BCE Inc (BCE) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the AT&T Canada first quarter results conference call. At this time I'll put the phones in a listen only mode. Following the presentation, we'll have a question-and-answer session. If anyone has any difficulties hearing the conference, please star 0 for operator assistance at any time.

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

Thank you, operator, and good afternoon to everyone joining us today. I'm here with John McLennan, our Vice President and CEO, John MacDonald, our President and COO, Brock Robertson and Dan Coombes.

Certain statements we make in today's call will be forward looking in nature. It's important to consider actual results can differ materially from projections. I would ask that you carefully review the risks outlined in our recent securities filings.

First John McLennan then John MacDonald will share their perspective on recent company developments. I'll turn it back to John for a brief discussion on our outlook before we open it up to questions.

With that I'll turn the call over to John McLennan. John?

Thank you very much, David. Good afternoon, everyone. That's so much for joining us today.

Let me begin by summarizing for you what this organization has accomplished in positioning itself for long-term success in the Canadian marketplace. We have fulfilled exactly what we set out to achieve when we launched the restructuring initiative a year ago now. We have considerably improved our operating and capital efficiency, we have established a sustainable capital structure and we continue to make progress in pursuit of a balanced regulatory framework.

On April the 1st, we successfully completed our restructuring. It's a significant achievement to have completed this process from beginning to end in less than six months. We look forward to capitalizing on our prospects as a revitalized and financial strengthened public company. I'm really proud of what this organization has accomplished. We have emerged from our restructuring with a strong financial foundation, with no long-term debt, with $175 million in cash and a business that generates positive cash flow and net income. We have greatly strengthened our business through a strategic refocusing tha significantly improved our operating profile, while at the same time made dramatic increases in customer satisfaction levels, a huge priority with us. The revenue and operating profit generated in the first quarter confirmed we are executing on our business plan.

During the quarter, we continued to win new business and renew existing relationships with our customers while completing our restructuring. In this environment, we achieved revenues for the first quarter of $353 million and recorded EBITDA of $66 million. We are on track with our transitional arrangements with AT&T that you will see establish a new brand identity in the coming months. And while continuing to work closely with AT&T to win new business, we also partnered with other carriers, positioning us to diversify our revenue stream as we transition to a newly branded company.

Going forward, we are continually reviewing complimentary ways to build value for our shareholders. First and foremost, we have a solid business platform. We possess advanced technology, a blue chip customer base, and sophisticated managed service offerings that we will drive to deliver earnings and pre-cash flow. Secondly, we will pursue growth initiatives through new technologies to expand our addressable market and lower our overall cost structure. We are actively looking at the evolution of technology on many fronts and evaluating how we might bring certain new technologies to market. You can be assured that we will balance our technological progress with financial prudence by only investing in areas that will bring an appropriate return. We are firmly grounded in the present, but are keeping a wide eye to the future.

Now, let me talk about the regulatory scene for a second. We have been absolutely resolute in our pursuit of a balanced regulatory structure and in working to achieve a liberalized foreign investment regime at the same time. We are very encouraged by the Industry Minister's stated commitment to support competition and his acknowledgement that regulatory and policy framework are crucial to fostering competition in Canadian telecom. The Industry Minister specifically addressed his expectation that the CRTC would continue its recent pro-competitive momentum and the government would be monitoring developments in the coming months. Not the coming years, the coming months.

Our goal in launching our appeal to the price cap decision was to focus the attention of the government and the regulator on the concerns and issues of competitors. And in this we certainly succeeded. While our appeal was dismissed, which was not a great surprise to me, we were heartened by the Minister's direct and aggressive comments that the state of competition was unacceptable, that CRTC's competitive momentum needed to be continued, that the CRTC should address the issue of regulatory lag, and that the CRTC should continue to act to improve competitor cost-based access to the network.

We are also encouraged by recent remarks from the Chairman of the CRTC which acknowledged that the current regulatory environment advantages Bell and the other incumbents, and that it is the urgent role of the CRTC to fix this imbalance. Recent CRTC decisions back this up. They recently reaffirmed rules with incumbent win back activities, struck down Bell's bundled link of services through it's Nexia affiliate and will monitor other incumbents compliance through the use of inspectors. We are also encouraged with the CRTC's interim decision in December to reduce competitive digital network access rates and expect that this positive trend will continue. We strongly believe that opportunity exists for further meaningful reductions in regulated costs. Any additional relief in that area would be upside to our current business plan.

