Innovate Corp (VATE) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2005 Financial Results Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session, and instructions will follow at that time. Should anyone require assistance for the conference, please press "star" then "zero" on your touchtone telephone. As a reminder, this conference is being recorded.

I would now like to introduce your host for your conference today, Mr. John DePodesta. Sir, you may begin.

Thank you, Patrice. And good afternoon, ladies and gentlemen, and welcome to PRIMUS's third-quarter 2005 financial results conference call and webcast. I'm 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 website, at "www.primustel.com."

Joining me from PRIMUS on today's conference call are Paul Singh, Chairman and Chief Executive Officer; Neil Hazard, Executive Vice President and Chief Operating Officer; and Tom Kloster, Chief Financial Officer. We will begin with formal remarks from management regarding the Company's third-quarter 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 historical 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 website 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 begin the management comments with some brief remarks. As the results reported today indicate, the Company has made great progress in executing on its strategy announced in 2004 to transform PRIMUS into an integrated provider of local and long-distance voice, broadband, VoIP, wireless and data services. With these new products gaining traction, we are now on trajectory to exceed comfortably our previously announced goal of exiting 2005 with an annual revenue run rate of $100 million from our new initiatives.

We have also reached some critical inflection points, with our Canadian operations leading the way. In the third quarter, Canada produced record revenues. Significantly, the revenue growth from the new local and VoIP initiatives exceeded the decline in our long-distance revenues. While competitive developments aided this outcome, primarily the retraction of the loss leader low-rate long-distance calling plans by our competitors, the growth of our new initiatives is gaining momentum and our product bundling remains strong in the 90% range.

In Australia, we are now on trajectory to exceed our broadband customer goal of 120,000 by year end 2005. The build-out of our DSL network is also progressing, as is the migration of services onto our network, both of which are key drivers of margin expansion. In recognition of this progress, it was gratifying to have our Australian team receive the top broadband and CEO prizes at the recent Australian Telecom Award Ceremony. Congratulations to Greg Wilson and his team on a superb performance.

These initiatives and investments, which now enable us to offer a broad spectrum of product and services, with favorable growth and margin potential in our key Canadian and Australia markets, have clearly improved our competitive position, as well as enhanced the value of our franchises in those countries. We believe that this, in turn, creates potential opportunities for bright investors with more visibility into the true value of those operations.

In a related area, as we are all well aware, the VoIP space has drawn increased attention as a consequence of the recent EBay-Skype transaction, the initiatives announced by Google, Microsoft and AOL, as well as speculation relating to a potential IPO of Vonage. In this environment, we will remain flexible in evaluating the feasibility of realizing value from our wholly-owned LINGO subsidiary.

I will now ask Tom Kloster, our Chief Financial Officer, to review the operating and financial results for the quarter. Tom?

John, thank you and good afternoon. Our third-quarter results reflect continued solid progress in our new initiatives and our return to revenue growth in both our Canadian business and our prepaid services business. However, as expected, we continue to experience a decline in our high-margin retail core long-distance and dial-up ISP businesses.

Third-quarter net revenue was flat compared to the prior quarter. Prepaid services revenue increased $10 million for the quarter, driven by our previously announced expansion into new markets, including the US.

We continue to be encouraged by strong revenue growth from our new product initiatives, which grew to $26 million, $6 million higher than the prior quarter. These increases totaled $16 million, fully offsetting declines of $9 million in retail long-distance and dial-up ISP revenue, $5 million in low-margin wholesale voice revenue, and a $2 million decline as a result of the strengthening US dollar.

As we made clear on previous calls, we continue to experience a decline in our core retail long-distance revenue from those countries in which we operate. Through introduction of new product initiatives and the resulting increased bundling capabilities, we have succeeded in slowing the overall rate of revenue decline in certain markets, though we continue to foresee customer usage of long-distance and dial-up services declining as a result of alternative solutions, such as unlimited mobile calling plans, VoIP, and various messaging solutions.

We are obviously encouraged by the $6 million sequential revenue gain from our new product initiatives, an increase of 31%. This strong growth was primarily driven by success in Australia Broadband and on-net local services, Canadian local lines, wireless, and VoIP services.

