IDT Corp (IDT) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your ITT Corporation Q1 '05 earnings release conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Jim Courter. Sir, you may begin.

Good morning and welcome to IDT Corporation's earnings call for the first quarter of our fiscal year 2005, which ended on October 31. I'm Jim Courter, CEO and Vice Chairman of IDT.

Before we begin, I must caution all those listening today about any forward-looking statements that you may hear during the course of our conference call. During both the prepared remarks and the question-and-answer period that follows, we may make forward-looking statements, either general or specific in nature. These statements are subject to risks and uncertainties that may cause actual results to differ materially from results that we anticipate. These risks and uncertainties include but are not certainly limited to the sensitivity of our telecommunications businesses to declining prices, our reliance on success in the prepaid calling card market, our ability to obtain cost-effective termination capacity worldwide, our reliance on the financial health of other telecommunications companies that are our customers, the impact of the changes to U.S. and foreign regulations, increasing competition in the consumer phone service market, our ability to integrate and manage acquisitions, our ability to effectively develop and produce animated films, our ability to protect our proprietary rights, general economic conditions in the global telecommunications market, the general condition of the economy of the United States and internationally, and any of the other specific risks or uncertainties discussed in our reports filed with the SEC.

We assume, as you know, no obligation to update any forward-looking statements that we have made or may make, or to update you about the factors that may cause actual results to differ from those that we have forecasted.

Now, to our most recently completed fiscal quarter. Fiscal 2004 is a tough act to follow, but I'm pleased to report that fiscal 2005 has started on the right foot and promises to be another year where records fall. We continue to grow our revenues, we have solidified the success of our Entertainment division, and we have controlled the losses from the restructuring of IDT Solutions, while continuing to invest in the future. We continue to adhere to our strategic goals while remaining flexible and opportunistic when circumstances warrant.

Before we discuss the first quarter, let's talk about two significant announcements from our earnings release. First, we've announced that we are in negotiations with one of our major shareholders, Liberty Media Corporation, to acquire all of Liberty Media's direct and indirect interests in Net2Phone. Liberty Media has long been a major investor in IDT and Net2Phone, and all three companies have reaped the benefits of the strong relationships that exist. If the transaction is consummated, we will extend our control over Net2Phone, increasing our stake in Net2Phone to approximately 41 percent of the equity and a majority of the voting power. Accordingly, we would continue to consolidate Net2Phone's results with our own.

The current proposal is to purchase the Net2Phone shares owned or controlled by Liberty Media in exchange for approximately 3.75 million shares of IDT Class B common stock, which would increase Liberty Media's stake in IDT to approximately 17 percent. This would provide a strong show of support by Liberty Media in the investment opportunity represented by IDT stock. There is no assurance, of course, that a definitive agreement will be reached or that any additional extensions will be agreed to by the parties.

Second, IDT Entertainment has announced the appointment of Janet Healy as President of Animation Production. Ms. Healy brings to us over 30 years of production experience with over 20 years in animation. Most recently, she was head of Digital Production for DreamWorks Animation, where she was a producer of the CG animated film Shark Tale, which has grossed over 300 million at the Box office worldwide. Prior to DreamWorks, Ms. Healy was ahead of Digital Production at Walt Disney Feature Animation and was a senior producer at Industrial Light and Magic. Ms. Healy is now responsible for the oversight of all of our animation Studios.

In addition to Ms. Healy, IDT Entertainment expects to add more top management talent over the coming months.

Now onto our first-quarter results. We recorded our thirteenth consecutive quarter of record revenue company-wide with overall revenues of almost $630 million. Our Telecom division remained steady on the revenue line compared to last quarter's record revenues and grew its revenues over 18 percent from the prior year. We are particularly excited by the gross margins we have generated from our Telecom and other operations. As a greater portion of our Telecom revenues come from our higher-margin consumer phone and calling card operations, the gross margins of our telecom division was over 24 percent, the highest level in almost two years.