If I can turn now to foreign investment. Last Monday, the Standing Committee For Industry, Science, and Technology, tabled a report before the government recommending the full removal of foreign investment restrictions in the Canadian telecom industry. We welcome these recommendations and are encouraged that the committee has clearly recognized that the removal of these restrictions will significantly improve the ability of competitive entrance to pursue sources of investment capital that cannot be accessed under the current rules. We encourage the government to move as quickly as possible to introduce the legislative and regulatory measures that are necessary to remove these restrictions. Canadians in the Canadian economy will be the ultimate winners under liberalized foreign investment climate.

As outlined in our management information circular, 2 million shares have been reserved for issuance under the company's management incentive plan. With our public listing on TSX and NASDAQ, the use of equity-based compensation provides additional long-term performance based incentives to assist in attracting and retaining qualified management employees. On April the 17th, our Board of Directors approved the granting of 639,000 stock options and 230,000 restricted share units to management. The stock options have an exercise price of 3605, invest in equal amounts over three years from the date of grant. The RSU's become vested at the end of the three years' grant in the performance based in that they are tied to the Company's performance over the three years.

With that I'll turn over to John MacDonald. John?

Thanks, John. And good afternoon to everybody on the call. Let me echo John's sentiments we have a great platform from which to move forward. After six months with the Company, I'm confident that as we move through 2003, we can continue the transformation of this company into a profitable tightly run industry leader.

Today I'd like to share with you our operating priorities. Firstly, we'll continue our focus on generating profitable growth by selling a broader array of on net services to our existing customers, to expand our overall share of their telecom wallet. The good news is we're already executing on this objective. During the quarter we've expanded an already significant relationship with transit AT, to implement and manage a global network. We renewed our relationship with Public Works and Government Service Canada, add diversity with ether net services. In addition, we renewed an important agreement with the Ontario government, with newly sunlight financial following acquisition of Clarica, exploring assets in the case of our blue chip customer base is a simple concept but one that can deliver significant return to our shareholders with little incremental costs.

Secondly, we'll work to strengthen our competitive advantages in customer service and responsiveness to win new business. During the first quarter we had considerable success in winning new customer and establishing new relationships. We entered into a significant new relationship with Toys R Us, for example. Here, we provide a high band solution connecting Canadian and US sites by partnering with [INAUDIBLE] Three Communications for U.S. connectivity. Also in the quarter, we were awarded important data networking contracts with Cisco and 7/11. We won the support of these and other companies because we're a company that acts differently. Our customers tell us it's our solutions orientation and agility with which we respond to their complex telecom needs, that sets us apart.

Let me provide another quick example. During the quarter we provisioned a complex data network to connect City Financial's 300 branch network in Canada to a Citigroup host and alternative disaster recovery location in the United States. We completed this installation in just 45 days, further cementing our already significant relationship with this customer.

Thirdly, a key priority for 2003 is to continue to promote a capital efficient business model that directs capital to the areas of our business with the best growth in margin opportunities. Like the incumbents, as a hybrid provider we don't need to maintain a ubiquitous local network. Only where it makes economic sense to do so. Capital spending for this year is sustainable and appropriate to support our growth profile. Our opportunity going forward is to utilize capital we're already deployed more effectively. We'll also use capital already deployed by others, when appropriate, as a means to lower our overall cost and expand our addressable market. This balanced network strategy lowers our overall technology risk.

To give an example as I look two to three years down the road I see great potential for fixed wireless as a replacement for the local bottleneck. By leasing much of the last mile to our customer premises today, in the future we'll transition our network to new technologies, such as this, without concerned for stranding legacy investments. Having flexabilities take advantage of technologies difficulties, such as this, is an important competitive advantage.

Fourthly, we'll transition to a new brand no later than September 9th under our new commercial agreements with AT&T. We view this as an important opportunity to establish a brand identity that reflects who we are and what we want to stand for in the eyes of our customers. Under these agreements with AT&T, we'll migrate our 800 toll free services on to our own AIN platform. We're already well advanced with this transition as we had to initiate the development of our AIN network 18 months ago.

As we move forward, AT&T will continue to be an important customer and supplier. In addition to bilateral revenue earned directly from AT&T, we continue to generate significant revenues from AT&T referenced accounts where we contract directly with Canadian arms of U.S. multi-national companies that are AT&T companies in the United States. We have long-standing relationships and long-term contracts with the customers. Most agreements feature services which not easily replicated. To date we've experienced little change in the revenue base. In fact, during the quarter we expanded many of these customer relationships, including those with Best Buy, Sun Core Energy, Icon Office Solutions and Starbucks.

In addition, we continue to collaborate with AT&T to win new customers. For example, in Q1 we implemented a cross-quarter MPLS data networks and entered into new agreement with Spiegel, Readers Digest and National Car Rental. Clearly we've had considerable success in the quarter with selling new business and expanding relationships with existing customers. It remains, however overall industry wide softness and demand that have seen some customers defer network extension plans. In data we're experiencing pricing precious in certain legacy product categories. But the growth elements of our data portfolio, including IVVPN, TLS, ether net and managed services are growing quickly. Pricing pressure continues in long distance, which remains very competitive.

