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TMF Interview With
Primus Telecommunications Executive Vice President John DePodesta


With Brian Graney (TMF Panic)
November 11, 1999

Based in McLean, Virginia, Primus Telecommunications Group (Nasdaq: PRTL) is a multinational telecommunications company focused on becoming a truly global international and long-distance carrier. Earlier this year, the company launched its iPrimus.com unit, offering Internet and data services in major international markets. We talked with Primus executive vice president and co-founder John DePodesta about the company's business, its rapid growth, and what sets the firm apart from other telecommunications companies.

TMF: To start off, could you talk a little bit about what Primus does and what your business strategy is.

DePodesta: Primus is a global long distance carrier. We offer both voice and data and Internet services basically to targeted retail customers in major markets around the world. And we offer these services over a network that has been built and operated by Primus, which currently directly connects 29 countries, as well as a satellite overlay network that is being rolled out with our first Earth station now operational in the U.K.

"I think increasingly companies that focus just on providing one service are going to find their customer base at risk."
TMF: The focus seems to really be on data Internet services. How does that trend tie into the DSL agreement that you signed this week with NorthPoint (Nasdaq: NPNT)?

DePodesta: Actually, up to this point in time, most of Primus' revenues have been derived from the voice sector. As you know, we've just recently reported out third quarter where we reached our goal of a billion dollar revenue run rate. But increasingly going forward, our focus is going to be on the data Internet space. Within the last month we raised over $400 million in the debt and equity markets and we expect to apply much of that capital in terms of building out our data and Internet network.

Now there are a couple of phases for this. To position ourselves as a true global data Internet player, number one, you need to have the broadband network assets. And Primus already has in terms of its cable switch network one of the most extensive networks of any carrier in existence directly connecting 29 countries.

With our overlay satellite network, we will then connect to an additional 60-odd countries to give Primus one of the most extensive global reaches of any carrier, which we can apply to the data Internet space.

We have targeted basically five major lines of businesses that we're going to attack in the data Internet space. The first is being a global ISP. Primus already offers Internet access in Australia, Canada, and Germany where we have our own ISP operations. We already have 130,000 customers which makes us a fairly substantial ISP already in our own right. You can look and see Primus to expand the ISP presence in the other major markets in which we are present as well as other major markets around the world.

Secondly, you referred to our recent announcement of our NorthPoint agreement which supplements the agreement that we've had with Covad (Nasdaq: COVD). We expect to be rolling out DSL services beginning this quarter in the United States with our partners Covad and NorthPoint. Also look for Primus to be rolling out DSL services in our other major markets in Canada and Australia as well as Western Europe.

The third area is utilizing our global satellite network, we're going to provide bandwidth to major carriers and ISPs and PTTs around the world. In fact, Global Crossing (Nasdaq: GBLX), one of the major infrastructure builders, is our first major customer on our satellite services. We're going to be selling $25 million of satellite services to Global Crossing and its customers over our network.

The fourth line of business is going to be selling data Internet services targeted to multinationals. Now that Primus has a global network that directly connects all the major financial centers of the world and an overlay satellite network that can get transmission to remote locations, we are now in a position to uniquely provide truly one-stop shopping to multinationals. [We can] provide their data Internet needs, not just in the major metropolitan areas, but also reaching remote facilities around the world.

The fifth major area that you will see us entering is in the web hosting area. And here, Primus' global reach is going to give us a unique opportunity to leverage our existing assets. We are already located and have switch sites around the world, [and] we intend to co-locate web hosting facilities at these switch sites which are ideal locations for it.

So, in all of those areas, I think you'll see in the future Primus being a major player in the data Internet space.

TMF: Do you expect to be competing with different competitors in each of the five business areas or do you think more companies will go towards the one-stop shopping model?

DePodesta: I think that's going to be a blend and I think the true success [will be the] company that can offer the bundled array of services. I think increasingly companies that focus just on providing one service are going to find their customer base at risk.

