BCE Inc (BCE) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Allstream second-quarter 2003 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. (Caller Instructions). I would like to remind everyone that this conference call is being recorded. I would now like to turn the conference over to Mr. David Lazzarato, Executive Vice President and CFO.

Thank you operator and good afternoon everyone joining us. I am here in Toronto with John McLennan, our Vice Chairman and CEO; John McDonald, our President and COO and our Senior VP and Treasurer, Brock Robertson and our Director of Investor Relations, Dan Koontz (ph).

Please note that today's conference call remarks are accompanied by a presentation that we will refer to as we move through the discussion. This presentation is available on our website at Allstream.com.

Certain statements we'll make on today's call will before looking in nature, so it is important to consider that actual results can differ materially from projections. I would ask that you carefully reviewed the risks outlined in our recent securities filings. Today's call will first have John McLennan and then John McDonald share their perspectives on recent company developments and for the quarter, then I will spend a few moments to review the financial results. Then I will turn it back to John for a brief discussion of our outlook before we open it up to questions. So with that, I'll turn the call over to John McLennan.

Thank you very much, David, and good afternoon, everyone. Thank you so much for joining us today. Let me start on slide 4 by saying how pleased I am to report that this company continues to deliver on its commitments. First and foremost, our financial performance in the quarter exceeded our expectations and confirms that we're delivering on our pledge to build shareholder value by driving our business to generate earnings and cash flow. Second, in mid-June, we executed a flawless launch of our new brand Allstream three months ahead of schedule. And thirdly, we recently completed an important series of new network support agreements that defines our strong, ongoing commercial relationships with AT&T.

Turning to the next slide, you can see that in the second quarter, we delivered EBITDA of $69 million, which takes into account 4 million of rebranding costs. Also, we achieved income from operations of $41 million, or $2 a share and we generated cash of 73 million to end the quarter with 248 million in cash on-hand. Our strong liquidity position provides us with the financial flexibility to respond to market opportunities as they arise. In addition, I'm pleased to report that in the quarter, our customer satisfaction bubbles continued to improve and that we were successful in winning new business and renewing existing customer relationships.

As I said previously, last week, we signed new network support agreements with AT&T for North American voice services and we have just now entered into new discussions with AT&T to establish how we will work together beyond their expiration at the end of 2005, so we're discussing how we can take these agreements out beyond the 2005 time period. While we continue to work very closely with AT&T, we now have the flexibility to work with other international carriers. The benefits of these relationships could include enhanced capability to deliver end-to-end international solutions to our established base of multinational customers and the further strengthening of our suite of enterprise solutions with world-leading technologies and applications.

There are many factors that we believe make Allstream attractive to international carriers. For instance, our base of customers with multinational operations generated significant out of country traffic. This is of interest to international carriers looking for ways to grow their own business. In addition, Allstream is the only Canadian carrier that owns and maintains a truly integrated national, local and longhaul network right across Canada.

I'm going to now turn to the regulatory arena, which you'll find on slide 7. During the second quarter, we continued to pursue the regulatory change that is necessary to establish balance between incumbent providers and competitive new entrants. Recent remarks from the chairman of the CRTC acknowledge that the current regulatory environment advantages Bell and the other incumbents and that it is important for the CRTC to address this imbalance. We are encouraged that the regulator has continued its recent procompetitive momentum with the issuance of guidelines for carrier access to multitenant buildings, its order of enforcement of incumbent services intervals (ph) to competitors and is directive to the incumbents to unbundle local voice service from high-speed Internet service. On April 15th of this year, we filed a part 7 application with the regulator, seeking tariff access to various next generation telecoms services which are currently being deployed by the incumbent providers, services like gigabit and ethernet. In granting competitors cost space access to these facilities, the CRTC would be applying consistent logic with that utilized in granting cost-based access for CDNA services. We believe the opportunity exists for further meaningful reductions in regulated costs and at an improved cost structure, will make us more competitive across an expanded addressable market.

Finally, we continued to pursue opportunities of how new technologies could allow us to challenge the established cost structure of the incumbents. You can be assured that we will only invest in areas that have the potential of generating real income. We are firmly grounded in the present and in executing on our core business plan, but very much maintaining and eye into the future. With that, I'll turn it over to John McDonald.

Thanks, John, and good afternoon to everybody on the call. Last quarter, I shared with you our operating priorities to continue the transformation of this company into a profitable, tightly run industry leader. Today, I would like to provide an update on that progress, starting on slide nine. In mid-June, we introduced our new brand Allstream, three months ahead of schedule, but our new corporate brand is much more than just changing our name and logo. It is about establishing a corporate identity that reflect who we are and what we stand for in the eyes of our customers. In the research we did in launching Allstream, we asked our customers what were the attributes that we possess and that were important to them in making their purchase decisions. They told us it was our flexibility, our ability to collaborate because we understood their business and our capacity to develop and implement complex solutions quickly. With the launch of Allstream, we've reaffirmed our commitment to our customers to be an innovative, agile and collaborative partner. This is the promise that we've established from the Allstream brand, and that we believe truly differentiates us in the marketplace.

