BCE Inc (BCE) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen thank you for standing by. Welcome to the Allstream first-quarter 2004 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. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Wednesday, May 12, 2004 at 8:30 AM Eastern Standard Time.

I will now turn the conference over to Mr. David Lazzarato, Executive Vice President and Chief Financial Officer. Please go ahead sir.

Thank you and good morning everyone. On the call with me this morning are John McLennan, our Vice Chairman and CEO; John MacDonald, our President and COO; and our Senior VP and Treasurer, Brock Robertson; and our Director of Investor Relations, Dan Coombes. Please note that today's conference call remarks are accompanied by a presentation that we will refer to as we move through our discussion. This presentation is available on our Website at Allstream.com.

Certain statements would make on today's call will be forward-looking in nature and it is important to consider that actual results can differ materially from projections. I would ask that you carefully review the risks outlined in our recent securities filing. On today's call, we will first have John McLennan and then John MacDonald share their perspectives on recent developments. Then I will spend a few minutes to review the financial results for the quarter. With that, I will turn the call over to John McLennan.

Good morning everyone. Thank you for joining us today on what will very likely be Allstream's final investor call as an independent company. As you know later this morning our shareholders will vote on the offer made by Manitoba Telecom Services to purchase 100 percent of the outstanding shares of Allstream. For Allstream shareholders this transaction not only crystallizes the value we have created in the Company since April 1, 2003 but it also broadens the platform from which we will compete going forward. The combined financial and operating strength of our two companies will create an even stronger national competitor with offerings across all service and product segments of the telecommunications industry. Therefore and most importantly, it provides our shareholders with the opportunity to participate in the future growth of the expanded even stronger Company.

While continuing to execute Allstream's strategy the combined company will apply the same disciplined approach our shareholders have grown to expect from us. This approach will be guided by the excellent combined new management team which will be led by Bill Fraser. I have known Bill for many years in the industry and based on my experience, I really would put this leadership team up against any other team in the industry.

On the next slide, I am pleased as we move to the next stage of our evolution in the teeming with MTS that we are continuing to execute on our plan. In this quarter we introduced new services; we won new business and expanded relationships with existing customers. Our revenue is continuing to show signs of stabilizing due to the positive impacts of our new service introduction and the expansion of our quota carrying salesforce and we grew long distance and IT services compared to the previous quarter.

Our free cash flow generation in the quarter of $26 million brings the total generated in the last 12 months to $167 million and our EBITDA remains strong as we generated over $50 million even after deducting $17 million in charges that are expected to be lower in future quarters. It has been nearly four years to the day that I joined this Company. As most of you know when the merger with MTS is completed, I will step down from my day-to-day executive responsibilities. However, as a member of the Board of MTS I will remain an active participate going forward in the future.

Although I have said this a number of times, I would truly like to once again extend my great appreciation to Allstream's employees. The successes we have had are the direct result of their dedication and commitment. I would also like to thank our customers for their support and confidence and to assure them that Allstream will maintain its commitment to bring choice and innovation to Canadian businesses. Finally, to our shareholders thank you for your support and investment in Allstream.

With that I will turn it over to John MacDonald.

Hello to everybody on the call. Our operating priority for 2004 is to return the quarterly revenue growth in the second half of the year while improving profitability and generating free cash flow. Today I would like to provide an update on our progress to date starting on Slide 7. An important component of our revenue growth initiative is the expansion of our distribution channels. Late last year we doubled the sides of our quota carrying salesforce. This change has achieved its desired result as we have significantly increased new sales volume consistent with our plan.

Our salesforce in the United States is having considerable success with several major wins and with many more in the works. We recently won a significant piece of business with J.P. Morgan, one of the world's largest financial institutions, to provide an advanced Canadian call center solution.

Canadian U.S. border is the most highly trafficked telecom quarter in the world and we believe there is an opportunity in offering Allstream's world-class contact center solutions and expertise in delivering seamless cross-border services to U.S.-based companies. In addition, the Company has expanded its addressable market for rapidly growing transparent line Ethernet services from 5 percent to 54 percent of Canadian business locations.

Turning to Slide 8; in addition to our expanded distribution channels we are arming our salesforce with an ever-improving array of capabilities. During the last six months, we have launched 8 Next Generation services with more to be introduced in the coming months. Let me provide some additional detail on the new services we introduced in the quarter. Our managed line service enables customers to outsource the management of their enterprise line infrastructure to Allstream, assuring business continuity through a stable and secure line environment. Managed line service is built on Allstream's state-of-the-art IP infrastructure and is an important element is supporting customer migration to enterprise great converged services such as voice-over IP and wireless LANs.

