Innovate Corp (VATE) 2010 Q4 法說會逐字稿

Welcome to the Primus Telecommunications fourth quarter 2010 earnings conference call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions. As a reminder, this conference is being recorded, Thursday, March 17, 2011.

I would now like to turn the conference over to Richard Ramlall, Senior Vice President Corporate Development of -- and Chief Communications Officer. Sir, you may begin.

Thank you, Operator, and good morning, ladies and gentlemen. With me today on the call are Peter Aquino, Chairman and Chief Executive Officer; Jim Keeley, Interim Chief Financial Officer; and Thom Hickey, Chief Legal Counsel.

This call is being webcast with an accompanying slide presentation that can be accessed at the Company's website at www.ptgi.com in the news section located on the lower left-hand corner of the home page. Once you have registered for the webcast, a PDF version of the slides will be available for download through that link. Please note that all the financial information that we are presenting today reflects the impact of the discontinuation of Primus's European retail operations in all periods.

Before we begin our 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 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, 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 Pete Aquino. Pete?

Thank you, Richard, and happy St. Patrick's Day, everyone. So, as we summarize the performance of new Primus for 2010, we will provide some insight into the drivers of our businesses in Canada, Australia, International Carrier Services, which is formally Primus Wholesale, and our US retail business.

We finished 2010 on a fast-track, paving the way towards meeting key financial and operating objectives. By year-end 2010, we were executing well on margin expansion strategies for our primary business units, and making decisions on non-core assets. As Richard mentioned, we sold retail operations in Europe, we netted about $6 million in cash. We reorganized some startup businesses in the US, and cut overhead expenses around the globe.

In addition, the Arbinet acquisition which closed a couple weeks ago delivered over $16 million in cash. We are very excited about our future opportunities across the whole PTGi portfolio, and we welcome Arbinet shareholders and employees to the team.

With our growing cash balance and positive free cash flow profile, we also took aim at our balance sheet. We recently announced a call of $24 million of our 14.25% notes and an exchange offering launched on February 9, that will be open until March 23. We have submitted an application to relist on NASDAQ and plan to relaunch new Primus as PTGi, which is short for Primus Telecom Group Inc., and you can check out our new our website at www.ptgi.com.

So, let's move to slide three to discuss the 2010 financial highlights. Revenue of $765 million was up slightly, while gross margin increased nearly 4% year over year to $276 million. Reported EBITDA was approximately $80 million. However, normalizing for deal costs and severance and other items adjusted EBITDA was approximately $89 million, up $5 million year over year.

The 2010 capital program was restored to a more basic level of $26 million as opposed to 2009, where the Company only put $15 million to work. From a growth perspective we are currently planning to fuel our upside potential in broadband services, data centers, and metro fiber, while keeping focused on our positive free cash flow objectives. The formula for keeping things in balance as we modestly increase our success-based capital program, calls for additional margin expansion across-the-board. EBITDA less CapEx was $62 million in 2010, which I think is a very good starting point as we tackle our key financial and operating objectives in 2011.

So, let's turn to slide four to review the current PTGi portfolio. Several levels of analysis offer insight into the full value potential of the PTGi portfolio. As you can see, revenue was primarily driven from Canada and Australia, and our standalone wholesale business, and this is before Arbinet. After further review, we now consider our US retail business as an emerging core business unit. Including these, revenue exceeds $737 million with nearly $97 million in EBITDA excluding unallocated overhead and non-core assets. Although the business units performed with $26 million of CapEx, we believe that an incremental $5 million to $10 million directed towards high return, data centers and metro fiber is a great investment.

Today, Canada has seven data centers in five cities, operating at or near tier three status. We provide co-location, managed services, dedicated and cloud services. We've been up and running for 10 years with an experienced team, and frankly have a high-class problem. We are trying to keep up with demand. Our data centers are located in Toronto, Ottawa, Vancouver, Edmonton, and London. And these are five of the top 10 largest cities in Canada.

Our team in Australia has three data center facilities, two in Melbourne and one in Sydney. They have a similar opportunity and are equally anxious to build on their momentum. We are executing a midmarket strategy and have the potential to move up to support more enterprises.

