Telegroup, Inc. to Focus On Core
Retail Customers in U.S., Western Europe and Australia
Company Revises Outlook, Significantly Reduces Operating Expenses, Defers
Investment in Multi-Service Network, and Refocuses Wholesale Strategy
Company Appoints Salomon Smith Barney to Advise on Financing and Strategic Partnering
Alternatives
FAIRFIELD, Iowa--(BUSINESS WIRE)--Oct. 12, 1998--
Telegroup, Inc. (Nasdaq: TGRP) today announced that as part of a
strategic repositioning of its business model, the company will focus on providing
national and international long distance services to retail telephony markets in the U.S.,
Western Europe and Australia, traditionally its core business.
Simultaneously, the Company will significantly reduce its
operating expenditures, scale back its wholesale business and defer deployment of an
ATM-based multi-service network. Telegroup announced that it has appointed Salomon Smith
Barney to advise and to represent the Company on financing and strategic partnering
alternatives, and further announced that it is in discussions with several parties to
secure up to $60 million in new financing and to refinance a $15 million note to fund
fully its revised business plan.
Clifford Rees, Telegroup's Chief Executive Officer, commented,
"Providing national and international long distance to retail customers is a business
in which Telegroup continues to experience significant revenue growth and gross margin
contribution. Upon reviewing current operations, management concluded that it could offer
the best future return to shareholders by focusing its time and capital on this segment of
our business."
Mr. Rees continued, "Telegroup has a very competitive cost
structure to carry retail traffic at healthy gross margins. This is a result of our
existing global voice network and excellent resale opportunities now available in the
industry. This cost advantage, combined with Telegroup's proven ability to build retail
customer bases through direct sales forces and agents should yield significant growth in
our core markets over the next several years. As a result, we are refocusing our strategy
on our profitable retail business in stable core markets and simplifying our operations so
as to require significantly less investment capital and human resources to execute our
business plan."
The Company noted that as part of its efforts, it plans to:
-- Reduce the number of employees worldwide by approximately 15% prior to the end of
1998 as part of an overall reduction of operating costs that will also include
downsizing senior management, reducing their salaries and replacing current
cash compensation with stock options;
-- Restructure its wholesale business to focus solely on sales which generate a
significant level of gross margin contribution; and,
-- Defer additional network expansion, including multi-service network deployment,
until favorable financing alternatives become available.
Mr. Rees added, "Although providing traffic to wholesale
customers was a growing part of the business, our view is that gross margins in this
business segment will decline. Therefore, further investment of capital and management
resources is not justified. However, we have developed an expertise to target profitable
opportunities within the wholesale segment and will focus our future wholesale activities
on the most profitable routes. This refocusing and the deferral of the multi-service
network should not have a negative impact on our retail business. Rather, it should allow
us to reduce operating and capital expenditures and more tightly focus our resources on
the retail business."
At the same time, the Company noted that it expects operating
performance for the third quarter of 1998 to fall below expectations. For the quarter, the
Company anticipates total revenues of approximately $105 million. While this represents a
25% increase over revenues for the third quarter last year, including a 16% increase in
retail revenues, it was not as high as originally anticipated. The company also expects a
third quarter EBITDA loss of approximately $11 million to $12 million.
Steve Baumgartner, Telegroup's President, added,
"Operating expenses accelerated in the third quarter in anticipation of our network
expansion. Deferring the multi-service network expansion and scaling back our wholesale
business should allow us to significantly reduce operating expenditures in the fourth
quarter and next year. We expect that these measures will generate positive EBITDA during
the second half of 1999. We plan to reduce wholesale revenues, improve gross margin
contribution and simultaneously reduce operating expenses over the next several quarters.
Thus, results for the fourth quarter of 1998 and throughout 1999 are expected to differ
from those previously anticipated."
For the fourth quarter of 1998, the Company anticipates total
retail revenues of approximately $70 million, representing an increase of approximately
25% over the fourth quarter of 1997. Given the immediate scaling back of the wholesale
business segment, wholesale revenues in the fourth quarter are projected to decline to
approximately $25 million, representing an approximate decline of 40% from the fourth
quarter of 1997. Consequently, total revenues for the fourth quarter are expected to be
approximately $95 million, representing a decline of approximately 4% from the fourth
quarter of 1997.
Mr. Baumgartner continued: "The immediate scaling back of
our wholesale business segment will reduce revenue expectations in the fourth quarter of
1998, with wholesale revenue declining 40% to 50% from the preceding quarter. Retail
revenues in the fourth quarter are also expected to be lower than anticipated, given the
effects of currency fluctuations in certain markets, and reduced investments in SG&A
expenditures to conserve cash. In light of the strategic repositioning, total revenues in
1999 are also expected to be below previous expectations. However, we expect to see our
retail business segment in 1999 grow by approximately 35% over 1998. With our focus in
1999 on retail sales, decentralized operations, and the de-emphasis of wholesale and
network operations, we now expect to be EBITDA break-even in the second half of 1999.
EBITDA in the fourth quarter is expected to improve over the third quarter of 1998, but is
not expected to reach break-even as previously anticipated."
Mr. Baumgartner added: "We have an immediate need to raise
$25 million in new financing and to refinance a $15 million note to fund our business
through the fourth quarter of 1998. We will also require an additional $35 million in 1999
to fully fund our revised business plan until we begin to generate positive free cash
flow."
Mr. Baumgartner concluded, "As indicated by our revised
future expectations, we believe that focusing on what historically has been our strongest
cash generating business will be best for the future growth of our company."
Telegroup is a leading global carrier of long distance
telecommunications services to over 200 countries, servicing small and medium-sized
businesses and residential customers. Telegroup is recognized as having one of the most
comprehensive global sales, marketing, and customer service organizations of the emerging
multinational carriers. The company operates a digital, facilities-based network, the
Telegroup Intelligent Global Network(R), which consists of a central operating center,
twenty-one switches, five enhanced service platforms, owned or leased capacity on ten
digital fiber-optic cable links, and leased parallel data transmission capacity. Telegroup
had revenues of $337 million in 1997.
Application of the Safe Harbor of the Private Securities
Litigation Reform Act of 1995: This news release contains statements which are not
historical facts and may be considered 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. Telegroup's actual results might differ materially due to numerous factors
including, without limitation, the Company's success in developing its business plan,
acquiring additional financing needed to meet this plan, foreign currency fluctuations,
obtaining certain operating agreements, canceling certain contracts, and changes in tax
law. Those and other risks are described in the Company's filings with the Securities and
Exchange Commission.
Contact:
Telegroup Inc., Fairfield
Steve Hutchins, 515/472-5000
shutchins@telegroup.com
or
Analysts/Investors Contact:
Telegroup Inc., Fairfield
Douglas A. Neish, Chief Financial Officer, 515/472-5000
dneish@telegroup.com
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