Innovate Corp (VATE) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and thank you for your patience. You've joined the Primus Telecommunications second quarter 2010 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) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. Carolyn Capaccio. Ma'am, you may begin.

Thanks, operator, and good afternoon everyone. This is Carolyn Capaccio of Lippert/Heilshorn & Associates. With me today on the call are Paul Singh, Chairman and Chief Executive Officer, and Tom Kloster, Chief Financial Officer. Before we begin, this call is being webcast with an accompanying slide presentation that can be accessed at the Company's website at www.PrimusTel.com by clicking on the webcast link located in the "In the News" box on the lower lefthand corner of the homepage. Once you have registered, a PDF version of the slides will be available for download through that link. Before we begin the call, we would like to remind you that statements made by the Company during this call that are not historical facts are forward-looking statements for the purpose of the Safe Harbor provision 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, capital investments, 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. 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. And now I would like to turn the call over to Paul Singh. Paul?

Thank you, Carolyn. Good afternoon, everyone. Thank you for joining us for the second quarter 2010 earnings call. I'll begin the call by walking through over operational performance, including a brief update on each of our businesses and then I'll turn the call over to Tom Kloster, the Chief Financial Officer for the review of our financial results. After that, we will open up the lines to take your questions. Let's begin on slide three to discuss the highlights of the second quarter. Our second quarter revenue and adjusted EBITDA grew sequentially and year-over-year. Free cash flow for this quarter was negative $7 million, primarily because of semi-annual interest payments aggregating to $17.2 million but also due to working capital deployed for revenue growth in some services.

We reduced our long-term debt by $10 million in the second quarter as part our continuing strategy to significantly delever our balance sheet. Our management focus is on expanding customers' uptick of our growth services and improving our cost structures to offset the margin impact of declining traditional services revenue. These efforts combined have successfully increased the stability and consistency of our financial performance over the last six quarters. We ended the quarter with a $34 million of unrestricted cash balance which we anticipate will build up again in the third quarter as we will not have any significant cash interest payments in this quarter.

Our investments and marketing focus on growth services continue to produce positive results in our primary markets of Australia and Canada. Growth services revenue grew year-over-year and continued to increase as a percentage of our retail revenue driven by continued customer demand for our data center hosted IP-PBX and broadband Internet services. Traditional services including dial-up Internet, long distance voice, and off-net local services continued to decline as more wireline long distance customers switch from fixed to mobile phone services. We continue to manage traditional services for cash flow while investing in the growth services through increased marketing and by expanding the coverage and capacity of our on-net infrastructure. We are executing well on our strategic objectives of delivering stable financial results and reducing our debt burdens while transitioning our revenue mix in favor of growth services in order to achieve sustainable growth over time.

Now let's move to slide four to discuss Primus Australia. In Australia, we recorded a 1.2% sequential decrease in revenue, driven primarily by a loss of revenue in long-distance voice and dial-up Internet services. Our commercial revenue grew quarter-over-quarter and year-over-year aided by strong demand for our services involving hosted IP-PBX data centers and advanced data service applications. Our Australia team continued to make inroads into enterprise markets by winning 22 new strategic accounts with billing of more than $5,000 per month. In the residential sector, VOIP and broadband services are growing at a moderate mid single-digit range while long distance voice, dial-up Internet and off-net local phone service revenue continued to decline at an annual percentage rate in the mid-teens. Our Primus Australia team is also doing a good job in improving operational key performance metrics.

Our strategy going forward is to strengthen our competitive position in growth service areas by adding new products and services to our portfolio, expanding market segments and channels and investing in our network and services infrastructure. Almost all of our second half 2010 business objectives are aligned to execute this strategy. We are also looking forward to a future rollout of the Government-sponsored National Broadband Network, often referred to as NBN, that would allow us to offer high-speed broadband services nationwide versus the roughly 50% coverage we have today. NBN is expected to be rolled out gradually over the next several years with a number of NBN parts opening each year in select cities. Primus Australia is positioned to be a strong competitor in NBN offerings to both residential and business customers as we will differentiate ourselves by providing a one-stop bundled solution for a broad portfolio of services. In fact, in Q2 Primus became the first Australian provider to sign and activate residential and business customers on the NBN network in Tasmania.