Our Hosted Contact Centre solution offers enterprise as the opportunity to outsource the management of their contact center and to benefit from Allstream's advanced contact center technologies. With a per seat pricing model, customers pay predictable monthly fees, avoid significant capital expenditures and avoid the risk of technological obsolescence. This service is an important enhancement to what we already are considered to be one of the most advanced contact center portfolios in the world.

Also during the quarter we introduced wireless high-speed Internet access which utilizes our broadband wireless venture technology platform. This service will target the SOHO market, small business, teleworkers, and enterprise customers with remote branch locations.

Just a brief commentary, having the products in the market is one thing. Next involves a ramp up to educate customers and our salespeople as to the advantages of moving forward with these new offers and it does take some time.

Moving to Slide 9, with our national IP infrastructure in place, we are well-positioned to support the entry of other service providers into local telephony including our own broadband wireless venture. We will support these services with products ranging from basic PSTN access to a fully managed outsource VoIP service. In fact during the quarter, we entered an agreement with Primus to provide PSTN and local access connectivity in addition to 911 service for their talk broadband voice offering.

On to Slide 10. Allstream has improved customer satisfaction significantly in each of the last two years. I am pleased to report we are still on track to improve customer satisfaction again in 2004. Through our customer practice model, we are insuring that every customer touch point in the organization that our customers receive a differentiated, consistent and valuable experience. And we are developing a deep knowledge of our customer's business and industry drivers so that our largest and most important customers will consistently view us as partners. We're gaining some success. In a recent survey of telecom decision-makers, Allstream scored higher than the incumbents in the important areas of overall quality, network reliability and service design.

These results support our conviction that Allstream has the infrastructure and service capabilities to deepen our competitive position in the Canadian marketplace. In addition, it has been nearly a year since we launched the Allstream brand. I am pleased to report that independent research and feedback from our customers tells us that we're executing on our brand strategy. The Allstream brand truly stands for our position as a leading telecommunications solutions provider that consistently delivers on the promise to be an innovative agile and collaborative partner for customers.

Turning to the next slide, with our expanded distribution channels new product offerings and leading customer service, we are winning new business and expanding our relationships with existing customers. This is all great news but news in an environment of relentless reprice and churn on legacy services. Let me provide some details on a few of these wins. During the quarter we renewed our significant relationship with IBM Canada to provide advanced voice service capabilities. In addition, we won new business with UPS to provide a seamless North American voice solution connecting their Canadian contact center locations. We also entered into an agreement with Hewlett-Packard to manage an MPLS Ethernet based network solution and we expanded our relationship with the Royal Bank to provide Gigabit Ethernet connectivity services for two of their data centers.

On the next slide, during the quarter we selected Alcatel's next generation IP service router to enable our national switch gigabit Ethernet solution. This network enhancement supports Allstream's ongoing investment in Next Generation IP services. We will continue to invest in our state-of-the-art IP infrastructure to enable our customers to migrate to enterprise grade converged services such is IP telephony, unified messaging and video content services. Allstream has been offering IP base services since the year 2000. Customers can expect us to lead others for IP services within Canada and internationally.

On Slide 13, we joined forces with Microcell and NR Communications last November to use advanced wireless technology to offer high-speed Internet IP based voice and local networking services to selected markets across Canada. The venture is currently in trial with the launch of networks in communities near Vancouver at Ottawa. The venture is structured as a wholesaler to allow other service providers to use the technology for their own commercial applications. There has been very strong interest with AOL Canada currently conducting trials in Toronto and with other deals in the works. In addition, Microcell has already launched iFido, a residential wireless high-speed Internet service being offered through that venture. Allstream will sell services to the venture including access to our national IP network and local facilities as the venture evolves and grows. Allstream and its partners are currently evaluating the results of the market trials in Richmond and Cumberland to determine the ventures next steps.

Finally turning to Slide 14, we will continue our pursuit of regulatory change to improve the balance between incumbent providers and competitive entrants. At present we await further rulings from the CRTC concerning tariff access to incumbent Next Generation network facilities and services and broadband competitive digital network access. We remain hopeful the regulator will issue decisions both of those of these matters shortly.

Late last year the CRTC expressed its intention to address the anticompetitive pricing policies of certain incumbents. We've initiated an application seeking to have the CRTC deny approval of Bell Canada bundles CRTC has already found to be illegal and to place a moratorium on further customer specific arrangements pending conclusion of Bell's appeal of the CRTC's decision. Allstream remains determined to ensure that the regulatory safeguards are in place intended to prevent incumbent anticompetitive behaviors; they are in place and they are enforced. In addition, Allstream will be an active participant in the recently initiated CRTC proceeding to review the regulatory framework applicable to voice-over IP.

