BCE Inc (BCE) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the AT&T Canada third quarter 2002 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties during the conference, please press star 0 for operator assistance at any time.

I would like to remind everyone that this conference is being recorded, and will now turn the conference over to Mr. David Lazzarato, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning everybody. I'm here in Toronto with John McLennan, our Vice Chairman and CEO, and Harry Truderung, our President and COO. We also have with us our Treasurer, Brock Robertson, and our Director of Investor Relations, Dan Coombes.

Today's call will contain forward-looking statements, and it is important to be aware that actual results can differ materially from any projections. I would ask you to please review closely the Safe Harbor language and the risks outlined in our release today and in our recent Securities filings.

First, we will have John and then Harry share their perspectives on recent company developments and for the quarter, then I'll spend a few moments to review the financials, then we will open it up to questions.

So with that, I'll turn the call over to John.

Thank you very much, David, and good morning, everyone. Thanks for joining us today. Let me just start by saying how pleased I am with our management team's continued progress in accomplishing the goals we set forth to ensure our long-term success. We have addressed the first component of our three-point strategy by significantly improving our operational and capital efficiencies.

Secondly, in reaching an agreement on the capital restructuring plan with our bondholders, we are well advanced on our efforts to establish a sustainable capital structure for our company moving forward. This plan will allow our bondholders as owners to participate in what we believe is a considerable potential of the company to continue to compete successfully in the Canadian telecommunications marketplace. And we continue to pursue the third component of our plan to establish a balanced telecommunication industry regulatory framework to promote the benefits of competition for Canadian consumers and businesses.

And with these activities as a backdrop and despite the slowdown in the North American telecommunications market, we continue to expand our relationships and win new contracts with Canada's leading companies.

Looking ahead, we'll continue to focus on our strength as a national telecommunications partner of choice to Canada's leading businesses. We will compete with the incumbents in the areas of our traditional strength in managed data and long distance solutions and in IT services to further enhance the company's competitive position.

I would sincerely like to extend AT&T Canada's great appreciation to our employees, to all of our customers and all of our suppliers for their continued support and confidence as we maintain our commitment to bring real choice and innovation to Canadian businesses.

Over the last year, we have taken steps to strengthen AT&T Canada's position in the Canadian marketplace. Most specifically on the operating level, we have implemented changes to scale our cost structure and to focus our deployment of resources to those products, services and markets that offer the highest returns. We are making considerable progress as we work through this process towards our goal of establishing the company as a strong, long-term competitor in the Canadian industry.

Turning to the capital restructuring plan, on October the 15th, we announced that we have reached an agreement in principle with a Steering Committee of AT&T Canada's public bondholders on a proposed restructuring plan. This proposed plan will exchange all of the company's $4.5 billion of outstanding public debt for equity ownership in the company and cash of no less than $200 million. This plan will preserve the value of the company for the benefit of all stakeholders and eliminate approximately $425 million of annual cash debt service obligations.

Completion of the restructuring plan is subject to entering into definitive agreement and the receipt of material approvals including bondholder, regulatory, and court approval. We expect this process to be completed during the first quarter of 2003. Under this plan, we expect to emerge as the only Canadian telecom company with no debt, cash at closing of approximately $100 million, and positive free cash flow.

And I'll just quickly state that the positive reaction to this plan from our customers, our suppliers and all of our employees has been tremendous.

Turning to the regulatory issues, on August the 27th, AT&T Canada filed an appeal of the CRTC's May 30 price cap decision. In our petition, we have asked the cabinet to endorse the principle that the incumbent telco should price all their network services to competitors on a competitively neutral basis. Within the current regulatory framework, only 30% of the network services that competitors must purchase are notionally (ph) priced at cost, while 70% are priced at retail.

We are contending that given the ubiquity of the public network controlled by the former monopolies, competitors must be provided with competitively neutral cost based access to all network facilities and services. We also believe that the 30-year-old methodology that CRTC utilizes to determine those costs needs to be updated to be transparent and capable of audits.

Over the last few years, each time the CRTC has reviewed the accuracy of costs forwarded by the incumbents for specific cost based services the result has been the reduction of those costs by an average of 60%. We are encouraged that the CRTC has decided to review and possibly vary one specific aspect of the recent price cap decision but we continue to believe that those aspects of the decision relating to pricing of competitive services needs to be fundamentally changed.

