Orange SA (ORAN) 2001 Q1 法說會逐字稿

Good day everyone, and welcome to this Equant first quarter 2001 results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Mr. James Armstrong. Please go ahead sir.

Good morning and good afternoon ladies and gentlemen, this is Jim Armstrong. Thank you for joining us today. Equant announced first quarter results last evening. The news release is available over most of the wire services, on the First Call Network, and at the Equant website. Let me review the agenda for today's call. First of all Didier Delepine, President and Chief Executive Officer will discuss some of the highlights of the quarter, as well as trends in the business; next, John Allkins, Chief Financial Officer will review the financial results in more detail; then Jean-Yves Charlier, President of Markets and Sales at Equant will join us for your questions. I would like to remind you that our speakers' remarks may contain remarks that constitute projections, beliefs, or similar forward-looking statements. I would caution you that the company's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause actual results to differ materially from the information the speakers will give you today is readily available in Equant's filings with the US Securities and Exchange Commission and the French Commission of the Bourse. We refer you in particular to the risks factors and forward-looking statements sections of Equant's 20-F report on file at the SEC and the COB. Now I'll turn the call over to our President and Chief Executive Officer, Didier Delepine. Didier?

Thank you very much Jim. Good morning and good afternoon ladies and gentlemen, and again, thank you for joining us for our results conference call today to review the highlights of the first quarter of 2001. Customers continue to react favorably to our unique offering. Our order intake at network services in the first quarter was $236 million, slightly less than the record level in the first quarter of 2000. Despite the economic slowdown in some parts of the world, however, the demand for our network services remains good. We signed 39 contract customers in the first quarter that were valued at more than $1 million. So the contracts continue to get larger in dollar terms, and the average contract durations continue to increase, with the average close to 4 years. The order pipeline continues to improve in quality, signaling high order intake over the next several quarters. At the end of the first quarter, the order books stood at the $2.1 billion value. In contrast to the demand for network-based services, we are seeing some weaknesses for integration and application services. While revenues from fulfillment services were good this quarter, we will likely see some decline in the future, as fulfillment is typically first impacted by any business slowdown. At application services, the only area of the business where we really have any material exposure to the dotcom industry, we saw a significant slowdown in the first quarter and expect that to continue for some time. We have moved swiftly to resize the application services division, for the new lower levels of business that we now foresee. We took a $3 million charge this quarter to reduce employment levels and consolidate some operation. We continue to optimize the performance of our network, which has resulted in a further $3 million charge being taken in the quarter. The quarter has also seen a significant increase in the bandwidth purchased for use in the network, with $22 million spent on capacity, in the first quarter, equaling last year's total expenditure. The strong order intake for network-based services in 2000, drove very good revenue growth in the first quarter, 48% more than the 2000 first quarter. Revenues from integration services grew 14%, driven mostly by increases in fulfillment, with some growth in services. The new markets and sales division, which is a combination of the former network and integration services divisions, add revenues of $339 million, an increase of 35%. For the company in total, revenues increased a strong 40% over last year's first quarter to a total of $443 million. We continue to focus not only on revenue growth, but also on the operating the business for profitability. Our gross profit increased by 25% this quarter, while SG&A expenses grew only 8%. EBITDA jumped 90% to $57 million, a record for a first quarter. With this operating leverage, we move back into the black at the operating level, with an operating profit of $6 million this quarter compared to a $6 million loss in the same period last year. Now let me provide you a quick update on our pending transaction with France Telecom. This is certainly one of the most important events in the growth and development of the company. We have spent a great deal of time in 2001 planning for the merger of Equant-Global One and the SITA-Equant network joint venture, while at the same time focusing on our current business and delivering results. We have a well-established integration process in place, focusing on the strategic plan, market, and business sizing, network integration, organizational development, management staffing, and functional process design. Jean-Yves Charlier has been leading the effort to develop the new sales organization. We see complimentary strengths, as well as significant overlaps, and opportunities to improve productivity in this area. Jack Norris is driving the network planning, both the integration of the networks and the processes, to install and serve customers going forward. We continue to affirm, based on this review, the delivery of significant synergies driven by the rationalization of network nodes, control points, and customer support centers. We have not so far advanced to announce details, but are confident that we will have completed the basic planning by the close of the transaction. In the area of general and administrative overheads, our work has identified, as expected, many overlaps in the cost base. In summary, we are building the new company from the ground up, to create the world leader in corporate data networking. This will not be an alliance or a side-by-side operation, but a fully integrated single focused business. We have received approval from the Department of Justice in the United States and from the Merger Task Force at the European Union. Additionally, we have made confidential filings with securities regulators in Washington and Paris. We expect approval from the FCC very soon. Later this month, we are planning to distribute the shareholders circular. We will schedule an extraordinary general meeting in late June and expect to close the transaction by the end of the second quarter. At that time, we will begin operating the new integrated company, and of course, at that time, the public shareholders will receive the Contingent Value Rights from France Telecom. If you look at the trends in the data networking market, you have to be pleased with Equant's competitive position. Demand is strong, Equant's traffic volume continues to grow at better than 100% a year, pricing trends are relatively stable for managed network services, decreasing but not nearly as fast as underlying cost, especially for our bandwidths. Equant is not exposed to the rapidly declining prices for voice traffic, and we have not aggressively invested in mega-hosting centers or massive bandwidth build-outs that could only be justified by the rapid development of the ASD model, which has not yet materialized. Yet, we are able to source transmission capacity around the globe from those suppliers at reasonable cost to build an optical IP underlay network. Furthermore, we do not see the bandwidth builders in competitive biz opportunities, as they lack the capability and expertise when it comes to global managed corporate networks. Many of our competitors continue to struggle to stay focused on the business opportunities. While Equant remains true to it's heritage with an unmatched competitive position in this high growth market, and that position will only be stronger with the France Telecom transaction. Thank you, and now John will report in more detail on the financials. John?

