Innovate Corp (VATE) 2011 Q3 法說會逐字稿

Welcome to the PTGI third quarter 2011 earnings call. At this time all participants are in listen only mode. Following managements prepared remarks we'll hold a Q&A session. (Operator Instructions) As a reminder this conference is being recorded November 15, 2011. I would now like to turn the conference over to Richard Ramlall, Senior Vice President, Corporate Development, and Chief Communications Officer.

Thank you, operator, and good morning ladies and gentlemen. With me today on the call are Peter Aquino, Chairman, President, and Chief Executive Officer, and Ken Schwarz, Chief Financial Officer. This call is being webcast with an accompanying slide presentation that can be accessed in the investor relations section of our website at investors.ptgi.com on the main investor overview 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 acquisition of Arbinet which was completed on February 20, 2011, and affects third quarter 2011 financial results.

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 the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, but are not limited to, statements regarding the Company's revenue and earnings projections, business plans and objectives, capital investments, capital structure, expected future financial and operating performance, future products and services, future market opportunities, and other financial matters.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those highlighted in the Company's most recent annual report on form 10K, and other periodic and current filings with the Securities and Exchange Commission. Such forward-looking statements are current only as of the date they are made. The Company disclaims any obligation to update any forward-looking statements in the event of changing circumstances or otherwise.

And now, I would like to turn the call over to Peter Aquino. Pete?

Thank you, Richard, and good morning, everyone. Let's turn to slide 3 and walk through some of the key milestones for the third quarter. As we reported earlier, one of the most significant accomplishments this year for PTGI was the execution of our debt exchange. In early July we closed a transaction, improved our balance sheet health, and locked in approximately $9 million in annual interest savings. You will note that in this quarter, our positive $2 million in free cash flow is net of nearly $11 million in working capital, interest payments and fees primarily related to this refinancing. We're very happy to have this behind us this summer and we had some very good timing.

You'll also note that in this past quarter, we completed the sale, through our partner Globility, of 3.5 GHz of fixed wireless spectrum for CAD15 million, and that was accomplished this quarter as well. So, our ability to consistently deliver positive free cash flow will be aided by improvements in adjusted EBITDA. This quarter hitting $23 million and an intelligent capital program designed to fuel our growth prospects. In this category we include Internet-based voice and data services for the consumer and SME marketplace as well as high-end telecom services for the enterprise and government sectors. And, that is where our data center and metro fiber investments come in.

Regarding our commercial opportunities, we announced two exciting projects this quarter. First, the initiation of our new Toronto data center in Canada. This will be our third in the greater Toronto area which is the largest market in the country with about 6 million people. This facility will increase our Canadian portfolio to eight centers across the country. Combined with the three data centers that we have in Australia and one in Brazil, our total portfolio grossed at 12 centers worldwide and generated $12 million in revenue this quarter alone. That's a 22% increase, year-over-year, and on pace to approximately $50 million annually with our current investment program.

The second important development was the creation of a division of Primus Australia that is branded Primus Metro Fibre. With the lighting of new metro rings in Sydney and Melbourne, we're now in position to enter commercial buildings with our new high-capacity enterprise services in each of the central business districts. By early next year we're planning to add intercity bandwidth to create low latency routes between the two most important markets in the country.

In addition, we also took an important step in ICS integration this quarter. By moving from the planning stage to execution on key targeted synergies. The net impact of the reorganization and cost cuts eliminated some nonproductive revenue with very little margin impact and lifted ICSs EBITDA margins for the quarter. We have now made it through the eye of the needle and put ICS on a new revenue baseline focused on profitable growth going forward. So, as you can see, the third quarter was quite unique and meaningful for the new PTGI, and memorialized with the ringing of the closing bell at the New York Stock Exchange this past September. Were all very excited about that.