As John mentioned, last week, we announced an important new agreement with AT&T related to the network service features and technology capabilities that support our North American voice clients. This agreement is consistent with the terms of the commercial agreements that we announced in January. In addition, our two companies are already in discussion to extend these support agreements beyond their current term. Allstream will continue to work very closely with AT&T, remains one of our most important customers and suppliers.

Turning to slide 9, expanded share of existing customers' wallet, focusing on that. We 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. We are having success in executing this objective. During the quarter, we renewed and expanded an already significant relationship with Wal-Mart Canada and what we did here is to provide advanced data and voice service to connect their 200 Canadian stores across Canada and cross-border to their head office in Arkansas. We also renewed a multiyear voice services agreement with Rogers Communications, with whom we have enjoyed a long-term collaborative relationship. In addition, we renewed an expanded important agreements with Hydro (ph) Québec and Fujitsu. Exploiting in-place assets -- in this case, our existing blue-chip customer base -- is a simple concept, but one that can deliver significant returns with little incremental costs.

During the second quarter, we also had success in winning new customers by living the promise we've established with the Allstream brand, and that is to be an innovative, agile and collaborative partner. I will quickly provide a couple of examples. During the quarter, we worked with Arvato (ph ), a large international IT services company based in Europe who required telecom connectivity for their new Canadian facilities by July 1. Having been first contacted by the customer in mid-June, we quickly went to work to deliver Internet connectivity and local services for the customer in just 4 business days. Arvato had originally placed this order, by the way, with an incumbent service provider and was told the service would not be available for 1.5 months.

Also during the second quarter, we entered into an agreement with (indiscernible), a leading commercial advertising distribution company. We were able to deliver an innovative data and Internet solution that has allowed Mijo (ph) to become the first Canadian firm to implement an Internet-based commercial advertising video distribution system. Replacing their previous tape-based service, this has dramatically improved Mijo's speed of delivery and other line cost structure.

In addition, we renewed an important agreement with West Jet, Canada's second-largest national airline, to continue to provide a full suite of telecommunications services. This renewal was predicated on our ability to collaborate in building the customized telecom and technology solutions that have supported West Jet's rapid growth. And Finally during the quarter, we implemented an advanced security solution for the Toronto Stock Exchange and entered into new agreements with Toshiba, Revlon and Lockheed Martin.

Turning to the 11th slide, we clearly had success in the quarter in selling new business and expanding relationships with existing customers. However, our revenue was the down both year-over-year and from last quarter. As we expected and reflected in the revenue guidance we provided for the year, the time we spent in CCAA interrupted our sales cycle and impacted our bundle of new sales opportunities. Given the long sales cycle inherent in complex telecom bids, the impact of this has been felt in the current quarter in lower new sales volumes and will continue to be felt for at least the next couple quarters.

In addition, industrywide softness in enterprise and wholesale spending continue. The marketplace remains extremely competitive in all of our major product categories. In data, we're experiencing pricing pressures in certain legacy products and weakness in IT services. Although our advanced and next-generation products like IP, VPN, TLS (indiscernible) and managed network services, are growing quickly. And pricing pressures continue in long distance where we've also experienced a decline overall volumes.

What is our response? Although consolidated revenues fell in the quarter, the quality remains high as we grew our profit margins and generated cash. The emphasis on profitability and pricing discipline, however, has meant that we've walked away from certain unprofitable businesses. As I said previously, approximately 80 percent of our revenue comes from our 4000 largest customers and our churn from this group is very low. We continue to have success in increasing our share of these customers' overall telecom wallet. In addition, we will continue our emphasis on the overall profitability of our business. We will pursue opportunities to remove cost through efficiency and productivity gains and we will work to scale our business appropriately to align the company's cost structure and current revenue.

Going on to slide 12. Generating new revenue opportunities to build on our core platform is a very high priority. We see opportunity in pursuing relationships with other international carriers. Over the last decade, we have developed an important relationship with AT&T, gaining experience in building cross-border solutions for multinationals and in providing international connections with both physical (indiscernible) layer and the service layer. We do believe that we are positioned to capitalize on this opportunity by applying this experience to work successfully with other leading carriers around the world. In terms of new product development, we will look to work with international partners to introduce new technologies and new platforms and applications into the Canadian marketplace. In addition, we're working on developing new and innovative products offer on top of our sophisticated connectivity solutions. Later this quarter, we will begin introducing new services that we have had in development over the past (indiscernible) to broaden offerings in data, Internet and our infrastructure management portfolio.