Thank you Didier. Good morning and good afternoon ladies and gentlemen. We feel Equant had a solid first quarter, especially given the current economic and industry environment. We believe we have a higher degree of visibility on our business than most companies in the telecom area and have proven again that we can manage the business to profitability, even if gross margins are under some pressure. Our revenues this quarter achieved a record level. Our network services products revenue grew by 48%, in excess of the 40% we said it would; the network services products gross margin figure was higher than the first quarter 2000, as we said it would be; and we met or exceeded street estimates of EBITDA and revenue. We have had some one-off items in the quarter that have affected earnings per share, and I'll describe these to you, but in all the important areas, we've done what we said we would do. You can see we had a solid quarter for our markets and sales division combining the sales of the former network and integration services divisions. Revenue for the quarter was up 35%. Within that figure, network services revenue growth was particularly strong with 34% basic growth, increasing to 48%, with the inclusion of the Radianz contract. As expected, gross margins on network services based products at 27.3% were reduced slightly from last year's fourth quarter reported number but up on the 25% of last year's first quarter. We continue to take the high share of the incremental cost of the network at 77%, as part of the 80-million charge for the network. However, our expectation is that these network services margins would continue to increase in the medium term. The economic slowdown is having an effect on the revenues of the integration services products, where the quarter-on-quarter growth at 14% is down from the figure reported for last year's fourth quarter but is still an increase on the 12% of comparable revenue growth reported in the first quarter of 2000. Application services represent our one exposure to the dotcom environment and revenues at $5.3 million are some 5% down on last year. We will see application services revenues continue to decline in the short term, but we have downsized the business to meet this new forecast activity level. Total gross profit grew overall by 25%. The gross margins overall fell by some 2.5 percentage points, quarter-on-quarter, despite the improvement in network service products margins. This is mainly because our integration services product margins declined from 26% last year to 22% this year, as fierce price pressure in the fulfillment business, driven by the well-recorded oversupply problems, reduced margins further on those box supply contracts. Also, we had slower than expected growth in managed and professional services revenue, which had an impact on margins. But as I said earlier, the company is determined to manage the business for sustained profitability, as further demonstrated by our containment of SG&A costs, which grew by only some 7.5% compared to the 25% increase in gross profit. This has resulted in a turnaround to the normalized operating profit, that Didier mentioned, from 6 million loss to 6 million profit this year. The one-off costs affecting earnings per share, include restructuring costs where we reflect the layoffs in application services and the continuation of the restructuring of our joint venture network cost base in terms now of facilities rationalization, key skills relocation, and retention costs. In addition, because the proposed transaction with France Telecom, in effect, will result in France Telecom acquiring a majority stake in the company, we have to expense our transaction related costs. These $4.1 million of costs reflect the integration advisory fees incurred to date, as well as the $2.8 million costs of the retention plans we have put in place to retain key management for the company up to and beyond the transaction close. Our investment in Radianz continues to generate losses during its startup phase, but the size of the loss is in line with our expectation. Approximately 50% of the loss reported is the amortization of goodwill created on the investment in Radianz. The interest cost of $7 million in this quarter, when compared $1.5 million of interest income last year, lead to $8.5 million swing equivalent to some ¢4 a share. Our net debt increased by $95 million in the quarter, reflecting the $81 million of capital investments, the cash cost is $7 million for one-off items, with the balance being the cash costs of operations. Of the capital investments, some $22.2 million were on purchasing transmission IRUs, an increase of 20 million over last year's first quarter number. We're confident that our funding arrangements are more than sufficient to take us through to the planned transaction with France Telecom. So we are achieving the targets and the market's expectations and are moving confidently into the second quarter of 2001. I'll now hand back to Jim to deal with the Q&A.

