). What do you see as the special attributes of the group and who is the top performer, or potential top performer, in that area?

Mr. Grover: It has been a very rocky road for that subset. All of these emerging carrier subsets are volatile, but the international space is extremely volatile because of a number of things. One, it is less tangible. I guess, for whatever reason, the CLECs area is more tangible for an investor. It has been difficult for investors to get comfortable with these international carriers’ models. They are exposed to interest rate volatility, currency rate risk, a basket of potentially underperforming economies, and instead of a couple of incumbents to compete against and deal with, they have to deal with dozens of incumbent PTTs (Post Telegraph and Telephone authorities, which were formerly government-sponsored monopolies). The EMCs have initially built their businesses around long distance services, which now is totally out of vogue on Wall Street because of concerns over anticipated significant price competition between incumbents and new entrants. Half of this group built their initial businesses around the US outbound wholesale market, which has just been decimated. There is zero profit left in that market or very little profit. A lot of companies in this space even resorted to selling minutes while their routes were underwater just to grow revenues. What all that has done — in conjunction with market risk, interest rate risk, currency risk, funding risk, pricing risk and all these other risks — is really blown up the valuations of what I think are some very solid franchises that are being built. With that said, we are very favorable on one of the larger companies in this group — Primus Telecommunications (Nasdaq:PRTL). Primus has a valuation approaching 1 billion on an enterprise value basis, if you add in the net debt. They have 1.2 billion in annualized revenues and 1.1 billion of that is international voice. Here is where investors, I think, do not do their homework, nor do they really discern the results. Primus has no prepaid revenues. Their international voice business is primarily one plus pre-select. So they are the company that bills the customers. They have a customer relationship upon which they can layer on other services. Their revenue stream is over 75% retail and 25% wholesale, and of the 25% that is wholesale, the majority of that wholesale is international originated, which is not really a value driver, but there is margin in it. It is not a zero or negative margin business like the US outbound market. With that said, unlike many of its “peers,” Primus is a real company. They are not trying and they have never tried to grow revenues just to grow revenues. Further, they have 100 million in annualized Internet and data revenues. They formed their Internet operation several months ago, iPRIMUS.com, and they have raised guidance consecutively three quarters in a row. They now have over a quarter of a million Internet subscribers around the world. They are building 10 data centers for the high end of the hosting market, the managed services space.