Our Entertainment operations contributed more to both the top and bottom lines, as it continues its growth as our second most significant business unit. Overall, IDT recorded gross margins in excess of 25 percent, the highest level in six years.

On the bottom line, our net loss shrank 16.1 percent from the net loss for the first quarter of fiscal 2004. This improved performance is further evidence of our ability to move towards our goal to create positive net income and operating cash flow on a consolidated basis while continuing to make significant investments to grow our business.

While other companies are exiting entire segments of the telecom industry, we continue to improve our operating performance, expand our consumer phone-service offerings and invest in the future. We are expanding to additional markets in Western Europe, Asia, and Latin America and expanding the scope and breadth of our operation in existing areas, particularly in the United States.

We're being increasingly recognized as a significant player in international voice traffic, and we are ranked third, only behind AT&T and MCI, in terms of international minutes carried according to Telegeography Reports. Our overall minutes increased more than 23 percent from last year's first quarter to over 5.880 billion.

At the end of the quarter, we had over 300,000 customers in 13 states for our America Unlimited flat rate plan. We continue to see attractive growth of new customers and migration of our long distance customers to these plans, which generally represent significant high revenues per subscriber.

We expect, as others do, a decision from the FCC shortly on potential changes to the UNE-P wholesale lease rate, and we will evaluate the outcome of any decision after it has been made. We have developed strategic plans based on a number of different scenarios, and we will execute and announce any change to our current plan accordingly.

IDT Entertainment posted strong gains in both revenue and income from operations in the quarter, as it now has had a full year of integrating several of our key acquisitions. Anchor Bay, our distribution arm, has recovered from the temporary disruptions caused by a shift to outsourcing some fulfillment and logistic functions to Fox Home Entertainment and is reaping the benefit of its typically strong holiday season. We now operate Studios in several locations and utilize their unique talents and experience to match the most appropriate operation for our proprietary and contract-based production work.

We utilize the base and diversity of IDT Entertainment studios and distribution arm to support our develop work on proprietary feature films, where the potential for greater growth and financial returns exist. We continue to work on Yankee Irving, our own animated feature film that was initially directed by the late Christopher Reeve. Mr. Reeve's duties have been assumed by his co-director, Ron Tippe. Mr. Tippe, who was the producer of the 1997 hit Space Jam, which grossed over 230 million at the box office worldwide, is bringing Mr. Reeve's vision to reality. This production continues on schedule and on budget for a 2006 release.

As we enter another holiday season, I am reporting to you strong results, great prospects and exciting times ahead. We will, of course, never rest on our accomplishments. As Thomas Jefferson said, "determine never to be idle." It is wonderful how much may be done if we are always doing. These are simple words, but they convey real truth.

Thank you. I'd like to now turn the call over to our Chief financial Officer, Steve Brown.

Thank you, Jim. Good morning, everyone.

As Jim just described, the first quarter of fiscal 2005 was another strong quarter for IDT. On a consolidated basis, we reported record revenues of $629.7 million; that is a 22.7 percent increase over the first quarter of fiscal 2004. The increase in revenue was driven by solid growth in our telecom businesses and the consolidation and growth of many of our entertainment acquisitions.

Gross margins improved to 25.4 percent from 23.2 percent a year ago and from 24.7 percent last quarter. Margins benefited from a more favorable product mix, as higher-margin Retail Telecom, such as our consumer phone service products, accounted for 76 percent of Telecom revenues, up from 72.4 percent a year ago, versus lower-margin Wholesale Telecom revenues. And, to a lesser degree, on the entertainment side, our higher-margin distribution businesses accounted for greater percentages of revenues versus our contract production service work.

Our loss from operations was $11.9 million in Q1, compared to a loss from operations of $18.4 million a year ago. This represents an improvement of 35 percent. Cash, cash equivalents and marketable securities once again stood at nearly $1 billion at the end of Q1.

