Innovate Corp (VATE) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to your host Mr. John DePodesta. Sir, you may begin.

Thank you, Alison, and good morning, ladies and gentlemen. Thank you for joining us today for PRIMUS Telecommunications third quarter 2009 conference call. I am John DePodesta and with me on the call are Paul Singh, Chairman and Chief Executive Officer, and Tom Kloster, Chief Financial Officer. Paul, Tom and I will provide our remarks on the quarter's performance and update our 2009 strategy and then we will conduct a question-and-answer session.

This call is being webcast with an acCompanying slide presentation that can be accessed at our website at primustel.com by clicking on the link located in the In the News box on the lower left hand corner of our home page. A PDF version of the slides is also available for download through that link. Let me repeat those instructions in order for you to be able to access the slides. Go to our website at primustel.com, click the link located in the In the News box on the lower left hand corner of the home page and you ought to be able to access the slides.

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 10k and 10Q and other periodic filings with the the Securities and Exchange Commission. 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 management's remarks and would ask you to turn to slide three.

PRIMUS's third quarter 2009 results demonstrate our effectiveness during a period of global economic challenge in executing our strategy of balancing investments in both services in our primary Australian and Canadian markets, while optimizing cash returns in our other services and markets. In the first full quarter since our financial restructuring we reported revenues of $207.9 million, adjusted EBITDA of $21 million and free cash flow of $9.1 million. Exclusive of foreign currency effects, revenue and adjusted EBITDA trends through the first nine months of 2009, show progressive stabilization, with slowing rates of retail revenue decline quarter to quarter. This was a key management objective, particularly during the financial restructuring in the first half of 2009. As we discussed with you on our September 23rd strategy call, one of our priorities is to expand our suite of higher growth, high margin services, particularly data hosting and IP based services to increases in advertising and marketing spend, while we manage the gross margin contribution from our traditional voice services.

The focus is resulting in a modest, but encouraging lift in the percentage of our revenues derived from growth services, as well as a slower rate of decline in traditional voice services. The bar chart on the right of the slide depicts the development of a diversified revenue mix in our three service portfolios to the first nine months of the year. In the third quarter, 32% of revenues were derived from growth services, an increase of 1% from the second quarter and 3% from the first quarter. Growth services are defined as broadband, IP based voice, local, wireless, data, and data centers solutions. These services are in highest demand by customers and hence represent our areas of focus, while traditional fixed line voice services continue to decrease in usage. Wholesale services remain stable as a percent of revenue from the second to the third quarter at 26% and decrease from 28% in the first quarter. Our traditional voice services decreased 1% as a percentage of revenues in the third quarter from the second quarter.

As a reminder PRIMUS launched its growth services initiatives in late 2004 and we have grown this segment dramatically over time, now exceeding an annual run rate of $265 million. It is significant to note, that we have continued expansion and growth services, even during periods when we were constrained on sales and marketing spends. Now, with resources available, we plan to continue to make selective investments of both capital and sales and marketing support to increase our market share. As growth services increase as a percentage of revenue, they are also increasing as a percentage of our gross margin dollars. As we continue to scale these businesses, we expect to derive additional margin expansion through leverage of available network capacity and extended geographic reach. In our traditional voice business, which continues to generate healthy margins, our strategy is to manage costs, to maximize cash flow contributions.

Today in 2009, we have generated $61 million in adjusted EBITDA and $25 million in free cash flow. As Tom will detail in his comments, after paying $6.1 million in previously accrued restructuring expenses, we ended the quarter with $41.9 million in cash, a level substantially higher than we had anticipated. Finally, we are continuing to generate solid levels of free cash flow through our strict costs and capital management programs. Now we will turn the call over to Paul, for a discussion of our third quarter results by markets and products.

Thanks, John, and good morning, everyone. Let's turn to slide four to discuss our Australian business. PRIMUS ranks as the fourth largest full service carrier in Australia with an established national brand name known for value, quality, and innovation. We own and operate an extensive fiber-based network infrastructure in Australia. In the Australian market, broadband, whole state IP, data hosting and mobile services are the main growth segments of the telecom market. With the benefit of having a strengthened balance sheet, we now have an opportunity to grow the revenue and profitability over time by strategically expanding our broadband service footprint, by adding data center capacity in Melbourne and Sydney, and increasing the on net capacity and broadband data speeds in our network. In the business sector, for example, we are seeing good progress in competing for the strategic accounts, which we define as accounts of monthly revenue of $5,000 or more.