In summary, this data center revenues approaching $37 million across the globe, excluding Brazil, and it is an increasing contributor to PTGi. More importantly, as many of you know, EBITDA margins for this business tend to be over 45% and we want to continue to build this value as a core competency.

The other hidden asset, I believe, is in the nearly untapped metro fiber that we have in Australia in both Melbourne and Sydney. Revenues driven off the rings today are included in our overall SMB revenues. However, our engineers are currently working on grooming the existing rings and adding electronics on a success basis to several buildings in the central business districts. This will allow us to scale up and leverage the rings for enterprise services including metro ethernet. This initiative, combined with our data center and NBN opportunities, is a full play for Australia in 2011.

Continuing on with the product set embedded in Canada and Australia, which in many cases are very similar, we have a gradual shift going on between highly profitable, yet downward trending products, offset by growth in IP based products and services for both the consumer and business segments. Today we offer local, high-speed Internet and long-distance services on and off our switching networks. We are committed to improving our on-net balance and product mix to expand margins, especially in Australia. We can harvest profitable LD revenues for cash flow and drive up data services through our soft switch platforms. The transition will be managed over time to get to a higher mix of on-net VoIP and broadband access across-the-board, including a growing number of US cities where we serve.

The US retail business has been reorganized, and now re-energized to focus mainly on plug-and-play products through Lingo and PTGi business services. This is much like the peer group of Vonage, Symbian, Paetec and the like. And, for example, we recently announced the expansion of our IP business services in Los Angeles, and introduced new product applications in Puerto Rico.

From a management perspective we're making progress organically, to ensure good processes. Similar to Canada and Australia, our traditional local, LD and prepaid card offerings are being harvested for cash flow, while most of the new marketing dollars are being redirected towards IP products.

Regarding global wholesale and the need to compete more aggressively, we believe that gaining scale is the key to success. We recently acquired Arbinet with over $300 million in revenue which not only adds scale but a product set through the Arbinet exchange. The combination of an expected $3 million to $7 million of synergies, along with the benefit it brings to our retail transport requirements in Canada and Australia, is a good first stop for PTGi. Almost immediately we expect the new PTGi International Carrier Services group will integrate sales and network teams to be more efficient and offer carrier customers a broader spectrum of solutions around the world.

We're very excited about ICS's potential to accelerate the cost savings and capture revenue and margin opportunities that we already mapped out. The addition of Arbinet will push the PTGi over $1 billion in revenue on run rate basis.

Below the line of our primary business units we're evaluating strategic alternatives in Brazil. Where revenues are primarily driven by our wholesale services there, and most of the margin is generated from one data center. As mentioned before, Brazil is a great market to be in these days, especially with data center facilities. But relative to PTGi, it's one of our smaller business units.

Corporate overhead, including human resources and NOC facilities built-up in India are within our control for improvement and rebalancing over time. The addition of Arbinet employees and facilities worldwide also provides an opportunity to build an all-star team.

Finally, we rounded out the year by discontinuing our selling operations in Europe and taking some severance charges to net $80 million in EBITDA.

At this point, let me turn it over to Jim to walk us through the financials in a little bit more detail. Jim?

Thanks, Pete, and good morning everyone.

Let's now move to slide five entitled Financial Summary, which provides four key financial metrics and their trends over the last five quarters. In the fourth quarter, net revenue decreased 6.6% to $189.1 million over -- on a year over year basis. The impact of foreign currency translation was a positive $7.3 million for the quarter. On a constant currency basis, net revenue decreased 10.2%.

The expected decline in traditional services revenue, such as residential LD and dial-up Internet, was offset in part by a 10.9% increase in data center, VPN, broadband and local on-net services that now comprise 25.3% of total revenue compared to 21.2% last year. These services also contribute higher gross margins.

Adjusted EBITDA as reported was $20.1 million or 10.6% of net revenue in the fourth quarter 2010, compared to $22.6 million or 11.2% of net revenue in the fourth quarter 2009. Included in adjusted EBITDA in the fourth quarter was the impact of $2.4 million of severance, regulatory, and deal costs. Excluding these costs, adjusted EBITDA was $22.5 million or 11.9% of net revenue. A 75 basis point improvement resulting from a base -- 180 basis point increase in the gross margin that was partially offset by a 105 basis point deleveraging of SG&A.

