Innovate Corp (VATE) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to your PRIMUS Telecommunications third quarter financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded. And now it is my great pleasure to announce your moderator for today's program, Mr. John DePodesta. Mr. DePodesta, you may begin.

Thank you John. Good afternoon ladies and gentlemen, and welcome to PRIMUS' third quarter 2004 financial results conference call and Web-cast. I am John DePodesta, Executive Vice President at PRIMUS. For those who have not had a chance to review the earnings release, it has been posted and can be viewed on our Web site at www.PRIMUStel.com.

Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer; Neil Hazard, Chief Operating Officer and Chief Financial Officer; and Tom Kloster, Senior Vice President, Finance.

We will begin with formal result remarks from management regarding the Company's third quarter 2004 performance and recent developments. This will be followed by a question-and-answer session.

Before we begin, please be advised that statements made by the Company during this presentation that are not historic facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

These statements may include but are not limited to revenue and earnings projections, statements of business plans and objectives, and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk.

Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Form 10-K and 10-Q and other periodic filings with the Securities and Exchange Commission. These filings may be obtained from our Web site at no cost.

The Company is not necessarily obligated to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now ask Neil Hazard to review the results for the quarter.

Thank you John. And good afternoon everyone. Our third quarter results continue to reflect a very challenging telecom environment in virtually all of our markets, although we did achieve our major targets for the quarter, as provided to you in our last conference call.

Third quarter revenue increased 1 percent sequentially from the second quarter, primarily due to gains from foreign currency exchange rates. On a constant currency basis, revenue was stable with the prior quarter, matching the aggressive target that we set for ourselves and when most of our competitors are showing significant revenue declines from wireline services.

We are already seeing the benefits of introduction of our new product initiatives and bundling strategies on stemming the decline of traditional long distance to stabilize our revenues. Our mix of revenues by customer and on a geographic basis was essentially unchanged from the prior quarter. However, we continued to generate increases in data and Internet revenues, which rose to a new record high of $63 million for the third quarter.

Our net revenue, less cost of sales as a percentage of net revenue -- what we used call gross margin, was 38.7 percent, down sequentially from the prior quarter, which was not unexpected. The decline was the result of 4 factors, all related to the increased competition we're facing in our core markets -- first, continuing pricing declines in long distance rate rates in all virtually all of the countries we serve; second, lower usage of long distance per customer, meaning fewer minutes per customer each month; third, increased churn in our dial-up Internet services due to increasing broadband penetration; and fourth, increasing revenues from our new initiatives, which are initially lower gross margin.

We expect the margins from the new products to improve as we build size and scale on these new businesses, and we complete our own DSL infrastructure network.

As expected, our SG&A expenses increased during the third quarter, rising $5 million over Q2, reflecting the forecasted additional spending on product development and advertising for our new product initiatives. We're now spending on our new VoIP broadband and wireless initiatives in negative EBITDA in the range of $25 to $30 million on an annualized basis.

EBITDA for the third quarter was $29 million, at the low end of our guidance range. Below the EBITDA line, we benefited from gains during the quarter in foreign currencies, purchases and settlements of long-term debt at a discount, as well as reversal of a previously accrued tax obligation as a result of winning a favorable decision from a taxing authority.

Our resulting net income for the quarter was $16 million, or 16 cents per dilute diluted share. On adjusted basis, our net income was $4 million and 4 cents per diluted share.

Moving to our balance sheet, we ended Q3 with a total cash balance of $69 million after generating $18 million of positive cash flow from operations during the quarter. We spent $9 million on CapEx, which gave us a free cash flow of $9 million positive for the quarter. We used this cash, plus some more, to reduce $21 million of our long-term debt in the third quarter. This leaves us with a balance of long-term debt of 561 million at the end of September.

Our goal for the fourth quarter is to hold revenue stable on a constant currency basis as we continue to move forward in our transition from a long distance voice and dial-up ISP carrier into a fully integrated wireline cellular and broadband services provider.