Admittedly, developing and penetrating adjacent market segments, such as the strategic account segment, takes a sustained and focused marketing effort, but we are becoming a contender in the segment and will get stronger over time. In the third quarter, PRIMUS Australia generated net revenues of AUD76.5 million and approximately 1% decline from the second quarter. The quarterly rate of revenue decline continued to slow down sequentially. And an important performance metric for us as we're surviving to return to growth. In the residential segment, the traditional high margin voice and dial-up internet service revenue declined by about 5% sequentially, whereas the broadband bundles and mobile revenues grew by 4.5% sequentially. With each quarter, revenue from residential dial-up, internet, and long distance voice, continues to be a smaller part of the total Company revenue mix and therefore a smaller adverse impact in absolute dollar amount with each quarter in the future.

On the business side, the business segment revenue grew quarter over quarter in both traditional services, as well as in growth services, even in this tough economic environment. We are pleased to receive a significantly greater number of invitations to bid on RFPs issued by larger businesses in Australia. This opportunity expands our traditional SME customer segment target. We upgraded our Melbourne data centers to accommodate high power density collocation customers and to implement services for the largest data hosting service orders received to date, more than $75,000 per month starting in the first quarter, 2010. In the fourth quarter, we have added a limited TV advertisement campaign to promote sales of broadband bundles and to increase our brand awareness. And this has been funded with an increase of AUD180,000 per month in our marketing spend in Australia. We expect this additional marketing spend to narrow the net customer loss trend in the residential sector.

In the fourth quarter we hope to successfully conclude negotiations with our carrier service vendors for reducing our cost of sales in Australia. This is a part of the $10 million annual saving plan. I also want to mention seasonality factors in Australia that we will experience over the next two months. The business usage in Australia falls off very significantly from mid-December until the end of the third week of January, because of the holidays and summer vacations. Residential usage also slows down during the same period, but to a lesser extent. Let's move to slide five to discuss Canada. PRIMUS Canada is the largest alternative full service provider in Canada, with an extensive fiber-based network to support traditional voice, broadband, hosted IP and data centers in Canada. We are a known brand in Canada that stands for superior value and service.

PRIMUS Canada primarily targets residential and small to medium-sized business customers. In the residential sector, in addition to delivering a superior overall value to the customer over the competition. We also provide positive differentiators, such as Canadian customer care for our bundled services, reward miles to an exclusive partnership with Canada's top two reward programs, Aeroplan and AIR MILES, and offering an unlimited overseas calling plan for bundled residential customers that is unmatched in the market place. In the business segment we're emerging as a strong, data hosting center competitor, as we have seven data centers operating in five major cities with approximately 120,000 square feet of hosting space and 30,000 square feet already in use or ready for use. This is a CAD26 million per year business, roughly about 30% of our business segment revenue, with EBITDA contribution of approximately CAD10 million per year.

We have a competitively strong high margin hosted IP service offering -- service offering with nationwide coverage that is beginning -- beginning to show good traction. We are positioning these two services, combined with our high speed data services, as the core engine of our long-term business segment growth in Canada. In the third quarter, PRIMUS Canada continued their revenue trend with a slowing rate of quarterly decline. PRIMUS Canada generated net revenue of CAD63.1 million, which decreased 2% from the second quarter. During the quarter, traditional voice and dial-up internet declined sequentially, which was partially offset by growth in local and broadband bundles. On the consumer side, PRIMUS Canada home phone service was rated number one in terms satisfaction and best value for money by an AIR MILES rewards member survey.

In response to our increased level of sales and marketing spend in the third quarter, our order input in bundled and local services continued to improve quarter over quarter. We are looking forward to next spring when we can launch smart phones and mobile data services under our recently expanded MVNO agreement with Argus Communications. Business revenue declined by approximately $300,000 sequentially, primarily because of a weak market demand. We have restored our sales group to its last year's size of 60 and expect this to improve orders -- order input going forward. As in Australia, we're expanding our target customer segment to include larger sized strategic accounts starting with our data hosting and hosted IP services. In October, we -- we were successful in signing up two larger-sized collocation customers for our data center services, with about 10 cabinets each. Was season average of one to two cabinets per customers today. And we have an increasing number of larger opportunities in our pipeline for contract awards during 2010.