Let's move to slide five and discuss performance in Canada. In the second quarter, Primus Canada delivered stable revenue while improving adjusted EBITDA by 2.3% sequentially. Revenue from growth services continued to increase at a moderate pace of 6% year-over-year driven by strong demand in commercial hosted voice and data center services. Traditional services revenue, primarily long-distance voice declined approximately 6% from Q1 similar to the previous quarter's rate of decrease in residential LD voice. Our commercial business saw steady traction in winning new accounts in Q2 as a result of higher sales productivity and robust demand for our data hosting and hosted IP-PBX services. Year-over-year IP-PBX revenue increased 48% and data center revenue grew 7%. Hosted IP voice order [sizes] are higher than initially expected as our service appeals to large-sized business customers as well as to SME customers. We are investing in additional sales and marketing resources in order to win a greater number of a larger sized business accounts for our data hosting services.

In early Q3 we added a suite of Polycom-based IP-PBX solutions to our current suite of Linksys-based offerings. Overall, our commercial new business sales funnel remains strong. Sales productivity is improving and we are gradually expanding our direct sales teams to increase new sales. The sales cycles are long for data hosting and hosted IP services. However, we are confident in our ability to grow the mix of business revenue in Canada. On the residential side, our non-LD customers adds remained stable as a result of our efficient marketing campaigns promoting broadband bundled services, effective provisioning in activations and improvements incurred.

In June, we introduced our smartphone offering in a soft launch that expanded our wireless footprint in Canada. For the second half of 2010, our business objectives in Canada remain to further penetrate the up-market SME segment by marketing our data center and hosted IP-PBX services and further expanding our managed and hosted service portfolio to include cloud computing. We are increasing our marketing investment and building a brand name for our business services which we believe will help us win more customers in the long run.

Let's turn to slide six to discuss our wholesale business -- excuse me. In the second quarter, Primus' wholesale net revenue grew nearly 6% quarter-over-quarter as a result of an increased number of new customers and higher traffic of volume from existing customers. In the second quarter, we recorded a $1.4 million benefit to EBITDA from favorable cost of sales settlements. Our wholesale group executed on the strategy to increase the proportion of US domestic traffic termination which carries much higher gross margins in the overall traffic mix.

Our Q1 hiring of new business development personnel resulted in service contracts from several new carrier customers and targeted new markets in the Middle East, Africa and Asia Pacific. We are now adding wholesale sales personnel in the US in order to expand our customer base of US-based service providers that have significant amounts of US terminating traffic. Our primary objective for the wholesale group is to improve on existing profit margins and grow revenue profitably. Our strategic objective for the second half of 2010 call for a continued focus on the execution of the initiatives I just mentioned to capture featured growth opportunities in this business.

Let's turn to slide seven to discuss our businesses in the US, Europe and Brazil. As we have discussed previously, our strategy with the businesses shown on this slide has been to primarily optimize their operational performance and manage them for cash flow. Let's review them one by one. Primus US generated $12.8 million in net revenue in the second quarter, a sequential decline of 8% resulting from loss in traditional wireline voice and retail VOIP services revenue. In the US, 65% of revenue is derived from residential customers, 22% from business customers and 13% from customers in Puerto Rico. Lingo VOIP services make up about 37% of the total US revenue and carry a gross margin of about 68%. Continued aggressive cost management has kept US EBITDA stable, exclusive of cost of sales, settlement benefits, and prior quarter's tax expense charges. Growth margin for the US business is strong at 58%.

We have stopped all new sales of low-margin retail services to business customers in Puerto Rico, from other offices in Tampa, Florida. Going forward, our focus will be to sell only VOIP services which carry a much higher profit margin. While this action will likely result in lower revenues but it should improve the unit's EBITDA contribution. We plan to invest all of our sales and marketing spend in the US into business and residential VOIP services to capture the robust demand and higher margins. And we continue to spend the role of online sales channels in our new customer acquisition strategy in the US.

In Europe, Primus generated second quarter net revenue of EUR8.5 million, a sequential increase of 3.7% over quarter -- over Q1 resulting primarily from the successful execution of our online marketing strategy in our UK residential unit. Second quarter adjusted EBITDA increased as a result of cost-effective online sales channels in the UK and aggressive cost rationalization. Primus France continues to perform well and is also increasing the use of online sales channels to drive growth. Primus Brazil grew both revenue and EBITDA in the second quarter. Brazil's data center revenue continued to grow at a steady double-digit growth rate from last year with strong incremental EBITDA margins. Brazil wholesale revenue grew very strongly in Q2 but this is a low-margin component of our business.