Thank you John. Jean-Yves Charlier will now join us for your questions. Operator would you please explain the process for analysts and investors to ask questions?

Thank you Mr. Armstrong. This question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the '*' key followed by the digit '1' on your touchtone telephone. We'll proceed in the order that you signal, and we'll take as many questions as time permits. Again, that's '*1' to ask a question. We'll pause just a moment to assemble our roster.

While the operator gets the queue in order, let me tell you that this call will be replayed through May 22nd. The call-in number for the replay is 1-719-457-0820, and the access code is 765-457. Alternatively, you can listen to the replay through our website. If you did not receive an email of the news release last evening, and you want to be included on our distribution list, please send me an email with your contact information, or give me a call at 1-678-346-3754 or Ashley Rayfield in the UK at 44-20-8321-4581 or Bertrand Deronchaine in Paris at 33-1-46-41-93-63. Operator we're ready for the first question.

Our first question comes from Steve Frank, Morgan Stanley.

Hi Steve.

Hi guys, thanks very much. I want to explore the 22 million in capex, which was 20 million more than you spent a year ago, and can you give us an idea from a geographic perspective, where you're buying that bandwidth, what the needs were in your network, and who you're buying from, and the length of those kind of contracts? Are they relatively short-term to take advantage of the roll-off of prices or are they long-term? Thank you.

Okay, thank you Steve. John Allkins is going to tackle that question. John?

Okay. Basically we're buying IRUs Steve, so they're not, if you like, short-term purchases. They tend to be IRUs with a 10-year life. We've extended our backbone in Asia. We've got roots between Hong Kong, Tokyo, Japan, Korea. We've developed out from our 10-gigabit network in Europe down into Switzerland, Italy, Spain, and we've brought roots out to South America, down the east coast and down the west coast, and basically, we are buying from a number of suppliers. We are buying from more than a dozen suppliers, if we look over our total purchases over the last 2 or 3 years, and we're doing that, yes, to gain the economies of scale, which we gain from owning bandwidth, but also we have to say, in today's market, it's quite good to be a purchaser, as opposed to a supplier.

Okay, and can you give us any sense of competition, again, from either a geographic perspective within Europe, US, that you can help us with? Who do you usually see when you compete against contracts?