Our appeal of the CRTC decision focuses on the way the regulator address the golden objectives of the telecommunications policy of the government of Canada. Experiences demonstrated and the government has supported the fact that a full and fair competitive telecommunications market place is in the best interest of Canadian businesses and the public to insure the benefits that come from choice, innovation, and value continue to be enjoyed by all.

Now, about our negotiations with AT&T, as we said in our press release we continue in our discussions with AT&T Corp. to establish new commercial arrangements between our two companies. As things now stand, we are discussing how AT&T Corp. can eventually operate more independently in Canada, while in parallel work cooperatively with us at the same time.

These discussions will lead to us becoming a newly branded, full service telecom provider under a new corporate name while retaining on going commercial and operating relationships with AT&T Corp. We are discussing -- implementing this new corporate name within 18 months. During this transition period and beyond, we expect to maintain operational relationships with AT&T Corp. and expand our relationships with other new carriers.

Right now it is not expected that AT&T Corp. will maintain an equity interest in the company following the completion of the capital re-structuring. However, we expect to continue to operate in a very co-operative manner given the strong historical relationship between our two companies. We are working to conclude these negotiations as quickly as we can to ensure transparency for our stakeholders including our employees, our suppliers, and our customers. Under this new agreement still to be finalized, we would have multicarrier global connectivity and an ongoing commercial relationship with AT&T Corp.

These agreements will preserve our cross-borders and global connectivity arrangements provided by access to the AT&T Global Network as well as ongoing products relationships.

As a re-branded carrier, we will continue to have the same people, the products, the services, the local market knowledge, and broad state-of-the-art national network across this country. We will continue to offer our customers local, national and global connectivity. Our customers will continue to enjoy the same products, services and network reach as before.

Now, on that note, I'll turn it over to Harry who will update you on our operating initiatives and some of the success we've been having on the business front. I am very, very proud of what we've been able to do in terms of winning new business and in renewing existing relationships with key customers. This performance underscores our belief that with an improved regulatory environment, with a successful restructuring of our debt, and by sustaining the efficiencies that we have achieved in the last three quarters that we can absolutely be a strong, profitable, and growing competitor over the long term -- Harry.

Thanks very much, John, and good morning, everyone. In recent quarters, I've outlined the initiatives that the team here is implementing consistent with our plan to support sustainable and profitable growth. And I'm pleased to say that we are succeeding in driving the operating and capital efficiencies that position us to be a strong long-term competitor. In the third quarter, we achieved a fifth consecutive quarter of improved operating profitability.

At the end of October, we have completed about 80% of the approximately 1,290 job reductions, which we announced for 2002. We will have completed 90% of these reductions by yearend with the balance expected to be complete early in the new year. These initiatives will produce annualized operating savings of approximately $90 million when complete.

We are succeeding in removing cost from our business by focusing our resources on higher margin products and services and curtailing higher-cost, lower EBITDA investments for the longer payback periods. Additionally, we are targeting new customer acquisitions for local services to businesses on our network with larger scale requirements. This will lead to lower access line additions but with improved overall margin. And while we are undertaking these structural changes to our business, we are enhancing our ability to compete by maintaining our focus on serving the needs of our customers. As I discussed last quarter, we continue to institute business improvements that have led to improve customer satisfaction levels.

In addition, we are continuing to enhance our ability to sell into the marketplace as evidenced by a significant number of new and important contracts we singed in the third quarter. And I'll talk about those new customer relationships in a moment.

On this note, I would like to share with you a couple of customer success stories from the third quarter that were a direct result of our steadfast focus on not only meeting but on exceeding our customers' expectations. Over the course of the last several months, we have worked in tandem on a joint project with Scotia Bank and IBM to move one of the bank's primary data centers to a new location.

This was one of the largest and most complex customer projects that our company had ever undertaken, and involved the successful and timely migration of over 160 working data circuits and the creation of a new ATM switching infrastructure. Our ability to manage this vital operational component for one of Canada's largest banks has solidified our position as Scotia Bank's telecommunications provider of choice.

And secondly, during the quarter, we signed an agreement with Disney Corporation to provide a national and cross border data network solution. The genesis of this relationship occurred when Disney needed to rapidly switch service providers to maintain their cross border data network. At Disney's request, we quickly went to work to provision a new 17 site IP data network linking Disney's 16 Canadian stores to the head office in Burbank, California. To the delight of Disney, we were able to provision and turn up this network in just 9 days, a feat that earlier in the process was believed to be impossible.