In the fourth quarter our priority in Canada is to improve our sales productivity, while continuing to negotiate lower cost of sales with our carrier vendors. We also have underway a call center technology upgrade to handle increased call volume, generated as a result of our increased sales and marketing campaigns and to improve the call center productivity per headcount. And this is scheduled for completion in January. Let's move to slide six to discuss healthcare. In the third quarter, PRIMUS wholesale business revenue grew in an otherwise seasonably weak quarter. Our net revenue was $53.6 million, which grew 6.2% from the second quarter. During the quarter we experienced a high volume of traffic in Europe from carriers with whom we have a minimum mutual traffic commitment over specified periods of time. We also experienced high level of U.S. terminating traffic driven by an increased sales focus on select large customers.

Going into the fourth quarter, we have added an additional sales executive to focus on new business developments in mobile and cable companies in the U.S. Our objective is to improve the profitability of this business unit from current levels by improving the revenue mix in favor of high margin services such as U.S. domestic termination minutes. In the fourth quarter, we are evaluating the revenue potential of a number of new -- new high margin services for wholesale, such as SMS and MMS gateway services for mobile carriers, customized call routing capabilities, collocation services and the capability to offer outsourcing options to other wholesale players. The profit potential of such services could be several times better for our current wholesale voice services. We expect to complete this evaluation in the fourth quarter, prioritize a few development projects and start working early 2010. We expect CapEx needs to be quite small.

We believe that having this type of long-term service development strategy in place is important to forging long-term vendor relationships with major mobile, cable and VoIP service providers that we are targeting in our whole sale business. Let's move to slide seven to discuss our other businesses. PRIMUS occupies niche market positions in the U.S., Europe, and Brazil, providing facilities based telecom services to consumers and businesses and generating positive EBITDA and cash flow from these services. These businesses use a very small percentage of our CapEx budget relative to their percentage contribution to revenue and EBITDA. As we stated on our last call, our strategy with these businesses is to continue improving their operational performance and manage them for cash flow contribution. Let's look at them one by one. In the U.S. PRIMUS generated $15.9 million in net revenue, a sequential decline of 6.2% resulting from declines in traditional long distance, voice and VoIP services.

Third quarter adjusted EBITDA was $2.4 million or 15.2% of U.S. revenues, which is a healthy margin. In the U.S. we expect continued decline -- continued declines in our traditional voice services and we will continue to manage that business for cash flow. However, we see additional opportunities for profitable growth. One of these opportunities is in hosted IP services targeted at SMEs, the leverages of a existing world class (inaudible) platform currently used for providing Lingo service to residential customers. We expect an ARPU of about $500 per month with one to three years contract terms. We are exploring this business opportunity in the Chicago area, where a full service full sales branch headed by an ex-CBeyond sales executive would be operational by year-end and generating some sales. In the residential market our focus is on our Lingo brand that competes with Vonage, Veilex and cable companies in the VoIP digital home phone market.

Late in the third quarter Vonage introduced an unlimited international calling plan to 60 countries with no increase in its monthly subscription fee which adversely affected our Lingo churn by about 100 basis points in September. Lingo has since responded by introducing a new calling plan with expanding its list of unlimited calling destinations to more than 65 countries. In Europe, PRIMUS generated net revenues of EUR9.4 million, a sequential decline of 2.2% caused primarily by summer seasonality in Europe. Third quarter adjusted EBITDA was breakeven on lower revenue, a significant milestone for PRIMUS Europe. In the fourth quarter, we plan to conclude negotiations with select vendors to reduce our current cost of sales so that PRIMUS Europe becomes a sustainable positive EBITDA and cash flow contributor in the year 2010.

In Brazil, PRIMUS generated BRL$7.7 million for 23.5% sequential growth, primarily driven by growth in the wholesale VoIP services. Third quarter adjusted EBITDA was BRL400,000 or 5.5% of net revenue. In Brazil our priority is to grow our high growth, high margin data hosting business. We have overhauled our marketing and pricing strategy designed to gain market share in the collocation and managed hosting services. We're seeing better sales in the fourth quarter as a strong -- with a strong incremental EBITDA margin. We plan to continue managing our VoIP business for profitability and cash flow. Now, I will turn the call to Tom Kloster, our CFO, for a review of the financials. Tom?