Okay, that's not in relation to bandwidth, but that's related to our competition position. As we have said in the past Steve, we continue to see the competitors coming mainly from the incumbent supplier in countries and that is quite normal in our type of the market, which are the big corporations. We continue to see [_______________]. WorldCom, for example, continues to be present in most of our bids, but I would say that it's been less aggressive with it's pricing than it has been in the past. About the past quarter, Global One has maybe become a little bit more aggressive with regard to the pricing, and that's something that we have observed. Concert continues to show sign of, maybe confusion is a big word, but certainly, uncertainty due to the ownership issues which is reflected in the Equant relationship with its customers. I think that Cable & Wireless has been quite aggressive for biz, particularly focused on the high-speed services and IP related biz, and maybe finally in our list of usual suspects, Infonet has been somewhat distracted by the ownership issues also, and they remain, nevertheless, a significant competitor. But as I said in the opening remark, the incumbent PDT are still the major competitors for Equant.

Okay guys, thanks very much.

Thanks Steve. Operator next question.

Our next question comes from Julie Lamirel, Lehman Brothers.

Good afternoon. Have a question on integration services. You mentioned a slowdown or possible slowdown on fulfillment. What about the services side? It looks also quite low growth. And so what are your prospects for integration services?

Thank you, Julie.

Hello?

Yes. Hi Julie. Thank you very much. Jean-Yves Charlier is going to answer that question.

Hi Julie. What we are seeing is obviously some slowdown in the integration services product line predominantly linked to some of the price pressures in the marketplace, and our objective is really to balance out on one hand revenue growth and margins. The margin downfall has been predominantly linked to the price pressure around the boxes on the fulfillment side, where quarter-over-quarter we saw a drop of roughly 5%. The slowdown in the managed services side is linked to fewer maintenance contracts, directly, in fact linked to fewer boxes being put out by customers.

Okay, and do you see an improvement on the margin side in the next quarter?

I think we have to differentiate in that product line between the fulfillment side and the professional and managed services. We are working towards improvement in margins on the professional and managed services, as we look at re-basing our costs in line with revenues. On the fulfillment side, that is mainly market driven, and I think there we'll continue to see pressure.

I had another question if I may. On the core business on the network services contract, do you think you would achieve, for the other quarters of the year, similar contract signing level as you did last year, or should we take the Q1 figure as lower guidance for the full year?

Okay, John, wants to answer that question. John?

Certainly, Q1 is always a low quarter, Julie. We will see growth, I think, as Didier mentioned, the strength in the pipeline. We will almost certainly see $300 million plus of orders in the second quarter. After that the glass obviously gets a little hazy, because we're talking about big contracts being signed on and off, but you certainly shouldn't take the first quarter as indicative. We did have record quarters, just to remind you, in the last 3 quarters of last year. We have an expectation of beating those, at least in some of those quarters.

Okay, thank you very much.

Okay, operator next question.

Our next question comes from Joanna Edmonds, UBS Warburg.

Hi, three questions. First of all, you mentioned that you're taking a further or a larger incremental cost in the network. Could you say, of the total network costs, what proportion fall in the quarter? And secondly, just to follow on a little bit from the last question, how much, are you still seeing that this market's very strong, and you're not really seeing any slowdown there of the network services...?

I'm sorry Joanna. Could you repeat the second question? You keep chopping down, so we have difficulty...

Sorry. Just in terms of demand, are you still seeing that that's being strong, or are you seeing that going down and sales slightly increasing?

Okay, John is going to answer your first question which I understand is the ratio of total usage what we paid Equant as portion of the total network cost. John is going to tackle this question, and Jean-Yves will answer your second point.

In terms of total network costs, we're looking at taking something like 34%-35% of total network costs. The network, 64%-65% of the traffic on the network is ours, and we have something like 19%-20% of the connections. So it's about 34%-35% of the total network costs.

Okay, on the second question, Jean-Yves Charlier?