Moving to slide eight. With positive and consistent execution in the first half of the year we are on track to achieve our key objectives for 2010. We are continuing to strengthen our competitive position in Australia and Canada with focus on growth services in these core markets, particularly in the commercial segment. In both countries, we continue to invest in new products and services, expand coverage and capacity for our on-net infrastructure to drive profit margins, increase network data speeds and broaden our data center services portfolio in order to meet the service requirements of business and government customers. New sales pipelines of strategic accounts are growing and our commercial sales effort to move up-market in the business sector are expanding.

Many of the planned infrastructure-based projects may take from 6 to 15 months to complete, but there are other drivers of growth and profitability in 2011 and beyond. Our objective is to lay a strong foundation for 2011 that will enable us to gradually evolve from a stabilization phase to a growth phase. To deliver stable adjusted EBITDA and free cash flow near-term, we are aggressively managing cost and concentrating new sales efforts on high-margin, high-growth data and hosting services while we manage traditional services for cash flow. In having already reduced our debt levels by approximately $14 million this year we plan to further delever by opportunistically applying proceeds from potential asset sales and free cash flow generated from operations to debt reduction. Now let me have Tom Kloster, our CFO, review the financial performance of the Company. Tom?

Thank you, Paul. Good afternoon, everyone. Let's now move to slide nine, entitled, Financial Summary. Here we provide four key financial metrics and their trends over the past five quarters. Second quarter net revenue was $205.4 million, which increased $1 million or 0.5 of 1% compared to the first quarter of 2010 and $9.8 million or 5% from the year ago quarter. The impact of foreign currency translation was an unfavorable $3.5 million sequentially and a favorable $15.5 million year-over-year. Therefore, on a constant currency basis net revenue increased from the first quarter to the second quarter by $4.6 million or 2.2% and declined $5.7 million or 2.9% versus the second quarter 2009. The $4.6 million sequential increase was comprised of a $4.7 million increase in wholesale services revenue and $100,000 decline in retail services revenue.

The $100,000 decline in retail services revenue this quarter compares favorably to the decline of $1.9 million in the first quarter of 2010 as well as to the quarterly retail revenue declines experienced throughout 2009. The decreased rate of decline in retail services revenue partially stems from an increase in growth services revenue of $800,000 in Canada and $500,000 in Australia and an increase of $1.9 million in wholesale voice services in Brazil. The $4.7 million sequential wholesale revenue increase is a result of new customer growth and volume growth from existing customers. Growth services net revenue which includes IP-PBX, broadband Internet, data, data center, on-net local, wireless, and consumer VOIP services was $71.2 million for the second quarter of 2010, increasing slightly from $70.9 million from last quarter. We continue to see encouraging growth in data center, broadband Internet and commercial IP-PBX revenue being partially offset by declines in US consumer VOIP services revenue.

Net revenue from growth services comprised a greater percentage of second quarter 2010 retail revenue, 45.6% that in past periods as growth services revenue generation becomes more consistent and the revenue trend of traditional services continues to decline as expected. Primus' strategy to prudently invest capital and sales and marketing in higher demand products including data center, broadband Internet and IP-PBX services is resulting in stronger traction of these services with small and medium-sized customers and increasingly with enterprise accounts.

Adjusted EBITDA was $23.6 million or 11.5% of net revenue compared to $21.6 million or 10.6% of net revenue in the first quarter. However, if we were to exclude non-recurring items such as severance, tax accruals, and cost of sales dispute settlements from reported results, our annual adjusted EBITDA run rate is in the low to mid-$80 million range. This is our sixth consecutive quarter of delivering stable to improving adjusted EBITDA and reflects our steady progress in changing the revenue mix in favor of growth services and ongoing cost management efforts in both cost of sales and SG&A.

Capital expenditures in the quarter were $5.8 million or 2.8% of total revenue and 3.7% of retail revenue compared to $4.9 million or 2.4% of total revenue and 3.1% of retail revenue in the first quarter. Spending levels in the first half of 2010 are in line with our previously announced expectations. Free cash flow for the second quarter 2010 was a use of $7 million. As we have discussed in the past, our free cash flow is higher in Q1 and Q3 than in Q2 and Q4 as a result of the timing of our interest payments which occur in Q2 and Q4 of the year.

Cash was generated during the quarter through $23.6 million of adjusted EBITDA and $500,000 from the sale of assets, which was offset by cash usage of $17.2 million for interest payments, $9.5 million for the repurchase of 14.25% senior subordinated secured notes, $7.6 million for working capital, $5.8 million for capital expenditures, $1.8 million from currency movements and $300,000 for capital lease amortization. We expect our free cash flow in Q3 to return positive due to material interest payments being made -- I'm sorry, due to no material interest payments being made.