Given the performance of the U.S. dollar thus far in the quarter, hitting our target will most likely result in a revenue increase on an actual currency basis. As an "oh, by the way," if we achieve this goal in revenues for the fourth quarter our revenues for the full year 2004 on a constant currency basis, using the December 31, 2003 year-ending exchange rates, we'll achieve a 13 percent annual growth rate over 2003, which is right in the middle of the range of our stated revenue goal for the year in our February year-end earnings release of 12 to 15 percent growth for all of 2004.

In the fourth quarter, depending upon the level of incremental advertising spending on our new products and the effectiveness of our campaigns, our EBITDA goal is to be in the range of $25 to $30 million. Capital expenditures in the fourth quarter are expected to be at the same level as Q3, resulting in the full year amount at the lower end or below our previously stated range of $40 to $45 million per year.

We expect the resulting free cash flow for the second half of 2004 to come in near the high end or slightly higher than our previously stated goal of our range of $5 to $10 million for the second 6-month period of year.

I would now like to turn the call over to John DePodesta.

Neil, thank you. As you know, early this year we announced a significant new strategic direction for the Company -- a plan to transform PRIMUS from reliance upon its long distance voice and dial-up ISP core businesses into an integrated communications provider of voice, broadband, VoIP and wireless services.

We settled upon this strategy after assessing the potential impact of altered competition in the marketplace, competition that would be primarily driven by bundled offerings of multiple services by the dominant incumbent carriers, as well as probable new entrants in the telecom business, including the cable companies with their Triple-Play cable TV, broadband and voice services.

In this new world, offering stand-alone long distance voice and dial-up I ISP services was an extremely vulnerable business model. Our experience over the past 3 quarters has confirmed that our new strategic direction was the prudent choice. We have now witnessed large carriers in our major markets exploiting their control over local markets and infrastructure to offer bundled services, while dramatically increasing their marketing expenditures to gain market share.

For PRIMUS to be able to hold revenues stable in the face of these challenges is a notable accomplishment. But we're also going on the offensive. To place PRIMUS in a position where it could compete effectively over the long-term and resume growth, we have accelerated the rollout of our new initiatives in local, broadband VoIP and wireless services.

Indeed, 2004 can be described as the year of development and launch of our new products. As we report our results today, the early traction we're receiving from our new products is encouraging -- over 10,000 local lines in Canada, over 25,000 VoIP customers, and over 30,000 broadband customers in Australia.

Significantly, other positive trends have developed beneath those numbers. In Canada for example, we have reversed an earlier downward trend in the number of long distance customers, and are now recording net customer additions. In fact, over 90 percent of our new local customers are subscribing to our long distance services.

Approximately 20 percent of our VoIP customers are requesting local number portability, signaling that they are cutting their local line and relying upon their VoIP service as their primary line. That trend is a favorable early indicator not only of the perceived quality and the enhanced features of the Lingo service, but also of the reality that such customers now have a disincentive to churn.

While these results are encouraging, we're in the early stages of making the transition. We have previously stated that we do not expect a material revenue contribution in this -- in the context of a Company currently with revenues of approximately 1.3 billion -- from these new initiatives until the latter half of 2005, when we expect many of our new products and services to be gaining traction in our major markets.

However, we are encouraged that the new initiatives, supported by increased marketing to defend our core businesses, have already begun to stem erosion in overall revenues. Our challenge, as we proceed with the transition phase, is to ensure that revenue and margin contribution from the sales of our new products more than compensate for any revenue and margin decline from our core businesses, certainly a difficult challenge in the near-term. But here again, the early indicators are positive.

The average revenue per user from our new local services bundled with our existing long distance product is 2 to 3 times greater than the ARPU from long distance on a stand-alone basis. Further, the new products will permit PRIMUS to participate in the fastest-growing areas of telecom, wireless and broadband services.