On the demand for network services products, Joanna, we continue to see strong demand out in the marketplace. Didier indicated that our pipeline is extremely strong. In fact, if you look at the Q1 order intake, 39 of our contracts were well above $1 million, compared to 32 of Q1 last year. We believe that trend will obviously continue, and as John has indicated, we believe that the revenue levels for network services products for the second quarter will be in the region of 40%.

And is the sales cycle still the same length or have you seen that...

Absolutely. The sales cycle is the same, and if I have guidance to give, it is that they tend to extend a little bit more, and that is coming from the ever more complex environment in which we deal with large corporations, and therefore, the sales cycle, all aspects of the sales cycle, by the way, that is to say from the bid to the first connections, all of those cycles tend to increase, but you can take that they are roughly the same for the time being.

The only slight change that we have seen in the marketplace is in terms of the price points. We have seen in the past 9 months, Joanna, affirming of certain price points predominantly in frame and IP where price declines in the past 9 months have been less than 10%.

Thanks.

Okay, operator next question.

Our next question comes from Sean Johnstone, SG Securities.

Hi, good afternoon. Just a couple of questions, the one is the impact on gross margins in network services from the acquisition of the IRUs. You said we'd see them running in parallel for the first two quarters. Can you give us an indication of what the impact of that has been? And also, on the completion of the deal with France Telecom and Global One, are we going to see you taking full control of the network sharing mechanism that you've got presently with SITA? Any indications that you can give us on what the impact on that in terms of cost is going to be, if we're going to see anything in the short-term or if that is a longer-term benefit that we'll see?

Okay, thank you. John what is the impact on the gross margin of the IRU?

Yeah, the IRU purchases haven't impacted gross margins hugely, maybe $200,000, because they tend to be a little bit backend loaded when we put them in, $22 million, 10 years, so it's a couple of hundred thousand bucks a month, and on that basis, we've probably seen one month of overlap out of what would be a 3-month overlap. So we'll still have a continuation of the double cost in the second quarter.

Okay. On the second question, let me introduce, and John will complement the answer. First of all you said that taking control of the cost sharing, I would like to make sure that we have an understanding here. The cost sharing mechanism was, in fact, a process, which we had put in place at a time when we had a joint venture between two parties, which were sharing cost base on activities. As the transaction will be completed, it has to be very clearly understood that the network control is passing entirely onto Equant, and the relation with our partner SITA will be done under contract basis, and therefore, not through a cost sharing mechanism. So I just wanted to make that point clear. John you want to add any impact on the...

I think what we will see is a lot more visibility of the numbers, because we'll have basically minimum revenue guarantees, guaranteed revenues, and we'll be able to manage our costs a lot better against that steady a revenue line, rather than have a rather complex analysis like the updated cost sharing formula.

So you don't see any immediate step-up or improvement in margin as a basis of that?

No, not at the moment, and in fact, it's a bit like a number of large outsourcing contracts. In the beginning, the issue will be no change in margin or perhaps even deteriorations in margin. I'm not saying there will be, but you understand how these large outsourcings work, and on that basis, we would expect in 2 maybe 3 years' time to see some improvements in margin coming from the SITA contracts.

Okay. Thank you.

Thank you. Operator next question.

Our next question comes from Simon Weeden, Goldman Sachs.

Hi Simon.

I think you may have covered a lot of what I wanted to ask, but really, I was just after a stare on the remainder of the year revenue outlook, particularly given what you mentioned on integration services, and whether if excellent work is continued on an independent basis towards the end of the year, you'd now be looking at a slightly lower grade than perhaps we had previously? Is there any color you can provide in terms of guidance revenues for the rest of the year?

Okay Simon. What we are talking about in integration services is very marginal movements. Basically, we don't see a lowering of revenues. I think most of you guys, most of the analysts, have got it somewhere in $1.8 to $2 billion range in terms of revenue, and we're very happy with that sort of growth.

Thanks very much.

Okay, operator next question.

Our next question comes from Matthieu Cordier, BNP Paribas.

Yes, good afternoon. I will ask two questions, if I may. The first question would be regarding to your SG&A corporate strategy, relative to your plan of creation of Equant markets and sales and to your plan of synergies. Can you put some more emphasis on that point? Second point would be relative to the share plan costs and before the merger that were to occur on the third quarter?