Our mix of revenue on a geographic basis remained well balanced in the third quarter. Retail revenue was 81% of total revenue in Q3 -- residential comprising 56%, and business 25%, while wholesale was 19%. Despite an anticipated decline in our dial-up ISP revenue, our data, VoIP and internet revenue remained stable at $70 million, or 24% of total revenue, for the quarter.

Net revenue, plus cost of revenue as a percentage of net revenue, was 32.5% as compared to 33% in the prior quarter. Our margin this quarter was adversely affected by $5 million of network transfer fees, up from $2 million in the prior quarter, reflecting the strong growth of new local customers in Canada, new DSL customers in Australia, and migrated on-net local and DSL customers in Australia.

As previously stated, these per-line fixed fees are approximately $110 in Australia and $40 in Canada. However, we expect the per-line fixed fees in Australia to decline and, thereby, have a positive impact on our margins.

SG&A expense was $93 million, 31.9% of net revenue, for the third quarter as compared to $99 million, and 33.6% of net revenue in the second quarter. The sequential decline was driven largely by lower salary and benefits cost as a result of lower headcount, lower professional fees, travel costs and general SG&A expense reductions.

The decline was despite a $3 million sequential increase in distributor commissions related to the growth in our prepaid services business. We remained firmly committed to effectively managing our cost structure. The impact of headcount reduction actions completed in the latter part of the third quarter was not fully reflected in third-quarter financials.

As a result of these ongoing benefits, together with further SG&A expense reductions planned before year end, we expect to see the overall SG&A levels continue to decline in the fourth quarter. Adjusted EBITDA for Q3 was a positive $2 million as compared to negative adjusted EBITDA of $2 million in Q2.

The $4 million sequential improvement is primarily a result of $5 million of lower SG&A expense and the inclusion in the prior quarter of a nonrecurring $3 million write-down of European prepaid card receivables and stock inventory. These improvements are offset by the previously discussed $3 million increase in network transfer fees.

As we made clear in our earnings release, we expect to report substantial sequential improvement in adjusted EBITDA as part of our fourth-quarter 2005 results. The expected improvement is as a result of, one, continued cost management actions; two, additional customer growth from our new initiatives; three, a full quarter of margin benefit from Australian DSL and local service customers migrated on-net during Q3; and four, improved performance from our prepaid services and LINGO businesses.

Below the adjusted EBITDA line, the third quarter reflected a $13-million non-cash asset impairment write-down, a $4-million non-cash loss on our early debt extinguishment, and a $2-million non-cash gain recognized on foreign currency transactions. Net loss for the quarter was $51 million, or a loss of $0.51 per basic and diluted share.

We ended the quarter with a total cash balance of $80 million, including $11 million in restricted to cash. We utilized $21 million in cash for operating activities and spent $12 million on capital expenditures during the quarter. This resulted in negative free cash flow of $33 million for the quarter. We expect the fourth quarter free cash flow to improve substantially as a result of higher adjusted EBITDA, reduced capital expenditures, lower levels of cash interests and active management of our working capital changes.

During the quarter we reduced existing debt by $4 million. We completed the exchange of 12 million principal amount of our 5.75% convertible subordinated debentures due February 15th, 2007 for 7 million shares of PRIMUS's common stock. That was further reduced by 5 million from scheduled principal amortization. These decreases were offset by an initial draw of Canadian $15 million by PRIMUS's Canadian subsidiary under an existing Canadian $42 million loan agreement with a Canadian financial institution.

We ended the quarter with long-term debt of $642 million. The improved operating performance, continued cost reduction efforts in our ability to moderate capital expenditures, combined with potential financing alternatives and/or interest expense savings should allow us to meet our cash needs in 2006.

I will now turn it back to the operator to open the call up for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Dave -- our first question comes from David Scharf.

Good afternoon, guys. I wanted to follow up on the LINGO side first. I guess I just wanted to understand -- you talk about here that you sort of moderated your investments in LINGO, and I guess if I look at the LINGO growth within the US alone, maybe a little bit slower then I would look for of about 8,000. So I was just trying to understand -- I mean, given the importance of that business for you and the overall valuations being ascribed to that sector broadly right now in that opportunity, just why -- first, why you're moderating some of your investments there?