These successes are directly the results of the dedication and commitment of our employees and our deep knowledge of the telecommunication needs of Canada's leading businesses. We greatly appreciate the ongoing support and confidence of our customers, and I'll reiterate that our team remains firmly committed to build upon our already significant capabilities to enhance our customers' ability to compete.

During the quarter, we continued to build on our success in the large business market with the signing of several significant new agreements. In addition, we renewed a considerable number of contracts with important existing customers, and I'd like to share some detail on just a handful of these new agreements.

In the third quarter, we expanded an already significant relationship with Microsoft to provide advanced data network support. Also during the quarter, we entered a significant new relationship with Deutsche Telecom for both voice and data services and entered into agreements with MCR, 7-Eleven, TD Bank, and Convergis (ph). And we have expanded our relationship with PricewaterhouseCoopers Consulting based upon their requirements for enhanced network connectivity as a result of their merger with IBM. As well, we are supporting the Canadian data network requirements for US-based Broadwing that is based on our ability to seamlessly route critical data network traffic nationally across Canada and cross border into the United States through our seven cross border points.

In addition, we renewed already significant agreements with Apple, Ford Motor, Hertz, Marriott Lodging and IBM. As we move into the fourth quarter and proceed forward with our restructuring plan, we are working diligently to build upon a positive momentum we achieved in the third quarter. We are continuing to sell into the marketplace, our supplier relationships continue in the normal course of business and our employees remain focused on achieving company's goals.

In other words, we are continuing our progress as we move forward business as usual. We have actively communicated our restructuring process when proceed with these important stakeholders of the company and the AT&T Canada has entered this process in order to implement an already agreed upon restructuring solution.

Going forward, our operating profile is strong as the company enters this process with $425 million cash on hand. And we expect to emerge from a successful restructuring process generating positive annual free cash flow with no debt and cash on hand of $100 million.

In summary, I want to reinforce that we have a strategic plan. We are implementing it as promised and it is generating positive results. These results are being achieved in part because of the unique strengths we enjoy in the Canadian marketplace. We are the largest competitor to the incumbent telcos in providing telecommunication services to business customers. We have a diverse suite of products and services specifically targeted at business wireline customers that enable customers of all size to compete and succeed on a local, national, and global scale. And we have deep customer relationships with many of Canada's leading companies and have demonstrated a unique strength delivering innovative solutions to the large business market.

Let me stop there and turn it over to David to share some of the financial details of the quarter.

Thanks, Harry. I will provide some of the highlights on our third quarter results. In Q3, our revenues were $359.9 million compared to $387.2 million in Q3 of last year. The decline is largely attributable to a 15% decline in our long distance revenues year-over-year. Service costs for $223 million, an improvement of $30 million and gross margin was 38% representing a 340 basis point improvement from the same quarter last year and as a result of significant progress in scaling the business and achieving operating and regulatory efficiencies.

In Q3, our SG&A expense was $82.6 million, representing an improvement from Q3 of last year of $21.2 million, and an improvement in the ratio of SG&A expense to revenue of 390 basis points down to 22.9%. Again, this reduction in SG&A expense is largely the result of the efficiencies we've achieved through our successful cost reduction initiatives.

EBITDA for the quarter was a record $54.3 million, representing an increase of $24 million from the third quarter a year ago. Our EBITDA margin at 15% in Q3 of this year compares to 8% in Q3 of last. And as John said earlier, I believe, this represent the fifth consecutive quarter in which EBITDA has improved. Capital spending in the quarter totaled just under $11 million and on a year to date basis is approximately $85 million.

After depreciation of $46.7 million in the quarter our income from operations was $7.6 million. This is an important milestone for this company as this is the first quarter that we've had positive income from operations and it's the result of those refocused efforts in the marketplace and in operating efficiencies. Let me focus on revenue a little bit for a minute. Combined revenues from all non-LD sources were 62% of the total revenue base, up from 59% a year ago. These areas of our business represent above $900 million of revenue on an annualized basis.

Revenues from data and Internet were $157.7 million in the quarter, representing a decline of 8% when compared to the same quarter last year. These results were consistent with an industry wide slowdown in enterprise data spending that included weaknesses on wholesale.

