BCE Inc (BCE) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Allstream third quarter 2003 results conference call. (Operator’s instructions) This conference call is being recorded today, October 30th, 2003, at 500 P.M. eastern time and I will now turn the conference over to Mr. David Lazzarato, Executive Vice President and Chief Financial Officer.

Thank you, and good afternoon. I'm here in Toronto with John MacDonald, our President & COO , our Senior VP and Treasurer, Brock Robertson, and Director of Investor Relations Dan Coombes.

Please note that these are accompanied by a presentation that we will refer to. This presentation is available on our website at www.allstream.com. Certain statements will be forward looking in nature and it's important to consider that actual results can differ materially from projections. And I would ask you to carefully review the risks outlined in our recent security filings.

Today's call, John McLennan and then John MacDonald will share their perspectives for recent company developments and for the quarter, and I'll spend a few moments to review the financial results.

I'll then turn it back to John McLennan for a presentation of the outlook, before we open it up to questions. With that I'll turn it over to John McLennan.

Good afternoon, everyone. Thanks so much for being with us today. Let me start with slide four. I'm extremely pleased to say that once again our solid financial performance in the quarter, confirms that we are delivering on our promise to drive profit and generate free cash flow.

We strengthened our liquidity position, which continues to confirm our stability and permanence for existing and prospective customers. And I'm pleased to report that we continue to have success in winning new business and renewing existing customer relationships.

During the quarter, we continual to build on our existing capability by introducing several new important services and in building relationships with leading enterprise service providers Oracle, Sun and Grick communications—Grick is our new mobile internet access partner. In fact, we introduced more products during the third quarter than any other quarter in the history of the company. I'm going to ask John MacDonald to elaborate on these services shortly.

In addition, we're encouraged by the continued steps taken by the regulator, to remove hindrances to a healthy and balanced Canadian telecom environment.

If I can go to the next slide. After spending $4 million in rebranding costs in the third quarter, we delivered EBITDA of $66 million. Also, we reported income from operations of almost $40 million, or $2.00 per share. And we generated almost $50 million in free cash flow. We ended the quarter with $308 million in cash on hand, and this represents over $15.00 per share.

Move to slide six. I know the question on many people's minds is what in the world are we going to do with all that cash. Coming out of our restructuring, we ant wanted to demonstrate successive quarters in which we executed successfully on our core business platform--and we are doing that.

In addition, we need to foster confidence in our financial strength and continuity in the customer community. I'm pleased to say that the strong financial position of Allstream is now a point of real advantage in front of existing and new customers. As before, any ongoing investments we're going to make will only be initiated after a very rigorous, strategic and financial review. And we continue to review our capital structure and our liquidity as part of our 2004 planning process.

If I can now turn to slide seven. We remain engaged in the pursuit of regulatory change to improve the balance between incumbent providers and competitive entrants. We are very encouraged the [CRTC] is continuing its pro-competitive momentum. During the quarter, the regulator confirmed that the access and link portions of competitive digital network access, or CDNA, are eligible for cost-based treatment.

As a result, we will recognize about $10 million in additional savings per year. David will share with you the impact of that decision on our Q3 results in a moment.

Also during the quarter, the regulator issued a decision that requires Bell Canada and other incumbents to file public tariffs on a customer-specific basic. The CRTC is currently reviewing approximately 165 customer-specific contracts to ensure that the pricing and other terms are in line with the regulatory rules.

In the case of at least 5 of these contracts, the regulator has determined that Bell priced service well below tariffed rates. They have therefore ordered Bell to increase pricing up to 25% or to discontinue services under the contracts. And on October the 23rd, the CRTC issued a public notice inviting comment on proposals to limit the ability of the incumbents to engage in anti-competitive targeted discount pricing.

I find it odd that others are puzzled that when rules as defined by the telecommunications act are broken, that there should not be some consequence for breaking these long-established rules. If these violations are left unchallenged, the result is clearly anti-competitive. This decision is an important step in sustaining the benefits of competition enjoyed by customers for years.

So with that, I'll turn it over to John MacDonald. John?

Thank you very much, John, and hello to everybody on the call. Today I would like to provide an update on our operating priorities to drive profitability and generate free cash flow as we work to stabilize the top line through the pursuit of new revenue opportunities.

Moving to slide nine, I'll start by saying how pleased I am with the success we've had introducing the Allstream brand into the marketplace. The promise we've established in the brand is to be an innovative agile and collaborative partner. And that is partly inspirational, but more and more customers tell us we're truly living up to the commitment in the way we deliver timely business solutions that help them compete more effectively in their markets.

A quick example. During the quarter, we entered into a series of arrangements with DEXit, an emerging micropayment transaction company, whose technology allows customers to swipe and pay for small convenience purchases. We started the relationship by developing custom application software for DEXit's transacting business. With an already strong relationship in place, we were given the opportunity to bid on a number of additional [voice] and managed hosting services that allowed a fully integrated solution.