The views initially expressed by the CRTC are consistent with our position that the CRTC regulate services and does not regulate technology. We believe the opportunity exists for further balancing of the regulatory environment and through such changes we can become more competitive across an expanded addressable market.

During the quarter, we introduced new products, we improved customer satisfaction and through our expanded distribution channels we increased sales volumes and won new business on both sides of the border. Our revenues in the quarter continue to show the positive impacts of these initiatives but frankly it is all taking place in a highly competitive environment which I had mentioned earlier on. We are still confident that Allstream's position to take market share from the competition and return to revenue growth in the second half of the year.

With that, I will turn it over to Dave to share some of the details of our financial operating results.

Thanks, John. I will start on Slide 16. In the quarter, revenues continued to show signs of stabilizing while EBITDA, net income and free cash flow remains solid. For the first quarter revenues were 297 million compared to 301.9 million in the fourth quarter of last year with sequential growth in long distance and IT services. Our rate of revenue decline is slowing with the decline in Q1 being 4.9 million compared to Q4, whereas the declines were 7.3 and 15.7 million in the two previous quarters. Revenues from all non-long distance services including local, data, Internet and IT services are 65 percent of total revenue, up from 62 percent in the first quarter of 2003. Long distance revenues now represent 35 percent of total revenue, down from 38 present in Q1 of last year. In 2004 we continue to shift toward higher margin and higher growth products. The following detailed discussion of revenue I will exclude from the prior period revenues of divested subsidiaries, Contour and Argos. So in the quarter, revenue from Next Generation data and managed network services continued to grow, however, with general market weakness in enterprise data and pricing pressures in certain legacy product categories, overall data revenues declined by $5 million from last quarter and 13.5 million compared to Q1 of last year.

We continue to experience growth in our managed network security practice; however, overall Internet revenues were down 500,000 from Q4 on reduced dial-up access revenues. As you know, that is not an area we are focusing on anymore. Compared to the same period in 2003, Internet revenues improved by 400,000.

IT services revenue improve 1.8 million or 16 percent from last quarter as we have seen renewed spending interest in IT consulting services. Combined revenues from data, Internet and IT services now represent 47 percent of total revenues, up from 45 percent a year ago.

Local services revenues declined by 1.4 million from the fourth quarter and 3.6 million compared to Q1 of last year and this is consistent with our strategy to target higher margin local lines on the Company's own network. Overall local service profit margins have improved with a number of local lines in service that are either on net or on switch increasing to 57 percent from 54 percent a year ago.

Long distance revenues grew by 700,000 from last quarter, due to a 4.5 percent increase in minute volume, partially offset by a 3.9 percent decrease in average price per minute. That is not elasticity coming back into the long distance market; it's incremental business. Compared to the same quarter in 2003, long distance revenue declined by 24.8 million the results of a 6.5 percent decrease in minute volume, and a 12.7 percent decline in the average price per minute.

Turning to Slide 17, gross margin in Q1 of 43.9 percent has improved 510 basis points compared to the same period last year. First quarter EBITDA of 50.4 million showed continue strength and was generally in line with our expectations. Included in EBITDA in the quarter were several items that are expected to be lower in the remaining quarters of 2004. These include $8 million in employee severance costs as we continue to execute on the employee reductions we have mentioned previously. And increased cross-border settlement costs of 7.2 million due to higher rates. These cross-border rates are expected to decline starting in Q2 as volume thresholds with U.S. carriers are reached.

In addition, payroll taxes are always higher in Q1 compared to Q4 and that contributed about 5.9 million to SG&A in the quarter. Partially offsetting these charges was a regulatory cost reduction of 4.1 million which relates to the resolution of a number of prior period regulatory items.

Further explaining the variance between Q1 of this year's EBITDA compared to the fourth quarter of last year is that we had lower branding costs or rebranding costs of 5.8 million. As that effort is now essentially complete and in Q1 we had lower variable pay expense of 6.9 million. These benefits were partially offset by increased stock option expense of 1.7 million. As we previously mentioned, we have adopted the new accounting rules for expensing of employee stock options.

Q1 EBITDA declined by 15.9 million compared to the same quarter last year. That decline in EBITDA is attributed in part to a decrease in gross margin of 6.9 million on lower volumes. While revenues were lower compared to last year, gross margin as a percentage of revenue improved, the result of operating cost savings, product mix changes and regulatory cost reductions. In addition SG&A expenses increased from a year ago by $9 million due to increased severance costs and the expensing of stock options in the period.

