Innovate Corp (VATE) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to your third quarter 2007 PRIMUS Telecommunication Group financial results conference call. At this time, all participants in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John DePodesta, Executive Vice President. Sir, you may begin.

Thank you, Siad, and good afternoon, ladies and gentlemen and welcome to PRIMUS' third quarter 2007 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, and Tom Kloster, Chief Financial Officer. We will begin with formal remarks from management regarding the company's third quarter. 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 plan and objectives and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risks. Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the company's Form 10K and 10Q 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 remarks.

On last quarter's conference call I discussed the opportunity created by our successful financing transactions earlier this year which raised over $90 million cash and extended near-term debt maturities. These additional cash resources, and an extended runway, enable PRIMUS to take actions to accelerate growth of our high margin new services. I described our challenge then as being all about execution. While Tom will detail many of the capital investments and enhanced sales and marketing efforts that commence this quarter, some early indications are encouraging. Despite the revenue decline in our legacy voice and dial-up ISP businesses, our overall margin percentages and contribution grew in the third quarter. We believe this reflects not only the sequential growth in our new, high-margin products, which are now at a $220 million annual run rate, but also the benefits from capital expenditures in our network, which allow us to bring more services on net with resulting higher margins.

Our belief is that on going network investment, together with enhanced sales and marketing efforts, will support revenue growth and margin expansion as we move into 2008. As part of that strategy we intend to continue to fight to keep our existing voice customers through a combination of bundling, win-back campaigns and improved customer service. That business and those customer relationships are simply too valuable to lose. And we will utilize a portion of our enhanced resources in a concerted effort to retain them. Thus, through a combination, strategy of stemming the decline in our high margin legacy voice business, and increasing our investment in our new high margin broadband, VoIP, local, wireless, data and hosting services, we plan to grow our high margin revenues.

It is also significant to note that these initiatives are taking place against a back drop that is historically unique. As many of you know over 80% of PRIMUS' revenues are generated outside the United States, primarily in Canada, Australia, and western Europe. Simultaneously, the official currencies in each of those regions are trading at historic highs to the U.S. dollar. The confluence of these unique events not only results in dramatically increasing the U.S. dollar value of our foreign franchises, but also affords us the opportunity, which we are actively exploring, to lock in exchange rates to stabilize cash flows generated in our major foreign markets. In short, these are good times to be, as PRIMUS is, a truly global company. I will now ask Tom Kloster to comment on the quarter.

John, thank you, and good afternoon. Last quarter we announced our intent to invest further in both infrastructure and sales and marketing capabilities to support and accelerate growth in our high margin, broadband, VoIP, local, wireless, data and hosting products. These undertakings were made possible by the numerous liquidity enhancing events we were successful in completing in the first half of the year. I am pleased to report that our efforts are well underway. In Australia, we have made solid progress with our expansion into 75 new DSLAM locations, with half expected to be operational in Q4 and the other half in Q1, 2008. We are installing high capacity fiber to a portion of our DSLAM sites in order to provide higher speed service. These actions will provide us with broader market coverage, the ability to sell higher speed IP services, and the opportunity to place more customers on net at higher margins.

Also in Australia, we recently completed our data center expansion by adding 100 new cabinets of space. We reorganized our commercial direct sales group and are gradually adding additional quota-bearing direct sales reps while expanding our outbound telemarketing efforts focused on broadband sales to residential consumers. We have been very active in Canada as well. We are continuing the expansion of three existing data center facilities and the retrofitting of two newly acquired facilities in order to augment our ability to serve customer demand. Expansion of our hosting and IP products direct sales force is already underway. We are finalizing the installation of IP-based soft switches and migrating from our legacy TDM switch platforms which will help further improve our network operating costs. And we have increased our advertising spend focused on our bundled product offerings to the residential consumer.