This win is an excellent example of how we're able to connect together the three categories of ourselves model, from IT services, through infrastructure management and connectivity. Doing so, we can build and deliver real value for a customer and to use a baseball analogy, it really is a triple play and it demonstrates the real promise of the value proposition we bring to the marketplace.

DEXit told us we won against the competition because we were willing to deliberate and draw upon the organizational resources needed to develop a complex and customized solution-- and to do it quickly. We also continue to have success selling new business and expanding relationships with existing customers. During the quarter we renewed a significant agreement with the royal bank to provide a an advanced data framework to connect 1800 retail branches across the country.

In addition, we renewed our successful navigator contract with TD bank to manage the contacts that have become instrumental in providing TD with advantage in the marketplace. And expanded our significant relationship with Scotia Bank, to implement a sophisticated bank and call management system.. We won new IT service business with EnCanada, one of Canada's largest corporations and entered into an agreement with Hewlett-Packard to provide a data solution.

Also during the quarter we renewed significant contracts with both [Ford] Canada and Siemens.

Turning now to slight ten, I'm pleased to report with the introduction of several new products during the quarter, we have demonstrated rapid success in launching innovative new services that enhances the capabilities we bring to the marketplace.

Additional detail -- we have significantly expanded our data in ethernet serving area. We can now provide ethernet access through transparent LAN service or TLS to more than 300,000 business communities in more than 150 communities across the Canada. This represents considerable expansion for our ethernet serving options from hundreds of locations to hundreds of thousands of locations. And this, in turn, translates into the expansion of our addressable market from about 5% to 54% of business locations. In this, the fastest growing product category in the data market.

Early in October, we announced that our world class portfolio data services is now offered internationally, in addition to supporting customers domestic requirements. We can provide them seamless global connectivity in over 50 countries. With these capabilities in place, we've enhanced our value proposition in front of Canadian multi-nationals and created significant growth opportunity. We've had considerable success in deploying this service, having entered agreements with five customers already and we are actively engaged in discussions with many other prospective customers.

Also, early in this month we announced the launch of global Internet access which enables mobile and remote workers to stay connected to the enterprise network by providing access to the Internet for more than 35,000 wired and nearly 2,000 wireless Wi-Fi access points across more than 150 countries. This represents important connectivity option for our customers, which in terms of breadth in coverage is as good as any offering in the world.

Last, last week we introduced managed intrusion protection services. This addition to the already world class portfolio security solutions further enhances us as one of the top providers in the vital and rapidly growing securities solutions marketplace. We already employed this service with DEXit, the important new customer I discussed just a moment ago.

In addition, we continue to evolve our relationship with AT&T. In certain areas, we continue to collaborate as during the quarter we won a significant deal with AT&T global services to route their Canadian data traffic to the global network. We renewed an agreement with Cisco, to support the Canadian network working with AT&T to support Cisco's interconnection requirements into the United States.

In other areas we're benefiting from our independence, as with the introduction of our Internet services. We can now offer our customers end-to-end international connectivity solutions. In addition, we also won a contract during the quarter with ADC, the broadband company, in direct competition with AT&T.

Turning to slide eleven, we clearly had success in the new quarter in selling new business and expanding relationships with existing customers. However, our revenue is down both year over year, and for last quarter even after adjusting for the sale of of [Contour inaudible ]. This is not unexpected and is a trend that is likely to continue in the first half of 2004.

However, we believe we're on the right track as we focus on the profitability of the business and generating free cash flow. On the regulatory front, we're pleased that our perseverance with the CRTC leading to change and the regulatory environment likely to support a healthier pricing environment.

And most importantly, as we transition our revenue to a growth development, the development of new products that position us with the best value propositions in our target markets. We demonstrated significant success by introducing more new products in Q3 than any other quarter in our history. We've greatly enhanced the capabilities we bring to the marketplace, and there's more to come. And on slide twelve, we recently launched the second phase of our branding initiative with an advertising campaign themed upon Allstream's new tag line "there's more to networks." This embodies the company's awareness the success is more than the data that flows on the network but about understanding a customer's needs and working in collaboration to deliver effective business solutions.

With our continued promise to collaborate with our customers to enhance their ability to compete more effectively, ,we're confident we can deepen our position in the Canadian marketplace.

In closing, I'm very pleased to announce that Tal Bevan has joined the senior leadership team as Executive Vice President of sales. He brings with him a wealth of experience in the telecom marketplace having acted as President, Business Operations of 360 Telecom, as President of Worldcom Canada and held senior positions at Lucent, Xerox, and Bell Canada. With that, I'll turn it over to Dave to share some of the results for the quarter.

I'll start with an overview of the financial results for the quarter beginning on slide 14.

For the third quarter total rev news were $309.3 million, compared with $359.9 million in Q3 of last year, and $336.6 million in Q2 of this year. As we reported previously at the beginning of the third quarter, we successfully concluded the sale of our subsidiaries Contour and [Argos] for $7.4 million and as shown on slide 14, excluding the revenue generated by these three, revenue ended for September 30 of last year were $347.6 million, and $325 million in the second quarter of 2003.

