PRESS RELEASE

TELEGROUP, INC. ANNOUNCES RESULTS FOR THE SECOND QUARTER ENDED JUNE 30, 1998

Domestic and International Retail Revenues Achieve Record Levels

Fairfield, IA (August 10, 1998) -- Telegroup, Inc. (Nasdaq: TGRP - news), today reported record revenue for the second quarter and six months ended June 30, 1998.

For the second quarter, total revenue grew 26.2%, exceeding expectations and growing to a record $101.1 million compared with second quarter 1997 revenue of $80.1 million. On a sequential basis, revenue showed a 17.7% increase over that achieved in the first quarter of 1998.

Retail revenue in both international and domestic markets achieved record levels, resulting in total retail revenue of $64.3 million, 12.8% greater than in the first quarter of 1998. Wholesale revenue for the quarter was $36.8 million, or 27.5% greater than wholesale revenue reported in the first quarter 1998.

For the second quarter of 1998, billed minutes of use reached 325 million minutes, also a record. This represents an increase of 64% over the 198 million minutes used in the second quarter of 1997. On a sequential basis, minutes also showed double digit increases over usage levels in the first quarter of 1998. This growth occurred across retail and wholesale services, and both domestically and internationally.

Clifford Rees, Telegroup's Chief Executive Officer, commented, "These record revenues stem primarily from the expansion of Telegroup's services and network in western Europe during the quarter, and are the result of management initiatives implemented earlier this year to attract new small and medium sized business customers."

Mr. Rees continued, "We are pleased to see our international retail voice revenues and minutes on a strong positive growth trend, indicative of the success of our interconnect programs in Europe and our new sales and marketing initiatives. Even as we add data traffic with the expansion of our network, retail and wholesale voice traffic will continue to be our core business."

The Company reported an EBITDA loss of $8.4 million in the second quarter of 1998, compared to a loss of $7.52 million in the first quarter of 1998 and an EBITDA gain of $0.3 million in the prior year's comparable period. The Company incurred a net loss of $12.9 million in the second quarter of 1998, or $(0.39) per diluted share, compared to a net loss of $1.0 million, or $(0.04) per diluted share, in the second quarter of 1997. The weighted average number of common and common equivalent shares outstanding for the second quarter 1998 was 33.176 million, compared with 26.212 million for the second quarter in 1997.

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Gross profit for the second quarter of 1998 was $18.7 million, or 18.5% of revenues, compared to gross profit of $20.9 million or 26.2% of revenues, for the second quarter of 1997. This reflects a current business mix that includes greater wholesale revenue and increased, fixed, recurring expenses stemming from the network build-out.

As a percentage of revenue, operating expenses, comprised of selling, general and administrative expenses, depreciation and amortization, and stock option-based compensation, increased from 27.3% in the second quarter 1997, to 29.5% in the second quarter 1998. This increase was in line with expectations and reflects the Company’s focus on expanding its networks, sales force and management information systems.

Douglas Neish, Telegroup's Chief Financial Officer, commented, "Telegroup is on-track in achieving its financial goals, as indicated by these results. While Telegroup is still in heavy network build-out and expansion mode, costs are in-line and investment in network and marketing initiatives are beginning to produce results in line with expectations."

Recent accomplishments include:

• In August, Telegroup, Inc. acquired Switch Telecommunications Pty Ltd. and its affiliate, Frame Relay Pty Ltd., increasing Telegroup's presence in Australia as a provider of a broad range of voice and data services to small and medium sized businesses.

• In August, Telegroup, Inc. committed to purchase an ownership interest in an STM-1 (equivalent to 84 T-1 circuits) on the Japan – U. S. Cable Network, and an undersea cable system that will connect Japan and the United States by mid-year 2000, improving the Company’s competitive cost position at that time.

• Telegroup, Inc. committed to a $12 million short-term revolving loan facility provided by Foothill Capital Corporation, in August.

• Telegroup, Inc. signed an agreement in July to become the global telecommunications partner of Sungwoo Information and Communications Co., Ltd., one of the first Korean companies licensed as an alternative telecommunications provider, allowing the Company to be an early entrant in Korea's newly deregulating telecommunications market.

• Telegroup, Inc. rolled-out its Spectra® service in the United Kingdom and Denmark, in July 1998, offering customers bundled national and international long distance services.

• In June, Telegroup announced that it completed the purchase of Newsnet Pty. Ltd., a Sydney-based provider of enhanced fax services, providing a broader array of services to its corporate customer base.