Let's now turn to slide ten to discuss foreign currency. Here we have provided the average currency rates utilized during recent reporting periods and as of Friday's close. While currency spot rates continue to be volatile, you can see that on an average basis the Australian and Canadian dollars, our primary foreign currencies have remained relatively stable over the past several quarters. Let's now move to slide 11 to review our capital expenditure strategy. In the second quarter, we spent $5.8 million on capital expenditures. The bar chart on this slide breaks out the allocation of our investments by service.

Again this quarter, over 85% of our CapEx was directed into higher growth and higher return projects in our primary markets of Canada and Australia. These projects include increasing our broadband network footprint, speed and on-net coverage and enhancing data center capacity and service capabilities. In addition to the above mentioned projects, we expect to initiate capital spending in the second half of the year to utilize existing Australian Metro fiber and to prepare for Australian IPTV services.

Moving on to slide 12, we ended the second quarter with $34 million in unrestricted cash and cash equivalents, down from $52.1 million at March 31, 2010. As I mentioned earlier, we made interest payments of a $17.2 million in the second quarter. Also, we repurchased and retired $9.5 million of our outstanding 14.25% senior subordinated secured notes due 2013. During the quarter, we reduced our debt by $10 million and have $246.3 million of debt outstanding as of June 30. We will continue to assess the most efficient use of the Company's cash resources toward investment in network, systems and product initiatives and to strengthen the balance sheet through debt repurchase or other means. That concludes my prepared remarks. I would now ask the operator to open the call for questions and answers.

Thank you sir. (Operator instructions) Our first question comes from Eli Danziger of Crossfields Capital.

Hey guys. Thanks for taking my call. I have a multi-part question. It sounds as if you're experiencing a pretty good level of demand for the IP-based and data center services from commercial customers. Can you talk a bit more about your competitive proposition relative to the other players in your key geographies? And also, what does the new business pipeline look like in these markets? And if you could spend a little bit of time on the economic sentiment among your potential customers? A mouthful, I know.

Thanks Eli. Let's start with the competitive positioning for both data hosting and hosted IP services. In Canada, we have a pretty good position in the middle market where we have about three to four competitors in Canada that compete for not really large enterprises but at semi to middle market. That's where we primarily compete today. We have seven data centers in five cities in Canada so fairly well -- a pretty big footprint coverage, more than our competitors so that helps us. Second, we have our data centers -- are very reliable and we have been operating them for a long period of time. We just, given our customers comfort that we operate -- the reliability is there and there's a long-term record of that one. In addition to that we have been able to offer full range of services in the hosting center itself so from (inaudible) to managed hosting to storage to disaster recovery, and security type of services.

That one service here that we have the added which would be growing with the cloud computers so by offering a wide range of services the customers can come to us and we can fulfill all their needs. Now the one strategy that we now have is that we are going after a little bit larger customers. So primarily before we had in the co-lo part for example, one to five cabinet customers for the most part. So now in our pipeline we have about more than ten customers that would be somewhere between ten to 30 cabinet range. And we have also hired a few salespeople who actually have the experience dealing with large accounts. So because of that one, I think we are also expanding the capacity of some of our data centers because the larger accounts like to see some more floor space available for their growth. So we are making some adjustments as to the capacity that we will build out in advance of the demand by six to 12 months.

But we are pretty excited about that we are being -- coming in the top selection of these larger accounts and we are confident we are going to start winning some large accounts and those. But then our bread and butter business is to have one to five cabinets which is generally quite strong here. In Australia, we only have a three data centers but the one in Melbourne has been our primary data center because that's where we have the space for growth and there's the demand is quite strong. We are one of the few in Melbourne that has capacity so we have a competitive advantage of geographical competitive advantage, if you want to call it. Going forward, we see a lot of demand coming from the government sector and we expect that we are going to build a new data center and this data center would meet actually all the requirements set by government also by large accounts. And we hope to get that thing started in the next two to three months and then, say, a nine to 12 month project and that will give us enough growth going forward.

In the hosted IP sectors, there we have a pretty strong position. We have in Canada we are winning lots of large customers. When I say large, medium to large would be the right segment. Which is when we started we were expecting smaller customers to start with our reliability of our services and our network in Canada. I think that's letting us win some larger accounts so that's quite encouraging and the revenues have been growing. We have been able to provision our services on time which is a big thing in hosted ip services and then as we are getting more revenue I think we will have better competitive advantage. So that will grow actually with the customer base and the same thing goes for Australia. There we are winning even larger accounts and there we're focused more on innovative applications of technology to meet customers' needs.