Combined revenues from all non-LD sources represent 64% of the revenue base up from 62% in Q3 last year and improved from 63% in the second quarter of 2003.

My following discussion of product revenues will focus on changes in our revenue excluding Contour and Argos, to assist everyone in understanding changes in our continuing revenue. Combined revenues from data, Internet and IT services of $143.8 million declined by $10.3 million Q3 last year and $2.5 million compared to Q2 this year. Core data and Internet revenues, excluding declined by $5.6 million in the third quarter of last year and were flat compared to the last quarter of this year. Industrywide softness and enterprise, and wholesale spending continues, although we continue to have double digit growth in our managed security services.

However, these growth areas represent a smaller proportion of our total data portfolio, and were more than offset by the pricing pressures in our legacy product categories and declines in IT services revenue.

Revenue from data, Internet and IT services now represent 46% of our total revenue base. Local revenue in the quarter of $53.2 million declined by $2.8 million compared to Q3 of last year, and $1.9 million versus last quarter, as total lines in service decreased to $493,363.

The percentage of these lines that are either on-net or on switch improved to 57% from 53% in the same quarter last year and 55% in Q2 this year. During the quarter, 15,600 lines were removed from the total line count base related to the sale of Contour and Argos. So local now represents 17% of our total revenue. Revenue from long distance services of $109.9 million declined by $22.6 million year over year, the result of 9% reduction in average price, and an 8.1% decrease in minute volume.

Compared to the second quarter, long distance service revenues declined by $10.6 million, the result of a 6.5% reduction in average price per minute, and a 2.3% increase in minute volume. As a percentage of total revenue long distance is now 36%. Turning to EBITDA and slide 15, Q3 EBITDA totaled $66.1 million, which included $4.4 million of expenses related to the rebranding. This represented an improvement of almost $12 million from the third quarter of last year, and the increase in EBITDA is due to gross margin improvement of $2.5 million, as reduced service cost more than offset lower revenues.

On a percentage basis, gross margin improved by 700 basis points, 45% of revenue, the result of operating efficiency gains from an emphasis on higher margin products and services, and from regulatory savings that included $5 million in the quarter in savings related to the competitive digital network access decision announced in August. Of that $5 million, $2.5 was retroactive to the second quarter of this year.

In addition, this improvement in EBITDA was due to SG&A expense -- reduced SG&A expense of $9.4 million, as efficiency gains exceeded our rebranding costs. Compared to the second quarter, our EBITDA declined by $3 million, the result of $1.6 million decline in gross margin, and that decline was –in revenue was largely -- almost largely offset by a 310 basis point improvement in gross margin.

Improvement in margin was a result of operating cost reduction and regulatory savings.

In addition the SG&A expenses increased $1.4, primarily the result of $2 million costs incurred to exit certain facilities associated with space utilization improvements. Impact of the sale of Contour and Argos on EBITDA was nominal, as we previously mentioned.

On slide 16, we have summarized our performance and generated consist improvements in gross margin as a percentage of revenue over the last seven quarters. Moving to slide 17, income from operations for Q3 totaled [$39.7] million. This represents an improvement of $32.1 million from the third quarter of 2002 and as a result of increased EBITDA of $11.8 million and lower depreciation and amortization cost of $20.3 million.

Compared to the second quarter of this year, income from operations declined by $1.5 million, the result of lower EBITDA, partially offset by reduced appreciation and amortization expense. This is the fifth consecutive quarter we've recorded positive income from operations.

On slide 18, net income for the quarter totaled $24.1 million compared to a net loss of $256.8 million in the same period last year. This improvement is primarily the result of the absence of interest cost and foreign currency translation adjustment related to the prerestructuring debt.

Also contributing to the improvement in income was increased income in operations of $32 million partially offset by increase of taxes, that except for some relatively small to large corporation’s tax are non-cash in nature. The income in the third quarter declined by $300,000 compared to the previous quarter, the result of decreased income from operations of $1.5 million, partially offset by non-cash taxes of $1.1 million.

You'll note that the income statement includes a provision for income taxes of $16.6 million in the quarter. As we previously discussed, this charge does not give rise to any cash income tax liability as we're able to use our tax loss carryforwards to offset it.

Turning to a discussion of liquidity on slide 19, at September 30th, we had carbon hand of $307.7 million, representing an increase of almost $60 million from last quarter. This increase in cash was a result of $49 million in free cash flow generated in Q, and depositive working capital and other activity that generated $10.2 million.

Moving on to slide 20. During the third quarter, we completed our evaluation of the impact of our financial restructuring on the amount of tax losses and the fair value of other tax assets that are available for carryforward as of April 1, 2003. Based on corporate tax filings for the predecessor company, our tax losses available for carryforward are approximately $3.2 billion.