So, let's move to slide 4 to discuss the third quarter highlights. As I mentioned, EBITDA margins increased significantly through our collective work on cost-cutting and margin expansion, driving adjusted EBITDA to an all-time high of $23 million. Revenue of $255 million was about $67 million higher, year-over-year, primarily due to that Arbinet acquisition on February 28. And, approximately $28 million down from Q2 after the ICS reorganization. Gross margin was up to nearly 30% and this supports our efforts on margin expansion.

Moving on to free cash flow from operations, defined as EBITDA less CapEx, PTGI produced $14 million this quarter, slightly higher than last year. However, this quarter includes $2.5 million in incremental CapEx, allowing us to reinvest in pent-up demand, primarily for our data centers while still maintaining positive free cash flow momentum. This quarter represents a real turning point and that we're gaining more consistency in margin expansion, continuing to invest in high return on investment projects, and focused on improving free cash flow.

Let's now turn to slide 5 to review the sum of the parts. In this third quarter Canada led the portfolio again with consistent levels of EBITDA of approximately $13 million, or 20% EBITDA margin on $63 million of revenue. The team is focused on moving customers on net where possible. And, leveraging our data center expertise to capture strong interest for our collocation, managed services, and cloud platforms. This quarter's CapEx of $4 million for Canada is slightly higher than last quarter, given our upside potential. However, the team continues to deliver significant cash flow from operations with nearly $9 million for the quarter.

In addition, given similar product sets for services such as IP voice and data for consumers and IP PBX services for small businesses, we have now assigned management responsibility of our US retail operation to our experienced, Canadian team starting this past October. This makes sense given US retail's relative scale and Primus Canada's existing and proven infrastructure. This management oversight is expected to create synergies and a North American strategy that allows us to leverage Canada's billing, provisioning, and customer care systems to optimize US retail business going forward. So, typically our US retail business runs about $11 million in revenue with about $600,000 to over $1 million in EBITDA a quarter depending on marketing costs and timing. We believe that if we apply best practices and mitigate duplication, both Canada and US retail operations can benefit going forward. As you can see, there's minimal CapEx required for US retail as a stand alone and also produces positive free cash flow.

Moving onto Australia, we had a very good quarter. Rebounding with key initiatives in place to cut costs and optimize margins where possible. We also are beginning to make progress in reducing our transport charges for telecom services, we're renegotiating deals for better pricing performance over the long-term. EBITDA was up to almost $11 million normalized, or 15% on $72 million of revenue. The capital program is aimed at on net aggregation, expanding our three data centers where capacity is needed, and lighting our Sydney and Melbourne fiber rings. And looking ahead, we believe that we have first mover advantage in pockets of significant commercial footprints where our fiber already exists.

Ultimately, we aim to leapfrog the competition by providing on net fiber services directly to enterprise customers in the central business districts in the top five cities in the country. And, that is Sydney, Melbourne, Brisbane, Perth, and Adelaide. And given this opportunity and management expertise, we will enter the market as Primus Metro Fibre and build a customer pipeline for state-of-the-art, high-capacity services. Today, we passed at least 1,000 commercial buildings and have a plan to light multi-tenant targets with new electronics by the end of this year.

The CapEx of approximately $4 million this quarter for Primus Australia went mainly towards success-based growth services, data center expansion, and these metro fiber opportunities. Primus Australia, on the heels of a very good EBITDA quarter, produced almost $7 million in cash flow from operations.

Moving on to ICS, we are beginning to see the fruits of our labor in cost savings this quarter. Where the team delivered $1.3 million in normalized EBITDA, with the majority flowing through to positive free cash flow. SG&A savings through integration are ahead of plan. And more work to do to complete some of the system upgrades and consolidation. With our carrier sales teams now integrated, with a renewed focus on profitable growth, we believe that our revenue baseline of $102 million this quarter is a very good foundation to build from.