We now have feet in the street in the states. In addition, we have a small but focused sales organization in the United States to gain direct access to the people that make decisions on Canadian telecommunications requirements. Their primary of this is north-south, maintain that revenue flow and actually to grow it. We will insure that these decision-makers are aware that Allstream offers a unique value propositioning and capabilities in the Canadian marketplace. We also continue our work to strengthen our competitive advantage in customer service and responsiveness and I'm pleased to report that our customer satisfaction levels have never been higher.

In turning to the next slide, we continue to provide a capital efficient business model that directs capital to the areas of our business with the best growth in margin opportunities. In the quarter, capital spending fell to $16 million. And on a year-to-date basis, totals 49 million. Given the current weakness in enterprise demand, there is little requirement for capital spending related to growth. However, continue to spend the capital required to maintain our network.

I will conclude by saying Allstream is financially and operationally strong and has a tremendous platform to build upon. We have the support of our customers who want us to succeed because we're the company that acts differently. We're confident that we can deepen our competitive position in the Canadian marketplace by introducing innovative new products and services and by our continued promise to collaborate with our customers to enhance their ability to succeed. And with that, I'll turn it over to Dave to share some of the details of our financial and operating results for the quarter.

Thanks, John. With that, I will start on slide 15. For the second quarter, total revenues were 336.6 million, in-line with our expectations, compared to 384.9 million in Q2 of last year and 353 in Q1 of this year. Combined revenues from all non LB (ph) sources were 63 percent of the total revenue base, up from 62 percent in each of the second quarter of last year and the first quarter this year. Let me get into some of the details.

Revenues from data and Internet at 149 declined by a little over $20 million, or 12 percent for Q2 of last year, and declined by 9.3 million, or 6 percent compared to Q1 of this year as industrywide weakness in enterprise demand and pricing pressures, especially in certain legacy product categories, more than offset good growth in next generation data services and managed network hosting and security services. Revenue from data and Internet now represent 44 percent of the total revenue base. Local revenue of 57.5 million declined by 2.2 million, or 4 percent from the second quarter last year. With the strategic repositioning of our local services business to focus on profitable local line growth, access lines and service are down as we expected 42,000 year-over-year. Total local access lines and service at the end of June were 514,000 with a percentage of these lines that are either on net or on switch improved to 55 percent from 52 percent in Q2 of last year. Compared to the previous quarter, local revenues increased by $600,000, or 1 percent and local now represents 17 percent of total revenues. Revenue from long distance services of 124.6 million declined by 22.4 million, or 15 percent from the same period last year. This results in an 8 percent reduction in average price per minute and a 7 percent decrease in minutes volumes. Compared to Q1 of this year, long distance revenue declined by 9.3 million, or 7 percent, the result of a 5 percent reduction in average price and a 2 percent decrease in minute volume. So as a percentage of total revenue, LD is now 37 percent.

Turning to slide 16, our gross margin improved to 41.9 percent, a 310 basis point change compared to Q1 of this year and an improvement from 34.8 percent in Q2 of last year. This is a result of the focus on profitable revenue and from lower international settlement costs, operating efficiency gains and some regulatory savings. Our SG&A in Q2 of 71.8 million included about 4.5 million related to our rebranding. Even with that, our SG&A was essentially flat to Q1 and 11.5 million lower than the same period last year. So with those changes, EBITDA increased to 69.1 million, an increase of 2.8 million from Q1 and 18.6 million from the same period last year.

Moving on to slide 17, our income from operations for Q2 totaled 41.2 million. This improvement from the loss of 1.3 billion reported last year was primarily due to the effect of various accounting adjustments and provisions recorded in connection with the operational and financial restructuring last year. However, this is the fourth consecutive quarter that this company has recorded positive income from operations, as you can see on slide 18. Compared to Q1 of 2003, income from operations improved by almost $5 million.

On slide 19, we show the company's net income for the quarter totaled 24.4 million, compared to a net loss of 1.35 billion in the same period last year. And, again, those adjustments in the prior year are the reason, including the absence of interest costs, foreign currency related to the debt that was on the company's books back then. Net income in the second quarter of 24.4, therefore, compares to almost 230 million of income in the first quarter. Contributing to this change was improved income from operations and an increase in the income tax -- the provision for income taxes of 17.7 million. I should note that this provision for income tax is a charge that does not give rise to any cash tax liability because we're able to begin utilizing some of our over 1.8 billion in tax loss carryforwards to offset this. However, the rules for fresh start accounting require that the utilization of tax loss carryforwards generated technically by a predecessor company, be recorded as contributed surplus on the balance sheet, and not included in the results of the successor company in their operations. Bottom line is we get the cash benefit of our tax loss carryforwards, so I think going forward, it is probably most appropriate to really focus on the pretax income line where we had over $2 per share earnings.