Okay. First of all, on your first question, on SG&A strategy. I think that what you have seen in this quarter is Equant's attention to specific effort to compress costs. I mean, obviously in those situations that we have seen in this past year, I believe that the differences of results is coming from the ability to control costs, based on the visibility of what you see on your landscape, and that's what we are trying to achieve. If you look at our number regarding selling and regarding G&A, we have contrived to contain both. Obviously, we are happier to spend money on selling than spending money on G&A. But it is clear that in this type of economic environment, it is our aim, as management, to execute on increasing productivity. And this is what we are doing and that we are focusing on at Equant, and that's the reason why you see a very contained selling cost, in order to make sure that we are able to increase productivity and definitely deliver revenue at a time, without having, like some of my competitors in the end of last year, having so much excitement during the highs that they are forced to reduce their sales force quite importantly by the next quarter. So we have done that. That's good strategy. If you ask for the strategy going forward with the new company, I can assure you that as long as we will be able to do so, this is the strategy that we will put forth. So contain G&A as much as possible, and tune the selling cost to the market environment, in order to choose either an increase of productivity or an increase in quarter bearing sales. You want to add anything, Jean-Yves?

No. I think you've said most of it Didier. I think that the strategy is quite clear for us. It is getting productivity gain out of just G&A, and the strategy going forward at Equant independent or Equant with the transaction will still be along that same line for the quarters to come.

Okay. For your next question Matthieu, John will give you a little color.

Okay. Share plan costs this quarter $14-15 million, we would expect that absent to transaction to more or less continue in line on a quarterly basis. The transaction will mean that most of the share awards and share options vest, and there will be a charge as a result of that. We will then, under the transaction modes, change our accounting base to a more normal APB 25, and we will not be showing going-forward share plan costs of anything like the magnitude we have historically.

So should we expect the same magnitude for the second quarter?

Yes.

Million dollars either way, but yes, basically it's same magnitude, second quarter.

So in fact, the idea would be to clean share plan cost structure before the merger gets wrapped. Am I right?

No, no. The share plan cost, the same number in the second quarter is absent to transaction. If there is a transaction, there will be, in the second quarter, there will be a larger hit, but that will be as part of the completion accounts. And on that basis, we will take a one-off charge to move from one accounting to the other.

Okay. Thank you very much.

Thank you Matthieu. Operator next question.

Our next question comes from Alex Paterson, Merrill Lynch.

Good afternoon Alex.

Hi there. Two very quick questions, you have talked quite a lot about the demand that you're facing. In the order book intake that has fallen quite a long way and that the intake you recorded in the first quarter is lower than any that you've recorded since the second quarter of 1999, is there anything in that that is suggesting that perhaps the slowdown is a bit more than seasonality and perhaps even a little bit more than just the lengthening of the sales cycle?

Okay, Alex, good morning. Jean-Yves is going to take this question.

Alex the answer is no. We are not seeing a softening at all for our network services products. The order intake in Q1 at 236 was in line with our expectations and our plan. This business is along a seasonality curve, with Q1 being the lowest and Q4 being the highest. That's what we've observed for the past 3 to 5 years. Companies tend to want to finalize transactions in the third and fourth quarter for implementation the following year, and we expect to have clearly lower order intake in the first quarter. If you compare this first quarter 2001, compared to 2000, yes, it was slightly lower, but I think the quality of the orders was much better, as we had over 39 contracts over a million dollars. And going back to John's point, we expect order intake to increase significantly during the second quarter of this year, to hit $300 million or above.

Yeah, Alex, I think just to add a little bit, we're watching all of those times very carefully, and you understand that we are not going out by broadcasting that nothing happens in the world of telecommunications, and we're watching all of these details extremely carefully. We do not believe, at this point, that at the level of orders we have anything. If you want a little bit more detail, what we see sometimes in this first quarter, is that the head office of companies tend sometimes to delay a little bit the connections where we see that they are waiting, and they postpone some connections which have already been done and that they delay it a little bit while-the-while, but we don't see anything in the order which can indicate anything serious with regard to the economic slowdown or its impact on Equant.