On Slide 18, we have summarized our performance in generating consistent improvements in margin as a percentage of revenues since the first quarter of 2002. Increases have been seen at our data, Internet and local productline, while margins and long distance have been relatively stable so there is no loss leaders within our product portfolio.

Moving onto Slide 19, I will note this is the seventh consecutive quarter that the Company has recorded positive income from operations and we expect this to continue. Looking at net income, this is the fifth consecutive quarter the Company has generated positive net income. As you can see Q1 of 2003 included interest costs and foreign current translation adjustments related to the pre-restructuring public debt that make the two periods not comparable at that level.

Our net income includes a provision for income taxes of 10.8 million in the quarter. 10 million of this amount does not give rise to any cash tax liability as we are able to use our tax loss carryforwards to offset it. The rules for fresh start accounting require that utilization of our tax laws carryforwards be recorded as contributed surplus on the balance sheet. If this accounting treatment weren't required, net income would have been 25.4 million.

Turning to a discussion of liquidity on Slide 20, during the quarter we generated 25.6 million of free cash flow; that is the fourth consecutive quarter that the Company has generated positive free cash flow. The Company ended the quarter with approximately $270 million representing a decrease of about 76 million from last quarter. That changes the results of the positive free cash flow offset by the payment of our special dividend in January of 69.4 million. And the payment of incentive based compensation for 2003 that we paid in the first quarter of about 24 million and an approximately $9 million payment representing the final installment on our 2003 pension funding obligation.

Deferred pension liability on our balance sheet is being funded over a five-year period in accordance with pension rules in Canada. In 2004, our required funding will be approximately $30 million for that deferred liability; a little lower than last year due to the strong investment returns generated by our pension investments in 2003.

Turning to the next slide, as we noted last quarter we expect future capital spending to be approximately 10 percent of revenue. Our CAPEX in Q1 was approximately 10 percent at $31 million. The majority of these investments will be in Next Generation network development and service enablement for converged IP services. In addition, we are investing in our BackOffice for productivity gains and in customer service enhancing initiatives.

On Slide 22, our outlook for the year remains unchanged. To reiterate, we expect to achieve quarterly revenue growth in the second half of the year. From a margin and expense standpoint, while they cost of our successful brand transition are essentially behind us, in 2004 our product development and new service launch costs have increased in support of those new revenue generating initiatives. And we have also adopted new accounting rules related to the expensing of stock options. As a result, EBITDA for 2004 will be relatively stable compared to 2003 and the Company will continue to generate strong free cash flow. As previously mentioned, we expect capital expenditures will be approximately 10 percent of revenue for the year.

Let me stop there and we will take your question. Operator?

(OPERATOR INSTRUCTIONS) David Lambert, TD Newcrest.

First of all, I was surprised by your revenue mix. I was wondering if there are factors sort of like seasonality that could be explaining the increase in LD and decrease in data and Internet?

I don't think it is seasonality as much as it is just we have various programs within the organization to focus on, various aspects of the business. For example, in terms of the LD side of things, folks -- we were looking at declines relative to transit and settlements for example and there was a focus in the quarter to actually improve that. I can't say that that's going to continue for the balance of the year but certainly I would say it was an unusual situation in the first quarter to see that level of intensity with LD. We still are holding all the salespeople feet to the fire in terms of finding any opportunities that might exist out there.

As I mentioned in my remarks the pricing in LD is still continues to be under a lot of pressure. It is something that's quite frankly -- what we're doing is we're focusing our salespeople on selling the Next Generation services as opposed to just what we would refer to as Legacy services. But as opportunities exist, they are going to grab below hanging fruit.

Is it possible to give us some measure of productivity improvement in your salesforce? You said in previous quarters that you are trying to double your quota productivity and I'm not sure how you stated that but give us some sort of metric going forward?

I will give you one metric that we are using this year, Dave. We are looking at bookings whereas in the past it was basically they were compensated and measured purely on revenue and retention which involved perhaps a lot of reprice. Now we want to turn them into rather than just pure defenders into hunters. So bookings becomes a major measure of success in the marketplace and we are fundamentally on track for the first quarter in terms of what we expected to see from the salesforce in terms of new bookings which represents a significant increase over last year. I believe, Dave, correct me if I'm wrong, but Q1 of this year over Q4 of last was like a 75 percent increase in new bookings.