In constant currency and excluding severance, regulatory and deal costs, our SG&A decreased $4.6 million year over year as we continue to manage our cost structure. The improvement in gross margin was the result of a better mix of higher margin gross services revenue, particularly data center and local on-net and the focus in wholesale on higher-margin, lower volume traffic.

The impact of foreign currency exchange to adjusted EBITDA year over year was a positive $1.2 million. This represents our eighth consecutive quarter in delivering stable adjusted EBITDA. Capital expenditures in the quarter were $9.3 million or 4.9% of total revenue, compared to $5.5 million or 2.7% of total revenue in the fourth quarter 2009. Capital spending in the quarter was driven primarily by investments in Australia and Canada to expand our local on-net presence and build out our data centers as well as normal maintenance.

Free cash flow in the fourth quarter was negative $10.1 due primarily to interest paid on our notes and the escalation of capital expenditure. Excluding the interest of $17.2 million, free cash flow will be a positive $7.1 million in the quarter. Cash generated during the quarter through -- was through $20.1 million of adjusted EBITDA and $4.7 million in net proceeds from the sale of certain European operations. Offset by cash usage of $17.2 in interest paid, $9.3 million for capital expenditures, $3.8 million for working capital, $2 million for currency movements and $600,000 for taxes.

Moving onto slide six to review our operations in Canada. Primus Canada delivered, in local currency, fourth quarter 2010 revenues of CAD59.6 million and adjusted EBITDA of CAD12.0 million, 20.1% of net revenue. As compared to revenues of CAD62.1 million and adjusted EBITDA of CAD11.8, or 19.1% of revenues in the fourth quarter of 2009. The pie chart on the left shows the breakout of Canada's revenues by type of service.

Data center, VoIP, and broadband services comprise 31% of revenue, long-distance, local, prepaid, wireless and dial-up services comprise 66% of revenue, and wholesale services contributed 3%. Year over year, net revenue decreased 4% as declines in residential long-distance and prepaid cards were slightly offset by solid increases in residential, local, and business VoIP and broadband revenues.

Among faster growth services hosted IP PBX revenues grew over 54%, and data center revenues are now approaching a $30 million run rate on an annual basis. This growth, as well as a $4.3 million in SG&A savings, is sustaining Canada's high and stable EBITDA contribution, our most profitable business in the port -- Primus portfolio, and continues to mitigate the impact that the decline in residential long-distance revenue has on EBITDA. Canada's EBITDA was affected during the quarter by a CAD1.4 million adverse regulatory ruling. And excluding this, adjusted EBITDA margin in Canada exceeded 22% in the quarter, a robust and strengthening run rate.

Let's move to slide seven to review our operations in Australia. Primus Australia delivered, in local currency, fourth quarter 2010 revenues of AUD71.8 million and adjusted EBITDA of AUD9.0 million or 12.5% of net revenue. As compared to revenues of AUD75.9 million and adjusted EBITDA of AUD9.7, or 12.8% of net revenues in the fourth quarter 2009. Again, the pie chart on the left shows the breakout of Australia's revenues by type of service, data center VoIP, broadband, VPN, and local on-net services comprise 43% of revenue. Long-distance, local, prepaid, wireless, and dial-up services comprise 47% of revenue, and wholesale services contributed 10%.

Year over year, net revenue decreased 5.4% as declines in residential local and dial-up were partially offset by growth in data center, VPN and wholesale. Gross margin improved 106 -- 56 basis points as we moved more local customers onto our network and shifted our revenue mix from residential to business.

Let's now move to slide eight to review our International Carrier Services operations. Primus wholesale revenues in the fourth quarter of 2010 decreased 25.2% to $41.1 million from $54.9 million in the fourth quarter of 2009. The impact of foreign currency was a negative $0.9 million. On a constant currency basis, net revenue decreased 23.6% as we continue to target higher-margin traffic, especially US domestic terminations where the margins are much higher than those internationally terminated traffic, and eliminate routes with minimal or very low profitability. This resulted in gross margin of 4.5%, a 60 basis point improvement from the fourth quarter of last year.