Let me conclude by saying this Company had a great platform to build upon, great customers, great products, and great people. Real agility in delivering customer solutions and plenty of ability to innovate. With that, let me turn it over to Dave to share some of the financial and operating details for the quarter.

Thanks, John. I'll start with an overview of our financial results for the quarter.

For the first quarter our revenues totaled $353.3 million compared to $383.8 million in Q1 of last year, and $359.6 million in Q4 of 2002. Combined revenues from all nonLD sources now represent 62% of our total revenue base, up from 60% a year ago.

Let me provide from additional detail by product category. Revenues from data and internet were $158.4 million in the quarter, representing a 4% decline when compared to the same quarter last year. These results were consistent with industry wide weakness and enterprise demand and pricing pressure in certain product categories. Revenues from data and internet represent 45% of the total revenue base, compared to 43% a year ago. Local revenues in the quarter were 56.9 million. With the strategic repositioning of our local services business, the focus on profitable local lined growth, access lines in service are down 22,000 year over year. This resulted in a decline in total local revenues of 5% from the first quarter of last year.

Total local access lines and service at March 31st were 531,000. Although total local line count is moderated, we continue to grow in absolute terms the number of lines that are either on net or on switch. The percentage of total line count that are either on net or on switch is now 55%, compared to 51% in the same period last year. And local represents 16% of our total revenue base. Revenues from long distance were $133.9 million in the quarter, a decrease of 20.4 million or 13% from Q1 of last year. This was the result of a decline in the average per minute rate of 4% and a decline in minute volume of 9%. The average per minute price decline has been mod rated by a change in the LD mix. As a percentage of total revenue, long distance is now 38%, compared to 40% in the same quarter last year.

Turning to EBITDA, in a supplementary schedule in our release today we've reconciled operating income as shown in our GAAP financial statement to EBITDA. Our first quarter EBITDA totals 66.3 million, representing an improvement of 28.3 million from Q1 of last year. Our EBITDA margin improved considerably to 18.8% in Q1 compared to 9.9% a year ago. This increase was a result of lower SG&A expenses of almost 20 million and initiatives to streamline our business improved SG&A efficiency to 21% of revenue, an improvement of 350 basis points. In addition the gross margin improvement of 530 basis points to 38.8% of revenue contributed 8.6 million to the EBITDA improvement. The increase in gross margin was due to lower service costs from operating efficiency gains and to savings from recent regulatory decisions. Our Q1 EBITDA is 66.3 million is lower than the 80.4 million of EBITDA reported in Q4 last year, due principally to two reasons. The first, in Q4 of last year we recorded a retroactive regulatory adjustment as we previously discussed with everyone. And in Q4 of last year, we had lower settlement rate, having realized some volume incentive threshold levels in Q4.

Our income from operations for the quarter totaled $36 1/2 million, excluding the partial reversal of the 2002 restructuring provision for work force reduction and facility closures of 11 million. Income from operations would have been 24.7 million. This represents the third consecutive quarter we've recorded positive operating income. Our net income for Q1 totaled $229.8 million, which was primarily the result of a noncash foreign currency translation gain of 324 million, the result of appreciation in value of the Canadian dollar compared to the U.S. dollar on what was the Company's unhedged U.S. dollar debt. This was partially offset by interest cost recorded in Q1 of 104.6 million and reorganization costs of 26.3 million. As a result of the completion of our restructuring on April 1, we moved forward with no long-term debt and no interest costs.

In addition, we'll no longer be subject to foreign currency translation gains or losses on U.S. dollar denominated debt. And if you exclude the interest expense, the foreign currency gain, the reorganization cost and that partial reversal of the 2002 restructuring provision from our fourth quarter result, our net income in the first quarter would have been 24.7 million.

Also provided in the release was our April 1st opening balance sheet of the new company. Due to the realignment in equity interest and capital structure of AT&T Canada under our restructuring plan, we were required to perform a comprehensive reevaluation of our balance sheet, better known as fresh start accounting. We've adjusted the historical carrying value of assets and liabilities to fair value, ing the allocation of the Company's reorganization value of $581 million. As a result there are two noticeable changes to the balance sheet. First, the carrying value of property plant equipment has been reduced from 927 million down to 574.7 million. Secondly, as part of the fresh start accounting, we were required to record a deferred pension liability in the amount of $120.2 million. This amounts represents a deficiency in the market value of the assets under the company's defined benefit pension plan versus the actuarial obligation to the plan members. This liability will be funded over a five-year period and will include approximately $35 million of funding in 2003. I should say that all of the fresh start accounting was disclosed in our information circular that was distributed in January of this year, and today's release simply finalizes those numbers. Capital spending in the quarter totaled 33.2 million, of this amount approximately 40% is for maintenance capital, about 10 to 15% is for spending to improve our back office efficiency, with a balance what we refer to as success based, meaning that it's customer specific, where the economics warrant the investment.