The new bookings, these are orders that are taken that don't necessarily translate immediately into new revenue. You have to look at many cases, it could be a complex service that has been sold and it may take in some cases a number of months before it actually translates into revenue. That is certainly very encouraging. It is still very much a work in progress. When Tal Bevan joined the Company back late last year he went through basically retooling the whole salesforce and reorienting exactly how they are going to be operating and that is still very much a work in progress. But we are very encouraged in the results we have seen to date.

Just clarify the 75 percent increase in your bookings, is that in the number of bookings or in the dollar value?

Dollar value.

Dollar value. Okay. The $7 million higher cost related to long distance, is that expected -- is that 7 million that is expected to be eliminated in future quarters or is just being reduced?

I would say it is being reduced. As we hit our volume thresholds with certain cross-border carriers, we will get into some lower rates so it will come down, it won't go away.

That is great. Thank you very much.

Glen Campbell from Merrill Lynch.

Just following on the questions regarding the costs expected to be lower -- I mean the severance number looks pretty straightforward but those other items -- just trying to get a sense of the magnitude of the difference between the Q1 results and what you are seeing in the back half of 2003 on payroll taxes and cross-border settlement costs?

Glen, I'm not going to give any other numbers other than what we have given here. The cross-border settlement will depend on volumes to a large degree. The payroll taxes, not unlike a lot of companies I guess that have variable pay programs across their entire employee population, we paid the lion's share of our employer payroll taxes in the first quarter because of those variable comp payouts. Neither of those numbers are going to go away but they are going to be meaningful reductions. I'm not going to get any more specific than that.

On the severance side and qualitatively, does this number reflect what is needed to integrate post merger or is that going to be a whole separate issue?

No, this severance charge in Q1 or costs in Q1 are related to the folks that have left the Allstream business, have nothing to do with what may or may not happen as a result of transition issues and opportunities with MTS. We said at the beginning of the year that we would look to improve productivity in Allstream as a stand-alone business. This is part of that. Anything that happens as a result of the transition thinking and discussions and actions with MTS, I guess the joint, we will explain that when the time comes.

On the Bell Canada call there was a comment made that industry revenues in the enterprise segment will likely dropped around 5 percent in 2003. I'm wondering if that number seems reasonable to you and I guess more importantly, looking ahead what you might see that might change that decline in the industry growth rate for enterprise?

I wouldn't disagree with the number for '03 compared to '02. But if you look at '04 and this is not just gut feel, it is certainly based on conversations with our customers. Our expectation is that the market will be flat. There will be parts of the market that will be declining, obviously if you look at expectations in terms of LD pricing for example and some legacy services. But there is I would say north of 25 percent growth in what we call Next Generation services in particular, services such as Gigabit Ethernet and TLS, etc. As more and more customers look at getting their infrastructure on a more converged Next Generation platform. That of course has a backward effect in terms of moving on Legacy data products, but when you net all those things out to gather, my view would be is that we're talking basically a flat maybe slightly negative market in '04 relative to '03.

Don't forget that are market scope is not just pure connectivity. We also sell infrastructure management services; some of the new products and services I referred to earlier not just pure connectivity plays, as a matter of fact, the managed contact center as well as managed land service don't fall into that category or at least not the traditional connectivity category. Our ITS success in the quarter also is quite encouraging where we actually saw revenue growth compared to Q4.

When you look at the complete scope of products that we can address to the marketplace, we think that there are opportunities in a flat market to gain share. We have probably, not probably, we actually have the largest security practice in Canada right now. And our security sales continue to be in March for example they are the highest they have ever been in our Company and they continue to be very strong. As more and more enterprise customers are concerned about things like viruses and worms those types of things. But that would be our overall perception of the market.

That is very helpful. One last one if I might on Anushuk (ph) . If the decision is made to go ahead with the launch -- that is an assumption I'll make, could you talk a little bit about what a rollout might look like? Does it take a -- can a major city be brought up in a couple of months or is that a matter of a year? Would you think the rollout would go one city and then see or would it be fairly broad and fast? Can you give us a general sense of what the -- ?

We believe that the rollout will certainly happen; there is no question about that. It can go very, very quickly. And dramatically less cost than anything we have ever been used to in the past and I don't want to share with you exactly where and when. But it will all began in the very near future and it will be a rollout not region by region but it can go across quite a number of regions at the same time and it will be at dramatically less cost than any asset deployment you have ever seen before.

With that and with what is going on internationally, can we expect a significant reduction in customer premise equipment costs?

We are working on that and the CPD gear right now which is basically just a data port at this time will also include voice within a couple of months. But the price that we are really looking at is in the 200 to 250 U.S. range. We think that is very attractive.