David, John DePodesta. I think during the third quarter what we experienced was a situation where a very effective marketing program got out ahead of our ability to service the new customers. So what we had to do, quite frankly, is to step back and invest in some critical infrastructure to expand our network capacity to improve the quality of the services. And as a result, we moderated the marketing expenses until we felt we had the infrastructure platform to accommodate the increased customer needs. Those investments have now been made and the marketing efforts can resume.

So as we look to the fourth quarter then and what you've seen thus far in October and what you plan to do this quarter, you do think that you'll turn the machines back on basically in terms of sub growth and look for that to pick up?

The one major thing we're doing here is also we're trying to moderate that investment, along with trying to enhance our EBITDA performance. As we have indicated in the past, the LINGO operation continues to be a major consumer of EBITDA. And we're very focused on trying to bringing into balance the investments we made with our resources to get the maximum returns from EBITDA. So while we expect to continue marketing efforts on LINGO, we also have demands in our broadband, in our local services in Canada and Australia that are also competing for those dollars and maximizing our returns.

I guess just in terms of your distribution channels and your attempts to grow the LINGO base, I mean, there was some discussion over the weekend in some of the press about Vonage and its marketing costs and the CPGA. I was just wondering if you can give us a sense of where CPGA and your cost per gross add is coming out for LINGO right now? And in addition, on some of the churn trends you're seeing -- and I don't know, you kind of haven't given specific numbers before, but if you can talk about maybe the trends and what help customers who're actually experiencing, again, the overall churn rate?

Yes, I think on the subject of acquisition cost for customer add, David, I assume you are referring to Barron's article?

That's right.

Well, that is 200 to 600 -- between $200 and $600 per customer acquisition. I think as I said last time, ours are more -- have actually become better, at least, for the last couple of months, more towards the low $100 range. So that has improved over what we had seen last quarter. Now some of it may be because of the moderated marketing spends, so you tend to get more efficient. So clearly, we are nowhere as high as what Vonage is showing.

Okay.

So that's definitely better. As I said in the last conference call, our ARPU is much better than any of the independent VoIP providers. So that range is -- I think I did mention last time, it was around $28.

And in part, David, that's because our service, somewhat uniquely, has a strong international component to it.

Exactly. Churn is improving, as we are making more investments into capacity expansion, as well as putting in more note closer to the customers, improve on the latency, which has positive impact on the call quality. And that has -- that, in turn, reduces the churn.

Okay. And on the --

I think the metrics are pretty good. I think, like John said, we got to balance how much money we spend on marketing. Obviously, if we had -- we spend $5 million to $10 million per month of revenues to grow proportionately and frankly, with that with better metrics than what Vonage has. But we got to balance with our other competing alternatives.

Okay. Thank you for that, Paul. Tom, just a couple of -- just a finance question on the balance sheet. Your drawdown on your facility in Canada, just wondering what carve-out were you able to use in terms of your bond debentures to be able to draw down on that facility? And what restrictions are there on you completing to draw down on the remaining amount of that facility?

We drew down on the Canadian facility under the capital expenditure carve-out, that $50 million of capital expenditures.

Okay.

So the proceeds will be designated for CapEx needs. We still have a sizable portion of that $50 million available. This was roughly $13 million in US dollars that we drew down. We had some small CapEx in other parts of the world, but for the most part, we have got roughly the remainder of that $50 million, say, $35 million under the bucket. Within the Canadian facility or the Canadian loan agreement, we can request additional draws and the lender has the right to allow those to review our progress, review the Company's financial performance and determine whether to make those fundings or not. But we don't have any reason to believe they would not.

And as I mentioned in my remarks, David, our Canadian operation is performing extraordinarily well.

And that the real driver for the borrowing is the results of the Canadian organization.

Okay. And just one last question and then move on to others. On the debt for equity side, you had done some 5 3/4 conversions into equity as of your August press release for your second quarter results, but none since,if I'm looking at that right. And I guess, Tom, is that your lack of willingness despite the equity did pretty well for parts of this quarter, or were you just not presented with the opportunity by holders?