Revenues from data and Internet represent 44% of the total revenue base. Local revenues in the quarter were $58.2 million, an increase of $12% from the same period last year. Local revenue growth can be attributed to the increase of 37,000 lines year over year. Local now represents 16% of the total revenue base versus 13% a year ago. At September 30th, we had 547,000 installed local lines that comprise 287,000 on net or on switch lines or 52% of the total. Revenues from long distance were $136.3 million in the quarter, a decrease of $23.5 million or 15% from Q3 of last year. This was a result of a decline in the per minute rate of approximately 10% and a decline in minute volume of approximately 5%. As a percentage the total revenue, long distance has declined to 38% versus 41% in the same quarter last year.

As we noted in today's press release, cash on hand at the end of September was just under $400 million. Included in that amount is approximately $10 million in cash the company received during the third quarter from the exercise of employee stock options. With the closing of the backend transaction in early October, AT&T Canada employees exercised the all remaining in the money stock options generating cash proceeds to the company of approximately $225 million. On October 9th we used $200 million of this cash to repay in full all amounts drawn under a bank credit facility.

So in summary, on a pro forma basis, our cash on hand at September 30th was about $425 million.

As you know, on October 15th we announced that we've reached an agreement in principal on a capital restructuring plan. When this plan is implemented, we will be debt free with bondholders exchanging $4.5 billion of outstanding public debt for equity in this company and cash of not less than $200 million. I'm confident that we have the adequate liquidity to fund our operating and capital requirements while we finalize our capital restructuring.

Upon completion of the restructuring plan, which is expected in the first quarter of next year, we'll go forward with the $100 million of cash on hand, a debt free balance sheet, and positive cash flow.

To provide liquidity to our new shareholders - under the restructuring plan - we intend to list our common stock on public exchanges in Canada and/or the United States. We've begun that process.

Let me stop there, and we'll take your questions. Operator, could you please explain how we'll conduct the Q&A portion of the call.

Yes. One moment, sir. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star 1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. If you would like to decline from the polling process, please press star 2. Please ensure you lift the handset if you're using a speakerphone before pressing any keys.

One moment, please, for your first question.

Your first question comes from Dvai Ghose (ph) from CIBC World Markets. Please go ahead.

Hi. Good morning. It's Darren Robinson (ph) for Dvai. Just a couple of questions. First of all, cap ex in the quarter at 11 million or so, significantly lower than expected. I think your target was 160 for the year. Can you just talk a little bit about why it was so low, and if you are reducing your target for the year?

Darren, it's Harry Truderung. We've been working very hard to size our capital spend to the opportunities that we see. The third quarter was low, the fourth quarter is traditionally a much heavier month in terms of capital spend, and we do expect to end the year somewhere around the 10% of revenue mark in terms of cap ex. So that would be my comment.

We're quite comfortable, I would add, with the process that we've undertaken to resize our capital spend and we're able to address the opportunities that we see ahead of us.

Okay, and a follow-up question, if I can. You'll be debt free coming out of the first quarter soon actually (ph). Can you just talk a little bit about what you expect to see in pricing? I mean, you'll probably be able to -- given the fact that you're debt free, you'll probably be able to be a little bit more aggressive in terms of pricing, especially on the data side. Can you give us a little bit of color as to what we may expect and what you're looking for from your competitors?

Hi, Darren -- it's Dave. Let me start. I think debt free and pricing, I try not to use them in the same sentence. I'm not sure that there's a direct correlation there. We will have the capital structure to be flexible to opportunities, but I don't think that means we're going to jump out of the blocks and change the pricing dynamic in the industry.

And I think you've seen a lot of the industry participants make similar comments that -- they think we've got pretty good pricing in the Canadian telecom industry. They don't want to see pricing being the only basis upon which competition is done. We certainly don't. We don't think that's good for competition. Now, that doesn't mean we'll be blind to evaluating each opportunity as they unfold. So -- there's been healthy reductions in pricing in LD, et cetera, over the last couple -- three years. And I think customers want us to compete not only on price, but on all the other dynamics as well.

Darren, John McLennan. I think if you were to observe our pricing policies after we've received the contribution decision last year, you'll see that we were -- we did not immediately go to any kind of aggressive pricing formula. We need the margin. We need the bottom line to support where we want to go forward, how we want to go forward. And I can assure you in many of these cases out there it's not us leading the parade of pricing downwards, and you will not see us leading the parade downwards now.

So we think there's a -- we hope a rational pricing environment can settle, and we look forward to that. But we're sure its hell not going to be the aggressive price leaders out there.

Okay. And if I could just sneak one more question in on the AT&T Corp. relationship. Could you just maybe give us a little bit of color as to what happened over the last month or so that led AT&T Corp. not to take equity stake post restructuring?