Thank you very much.

Dvai Ghose from CIBC World Markets.

First question to Dave. I'm a little confused about your guidance on EBITDA here. The reported number obviously was down 24 percent year-over-year. I understand there is lots of extraordinaries here, but it looks if you normalize, you are still looking at a 4 to 5 percent decline in EBITDA. So my question is when you say that EBITDA should be at similar levels in '04 versus '03; first of all, are you referring to the 254 million in '03 or are you normalizing for these items?

Secondly, even if you are normalizing it seems a little bit of a challenge from here. Is the main emphasis going to be revenue increases? Is going to be a turn around in the margins? Are there more regulatory relief issues to come down the pipeline? Because I am certainly finding it difficult to get to 254 million in '04.

We remain confident that it will be our EBITDA for this year as we have said, my words, relatively stable. I forget the exact phrase you used but it will come in part from all of those things excluding regulatory. We haven't factored any incremental regulatory change in here but that doesn't mean we're not working on it. It doesn't mean that we are not hopeful that it will happen. But it is not factored in. It does come from changing the slope of the revenue line. It does come from holding and in some areas, improving our gross margins and certainly controlling our SG&A expense. If you look at the costs that we explained in Q1 of this year, I think our guidances still very good and very achievable. We are very confident.

Just to confirm though. The guidances will be around 254 or 254 offset by these items?

It will be relatively stable to the number reported last year.

Okay. In light of the MTS merger what sort of impact do you see, if any on your long haul traffic from MTS assuming that they're going to migrate over time from Bell's networks to your networks?

In terms of volumes?

Volumes as well as revenue.

Quite frankly that is something that is still a work in progress as the teams will get down to brass tacks in figuring out exactly what volume impacts, what advantages could be realized to the overall Company associated with that. There are a significant amount of the $40 million savings or synergies that have been announced relative to the acquisition or associated with those kinds of initiatives. For example, if we're talking about U.S. termination, are there advantages to not just ourselves but also to MTS in terms of increased volumes getting lower, lower prices, things such as Internet transit, things such as database dips. These are all factors that are being analyzed as we speak in terms of the opportunities that they might represent in terms of lower cost.

That makes sense. The decline in access lines obviously has been somewhat driven by your intentions to get out of resell businesses. When does that come to an end and does that coincide with your projections for sequential revenue increases? Also tell us on their call, certainly they changed their nonincumbent wireline guidance, arguing that they are being more aggressive with larger, longer-term contracts with PD, cooperators, etc. Is that having a negative impact on your business?

No, certainly all of the individual major contracts that they have talked about and announced we are well aware of. We don't see the competitive landscape in terms of the enterprise solution as changing significantly. It is basically still the usual suspects competing aggressively for the same amount of business. As I mentioned, it is still very aggressive. But we still think there is an opportunity to move up the food chain and start talking to our customers less and less about how our long distance minutes are better than Bell's or TELUS' long distance minutes and start talking about how we can enable new revenue generating our cost reduction applications that a customer might have that might require a high performance network. Or talking to a customer how if they don't have the appropriate security and firewall solutions in their company, then there is a vulnerability to business continuity. And that is sort of the change that we are moving towards quite frankly.

On the access line side of things, it is just basically staying the course we talked about. We're not actively out there selling access lines where it is not probable. We are on the other hand, we are in areas where for example selling PRI's to new entrants who want to get into telephony using VoIP technology then that is clearly a focus for us. We do see an opportunity to work with all of the new entrants, both the players such as Primus; I guess Navagata is now in the marketplace, Vonage is in the marketplace. Vonage, it doesn't represent an opportunity for us at this particular point in time; I think they have gone with somebody else. But certainly we are talking to all of the large cable companies, the small cable companies and looking at how we can offer them a variety of solutions, including the local network and the connectivity as well as a full meal deal which would include all of the soft switches and the back office associated with getting them into business.

Thanks very much. Given this is probably your last call as a public Company, I would like to extend my thanks to all of you for your great work over the last couple of years.

John Grandy of Orion Securities.

I would like to focus on the sequential decline in gross margin which I think is the first decline we have seen in your gross margin in about three years. You have highlighted the U.S. traffic impact, is there some change in your contractual arrangement with AT&T Corporation that is having an impact here? Second part of that question is was there a similar impact in Q1 of '03 that we should look back to? Is this something that happens every year?