It could mean a meeting of the minds with some other participants. I think there continues to be interest among holders in doing these transactions but -- and they obviously initiate these transactions. And hopefully, going forward, we can continue to be opportunistic and consummate some.

David, you are correct in how you are looking at that. We completed 5 million of principle value in Q2, 12 million in Q3. At the time we did our second quarter earnings release, we spoke of 17 million because the 12 million had already been completed. So there hasn't been anything new since the date of our last earnings release.

All right. Thanks, guys.

Our next question comes from Romeo Reyes of Jefferies. Your line is open.

Yes. Just general questions on sequential performance on your ARPUs here with some of these -- some of the new initiatives. Canadian ARPU and bundle of customers appears to have declined from $47 Canadian in Q2 to $40 Canadian in Q3. Can you give us a sense of why that is?

Also on the VoIP LINGO ARPU, it seems like you were around $28, $29 for Q2 but based on the numbers that you're putting out here, $7 million of revenue and 20,000 customers, it seems like the ARPU, even using the average number of customers during the quarter, that the ARPU is around $23. So I don't know if there is ongoing pressure there, but can you give us a little bit of detail there?

With respect to Australian -- the migration, the 40,000 services that you have on net, are you pretty much done there, or how much more should we expect in one-time fixed cost here in migration expenses? And lastly, on sort of the cost cutting that you mentioned in the press release, that some of the initiatives didn't make it onto the P&L here because they took place late in the quarter, can you give us a sense of sort of what a run rate EBITDA would be if you were to eliminate or back out the -- some of the costs that you've taken out of business late in the quarter? That will be great. Thanks.

Hey, Romeo, this is Neil Hazard. I'll take one of them, which is the -- your third question on Australia, yes, we had migrated approximately 40,000 of our customers over in Australia to our own network. Our original goal that we had stated last quarter was a total of approximately 60,000. And we still think that at the end of the day, yes, we'll have upwards of 60,000 customers from our existing base migrated on that. We are working closely with Telstra to make that happen, but it's a very complex network project where the -- it's the first time they've ever done it because we're the only other carrier with global customers on Telstra that they're putting in our own network. So yes, we will get to the 60. We do expect a chunk of those will be done in the fourth quarter and then I think if that effort will continue on in Q1 and hopefully ramp up by the end of Q1.

Will you invest in other nodes, other [COs] or are you going to retrofit with your R&D plants, so that you can migrate more than that 60,000 number? And are you seeing the margins that you are expected to see on some of the off-net customers?

Yes, as we initially announced, ultimately, the end goal is about approximately a 300 node network in Australia. We had announced kind of phase one, which was (inaudible) getting up to 189 nodes, which we are on track to do. We said in the press release were at 134 up and running today. I do expect that project will continue and we will, by the end of the first quarter, be upwards of 189. We call it phase one. The margins for on-net services are great. And the sweet spot for us is really to get a customer with bundled local, long distance and DSL on that. So obviously, those kind of combined customers or bundled customers are the first ones that we want to put on net and if the margins on that are -- or better than we used to get for long distance. So that's the sweet spot; that's where we want to move towards.

How much of income on CapEx would you have to invest to get from 189 nodes to 300 nodes?

They're running about -- for the initial setup, it's in the order of $75,000 to $100,000 per node. So that would give you a rough estimate of the total project. But again, we don't -- that will be spread out over time, so it's not only going to happen in Q1 or next year. So Romeo, I'll jump in and try to answer of your other ones here. Your first question related to in Canada, the bundled ARPU last quarter. We referenced 47 versus 40 this quarter. That really relates to -- we estimated what we thought the long distance ARPU would be in the bundled product set last quarter, and now as we're seeing more history of the bundled service offering, we're seeing that the bundled customer uses long distance less than the standalone long distance user. So before we were combining the ARPU for the local service plus the ARPU of a standalone long-distance customer to come up with 47, the actual usage of these bundled customers now is turning out to be little bit closer to 40. We adjusted that.