The acquisition of control that occurred on the implementation of our plan required the writedown of all the tax assets of the predecessor company to their fair market value.

In addition, the company used a portion of its non-capital losses to offset income created from debt forgiveness as part of the restructuring. The net impact of these transactions is an increase in the tax loss pool from $2.2 billion at the end of 2002 to $3.2 billion at the end of April 1st of this year. And a corresponding decrease in the tax depreciable base of the company's capital assets.

The expiration schedule for these carryforwards is available in note 6 of our Q3 financial statements available on our website.

With that, let me turn it back to John McLennan to discuss our outlook as shown on slide 21. John.

Thanks very much, David. I'd like to spend a moment now to discuss our financial guidance for the balance of the year. We have had considerable success in depriving profitability and generating free cash flow in a very, very global telecom environment. We focused on the quality of our revenues and the efficiency of our business.

In addition, we have benefited from an improving regulatory environment. So, therefore, we still expect revenue for the full year 2003 of approximately $1,300,000,000-- which includes the income of Contour Argos subsidiaries at the end of the third quarter. We're increasing our EBITDA guidance to a range of $240 million to $250 million which includes planned rebranding costs for the fourth quarter. This would be up from $200 million to $220 million we provided last quarter and still forecast CAPEX of approximately $100 million for the 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?

(Operator’s instructions) Your first question comes from Glen Campbell from Merrill Lynch. Please go ahead.

Yes. Thanks very much. A couple of questions. First, it was interesting and encouraging to hear what the contract wins and new business during the quarter. I wonder, though, if you could talk in terms of revenues won and lost during the quarter. Clearly, the revenue declines in a lot of cases are due to repricing of existing business.

But I’m wondering if you can give us a sense if you're winning more than losing in terms of business and how that might be trending?

It all depends upon which product categories you're looking at and you have to temper this in terms of wins and losses. In many cases it's a conscious loss. If we don't think it's a profitable piece of business we will decide, for example, not to rebid it or bid it when it comes up on the market.

But we have gotten brand new customers. For example, recently, a company based out of Phoenix. It was expanding its operation for a [ inaudible ] network across Canada, a brand new piece of business.

The TD navigator contract extension I talked about is just that, a contract extension. In many cases when we go to that situation, certainly customer expectations are that the prices don't go up, they go in the other direction. So, we do have the wins. We do have reprice. And there are some losses there as well.

But, for the most part, we do have a very rigorous approach in terms of defining which kinds of business, which pieces of business we want to keep and we think we've gotten the cost structure. We think we've got the approach in terms of deploying capital that will allow us to be effective in those bids, but in other cases we'll walk away from the business.

We are not, by the way, as one of our competitors has stated recently, taking advantage of our balance sheet in terms of being very aggressive in terms of pricing in the marketplace.

Okay. Maybe just to clarify. You've gone through a period where you were shedding what you were considering unprofitable business, and my sense is that is largely done. Am I wrong in thinking that or are there still chunks of business you are trying to exit?

Two things. The shedding of the business basically had to do with a very small market and very small line sizes in terms of local. That was basically a whole segment that we were shedding and we pretty much rippled that through the system. There are still some customers on the system, but I would say that is mostly all behind us.

There is another factor, which is from time to time customers come out with RFPs, they are looking for a particular kind of service with a particular kind of attribute covering a particular territory. And in some cases we will -- most cases we bid on those but in many cases we'll decide not to for a variety of reasons. It could be it's a high-speed service in a very remote area, which even becomes a challenge for the incumbents. So there's really those two answers.

My follow-up was on the use of cash. It's reassuring to hear that any big investments would be considered carefully, clearly having $15 a share in the balance sheet is an unusual capital structure. It's hard to see how it profitably would be redeployed in the business. At what point in your view should this be returned to shareholders?

Glen, I'll just take a quick -- this is John McLennan. I'll take a quick shot and then ask David to take a shot at it. We analyze all our investments. Not just capital and not just new investments. We have very consciously pursued the strengthening of our balance sheet through these last two quarters. We are really looking at-- the requirement for cash as we finalize our 2004 budget and plan. And we'll have a much clearer idea as to what we're going to do with our capital structure, including the cash, as part of that finalization of the 2004 plan.

So, we would be prepared to announce what the strategies are after that sometime in early December.

Okay. Thanks very much.

Okay.

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

Hi, guys. You should have rebranded the cash stream, not Allstream. I got a question on your revenue guidance. If you use $1.3 billion and assuming that you're right for the full year you're looking at a 3% sequential decline in Q4 versus basically a 5%, or 2.5% in Q4, almost 5% in Q3.

It sounds like you might be able to stabilize revenues earlier than the second half next year. What makes you say that you think it's second half next year?

Dave, it's Dave Lazzarato. I would tell you that the $1.3 billion is for starters. It's a point. We hear your point in terms of the sequential decline that [we] arithmetically come to in Q4 but hopefully we can beat a point estimate like $1.3. We'll see.