In the U.S., we are also reorganizing and expanding our sales teams to drive sales of broadband and hosted IP products, targeted at small and medium-sized businesses. And we are very pleased to announce the recent appointment of DG Gulati as President of PRIMUS U.S. to spearhead these initiatives. In Europe we are successfully completing the migration to an IP-based soft switch network. Consistent with our strategy, these efforts are all designed to enhance the growth of our high margin broadband, VoIP, local, wireless, data, and hosting products. As we explained on our last call, these efforts have resulted in higher levels of capital expenditures and expenses during the current quarter. As further explained, we expect the higher expenditure levels to continue throughout Q4. Third quarter net revenue was $225 million, down 1% or $2 million from the prior quarter. As the U.S. dollar continued to weaken against foreign currencies during the quarter, especially the Canadian dollar, our reported revenue was positively impacted by $6 million.

Exclusive of the currency effect, we experienced an $8 million overall revenue decline comprised of $2 million from low margin, wholesale services in Canadian prepaid services and $6 million in high margin retail services. That $6 million decline can be further broken down into an $8 million reduction in legacy, voice and dial-up internet services, partially offset by a $2 million increase in our broadband, VoIP, local, data and hosting growth products. Revenue from these high margin growth products increased 2% sequential and now account for almost 225 -- $220 million annualized or 24% of total revenue. The average margin from these products is in the mid 40% range. These products are the primary focus of our increased investments.

Net revenue less cost of revenue as a percentage of net revenue was 39.4% as compared to 37.4% in the prior quarter. A sharp sequential increase reflects the benefit of $3 million related to a retroactive price reduction from a vendor booked during the quarter. Nonetheless, it's important to note that even without that benefit, we would still have reported sequential quarterly improvement in our cost of revenue. Our consistent progress in this area reflects both the increasingly favorable mix of [on-net] services and the continued success of our on going efforts to improve the efficiency and cost structure of our network. Our SG&A expense was $73 million or 32.3% of net revenue in the third quarter, up as expected from $69 million and 30.3% in the prior quarter.

As I mentioned previously, the bulk of this increase reflects additional investments in marketing initiatives focused on our growth products. $4 million of the sequential SG&A increase is attributable to such actions including: outbound telemarketing, improved customer care, customer win-back efforts, additional direct sales in support head count and a higher advertising spend. Additionally, the quarter included an increase of $1 million for severance cost. These increases were partially offset by $1 million decrease in professional fees. We continue to focus on off-shoring certain accounting, network operations and IT service functions. That program is progressing well, and we currently have an excess of 75 personnel based in India performing functions previously perform in the UK and the U.S. Additionally we're currently centralizing select functions such as billing operations in an effort to further reduce our cost structure. Our off-shoring and centralization efforts have predictably increased our cost in the short term due to transitional training and duplicate employee cost. However, we expect to see financial benefits from these actions during 2008.

Adjusted EBITDA for the third quarter was $16 million, consistent with the prior quarter. Despite the revenue decline in increased SG&A spending adjusted EBITDA remained relatively constant as a result of continued improvement in cost of sales. We ended the quarter with an unrestricted cash balance of $109 million as compared to $105 million as of June 30th, 2007. From an operating standpoint, adjusted EBITDA produced $16 million of cash, $2 million was generated from working capital, $1million from the sale of an asset and $2 million from currency improvements. These cash increases were offset by $17 million in cash interest payments, $13 million for capital expenditures, $2 million for scheduled principal debt reduction, and a $1 million increase in restricted cash. On July 3rd, 2007, the company completed the sale of 22.5 million shares of common stock to existing and new qualified institutional buyers for net cash proceeds of $19 million.

During the quarter, the company repurchased and retired $3 million principal amounts of its 12.75% senior notes. Additionally, since the quarter end, another $4 million principal amount of 12.75% notes have been purchased and retired. It is required within our $35 million U.S. denominated Canadian credit facility., we have completed a currency agreement to fix the Canadian dollar to U.S. dollar exchange rate upon maturity of this facility in March of 2012. Furthermore, as a result of the unprecedented currency exchange rates for the Canadian and Australian dollars, we are exploring potential strategies to secure such rates for the future. I will now turn it back to the operator to open the call up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) One moment for our first participant to queue up. First question comes from David Sharret from Lehman Brothers.