Just last week, we launched our wireless service product in Canada, which highlighted one of our key objectives for 2004 -- mainly, to have our new initiatives launched in all of our major markets by the end of this year.

To put this all into perspective, consider the progress we have made in 2004. One year ago in Canada, we were primarily offering long distance and dial-up ISP services. Today, we provide a complete array of services in that market -- wireless, broadband, VoIP, hosting, local, and long distance voice services. The planned transformation of PRIMUS is happening. And it is happening with incredible speed.

In Australia, we have now joined the battle for the customer land grab in the broadband space, even while we deploy our own DSL network. Our rationale is to acquire DSL customers while the fight is on, even though the margins may be slim, in the expectation that once we're able to migrate customers to our own DSL network, we will experience significant margin increases.

2004 has been a year of major challenge, highlighted by our successful development and launch of our new products and services. We expect 2005 to be the year of deployment of those products and services. And given the progress we have made to date, we plan to have a full head of steam in taking on that goal. John, we will now begin the Q&A session. And if you would, please review the polling process and start taking questions.

(Operator Instructions). Romeo Reyes, Jefferies & Company.

I have a few questions for you guys. Can you start out, perhaps, on the present (ph) profitability? Can you go through how much of your revenues are coming from intra-country long distance, domestic long distance, which I believe is the sector that is under more pressure, plus inter-country long distance?

Also, can you go through, basically, the calling card business, how much of your revenues that is at this point and how profitable that is? And lastly, on the data side, it seems like you grew both on year on year and sequentially on the data side. Can you give us some sense what your profitability is there now?

And then the second question is with respect to your SG&A. It seems like it -- you're able to maintain -- your revenue is relatively stable, but -- and obviously it's very expensive (ph). About a year and a half ago, you were spending about $70 million of SG&A per quarter. Now you're spending probably close to $105 million in the fourth quarter. Can you give us a sense of what the new level of SG&A spending is going to be, if it's going to the north of $100 million, or if you would expect that it would stabilize anywhere between 25, 27 percent of revenues where you were just about a year ago -- year and half ago rather?

And lastly, with respect the capital structure, if you could give us a sense of what the next development is here. You guys probably saw that priming transaction out of Level 3 announced on Friday afternoon. Can you give us a sense as to whether or not you're looking to raise any cash that would be structuring (ph) senior to the 8 percent note? Thanks.

I guess I would call that a compound question. Neil, why don't you take a start at some of those?

Well on the -- start going in reverse -- on the capital structure, as you know, we have now been reducing our long-term debt, once again as we were the last several years. For the past two quarters, we had a flip up in the first quarter when we issued the 8 percent bond and refinanced some of the higher interest and the maturing debt. But since then, in Q2 and continuing on in Q3, we continued to reduce our long-term debt. We generate positive cash flow, pay off our debt, and then we paid off $21 million of long-term debt in Q3.

So, do we have any immediate plans to raise money? No, not at this time. But we do have positive cash flow, which is -- and positive free cash flow, which is funding our needs for SG&A and new products, as well as shown in third quarter, generate some excess to pay off -- pay down our long-term debt as opposed to increase it.

But we also do have, kind of as a stop-gap liquidity, a credit line in Canada. And that is a he $42 million Canadian line which we have not drawn upon, and again, no current intent to draw upon it.

On the SG&A costs, the -- most of the incremental spending that you mentioned over a year ago is really going toward our new product initiatives. In addition to increased sales and marketing for things like Lingo, VoIP services, broadband services, which all kind of the new wave of telecom services, we've also been setting up and supporting the infrastructure to support those products.

So we think we have a very bright future in terms of where we're getting into the wave of all the new services that are growing significantly, as the traditional long distance becomes less and less of our business. Yes, it has been going up because we are in the start up phase on a lot of these products. But certainly, our expectation would be -- in the intermediate term, long-term that yes, we will -- those will generate a lot more revenues than they are generating now. And the SG&A as a percentage of our revenue would decline in the future.