Turning to a discussion of liquidity on April 1 we had cash on hand of $175.2 million. We had estimated we would have cash on hand of $140 million upon completion of the restructuring. The difference is due to operating cash flow generated during the month of March, and advisory fees related to the restructuring that were paid in April. In the first quarter the company's cash flow from operating activities, less capital expenditures, was negative 11.9 million. However, after excluding the cash spent on one-time items under the restructuring of 29 million, we generated positive free cash flow from our business of 17.1 million in the quarter.

With that, let me turn it back to John to discuss our outlook.

Thanks, David. I'd like to now spend a moment to discuss our financial performance for the balance of the year. First, though, it's important for me to discourage you from taking our Q1 EBITDA, multiplying by four to estimate EBITDA for the year before adjustment for or one-time rebranding cost. As we've already commented, the Canadian telecom market remains very competitive across our major product lines. And while we are very pleased with our financial performance in Q1 and feel very optimistic for our prospects for the balance of the year, the uncertainty of future price competition, the transition of our relationship with AT&T and our rebranding needs to be considered and thought about as we look forward. So with that, we are maintaining our revenue, EBITDA and capital expenditure guidance for the balance of the year at this time. Also while the divestiture of the Argos business unit will have no appreciable impact on our 2003 EBITDA, it will result in the loss of revenue of 15 million per quarter starting in Q3 of this year.

So let me stop there, and we'll take any questions you might have. Operator would you please explain how you'll conduct the Q&A portion of the call.

Thank you, sir. If you have a question, touch star 1 on your phone. The questions will be polled in the order they are received. If you would like to decline from the polling process, press star 2. One moment, please, for your first question. Your first question comes from Glen Campbell from Merrill Lynch. Please go ahead.

Yes, thanks very much. I had a couple of questions related to your EBITDA margin, first on the SG&A spending rate, came down nicely during the quarter, in part because of the head count reduction. I wonder if you could talk a little about that head count reduction in terms of when it happened, how much of the savings were achieved in this quarter and what you expect the full run rate savings to be?

Okay, Glen. It's Dave. The head count reductions that we've done largely occurred in the late Q3, early Q4 timeframe in '02. There were a few reductions in '04 and very few reductions from this point forward. We are substantially complete with that. The people costs that we see in Q1, save for any timing issues on with holding taxes we shouldn't see any dramatic quarter to quarter.

We have about 60 left to go that will complete over the next quarter.

Okay. My second question was on the gross margin, just under 39%. Could you talk about some of the factors that sort of pulled it down a little bit from the normalized rate of of 39 during the fourth quarter and what you expect to affect it over the remaining quarters, other than regulation?

Yeah. You're referring to 38.8% gross margin in Q1, and we certainly had a much better gross margin in Q4 of last year. Both of those items I mentioned earlier impact the gross margin line as opposed to being in SG&A, that being the out of period part of the 12 million dollar regulatory adjustment, a little better than half of that didn't really belong in the fourth quarter, it belonged in previous quarters. Really, the lower settlement rates we achieved because we hit the volume threshold in some of those commitments really helped Q4 as we explained back then. So you look broader than that on a comparative basis back through Q3, 2, and 1 of last year, we continued to show good margin improvement. That's really because because of some regulatory changes. It's because we're managing the cost side, not just regulatory, but access cost, and focusing on net. In the face of reprice that exists out there across our product. So we're optimistic about our ability to manage our gross margin, but we're not putting any specific forecast in the window, Glen.

Just to finish I'm looking back at the SG&A line you spent 17 million in the quarter, compared to 76 1/2 in the fourth when I gather there was expense reversals, I'm just surprised at the extent of that reduction and wondering if there's any one-time items in the first quarter?

No, not really. Not really. We would hope we can continue to achieve that. There's nothing special suppressing SG&A if that's what you're thinking.

Okay. Thanks very much.

You're very welcome.

Your next question comes from Peter Rainy. Go ahead.

Looking at numbers, it appeared stronger certainly than we had been forecasting, that was without all the information you presented this time around. Looking at your EBITDA, John, you mentioned -- McLennan, that is, you mentioned you're not in a position to revise guidance. I just can't help but look at the numbers, you've been under price pressure and competitive pressure for quite some time. That's baked into the numbers. On a momentum basis you're starting to turn the tide so to speak. It's almost like you anticipate or are very cautious or fearful of reacceleration of the competitive intensity up there. And I just don't see that, particularly with the spotlight that industry is on, from industry perspective from the regulator perspective, from the government perspective. I'm trying to reconcile why you haven't indicated you could do much better than the guidance you've given.