On February 28, we completed the Arbinet acquisition. The table at the bottom right shows, on a combined basis, Primus's International Carrier Services unit pro forma financials, which reflects the addition of acquired Arbinet operations to Primus's standalone wholesale unit. As we did not yet have audited full-year 2010 financials for Arbinet, these numbers shown here remain annualized third quarter 2010 numbers, and we will provide updated fourth quarter financials when we report our first quarter 2011 results.

The combined ICS unit generates over $500 million of revenue at a run rate gross margin of over 7%. With Arbinet, we have increased our customer base over four times, and our minutes of use nearly three times. We expect to derive at least $3 million and $7 million in cost synergies in 2011 and 2012, respectively. And we also expect to incur certain integration costs in 2011 such as severance and costs associated with integrating our systems.

Moving on to slide nine, let's discuss our US retail operations. As Pete discussed earlier, after considering our strategic options with respect to the US retail, the decision was made during the fourth quarter to classify these assets as core beside the big three of Australia, Canada, and International Carrier Services. US retail net revenue decreased 23.5% in the fourth quarter of 2010 to $11.9 million due to decreases in retail voice services, consumer VoIP and Internet services. Despite the revenue decrease, US retail adjusted EBITDA improved on a sequential basis to $2.4 million or 20.1% of net revenue. A combination of better pricing, cost reductions, and improved consumer -- customer metrics such as churn and customer additions all attributed to the increase.

Let's go to slide 10 to discuss our balance sheet. We ended the fourth quarter 2010 with $41.5 million in unrestricted cash and cash equivalents. Down from $49.6 million at September 30, 2010. Upon the close of the Arbinet acquisition, we assumed approximately $16.4 million in cash for a pro forma cash balance including the 2000 -- or December 31, 2010 Primus balance, the total would be $57.9 million. As mentioned earlier, we sold all of our remaining European retail operations during the fourth quarter, generating proceeds, net of cash disposed, of $4.7 million.

Debt at quarter end stood at $245.7 million and our leverage ratios continue to improve from last year as we build up cash reserves from free cash flow. As part of our efforts to transform our balance sheet, we announced earlier this week that we will redeem $24 million or 21% of our 14.25% notes due on 2013 on a pro rata basis on April 15, 2011. This leaves $90 million of principal outstanding, and we anticipate that this redemption will result in an interest savings of $3.4 million. The redemption will improve on a pro forma basis our total debt to LTM adjusted EBITDA from 2.5 from 2.8 times, and our interest coverage ratio to 2.8 times from 2.5 in the fourth quarter of 2010.

Further, on February 9, Primus launched a dead exchange offer and consent solicitation that expires March 23. Under this offer, holders of our 14.25% notes and units representing 13% senior secured notes due 2016 may exchange their notes for newly issued 9.5% senior secured notes due 2019. In today's release, we reported that we discovered a material weakness doing our 2010 audit process relating to internal controls over accounting for income taxes. This material weakness was first identified as of December 31, 2006 and remained applicable as of December 31, 2008. During 2009, we remediated this material weakness to a significant deficiency.

However, during 2010 there were several complicated financial transactions that were not properly accounted for due to insufficient documentation of historical positions. Therefore, we have concluded that as of December 31, 2010, our disclosure controls and procedures were not effective. To remediate this material weakness, we are implementing several changes that you can find described in our 2010 Form 10-K planned to be filed with the SEC this week. Even though a material weakness exists, we believe, to the best of our knowledge, that previously filed financial statements fairly present in all material respects our financial condition and results of operations in conformity with US GAAP.

In 2011, we are focused on improving profitability and free cash flow generation as we grow services that are in demand by customers and harvest more mature services for cash flow to invest in the business and strengthen our balance sheet. As evidenced by our recent redemption, we remain committed to reducing our debt levels and interest burden.

That concludes my prepared remarks. I will now turn you back to Pete for his concluding remarks.