Thank you, Paul. Good morning, everyone. Let's now turn to side eight entitled financial summary. Here we have provided a snapshot of four key financial metrics and how those metrics have trended over the past three quarters. I will focus my comments on the sequential comparison from the second quarter to the third quarter of 2009 and have provided the first quarter for reference. Reported net revenue increased $11.2 million or 5.7% to $207.9 million in the third quarter versus $196.7 million in the second quarter. However, please note, that reported sequential revenue growth was driven by a favorable foreign currency effect of $11.8 million. Exclusive of this favorable currency effect, net revenue decreased from the second quarter to the third quarter by $600,000 or three-tenths of 1%. The sequential decline, exclusive of currency, was comprised of a $2.2 million decline in retail revenues and growth of $1.6 million in wholesale revenue.

The $2.2 million decline in retail revenue, exclusive of currency, reflects improvement from the $5.3 million decline in retail revenue experienced in the second quarter of 2009. We believe this improvement is reflective of our efforts to expand growth services through enhanced advertising spend and sales performance improvements, while reducing the pace of decline in traditional services through bundling of such services. Adjusted EBITDA was $21 million or 10.1% of net revenue, compared to $20.4 million or 10.4% of net revenue in the second quarter and $19.7 million or 10.1% of net revenue in the first quarter. Thus, we are reporting the third consecutive quarter of stable to slightly increasing adjusted EBITDA. The sequential improvement in adjusted EBITDA benefited from a $1.4 million increase from currency translation, but also is reflective of an increase of $500,000 in advertising spend to support our growth services primarily in Canada. Year-to-date adjusted EBITDA is $61.2 million or 10.2% of net revenue.

Capital expenditures in the quarter were $3.9 million compared to $2.9 million in the second quarter. Year-to-date capital expenditures were $9.6 million and we expect to end the year well within the $18 million ceiling for 2009 required in our loan covenants. In the third quarter we generated free cash flow of $9.1 million. As a reminder, we define free cash flow as net cash provided by operating activities before reorganization items, less cash used in the purchase of property and equipment. Let's now move to slide nine and continue our discussion of free cash flow. As noted here, the Company is positioned quite well to generate positive free cash flow. However, quarterly free cash flow may vary, mainly as a result of the second lien note semi annual interest payments occuring in the second and fourth quarters of the year.

The illustration on slide nine reflects our current annual cash interest expense, ranges for capital expenditures and cash taxes, and our last 12 months of adjusted EBITDA to arrive at an illustrative annual free cash flow range of $22 million to $28 million. This represents very strong levels of annual free cash flow generation. Let's now move to slide ten. As we discussed on our September 23rd strategy call, we have been implementing a number of initiatives intended to reduce annual costs by $10 million. The top pie chart on this slide depicts the overall savings we expect to realize by expense category that includes both cost of sales and SG&A expenses. And the lower pie chart reflects the expected savings by geographic operating unit. To date, we have made good progress in implementing these cost savings initiatives and have completed approximately 65% of our planned actions.

We have executed contract revisions, which include lower pricing, with certain cost of sales vendors in Canada. The revised pricing became effective the first of October. Additionally, all planned U.S. and European headcount reductions were completed by October 31st. Other cost of sales and SG&A reductions are either complete or well underway and are expected to be finalized by the end of the year. Therefore, we are on track for completion of our cost of savings goals and realization of the benefit in full starting the first quarter of 2010. We will continue to look for additional ways to reduce costs across the organization, optimize our operations, maximize free cash flow, and increase our flexibility to invest in future growth. Let's move now to slide 11 for an update on our capital expenditure strategy. As we have discussed, our strategy emphasizes investments in growth products in our primary markets, with over 90% of our spend being directed to Australia and Canada.

The pie chart on the top right of this slide shows the third quarter's allocation of capital spending by type of service with emphasis on higher growth, higher margin services, such as data center expansion, broadband and network infrastructure, and back office systems to support such services. The chart on the bottom right shows the third quarter allocation by country. In the first nine months of the year we have spent $9.6 million, as we limited capital spending to maintenance and success-based purchases during the reorganization process. We do expect our capital spending in Q4 to increase from the level experienced in Q3, with continued focus on growth products in our primary markets of Canada and Australia. Let's now move to slide 12 to discuss foreign currency. This slide shows that the four major non-U.S. currencies in which we transact business have appreciated materially during the course of the year.