On slide 20, quickly a discussion of liquidity. At June 30th, we had cash on hand of almost 250 million as a result of generating cash of 73 million in the quarter. Cash flow in the quarter can be attributed not only to strong operating profitability, but a partial recovery of the CDNA regulatory credit, a return to normal payment terms with a major supplier and a continued strong management of working capital. And excluding the cash cost that we did incur in prior quarters under the company's reorganization, we have been free cash flow positive for three consecutive quarters now with free cash flow being defined as cash from operating activity, loss additions to property, plant and equipment.

Finally on slide 21, as we announced last quarter, we successfully concluded the sale of our subsidiaries of Contour Telecom and Argos Telecom to YAK Communications, and we concluded that on July 7th. This transaction is consistent with our strategy to focus on our core business and under the terms of the transaction, Allstream received approximately $8 million in cash. Starting in Q3, the divestiture of Contour Argos will reduce revenue by approximately 15 million on a quarterly basis while the EBITDA impact will be minimal. With that, let me turn it back to John to discuss our outlook as shown on slide 22.

Thank you, David. As David said, I'm just going to provide a brief summary of our projected financial performance for the balance of the year. We expect to generate revenue for the full year 2003 of approximately $1.3 billion, which is reduce from 1.337 billion, which we communicated to everybody previously. This change reflects the divestiture of our Contour Argos subsidiaries, which resulted in the loss, as David said earlier, of approximately 15 million in revenue per quarter and that starts in the third quarter of this year. This reduction of course in revenue was not planned for in our original plan. Industrywide weakness in enterprise demand continues and pricing in the Canadian telecommunications marketplace remains extremely competitive across all of our major product lines. However, we believe the opportunity exists for further reductions in operating and regulated costs that would not only prove benefit in year (ph), but improve our overall cost structure that in the future, will make us more competitive across an expanded and addressable market. So in this environment, I am comfortable in increasing our EBITDA guidance to a range of 200-220 million, which would provide for rebranding costs, and that is an improvement from the 163 million which we had put in the window earlier in the year. And with year-to-date capital expenditures of about $50 million, we are changing our full year CapX guidance to approximately $100 million, which is reduced from $140 million. SO let me stop there and we will take any questions that you might have. Operator, would you please explain how you'll conduct the Q&A portion of the call?

(Caller Instructions). Greg MacDonald, National Bank Financial.

My question has to do with the data and Internet revenues, and in this is probably going to be a big focus of this call. You're not the only one that has experienced some weakness here. I wonder if -- it's a two-part question. I wonder if you might comment -- John McDonald, earlier, you mentioned that 80 percent of your business comes from 4000 customers that represent what you consider low churn. I wonder if you would say whether the data and Internet business has that same ratio of customer profile? And then secondly, when I'm looking at the $9 million sequential decline, trying get an understanding of what that might mean going forward. Could you give us a definition or some sort of more granularity in terms of customer profile and product profile when you are looking at that decline?

The data and the Internet is actually -- I think I said this before. I think quite frankly, it is an inappropriate characterization of what the products and services are. It's too much related to the technology. What most customers are looking for increasingly, whether it is carrying voice or whether it is carrying data or whether it is carrying Internet kinds of traffic, is ethernet everywhere, and they just want a single integrated fabric that will accommodate all of that. But I would say -- if you looked at the percentage of data and Internet business concentrated in the top 4000 customers, probably is a little bit lower than the overall percentages. I don't have the exact figures at hand, though, so I really couldn't tell you that. But increasingly, what we're seeing is customers really do want a highly simplified portfolio.

The industry has to get away with where pricing is going. It has to get away from -- I call it legacy back office and legacy provisioning systems, customer care systems and make it more and more self-provisioning. And what we're working on right now is actually developing a number of products along those lines. Don't forget this is a company that a year ago did not have to worry about new product development in these areas because quite frankly, we were going to get the products from AT&T. So one of the operating priorities I referenced earlier on is actually to really crank up significantly the product development engine and you're going to start to see the results of that over the next little while. But must customers out there, particularly large customers, they are really focused on cost reduction, their operational cost reduction and they will translate that into expectations, in terms of lower telecom prices. And there is a lot of crazy pricing going on out there.

Just as a quick follow-on to that, if you could give us some indication -- I'm not expecting specifics here -- but some indication of what percentage of your 149 million revenue line in the quarter would be related to more bandwidth type products or wholesale type products that we might expect could be further susceptible to either volume or pricing pressures in the near-term?

I don't have the figures at my fingertips right now. I just don't have it.

Is it over 50 percent?

50 percent of 149?

Yes.