Sure. I think -- John again, Darren.

Yes.

If you take a look at the fact that when they completed the back-end, there were several things going on. They paid between $5 billion and $6 billion Canadian to buy the equity in the company. And of course, that is all going to disappear into the hands of the bondholders as (inaudible) the restructuring is done. And through the initial negotiations we were having, AT&T was looking like they were going to end up with anywhere from 7% to 10% of the equity in the new company, and I think a couple of things were happening in parallel.

Number one, they took a look back and say, "Why is it worthwhile for us to own 7% to 10% equity in a company in one of these foreign markets?" And at the same time they were revising their whole -- it's our understanding -- they were revising their whole strategy and go forward initiative in global markets. And I believe that consistent with that new evolving strategy, I believe, which is evolving as we were discussing it, they really are tending more to more towards not owning facilities, not owning companies, not managing companies, but working independently with strong local partners to focus on core global accounts that they really are -- that they've represented are very, very critical to them.

And so I believe that they're really working with us to really fit their involvement in Canada more into this new global initiative than anything else. That's at a high level, but that would be quick summary.

Yes, will this -- if and when the new commercial agreement is signed, will this preclude another foreign carrier up take in any ownership in AT&T Canada?

No, it wouldn't. No.

Okay. All right. Thanks a lot, gentlemen, for your answers.

Okay.

Your next question comes from John Randy (ph) from European Securities (ph). Please go ahead.

Thank you very much, and good morning. Getting back to the capital expenditures, obviously, bit low this year for obvious reasons. I know you probably don't want to give guidance for '03, but what would you say is the sustainable level of cap ex to revenues going forward in your business?

Let me take that, John. We have really reduced the level of capital spend this year as you know from previous years. Part of that was as a result of -- we had, I think, somewhat fortunately (ph) arrived at a point where we had built our network. We -- the need to expand the network geographically was not there, and so we were able to use a lot of the capacity that had already been put into place.

Now, what we're finding this year is that at the spend level we're at and we are projecting that we are able to meet all of the customer opportunities any specific customer builds (ph) that might be associated with, for example, (inaudible) applications where we need to complete a building and continue to invest in some of the basic support infrastructure for the network.

Going forward, I would say that we're looking at a moderate increase in the amount of cap ex from the spend that we anticipate this year, but frankly not a lot.

John, it's Dave. I think we recently disclosed capital expenditure going forward in the 140 million to 160 million range over the first -- the next few years. And that would still be our best estimate of what's required to meet our business plan.

All right, thank you. If I could just have a follow-up. Obviously, it's been a very tough year for a variety of reasons, but ...

We had (ph) some challenges, John.

I noticed that, sequentially, pretty much all of the operating metrics are down, revenue is down across the board. Do you see, at this stage, any signs of a turnaround? Any light at the end of the tunnel in -- let me just address that to each of your lines of business if possible.

Well, John, you mentioned revenue. I think that our view and analysis of revenue is that if you look across the industry at all the players, the incumbents in Canada and even the industry in the US, its clearly been a very tough year for telecommunications. Our experience is that volumes in the business telecom segment are down in a number of industries. And wherever possible, business customers have been trying to find ways of reducing cost.

So the mantra this year has been compact your networks, take out the volume, find ways of reducing cost. The telecom industry, we included, have responded to that.

And I think it's put some pressure on revenue and in part, on pricing. It's really, I think, driven a lot of benefit to the customer. Looking ahead and looking across the industry, frankly, our view of the numbers is that our revenue is really not that different in terms of trend from the revenue being reported elsewhere.

It sometime is difficult to just aggregate the revenue streams in the ILX because they are in businesses that we are not. They tend to put things like consumer broadband internet access into the data portfolio and so on. But our analysis is that that we are pretty close, and we are absolutely holding our own in the marketplace.

John, it's Dave. In terms of the some of the other operating metrics as well, both on the margin side and on the SG&A side, we've had consistent improvement in both over the course that'll last a little while, and I would say significant improvements in our efficiencies, our cost structures. While at the same time importantly, improving our customer service metrics as we objectively measure our ability to serve customers needs, and we get that feedback in objective survey. We're doing that on the cost side at the same time as we're improving the customers perceptions of our ability to serve them.

So we think that's quite exciting. If we can take advantage of that during kind of an economic period that we've been in, we think that really augurs well for whatever is ahead of us.