And what you saw on the -- for your first question on the segment profitability yes, that is correct. Our data and Internet revenues are growing nicely every quarter. They hit a new record high in Q3. And as we have introduced our Lingo VoIP services, as we're introducing broadband services in Australia, and they are becoming a higher and higher percentage of our mix. And yes, those are our highest margin -- highest gross margin products in the Company right now. So you should be encouraged that the more we can grow those, the higher gross margins we will have.

Just going back on that profitability -- some (ph) profitability Neil, we talked about that the domestic long distance being the most fiercely competitive segment of your Company. And that, I believe last time we spoke, that was about 15 percent of your revenues. Obviously there's competition on the dial-up side because of migration to broadband. But that's an entirely different issue.

On the long distance side, what one of the things that I hear is that basically that your whole business is unraveling. People come back telling me that. But one of the things that from speaking with you guys that I have heard a number of times is that it's somewhat localized.

Can you give us a sense of -- basically, with all these new products you're rolling out, it seems like you're stemming some of those declines and you're doing it -- you have a reasonably well -- a good job of stabilizing your revenue base. Can you give us a sense of -- is the whole inter- and intra-country domestic long distance under pressure? Or is it somewhat localized?

I think a good example of that is in Canada. We reported to you at the last conference call that because of actions by the local -- not dominant, local providers of Bell Canada and Telus that during the second quarter April, May and June we're actually having a decrease in our net number of customers. And I'm happy to report this quarter we have turned that around. And we have now net new customer additions in Canada for the third quarter. And of course the customers lead to minutes of use, and leads to revenue.

We also have been -- so, I think the answer is yes. And we have started to stem the decline of our long distance customers and usage. In Canada, we also announced in -- remember in June, a local product. So we were able to now offer a bundle of local and long distance services to our customers to really combat Bell Canada's offerings, where they were discounting long distance and making it up on local and some of their (ph) (technical difficulty) and things like that. And that seems to working very, very well.

And there's really two dynamics. One is that when we now sell a customer local service, as John mentioned, over 90 percent are taking long distance as a package or a bundle. And we're also getting -- customers are being attracted to a fixed-price long distance amount, where they get a certain amount of calling, 1000 minutes for a fixed-price. And we're able to bundle that, not only with our traditional local service, but also with our VoIP service.

With VoIP, everybody is taking a bundle on the fixed-price of local and long distance. And the ARPU or the revenue per customer on local is about 4 times what it is on long distance. So when we get a package of local and long distance, we lose a long distance customer. We lose onetime revenue. But when we gain a bundled customer we get 5 times revenue.

So I think the dynamic of replacing the revenue, hopefully in the near future you will see us where the revenue from the new service is now overtaking the decrease or loss of the domestic long distance.

Vik Grover, Needham & Company.

A couple of questions here. What were total Voice over IP revenues in the quarter? And can you give us some more insight into what is going on in your Lingo business in terms of where are the subscribers, I guess by market or region? And what has been the reaction of this unlimited Asia calling plan? It seems like something that is unique out there. And what has been the reaction of your agents to the Lingo product and your plans there? Thanks. In other words, with the agents, are they seeing it as an opportunity or a threat or both?

Vik, this is Paul. So let me answer the last question on lingo. Lingo certainly is doing very well. They are signing up lots of customers. As John said, they were retail VoIP customers and now it's say (ph) 25,000. We're the first ones to introduce new services, including the unlimited Asia service. The response to that has been positive.

At this point, we are not advertising that one very heavily. But again, in the course of our advertisement campaign, that we would have more focus on. In terms of the agents, again, other (ph) our agents will also be selling Lingo service. And they are very anxious to actually sell it. There's no -- it's all positive from their side.

And we have been investing a lot of money into the system to automating all of the transactions and the -- the commissions fees, and so on. As you also know, Frost & Sullivan studied general (ph) gave us very high standing in work (ph) as all other competitors so we were trying (ph) to understand right at the top.