Peter, thank you for that observation and for the analytical process you went through thinking about it. We obviously talked about it at some time. You have to understand we have a new board and we're educating everyone on the board about the potential risk going forward, and all of the different unseen variables that are out there that we're not aware of yet, beyond the ones that we've spoken about, if that may happen. We concluded at the end of the day that it was a little too soon in the year to beginning to take guidance up, although I think you heard me say that I was very optimistic about how we were going to go forward in the balance of the year. And I think we would all here be more comfortable when we take guidance up to at least have another quarter under our belt. But certainly we're very optimistic, Peter.

Okay. That's good to hear. David Lazzarato, 35 million dollars that's a cash contribution to your pension?

That's right. That's not accounting expense. That's the funding.

So I guess two things. What does that do to your free cash flow, do you intend to do free cash flow record with that in there and secondly what is the accounting impact on your earnings, if any?

As we said before, the accounting will result in an expense of something in the order of 12 to $14 million on an annual basis. There's the difference to the 35 number, which is funding, will essentially draw the liability down in the balance sheet over time.

Right.

With respect to free cash flow, we, I think, have publicly said on an annual basis we expect to generate free cash flow and we've not made any quarterly projections on that in relation to John's earlier comment. We've maintained our annual thought on free cash flow. We expect to generate positive free cash flow based on our revenue -- excuse me, our EBITDA and CAPEX and change in working capital, this being the predominant issue. We expect to generate free cash flow for the year.

Do you have a sense where your depreciation rate will be on a pro forma restructuring?

Pro forma, the restructuring and with our plant level of capital expenditures, I think in the area of $30 million of quarterly depreciation, give or take.

Okay. And last question and probably a little bit more difficult. I can't help but observe the number of options were issued, three times as many as the RSUs. John McLennan I understand you talked about performance based compensation, but I think the options -- the way I read the press release, they are not performance based.

Sorry, Peter? The options are not performance based?

That's the way the press release reads, I just want to clarify on that.

Yeah. I'm just sorry, I'm not understanding your question.

My question is are the options performance based?

No, they are based on over time. They vest over three years. But we did go to RSUs over a three-year period and made that totally performance based. And you'll see also that we -- when take you a look at the number of options, 659,000 out of 2 million, that's not a lot of options out there yet.

No, not yet. And the other issue I have is that you decided off-the board decided to issue options and RSUs today as a result to when the results were released.

We have been -- this is a senior management team that has been without long-term incentives since way into last year. It was going six and seven months without any long-term incentive. What I was really trying to do was get the options granted at the same time as the conversion from debt to equity, in fact, happened, but we couldn't. The price went up after it came out, and what we did was we worked hard to get the -- or we moved to get the options granted as soon as possible, you know, regardless of the quarter. We think that the senior management team has been without options for far too long a period, and what we tried to do was address that.

The way to look at that is almost looking at compensation, almost owing as opposed to the future.

We were a long time without any incentive at all, and that was through the whole restructuring period.

Peter, just for clarity, the stock options were issued, granted with board decision on April 17th. So it was a recent decision, but not recent as in today's board meeting.

No, I agree with that. Okay. Thank you.

Your next question comes from David Lambert from TD Securities. Please go ahead.

Good afternoon. A couple of questions, if I may. First on the regulatory front, can you give us an update of, was there additional savings on carrier charges from Q4 to Q1?

Dave, it's Dave Lazzarato. No, you'd have to normalize Q4 for that retroactive impact that got included in there, but incremental to that decision, no, there's been nothing yet. We've remained optimistic that there are things being looked at and worked on. And we're optimistic that those incremental decisions could come in the near future. That's not a prediction of weeks, mind you, but certainly this year. But nothing was recorded in Q1.

Okay. We heard from one of your competitors that the incumbent still owed money for this decision. Is that the case as well for you guys?

That's right.

Okay. Would that have impacted your working capital in the quarter?

yeah, just a little bit to the negative. It would have impacted working capital just a little bit. That will all get recovered, we hope, in Q2 of this year. Through CCAA we managed the communications with both our customers and suppliers and were able to do better than we were fearful of in terms of our capital working management, we had very few, very few suppliers change our payment terms during CCAA process. One of them that did is a large telecom but now we're on the working side so that capital will come back to us in the second quarter.

Back on the regulatory for a second. One of the decisions effectively froze incumbents from changing their promotions on local. I assume that's mostly residential focused. Does that have any impact on you guys?

Not really. I think it would be people that would be in the business of selling local to th consumer, maybe small business would probably be more affected by that.