We also made progress towards another key objective which is to strive for best in class gross margin metrics. This quarter, ICS delivered 5.8% gross margin, and beginning to reflect peer group standards for profitability. This is a very positive step in the right direction for ICS. Finally, as you can see from the chart, ICS, Australia, and Canada drove most of the revenue for the portfolio while Canada and Australia nearly splitting a growing EBITDA pie. The primary business units, Canada, Australia, ICS in US retail delivered over $25 million in EBITDA this quarter, and almost $17 million after CapEx before Brazil and corporate overhead. So, I think the third quarter is off to a very good start.

Let me turn it over to Ken to go over the financials in a little bit more detail. Ken?

Thanks, Pete. Good morning, everyone, I'll walk you through the financial results now. As we walk through the third quarter financials, please note that the results include the Arbinet acquisition from March 1, 2011 on. Therefore, third-quarter and year-to-date results are not directly comparable with prior periods.

Let's start with slide 6, titled Financial Summary, which provides four key financial metrics and their trends over the last five quarters. In the third quarter, net revenue increased 35.3%, to $254.7 million, on a year-over-year basis. The impact of foreign currency translation was a positive $17.3 million for the quarter. On a constant currency basis net revenue increased 26.1%, growth services revenue, which is a key focus for the management, and consists primarily of consumer and SME broadband, data center, and commercial data services, grew a strong 15% year-over-year.

Normalized adjusted EBITDA was $23 million, $22.9 million reported, in the third quarter of 2011, compared to $19.9 million, $15.8 million, reported last year. Normalized EBITDA margin decreased 160 basis points to 9% in the third quarter from 10.6% in the third quarter 2010. One of the primary contributors to maintaining our adjusted EBITDA margin dollars was that even with the addition of Arbinet's lower margin wholesale business, we were able to reduce SG&A costs across the board including making significant progress on the Arbinet integration.

SG&A was only $2.3 million higher in dollar terms including Arbinet and in constant currency, SG&A decreased $1.8 million. The primary contributor to the decrease in gross margin is a greater proportion of lower margin, wholesale revenue on a consolidated basis. On a dollar basis, gross profit increased $8.6 million to $76 million in the third quarter, driven by favorable currency environment, Arbinet's contribution, plus a better mix of higher margin, gross services revenue, particularly data center, data services and on net traffic. In addition, as part of her ICS strategy, we eliminated some nonproductive revenue and continue to focus on higher-margin wholesale traffic.

As a result of continued growth in Internet traffic and decisions to take additional capacity in Trans-Pacific circuits from Australia to Los Angeles, during the quarter a long-term fiber optic agreement was treated as a capitalized lease. This resulted in a reduction of cost of sales and an increase in depreciation and interest expense and has a net positive effect on adjusted EBITDA. Finally, the impact of foreign exchange to adjusted EBITDA, year-over-year, was a positive $2.2 million.

With respect to capital expenditures we spent $8.9 million, or 3.5% of net revenue in the quarter, compared to $6.4 million, or 3.4% in the third quarter of 2010. Capital spending in the quarter continued to be driven provided by investments in Australia and Canada to expand our data centers, light our metro rings, move customers on net, and improve our margins. Free cash flow for the quarter was positive $2.1 million, compared to $14.5 million in the third quarter 2010. This is primarily the result of negative working capital of $10.5 million resulting from the management of our cash leading into the debt exchange, higher capital expenditures as we continue to invest in our growth businesses, and interest and other costs associated with the exchange. We do not anticipate this type of change in working capital in the future. We're committed to growing positive free cash flow bolstered by higher adjusted EBITDA generation while we continue to invest in our growth businesses.

Separately, during the quarter, as part of our ongoing cash cost management, we completed the transition of our Indian operations to a third-party. Under the terms of the transition agreement we obtained favorable pricing arrangements for certain operational support services they provide and we will have continued obligations for a minimum period of one year.

Let's move to slide 7 to review our operations in Canada. Primus Canada delivered, in local currency, third quarter 2011 revenues of CAD61.5 million, and adjusted EBITDA of CAD13.2 million, or 21.5% of net revenue. This compares to revenues of CAD59.1 million and adjusted EBITDA of CAD11.8 million, or 19.9% of net revenues in the third quarter of 2010. The pie chart on the left shows the breakout of Canada's revenues by types of service. Data center, SME, VOIP, and Broadband Services comprised 29.9% of revenue. Long distance, local, prepaid wireless, and dial-up comprised 67.0%. Wholesale services contributed 3.1%.