IDT Telecom reported revenue of $540.2 million in Q1, which is essentially flat from the record level achieved last quarter but is an increase of 19 percent versus the year-ago quarter. The increase in revenue versus a year ago is primarily due to an increase in overall minutes of use to 5.9 billion minutes, up from 4.8 billion minutes a year ago, an increase of 23.4 percent.

The positive effect of the increase in minutes was partially offset by a 4 percent decline in gross profit per minute from 1.19 cents per minute a year ago to 1.14 cents per minute in Q1.

Income from operations was $15.7 million, a 29.4 percent decline from last year's $22.3 million. The decline in operating income is largely attributable to an increase in SG&A expenses due to higher sales and marketing expenses for the consumer phone services businesses in the U.S. and abroad under the Toucan label and increased staffing levels mostly for the development and growth of our international businesses. We expect to continue to focus on expanding our international operations, as they offer the potential for higher growth rates and margins.

Regarding our calling card business, as we described last quarter, we introduced several new aggressively priced cards to rapidly gain market share in some of our markets, and the result of this plan was a sharp increase in calling card revenues and a decrease in gross profit per minute, resulting in lower gross margin. We had also mentioned that we expected to see an improvement in margins over the next quarters, as we began to increase the permitted rates of many of these cards while holding onto most of the revenue. In Q1, that is indeed what happened; calling card revenues declined slightly sequentially to $326.3 million from $333.2 million last quarter, but were up almost 12 percent from a year ago. However, our profit per-minute increased 9.6 percent to 1.23 cents per minute, up from 1.13 cents per minute last quarter and flat versus a year ago. This is significant because our termination costs have also declined to 5.67 cents per minute in Q1, which is 3 percent lower than last quarter and over 13 percent lower than a year ago.

We continue to grow in our existing markets, and we continue to expand our service offerings to new markets. In the United States, our core markets continue to grow with card revenues in New York up 11 percent year-over-year and New Jersey up about 40 percent year-over-year off a smaller base. As we continue to move across the country, we are seeing calling-card revenues from newer markets, such as Texas, up about 60 percent and Arizona up about 30 percent from a year ago. Revenues for the Midwest region increased nearly 60 percent, including revenues from Illinois, which tripled from a year ago. Internationally, revenues from our South American and Asian debit operations have more than doubled year-over-year.

Our consumer phone-service businesses posted revenues of $84.8 million, up 8 percent from last quarter and more than double from the $37.2 million recorded in the year-ago period. We now have approximately 302,000 customers for our America Unlimited bundled product and approximately 374,000 customers for our long distance-only offering.

Gross margin moved up to 51.8 percent in the quarter, up from 49.3 percent last quarter, as average revenue per subscriber moved up partially due to the introduction of new high-margin features, such as the availability of voicemail on the America Unlimited product.

Wholesale Telecom revenues were $129.2 million in the quarter, essentially flat over last quarter and up about 3 percent from the $125.6 million in the year-ago quarter. Gross margins for the wholesale business were 10.2 percent in Q1, down slightly from last quarter's 10.3 percent and down from 11 percent in the year-ago quarter. Wholesale minutes of use increased about 9 percent sequentially and 20 percent from a year ago. However, the gain in Wholesale minutes was offset by the decline in per-minute price realizations.

Now, IDT Entertainment -- IDT Entertainment had revenue of $60.4 million in this quarter, approximately double last quarter's level and nearly five times the year-ago level of $12.1 million. Of course, much of the year-over-year increase is due to the consolidation of our acquisitions that were not included in prior years' figures and most particularly our Retail distribution businesses.

Our fiscal first quarter is seasonally strong for us, especially on the retail distribution side, because our video distribution business picks up notably as retailers begin stocking for the holiday shopping season. Our fiscal fourth quarter, which was last quarter, is typically weaker because it encompasses the slower summer months.

Our revenue guidance for Entertainment for fiscal 2005 has not changed and remains around $200 million for the year.

Gross margin was 30.2 percent in the quarter, up from 12.1 percent in the year-ago period. This dramatic increase reflects the higher margins of our distribution businesses, which are around 40 percent, versus the lower-margin contract production services work.