This results in favorable reported operating results, as we translate the foreign currencies at the average exchange rate in effect during the period. As we have previously discussed, PRIMUS in a sense experiences a natural in country currency hedge, in that our operating units collect revenue and incur expense in local currency. The more important effect currency movements have on PRIMUS relates to the transfer of foreign-generated cash back to the U.S. for use in servicing our U.S. denominated debt. Our current annual cash interest expense is $31 million, along with annual debt principal amortization of another $12 million, which creates the aggregate need for $43 million of U.S. dollars to be brought to the U.S. from the foreign operating units. Thus, for example, a 5% movement in currency rates has roughly a $2 million annual effect on our U.S. dollar cash needs.

To date, we have not chosen to hedge this exposure, as we have not found it to be economical. However, we continue to explore currency hedging alternatives. Let's move to slide 13 for an overview of fresh start accounting. Upon our July 1st emergence from reorganization, we were required to implement fresh start accounting. Under fresh start accounting all assets and liabilities are reset to their fair market values. As you can see from the table presented, the -- the revaluation resulted in an increase in our fixed assets, other intangible assets, good will, and deferred tax liabilities carrying values. All other assets and liabilities, such as accounts receivables and payables, were deemed stated at fair value and accordingly no adjustments were made to such balances. The resulting effect is a substantial increase in the Company's depreciation and amortization expense. For Q3 depreciation and amortization was $20 million, as compared to $6.3 million in Q2, 2009.

Additionally, debt obligations were restated to reflect restructured debt levels and stockholders equity was adjusted to reflect the items just discussed. As of September 30th, total debt outstanding was $252.6 million. It should be noted that the various adjustments as a result of fresh start accounting did not have any effect on reported adjusted EBITDA, free cash flow, or cash balance levels. I would also like to discuss briefly our cash position. We ended the third quarter with $41.9 million in cash and cash equivalents, compared to $41.5 million at June 30, 2009. Cash uses during the quarter were comprised of $3.9 million in capital expenditures, $4.6 million for debt reduction, $4 million for interest, $2.8 million for taxes, $1.3 million for working capital, and $6.1 million for payment of reorganizes costs. The September 30th cash balance is somewhat favorable to our forecast due to favorable currency rates, lower cash payments on reorganization expenses, lower capital expenditures, and working capital movements.

In the fourth quarter we expect to pay approximately $4 million in final payment of previously accrued reorganizes costs and settlements. It should also be noted that we will make a $7.3 million semi annual interest payment on the second lien notes during the fourth quarter. That concludes my remarks. I would now turn the call back to Paul.

Thanks, Tom. Let's turn to slide 14. We show the key element of our 2009 strategy. The left side depicts our continuing strategic objectives. First, as we have discussed today, we are driving profitable top-line growth by emphasizing high margin, high growth services that are in demand by consumer and business customers in our timely markets. We are increasing the revenue contribution from growth services to the overall revenue mix and anticipate that they will be in greater demand as the global economy recovers. Second, we continue to rationalize cost to offset the revenue and gross margin dollar loss from expected decline in traditional voice and dial-up internet services. We are well on our way to substantially complete $10 million in annual cost reductions by the end of this year and will continue to pursue a disciplined capital expenditure strategy that emphasizes investment in our growth services.

Third, we continue to evaluate and assess various business units in our current portfolio with respect to a full range of alternatives, including incremental investment, harvesting, and potential sale with an overall objective of maximizing the financial performance of our complete portfolio and in turn maximizing the enterprise value of PRIMUS. The right side of this slide shows management style financial priorities for the fourth quarter. First, continue to actively assess opportunities to address our 2011 debt maturities, improve our balance sheet and enhance liquidity. Second, continue the trend from the past three quarters of stable adjusted EBITDA on a constant currency basis, giving consideration to potential quarterly radiation from seasonality and modest increases in our sales and marketing expenses.

Third, direct our capital expenditure program toward growth services in our primary markets. We expect the 2009 total CapEx to be well within the financial covenant ceiling of $18 million. Finally, and importantly, manage our business to generate positive free cash flow on a consistent basis. That concludes our prepared remarks. Operator, will you please give instructions for the Q&A session.