Good afternoon, guys. If I can ask just on just some of the retail revenues this quarter, just some of the trends you saw. It sounded like if you net out the benefits from some of the new initiatives, some of the legacy revenues declines you saw were greater this quarter then they were in the second quarter, and I don't know if you can touch on if that was more Australia, or Canada or maybe just some of the drivers of why you say the revenue losses pick up in this quarter.

Yes, I think the legacy revenue, it's kind of been relatively consistent the last I would say probably four quarters. Somewhere in the $4 million to $6 million quarter range. So this quarter we reported was $6 million. Last quarter, it was $4 million, the quarter before it was $6 million. It's -- I'm not sure that's necessarily a trend from quarter to quarter of improving or getting worse. I think there's a little bit of seasonality and business days in there, but I think the decline we see in it is relatively stable, and I think that's the focus to try and improve on that stability that we have and start seeing less of a decline.

Another thing I want to ask on the new initiative decline. You did see as expected an increase in the sales and marketing and advertising expense this quarter as expected and I think you had said last quarter you don't expect to see material benefit from that investment in 2008, but new initiative revenues were up only $2 million, the same as they were last quarter despite this increased investment. Is there any kind of early indications that you have as far as success that you quantify, either in terms of orders or the DSL platform or on data center square footage that you're starting to see orders come in, that given the indication that this increased spending is having the desired effect?

I think, David -- I think it very early, but we are seeing some uptick in the orders of DSL and some uptick in consumer services in Australia, but like a said, it's a little bit too early to tell as the revenue lags a couple of months behind. And so I think with time we'll have a much better visibility into it. Also, as we said in the last quarter as you add direct sales folks or any of these channels. These channels themselves take about three to six months to get them to productivity. So I think that's another reason it takes some time.

What is the increase in sales head count that you're planning here.

Increase in head count --

-- adding direct salespeople just wondering what amount of the number of salespeople you're thinking about.

I think over the six month period, we would target about adding 50 to -- somewhere between 40 to 80 people, depending on if you can find generally good people in these countries.

And David, just to kind of follow on the comments DSL customers, we -- last quarter we reported that we were at about 200,000 DSL customers. We had a nice increase; we were up around 210,000 DSL customers. We also are seeing a nice increase in on net services both in Canada and Australia. So services we refer to as either local or DSL and on those on-net services have increased as well which should help us in the future in the way of margins.

And then there's, just in terms of the assets sales side, I don't know if you mentioned again the target of $50 million to $100 million. If you could talk about any progress you're making and what you think of the M&A environment in general and in terms of trying to reach that goal?

I think that continued to be a target before the year-end 2010.

Okay, all right, thank you very much.

Our next question comes from Ana Goshko from Banc of America Securities.

Hi, thanks very much. A few different questions. First of all, I -- just going back to the cost side. On the cost of service benefit, I don't fully understand what that benefit was, but I don't think that's actually the point. What I really want to confirm is that it really was a one-time thing, so if you sort of normalize the cost of service in the quarter it would be $3 million higher and that's the margin that we would expect to see going forward, is that right?

Yes, the $3 million that we referenced was a credit for prior period price decreases. So, you're correct that it's not a run rate item. So if you did it -- back it out, you would get the normalizes cost of sales, but the cost of sales, even if you do that, both in absolute dollars and in gross margin percentages, we saw improvement quarter over quarter despite the revenue decline. So not as great as when you have the $3 million in there, but even exclusive of the $3 million, we were pleased in what we saw in terms of cost or what we saw in the way of gross margin dollars and gross margin percentage increase over the prior quarter.