Going forward, the focus of our Entertainment division will be on producing feature films, which will most likely be distributed through third parties, and producing our own direct-to-video and direct-to-broadcast projects that we own and distribute through our own distribution channels.

Income from operations were $4.6 million in this quarter, up from a loss of operations of $1.2 million last quarter and a loss of $700,000 a year ago.

For further information regarding our financial results, please refer to our press release, and also you'll be able to refer to our 10-Q, which will be filed shortly.

At this point, I would like to turn the call over for Q&A.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Reg King from WR Hambrecht.

Great, thank you. I was hoping that you might be able to give me a little insight into the Retail revenue from Telecom this quarter. I know you saw some strong growth over quarter-over-quarter last quarter, and is it just that we saw the strong growth and the somewhat flattening in the business, or were there some dynamics behind it, maybe with the bundling product or with the calling-card product, that you could give us some insight to?

Good morning. It's Norm Rosenberg. I will take that one. I think that the biggest issue to look at, in terms of Retail, is the comparisons, so year-over-year, there was obviously some very good growth, about 25 or so percent. I think the biggest issue for us was simply that we had a very, very big quarter in Q4, as you recall, that we went from 343 some-odd million in Q3 to about 412 million in Q4, so we were working off a pretty high hurdle.

Going into the first quarter, our plan on the retail side, on the calling card side, was to attempt to improve our margins. We were able to do that, and the idea there was to see how much of our revenue we would be able to keep while being a bit more aggressive in our benefit on the pricing. So that was part of what happened over there.

As far as the consumer phone services business is concerned, what you're seeing is a little bit of a flattening out in terms of our U.S.-based consumer phone services business. On the other hand, you are seeing continued growth, albeit a relatively small number still, on the European side. But overall, that's what happened during the quarter.

Okay, great. Thank you. Jim, I think you mentioned earlier in your comments that you expect some changes from the FCC soon on UNE-P regulations. Do you have a time line on that or do you have some estimate of when you think you might hear from the FCC next?

You know, it's very difficult when you're dealing with the federal government to determine when something is going to happen, but I would imagine it's certainly the first part of next year. I would say sometime during the first two or three months of next year, the FCC will make a final decision. But the real question, this will be the fourth time they are at bat, and they keep hitting home runs, from their standpoint, and then the umpires say, it was a balk (ph) or something and you have to go back. So this is the fourth time. So we don't know, even if they make a new ruling on access -- and they certainly want to discount it because they believe in competition. We don't know if that's going to be overturned for the fourth time by the Circuit Court.

Then finally, I think you talked about Janet's addition to the team. Can you give us a little bit of insight into what other areas in top talent you're looking to fill in the Entertainment Group?

I'm going to ask Steve Brown to answer that question. Morris Berger is not here because he had a death in the family. Steve, why don't you jump in?

I think where the future -- the big upside in the future is going to be coming from the feature films side. We want to add more talent of people who have the experience on the feature films side. The way we look at that is a business, a top business person, a top production person, and a top creative person. So, we will be creating a position of President of Feature Films to handle the business side. We've actually pretty much have circled in on one individual that we are in negotiation with right now.

On the creative side, we've interviewed a number of people for the Chief Creative Officer, and we have some interesting leads over there. Those are the two main positions we will fill. Probably also an expert also on the broadcast side we may bring in in the next few months.

Would that be separate of Janet's responsibilities or would that fall in her (inaudible)?

Janet, while she was the producer of Shark Tale, her strong suit is in building a 3-D animation hub and overseeing all of the animation going on, so she is more on the production side, on the technical side. So, we're looking to add some creative and other business talent.

Peter Gouric (ph) from Card Cap (ph).

Good morning, gentlemen. A question on the telecom and the entertainment side. The telecom would be -- it looks like the addition back of Net2Phone. Do you see telecom routing more over that Net2Phone spectrum? On the Entertainment side, being as you're getting more and more like Pixar with better quality, is there a possibility that there would be a liquidity event to go public here?