I think that is probably in the ballpark, but I would have to tell you it is plus or minus 10 spot (ph) points.

That's helpful. Thanks.

David Lambert, TD Securities.

Hi. A couple of questions. The first is on the gross margin sustainability. Would it be possible -- you say in your MD&A that you increased gross margin by 710 basis points due to three factors. Would you be able to allocate that 710 basis point increase by factors or (indiscernible) operating efficiency and regulatory savings?

The 710 basis points you're talking is the year-over-year comparison, obviously?

Yes.

Certainly, settlement costs are important, but I think the bigger pieces of the changes that we've made year-over-year are the operating efficiencies and the regulatory savings. Recall that we -- compared to the second quarter of last year, we had the CDMA decision. Compared to the same quarter last year, we have taken people out of the business. It's not the little, the importance of the lower settlement costs either. Compared to the first quarter of this year where our margins have improved by a little over 300 basis points, I think the single largest piece of that comparison would be the lowest settlement costs, because were historically we have hit come volume thresholds later on in the year, and therefore settlement costs post that have gone down, this year, the way some of our contracts have been constructed with our larger carrier relationships, we have hit the economic threshold, if I can call it that, earlier in the year.

So are you saying that those margins that you have in the first quarter, those gross margin are sustainable into the rest of the year?

I think on the cost side, I know where we're going to be. The other half of that is the revenue question, and I cannot as accurately predict the pricing in the marketplace. So are we trying to maintain our margins where we are in Q2, yes? Are we're going to absolutely able to do that? I don't know. There's going to continue to be some significant pricing pressure. So we'll manage as best we can, focused on profitable revenue.

I'm also trying to reconciliate (ph) free cash flow here. I get $53 million from sort of true free cash flow, 8 million would be from cash that you got in the quarter would be from the sale of Contour, and does that mean like you have a 12 million cash settlement from the ILECs on the CDMA services?

Let me refer to our statement of cash flow I think that we provide everybody. The definition we use for cash flow is just total cash of 73 million, compared to the beginning of the quarter. I think some people exclude the change in working capital and maybe that is what you have done, you've looked at EBITDA minus change in working capital. I don't know, I'm just guessing here. What we have done is the Contour 8 million, largely, that was received in July, so that is not a Q2 issue. Again, return to normal payment terms from Belk (ph). They were only supplier to change their payment terms when we were in CCAA and we've returned to normal with them in the second quarter. We received regulatory credits refund from Belk in the quarter.

How much was that?

It was just over $20 million that pertained to the period of time going all the way back to June 1 of last year, and it is a cash issue. That is not an accounting in period issue.

That would suggest that your CD&A (ph) savings are higher than the 20 million that you were mentioning at the beginning of the year, wouldn't it?

Well, we're hopeful that when we get the final definition of CD&A from the regulator, which we're hopeful will happen in the next short while, we're hopeful that that could be a true statement, but right now, I don't think that is a true statement.

One more question. On reading your last document on your part 7 filing, it sounds like BCE is trying to sort of delay the outcome of this filing. Is there -- can you give us sort of a timing -- do you think that has been delayed? Are you now expecting sort of a later settlement on this filing, or it is this do you think pretty imminent?

Let me start just with -- there's two different issues here. The settlement, or the CD&A definitional issue I refer to is one thing. And we're hopeful that that decision can come in the nearer term, just for clarity. The part 7 is a different issue. And maybe John McDonald can talk to that.

The CD&A relief that we received really only applies to speeds up to about DS3. Increasingly, customers are looking for Gigabit Ethernet kinds of solutions. And the basic pitch we made to the regulators is access is access and we don't want the incumbents basically trying to actually move up the technology curve to get away from regulatory decisions.

So basically, it should comply consistently across all access categories. Now having said all that, it certainly doesn't surprise me that the incumbents would have a different view in all this, but we're hopeful that, by the end of this year, we will some indication as to how the regulator sees our arguments. By the way, we see that as not a cost reduction per se, but more of an opportunity to grow the top line, so we see it in terms of improving growth opportunities because, rather than just just bidding on business where it's only on net, that excludes a large part of what a customer requirement might entail. So we are having this part 7 application, I think it will help the competitive framework.

One more really quick one. The AT&T Corp. deal -- how much of your revenue does that effect? The new deal you signed with them?

This is something that relates to all of the network support that we have historically got from AT&T. So as we have said before, about 20 percent of our revenue, give or take, is related to AT&T, so it is really that. The part that we're talking about extending at this point with their initiative really relates to North American voice products, and we'll keep you up to date on that.

On that specific part, what percentage of the 20 percent or of the sort of 250 million with AT&T Corporation does that represent?

If you think of about half, you're not out of the ballpark.

Thank you very much.