Okay, and then on the SG&A side, are you -- it -- are the SG&A costs related to the new initiatives, are those going to continue to increase still at a higher absolute level on a quarterly basis? And I guess the root of my question is, if I just fast forward to fourth quarter, if your revenue were to keep on track with the same pace that we're seeing, cost of service, you reverse that one time benefit and SG&A continues to inch up as you continue to add salespeople, is that -- is it reasonable to see a decline really in sequential EBITDA? And if that's so I just wanted to start setting expectations for that.

I think the right way to think about it, in the SG&A, we are also reallocating a lot of resources. So the answer to your question, yes, right now we are gradually increasing direct salespeople as we can find good salespeople and expanding some other channels. At the same time, we are also seeing where we can reduce our SG&A costs. So that the resources could be allocating from nonsales functions more to the sales functions. So timing wise, in general I think this quarter the SG&A went up because of the direct investments into sales channels. Will they continue at the same rate? Obviously, it can't continue forever. So, but in one, two, three quarters, you may see that, and -- but at the same time you should also know we're trying to reduce our other SG&A costs to afford more into sales and marketing.

And, Ana, I think we're still staying with our previous guidance of adjusted EBITDA being between $60 million and $65 million full year, and through the first three quarters we're at about $46.5 million. So we're still comfortable being within that $60 million and $65 million range, so that gives you some kind of general idea of where we think Q4 should come out.

Okay. Great. I have two more questions. So on the announcement of the new president in the U.S., I'm just trying to get a sense of -- I guess how different this is from what you have already been doing. Is this -- first of all, is he replacing somebody, and if so why was the replacement made? And secondly, is this sort of a renewed focus in some ways on the U.S. business versus what you've been doing to date?

I think you're correct on both of those counts. The first one, actually, I was filling in as president of PRIMUS U.S. for the last eight to 10 months. And Ravi Bhatia, was running the Australia business. He moved from president of the U.S. to Australia. So, by filling that position, this will give me some time to focus on other activities. And the other question that you asked, more focus on the U.S. business. That is correct as well. We see more growth opportunities in the U.S. That business today I think has gone largely from the reallocation of the SG&A to -- from nonsales SG&A to sales SG&A. Lingo is now profitable. It also, by the way, was rated as the best service by "Wired" magazine over Wirenet, AT&T, Comcast and seven others in quality as well as overall value. So we see potential to grow that business, potential to grow with the IP-PBX business. So, we see more opportunities to grow there, so by having Mr. Gulati, I think that's also going to help us put more focus on growth in the U.S.

Okay. Great. And then final question, just on your cash balance is that cash or --

I think we lost Ana.

Can you hear me?

Yes, if you could repeat that last question.

The last question is on your cash balance, is that cash or is it have invested in some types of securities, and do you have any exposure to these auction rate securities that have been causing liquidity issues -- not liquidity issues, but problems for other companies given the state of the market these days?

No. We have no exposure to high risk investments whatsoever. I think if anything we can be criticized for being too conservative in our investments, but we tend to stay in treasury funds and shorter-term treasury funds. So, I think there's very little exposure.

Great, thank you very much.

Our next question comes from Chris Roberts from Tejas.

Good afternoon, guys, and thanks for taking my call. Congratulations on the quarter. Most of my questions have been answered, but I just want to follow up on the debt reduction comments that, Tom, you made earlier. Did you -- can you clarify. Did you say the company bought back $4 million of the 12.75% quarters subsequent to the quarter?

Yes, that is correct.

Okay. So it would be a total of $7 million reduction since 2Q?

That's correct, Chris.

Okay. And then, going to ending subscriber counts. You mentioned that you had 210,000 DSL customers as of the end of the quarter. Could you break that out between Canada and Australia, as well as give the ending Lingo subscriber count?

We have a much larger DSL business in Australia than in Canada. So, a good two thirds of that is probably Australia versus Canada. And on VoIP business, which includes Lingo as well as what we have in the way of VoIP customers throughout Canada, Australia and other parts of the world. We're now in excess of 110,000 VoIP customers.