Net revenue, on a constant currency basis, increased 3.9% as increases in our IP-based voice and data products and local and data center services were partially offset by declines in retail long distance and prepaid services. Among our faster growth services, broadband revenues grew 7.3% and data center revenues grew 7.5% as we continue to grow our market share in the IP PBX voice compared to prior-year quarter. As Pete mentioned, we see large opportunities in both Canada and Australia to increase our share of the commercial market. In the third quarter of 2011 we expanded the percentage of our Canadian revenue derived from the segment from 36.7% -- to 36.7% from 35.2% last year. Going forward, we continue to focus on driving higher margin services and supporting Canada's high and stable EBITDA contribution.

With respect to the US retail operations, we moved the management of these operations to our Canadian team in October. US retail had net revenues for the third quarter of $11.2 million and adjusted EBITDA of $0.6 million. During the quarter, residential Lingo sales efforts were expanded beyond online marketing activity to include a significant agent channel component. This resulted in a 47% increase in new Lingo installations in the third quarter versus the prior year quarter. In addition, price increases on our Lingo residential plans were implemented in early September. These are designed to fuel ARPU growth in future quarters. We believe that by managing our US retail through Canada's team, we will be able to obtain synergies in our marketing, sales, and operations.

Let's move to slide 8 to review our operations in Australia. Primus Australia delivered, in local currency, third quarter 2011 revenues of AUD68.2 million and adjusted EBITDA of AUD10 million, or 14.7% of net revenue. Compared to AUD75.8 million, and adjusted EBITDA of AUD10 million, or 13.2% of net revenues in the third quarter of 2010. The pie chart on the left breaks out Australia's revenues by type of service. Data center, VPN, SME, VOIP, Broadband, and local on net services comprised 46.7% of net revenue. Long distance, local, prepaid wireless, and dial-up services, comprised 43.9% of net revenue and wholesale contributed 9.4%. Year-over-year, on a constant currency basis, net revenue decreased 10%, as decreases in traditional voice, DSL, and wholesale services were partially offset by increases in our data center and IP-based services.

In the third quarter, Australia also expanded the percentage of net revenue derived from the commercial segment to AUD38.6 million, from AUD36.6 million last year. Australia adjusted EBITDA improved in the third quarter, as gross margin increased over 200 basis points from 38.4% in the third quarter 2010, to 40.6%. This is due to the capitalization of the Trans-Pacific cable lease I mentioned earlier, and our initiatives to improve profitability. SG&A decreased to AUD17.7 million, from AUD19.1 million, year-over-year, and down AUD2 million sequentially as management had a favorable reserve adjustment and continues to focus on streamlining the service delivery process to customers and positioned the Australian business unit for long-term growth.

Let's now move to slide 9, our international carrier services operations. PTGI international carrier services revenue third quarter of 2011 was $101.5 million, it increased 142.5% from the third quarter 2010 primarily through the inclusion of Arbinet. The impact of foreign currency was a favorable $2.8 million, on a constant currency basis, net revenue increased 136%. Sequentially, ICS net revenue decreased to $101.5 million from $126.5 million in the second quarter 2011 as we completed our reorganization, continued with our integration efforts, and focused on profitable sales. We believe that we have completed the major organizational changes and sales realignment and expect future revenue growth to be in line with the overall industry.

ICS gross margin increased to 5.8% in the quarter compared to 5.2% last year. As we increased our US termination in traffic, and with our overall focus on profitability, we believe that we are beginning to approach industry standards for gross margin in the wholesale business. With respect to the integration cost savings, we surpassed our minimum expectation for 2011 of $3 million and are aiming at a $7 million run rate for 2012. As integration continues to we expect a further improvement in adjusted EBITDA given that this quarter alone, we reported $1.3 million normalized, up from $500,000 in the same quarter last year.