Thanks, Jim. So, our priorities are to execute on our financial and operating goals, as discussed today. We'll continue to manage our core businesses to establish long-term profitability and to use the incremental capital to invest in high return projects, specifically in data centers and metro networks.

In addition, we're well on our way in integrating Arbinet into the ICS group and will march towards our achieved targeted synergies this year. And then, finally, as Jim said, we'll remain committed to improving cash flow by accelerating our balance sheet transformation and driving towards a lower cost of capital.

So, at this point, Operator, we're happy to take questions.

(Operator Instructions) Our first question comes from Gary Jacoby with Wexford.

Good morning. I was just wondering if you've noticed any disruption in international traffic as a result of disruption in undersea fiber-optic cables?

No, at this point we haven't noticed any real blips. And to be honest with you, there's so many millions of minutes traveling over the combined networks, it's hardly a difference right now. But we are keeping our eye on it too, and see, to the extent we can help with the situation, we are really focused on that in Asia.

Good thank you. That was it.

(Operator Instructions) Our next question comes from [Ron Codin] with Ivy Lane Capital.

Hi guys, thanks for the detailed presentation. Very helpful. With respect to what Arbinet brings for 2011, is it still fair to look at the $2.3 million of free cash flow that you estimated in the S4, and then adding in another $3 million of synergies?

It will be difficult to make it completely additive. As Jim mentioned on the call, there will be some integration costs. But on a run rate basis, we fully expect that $3 million to $7 million of synergies not only can be achieved, but we are hoping we can even do better. We will try to be very clear on future calls as to what is the run rate improvement versus what we will have to spend ultimately to integrate the companies. But that would be the only distinction I would make.

And just to follow-up on that, you mentioned earlier that you have a NASDAQ ticker assigned now. What is the timing for that launch?

We've made an application. Certainly we hope that any minute we'll get the news to go forward. We reserved PTGi, and that was pretty helpful from a marketing perspective, as well as the NASDAQ perspective because you could actually recognize the Company and go to the website, hit the domain, and everything is the same. So we tried to make it all uniform and basically upgrade the brand across the Company. And so I'm hoping any minute now we will get news to go forward on NASDAQ, but it's really in their hands as part of review. We've been at it for a while, so we should be coming to an end.

Thank you.

Our next question comes from Bob Kricheff with Credit Suisse.

Could you give us any more color on the exchange offer? Do you have any commitments from any of the large holders, or what the key points that people are raising with you going forward? Then, also just if you do see other M&A opportunities that you might be pursuing out there.

Sure. On the exchange offer, it's really appropriate for us to say no comment at this point. There's certainly a lot of work going on as the bondholders consider the opportunity, but we don't have anything to add to that at this point. We are going to wait and see what happens by the end of March.

Regarding M&A, our philosophy here is anything in our footprint, especially in Australia and Canada, is really something we have to look at. From a tuck-in perspective, a lot of these smaller deals really make sense. From a global wholesale perspective, as we mentioned, if you don't have scale you probably shouldn't be in the wholesale business anyway. We are going to keep our eye on the opportunity in global wholesale as tuck-in opportunities present themselves. And, frankly, we are just keeping our minds open across the board on M&A coming and going across the portfolio.

We want to be mindful of our free cash flow objectives, we want to be mindful of the balance sheet we have today, and basically increase the value of the Company across the board any way we can. I think organically, there is a lot of upside opportunity. But there are, especially when you are focused on worldwide opportunities, many opportunities come our way that we are looking at. But we are mindful of the position we are in and the free cash flow objectives that we have.

Is it fair to say that most of the acquisitions you are looking at then, because you're talking about fill-in acquisitions, are within the business lines of the markets that you are currently in then, right?

It makes the most sense. I really have three choices. One is to increase scale in wholesale or find ways to add companies that we could actually realize those synergies pretty quickly, like the Arbinet deal. But if you look at the business units in Canada and Australia, we saw so many telecom products that, frankly, some of them need to be bolstered and some of them need to be harvested.