Okay. 110,000. And is there any reason for us to believe that the ARPU levels that you've mentioned on previous calls that it's still consistent at that level.

Yes. The Lingo business, as we have said before, it's roughly about a $30 million business.

Right.

With ARPU about $33 and generally the gross margins of that are in mid 50% range. And that's generally when we write up the (inaudible) unlike some other companies that capitalize it and the write-off over three or four years, we write-off at the same time. So given that one, I think the margins, as I've said is pretty good. Now we have to find a way to find scalable channels to grow the business, but the business metrics and performance metrics are quite good.

Okay. Great. Well, congrats again on a solid quarter, and thanks for taking my call.

Thanks, Chris.

Our next question comes from Joe Stauff from CRT Capital.

Good afternoon. A couple of quick questions. And I apologize if you had already stated it, but got on the call a little bit late. For a full year '07, you guys are still projecting $60 million and $65 million in EBITDA, correct?

Correct.

And then CapEx really hasn't changed either, that being anywhere from $35 million to $40 million?

I think last quarter, Joe, we had mentioned that we planned on enhancing our capital spending on these new initiatives in the second half of the year, and we went from guidance of $30 million up to between $40 million and $45 million for the full year and we still think that's appropriate.

Okay. So, the range -- the explicit range is more $35 million to $45 million.

$40 million to 45 million.

$40 million to 45 million. I'm sorry. Okay, and as -- let's see here -- so the amount of 12.75% outstanding, I guess as of the end of the quarter was -- I guess $28 million and you bought $4 million back since.

That's -- yes, that's pretty close. Within a $.5 million or so.

Okay. That's it. Thank you very much.

Okay.

Our next question comes from Chris [Carney] from [C.R. Incentric].

Hi. You mentioned that you had, I think in the EBITDA calculation, that there was some type of severance and a reduction in professional fees. Are there any of those items currently in that number?

Not --

I'm looking at last -- I'm just looking at last quarter and I know there was, I think, $1 million of legal expense associated with the lawsuit, I guess, brought back by the holders of the 8%. I mean, is there any professional fee, say in that SG&A number that would be considered, say, I don't know, one time or a little bit unusual?

Nothing of a significance in the way we've broken out say the bond holder litigation costs in the past, or in the past we've broken out accounting fees related to the implementation of FIN 48. So, those were two pretty significant items, $1 million plus in particular quarters. So, every quarter in professional fees we seem to have something, whether it's legal fees related to a particular matter or accounting fees or whatever. But I think if it's in the hundreds of thousands, we typically don't emphasize it. If it gets up over $1 million a quarter, and it's nonrecurring in nature, we usually emphasize it.

Okay, but in the press -- I don't know if it was in the press release or your comments you mentioned severance, severance being $1 million higher then last quarter. Is it safe to say it was $1 million this year, or was it -- excuse me, this quarter?

It was $1 million increase from the second quarter to the third quarter. But the total severance in the quarter was probably a little bit closer to $1.5 million.

$1.5 million Okay. So it was about $500,000 last quarter.

That's correct.

And do you see that just continuing as you sort of -- I don't know, right size the organization?

I think we're going to have severance in every quarter of some magnitude as we continue to alter our work force, so we are continuing to off-shore positions as we talked about in our comments. And we think that will continue in Q4 and probably into Q1 and beyond, so that has an effect on severance. We alter our work force, and as Paul is mentioning, we are trying to push more of our SG&A dollars to sales and marketing and less into administrative functions. So as we do these things, it does result in severance, some quarters being a little bit higher then other quarters. It's hard to project it out, but I don't think you'll see a quarter in the near term without any severance.

Okay. But it -- would -- if you said it was $1.5 million this quarter is that considered on the high end or should we --

That's probably considered a little bit on the high end.