(Operator Instructions) Our first question comes from Joe Stauff of CRT Capital. Your line is open.

Thank you, Good morning,. Couple questions. Regarding the cash balance. Coming out of bank -- bankruptcy the projection for your year ending cash balance this year was approximately $25 million. Given the EBITDA outperformance can you help me reconcile, again, kind of where you expect to be given the payment of professional services from -- I guess, now until the end of the year, et cetera?

Yes, Joe. So, we are a bit higher than where we expected to be. And that -- that is the good news. So -- so we're up at almost $42 million ending the third quarter.

Right.

I did mention that we -- we still have approximately $4 million to pay in the way of crude reorganization expenses and settlements. So those will get paid in the fourth quarter. That will be the final amounts associated with the restructuring. So that will be nice to have that behind us.

Yes.

And then I think the fourth quarter from a cash standpoint has a couple of things in it. One -- one mentioned is that we do have the semi annual interest payment on the second lien notes that hits November 30th. So that's about a $7.3 million payment. So our interest, our cash interest in Q4 will be almost $11 million with term loan payments and then that -- that lump payment of the -- of the second lien interest payment. So, Q2 and Q4 for us will be heavier cash usage quarters as a result of that. But we still expect to end the year with a very strong cash balance.

Okay. And regarding sort of the EBITDA you had given a measure in late September on that conference call, suggesting that the EBITDA performance at that particular time about three-quarters of that outperformance were driven by currency, where as roughly a quarter, and please correct me with the allocations, was due to just sort of better than expected sort of EBITDA results. Is that -- is -- can you give me an updated view on that number? Or that sort of allocation of sort of EBITDA outperformance and kind of what buckets it falls into in theory?

And I guess what you're referring to, Joe, is going back to the plan of reorganization or -- .

Correct.

Okay. So the plan of reorganization certainly had currency levels that were less favorable than what we're currently experiencing and that the currency levels in the plan of reorganization for Canada was $0.08 and for Australia $0.65. So we clearly have much -- much better currency rates today than what we put in the plan of reorganization. I don't have a calculation of what effect that currency change has on the EBITDA, but it is material. However, I do think also that we have performed operationally much better than what we put in the plan of reorganization as well. And I think you have to remember that plan of reorganization was done in kind of the February March timeframe. So it was done very early in the year and as we have progressed and enhanced the business, I think we have clearly outperformed it from an operations standpoint. But I don't have the calculations, the percentage split.

Okay, I mean, that's all right. I can calculate that. The EBITDA, though, year-to-date EBITDA, did you define that as -- you said 61 to 62 million?

Yes, the year-to-date EBITDA through the first three quarters is $61.2 million.

Okay. Thanks very much, guys.

Okay.

Our next question comes from Chris Roberts with Tejas Securities Group, pardon me if I mispronounced, your line is open.

Good morning and congratulations, guys, on a solid quarter.

Thanks.

Regarding SG&A expense. The margin was 24.6%. Prior to the restructuring, that number or that metric fluctuated to even as high as the low 30s and now has come down to traditionally a very low level. I know that you have been focused on cost controls. During 2010, do you think that number ticks up as you spend a little bit more on marketing and sales support going forward?

Yes, Chris, I think one thing that we have been quite successful in doing is reallocating of our SG&A. I think one for not only that our SG&A as percentage-wise has come down, but we have also been able to gradually and modestly invest more and more in sales and marketing. My sense of it is with this cost reduction program that we have underway, that would compensate for some of the gross margin loss that we would have from the -- from the declining revenue from traditional services part of it. So that would -- it does bring -- part of it is in SG and part of it is in cost of sales, as you know, the $10 million program. My sense is we would have some modest increases in sales and marketing only where they produce results and -- but we are also would be looking at other structural changes and costs.

I think I mentioned last time, we had moved from -- of U.S. and European operation, we were able to kind of run them as one unit even though sales and marketing is done at local levels by moving -- setting up PRIMUS India, which now support most of the -- most of the operations are supported from India for those two units. I think though that was a structural change in which we not only reduced costs, actually got a lot more flexibility to run those two businesses. And we believe going forward, it may be towards the second half of the year, we will try to make organizationally more efficient structures that will keep the SG&A low.