The ones that need to be bolstered, you can attack it from a couple angles. One, in the data center world, if you could acquire another data center, even if it's a small one, the question is how much work do you have to do to get it up to tier three? So we have to look at those things with our eyes open. It may be better just to augment what we have and expand in the real estate we currently have. As we mentioned, in Canada we have seven data centers already. Within each of them, there is growth opportunities in and around the areas where we already have a presence. I think we should focus on that. And the returns on data centers is pretty good. The multiples are very good. And now we are approaching almost $40 million in revenue and I think at some point relative to the peer group we are becoming quite large. I think that's where we want to keep our focus today.

Okay, great. Thank you.

(Operator Instructions) Our next question comes from [Tom Koch] with Tejas.

Yes, good morning. I was wondering if you could just touch a little bit on the Australian market. I just had a couple questions. Can you talk a little bit about the capital expenditures that you intend to deploy there? And you mentioned increasing some of the engineering or electronics on some of your fiber rings, and I'm just wondering how much you tend to spend there and what you see as the opportunity for growth there, and the timing of that.

Hello, Tom, this is Pete. I think in my script today, I talked about incremental capital of about $5 million to $10 million over 2010. That $5 million to $10 million, part of it will go towards Canada and Australia, specifically in augmenting our existing facilities and data centers and metro rings. In the case of Australia, we have physical glass already under the streets of Melbourne and Sydney. And the glass just needs to be optimized. Much like the opportunities in the United States where grooming took place over the last 10 years to maximize the use of the fiber. Australia in some ways is, I would say, just like that in the sense that if we augment the fiber and put state-of-the-art equipment in the core network and in the buildings. You are really talking about incremental electronics investments that could be associated with a customer and be success based.

So I don't expect to have a big capital infusion requirement in Australia to improve on what we've got. We are really augmenting what we have. And we are pretty excited about it, because the hardest part of a fiber ring, as you probably know Tom, is you just have to get the glass in the ground. We have major networks in Melbourne and Sydney in the central business district that are already passing thousands of buildings at this point, I would say. Or at least, close to -- I think the last number I saw we're passing about 5,000 buildings. Is that about right? Depending on the size. But the central business district in Melbourne and Sydney is pretty rich with multi-tenant opportunities.

And what do you see as far as that when I look at the pie chart of all your revenues in Australia, what kind of opportunity are we talking about here?

In terms of what? In terms of metro?

Yes, as far as the growth in that.

We really can't guide exactly what it could bring. But if you look at the telecom market opportunity in Australia, I would say you have Telstra, and then you have everybody else. And everybody else is a pretty far cry, I think, from what Telstra is doing in terms of telecom revenues in Australia. That, to me, is a big opportunity, because I don't think anybody filled the void of that middle market. And having fiber rings in Melbourne and Sydney today, to the extent we could upgrade them quickly and stay ahead, I think we have an opportunity to capture some good market share in that middle market area. That combined with the data centers that we have there is a good opportunity.

I can't really put a number to it today, but we are starting at EBITDA margins in the 12% to 13% range with a $300 million company and we are in the right place. So it's really up to management to execute well to go from here. I really can't give you a number today, but we will report on it as we develop more.

Okay, thank you.

Our next question comes from [Andrew Gavin] with Bantam.

My first question is, on the M&A front you mentioned that you wanted to add scale to the wholesale business. How close are we to being at scale in the wholesale business?

It's another long tail of food chain in the wholesale business. We're doing pretty well. We basically doubled. I wouldn't say we are in the middle of a long tail. And you have big companies like Belgacom and KPNI Basis that really are at the top end. We have opportunities, I think, through not only the Arbinet exchange, but through direct sales, to move up organically, because now we are offering customers a broader spectrum of products. So we can move up ourselves. But the wholesale industry, as a whole, is really fighting over time for scale. I think it's in the consolidation mode, personally. We are just part of that movement.

Okay, great. Also, in terms of cash, do you guys have any cash trap issues overseas?

As far as bringing it back into the States?

Yes.

No. We have a lot of vehicles in place to bring cash back from both Canada and Australia. And we will continue as we move forward to figure out ways to bring that back in the most tax efficient manner. Right now, we do have vehicles to do that.

Okay great. Okay, thank you very much.

Our next question comes from John Gibbons with Odin Partners.