And is there any change in the demand profile in terms of the services customers demanding out of the ordinary, that you would expect?

No, not really. If we see anything out of the ordinary, we, as you have seen, we see the quality of the order, which is better for us, and we define quality in lengths of contracts and the amount of orders, so we do not see really a change. As you know, because of our long lengths of contracts, we walk people through different phase of technology, and you have seen that we have renewed important contracts, historically, for example, with British American Tobacco, where we have renewed now for 3 times, those contracts, and we are going along and moving them along the technology chain, but not really any changes significantly in the orders.

Right. Thank you very much.

Thanks Alex. Operator next question.

Our next question comes from Pierre Machelon, Exane.

Hi, good afternoon. I've got three questions. First is on gross margins, should we expect it to decline further quarter-on-quarter, after the decline Q1 versus Q4 2000? Second question is, back on this backlog issue, could you say how many contracts over $1 million you had last year compared to 39 this quarter? And well, should we say that if you have more multi-million dollar contracts then there may be a price impact on the total of the backlog? Meaning that if you deal with multinationals, maybe there are much bigger contracts, but with maybe some twice effort to make to get this contract. And lastly, please could you tell us if you maintain the target of EBITDA breakeven by the end of the year for the new group Equant-Global One.

Okay, thank you very much. John is going to cover your first question regarding the gross margin.

Okay, we would expect to see for network services, we wouldn't expect to see any growth in that gross margin. It would still be higher than the gross margin we achieved for network services products in the second quarter of 2000. On an overall basis, as Jean-Yves said, we would expect an improvement in our services margins, within the integration services portfolio, and probably a slight deterioration in the margins for fulfillment. If you add that up, you see margins very much staying broadly the same. If I just skip, because it's an easy answer, to the EBITDA breakeven for a new curve, we would expect to turn EBITDA breakeven based on our current projections of the Global One business. We're very happy we understand our business. We're still a little bit working at arm's lengths with the Global One business, but we're very happy to say that we would breakeven. By the end of the fourth quarter, we would be running a breakeven EBITDA.

Is that answering your first question?

Yeah, thank you very much.

Okay, thank you. With regard to the second question, which is a mixed question, which is both the backlog situation and the length of our contract and margins impact, Jean-Yves is going to cover the beginning of that question.

Okay, Pierre, we, as we indicated in the first quarter, signed 39 contracts over a million dollars compared to 32 in the first quarter of 2000. I do not have the total amount of contracts in our backlog at the end of the first quarter that represents above a million dollars, but let me give you some comparative numbers, 1999 to 2000 on a full year basis. In the year 1999, we had 111 contracts in our order backlog that was above a million dollars. During the year 2000, that increased to 158. So I think that we will continue seeing that trend of higher and longer type contracts that Didier indicated. Your second part of the question was on the price points. I believe I gave some indications of what we are seeing in the marketplace. The equation has not changed at all over the past quarter or past few quarters. The only change that we've been seeing is a firming of some of the price points, particularly in IP and in frame which are, as you know, the core of our product sets. We still see, on the renewal of 3-year contracts, a 15%-25% price decline, offset to a certain extent by an increase in services that the customer is going to take, giving us a bottom line price decline, on 3-year contracts, roughly in the range of 15% to 18%.

Okay, thank you very much.

Okay, you had a third question regarding EBITDA, but I think John has covered it at the same time as he covered gross margins. So can we have the next question please?

Our next question comes from [_______________], Handelsbanken.

Good afternoon. You have already covered all my questions. Thanks guys.

Okay. Thank you.

Next question operator.

We'll go next to John [_______________], Wit SoundView.

Good afternoon. I'm wondering with regard to the merged entity, whether you anticipate that NewCo will have a delayed breakthrough to pre-cash flow positive, vis-à-vis Equant, and if so, if you can give us a sense of how long that pre-cash flow positive might be delayed as a result of the merger? Thank you.