Is that going to continue to decline?

No. I don't think it will decline. I think it's just an adjustment based on what we now have in the way of some history and some trend on these bundled customers versus where we were estimating it based on standalone ARPU combined with local ARPU. So there is no reason to think that will decline.

One of your other questions then was -- we did mention that we had some further headcount reductions that took place later in Q3, so that we didn't have a full benefit of those headcount reduction actions. But as well as there is, various cost savings actions that go into place over the course of the quarter, whether it's trying to reduce professional fees or travel costs or a variety of things. So we will see the benefit of all those for a full quarter in Q4. However, we also expect to take additional action in Q4, which we won't have a full quarterly benefit of those actions. As far as projecting out what that means in the way of run rate and so on, and it's like we are ready to put a number out on that. But we did state that we are comfortable that SG&A will further reduce in Q4 from the Q3 levels.

And on the VoIP part, Romeo, how did you calculate again?

Yes. You indicated in the press release that you produced $7 million of revenue --

Right.

-- in the quarter and you have 100,000 customers overall at the end of the quarter and that's up approximately 15,000 sequentially. So all I did was I took the 7 million --

Got it.

-- and divided by the average number of customers in the quarter.

Got it. I did say 7 million number is for -- John, if you could add.

That's LINGO.

It's just for LINGO. So if you take that one for that, say, roughly $2.35 million per month divided by average of 74,000 customers, you would actually end up with about $31 ARPU.

So the $7 million is just for the US?

Yes. That's just for the LINGO revenue.

Yes. In the -- in our press release under the description of the retail VoIP services, now we have -- say in the other revenue from LINGO customers reached 7 million during the third quarter. So the 7 million was just for LINGO customers.

I got you.

And we have a product [mechanical] talk broadband which is similar to LINGO, a residential VoIP Internet service.

Yes.

But that's outside the 7 million. So I think if you look at the ARPU numbers and the revenue numbers, you would find them to be much better than what you see from (inaudible) others.

Okay. Just if you don't mind, one last question here. On CapEx, what's a realistic number? I guess last quarter we talked about $20 million to $25 million potentially being an adequate range for 2006, as you look to cut cost and also cut CapEx. Is that a realistic range still for 2006, would you say?

I don't recall, since putting a range on 2006 CapEx because it's, I think, a little too early as we go to the 2006 planning and see which initiatives we want to pursue. Then, we'll have a much better sense of it. But for this year, we had set a range of 50 million to 60 million. We probably end up on the lower end of that range for 2005.

Great. Thanks a lot.

Our next comes from Bill Heffron from Regiment Capital. Your line is open.

Yes, just going back to David's question on churn, I know you said it's improving but can you give us a little bit more actual numbers?

We have not given the numbers for competitive reasons. And also as the general churn actually gets impacted by all the improvements we are making, so I can tell you simple (inaudible) and it's it will be -- what else can I tell you? So anyway, we haven't given the numbers, but it is improving.

Maybe you can then talk about some of the issues you were describing in terms of why you have to slow the growth down because of operational issues. And can you give us some kind of specifics in customer reactions too?

Well, there is, I think, two reasons, which are related as well as somewhat not related. First one is, we want to have here managing the cash. As we are transitioning in 2005, remember, we started the year by saying we want to accelerate all of the major programs sort of simultaneously, so we can implement them and introduce the product, get traction and make sure we can prove our business model. As we are going into the fourth quarter into 2006, now I think I'd say, team, we have achieved those goals, as we are seeing progress in DSL, in local, in LINGO. So now we know the models and they are getting traction.

We are now slowly transitioning into -- putting more emphasis on EBITDA enhancement, generating more profits out of what we have already invested in. As we are going through that, we are looking at how much cash we can invest in different growth initiatives, because LINGO is a great product and good growth initiative; so is DSL in Australia; so is local in Canada, and a number of other initiatives where we can actually put in the marketing money and generate growth and profits.

So it's a balancing act of that one is that we are moderating in LINGO. Second is, in LINGO, like John had said -- that the network -- we wanted to expand our network to make sure there's ample capacity. And we get ahead of the demand, the expected demand, by a quarter or something, plus the DSL latency in our network, which essentially a lot -- you need to put in more nodes closer to our customers. And so that has been accomplished. That simply improves the quality of our service, and therefore, we should have positive impact on churn.