I think if you look at Slide 18, those of you that can still access that is that gross margin as a percentage of revenue that we spoke of sequential increases in gross margin. The other time, you are right, the other time where our gross margin as a percentage of revenue declined is as we went from Q4 of '02 to Q1 of '03. Again at that point, I recall that again it was related to the initial traunche of cross-border minutes being contracted at a rate that then declines when you hit a volume threshold and those things started to kick in subsequently to Q1 in '03. This is something that has occurred in the past; whether it will occur exactly like that in the future years depends on how things are contracted between us and the other carriers and how those market pricings evolve. But certainly we expect '04 to be consistent with '03 from that perspective.

Any AT&T, any changes there or is it just business as usual?

Our relationship with AT&T remains really solid. Prices will change year-over-year in the contracts but no major change in our relationship. We are continuing to do great business with AT&T together with AT&T.

Okay one last segment, question I guess. Can you help us by giving us any the guidance for gross margin for the balance of the year?

No, we're not going to get into incremental guidance at this point. I think we will stay with the qualitative guidance that we have given on the items at this point.

Thank you.

Peter Rhamey from BMO Nesbitt Burns.

Looking at your data, the sequential decline in data and you may have discussed it, I was wondering if you can provide us a bit more insight? First of all, what comprises your data revenues, I believe it is T-1, Frame Relay (ph) and ATM and if that is true, what is happening there? How should that continue going forward? What kind of a price pressure are you seeing? And then I would like to follow up with some cost questions.

If you look at the data revenues IT includes Private Line, Frame (ph), Business IPH (ph), TLS, GigE, and the whole alphabet soup like Ethernet Private Line and a new one we announced as well this past quarter. What is happening there basically is that there is as I mentioned earlier on, there is growth in the next generation IP based fabrics which by the way, there is price pressure on them but there is also some capital advantages for us in terms of deploying that infrastructure. Anything based on Ethernet at this particular point in time is very much more cost-effective from a capital deployment standpoint and much more granularly deployed, if there is such a word, relative to the success in the marketplace. People are buying data services now the way they buy PCs.

I guess, John, what I am looking at is you did 96 million roughly in data revenue in your income statement. The Internet and IT services I thought were of the value added, the high-end thing. So it has been growing at a sequential rate of maybe a couple million or 1.5 million Q1 versus Q4. But what I'm wondering is does data in your income statement represent your legacy business and -- when I look at the sequential decline Q3, Q4 it was about a million, and then you move on to Q1 and you see a sequential decline exhilarating to 5 million. I'm just wondering, are picking up here in acceleration in price declines in the Legacy business? I was just hoping you could help us out in that?

You are right. In terms of the classification part of your question certainly our data category includes Legacy as well as some of the new stuff, so it is mix. The pricing in the market that is occurring these would be orders we received sometime in the last two years that are impacting data obviously, and the change being more the older ones dropping off and the really new ones adding in. We continue to see pricing pressure. We would be kidding you if we said it is not still there, it is not still an important element of the market. You referred to contract announcements by -- I'm sorry someone else referred earlier to contract announcements by TELUS, and I think largely those were data and as a result of what they have been doing, they have taken their non ILEC guidance down on EBITDA. That does have an impact on the market, so we are trying to introduce products that have different value propositions for people that are unique to give us a competitive advantage and that is how we're trying to combat them.

Peter, we don't see them in the marketplace itself. Any discontinuity in terms of all of a sudden pricing has ratcheted to a different level relative to data.

So it is the same trend, just lumpiness as the quarters go by here?

I would say it is more that.

On the cost side you took a severance charge. Could you remind us how many people that involved and whether you got the full benefit in the quarter of the cost savings associated with those (inaudible)?

Certainly did not get the full benefit. Those people didn't all leave early, early in the quarter. In terms of the number of people, it was approximately 200 -- I don't have an exact number but it was approximately 200, Peter.

That would be consistent with what you reported quarter-on-quarter, the sequential decline in employees?

Yes.

On the payroll trend in terms of taxes, I will put it to you this way, Dave. How did it trend last in terms of --?

Same way in terms of Q1 being heavy. I don't recall what number I used last year at this time but I would certainly be using the same explanation that Q1 was heavy for the same reason in terms of the variable pay payouts.

And the delta between Q1 and Q4 was that a 3, $4 million number or something larger, do you -- ?

Peter, I just don't the number off the top of my head from a year ago, sorry.

Very good, thank you.

Jonathan Allen (ph) from RBC Capital Markets.

It certainly seems with the number of the announcements you been making in terms of broadband wireless and some of the support services that you have been offering for voice over IP initiatives in the consumer segment, do you see any possible conflict there with MTS's ILEC status? Is this something you have discussed with them or perhaps just avoid the Manitoba market?