Well, absolutely. I didn't mean to imply that you haven't done a fine job of improving the margins. But I guess my question was if you see - at this stage - any signs of recovery, or is it still pretty cloudy out there?

No, I wouldn't -- my view of it, John, would be that there certainly isn't any measurable sign of recovery out there yet. We are very much focused on our current customers, growing business with our current customers, and extremely fixed on cost. We are really going to push hard on our appeal because we believe there is tremendous merit (ph) in that and that would be additional cost savings that we have not budgeted or planned for if there was any kind of positive resolution in that area at all.

And if you take a look at analysis and articles that are being written about how competition should be sustained -- can be sustained and take a look at what's happening in the US, facility based competitors are going to have to be able to buy access from the RBOCs, from the incumbents at some form of cost based formula. And it's happening very aggressively and unilaterally in quite a number of states.

And we believe that if you truly believe in competition you're going to have to move in that direction, however measured that might be. So we're not planning for any significant improvement in that area but we are -- we think that's the possibility. So we're going to be very focused on our core customer base. We are going to grow new customers as well as we can, but I can tell you customers are not really -- the demand for services are not really growing dramatically John. So we don't see it sort of falling rapidly -- we -- it's more of a stabilized environment, but we don't see it growing rapidly either. And we don't necessarily see it growing through 2003 either.

Yes.

But we think that we're pretty darn well positioned to meet our goals and objectives for 2003.

Thanks very much, and good luck.

Okay.

Your next question comes from Glen Campbell from Merrill Lynch. Please go ahead.

Yes. Thanks very much. A couple of questions. First, on pension expense, as you look forward to 2003, do you expect a significant increase in that area?

Glen, it's Dave. You know, to answer that question, I got to forecast the global equity markets (inaudible). And I wish I could do that. John is looking at me like there could be some personal investment advice involved here. We don't expect a major change, Glen. Our workforce is shrinking. That will help to offset any rise in pension expense. But, you know, I don't have insight beyond that, to be honest with you.

Okay. That's fair enough. Two other questions, if I may. The first is just on the quarterly trend in revenues. Based on the disclosure that you'd filed, I guess, from your bondholder discussions, you're looking for revenues for the year -- this year of 1511, and if my math is right you'd have to go from 316 in the third quarter to 383 in the fourth quarter. And I guess that the basic question is that still realistic? Do you expect the revenues to increase from third quarter to fourth?

Glen, I think, as we've done throughout the year, we're not going to update - at any point in time - on these conference calls as that's our update. That's our most recent information and if we come off that in any material way, we would generally disseminate it. We're not going to do that at this point.

Fair enough. Then the last one is if you could just talk about the economics of local competitions? You know, it has gotten a little bit better from your point of view. Are you getting, you know, decent margins and a quick payback there? And is voice over DSL an interesting possibility for you?

Glen, let me start with the last one. First, voice over DSL -- we did pretty extensive work on deploying that technology out last year; and we arrived at a point, where we just couldn't see enough of the return or payback on that kind of investment in a major way. So while we did a lot of interesting work and we looked at a lot of technologies, we just couldn't see the payback sufficiently to make a major investment. In terms of the local business, we have really refocused our market approach on larger size customers.

So those customers who have a concentration of lines in one location, and that location is very much preferably on net or in a (inaudible) -- those margins are very good for us, and we're -- we are seeing some churn in the resale side of the business. And while we don't want to lose any customers that we've already acquired -- if we're going to lose any customers, those are the ones that are more marginal for us. So we are seeing a decline in our local line additions as we experience some churn and as we focus on this higher concentration on net customers.

But we think we're doing the right thing there. The economics are positive, and we believe that we're going to see a slowing of the churn and those numbers are going to slowly start turning around and growing on us both in terms of absolute adds, quarter over quarter as well as the margin we expect will continue to improve in that business.

Very helpful. Thank you.

Your next question comes from Nick Dermosic (ph) from RBC Capital. Please go ahead.

Hi. I just have a question regarding the relationship with the AT&T. I was wondering, how do you guys view the relationship in terms of how instrumental was it with you guys when you are signing on new customers in the past? And then how do you think -- do you guys -- do you think you are going to have greater difficulty in brining on new customers when you don't have that AT&T brand?

That's a great question, and that's right -- we're right in the middle, Nick, of those discussions right now with them because we are really trying to create an environment where we do give them more freedom but we also do work very cooperatively with them because that makes good business set.