All right. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Brent Brewer of APS Financial. Your line is open.

Yes. Thanks. Good afternoon, guys. Just a few -- mainly just housecleaning type things. I was just curious, I didn't see -- I looked through the release quickly and have been listening to the call, but I didn't hear anything about an explanation for the $12.8 million asset impairment charge?

Yes. Brent, there is not some one particular -- there is not one particular situation there. In the past we've decommissioned a switch and put in a soft switch. That's not the case with this charge. It was basically a number of smaller issues and, in effect, kind of a cleanup of our asset base to make sure that any assets still on our asset register that are no longer in service were properly impaired. So the combination of anything from some IR used fibers that are no longer in use to leasehold improvements from buildings that we have since vacated, there are just a variety of things.

Okay. So it sounds like -- just looking at the sequential operating cash flow usage, it looks like there was a fair amount of that, looks like it could be cash related, or were there some another working capital items going on in there to make the cash usage a lot higher than the operating cash flow this quarter?

It's not that much in working capital, but there was a little bit used into the tune of about $4 million that improved our working capital or our payables balances. But the primary issue really relates to -- Q3 and Q1 tend to be a much heavier month from a cash interest standpoint. So we had interest paid in Q3 of about $18 million, and then Q4 will be much less than that, more down in the neighborhood of 9 million to 10 million, and then, Q1 jumps back up. So that's the primary issue.

Okay. All right. And I don't know if you could comment on the -- I saw that the -- you talked about the Canadian labor situation affecting installs a little bit there. Did that affect -- is that going to affect sort of the year end? It looks like it will probably affect the year end local line installed base there. Is there any guidance on that, and is that situation pretty much under control now or what's going on there?

Well, at the moment, Bell Canada has returned to work, I believe [Talus] is still having some issues. But the shorter answer is yes, that will impact the amount of new local lines we can install during the quarter. Kind of coincidentally, just on a seasonal basis, we tend to back off our advertising spending between Thanksgiving and Christmas, around the holidays, because there's a lot of cell phones being advertised and other things, plus advertising rates go way up in the Christmas season. So traditionally, we advertise in October, some in November and back off, so just kind of two unrelated things. That's going on in the fourth quarter also. But it wouldn't make sense to spend more money on advertising. Anyway, then with the strike, it doesn't even make -- it makes less sense. So -- but yes, that will -- it will lower our order input in our new orders coming in for Q4, and then we expect -- and hopefully, everything get resolved. After the holidays, we're back on our previous program.

Okay. And just kind of one last follow-up on some questions about Australia, you talked about the strong ARPU of the bundled customers there and getting them on net. Can you be any more precise on sort of the gross margin difference in a customer (inaudible) long distance model off-net versus this on-net bundled customer with ARPU maybe?

The revenues in Australia for a complete bundled customer, which is the ones who want it, is upwards of $100 Australian. And again, the margins -- remember, in the past we didn't have a network, with a local component, it would be basically a resale of Telstra at very, very little margins in the single digit. And once we're able to put that in DSL or on-net, we're up well above 50%, 60% gross margin with that bundle on-net. So it rivals the old gross margins for just pure long distance on that, but we get DSL and local thrown in on top of it so (inaudible) three or four times or it was just for pure long distance.

Thanks a lot, guys.

Okay.

Our next question comes from Chris Roberts of Tejas Securities. Your line is open.

Good afternoon. Thanks for taking my call, guys. Most of my questions have been answered. I just want to get a little further clarification on LINGO. Last quarter, you talked about a breakeven level there would be in the range of about 200,000 subs. With a reduced amount of spending that you showed during the quarter, do you have any comment as to what a breakeven level might be now with that lower amount of spending to support the business? You might be breakeven at, say, 150,000 subs.