It's all of these positive things are going on in general in Lingo. And we have a very differentiated service, because we have a global focus on that. We have the most number of countries where we can give the ID numbers to our customers. So anyway, all considered, we're very excited about the Lingo service. And you should only look for more positive results on that.

Okay. And then what were total revenues in the quarter? And I guess a follow-up would be -- total revenues including the wholesale Voice over IP. But also a follow-up -- everybody is focused so much on the consumer segment, especially with Jeff (ph) talking about Vonage, it seems, every week in the new show. But can you talk about your enterprise strategy, because it seems like that's really where the profits and bigger opportunity to be.

As you know, we have an SME customer base. And I think this service applies (ph) Lingo business, as well as IP related services -- are ideal for SME base. And you should expect us to -- in every country, we are rolling out services based -- some based on Lingo, some based on enterprise IP technology. So it definitely has a very bright future for the business customers.

Vik, I was going to add that the reaction to our Asia-Pacific program is excellent. People seem to be very excited about Lingo. We're getting a lot of orders -- a lot of signups, not only for Asia-Pacific. But we also were the first ones to introduce -- calls to Canada and to Western European countries were included in the basic package.

And so it's generating, I think, a lot of excitement. As Paul said, that's how we differentiate ourselves. We have the international network. And we can offer not just domestic local and long distance calling, we can also offer selected international calling included in the base package. And then very good for other countries, very good incremental long distance rates for people calling other countries that are not in the package on top of that.

So I think, as John mentioned earlier, 20 percent of our customers are actually porting their main Verizon or SBC line over to Lingo. So we think that's very encouraging. If that trend continues and hopefully gets a lot bigger, we will be taking local lines away from the RBOCs.

(Operator Instructions) Chris Roberts, Tejas Securities Group.

I want to clarify something that John said. And maybe I misunderstood it, but the statement was that the Company was spending a negative EBITDA of 25 to 30 million a quarter on the new initiatives. Is that correct?

On an annualized basis.

On an annualized basis. So the new initiatives right now are draining or taking out about 25 to 30 million annualized. Obviously, you expect that to decline over time.

Yes, I think that would be the EBITDA investment in initiatives that today are not contributing general (ph) too much in revenues, in the early very early start up phase. So it is a significant investment.

Right. Okay. Also, Neil, I was wondering if you could help me work through the ending cash balance. It looks like the total change in cash, including restricted, was about 9 million quarter-over-quarter. I see that adding in the debt buyback and the settlements in CapEx, it looks like there was (sic) actual expenditures of 17 million during the quarter. Was the difference a positive working capital adjustment?

The working capital -- actually it was fairly neutral for the quarter. We may have gained a couple of million dollars from that. So I think working capital pretty much didn't amount to much of a change. But as you said, the numbers were that we generated $18 million cash -- positive cash flow from operations. We spent 9 on CapEx.

There's about 2 million that we used for obligations related to business acquisitions. And then we did spend that resulting free cash flow of 9 million, plus more, to retire $21 million of our long-term debt. So I think we're continuing the pattern of generating free cash flow, payoff long-term debt, and long-term debt keeps going down.

Richard Klugman, Jefferies & Company.

I had a couple of questions, if I could, as well. I will go through them one at a time. First of all, I think Vik was asking about the revenue breakout of VoIP versus data. You gave it on a combined basis. Can you tell us how much it was separately?

The level of granularity that we report is data, Internet and VoIP combined. And it was $63 million for the third quarter.

Right, but are you -- you're going to provide that, I presume, in the Q separated?

Again, I think as we said last time, we are a little sensitive because this is just getting started. And that is a competitive piece of information, both in the U.S. and in other countries.

Okay. But needless to say, given the Lingo rollouts, the VoIP should have a pretty nice sequential boost in there, I presume.

Yes. We're very pleased with the signups and turning those signups into revenue-producing customers. And yes, the revenues from VoIP are growing very nicely.