Okay. And then would you mind explaining to me just how you account for the foreign currency gain, because you do mention that in the top line on your revenue number there is that benefit from foreign currency gain, but then you recognize a line item under the income statement where you've got a significant foreign currency gain. Would you -- I mean if it doesn't require too much time do you think you could sort of walk me through how you ended up -- end up with at that $12.2 million figure?

Sure. When we refer to revenue or SG&A or any other particular line item on the income statement that's affected quarter-over-quarter by the currency exchange rates because your income statement is converted based on your average rate during the month or during the quarter. So when we say revenue was affected positively by $6 million, that's due to the average currency rate change during the quarter. Okay.

Okay.

The line item that's on the income statement that this quarter and last quarter is relatively significant, $12 million I believe in this quarter and $15 million last quarter. That's totally different. That -- we have intercompany balances between the U.S. and some of our foreign subsidiaries. And accounting rules have you mark those balances to market. So, that translation gain is what is the $12 million or $15 million. It's a noncash item. It's not something we spend a lot of time focusing on. It's just intercompany debt mark-to-market. It swings the income statement relatively largely, but it's a totally noncash item and a nonrecognized item.

Okay.

If I could just make one comment on the income statement. Also, because of the currency changes most items on that one get affected by the currency. For example, the cost of sales get impacted, the -- assuming that we buy some of the -- intercompany transfers you buy from another countries. Similarly SG&A gets impacted and remember this also gets into translation of that one.

Yes.

So on a statement sometime we compare and correct me if I'm wrong, is when we compare SG&A year-over-year, some of it also has the currency part built into it. The dollar gets weaker and we're looking actually higher, whereas in the in-country part actually have had that much change. More complex -- makes it more complex actually to look at every number.

Chris, when we file our 10Q, which should be Friday, I believe is the filing deadline. In the 10Q, there's some breakdown on functional currencies by geographic region, as opposed to all U.S. dollars, and it's a little bit more apparent in the Q and at the changes in the functional currencies.

Okay. And then one last question. When I was looking at your EBITDA for Q2 -- excuse me, for last quarter, Q2 '07, I was looking at operating income of $8.3 million. You had $7.3 million of D&A, so that gives me $15.6 million. Now you had an asset impairment charge of $1 million. Was that something that you had broken out or discussed -- I don't even know if you remember, but you had discussed in the last quarter?

I don't remember if we specifically mentioned it. I know it's on the face of the income statement.

Okay, okay, and then you had a -- you sold an asset. You sold an asset last quarter and you had said you had taken a $700 million sort of loss on it. Was there a similar loss to the German asset you sold, or was there any loss associated with the German asset you sold this quarter.

No. Just let me kind of correct you. You said $700 million.

I'm sorry, 700 -- excuse me $700,000. I'm sorry. $700,000.

You're going to come down to PRIMUS numbers.

I apologize $700,000.

The asset that we sold in Germany was a relatively small business and there was a book -- actually think there was a book gain on it of a couple hundred thousand.

Okay. All righty, thanks again. Take care.

(OPERATOR INSTRUCTIONS) Our next question comes from Matthew [Dundan] from MTR.

Hi. Do you have a constant currency EBITDA number reflecting USS G&A or any type approach to that?

Matthew, we do not. So, I can't say I have that calculated for you.

Okay. Another question. When you -- can you talk about sort of efforts to win back legacy consumer customers? That's -- what sort of targets and goal -- How do you keep that from being a cash hemorrhage? How do you know if that works? How are you identifying right levels of incentives? And are you picking people who you think can you migrate to next generation projects or is the goal to keep them on the current infrastructure and earn it out?

Yes, generally the win-back calls -- the ID on the win-back calls is one, to see if we can bring the customer back, if we can find them in short enough time period from when they canceled. I think that gives our in-bound salespeople an opportunity to also educate them all of the other services that we have. Either they can migrate up or buy a bundle in which they would actually have some savings for the services they have canceled, but we kind of come out ahead by selling a bundle to them. In some countries, depending on the promotions that others [incumbents] may be running sometimes they have incentive. If you sign up with us we will give this much incentive, whether it's some three month service, a couple of months service. Sometimes it's checks, the way it generally used to happen in the U.S. and AT&T. MCI used to send checks to customers. So depending on the promotions, those kind of things go on and what we have decided to do is just get a little more proactive to those and respond to those in a different way that works for us, rather then to just leave those customers without trying to regain them.