Do you know, my sense of this is it's still going to take probably fairly large number to break even because as you had -- if you don't spend enough marketing money, at some point, your churn equals to the new customers so you actually don't grow. The right thing, I think, for us to do would be to grow as fast as we can. We are managing all the costs and managed the churn. It's going to be combination of it. But I have not done exact calculations at the new spending levels, but my -- right now, I can only give you my guess, it's still going to be about 150,000 to 200,000 range.

Okay.

But maybe next call, we can give you more specific answer.

Okay. Great. Thanks a lot.

Our next question comes from Mark Anderson of Axial Capital. Your line is open.

Hi, guys. I was wondering if you just comment briefly on the competitive environment for VoIP. And specifically, my question relates to your combined objectives of trying to sort of (inaudible) cash and grow your VoIP business. Maybe you could talk a little bit about the competition out there and why you think it's prudent to spend your money on a business that appears to be getting more and more competitive every day?

I think on the competitive side, my sense is that competitive picture is clearly stable. The pricing by the independent VoIP providers in the range of, you know, $20 to $25 with PRIMUS's or LINGO's ARPU being the highest. I don't think prices are coming down, because the cable companies are in, sort of, $30-plus range and so are Verizon's and others. The question of IP demand continues to grow, and I do expect it to continue growing in the future. So it is a high-growth market.

The other part for PRIMUS -- as we are a diversified company, there are lots of advantages from us on leveraging we can get from LINGO. And that is into the enterprise IP business offering LINGO-type service or LINGO brand service in other countries, including Australia, where we would be rolling our VoIP services. So for us, it is having the service. And more we expand, more systems we have developed, we can take those systems and deploy them in other countries.

So it's not just unlike a bill-pay company where it is only that base of customers; we are kind of transforming the company into the IP arena. And it's the same technologies, similar networks, and systems could be leveraged as well.

You --

So that's the reason why you want to grow that business, but not just grow it only in the US. We can grow overseas. We can use the same feature functions into our other products. And that's kind of the process we are going through to leverage what we have spent and benefit from that in other ways.

Sure. Do you worry at all about, you know, Meg Whitman's point that voice goes to zero overtime? And I guess, I'm looking at that thing, the rate at which their business model changes and obviously, now the rate at which yours is changing, it strikes me that for a company that's got a fair amount of debt on its balance sheet, as most people recognize, to be spending your cash on voice-over-IP seems to be chasing the next rainbow, to put it --

I think you have a fair point. That's one of the reasons why we are moderating the growth. If we were a bill pay company, I would say, we grow as fast as we can, we sell the company, and you can get good returns, as the Vonage strategy and as the Skype has done. And there is a lot of merit to it.

So could we get -- and again, the reason for investing in LINGO goes beyond just the LINGO service. It is companies like PRIMUS or telecom companies must be in the IP area. If you don't have IP technology, you don't have systems, you don't do web-based or e-commerce models to service your customers around the globe, then you are just not going to be competitive.

Yes, you will save $25 million, but you may not have -- be competitive in any of your businesses. So it's a direction that's necessary. Now, do we want to spend $50 million in marketing in LINGO at this time? No, because we have uses of that cash or better uses of that cash somewhere else. But at the same time, we've got to balance our portfolio, so we can use the technology to benefit other businesses as well. So it is a balancing act.

Okay. Thank you.

Our next question comes from Steve [Siegel] of Janney Montgomery. Your line is open.

You had earlier remarked that the Canadian operation was doing extraordinarily well. And there was an article around August 15th that gave some numbers -- I think it was $5.9 million in profits. Would you say that it's expected to be up at least 10% in this particular quarter compared to the earlier? I think you said $5.6 million and the revenue was $62.9 million.

I don't recall.

I don't recall the article. We, obviously, did not supply that information, nor were we asked to comment on it. Steve, there was a point in our past, where our Canadian operations, as well as our Australian operations, used to report their quarterly performance a couple of days after our consolidated report. For competitive reasons, we had stopped doing that. But it's something that we are considering reinstituting after the 1st of the year. So both of those franchises can once again advise the market with respect to their specific metrics. And so that's something that may be available in the near future.

Okay. I think that you called it "generated a profit from operations." So that article wasn't broken down. I didn't see it, but it said it was in the 10-Q. It was a DOW story.