Glen Campbell, Merrill Lynch & Co.

Thank you very much. You have seen some significant productivity gains here, and I'm wondering first where severance costs are being booked, if you can help me with that. And also, what you expect your rebranding costs to be in the third quarter, and I have a follow-up?

Any severance costs we have had in the second quarter would be reasonably nominal. Just sort of more of a -- I'll call it a recurring nature, and they would be booked in SG&A. Rebranding back half of year, we're looking at it -- we've told people originally, we're going to spend, give or take 25 million. We think we're going to spend less than that, meaningfully less than that. But the bulk of our rebranding statement is still on the back half of the year. So is that going to be 12, 14, 16, 18 -- we're working on it, but it will be significantly less than 25 in total.

Okay that is helpful. Thank you. My follow-up was on what is going on in the enterprise market. You're the last of the Canadian carriers to report and everyone is reporting weak numbers. Everybody's saying they're losing business they really don't want to have. Bell provided some quite useful detail where it would seem that the wholesale market is responsible for the sort of bulk of the decline, which would sort of suggest that people are grooming their networks, rather than sort of a lack of retail demand. I wonder if you could give us your take on that, and in particular, why this quarter was so much worse than the quarters we have seen before?

When Bell is classifying wholesale, they would also include what they paid to new entrants like ourselves. Not just carrier to carrier kinds of transactions.

This is just on the revenue side, right?

Yes, but they would include that wholesale revenue in there. Like last year, we spent north of $400 million in terms of accessing the incumbents' networks. About 8 percent of that was basically at retailer rates and we're trying to get more of it on a cost basis. But that would be some regulatory decisions I would suspect would flow through there. I don't know Dave, whether.

I think to the extent that we have had reductions or other nonincumbents have had reductions, it is to some extent, to the extent that any of that is (indiscernible), then that would either be reflected I guess in Bell or Telus' results as well.

Having said that, in terms of what is unique to their announcement -- I don't know whether they have that kind of revenue in that category. But having said all of that, there is a lot of capacity out there and a lot of people in the wholesale basis, it is amazing where price points have gotten for DS3s, for example. But it is not a precipitous overnight kind of thing. It has been aggressively more impactful. But I think that -- we don't spot any novelty in the marketplace that would indicate that wholesale is falling off the book.

In terms of retail demand, it is encouraging to hear the the focus on new products that might drive revenues, but I guess if customers are really focused on just bringing the whole bill down, should we be realistic in thinking about what the revenue -- the fact that revenue in total seems to be on a negative trajectory here at the retail level?

I've been a strong believer, and I always say it to our customer is my objective is to have your telecom bill go up and your total cost go down. But quite frankly, a lot of customers are just taking advantage of where things are in terms of price points, but there are customers out there that are interested in developing new applications. There are opportunities for us, in terms for us in terms of international, for example, which was an area that was pretty much closed to us this time last year because of our agreements with AT&T. So these are opportunities that we can go after in terms of increasing the addressable market, as well as making sure that we service our existing customers the best way we possibly can, and better than the incumbents.

Okay, thank you very much.

(indiscernible), CIBC World Markets.

A couple questions, if I may. First on your guidance, your revenue guidance seems quite appropriate. You're talking about 10-11 percent decline in the second half versus the first, which given what you're talking about, market conditions, it seems quite appropriate, but your EBITDA guidance, your first (indiscernible) EBITDA is 135, so your guidance implies second half EBITDA of 85, which is most surprising because of the level of decline. But also, your first half EBITDA margin was 20 percent and you're looking at a second half margin of 14 percent. I'm wondering if that just reflects prudence or whether the rebrand is taking some impact there or just general market conditions, because it does seem as if guidance is still rather weak, given the strong first half EBITDA?

I would say that we have put numbers in the window that we want to achieve and we had taken a look at what could happen on the upside, what could happen on the downside. We do have these onetime rebranding costs that we have to really come to agreement with as to what we're going to finalize that at. There is significant repricing going on, although we don't see a tremendous amount of decrease in volume. So we are very competent we're going to achieve these numbers. But there is definitely some further weakness in the marketplace, based on all of the discussion we have just had. And so I am very committed to putting numbers in the window that I think we could achieve, which is why we waited one quarter before we came back to you with new guidance on EBITDA and so we're conference with the guidance we've given you.

One another thing too, is I talked earlier about a number of new products in product development and they are going to start appearing towards the latter part of this year. So the marketing costs will be little bit higher in terms of making sure we introduce those appropriately into the marketplace, in addition to their rebranding.

So that would be mainly an SG&A sort of thing, or would it put any pressure on gross margins, do you think?

(indiscernible) on SG&A.