Is it going -- is this program going to be an EBITDA investment in fourth quarter -- first quarter of '08?

Again I think it's part of an on-going program. Like I said, I think what we are trying to do is put more money into a combination of these efforts, expending channels for new services, putting more effort on retaining existing customers, like you said, to the extent they are profitable for us. But nonetheless more effort going into that one in terms of a customer service spot, upgrading some of those, but doing the service. We have found that customers like our service. They like the value. They like the prices. But it's hard with customer, if we had more people respond to customer inquiries much faster, they would actually like it more. So we are taking the customers' feedback and allocating resources where we think it will optimize retention of customers as well as getting new customers. And in the meantime, like I said, then we need to take some money out of other places in our SG&A and there the CapEx part of it and automation of processes going more online. All of the things we have been doing for the last general couple of years and continue to do, they actually help us increase the productivity, whereby in some of those we don't need as much dollar amount. So those things are coming out and more is going into sales and so on. That's why you see the severance payments continuing, as we kind of reallocate and it's not just right sizing. It's also reallocation is going on.

Okay. Thanks.

Okay.

Our next question comes from Rudolph [Kalbone], private investor.

Hi, John, it's Rudy again after all of these years. I wonder if you would update us on the access charge situation in Australia, if there's any news or any thoughts. Thanks.

Actually, Rudy, we don't have any new developments to report. I think the last time we commented on this there had been an interim final decision that had been drafted, but we are awaiting the ultimate final decision. As you know from listening to us over a number of quarters we're very poor predictors of when these will finally issue as final orders, but, again, we remain cautiously optimistic in terms of the outcome, but I'm at pains to be able to give you any definite prediction of when that will occur.

Would you be good enough to give us some idea of what it costs us a quarter, and what is at stake at this stage of the game?

Well, I guess the one benefit, Rudy, to answer your question is that in some of the major outstanding proceedings, if we are to prevail there would be a retroactive award. So while it's painful to wait with the uncertainty, when, as, and if we get a final award, and it is favorable to us, we will have the ability to recapture past period amounts.

And it's several million dollars, and each month that amount increases. And I have to say it's actually quite disappointing how long it is taking by the regulatory body there to come up with a final determination, but we have stopped predicting when that will happen. But we are told it's going to happen very shortly. So when it does happen, I think that would be a cash benefit to us and at the same time they will be generally cutting gains from that as well. Not just one time.

But again, the same question, I think Ana had asked before in terms of one-time benefit regards to this quarters. I think in terms of keeping the accounting policy and when do we take the gains, until we are absolutely sure that the gains will come, we don't take them. So they become lumpy in that respect which quarter they come in, but I think if you looked at it on an annual basis that's probably the right way to look at it.

Thank you.

Okay.

And we have time for one final question. Our final question of the day comes from [Eric Arian] from Deutsche Bank .

It's actually Alex Zinger here. Quick question, I know somebody asked about the potential asset sales, or that you guys have announced previously. Is there an update on that? I actually didn't hear an answer.

No, I think we still have the same target before the year-end 2008. Okay. No other update.

Then the next question is, obviously, you're trying to create a few engines for growth here. I mean in your mind, like you're assuming some form of successful outcome, how big can these things be? What magnitude are we talking about? Which is I think the -- where I have a hard part trying to project how big these things can be if we can make them work.