John Allkins is going to cover this question. Thank you.

Yes, there will undoubtedly be an impact of Global One on the breakeven date of pre-cash flow positive. It is still early days, but we would anticipate that that would be at least a year, if not more, slippage in this case, and I really don't want say a lot more until we send out our shareholders circular which will give some indications of the numbers.

Thank you.

Okay, operator next question.

Our next question comes from Paul [_______________], DrKW.

Hi guys. You've answered most of them, but on the integration services and the slowdown, can you give me an indication whether that's a global thing or just in specific markets, for example the US?

We've seen, Paul, a slowdown predominantly in the US, particularly through a lot of news on the slowdown overall for the high-tech sector. We have seen a little bit of softness in Asia, predominantly at the backend of the quarter, and virtually no softness, whatsoever, in Europe up to now.

Great, thanks.

Operator, next question.

We have a question from Richard Sloane, ING Barings.

Yeah hi. Can you go into some detail as to why you're seeing a firming of price points in frame and IP? Is it lack of competition, what's going on?

No, I think that we have a roller coaster on price, and like sometimes in the airline industry, you get some people who definitely like to go with a very aggressive pricing, usually it's coming from people in despair. It is clear that we have a number of competitors right now who have bandwidth, which needs to be filled, and the value today now in the street are the customers not the bandwidth availability. So in order to fill up those large pipes, there is sometimes some very aggressive pricing, which is going but obviously with consequences for all of us, because as you know, we operate with price benchmarking. When we renew our contract, we go with usually a price benchmark, which looks at a basket of things. So the firming right now, I think, is that everybody in difficult times understands that we need to hold all to a business, which needs to be a little bit better stabilized. These are cycles. We are in a cycle, right now, where the prices tend to firm up a little bit or at least not to decrease as fast as it used to. So the reason why is we're all making a little bit more sense with the business we have, and no one is starting a price war at this point, and I think that's what we see. So stability in that environment and that is good for all of us, for as long as it will last.

Okay. And the second question, I guess, going back to the order book, is there any relevance to looking, sort of, at network services revenues against the amount of money in the order book? Because if I look back 5 or 6 quarters, the order book seemed to be about 1.5 or 1.6 billion and network services revenues would have been under 200 million. Is there any relevance to that relationship?

Jean-Yves is going to describe that to you.

Yes, there is absolute relevance in the relationship between the order book and the revenue flow. Obviously we have an extremely strong understanding of what our revenues are going to be during the year 2001, given the order book at the beginning of the year, and this is something that we monitor on a month-by-month basis having an outlook for the next roughly 4-5 years, as that order book of 2.1 billion runs out. So a very strong relationship between the two, and hence why we work on sales productivity both in terms of orders and in terms of revenue.

Thanks.

Thanks Richard. Operator next question.

Again, if you wish to ask a question '*1' on your touchtone telephone.

Are there any more questions operator?

No sir. There appears to be no more further questions at this time. Before I turn the call back over to you Mr. Armstrong, I would like to make everybody aware that Equant's web address is www.equant.com/ir. There is also a rebroadcast available via your telephone; that number is 719-457-0820, and you will need the confirmation code 765-457. Again, that number is 719-457-0820, with the confirmation code of 765-457. It will be available from 11:00 a.m. Eastern Time through midnight Tuesday May 22nd. I will now turn the call back over to you Mr. Armstrong for any additional or closing remarks.

Okay. Thank you all for joining us today. I'll remind you that investor relations' team will be available after this call to answer any additional questions that you may have. You can call me, Ashley, or Bertrand. Members of the media should contact either Scott McClintock at 1-678-346-4725, Dara Hailes on 1-678-346-3178, or in France, Bertrand Deronchaine on 33-1-46-41-93-63. Thanks very much for joining us today.

That concludes today's Equant's quarterly earnings conference call. We thank you for your participation. You may disconnect at this time.