It's not as big an issue with us, David.

On the AT&T core business, one of the arguments you've made to offset some of the negative comments you've had on losing some traffic there was that you were going to replace some of that traffic with other carriers. Can you give us an update on what you -- sort of what you've done to try and gather some more traffic from other carriers?

We're in negotiation with a number of different carriers, not just in North America but also international carriers in Europe. We're talking to a number of them. As a matter of fact, we went for proposals to all the major U.S. carriers, including AT&T corporate, Williams, MCI, I think British Telecom was in there as well. We wanted to get a rate for basically terminating frame and ATM services and AT&T Corp. offered the best deal, best arrangement so we went with Corp.. Could be with other services, perhaps some of the more advanced services such as transparent lan services, ether net, we could just as easily go with someone else. I referenced earlier, this is on a case by case basis, not a strategic partnership, with the Toys R Us, with used level 3.

At what point we continue to work strongly and cooperatively with AT&T, we are really services them up in Canada, and they are services us down there. We've made them a very, very important customer. John is the Executive in residence on that account, and we continue to -- we're very pleased with our continuing relationship with AT&T.

Thank you. Appreciate .

Your next question comes from Dvai Ghose from CBIC. Go ahead.

Couple of questions for each of the Johns. John McLennan, on the residential side, obviously you're not on that side, wit recent regulatory relief do you think there's a business model on the residential side and do you think, for example, call net can grow in that business and would you be interested in entering that business in the future?

Well, do I think call net can do it, you're going to have to ask Mr. [INAUDIBLE] that one. Do I think it represents an opportunity? We are looking at the residential market not only by accessing favorable regulatory scenarios, we haven't made the decision go, no-go based on a regulatory decision, but we're also looking at it from other points of view, utilizing alternate technology and things like that. If the residential consumer market begins to make sense for us, and we hope it does, based on any of these variables and changing variables, we would certainly be interested in going into it. But it's not -- it's not part of our aggressive plan in the short-term.

If you could elaborate on that when you talk about alternative access technologies are you working to wireless as John MacDonald referred to or voiceover ?

I can assure you we're looking at both those technologies, and we are talking to technology organizations, other organizations around the world. And I probably don't have much more to add beyond that, except that we have talked about creating breakout strategies beyond the core platform we have today, and certainly divide those areas as areas of interest to us.

I think some of the technologies that we're referring to here are starting to get ready for prime time in terms of what the price points are. There are companies that are actually being -- are quite successful, in terms of growing their customer base using completely nontraditional technologies, companies in states which grew something like 25,000 customers over the space of a few months and there's no office anywhere to be seen. Actually when you look at some of the applications that can be delivered, additional applications, it becomes quite interesting. So for example with them you can pick your own area code. If you happen to be living in Idaho and want a prestigious Manhattan telephone number and you're a small business you can do that.

Those are more factors in your determination than, say, the price cap on residential, which sort of caps.

It's whatever it takes to -- what's the most cost effective way of getting access to the customer. The customer base we would look at, we would include on our radar scope consumers and small business, why not? In terms of growing the top line. I would say we're probably more focused on those kinds of approaches as opposed to just relying on the regulatory relief.

Yeah. And that's not to say we're not looking at the regulatory relief as a financial discipline and structure that would provide us the incentive to do it. We're looking at it all.

That makes sense. On the regulatory side, John, we are looking for phase two cost announcements from CRTC and other announcements this year. Do you have an estimate as to what level of relief you might get.

I absolutely do not want to hazard a guess, because when I've been optimistic in the past, I've always been disappointed. When I've been sort of more not looking for relief, all of a sudden things get a lot more positive. So it's a hard environment to figure out. I am encouraged by the momentum that's going on. I'm encouraged by Mr. Dolphin's comments last week. I'm very encouraged by the minister's response when he denied our appeal. You'll remember that he denied our appeal on contribution two years ago as well. It was a different minister at the time. And his words were very, very strong back to the regulator. And I was pleased because I think Minister Rock's words might have even been a little stronger this time. So with that kind of incentive and momentum hopefully it can lead it a much more balanced playing field going forward. That's something we keep working on all the time as Mr. Linton does. We're all very focused on it, as you know.

Right. That makes sense. The last question, this will be short, coming back to the first question from Glen Campbell, you saw a decline on SG&A and a decline on employees obviously you're doing something well on the back office side, I presume. Is that sustainable, are we looking at recurring SG&A or further reductions?

I'm not going to project specific number like SG&A. We're comfortable with the level we had in Q1, we don't see staff level going up, minor reductions if anything the rest of the year. So see where we go. I don't look for any dramatic change. We like where we are on an efficiency basis with SG&A in the very low 20s as a percentage of revenue that's something we set out to achieve 18 months ago when we were in the high 20s.