As we go through and look at the sequential past Q4, the new products that we're putting into the market -- and as John said we put more in the market in Q3 than any other quarter in history -- they all take a little bit of time to take hold. We're pushing like hell, but they take a little bit of time to take hold.

So we're increasing getting confident but you've got to hit that point, that inflection point where your wins are overtaking those other impacts. We're confident of that. As we sit here today, we think that's the back half of '04, though.

Can you give us some progress on your -- on your self-pursuing relationships with international carriers? I understand that's one of the objectives that you guys have for this year.

Yeah. Well, it's pursuing -- we already have a number of those established relationships. For example we have bilateral arrangements of course with AT&T. We have them with MCI. We have them with [ inaudible ], T systems, et cetera.

The key question is on a specific product basis, or even different platform basis, whether there are opportunities to develop a consistent global offerings.

So on the data and Internet and frame that's with one particular partner. Not to say that particular partner will have all the other offerings for a global MPIS offering. We are a business IP offering. So we are talking to all of them.

Okay. On the international data network that you've announced, I understand that you're using AT&T Corp for their international?

Can you give us an idea what kind of deal that is? Is that in line with sort of reinforcing your relationship with these guys on -- we've seen that in the past quarters where you've extended some contracts, and now you're announcing a new product in conjunction with AT&T Corp. What can we read into that?

First of all, on the voice side, we continue to work closely together on North America Voice Services, as well as North America 800. It makes sense because it's basically the best platform in America today.

The data side is different because it's more competitive kind of relationship. When I say competitive, that is, we'll be on the receiving end of the wholesale request of AT&T, and they'll be on the receiving end of a wholesale request for us going into the states. So there is still a relationship. It's just we end up competing more often than not with AT&T Global Network Services.

But in terms of the international data service that you're referring to, we didn't automatically give that to AT&T. We actually did solicit other proposals from carriers such as MCI as well as Williams, et cetera. So we evaluate the terms and conditions, the pricing structure, the pricing points, service levels, et cetera, from a variety of service providers. And AT&T had the best offer.

Okay. What kind of customers -- what kind of services are planning to or what kind of customers are you planning to load on to these services?

The customers we're talk targeting, this is product development towards basically midsized customers but, by and large, large global multi nationals, anchored here in Canada that have global requirements into the states and elsewhere.

What's the size of that market?

Oh, God.

Any idea?

I don't have -- in terms of the global telecom spend for multi-nationals in I don't know.

Just one more question on your data Internet product that you just announced a couple of days ago. You say you basically have an ethernet fabric going to a number of locations.

And my understanding is that you're using some of the -- the reason for that to happen is you're using some of the CDNA of the incumbent telephone companies.

Can you explain to me how that works a little bit and how does that defer from the applications that you have in front of CRTC in terms of having access to gigi services?

There is a multiplicity of approaches across the country. In some cases, we have negotiated agreements to connect -- get access to the incumbent's TLS services that they've defined. That's mostly the case in western Canada and Western Canada.

As you point out, it's mostly CDNA access. And the movement that we would make is we'd like to cement the relationship with the eastern incumbents to have the same thing out West in terms of TLS access. But the problem is that that is a retail kind of relationship, not a tariff relationship. It's what we can best negotiate from the incumbents. That is what we get.

The part 7 application we have in front of the regulator right now, basically said access is access regardless of the nature of the boxes that are attached to the end of it. And, therefore, if what's applied in terms of CDNA should also be applied for the higher speed services such as TLS and giggi and MPLS. We think the opportunity to improve the margin will be enhanced and the availability of those products across the country will be enhanced when we can get a successful ruling from the commission.

Thanks very much, Dave.

That's great. Thanks. Good numbers.

The next question from John Grandy from Orion Securities.

You did much better than I expected this quarter and the key reason was the significant improvement in the gross margin. A portion of that is due to the DNA tariff that you referred to, but even excluding that, the margin was up nearly three points from the previous quarter.

So my question is, can we fairly assume that you can sustain the current gross margin levels as we move forward?

Hey, John. Dave Lazzarato here. In Q3, our margin improvement, you're right. Some regulatory, some internal cost deficiencies across our business. We certainly are hoping that that's what we can sustain or improve on. A lot of factors going to go into that, obviously.

But taking price out of the equation for a moment, our objective as we manage our business going forward is to continually look for productivity improvements, small medium and large. Whatever we can do logically but at the same time, maintain or improve customer service level. So that's what we're working toward.

At a different margin line, at the EBITDA margin line, we've said consistently we want to stay at or north of 20% EBITDA as well. We think of productivity, not just of the gross line but at the EBITDA line as well.

If I could have a couple of brief follow-ups. The next one would be with regard to the rebranding costs. Can we assume in Q4 they will be similar to Q3 or will it be an uptick? I understand you’ve launched a new advertising campaign.

You should assume they're going to uptick a little bit. In total, we'll be well within our overall objective of $20 million. It will --maybe a million or two will tail off into Q1, yet to be determined. But it won't be substantially higher than Q3.