So we're structuring -- I don't see a major impact on our business plan in 2003 as a result of this evolving relationship with AT&T Corp. Whether it's going to really give us an opportunity to do even better and to really grow our business better or in fact have an impact of not allowing us to gain contracts as fast as we've been gaining them it's still to be determined and I would say an awful lot of it is going to depend on how well we work together. And if we really work together, I don't see any impact at all.

As a matter of fact, I would see it enhanced. If we don't work well together, then it's going to depend on how aggressively and successful we can be more independently from them than we have been and how we work with other carriers. So, that's one of the unknowns as to how we go into this new evolving relationship with them. But it certainly -- that's an interesting question -- Harry.

Thanks, John. Just like to add, it also opens up additional opportunities. And we believe that our strong historic relationship with AT&T will continue to service well. We had very common technology platforms, which make it very easy to work together, but some of the opportunities that we are looking at is obviously a larger array of global partners on the carrier side. And on the IT side for example we do have an office in the US, which will be free to pursue whatever opportunities are down there. And so there is a variety of opportunities that we will be looking at, as we move into this new way of operating.

I think we'll be able to, perhaps more clearly, answer that question over the next couple of quarters.

Okay. Very good. Thanks.

Your next question comes from Roger Sack (ph) from Cathay Financial (ph). Please go ahead.

Thanks. A few questions. I hope I don't repeat them (ph) that were previously asked. But in terms of the AT&T relationship, at least historically, how much revenue to AT&T Canada came from AT&T? I don't know if that's been disclosed or if you can disclose that. And with the negotiations with them that you've been seeing, you think, that would be negatively impacted, going forward, et cetera? Second question -- more housekeeping -- in the, I guess, Internet and e-business revenue line, how much is, I guess, from the DMC Montage (ph)?

And lastly, in the data line, the sequential decline, I think, was about -- like 9 million or so. Just wondering, if you can give us little color as to maybe what happened there? And in terms of pricing on the data products, at least right here in this space depending on which carrier you speak to, there has been some stabilization in some of the (inaudible) ATM products; are you seeing that as well? Thanks.

Roger, I think I've got the list, but if I miss one, keep me on it.

Okay.

As a percentage of revenue, if you look at our AT&T relationship, it has, maybe, simply two forms. The business we do with AT&T and the business that we do with customers in Canada -- where you could pay us because of that business's relationship with AT&T either in the US or elsewhere in the world -- if you combine those two things, our revenue or our business from AT&T and those relationships wouldn't exceed 20% of our revenue. So it's not 40%, it's not 70%. So I'm just trying to give you a ballpark. In terms of impact, going forward, in the very, very short term, there's no impact.

That revenue is with medium and large size customers. It's the business that's on a one- two-three-five-year contract; whatever the case might be. Going forward, beyond all of the short-to-medium term, it's back to John's point of how does the business relationship at an operating level, not at a corporate level not at a corporate capital level - if I can use that expression - how does that relationship maintain and evolve. We do everything we can to be a fabulous supplier. Hopefully, they'll do everything they can to be a fabulous supplier to us as well. In terms of Montage -- I think that's the question.

Yes.

Montage DMC -- the revenue in the quarter -- the third quarter of '02 was 16.4 million, and that's up from about -- it's up a little over a million dollars from Q3 of last year, and quite honestly we think that's quite an achievement for our team at Montage DMC. Speaking about economy and thinking about capital and where people are spending there IT money, the guys have worked really hard and as you know, we previously mentioned a year or two years ago, Montage DMC had quite a significant chunk of their work with Nortel and JDSU sort of increased their business while business from those two then really important customers has gone down. It's quite an achievement. The guys are really capable and their customers understand that. In terms of data pricing, I think maybe I'll get Harry.

Sure.

Harry, can you take that one?

Sure. Let me make the comment on that. What we have been saying --I think I alluded to it early in terms of pricing. On the data side, we've seen considerable weakness - I would say - on the wholesale side of the market and that really reflects back into what's happening on the retail side, which is -- where demand has been really cost driven demand.

We're seeing customers that are taking every step possible to compact their networks. There is some substitution going on and obviously there is some churn going on when customers are looking for the best price between carriers. This has put some pricing pressure on the data portfolio. So when you look at all of that happening at the same time we -- that's the picture we see and the numbers that we're reporting.