And Chris, I will caveat it with as long as our wholesale revenue stays relatively stable, the percentage of revenue, SG&A percentage of revenue should not move that dramatically. So -- so you got to focus on wholesale revenue because there is little cost associated with that revenue movement. But the change from the 30% or low 30% as a percentage of revenue down to where we are today we think is very significant and is reflective of all the efforts that we have put forth over the course of the last year. I don't think any changes will be that dramatic going forward.

Actually that's a good point. I think on -- for PRIMUS business looking at some of these ratios should look at them without wholesale and with wholesale. I'd also like gross margin, our gross margin if you look at just for retail, they are actually quite healthy and very competitive with other players. They fell in low 40%. Similarly on CapEx, sometimes there is a concern of are we spending too little CapEx and for us we look at CapEx as a percentage of our growth services, because of the voice services we have enough capacity and investments have already been made. If you look at the CapEx part of it as a percentage of say, $260 million of growth services, than those things are going to be 6% to 8% of the revenue, which is the right way to compare against other companies that are we generally investing at the right levels and benchmarked right. So if you looked at the other business without wholesale and with wholesale, I think it will -- it will be a lot easier to benchmark us against our competitors.

Okay, good. And then just to confirm, you'd mentioned on the last call that you intend to pay -- use cash to pay the coupon in the 14 quarters even though the indenture allows you to pick a portion of it. Is that still the case?

Yes.

Okay, great, that's all for me. Thanks and congrats again on a good quarter.

Thank you.

(Operator Instructions) Our next question comes from [Jitan Joshi of Polycapital], your line is open.

Good morning, gentlemen. Does -- wondering if you could perhaps just provide more of a timing guidance on the -- on what might come out of the strategic revenue and when we should expect to -- to hear something in terms of divestments or otherwise. And secondly, also on timing I was wondering if you could give us some guidance on the opportunities you're looking at to address debt maturities and your whole capital structure.

This is the John DePodesta. I will try to be responsive. Probably not as much detail as you would like, but I'm really not in a position to provide it. With respect to the portfolio assessment, I think as Paul indicated, that is ongoing and it is our intent to -- to keep investors informed as decisions are made and actions are taken. Paul indicated that analysis (inaudible) a broad range of options as we look at our -- our portfolio assets. That includes everything from incremental investment to harvesting cash to potential disposition. So that -- that is an ongoing process and we will report results as determinations are made. With respect to our continuing assessment of opportunities to address the 2011 maturities and potential financing, again, here, we really can't comment at this point on either the probability or the potential composition of any financing. But yet, again -- well, when as and if we're in a position to announce something tangible and substantive in that regard, we will obviously do so.

Great. Appreciate it. One question on the -- you mentioned the seasonality in the Australian business going into the end of the year and the early part of next year, could you perhaps give a little more guidance on the magnitude of that so we can adjust our expectations for revenue coming out of that geography for the fourth quarter and the first quarter?

I think one -- for the business segment, the -- it is about a couple -- last two weeks of December and about for three weeks of January. It is really a slow period. As India the revenues made the domes -- the usage general maybe it -- it has varied over the years, but it will be from where I would think 25% to -- 25% to 50% type of thing is to be expected.

25% to 50% lower usage over --

Well, just for those -- that four weeks, four to five week period. On the -- on the residential side, it -- it has a less -- lesser impact because many of the residential customers have now more subscription based services. So whether they use less or more the monthly revenue doesn't change all that much, but it still would, I think, would change probably 5% to 10%, maybe 10%. Again, just for those three, four weeks.

And it is a trend. Maybe put some numbers around that. It is kind more focused on the variable revenues, so the long distance usage and in Australia you get some metered local calls as well. The -- the services that are just pay for a month of broadband service, that obviously doesn't effect, so -- and then you -- you limit it to our business section. So roughly, you may see seasonality to the tune of $0.75 million to $1 million.

Great. And just one -- one last question on Australia. Any update on the regulatory situation developing there?

No, there is -- currently there is legislation, that is dealing with the structural separation of Telstra that is before the senate and it is our understanding that that may be acted upon literally within a week. Although it is unclear about what that outcome may be because the government today does not really have a controlling majority in the senate. So, it is still -- very much a fluid situation.