Just a couple of quicks ones, if I may. Dave, looking forward, this is clearly premature in terms of questions, but you're managing businesses for the long term. Your guidance is calling for 200 million of EBITDA, 100 million of CapX, so call it 100 million or so of free cash flow on a sort of run rate basis, given the fact that you have no interest payments and so on. And growth is obviously an issue here. You're not spending capital because there's no growth and you don't want to chase growth. So are you thinking about selling to dividend out the cash, once you get to say $300-$400 million of cash, or what are your cash plans at this stage?

Great question. I think we have to settle on, as we've talked about with everyone in the last month or so, what are the opportunities, whether it is technological change that can address cost structure, etc., and we will get to those answers in the short to medium-term, but I think we have to get there before we talk about liquidity and dividends or share buybacks. I think it would be impractical to act in the reverse sequence and say this would've been the best use of cash, but we already made a cash decision shortly before getting there. So I think let's get the business, keep the business going operationally the way it is, make the decisions on technology, breakthrough technology, disruptive technology, as we are often using the expression, and then make the other decision sequentially.

As we have been saying now for the last six months, we are really intensely looking at different ways of going to market, different ways of providing service which represented a dramatic cost, a restructuring of the cost space. We will invest very, very aggressively in that type of a platform, that type of technology. And, therefore, I am very anxious to preserve cash for those kinds of applications and preservatives (ph) and opportunities, as opposed to coming up with a dividend at this time.

You talked about some of your contract and renewals and new contracts in the quarter. Obviously, price competition is very intense, given the excess capacity out there. To what extent do these new contract and renewals -- and I'm thinking particularly on the Rogers one where I've heard there was a lot of pricing competition between yourselves and the incumbents, and obviously you won, which leads me to ask -- are these new sort of renewals putting pressure on margins, are they average margins, or higher than average margins?

We always put pressure on margins, but you also have the opposite of volume. It's margins times turns actually that you tend to look at. The other thing that is interesting is that our business -- our business is not just the straight connectivity. We came up with the brand, we talked about the connectivity, we talked about the infrastructure management, which includes things like Internet security solutions, includes things such as Web hosting and the third arm which is systems integration, or IT services. And actually when you look at some of these wins that we're having in the marketplace, it actually could include all three. I know one, for example, where we have we're building, the SI people are building the transaction engine, the infrastructure management folks are during the Web hosting and we also have a call center in the mix. So it is more and more, it's those triple plays that we're looking for as opposed to just looking at going from 10 cents a minute to 5 cents a minute, wherever.

Make sense. Thank you for your answers.

Roger Saks, Cappy (ph) Financial.

Thanks. I want to go back to the data and Internet revenues. The sequential decline -- was any of that due to either voluntary or involuntary churn? And I have a couple of follow-ups.

There is some back as we focus more and more on the mid to large size business. There would be some churn there associated with that. We would also see -- as customers are moving away for what I would call the more traditional data-oriented products, such as point-to-point private line and frame relay, into the higher speeds, higher performing services, we would see some element of that in there as well.

Was most of the churn, would you categorize voluntary, or have you churned nonprofitable customers?

There's been some of that, but if you wanted me to quantify it, I am unable to do that right now.

Fair enough. The second part of the question is -- of your data and IT contracts, what's the average length of a contract -- one year, two year, three years?

It's highly variable. Traditionally, you would see three years probably being the average, but you end up -- customers will specify (indiscernible) how long they're looking for, and in general, the service providers will provide different price points, depending upon the term of and duration of the contract. By since I have come here, I've actually seen a contract that is for one year. But that is very unusual.

Normally 2-3 years.

I've seen some that are upwards of five years.

The majority of your contracts, are they in the 2-3 range now?

Yes.

On a percentage basis of your current customers, how many, what percentage is up for renewal in the second part of this year?

I think you just do the proration math and say if you have a 30-month average contract, then in six months, we're going to have 20 percent of our contracts come up, give or take a few points, right?

Last part to this. I think you touched on it earlier and I just didn't catch the answer. Of the data type contracts, sort of percentage of the data revenues, is there a breakout of legacy versus more advanced products?

I don't have the numbers in front of me, but what I can say is that the advanced products are growing at a significant rate. It may not represent in total. The total representation is around 45 percent, somewhere in that range, but it's growing at a trajectory of about 50 percent. And here, I'm talking about GIGI (ph), transparent line service and even throwing some ATM in there. So I talk legacy, I'm really only talking about private line and frame.

Again, it's just a private line frame where you're seeing the bulk of the pricing pressure -- is that correct?

Actually, customers at churning off of those products onto the higher performance products.

Terrific. Thanks very much.

Peter Ramey (ph), BMO Nesbitt Burns.