Now, let's turn to our balance sheet on slide 10. Unrestricted cash and cash equivalents at third quarter end was $27.2 million, down from $31.5 million at June 30, 2011. Cash was generated in the third quarter in the following amounts, $22.9 million of adjusted EBITDA, offset by $10.5 million decrease in working capital previously mentioned, the usage of $8.9 million for capital expenditures, $2.5 million for costs associated with the Company's debt exchange, $2.7 million in interest payments, $2.2 million of capital lease payments, and $400,000 used to repurchase shares of common stock.

During the third quarter we completed the new exchange offers that exchanged the new, 10% senior secured notes, due 2017, for the 13% and 14.25% notes, creating an interest saving that contributes to cash flow generation. As a result, our long-term debt obligations at the quarter end stood at $255.8 million, up from $245.7 million at year-end. And, while our leverage an interest coverage ratios deteriorated slightly due to the debt exchange and the Trans-Pacific lease, we expect to see continued improvements in these ratios going forward. We continue to have stable and growing adjusted EBITDA, positive free cash flow, we are updating our 2012 outlook for capital expenditures, lowering our spending target to $31 million to $33 million. This includes $2 million of ICS integration expenditures that is from the previously provided $35 million. This translates into $8 million to $10 million maximum CapEx in the fourth quarter 2011. Again, aimed at high return on investment projects, such as our data centers and our metro rings.

Overall, we are committed to building our track record to improve the adjusted EBITDA margin and positive free cash flow on a consistent basis, particularly with the lower interest rates going forward on our debt. This concludes my prepared remarks and allow turn it back to Pete.

Thank you, Ken. So, to wrap up our remarks, we continue to execute on our strategy. The debt exchange was a transforming event for the Company. Obviously, that puts us in position to totally focus on operations and improving free cash flow going forward. And, the management team will continue to optimize the consumer business, SME, and large customer opportunities that we have in a geographically diverse opportunity on our portfolio. We're also very confident we can capitalize on or position of strength in data centers and high-capacity transport services in both Canada and Australia. In addition, the ICS integration is well on its way and its new scale will be a benefit to our carrier customers as well as to our own retail traffic.

As a reminder, our share repurchase authorization is still in effect and we will be opportunistic when possible either to buy back shares or to lower our debt to strengthen our balance sheet further. And finally, we'll continue to strive to build on this quarter's momentum and we'll look to find ways on lock value and a diversified PTGI portfolio. So, at this point, operator, we'll be happy to take questions.

(Operator Instructions).

Rob Kern, Ivy Lane Capital.

Morning, guys, Rob, Kern. First of all, congratulations on an outstanding quarter. That was terrific execution, really, on all fronts. My question, with regard to the quarterly performance, is there any seasonality that we should look to expect going forward? Or, can we look at that $23 million adjusted EBITDA number as a reasonable run rate target?

Basically, as I am looking at the S4 going back to December 2010, you were targeting EBITDA of something like $93.4 million for 2013. And, if you -- it seems like you're effectively already almost there on a runway basis. So, how are you all thinking about, without giving too much guidance, how are you thinking about the run rate EBITDA of the business?

Thank you, Rob, it's Pete. The old S4 is old now as you can imagine, it's before Arbinet as well. But, as you can see from the execution, we want to be as strong as possible in each of the business units. And, what's happening now, and I mentioned in my script, is I really feel like we are at a turning point because after about a year of the new management team being in place, I think we've turned over most of the rocks, if you will. And, in the third quarter, pretty much, is a very good foundation. Even after the Arbinet acquisition, we had to go from planning to execution on the synergies to get the revenue baseline reestablished.