Great. Thank you very much, gentlemen.

Thank you.

Our next question comes from Matthew Dondling of MMG Corporation. Your line is open.

I think you meant Matthew Dundon of Miller Tabak Roberts MTR.

Your line is open, sir.

Hello, can you hear me?

Yes.

Okay. It's Matthew Dundon of Miller Tabak Roberts, I think we had a tag game of telephone with the operator. Here's a question. You mentioned your -- your competitors. Who do you specifically, if you can say, benchmark against yourself. This is a discussion that investors often have. Who are the right comps to PRIMUS with your -- with your diversity of businesses?

I think, again, just going country by country, the -- we -- the majority of competition in every country generally comes from the major players, because they generally have 85% of the market shares. So -- and they kind of generally define the market, the pricing and so on. Then as the second tier carrier we kind of focus on how do we respond to those and how do we position ourselves. So if you're in Canada, you look at Bell Canada, Telus and All Stream, those are the three main ones. Bell Canada because of our market share on the eastern side of Canada being more, so Bell Canada would have just a little bit more waiting on that one. And then we have cable companies. So Rogers would be the primary one and then Shaw on the west. But those would be the five players, I would say, that we kind of look at it each quarter, how did we do. How did we do against what they saw versus what we experienced. (multiple speakers)

Are you looking at trend lines or actually margins and where you're expecting to be as efficient as they are or just growth and more macro (multiple speakers).

I think we look at more macros. What happens is it is almost impossible the way they announce their results and how large they are to -- to say this competes directly with my, say, broadband's bundles that we offer or it deals directly with the data hosting part, because some numbers they don't give. And some numbers are just too broad and they are much larger to actually say, now this compares directly with it, but it gives you at numerical levels pretty good sense of are we gaining market share, are we losing market share. Even if not the market percentage-wise, are they experiencing -- for example, I think this quarter on the long distance part, even this hard to pinpoint exactly as long distance, we can measure their performance versus ours, but just looking at our numbers we thought long distance-wise we probably lost a little bit more than they may have lost. This is just our sort of internal analysis. In local in broadband that they decrease a lot more than we gained, as we had expected to gain.

On the hosting side, is much different, because in Canada, like I said, our hosting parties actually -- we have a pretty good business in Canada on the hosting side. It is not as large as we want it to be, but that's -- we have a solid foundation on that one because of our seven data centers in five cities. But there competitors are not -- the large companies do have hosting centers, but the key ones would be Q9, Infusion, those would be the major ones for us in the data center business. Similarly, you go to Australia, same kind of thing. Telstra is again. They are so much larger but they do -- they do give some metrics of their performance each quarter, so we will compare Telstra, Optus and APT, which is Telecom New Zealand. Then there is two other players that we compare. That is IA Net and TPG, which are more focused on the broadband part of it.

So those would be the five we would normally foresee from the public information. In the U.S., again, the two key ones we have is the IP services for Lingo. We look at the Vonage and we would compare the key metrics and see how we're performing against them. And then in Europe it's -- there just too small to compare against others, but we do look at how the overall market is looking at, again, three top players in each country.

Okay. Thanks a lot, I appreciate that.

Okay.

And we have time for one more question from [Briss Song of LKS Capital]. Your line is open.

Hi, morning, gentlemen. I understand you can't give us anything concrete regarding your efforts to refinance the debt, but, I could just wonder if you could give me a little color is that taking up a lot of your time recently than it does in -- normal operations?

I believe Paul described that particular undertaking as our top priority.

And have you set any deadlines as to when you aim to announce a deal or anything like that.

No, we really cannot at this point comment on either the probability, timing or potential composition. But when as and if we're in a position to do so, you will hear.

I think it is also fair to say historically and as -- as we have done things in the past, we announce things once they are actually -- generally they are absolutely certain or they have been concluded. Same comment goes for when we talked about the portfolio part, we are not expecting to say this business unit we are going to sell by this date, because setting deadlines for ourselves in areas where we don't control everything is -- is not the right thing to do. So -- but I think it is our top priority and we will announce once we have something concrete to announce.

Okay.

Thank you very much. Operator, I think we're concluded with the Q&A section.

Yes, sir.

Well, I want to thank everybody for joining the call and we look forward talking to you for the next quarter results. Thank you. Have a great day.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.