Good afternoon. I need to get some sense of when we see stabilization in your revenue, and I guess you're looking at each saying you'd like to know when it stabilizes as well. So, given the visibility in the industry, but when you look out -- the previous person asking asked some good questions, and I was just wondering whether looking at your pipeline, John McDonald you mentioned the pipeline isn't full up to capacity to to where you want it to be. When does it get there and what type of volume do you have today as a percentage of perhaps total revenue, you can give me some idea. And how long does it take to bring those contracts on line? And looking back, I am wondering with all of those announcements that you have from last quarter and this quarter, are those all on and being recorded, or is that yet to come?

I wouldn't say all of them would be billed yet. They (indiscernible) signed the contract, you can take a month or so before you actually bring it online, in terms of getting the revenue, so they mostly would ramp-up. By the way, I am not a big of stable revenue. I like growing revenue.

I will settle for stable right now.

Our pipeline -- there is a number of very significant deals that we have quoted on that are in the pipeline right now. There are ones that these salespeople are actually working with the customers -- well, it is constantly at work and some of these deals are fairly significant ones, but it could take a long time to actually close and execute. And some are smaller than a breadbox. It is right across the map in terms of what the nature of the deals would be. So it is very hard to characterize it in one way and one-way only.

In terms of your overall question, in terms of it is the thing that keeps me awake at night is how do we turn that curve around. One of the opportunities as I mentioned earlier is with a better product portfolio with a better operating approach with our customers. Our customers really did tell us when we canvassed them, (indiscernible) coming up with the new name, whether they thought some of the attributes we were describing were of value to them and would differentiate us in the marketplace -- they absolutely believe that to be the case. We only we have overall in the markets we are addressing, 12 percent share and that 20 percent share in the very high-end enterprise markets. So we think there is an opportunity with better products to actually grow that topline.

How long product development my sense is it could take months, if not a year or two (MULTIPLE SPEAKERS) to get going and get out in the marketplace, so we could be stuck in the mud here for awhile?

You're going to see new products in the marketplace from us before year-end. And as I mentioned earlier, our geographics, our addressable market has changed markedly with our access to different international options as well. And the sales people in the states are prospecting new opportunities for call centers, for disaster recovery back-up, a whole bunch of applications focused approaches to the marketplace. But if you ask me exactly when, I cannot tell you. I don't know.

How about not exact exactly, but do you think you could stabilize it by year-end, or is this an '04 event?

That is certainly something I would like to do.

Dave, looking at product development, John has talked about renting product development. Where are we in terms of incurring those types of costs and have we reached the full budget, so to speak, in terms of their run rate costs, or is that something yet to come on the SG&A side?

I think a little bit of that is yet to come, Peter, to the extent we do it ourselves. And so there is an A and B style of product development. To the extent we partner with other folks, maybe that is one of the reasons we would partner. To the extent we do something all by ourselves, it's more likely it is part of SG&A as well. So I think you'll see a little bit of both, although that is a crystal ball that is a little foggy. But I think that is what our plan is. And so you will see a little bit of an increase I think in SG&A. We will try as best we can to manage the rest of our SG&A, to manage against that.

Are you negotiating any other partnerships right now?

We're talking to lots of folks. We probably can always we're talking to lots of folks. I think we've said to everybody, we hope to make more and more announcements near the back end of this year. What type, we will see.

Thank you very much.

David Lambert, TD Securities.

I have a follow-up. You have been talking about adding some international carriers to your fold, and it looks like the termination of the previous AT&T Corp. deal might be a blessing to you guys, in terms of adding that type of revenue. Can you comment on sort of the magnitude of revenues from signing an international carrier would be the compared to AT&T Corp. revenues? Is there opportunities like AT&T Corp., or is it just a fraction of that?

By the way, it's not that we are extremely happy to move away from AT&T. That is a great global brand, but we think they make actually in some product categories could be a supplier to us, in terms of servicing our Europe and global requirements. And actually, that may in fact become more obvious on a product basis. But it is right across the piece. It's the lowest level in terms of relationship. You can talk the straight correspondent exchange of LD traffic, you could talk about private line, you can do that with anybody who intends to be driven mostly by price. Then, you have opportunities to do things in international frame, international ATM that require more -- you have to have a global platform that fits together. The next level beyond that is some of the event services we were referring to, like MPLS, global MPLS, as well as some of the advanced call center, global call center approaches. And you can do these on a transactional basis, or you can do them on a more -- I will call it a more significant partnership. And we are just exploring all of the various avenues that would be open to us open to us in going forward internationally.

Thanks.

That's all the time we have for questions. I'd like to turn the conference back over to Mr. Lazzarrato.

Thanks, operator, and thank you everyone for joining us this afternoon. As usual, a rebroadcast of this call will be available shortly on our website or by dialing the replay number we provided in today's release. That concludes our call and thank you very much.

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

(CONFERENCE CALL CONCLUDED)