And forgive me, both you and John said this, and I wasn't sure I heard it. The LNP percentage of the gross additions for VoIP was what percentage?

It's around 20 percent -- 2 zero.

I thought I had heard, both from talking to AT&T and Vonage, that they had been talking about a majority of their customers were switching lines.

That would be great news for us if our percentage went up to 50 percent or higher. We would be very, very pleased because that means we're taking business from SBC and Verizon that we, heretofore, never were able to participate in.

So the majority of your customers you think are using this as an additional line as opposed their primary line?

Currently, those are our statistics.

Okay. That's great. Neil, could I ask you on the foreign exchange, you said -- and I hate to get overly granular here. You said it was essentially stable, normalizing for currency. So effectively, there is 1 million or 2 million of positive currency impact in this quarter?

Yes. That's correct. For Q3 versus Q2 it was 1 to 2 million dollars currency effect.

Okay. And next quarter you are seeing -- we can run the numbers, obviously, on how this plays out. But I'm guessing you have already. If the exchange rates stay where they are today, how much will that 1 to 2 million be impacting third to fourth quarter?

Again, I don't know what's going to happen from November 1 through December 31. But I said it in my remarks that at the Q3 average exchange rates, which is numbers reported today, revenue would be kind of equal to slightly positive for Q4.

However, today's exchange rates, if you have been following especially for the last week or two, the foreign currencies have just soared. And if that level is maintained, we're going to have a huge revenue increase versus what we've had so far this year because of those currency impacts.

Okay. So assuming, if they stayed right where they are today, do you know roughly where that 1 to 2 million goes?

Again, I think that if they -- well I don't want to give a number, because as soon as I say something, it will go down tomorrow.

Well no, I am not holding you to it because you don't control those -- the foreign exchange.

Again, we have not been mid quarter calculations. But all I can say is it would be significantly higher. You would show a very nice revenue boost for PRIMUS in Q4, and gross margin boost and EBITDA boost if they were to stay where they are today.

Okay. Great. Talking about gross margin, you've got a lot of moving parts and I want to understand, if it's possible, where we should expect the gross margin percentage to go over the next handful of quarters, because as you said in the opening remarks, you're adding on new services, some of which have different gross margins than your traditional long distance. Can you talk us through that trend, where this is heading?

You know, one way to estimate is that the new revenue streams, on average, have about I would say half the gross margin percentage of the long distance and dial-up Internet services, just in rough numbers. So, that means for us to get to the same gross margin, to maintain the current percentage, we've got to have the new initiatives to generate twice as much revenues as we may lose some long distance and dial-up Internet services.

Now, the good news is as we go in the future, because the new initiatives initially have lower gross margins, but as we develop more scale in those, the rapid growth margin and percentage turns will expand for those services.

As a result of scale (multiple speakers)

As a result of scale and to just give you statistical examples, take DSL in Australia. As we talked last time in our conference call, the gross margin of that is pretty much nil. There's no gross margin and you could argue that we may even be losing a little bit of money today because of the Telstra cost structure and the market prices there today.

However, we continue to -- we want to gain as much market share as we can in the DSL business in Australia, knowing fully well that it will negatively impact our gross margins. Now, the reason for that is as we are investing in our DSL network in Australia, the gross margin -- positive impact of that will be in the range of 30 to 40 percent incremental gross margin. Once we have the revenues, we have customers, as our network comes online, for the customers that we migrate to our net we would have a huge increase in gross margin.

There are other projects which may also benefit from implementing our network. So what you have is for the next 2, 3 quarter some of the new initiatives are going to have very little gross margin. But we do have a roadmap whereas the gross margin would expand substantially. And that is the reason why you are investing in those and why we are accepting lower gross margins at this stage.

That's really helpful Paul. I want to make sure I understand, though. The VoIP, I thought, was higher gross margin?

VoIP is higher gross margin, yes. That's absolutely right. Certain products are general same growth margin, accretive to our gross margin today. Then you have other projects which, initially, will not have very high gross margins, just example I gave you on DSL in Canada.