In terms of are we seeing stability, statistically I would say that I wish we had a little longer run on the -- on that. But I would say that we are feeling like we're at approaching the stability point on pricing. Frankly, I think where we at now the -- we and I think the industry really needs to preserve the margins that we've got. And so we're very hopeful that rationality will apply in telecom and in data pricing.

Okay. I think that's very helpful.

Your next question comes from Dave Ranburg (ph) from CBA Securities (ph). Please go ahead.

Yes. Hi. I'd like to know how much of your business is on a contract that's coming due in the next year?

Dave, it's Dave Lazzarato. I don't really have a number of percentage on the top of my head. I'll be happy to go away to see if I can come up with a pretty reasonable estimate and give you a call back.

Okay. I have a quick second question. Is the dissociation with AT&T Corp. -- is there a clause in the agreements that you have with them, where there would be a non-compete for a certain period of time? So like as AT&T Corp. wanted to come back into Canada and look at some of the clients that AT&T Canada has traditionally served, is there a sort of a non-compete there?

All of that is being discussed, David, but we do not have a non-compete at this time.

Okay, great. Thanks.

Ladies and gentleman, we have time only for one more question, and that question comes from the Richard Talbott (ph) from RBC. Please go ahead.

Thanks very much, and good morning. A couple of questions. First, I wondered if you can put any color around the timing of when you think you might be able to have further details on the commercial arrangements with AT&T? That would be great.

Second, with respect to the prior commercial arrangements, were there any minimum quantities of traffic or may be you could just give us some color as to, you know, what the rough terms were for that relationship? Presumably, you had some sort of preferred supplier arrangement. And secondly, with respect to the non-cash foreign currency loss, maybe you could just give us a bit of color as to how that occurred, please?

On the AT&T arrangements, we did not have guaranteed arrangements for a residential revenue delivered one way or the other. What was your first part of the AT&T question, Richard?

Timing.

(inaudible) time.

Timing (ph).

The timing. Well, we're working very hard at it and I think one of the things we're running into is, quite honestly, they're standing back and continually evolving a global strategy as we speak. So we're really fitting into a bit of an agenda as we move forward that sort of fits into their new thinking as they go forward. But I would expect -- I would very much hope that we can have this type of agreements while we're going to target for a couple of weeks, it may take a bit a longer than that.

Richard, I think, your last comment or question -- excuse me -- related to the foreign currency item in the income statement on the quarter.

Yes, that's correct.

Okay. Even though we're going through a capital restructuring process, we've had at the end of the quarter, significant amounts of US dollar denominated debts that is -- (inaudible) that was during the quarter, largely unhedged, and at the end of the quarter was entirely unhedged as we monetized the swaps.

So it's really that the current period impact of exchange fluctuations on the unhedged debt. Of course, we should think forward in terms of our capital structure, no long-term debt, therefore no US dollar denominated long term debt. Therefore, the only exchange -- foreign currency fluctuations would be on - I'll call it - trade items that our US currency denominated by any relative measure that would be pretty de minimums. So, some (ph) of the income from operations line again looking forward, think of no foreign currency issues with no debt and with a capital structure of no debt, no interest income.

So, I would like to think that - you know - this quarter although, I would be talking on a pro forma basis that we had income from operations, we are going to have a lot of tax losses to carry us forward and be very beneficial to this organization in the future. So the things that we have gone through really changed the dynamics in our P&L, little on our balance sheet.

That's very helpful. Thank you. Sort of (inaudible) - I guess - two follow-ons to that. You mentioned the tax losses. Could you quantify for us what those might be currently? And then secondly, with respect to the relationships with the Brascan (ph) and - I believe with CIBC, can you just give us some colors as to whether you think that relationship would continue going forward or if you could update us where the things stand there? That would be very helpful. Thank you.

First -- John here. I'll just give a quick update on Brascan and CIBC. We would very much like to see them continue and go forward and it's still being reviewed, still been considered, so that will be determined in a relatively short period of time, but we'd very much like to see them stay involved for sure.

Richard, in terms of your first question about tax losses, a lot of the future ability to use tax losses depends on how we go through a restructuring process from a mechanical perspective, but I am very comfortable saying our tax loss is going forward will be at least $2 billion if not significantly higher. So there is lot of value there, and we are certainly going to do everything we can to take advantage of it.

Okay. Thanks very much.

Thank you. Well, thank you very much everybody for joining us this morning. Rebroadcast of this call will be available shortly on our Web site or by dialing the replay number provided in our press release. So that concludes our call, and thanks again.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, and please disconnect your lines.