Makes sense. Thanks a lot.

Your next question comes from John Grandy from Yorkton Securities. Go ahead.

I had two questions, if possible. First of all on the rebranding cost, guidance was for approximately 40 million this year. Is that still the right number and can you give us some sense of timing?

I think 40 million would be a little bit high, John.

That would be hi?

It would probably be in the 25 million dollar range, plus or minus.

Okay. Good. My next question relates to the local access lines. You've commented -- in fact you made the same for several quarters that you're refocusing on more profitable business and see this in terms of increase on line as a percentage of total. Having said that, though, the absolute level of decline is a bit of a concern. I wonder if you can comment on -- give us a little bit more clarity and what it is that makes a local access customer attractive to you. I guess the second part of that question would be if the CRTC does bring down your access tariff significantly, presume it would make some of these customers more attractive. Are you then going to have to go back to some customers you've allowed to drift away and try to get them to come back?

John, Dave Lazzarato, good questions. I think what makes a local customer attractive to us, I'd say two things. One, certainly on net on switch, much better margins, whether it's gross margin, net margins, contribution margins, pick a margin, on net on switch local customer is better. Number two, really part of our focus, refocus has been to try to target customers that have multiple local lines, not single digit numbers of local lines as in many small business that is have one or three or five, but really to focus on businesses that have clusters of local lines. You know, we use a threshold of ten as a rule of thumb. And below that, it just hasn't made sense for us historically. Now, in the future, regulatory environment changes, you know, anything is possible, but you really have to look at that financial discipline as it stands today. If it doesn't make sense to deal with certain customers today, then I think, you know, we've exhibited the courage to say we're going to make choices. If it makes sense in the future, then be happy to go back to those customers in the future. If it's not making sense today, you've got to stop doing what's detracting from your success. It's a conscious choice we've made.

John, you have to remember, remember we took out close to 2,000 people, and an awful lot of them were dealing with provisioning customer care and service and looking after billing problems and provisioning problems for a lot of these local lines, one and two and five and six-line orders. And the reason we were able to really hold onto our revenues and really, really improve our financial performance is because a lot of the people, besides the overhead and management that we took out, a lot of those people came out of that functional area. And, you know, we want to see a much better business model at that low end before we go back in there aggressively. We're not dismissing it, but we want to see a better business model.

We would you still be interested in servicing customers with PRI. I think that's going to be very economic. The other things is if it turns out when you look at the target market services the requirement of, say, a large bank across the country, when you get significant concentration of service in a particular location, then you have th justification to convert the customer to on net service, deploy the capital to make that happen. But you do it on a very granular case by case basis. Most of these customers we're targeting are setting the pace in terms of new technologies. We're not selling them dial tone, gigabyte ether net managed services both in metropolitan services nationally and internationally.

I understand. One more. With the customers, local customers you are allowing to turn off, are you seeing much bad debt associated with that?

No, John, we're not. It's really a combination of where we're targeting our sales efforts as much as it is who we're choosing to turn off. We've done a lot of work on ourself cables in the last six to eight months. In fact, we've improved our collection efforts and day sales outstanding during the last seven months dating back to the beginning of CCAA filing.

Great. Thanks very much.

Your next question comes from Mark Wilde from Deutsche Banc.

Hi, guys just a couple of questions. Can you give an overview of the business you're doing with AT&T now versus same time last year and kind of how that has been. Have you lost any business at all?

It's about the same at this point. As a matter of fact, the funnel looks pretty strong at this point in services the requirements for North American customers. One of the things particularly for featured services we're talking about a big North American call center approach for could be a bank, automobile manufacturer, whatever it might be, it relies on a platform known as 4E-SS and we share tha platform with AT&T. We have two switches up here. Quite frankly if you wanted to offer a seamless North American capability to your customer, that's the platform you'd have to go to. That creates its own set of I call it positive inertia that would have us work together.

I'd add we worked hard in the last eight months from the AT&T Canada side to stay in contact with multi-national companies with locations in Canada to keep them informed of what's going on through the restructuring process, and we'll continue to do that. They are important customers, restructuring or not. So that has worked out well.

Additionally, guys, just on potential new business, can you talk a little bit about that, how you've seen kind of the pipeline grow since you guys came out of CCAA in the last month before you came out.