And I think in hopefully next order we can announce a couple of larger ones to give you a sense of the type of applications that we have used to win those large accounts. I think in terms of the pipeline I look at the pipeline for example in Canada and Australia, the pipelines are pretty strong but it does take a long time for customers to make these decisions so looking at the demand so we know the demand is quite strong. We also know larger accounts more and more of those are now looking at Primus so as a result of that one, we are investing more actually in marketing together with brand name up in the business sector because that would help us to win larger accounts. We are -- our data center capacity, we may invest more to have more space capacity available which larger customers like to see so all that, I think we are feeling pretty confident that we can grow and continue to grow our business. I think I answered almost all of the questions.

I think you did. I think so. Great -- that was great. Thanks. I appreciate you guys taking the call.

Our next question comes from Eric Shahinian of Kingstown Capital.

Hi, how are you? My question and I apologize -- I had gotten on a little late is pertaining to refinancing. I know you guys have been trying to refinance the facilities. Just wanted to know how that's going if you have any updates in terms of timing, things like that, that you could share with us?

Eric, hi. It's Tom, I wouldn't say that, that we have been trying to refinance the facilities. I think we're very focused on our free cash flow and cash generation and that giving us the ability to do a variety of things as we did during this quarter and buying back $9.5 million of the 14.25% debt.

I agree with that. I think that's actually a very good use of cash so if that's the plan, that's great.

I think we'll stay opportunistic to see what the market is doing but also to utilize our free cash flow to try and delever the balance sheet and then make appropriate decisions as they come up in the future.

Our debt maturity doesn't come up til --

No, you guys are definitely clear I guess. You could make the argument that your coupon is a little high and there is a potential for some room there but I think you guys are doing the right things with the cash. So if you think paying back is fine then that makes sense.

Thank you. We agree with you on the coupon.

Our next question comes from Tom Koch of Tejas.

Hi. I was wondering could you just repeat the comment you made when you were talking about slide nine and you were going through the adjusted EBITDA and you made a comment about excluding non-recurring items at the annual run rate EBITDA would be mid-$80 million. Did I hear that correct?

In that range, yes.

Guess how many are in the low to mid-$80 million. And we've had in the last several quarters, a number of items that you can call non-recurring whether its severance charges or accrual for taxes or favorable items as well where we've won some cost of sales dispute settlements where we may have accrued from and so consequently, release that accrual. So, and that's somewhat going to happen from quarter-to-quarter as part of normal business but they're probably a little bit, I would say, more significant in the last couple of quarters so a good way to look at annualized EBITDA is in the low to mid-$80 million.

Can you break out in this last quarter of this $23.6 million.. How much of that are one-timers, I mean,for example I noticed the EBITDA and wholesale in US is up a lot or is that because there are some one-time events in there or --

Yes, there are. There are some one-time favorable cost of sales settlements in both of those two business unit P&Ls so again, if you factor in $85 million, call it, annualized EBITDA been you're in a run rate of 21%, 21.5% quarterly EBITDA. But it does move from quarter-to-quarter. That's why we prefer to look at it from an annual basis.

Okay. Great my second question is, can you comment at all? There's been quite a lot of activity going on in Australia right now as far as the competitive acquisitions and the competitive positions of some of the ISPs, the [iiNet], TPG, the AAPT transaction as to where you stand relative to the smaller players and where you see yourself standing relative to the larger players as far as how you see the landscape evolving there -- the competitive landscape.

Yes, I think the competitive landscape there's more consolidation going on as you probably saw. [IINet] acquiring the residential part of AAPT. AAPT, which is a subsidiary of Telecom New Zealand has been on the market several times but this time they were successful in selling their residential part general to [IINet]. And [IINet] competes with us on the broadband sector and the residential segment. Then there's the TPG, those are -- I would say those are the two primary players that came from the broadband-side. TPG also owns a fiber company they recently acquired called [Pipe] that's from domestic but they also now have now an international trans-pacific fiber capacity as well They have laid fiber cable actually. They're owners of that.

So in terms of the competitive part, I think more consolidation going on which, in my view, at least I prefer to have the consolidation because you have fewer players than having a lot of small players and that's what happening in that market. So you have one categories -- Telstra and Optus, now I would say Primus which I referred to them as integrated players so they have a full-service company then they have business segment as well as the other residential segment then you have iiNet, TPG and there's one other smaller company, the name slips me. But TPG and iiNet are the primary ones. And they have been growing primarily through acquisitions by buying customer bases and their public companies, both of them. So that's the universe for the most part that we look at and I think within the market as it is today, we are focusing more on the business segment to growing there with (inaudible) data hosting type of services but hosted IP services.