One last one very briefly, if I may. The guidance you sort of -- I'll call it soft guidance you've given you hope to see return to revenue growth in the second half of 2004.

Is that based in part on the expectation that CRTC will follow through with its new pricing regulations for bundled services that they announced last week?

That certainly will play a role. But we're actually trying to put as much of the control of that [ inaudible ] in our own hands as opposed to somebody else's and we're doing that through basically beating the competitors with better -- higher value products. We had a lot of products come out under the -- out of the pipeline in Q3. There is a whole heck of a lot more in progress as we speak.

Okay. Thanks very much.

Your next question comes from Greg MacDonald from National Bank Financial. Please go ahead.

Hi, guys. Good afternoon.

Good afternoon.

If you allow me a little more patience on this issue of wholesale/enterprise weakness, I would like to just delve a little bit more into details on that area. It impacts LD and data access, which is kind of two-thirds of your business.

And to try and get a handle on when we exactly might be able to see a turnaround in the business I wonder if you might give us a little more input on the volume versus pricing issue? At the least on the volume side, are you seeing stability in volumes out of enterprise customers at least?

And in terms of wholesale, what does the pricing outlook look like for the next couple of quarters?

If you look at -- you're talking wholesale carrier -- carrier kinds of pricing?

Yes.

There's been significant changes that's taken place over the last little while.

Yep.

One example of a DS-3 from Quebec City from Halifax four or five years ago was like $25,000 [bucks] and now it's more like $650,000. The technology driving these services, dramatically changing the cost per bid, are much more granular and not as lumpy and significant in terms of the cost of the old technology.

But in the wholesale market, it used to be fairly competitive. It all depends on the nature of the services you're offering and the quality of service that you're looking for and those kinds of things become factors in that discussion as well.

Increasingly, when you're looking at Internet services and pairing arrangements or getting services from other carriers, you have to be concerned with the performance rallying of BGP. More and more customers are using that and picking the more highest performance routes in terms of delivering traffic.

In terms of volumes, that's getting to be a difficult factor to measure. Used to be the classic measures were easily understood such as minutes and ARPM. But more and more customer networks are being transitioned into package based business IP fabrics, with high performance backbones, with different qualities of service so they can actually send many different kinds of traffic over that network. Voice just becomes another application.

Right. John, just as a quick follow-on, then, maybe just in terms of conversations you've had with your carrier customers and with your enterprise customers, what are they saying about their businesses?

Enterprise customers pretty much every customer we talk to is interested in one thing and one thing only and that is finding ways to reduce their cost.

Of course, what we're trying to do is say, yeah, but you should look at your total cost, and if you can reduce your total costs overall by increasing your telecom cost, that should be sweetness and light. But there is an expectation in the marketplace. And an LD, it tends to be -- each time I renegotiate my contract, and the price is going to be reduced 10%. And what I -- when I renew nigh contract for my data service I get quadruple the capacity for the same or lower price.

It's very difficult -- it's not out of the question. It's a broad generality but it's very difficult to engage customers in discussions about new applications. Everybody is basically looking at their cost structure, and they see telecom costs as something they can manage.

Hence, your guidance. Thanks very much, guys.

You're next questions comes Peter Ramey from BMO Nesbitt Burns.

Just a quick question. Your company has been, we say, very conservative guidance in the past as we track through the '03 and reflective of an uncertain environment in the genesis of the company and that's understandable.

But, when I look at '04, you have a few good quarters behind you and some of the numbers are coming through nicely. Your guidance implies a run rate, EBITDA number of around $200 million, $50 million in the last quarter if you believe in the lower end of the range. I need a sense from the management you put the $250 million, $260 million as a general number you don't have a lot of expectation on. [ inaudible ]

Peter, I think the number was $240 million to $250 million. Don't Jack it up on us, please.

You're at $240 million to $250 million. Your year-to-date is 200, if I've not misspoken?

That's right.

What do you see coming down the Pike in Q4 that would cause this sudden decline in profitability? And the reason I think we're all interested in this number is that sets the run rate going into '04.

Peter, it's Dave. The Q4, as we look at Q4, the cost to introduce products and services is going to be higher than it has been for us in the last number of years, as we've mentioned before. And a little bit hard to estimate exactly what that is. But there will be some positive increase in that. But, hey, with the right benefits in the long term.

Yeah, I guess you can say we've been conservative using the rearview mirror now as to what's happened or we've been able to manage those risks that we saw to the business 12 months ago and 10 months ago. It's a combination of things.

As we look at 2004, we will decide whether or not we'll issue formal guidance or whether we'll leave it to you guys to kind of track run rates and make predictions that way. That decision is in front of us. We've not decided yet whether or not we'll publish Q4 -- or excuse me -- '04 guidance. But we'll let you all know at the same time what we're going to do with that.