Okay. That's really helpful. One just final thing if I could. You gave out some good information on your customers. I think, John, you were mentioning this in your remarks about VoIP worldwide, Australia broadband, Canada local. Can you kind of give us a sense on -- directionally where that's going? I imagine the VoIP is still kind of in the early stages in -- hopefully approaching a hockey stick like as we go into next year. Is there any kind of color you can provide on those 3 statistics for what we can expect going forward?

I think it would be fair to say -- the -- how fast they grow partly is going to be a function of how much marketing money we invest in those, because the projects are very good. We talked about Lingo. We talked about local services in Canada, and the mobile services that are being introduced this quarter. I think, then, it's going to be a question of how much marketing money we put behind them and the effectiveness of the marketing campaigns. But overall, general direction -- I'm confident it will be positive. That's why we're investing money in these projects.

And I will dream tonight of your hockey stick formula, Rich.

Well, thanks a lot. I appreciate it.

Stephen Glenn, Morgan Stanley.

Last quarter you talked about the third quarter being your low watermark for EBITDA. I thought it was going to be up sequentially in the fourth quarter. Let's just talk about what has changed, why you are giving a range of 25 to 30 in the fourth quarter. Is that just advertising is higher than expected in the fourth quarter?

Steve, I think, basically, we have had some very good initial traction with our new initiatives, and primarily the fourth quarter EBITDA. And you know, we've given a given a pretty wide range of 25 to 30. But I think a lot of that is reflecting the success that no, we want to advertise more. We want to get more customers.

Right now, in Australia for example, as John mentioned, there's a land grab for DSL customers. Telstra has significantly dropped the price. There is a big wave of customers switching from dial-up to DSL and -- as a result of the price decreases. And we want to be participating and get our fair share of that wave. And come a year or two years from now, it will all be gone, because everyone would've locked into one or two-year contracts. And that shift would be finished.

So we think the best strategy is to spend the money now to get those customers so we have them in the future. So, you're right. But again, we gave a range. So we will see where everything comes out. But (technical difficulty) in one sense, you should hope that we do have success and traction, so that we do spend more money and we get more customers from it.

Okay. I had another question. Earlier in the year you talked about significantly improving your working capital. In other words, using a lot of cash to -- I thought was to reduce your payables. But looking at what you have done so far this year and your guidance for free cash flow for the second half of this year, it looks like working capital will probably be flat if not slightly down. I was just wondering is that correct? Has something changed? Is there some reason why the payables maybe were not being reduced like we originally thought?

Well, during the -- we said that was primarily in the first half of the year. And if you would go back, we did spend a fairly significant amount of money in Q1 and Q2 in bringing our payables more current. And right now, actually, our accounts payable are the most current in terms of numbers of days that they have ever been for PRIMUS. Conversely, on the accounts receivable side, our receivable days outstanding has gone down to the lowest level that it is ever been.

So we've been bringing our -- collecting our money from the customers faster, going to more billing upfront products like VoIP and other things, and then also bringing down our payables. So I think the big changes in those numbers happened in the first 6 months of the year. As I mentioned for Q3, it was fairly stable. And that would be my expectation for Q4.

So I do say we had given the range for the second 6 months of $5 to $10 million free cash flow. And you know we've generated 9 for the first 3 months. As I said, we expect to be at the high end or above that range when all is said and done at the end of the year.

Okay. And sorry, then just last the question was the $6 million debt obligation settled in the quarter, where in the debt breakdown would you find that? Was that in an AR facility or a leased fiber cost or something like that?

No, that was in the other AR section. It was not -- we had a total of $21 million of debt reduction. 6 million was the other debt.

Other AR section? Okay. Great; thank you.

Ladies and gentlemen, unfortunately we don't have any more time for questions on today's presentation. Ladies and gentlemen, that does conclude today's presentation. Everyone have a nice day. You may now disconnect. Good day.