The reason that we have developed this model is really in response to customer demand. They want to have one single point of presence, one sole provider. Primus is positioning itself to offer on a bundled basis voice, data, Internet, and cellular services to our customers. We currently do that today in Australia, which is our most mature market where we're the fourth largest carrier. We have bundled service offerings in Canada where we're the second largest alternative carrier. And you will now see us rolling out bundled services in Western Europe where we currently have a revenue run rate of a quarter of a billion dollars a year, which makes us one of the largest new entrants on that continent.

"We think to be a true player in the data and Internet space you're going to have to offer customers an integrated fiber and satellite solution and Primus is one of the few carriers who's going to be able to offer that."
TMF: You mentioned the revenue growth. Was there anything else in Q3 that really stood out in your mind?

DePodesta: We think it was a spectacular quarter. Let's look at it in perspective. Primus was founded in 1994 and our first operational year was 1995. In that year we had $1 million of revenue. So in less than four years we have now grown this company to a billion dollar revenue run rate, which I think is spectacular growth. Alongside of that we have expanded our gross margins, almost quadrupled them to over 26% in this last third quarter. We have tripled our customer base over the last nine months. We now have over 1.7 million customers internationally. And with respect to our profitability we reported $4 million worth of positive EBITDA in this third quarter. So clearly the trajectory for Primus is very positive and we expect continued improvement on all of these fronts.

TMF:
What do you think will be the main competitive advantages that set you apart? Will it be the strong growth, will it be the margin performance, the more profitable model or size? How are the companies going to differentiate themselves?

DePodesta: I think there are a number of factors. You've touched on some of them. I think what really differentiates Primus in the market place is, number one, a retail focus. About 75% of all our revenues are currently derived from the retail sector, both small and medium sized businesses, large multinationals and retail consumers.

We have also focused on really developing significant scale in major markets around the world. Currently we're focusing on Australia, Japan, Canada, U.S., U.K., Germany, France, and Italy as our eight major markets. As I mentioned earlier, in four short years we have brought ourselves to the point where we're the fourth largest in Australia, the second largest alternative carrier in Canada, and one of the largest new entrants in Western Europe. So that scale is a differentiating factor.

Third, I mentioned earlier our bundled service offerings where we package under one name, under one brand voice, data, Internet, and cellular services. We truly offer one-stop shopping for customers.

Another differentiator is that because of our global network, Primus is going to be able to be a data Internet player. We think to be a true player in that space you're going to have to offer customers an integrated fiber and satellite solution and Primus is one of the few carriers who's going to be able to offer that.

I think if you wrap all those up, one of the things that really differentiates us is our performance as compared to many other companies in this space. Primus' performance has been stellar quarter after quarter. Since we've been public we've recorded record revenues, record increasing gross margins. And I think all of this reflects on what is the true differentiator for Primus -- the quality and depth of its management team. It's a group that has essentially been together for over ten years in different companies. [We] are experienced international telecommunications executives and I think our ability to strategize and to implement is born out in the operating performance of this company.

TMF: What do you think is the most misunderstood aspect of the company by investors?

DePodesta: Less than misunderstood, I think not adequately appreciated is the value of the franchises that we have created around the world. It's not just enough to say that Primus is a billion dollar revenue rate company right now. But when you look at the source of those revenues, they are concentrated in major markets. That scale in and of itself has sufficient value.

The other feature of the company which I think is not appreciated yet, but is beginning to be known, is our initiatives in the data Internet space. Only earlier this year did we create our wholly owned subsidiary iPrimus.com to focus on the data Internet space and we expect to aggressively grow this business. We've guided the analysts that in a couple of years we expect to have a $200 million revenue run rate in the data Internet space. And that would make us a very large data Internet company in and of itself.

I think when analysts and investors begin to appreciate Primus' prominence in the data Internet space, together with the scale and intensity of the voice markets we've created, we're going to start getting the kinds of multiples and reflection in the market that other players in those spaces have.

TMF: What do you think is Primus' biggest near-term challenge?

DePodesta: The biggest challenge is how to manage all the opportunity. With global deregulation we are now finding ourselves as early entrants into some major markets. One of our biggest challenges is how can we manage our human resources and our capital to get the best returns with the multitude of opportunities that are in front of us.

TMF: I sure appreciate you taking the time to talk to us today.

DePodesta: Thank you very much.


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