Yes. Steve, in the 10-Q, we do break down businesses by geographic segments. And it's a at very high level, at the revenue level, at income from operations, and I think, total assets. So those numbers are in the Q. They will be in the Q that we file on November 9th. And you'll get at least at that level, an understanding of the Canadian operations. And then, as John mentioned, we may reinstitute further financial disclosure come the 1st of the year.

Okay.

Would you --

Yes. Go ahead.

Would you remark what extraordinary well you're talking from the quarter that just happened? Should that usually be considered the number is up 5% or more or a lot better?

Well, I think, first of all, Steve, particularly in this marketplace for the Canadian operation, we have a competitive environment there to have recorded record revenues in and of itself is significant. And the other major inflection point is that revenues generated from their new initiatives in VoIP and local for the first time exceeded the decline in just the long-distance revenues. So on both of those fronts, we think there is some very strong momentum that is occurring in our Canadian operations.

I think in addition, in Canada, there are -- now we have multiple growth areas. So, one is, John talked about the VoIP as a growth area for us. But the local is probably the biggest growth area today. Now that is also being matched by other hosting business in Canada and that business is a growth business in Canada with very high margins and profitability. So we now have multiple growth areas in which we have opportunities to invest and grow the margins.

And as we grow the local business, again, at some point, once you have the customer base, you also have the opportunity and need to implement your own DSL network or DSLAM network, which will give you further opportunity to enhance your growth margins by bringing them on-net, similar to what we are doing in Australia. So at least compared to 12 months ago, when we only had long distance business and our competitors was using that as a loss leader, in that 12 months now, we have come to sort of where we have a full service portfolio. We are at least positioned in growth areas. Now it is a matter of how much marketing money we spend but at least we have those opportunities now.

In that particular article, which may be wrong, and I guess maybe you haven't even seen it, they said that according to "market sources" -- I think that's a good quote of what they had said, you were eyeing, and possible as early as September, a spin-off of that division. Are you able -- and you've said you look at a variety of things on an opportunistic basis but have you had anything besides possibly preliminary conversations with any of the underwriters up there? And if so, there were couple of articles that came out after that said the possible unfavorable tax treatment that Canada may try to work on these trusts. [If depleting] the sector, I'm wondering if that may have any effect?

Well, let me make a general statement. Over the years, we have always talked to the bankers. We like to see what our options are, what the valuations are. So that won't be something new. Now we have done that in Australia; we have done that in Canada. And that's the way we know what -- you know the franchise values, how to increase and what things we should be doing, how is the market. So we kind of keep ourselves addressed of capital market in those countries.

Right, but have you been able to get anything besides kind of the superficial stuff on specifically the Canadian?

Well, as you may know, Steve, in Canada, up until recently, the big thing for IPOs this year was these income trusts and there are a variety of businesses can be taken public via the income trust model. We think Primus Canada is one of those businesses that can be taken because we have had fairly steady cash flows over the years from Primus Canada, as well as growing revenues. Obviously, telecom isn't the hottest sector now for IPOs, but we certainly think that could be one vehicle to realize value in Canada, either as a partial spin-off and taking an IPO. And we have looked at that in the past and we are actually looking at that today.

As you pointed out, I think with some of the tax rulings and things, the income trust market in Canada has gone very cold the last few months. And I think we view that hopefully, as temporary. And come next year, maybe some of those issues get resolved and then the market will come back. But that is one of the possible vehicles for realizing value enhancement on the [political] front.

Also when we look at these things, Steve, that we do look at them seriously, so not superficially. So we have looked at them over last couple of years, maybe longer. So we know what the franchise values are and what could be done and not done.

Thank you.

Unfortunately, ladies and gentleman, that's all the time we have for the Q&A session at this time. I would now like to hand the conference back over to your host, Mr. John DePodesta.

Thank you, Patrice. This will conclude PRIMUS' third quarter 2005 financial results conference call. Replay information can be found on our website at www.primustel.com. The replay will be available in about an hour. Thank you very much for joining us today and have a good evening.

Ladies and gentlemen, this concludes today's program. You may all disconnect.