We think, as I said before, that there's some productivity things that we can still do over time. And that's how we're managing our business. We're trying to deal with profitable customers in the right segment and from an internal perspective do business in the right way.

Don't want to get ahead of ourselves in terms of predicting that but hopefully the last few quarters shows our ability to manage things.

On the product introduction costs you, John, earlier on, mentioned you launched more products this quarter than any other quarter. Presumably those whatever upfront costs were already expensed. Is that right?

Yes, in terms of those costs but product introduction isn't just necessarily the months leading up to and the day you announce. There's advertising that may or may not go with it. There's training, those kinds of things, not only for the sales force but for customer service and field operations people, et cetera. So, you know, think of product introduction in a bit broader context.

To be clear, CPU equipment, you're capitalizing that, for the most part, right?

If we own it. Oftentimes, the customer owns their own equipment, right?

Okay. Great. A more generally question. On the CRTC proposal for interim decision of raising the price ceiling in the enterprise segment, looking at (inaudible) tests, my take is a 10% to 20% price ceiling under-- what you have to price. Is that what your sense is? How does that change your business plan, if anything?

Peter, John here. I can tell you that we have not changed our business plan at all yet based on any assumptions because we don't know how this is all going to sort out and we don't know what the outcome is going to be.

I can only tell you that after several years now of being called in by really good customers of ours and saying, listen, we really like doing business with you, John, but we've just been presented with a package that is just too good to be true and we just have to go with it. That's a bundle and it's a package. And we weren't even able to really be able to seriously compete, because we couldn't possibly offer that kind of a bundle.

Well, I'm delighted that it's finally come home to roost, and that the regulator has decided to step up and address it. Whatever the outcome is going to be right now, maybe it's a little built of our conservative nature, but we really have no idea how this is going to all turn out. We don't know what the consequences of this happening in fact is going to be, for the people who are doing it. And we've not made any decisions about how we're going to embed that in our 204 pricing yet.

But it's going to unfold and time will tell. But I'm delighted that the regulator finally stood up and really addressed what is a pretty significant problem.

Peter, a quick add-on to that as John MacDonald mentioned earlier, when he we do pricing, we look at it contract by contract, maybe a little bit differently than how some others might, in terms of a bigger, broader market with many, many more customers. And so we can understand what's going on in the marketplace at a much more granular level, I think, quicker than others might be able to. We're not the price leaders now. We don't intend to be. We'll react but not be the leader.

I was going to say, I think our results verify that we are not out there buying contracts. We're not out there leading the charge on discount pricing. And whatever assumptions, Peter, we put in 2004, we're going to make sure they're valid. And we still have to see how this is going to play out.

But all things being equal, your win contract on contracts should go up?

Well, we certainly hope that we have an opportunity to win more. Certainly these ones where we were almost disqualified at the start will now be open to us again. So hopefully that we will see an increase win rate.

thank you very much.

Your next question comes from John Henderson from Scotia Capital. Please go ahead.

Yeah, thanks. I wonder if you could talk about or tell us what your revenues are now with AT&T. They were sort of $280 million a year. What would be your annualized level now?

Hey, John. It's Dave Lazzarato. You're right. We had said a year ago they were roughly 20% of our revenue. And I would tell you that they're not significantly different from that today.

To the extent that pricing has changed, yeah, pricing with AT&T has changed or customers that were jointly serving. You know, there hasn't been a dramatically different pricing dynamic in our relationship with them, or our joint relationship with mutual customers. In terms of the volumes between us still pretty consistent we haven't had a major change up or down.

So, again, great relationship. A very, very effective relationship, albeit a different one from an ownership perspective a year ago. But a great supplier relationship to go out and solve the right kind of customer's problems.

: And this relationship really is being driven by the customer. And the customer's really dictating a lot here as to what is the best solution. And it turns out a lot of times it's for us to keep right on working together.

Okay. That's great. Speaking of the customer, just wondering how do you think the customer may react to the CRTC's proposals?

You know, if there's one thing that I think is unfortunate in this whole exercise, it's that the customer in many cases feels a bit put upon, in terms of their costs going up. I personally believe that that's the wrong person that should should receive the consequences of this particular activity, the uncompetitive activity.

I think that Bell should be the company that basically has to deal with that, not the end customer. The customer didn't put themselves in that situation. But it seems that Bell was really not taking any sort of accountability, responsibility for that. But at the same time, as John mentioned, we do believe that having a healthy, competitive environment is ultimately in the best interest of the customer.

And I would add -- this is John McLennan. I would add as well that our enterprise customers have enjoyed enormous, enormous benefits over the last number of years as a result of us being in a really strong competitor against Bell, Dallas, whoever we're competing against. And we've competed on open competitive basis.

And these customers have really, really enjoyed the benefit of that. The enterprise customers have probably enjoyed competition more than anybody else in this country. And you can see how competitive the pricing has been and how aggressive it's been when this kind of a situation begins to unfold.