No, we are staying true to the strategy and it is not just in terms of the new products and services but also from a regulatory perspective. We think that in terms of the growth opportunities it represents for the combined entity to continue along that trail makes a lot of sense. If MTS was not as well-positioned as they are right now relative to their -- not just their relationship with their customer but the infrastructure they have deployed within the province of Manitoba, I suppose there might be a different discussion but they are very well-positioned. I was quite impressed with what they have got in the way of infrastructure deployment for not just high-speed data but also video services as well. They are pretty confident in terms of their ability to defend their territory against any sort of attacker. It is always that classic trade-off between how aggressively do I sale wholesale, are my retail operations going to try to constrain me. But my experience in telecom is that you just basically drive as much as you can out of both channels and make sure that you have the separation between them so that there is obviously no conflict.

So there wouldn't be much in the way of hesitation if say Primus or any of the other voice over IP carriers wanted to roll out in Winnipeg?

We have the agreement with Primus if they wanted to do that then we would follow them there and provide PSTN connection.

Perhaps we could switch tracks and talk on the regulatory side. Back in February we had the interim decision on access to next generation services at rates proposed by Bell Canada. From what I understand there has a push to actually reduce those to a cost plus 15 percent level. Perhaps you could comment on any discussions that have been under way and if you could perhaps quantify if that change in price occurred, what would be the cost impact on Allstream?

From our standpoint we're not looking at that particular initiative as like a cost reduction initiative, we are looking at it as an opportunity to expand top line. Because we only quote business where we can actually make some money. So what this will do is in effect expand the footprint of the network into higher speed services. And we think that our arguments are consistent and they are appropriate arguments in terms of what represents a monopoly or regulated service. We think that was probably the most important part of the decision the interim decision was that the commission did not say that those services are foreborn (ph) . So now it is just a matter of working through the details as they fine tune exactly what components of the offer actually our cost plus 16 percent or whatever that figure might be. And that is where the work of the discussions are at right now.

I believe you said you expect a decision on that sometime in the near future?

Last quarter we would have said by June. We are still hopeful. We keep pushing the CRTC to get these decisions out the door as quickly as possible, but they obviously have a lot on their plate at this point.

I noticed in the MD&A that you indicated that you expect the MTS- Allstream transaction if the vote later today goes ahead; you expect the transaction to close late May, early June. That seems to be in advance above what MTS had previously been talking about in the late June at the latest time period. Has anything changed?

No, I think the late June timing that MTS was probably talking about was a while ago they were talking about when their annual general meeting would occur, and I remember them saying late June. I don't recall if they've scheduled that yet or not. But with respect to closing this transaction, we have always been consistent that subsequent to this vote we would work diligently to get this thing closed as quickly as we could but no later than early June.

Thanks very much.

Gentlemen, we have time for one final question. Jim Cicora (ph) from National Bank Financial (ph) .

Following up from Peter's question earlier; on the data line you showed a 12.4 percent year-over-year organic decline. Just want to get a sense of how much of that is from pricing and how much from volumes? Looking forward, we received some comments earlier in the quarter from the likes of BCE that volumes seem to be stabilizing. I was wondering, are you getting that view as well?

I would say most of it is pricing, not volumes. Obviously, like I said earlier the customers buy this stuff like they buy PCs. They want quadruple the capacity for the same or lower price. If you looked at the actual traffic I suspect that you would see that the bits that are actually being transmitted or would be increasing significantly. The key thing from our perspective is actually to make sure that the growth parts of that data portfolio in particular when we are talking about PLS and GigE, for example, is that we have the absolute best most highly featured products in the marketplace. So that we can get our disproportionate share of that growth. But the overall fundamental within the market is decline in some of the legacy services and they are talking about ATM and Frame. I find it hard to believe I'm calling ATM Legacy -- not too many years ago it was considered to be state-of-the-art. That is the focus and if you look at the product offers that we've had in the first quarter and we are going to continue to launch throughout the course the year, they will all be in that IP, Ethernet space.

I just want to clarify, on the long distance that the 19 percent organic decline, that was 13 percent for pricing and the rest from volume, is that correct?

Let me go back and double check. The decline compared to Q1 of last year you're referring to?

Yes, excluding Contour.

It was about 6.5 percent volume and about 12.7 percent price.

Thank you very much.

Gentlemen that was our final question. Please continue.

Thank you everyone for joining us this morning. Rebroadcast of this call will be available shortly on our Website or by dialing the replay number provided in today's release. That concludes our call. Thanks again.

This concludes our conference call for today. Thank you for participating, please disconnect your lines.