I think the third quarter is a very good stake in the ground that represents what we could be as a standalone in each of the business units. I think there is still opportunity for improvement. I think the capital program put to work is aimed in the right place now. I think the growth services opportunities we have are not marginal opportunities they're actually very good opportunities for long-term health when you're dealing with data centers and high-capacity transport in countries, frankly, with less competition than the US. Maybe even from a technology perspective, in some ways behind where we feel like we have advantages that we could execute on given the team's expertise in Canada, in Australia, and the US. We've seen this movie before, in many of the segments, and we can take advantage of what we have and the facilities that are already in place.

I feel very confident that we are on the right track. That's a long way of saying it. It's tough to give guidance. But again, the third quarter is a very good representation of where we are with focus on the things we set forth in the growth services.

In just a follow-up on that, just using the LPN at this point, basically what I have is something like $87 million of LPN adjusted EBITDA. If you use the midpoint of your CapEx guidance your at $32 million there, $24 million of cash interest, roughly, in zero to $2 million in cash taxes gives you right now something more at like $2.00 a share of leverage free cash flow for the equity. If you were to run rate that EBITDA level, you would be closer to $2.50 a share. Is that really how you think about it?

Well, your numbers are correct. That's exactly the way we see it today as well. The goal is not to stop here. If you take everything that you see today through the third quarter and you work backwards, yes, you have that profile. But, we're not satisfied with that.

That's the way of saying that after a year of work and we got to 20% EBITDA margins in Canada and close to 15% in Australia, I still think there is room for improvement. But, looking back, those numbers are exactly correct. But, I feel in many ways just beginning to fight.

Right. And then, just finally is there anything you can say at about the [Jepson] process at this point?

No, I really can't. It's a work in progress and we really just got started with them. Not too much to report at this moment.

And, does that affect your ability to repurchase shares, the fact that you have a process ongoing?

We really can't comment on that. We're subject to the same blackouts and regulations of any public company. We will just follow the rules and do what we can do.

Okay, thanks.

Thanks, Rob.

Mike Crawford, B. Riley and Company.

Thanks, Mike Crawford, B. Riley and Company. For your retail voice business, Lingo, that is running around $9 million a quarter, how much of that is residential versus business VOIP?

I think it's primarily residential at this point. Some of the work that we are doing on Lingo business will look like the eight by eight product for the most part. And, that's a work in progress. But, we're actually making very good inroads into the small-business area with Lingo business.

And, that product exists in the US, Canada, and Australia in some form or fashion. That really is how we're going to deliver small-business voice. It's all going to be on net, it's going to be IP-based which is much more profitable than circ to switch, obviously. And, we're actually good at it which means that we could leverage that platform in all three of those business units.

But, today it is primarily a consumer platform. But, the small-business applications, at least through Lingo, are just making some inroads. Now, Primus Canada and Primus Australia have very good progress in their own small-business solutions that are not necessarily Lingo branded but they're Primus Canada branded, Primus Australia branded, Primus Telecom branded.

They are in the small-business space with a lot of products. But, the Lingo business product is just now really getting momentum. And, the idea is approaching the market mostly through search engine marketing versus feet on the street. It's a really good product to have in our arsenal and right up our alley.

Okay, thanks. Other than some maybe businesses that are disjointed from the rest of Primus like Brazil data center -- but is it fair to look at say the interrelationship between Australia and ICS, if you're trying to think of this business as a sum of the parts of Canada, US, Australia, ICS, how -- what is the level of interdependence? Because they do benefit from each other which presumably would be less of a benefit if that, say wholesale was owned by another party?

That's a very good question. I would start by saying they are not very dependent on each other. If you think of them as literally three different islands, if you put US retail in Canada because the Canadian team is going to manage it, you have the North American strategy, you have Australia, and you have ICS. The ICS business is a wholesale infrastructure that our retail traffic in Canada and Australia can benefit from. But, it's kind of an arms length relationship between sister companies. And, where wholesale has basically gone to these days we can continue that relationship even if it did spin out to some other company.