Peter, it's Norm Rosenberg. I will start with the telecom question, which I understand is about our ability to use Net2Phone. There are a couple of areas where we can and where we have used Net2Phone, without putting a specific number on the number of minutes that we're going to be able to route over Net2Phone. There are two things. The one thing that we've been able to gain already has been the (indiscernible) expertise that we get from our affiliation with Net2Phone is routing more of our -- all of our traffic on the wholesale side or even on the retail side over VoIP-type of technology. Our network -- and this is something that is somewhat invisible to the naked eye -- but our network tends to be a lot more VoIP intensive, if you will, or IP-intensive than it had been in the past on some indirect level. But that has a lot to do with the fact that we understand the technology and we know people who understand the technology and we are comfortable with it as we build out our network.

In a more direct or I would say tangible sense, more visible to the naked eye-sense, I think that the ability for us to use Net2Phone to provide a VoIP retail-type product to our consumer phone services customers, which are something that is in pilot right now and something that we would like to roll out both in the U.S. and in Europe, is something that's going to be a nice added advantage to us. It allows us to expand our addressable market a little bit by being able to offer it to those people who are looking to get their telephony via a high-speed cable-type line. That's really a benefit that we get from being affiliated with net Net2Phone.

To answer your entertainment question, obviously with the very successful IPO of DreamWorks and the high valuation that is given to their animation business, it's interesting. You know, you do note that DreamWorks' IPO was on the heels of their Shark Tale release, and if we want to get -- if we want to consider this and get the proper valuation, I think the market would need to -- it would have to coincide with our ability to -- when our feature films are ready, and that's not until 2006. So, we will consider all alternatives, but it's a little premature to talk about it right now.

Continue the great work. Thank you.

Donna Jaegers from Janco Part (ph).

Good morning, and Happy Hanukkah. The lead story InteleCard News this month is about the consolidation in the calling card business. I was wondering if Norm could comment on what you guys are seeing maybe regionally, as far some of the shakeout in the business.

Yes, sure. To me honest, most of -- and I'm not familiar with the article yet; I've got the InteleCard News but I'm usually on a two-month lag as far as reading it is concerned. But most of the consolidation we've seen in the industry is not consolidation in the pure sense of one company buying the other; it's more a matter of companies dying off and then the next thing you know, there are far fewer companies than there had been in the past.

Anecdotally, I can say that, in our New York market and in the New York/New Jersey/Connecticut market, I'll call it in the tri-state area here, we've seen a couple of our competitors who had been difficult to deal with or to compete against in the past become substantially weaker and/or completely fall out of business. It has helped us; that's one of the reasons why and I think it was mentioned in an earlier part of the call, if you look at it year-over-year, we've seen some very, very big increases in our core markets, and we've been able to accomplish it without giving away the farm, as far as profit per minute and revenue per minute and margins are concerned. So we have seen a little bit of it.

In some of the newer markets, I guess it has happened. We haven't really seen a huge impact of it. As larger marketshares we have in some of our core markets, it's not going to be as visible to you when some of the other competitors go out of business. But it's the kind of trend that I think will continue. I think that, from our perspective, when we look at things, we like what our cost structure is; we firmly believe that we have a better cost structure in the card business than the predominant majority of our competitors, and so it would not surprise us to see some of these people go out of business or to be swallowed.

Just one other quick question -- there's been some rumors of an experiment with Net2Phone on WiFi, Voice-over-IP in the Newark area. Can you give us any details on that?

We are still very in the early phase of that program. You know, it's a very early technology; we're testing it out in Newark. It's going to be months and months before we really have a handle on the technology, so everyone is talking about it and maybe one day, it's going to be a reality. We think we are in the lead with regard to the technology, but we're just going to have to wait and see.

Richard Klugman from Jefferies.

Thank you, good morning. Norm, you were talking before about the lag effect on the prepaid card price increases. You know, and I'm sorry -- you were talking about how the revenues didn't go down by as much, despite the price increases. But shouldn't we be -- should we be concerned that there could be a lag effect going into the next quarter?