Well, let me put it this way to you. Let's just look at -- just as an example, look at the U.S. market. As we look at the U.S. market and the U.S. general business has improved in profitability over last 12 months, as I look at the opportunity, take Lingo, for example, $30 million revenue. There's no constraint in terms of the market size of growth where we are. So, it's not limited by the market size. I think it is limited by how much money we can put into growth and then also finding scalable channels that could grow -- generally could grow by 5,000, 10,000 customers per month. Which, again, is not such a big thing in the big picture as the whole market is growing, but I think finding those channels and funding them is the part we are trying to do. How much we can fund them and then not all campaigns it's -- You just never can tell which campaigns are successful for you, but the opportunity's enormous. Similarly, when you go to the business side, we are trying to do IP-PBX as a new market. It's a growing market.

On both of them over gross margins I think 50% plus gross margins are very realistic and again, we are trying to expand the channels. Now we have a proven product and we know it works. So how much we can grow it's not limited by the market. It is -- we are trying to find the funding for these ones without totally destroying the SG&A part of it. So to give you a sense of, is it the opportunity that are there. They're clearly there. Whether is it hosting, whether it's IP-PBX, whether it's VoIP. So we now have enough products where we can grow. But, again, I think the last quarter was the first time after having enough cash that we could actually think of investing in sales channels. Before that, we just didn't have enough cash to even start investing in this. So as we're doing this, I think still we need to find these channels to be productive and start showing some progress. After that one, there's plenty of market.

This is not a -- the things we are focused on, they're all growth markets and will continue to grow. So I'm less concerned about that -- to actually showing that, one, we have the fundings, second, to execute and see if the funding results in new customers, but I'm confident we can manage the cost of sales, because we see it on the scale we are that we can have a pretty good margin on it. And we have the capital, at least the cash to invest in the sales channel, even though we like to stay prudent and make sure -- we are reallocating some of the other costs.

So, given that like -- given that where you are right now do you believe you have the necessary funding to essentially prove that you could make this a successful and scalable business? And then, second, how many quarters do you think we should expect to wait to see very clear signs? I think we're seeing some early signs. The question is to see very clear signs that this plan is working.

Yes. I think the signs are not as obvious, which I'd really like to see the signs for sure, when the revenues are showing clear improvements. And how many quarters we have to wait? It's -- I'm not going to put in how many quarters. I think we're going to see progress along the quarters. Do we have enough money? I think with the -- as I said on the last quarter, we have enough cash plus some of the sales of assets that we can afford to actually push the sales and marketing part and invest in it. Because that's the part that we have to make -- we have to make that part work while the CapEx in the network. I think clearly showing signs that capital is paying off, because if you see the reduction in revenues and then you see the gross margin reduction, you will see actually the gross margin line reduction is much lower than the top line reduction.

A lot of it has to do with the impact of the CapEx general infrastructures that result in lower costs for us. But there you clearly see progress. I think on SG&A part you will see progress as out of the total combination more going into sales. Then the risks are generally in your direct sales force it takes a long time to show the results. Finding the right people in today's market is not that easy, so it takes a lot of money to recruit people and the outcomes are not always 100%, so that's something we are generally trying to find the right people, yet I also think some of the channels which could be scaled up and down quicker than having in-house people. So I think we're doing the right things. We're in the right products and we, obviously, are confident we're going to make it work and we have enough time to make it work.

Good. Thanks very much.

Okay.

This concludes our question and answer session for today. I would now like to turn the conference back over to Mr. John DePodesta for any closing remarks.

Thank you, Siad. In closing, I would like to inform all of you that PRIMUS is scheduled to participate at the following upcoming conferences: Next week, on November 16th at Credit Suisse's 2007 Leverage Finance and Media Telecom conference in New York City, and then on December 2nd through the 4th, we'll be presenting as part of the Banc of America 2007 Credit Conference being held in Orlando, Florida. This concludes PRIMUS' third quarter 2007 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. Ladies and gentlemen, thank you for joining us today, and good evening,.

Ladies and gentlemen, thank you for participating in today's conference call. This concludes our program for today. You may all disconnect, and have a wonderful day.