And in Australia, even other voice revenue in the consumer segment is increasing because of more customers that we are getting even though the usage per customers is down. But we are adding more customers and therefore, even the LD parts of the business segment has been growing. Some of it is what I talked about coming up in new applications to service customers' needs that can help them grow their businesses faster so that has allowed us to get some larger accounts. So that's basically the competitive environment that you have there. I think NBN rollout, as the elections are coming pretty soon, and the NBN thing will sort it out, how fast it will get to rollout. But you see NBN net cannot positive for us because we'll had more coverage. Everybody will have same costs but we also own our network because everybody may not want to pay $60 to $100 for broadband. So our network also continues to be used and that gives us an advantage so we can compete effectively with iiNet and TPG on that.

Great. I just have one other question on that. Is your business integrated between the residential and the business or could you separate those businesses, and what I'm reading in the press is that this consolidation going on in the residential side and so certain players can get bigger and have efficiencies in scale? And I'm just wondering where you see yourselves playing out in that?

The common elements, obviously, the network infrastructure, so for example, say, broadbands. So broadbands, once you have the infrastructure, you use it for both businesses as well as you use it for residential customers so your voice network -- so many of the services are same but sales and marketing, clearly are different. So billing part of it -- so the backroom systems are integrated if you want to call it that way. Canada is split up, yes, it can be split up. It takes some work to get -- from the network but the shared economies of scales are the one that if you have both of them you use the same network, nine-to-five for businesses and residential you use it in the evenings and weekends so you always have it better utilization of your network.

Thank you.

Our next question comes from Hamed Khorsand of BWS Financial.

Hi I'm just trying to figure out -- you were posting quarter-over-quarter revenue declines this period. Is there a specific disadvantage or in that you would explain recently or is this purely just market dynamics and by you focusing on the larger customers you would see an increase in revenue going forward?

No, it's a market dynamics. Actually, we -- Primus performs a lot better than our competitors. If you look at wireline revenues drops in major players, I think you would find it a drop in the wireline part which is the market dynamic as people are moving more to mobile and more [towards] Internet. And so that's what we call the traditional services. I think dial-up Internet for us over the years has been a big part but if the remaining part is in Australia it still makes up about 7% of our revenue -- our total revenue in Australia which we know in two, three years it will all move to broadband services. So it's the market dynamics competitively. Actually we do quite fine so because we can provide better service to customers than the large (inaudible) players that we mostly compete with on those services.

And so the focus has been on the services that grow which will be broadband services, how we bundle them with our local and traditional services. And the business is clearly -- everything is moving to IP so we are moving into that direction as fast as we can. So the hosted IP, broadband services data services, hosting services those are all the new services that are growing. So if you compare us with our different competitors, I think we have a very favorable trajectory. It will still decline unfortunately but on the traditional services but declining in most cases lesser than what the other guys have reported.

And I just wanted to be clear on this sequential revenue change. We reported revenue growth and then you back out the currency effect and there was even more revenue growth. Now as we stated, most of that came out of our wholesale business so from a retail revenue standpoint, we were relatively flat and that's in our primary markets in constant currency such as in Canada, we were relatively flat sequentially. Loss in the voice business, as we expect and growth in the growth services business. We were down a little bit in Australia, not quite flat, we were down somewhat but where we're losing more revenue is in the US market on the traditional voice services and less in our primary markets.

One of the reasons we break up -- we could have just focused on we grew so much quarter-over-quarter. The reason we break up wholesale because the retail revenues is what generates most of our cash flow and will generate most of our gross margin. So those are the ones we focus on more on. Wholesale business is a scale business so you should make it quite large it can produce good cash flows for you but $200 million we want it to be profitable and expand margins. So more talk -- we do on retail because that's what the way we spend overtime because we can expand the gross margins of retail businesses and as they grow they can produce a lot of free cash flow for us as well as high profitability.

Okay. Thank you.

Thank you. At this time, I would like to turn the call back to Mr. Paul Singh.

Thanks operator. Primus is scheduled to present at the Imperial Capital's Fourth Annual Global Opportunities Conference, which will be held on September 15 in New York and we invite you to participate. In closing, thank you for participating in our second quarter call. We look forward to speaking with you again in November when we report our third quarter financial results. Have a good evening.