Yes. Look, it is always a concern and it is something that we try to manage as best we can. I think the advantage of it, from a seasonal aspect, is that this current quarter, the November/December/January quarter, is traditionally a very good volume-type quarter because you've got December holiday season; January as well is always a very strong quarter, very strong month. November is, compared to October, usually down a little bit and it's obviously lower than December. What we do is we plot things year-over-year and look at the curves. The curves, by the way, if you look at the past three or four fiscal years by month, in terms of revenue, tend to have just about the same shape year-over-year with a couple of exceptions, just thankfully that it's a higher and higher number in terms of the volumes.

I can tell you that, given the way the card business works where first you sell a card obviously and then eventually we recognize revenue as the usage happens, November was a very strong month for us in terms of card sales, so that provides us with a good feeling about our backlog, if you will. At the same time, we have been selectively offering new cards. We are always offering new cards. I don't want people to get the impression that because we had a period where we offered a lot of new cards at once back in Q3 of '04, that doesn't mean that we're not doing it on a frequent basis; we are doing it in certain selected tested markets.

That having been said, Richard, I think that it's not going to be easy keeping revenue where it is right now, but I think that the revenue level is at least sustainable and as we go through the second half of the fiscal year, it will be something to build on and to take higher.

Okay, that's great. If I could switch gears on the movie timing, you said, in the release, that Yankee Irving will be completed in early 2006. When will it be hitting the theaters? When will you be announcing a signing distributor?

We are actually in negotiations with a third party to distribute, and until this deal is done, we cannot fully talk about the timing, but obviously -- you know, it's subject to the availability that's given to us by the third party. But to the extent we will try to have it released as early as possible that's allowed under the contract. The goal is to have two feature films released in 2006 and then going forward to at least have two CGI animated feature films released per year thereafter.

Okay, a final question if I could? On the balance sheet, I noticed the marketable securities went down and investments went up and both by about 40,000 or so -- 40 million, excuse me. I remember, last quarter, you had talked about making some investments in intellectual property, on the content side, from the entertainment business. Is that what's going on here, and can you elaborate?

No, that's just different from short-term securities to more long-term securities, but it's a combination of long-term funds and some good real estate investments.

Okay, what is the status of that plan for investing in more content?

Again, the goal is to produce two feature films a year. The average cost of our films should be in the 20 to $30 million range. As we get close to a release date, depending on how many theaters that we release it, the P&A can be in the range of anywhere from 15 to $25 million, but the goal on that part is, as these costs accumulate, we hope to have a financing deal done with a major bank that would finance a large percentage of these costs in a manner that's nonrecourse to both IDT and also IDT Entertainment; the only recourse would be the feature films.

Steve Balog from Cedar Creek.

Good morning. On page 2 of the press release, you talk about the increase in SG&A for IDT Telecom, the 55 percent. The three bullets there, could you try to gauge for us how big -- which is the most important of those three factors, or rank them? Then on the third bullet of significant investments and development of new businesses, is said there something about some are non-telecom. Could you shed some light on that for us?

Yes, sure. We're getting little bit of reverb here. This is Norm Rosenberg. This is good. I get to expound on a lot of things that I really look forward to talking about, believe it or not. As everyone has seen, the SG&A for Telecom has gone up quite a bit, both sequentially and year-over-year, and we did outline a few different bullet points. So, to give more clarity on that, when we look at the SG&A, I think that almost all of the gain is attributable to our consumer phone services business, both in the U.S. and in Europe, those are marketing costs; those are headcount costs related to servicing a higher number of customers and a more complex type of customer. In other words, in the U.S. ,we are servicing a local and long distance customer as opposed to only long-distance customer. That is sort of a higher headcount-related type of customer, so there's a lot of that going on. In Europe, our costs are marketing costs related to both advertising and the commissions that we pay to the sales agents that we use to bring in the customers who were building a customer base out there as well. So that's probably the biggest driver.