Hi gentlemen. Good report. I'm just trying to understand -- Jim maybe you can help me -- how material is material in this commentary, both in your press release and in what you just said. I understand that this is complicated when you go from company A to company B, but I noticed in your balance sheet that you've got a tax liability of $29 million and you actually have some accrued taxes. Is this where the problem lies? Is deferred tax liability not a clear tax liability, or what? Take us a little more granular to what is material in the taxes.

No. From a material standpoint, we were in a material weakness in prior years. We got it downgraded to a significant deficiency when we brought in a new tax director. Unfortunately, everything didn't get documented as well as we would have liked in the current year. And there's a lot of historical tax positions -- or, not positions that were taken, but as we start to sell some of the European assets, the records from early 2000s for tax basis are difficult to find at times, and it's putting a puzzle together. So, that's really where our complexities lie in trying to do some of these transactions, is really going back into the history and trying to find out what happened, what our true tax basis is, and working through with the auditors to get that past. That's really where our problem lies.

I have a new tax director that just started in January, so in transitioning his responsibilities over and lack of that information and knowledge of past transactions, it just made for a very difficult time getting things closed. Everything has been audited by D&T and we're comfortable with the numbers. It's just getting to that process, it leads to error and we just need to do a better job in really going into the historical data and discovering what our tax basis is. So we are going to get third-party help in here this year to almost do a forensic study on high jurisdictions that we are in that we may need more sufficient documentation, so that going into next year we don't have those issues.

That makes sense. And can you give some clarity on tax loss carryforwards in general? Or is it just too complicated to do that?

In Australia and Canada, we still have some NOLs and US with attribute reduction. That's one of the things that makes this more difficult now is, with the attribute reduction due to the bankruptcy proceedings, we lost a big chunk, if not all, of our NOLs in the US. With that happening, there's a lot more scrutiny as to what you have to look at as far as the tax deferred assets and liabilities that are there. In the past, it was always you had a full valuation allowance and things may not have been looked at the scrutiny that they should have been. But going forward, because those NOLs are limited going forward with the Arbinet, where it is a change of control, so any NOLs that were left are also limited on a go forward. We have to pay, do a lot better job in understanding what those past deferred balances and the tax basis involved in that, because it will impact the P&L more than it has in the past.

Pretty much what we went through in unveiling in third quarter in Australia where we went through and did a deferred tax study to true-up all of our deferred tax balances, because -- quite honestly, it's a good thing because we are making more money than we had in the past. And instead of building up NOLs, in the next year or two years, we are going to have to start looking at better tax planning strategies. We have to get the house in order from those past sins, so to speak, so that we can close the books in a more efficient manner.

Great, good answer, thank you.

Our last question comes from Gary Jacoby with Wexford.

Thanks, guys, for a second question. Two quickies. One, when do you think you will be filing your K? And, two, what currency hedges, if any, do have in place and are thinking of putting in place?

We're anticipating filing the K in the next few days. Again, we're just trying to nail down documentation, particularly related to taxes, to make sure everything is correct. As far as -- what was the other question, second question, I'm sorry, Gary?

Hedges, foreign currency hedges.

Foreign currency hedges. We don't have any foreign currency hedges in place. We've gotten the benefit of the currency in the last six years. It's something that we are looking at. It's never been done here in the past. I had the same concern, what goes up must come down at some point. So, we are certainly looking at what we can do to protect the cash that we do have on the balance sheet going forward.

I think I would encourage you, given the strength of the Canadian and Aussie dollar against the US, to strongly start considering some hedging.

Yes, and we do move on a daily basis, we will move a lot of stuff into US dollars. In Canada and Australia. Especially because when we make payments back to the US we will lock in those rates at certain times. It would be nice to have, ideally if we had debt in each respective jurisdiction, we'd have a natural hedge. We are working on a hedging plan as to what we need to do.

Good. Good quarter and thanks for the update guys.

That's all the time we have today. I would now like to turn the conference back over to Pete Aquino for any closing remarks.

Thank you, Operator, and thanks to everyone for today's call and the questions. We appreciate it. We look forward to giving you an update when we report our first quarter results. Have a great day.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.