So I can understand some of the customers being a little bit frustrated by that. But if you stand back and take a look at the whole thing, it's not us that violated any of the rules here. It's us that have not been able to compete on an open and competitive structure the way the regulator had defined. So it had to be addressed. And I really do compliment the regulator for standing up and addressing it.

That's a good point. I have -- my last question is on your revised tax losses available. Just wondering what, if any, limitations are there on speed of using those tax losses, if you had unlimited earnings to use them against?

Unlimited earnings. Hmm, John --

What are those, John? Unlimited earnings. Can we meet in the morning?

I mean if earnings were not your limit.

I gotcha. There's -- you know, the tax laws in Canada are far more advantageous or liberal than the tax laws in the U.S. when it comes to utilization of loss carryforwards.

As long as we're making money in a telecom business, carrying on the business that generated the losses, we can use those losses for up to seven years. I don't mean to sound like the tax act.

The good news is, out of $3.2 billion of tax losses, $1.6 billion of those don't expire until the seventh year. That big number relates to the recent writedown for tax purposes in the assets value. So that's tremendous flexibility. That's tremendous opportunity. We're not going to pay cash taxes for a long time, but it provides other opportunities, as you say. [ inaudible ]

And are there ways of extending that $1.6 billion beyond the seventh year?

Remains to be seen. I wouldn't say there's a high probably of that. But seven years from now is an awful long time in Canadian telecom, wouldn't you think?

It's a long time. And I guess finally, can you see, I guess, a fit with more than one company that could use those tax shelters?

David, why don't you --

can I answer that? Not being an expert on other Canadian companies' tax situations, I could imagine that your investment bankers could come up with more than one company that could benefit.

You know, the separate issue as to the financial/tax combination benefits versus competitive evaluations that would have to take place, et cetera, of any M&A activity.

But I think there is more than one Canadian company that could utilize the tax losses. It's an issue whether the businesses fit together or not from their perspective.

Thanks very much.

We have time for one last question and it comes from Richard Talbott from RBC capital markets. Please go ahead.

Thanks very much. It looked in the quarter as though there were, I think, about 180 fewer employees. I was wondering if that related at all to the disposition of Contour? Or whether there were further reductions in the core base and whether there were any severance charges taken or whether those have already been booked.

Richard, it's Dave. About half of that employee reduction comes from Contour and Argos and half is, I'll call it organic productivity. Some of that organic productivity would have had severance-related amounts but they're immaterial. The other part would have been attrition related.

And with respect to the cost structure, I remember last quarter there was reduction due to traffic. I think the benefit of that was somewhere in the $8 million to $10 million in the quarter. Can you confirm that and help us whether that was the same order of magnitude of benefit that you felt this quarter?

Yeah. I don't recall the exact number from the prior quarter's discussion, but it sounds in the ballpark. Maybe the low end of that range. And we enjoyed the same kinds of rates in Q3 as we did in Q2.

I believe the discussion in Q2 was we had hit the volume thresholds where the lower rates kicked in during that quarter. So we continued to benefit from those lower rates. We don't have any other second or third level volume threshold in the back end of the year. Just in case that was a follow-up.

Thank you for anticipating that. So I guess in terms of the overall cost structure, it would seem as though with CDNA having worked its way through the system and with the aggregation and employment reductions that this would be -- would you agree that this is more or less a reasonable run rate in terms of the gross margin level?

Or do you see there being further room to, in a significant way, to reduce the cost structure?

Richard, as I said earlier our objective is continue to have productivity gains. That can come from being more selective in what contracts we want to enter into, that have better margins, and/or doing things better internally. We'll make both of those choices.

The wild card, of course, is pricing. We have the least control over that. We have more control over the first two. We think there's room to expand margins, but we'll see how that evolves over time.

Okay. And then just finely, to finish off, the increase in the tax/loss base, without getting into a deep discussion this hour of the day, can you just summarize for us what changes in assumptions, or what would have accounted for the increase in the tax/loss carryforward balance? And is that something that needs to be opined on by CCRA , and have you got that kind of opinion?

The change in our tax/loss is really the result of taking or tax value of the assets or the end appreciating schedule of the assets, and writing them down for tax purposes at the acquisition date, then working through the income generated by debt forgiveness and finalizing all of that as we completed and filed our predecessor company tax returns in the third quarter.

We've worked through that with our tax advisors, and we're very comfortable with that. And so that's really what it relates to. And as I said earlier, the majority of the losses have a very long tail on them in terms of our ability to utilize them.

So from a CCRA perspective --

We've thought about -- we looked at the rules and the fact circumstance and we didn't see a need to go through the -- advance the opine route. We felt very comfortable with the fact circumstances with our advisers, so we followed on.

Okay, thanks.

Okay.

Mr. Lazzarato, I'd like to turn it back to you.

Thanks, he everybody for joining us this afternoon. Rebroadcasts of this call will be made available shortly on our website, or can be accessed by dialing the replay number provided in today's release. So that concludes our call. And thanks again.

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