Then of course, as your revenues go up in that business, you have obviously a reserve for bad debt just like you would in any other business. It tends to be higher in a consumer business than it would be, say, for prepaid business, and so that obviously has an impact. So I think that, of the bullet points, I think the biggest issue is obviously, to me, on the consumer phone services side because when I peel that out of the overall SG&A, I look at an ability to sort of keep our SG&A flat for the most part in the U.S., especially in businesses that are not consumer phone services-related, and that is really where the gain is isolated.

As far as your second question -- and we did make the comment about the non-telecom businesses -- this sort of gets to why it is that our model has changed in telecom overall and we have more of an SG&A-heavy income statement, if you will. If you will notice, our gross profits have actually increased for about seven consecutive quarters now. We had some very strong margins and we were able to sustain our revenue at the high-level that we saw in Q4. That's really a testament to the strength of our core businesses. What we need to do now and what we've spoken about doing for a few quarters is to be able to invest ,and in fact that's what the SG&A is, because remember, SG&A is, by nature, discretionary and it allows us to invest in building some new businesses, whether it's a consumer phone services business in the U.S. or in Europe or in some of these new or non-telecom business.

I will throw out a couple of the businesses that we're currently working on with the caveat that I would not expect to see a revenue impact from them over the next couple of quarters. One of them that we've spoken about a bit in the past is financial services. The idea here, as well as with the other businesses that we're working on, which is at the very early-stage, which is an education type product, an English as a second language product, is an outgrowth of our taking a look at who are customer base is and saying what other products can I sell to my customer base? I'm selling a product now to my customer base, a calling card that has been experiencing increasingly lower and lower revenue per-minute and profit per-minute, as we've seen, and we've been able to make it up on volume.

So, how can we take that very same customer and get a bigger part of his spend? On the Telecom side, we're going to be launching eventually ,or within short order, more of a prepaid wireless business, so that's a telecom product -- we can get more of the customers telecom spend. Then by offering financial services such as the ability to do money wiring, the ability to have a prepaid credit card -- because after all, these are the very same unbanked Americans are the people who are buying our calling cards to begin with; they are the very same immigrants who come to the country and need to buy an English as a second language product, which to many of them is their gateway to being able to chase the American Dream. So these are some of the businesses we're building now. I will say that, over the next couple of quarters, you're going to see something of an SG&A impact and I think that, towards the end of the fiscal year and as we move into fiscal '06, that's going to be a larger and larger impact for us on the top line and on the gross profit line. Obviously, as we start to put that into our model and that becomes part of our projection, we will share that and give people guidance there. But again, circling back, the biggest driver right now for SG&A is on our consumer phone services side.

The final point -- as Jim alluded to earlier ,we're waiting for the FCC's ruling on UNE-P, which could come anytime from mid-December until sometime in mid/late January. That will impact ,one way or the other quite possibly, what we do in terms of marketing on our consumer phone services business. So we are in a funny spot. I can't tell you what's going to happen because I can't tell you what the FCC is going to rule on. What I can say for everyone is to keep an eye on that because that could have a pretty big impact on SG&A in the short term as well.

Just a little bit of a follow-up -- the money wire business is very exciting. I mean, it's so exciting that it's so lucrative that I guess (indiscernible) Congressmen and everybody is looking into it, saying it's too lucrative. Have you yet -- nobody has been able to quite crack the quasi-monopoly that's enjoyed by First Data. Have you guys figured out, do you have an idea how to finally do that?