Well, going through CCAA was actually quite amazing that not only do we retain a large part of our customers, some reprice going on within that existing base, but we also are able to gain new business. And we have a number of opportunities in front of us right now. Interestingly enough, most of the growth we see is in the areas of advance data networking service. It would be in advanced services, IB, BPN, gigabyte ether net, managed hosting as well. What our customers are saying, they want a very, very simple, high performance, low cost, integrated facility that can handle not only their existing requirements for data and internet but also voice ultimately. Keep it real simple. Actually, I think the industry has an opportunity to renew positioning moves that have changed cost that have been historically hard coded into a telecom and come up with this new servicing model. If they want some additional capacity to do a backup at their data center, then they can do it on their own as opposed to processing an order. More and more it's those sophisticated kind of applications that the customers are expecting. And moving up the food chain in terms of bid rate.

Right. Also, guys, on the long distance side, it seems like here in the states that long distance permitted almost looks like it's bottomed, come up a little bit. Are you seeing the same thing in Canada?

Mike, are you talking about on the business side or residential side.

I'm hearing on the business side it's somewhat of the same thing, but I would like to hear your thoughts.

I believe that on the consumer side, although there's something changing that probably is going to impact that over the next little while, which is, , you know, I've referenced this company that uses Internet technology to deliver service, telecom service. They actually flat rate that service for $40 U.S. a month you get not only your local access of features but also unlimited long distance in the continental U.S., Australia, and areas of Hawaii and Alaska. I understand that AT&T servicing their consumers has come up with a bundled offer as well that combines local and long distance. I think they are offering that in Buffalo. You may see the adds of MCI of the neighborhood, which does the same thing. It's interesting, but you might see if the consumer and small business market, a move towards more and more flat rate kinds of notions. In the business market certainly here in Canada, there continues to be price pressure on permanent rates both outbound as well as in bound.

Can you give us an idea of what your cash balance is now?

As we stand here today?

Yup.

No. I just don't give out of quarter end information.

How about advisory cost?

Advisory costs have essentially all been paid now. The little bit that were left at the end of March and were provided for in that cash balance of 175 have all been paid. I think I referenced approximately $10 million earlier, that's been paid now.

Okay. And can you give us any idea of how April has look?

No. You don't disclose monthly stuff as you can appreciate, Mark.

Okay. Thanks you guys.

Take care.

We only have time for one more question and that question comes from Greg MacDonald from National Bank. Go ahead.

Thanks. Good afternoon, guys. If I'm correct you have made a request to the regulator to unbundle, to have forced unbundeling you willing of the gigabyte ether net.

That's right.

You mentioned at the beginning of the call you are seeing some success on that product. I wonder if first you might comment on the demand. Just describe what's going on there, is this demand that's being taken away from other legacy products or is this new demand. And then secondly in terms of taking advantage of what I would call a favorable regulatory environment for yourselves, have you recognized other areas that you're thinking of in terms of fresh filings? Are we to expect new regulatory filings from you in the future, say a couple of quarters. Just answer the last question first. Where it makes sense, where we think there's an opportunity, inequity in terms of accessing the customer, then we will not be shy in terms of filing with the regulator. The earlier filing you referred to is part seven of application. Basically the essence of it is that access is access. So we were concerned that the price relief we were getting in terms of getting a fair access to the lower speed data network components through CD&A was not going to be extended to higher end products, gigabyte ether net services. We were forced where the incumbent had an option of offering them to us at a particular retail price, maybe some recent volume considerations, who knows? We think it must be more predictable, that game will put us behind the eight ball trying to chase them up the technology curve. So the fundamental argument of that is access is access. When we do this it's not necessarily going to reduce cost but it will certainly provide the opportunity to get access to broader revenue base. On the -- another dimension to your question which was -- Demand. I put data products into really three buckets. There's one category which is what I call legacy data products, which would include full period private line, as well as low speed frame relay, and sort of midterm, starting to get a little long in tooth, which would be ATM kinds of technologies and next generation technologies, which would be there's certainly packet based, probably ether net based. That's what we see growing. We do see some price pressure on the legacy products for sure and we're seeing some declines, so we saw in like 11% decline in frame and full period private line year over year, but we're seeing phenomenal growth in the new, next generation data products, 85% year over year would have been the growth figure. That represents somewhere in the vicinity of 14% of our revenue. It's hard to categorize. It's a complex equation. There's some reprice, some new services going in as well. For the most part the legacy products are being replaced by these newer technologies. I guess related to the first part of my question in terms of expanding what are known as essential services, that was really the question I was getting at. It appears to me you've sort of picked off an area here with gigabyte ether net that could be an opportunity to expand essential services, am I think being that correct? Yes. If I am, are there other areas you see in sort of the immediate term? We have a number of areas under active consideration. I think it's premature at this point to specifically identify what they might be. Fair enough. Thanks very much. Thank you.

Gentlemen, I'd like to turn it back to you for closing remarks.

Thanks, everyone for joining us this afternoon. Rebroadcast of this call will be available shortly on our website or by dialing the replay number provided in today's release. Thanks again, and that concludes our call.

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