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• In June, Telegroup acquired the U.K.-based Corporate Networks group of companies, including South East Telecom Limited and its affiliate, Phone Center Communication (Service) Limited, as well as the assets of Mediacom Telefacilities Limited, offering bundled telecommunications services to corporate customers throughout the U.K.

• In May, Telegroup, Inc. activated four E-1’s on the NPC system between Japan and the United States. The Company can now run minutes over its own transpacific circuits linking the two countries, improving the Company’s competitive cost position on this route.

• At the annual shareholders' meeting in May, Telegroup announced plans to expand the Telegroup Intelligent Global Network to be one of the first global multi-service transport networks capable of carrying voice, data and video for corporate and carrier customers in major markets.

Telegroup’s mission is to be a leading global provider of fully integrated and profitable voice, data, video and enhanced services over a high-bandwidth, multi-service network. Telegroup provides national and international long distance telecommunications services, serving residential and small and medium-sized business customers in more than 200 countries worldwide. The company also provides value-added wholesale services to over 40 domestic and international telecommunications carriers. Telegroup operates a global, digital, facilities-based network, the Telegroup Intelligent Global Network ®, which consists of 25 Nortel DMS 250/300 and Excel LNX voice switches in 12 countries, 19 Nortel Passport ATM switches, 5 enhanced services platforms, 26,000 miles of owned and leased capacity on 10 digital fiber-optic cable links, and leased parallel data transmission capacity. Telegroup had revenues of $337 million in 1997.

This press release contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding Telegroup's future operating performance and network expansion. Telegroup's actual results might differ materially from those projected in forward-looking statements as a result of numerous factors including without limitation, the Company's success in developing its business plan and acquiring additional financing needed to meet this plan, market competition, unforeseen operating and technical problems, regulatory uncertainties, possible delays in the full implementation of liberalization initiatives by foreign governments, foreign currency fluctuations, and changes in the U.S. and foreign tax laws. Those and other risks are described in the Company's filings with the Securities and Exchange Commission.

--(Financial Tables Follow)--

Telegroup, Inc. And Subsidiaries

Unaudited Consolidated Statements of Operations

(In $000’s, except per share data)

 

	Three Months Ended				Six Months Ended
	June 30, 1997		June 30, 1998		June 30, 1997		June 30, 1998
Retail revenue	56,618		64,302		113,528		121,320
Carrier revenue	23,443		36,765		40,629		65,611
Total revenues	80,061		101,067		154,157		186,931
Cost of revenues	59,114		82,391		112,397		151,393
Gross profit	20,947		18,676		41,760		35,538
Commissions	8,915		7,163		17,950		14,091
SG&A	11,776		19,889		22,280		37,328
D&A	1,137		2,721		1,944		4,903
Operating income	(881)		(11,097)		(414)		(20,784)
Interest income	170		817		355		1,941
Interest expense	(760)		(2,375)		(1,489)		(4,865)
FX loss	(89)		(196)		(457)		(348)
Other	49		110		80		163
Loss before taxes	(1,511)		(12,741)		(1,925)		(23,893)
Tax benefit (expense)	500		(156)		638		(244)
Net loss	(1,011)		(12,897)		(1,287)		(24,137)
EBITDA	302		(8,377)		1,323		(15,896)
Net loss per share	(0.04)		(0.39)		(0.05)		(0.74)
Weighted average common and common equivalent shares outstanding (in thousands)	26,212		33,176		26,212		32,633

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Telegroup, Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(Condensed, in $000’s)

 

 

Selected Balance Sheet Data	December 31, 1997 *		June 30, 1998
Cash and cash equivalents	74,214		21,125
Securities available- for-sale	21,103		4,024
Accounts receivable (net)	54,189		58,767
Income tax recoverable	2,694		2,340
Other current assets	1,577		4,046
Property, plant and equipment (net)	27,913		52,102
Intangible assets (net)	8,475		27,530
Other assets	3,594		14,192
Total Assets	193,759		184,126
Payables and accrued expenses	60,606		61,002
Current portion of capital lease	159		126
Current portion of long term debt	94		112
Other current liabilities	965		1,289
Capital lease (net of current portion)	221		263
Long term debt (net current portion)	101,451		105,535
Shareholder equity	30,263		15,799
Total Liabilities and Shareholder Equity	193,759		184,126

 

• Selected balance sheet data for December 31, 1997 is derived from audited financials at that date.

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