I think the issue is that we've more than one idea and it's a matter of sifting through them and seeing how to do it. Without getting into incredibly boring details of the meetings that we have, there are a couple of different philosophies as far as how to go about doing it, you know, whether we want to have a card-based product or whether we want to first begin a small money wiring operation and then transition that to a card-based product. But you do make a good point. One of the reasons why it's an exciting business to us is it's the same kind of thing that we saw in telecom years ago, where there's this huge price umbrella, we call it, whereby I can come in and undercut the current providers, the monopoly, or oligopoly that is currently enjoyed by people like Western Union or MoneyGram or a couple of the others. At the same time, there is still some profit to be made there. But it is part of a more comprehensive financial services business. To speak in big-picture terms that normally the CFO doesn't dabble in, I will tell you that we're looking to build a consumer products company for the recent immigrant with a strong slant towards the Hispanic immigrant. Today, that's calling cards and tomorrow hopefully that will be calling cards and English as a second language type of products and a whole suite of financial services. Again, right now, the only impact you see on the P&L from that is on the SG&A side. Our whole goal here is to make sure that that has a positive impact throughout the P&L as we move forward. But that's very much tomorrow's type of business as opposed to today's.

A follow-up question coming from Donna Jaegers of Janco Part (ph).

I was just wondering if we could get maybe a little more detail on the consumer business, so that we could sort of flesh out some of your options ourselves. Could you talk a little about the churn in the consumer business? You also mentioned that you were having some success converting your long distance-only customers over to UNE-P. Could you give us any sort of quantification there and also some feel for what sort of density you have in your UNE-P clusters, so that we could try to figure out if you have -- if there's much potential to convert some of the business to UNE-L? Thanks.

It's Norm. I will take those in order. I think the first question was -- well actually, I'm going to take them out of order because I don't remember the first question! The last question -- I will take them backwards. It's still early for me. The last question was, as far as the -- the last question was, as far as our ability to transition some of the long distance customers to UNE-P. I'm sorry, it was about our density. Our density obviously is one where I think the only market where we really have a strong enough density that we can look at a fixed asset-based program is in the New York market. We've looked at. Honestly, it's really going to come down to what the FCC ruling is as far as which elements of the network we're going to be forced to provide and which ones we're going to be able to rely upon Verizon over here to provide. So I think that New York would be a market that we can do something in.

I don't know about a lot of our other markets, meaning, to be perfectly clear about this, if the worst-case scenario, the FCC said that not only would costs for the elements go up, but that the Verizon or the other RBOCs would not have to offer us access to their work elements at all, to the switching part of it, we would have some real hard decisions to make. I think that would have some real impact as to whether or not we continue to market and to bring in new customers.

As far as our ability to transition long distance-only customers to local and long distance, we've had reasonable success with that. I think our strategy has been though that relative to the adjustable market, that's still a very small piece. So even as we had 4 or 500,000 long-distance customers at the time, to be able to transition them over, obviously that was sort of the first thing that we tried to do, but the bigger marketplace is to be able to go out to the mass market as we have done and advertise via either print or direct TV advertising or indirect mail or other methods. So, you know, we've had reasonable success transitioning people over; it's never been a huge part of our marketing strategy.

As far as the churn is concerned, I think the churn right now in that business is probably running I would say somewhere in the area of 5 or 6 percent a month, in different months, but it varies very widely. It's not like our LD business where, if you sort of plotted out on a curve where it's somewhat stable and you try to get it to plateau and then come down, it's really all over the map. I think that we are currently suffering the perception that is out there that we will not be able to provide this business ,going forward. I think that that is definitely helping -- it's sort of becoming (indiscernible) -- to some extent in the industry, it's becoming a little bit of a self-fulfilling prophecy before the FCC ruling.

That having been said, I think that, if we were to get a ruling from the FCC that said that it would be more difficult -- they indicated that it would be more difficult for us to economically bring in new customers -- then obviously we would cut back on our advertising there but we would continue to spend money in terms of keeping the customers that we have, because once you start to harvest this business ,if that's what we need to do, obviously as you can imagine it would throw off a nice amount of cash for us. It's wait-and-see. Unfortunately, we were asked this question a quarter ago and two quarters ago. Aside from some rumors and conjecture and a couple of articles here and there, we officially know nothing more than we did back then, so it's something we have to keep an eye on and we are definitely thinking about it every day.

The Q&A session is now over. This does conclude today's teleconference, and you may disconnect your lines at this time and have a wonderful day.