We could always have that affiliation one way or the other. And, given the accessibility, if you will, to other wholesale products and services by other carriers, you're not that disadvantage to a certain extent. But, however, while it's inside we are going to take advantage of it as part of the family, and we are. Think of it from -- I think of it simply as not very dependent but we are opportunistic to use the infrastructure of ICS to our own advantage where possible. And, we are good at it. It makes a lot of sense to scale it up certainly, to the extent we could actually drive more retail traffic to it for our collective benefit we will do that.

Okay, thank you.

You're welcome.

Scott Storkamp, Morgens Waterfall.

Great quarter, guys. Good job. I have just a couple little questions. I'm trying to understand Australia a little bit better. At least 50% of the CapEx you spent this quarter went to Australia. And, it was supposedly success based. But, I don't see any real revenue increase. Is this -- do we expect a pretty big revenue increase in Australia going forward? Or, am I missing the model here?

Yes, it's not just a revenue play when it comes to CapEx. It's basically a margin play. The revenue line in Australia has been declining for the most part because we had a market share strategy historically. Be all things to all people on net, off net wherever. It didn't really work for us and what we're trying to do is use our capital program to bring customers on net.

what you may see is a slight decline on the revenue line but a more profitable profile going forward. The other use of the capital program in Australia is to strengthen our lease facilities in trying to get optimized, wherever we are leasing, other folks bandwidth to get the best product and price to do that. Sometimes we actually have to commit into long-term agreements such as the IRU we just committed to. It's something that we basically need to run the business. In the long-term it will end up capitalizing that asset.

There's also investments in the fiber rings, those rings exists. That glass is in the ground. But, we need the capital program to actually light the rings to behave as a modern, state-of-the-art fiber network not a network that's just point-to-point glass points. The capital program for the third quarter, primarily in Australia, was infrastructure and margin enhancing related.

I would not focus so much on the revenue line and focus a little bit more on the margin line and the strategy line in the case of Australia. You can see already the increase in the EBITDA this quarter alone is very encouraging that if we aim that capital program in the right spot to improve our infrastructure and to invest in growth services we can improve our margins. And, that's really our focus in the case of Australia. It's not so much the revenue line for the sake of revenues. But, to be focused on, on net aggregation, get some of those customers either on net, or frankly, in many cases, we actually are losing customers where they're not profitable and it's not someone we can serve going forward. We're just very sensitive to that.

We're trying to keep as many customers as we can. But, you can't be all things to all people. And, that's what we realize as a management team, we have to really focus on where we can be profitable, successful over the long-term. And, it's not just offer services country-wide off net. That's not the way to go. That's affecting the revenue line to a certain extent and it's done on purpose.

Thank you, that's a very helpful answer. Can I ask one more just quick follow-up? Overall, I know we've had a pretty big acquisition here, overall for the firm you have almost 35% year over year revenue growth. EBITDA is up 23%. At some point, those numbers, do they reverse do you get some leverage in this model or am I misunderstanding the business?

Yes, I think what you may be missing is that the acquisition by Arbinet was a big revenue chart. And, it didn't have the same margin profile, if you will, of Canada and Australia at 20% of 15%, had a lot lesser EBITDA margin profile. That's the nature of the wholesale business. If you take that into account, revenue for the most part was modestly changing, year-over-year, that big change is really the acquisition and the EBITDA expansion that you see, that's real. That's cutting costs, that's focus on, on net services, that's focus on growth services like data centers, that's the absolute benefit, year over year, that we're experiencing. And, that's producing the positive free cash flow profile. If you disconnect the revenue change year-over-year and attribute most of it to a wholesale business and you focus on EBITDA and free cash flow, that's the management strategy that we are executing on.

Thank you, very much.

You're welcome.

Travis Hogan, Riva Ridge Capital.

My question has been answered, thanks.

Thank you.

Fred Spong, Britain Hill

I've got a quick question. On your last call I believe you talked about the data centers and you'd mentioned, I believe, your $50 million run rate with a 50% EBITDA margin. Can you give us any update and additional color on that part of the business?

Well, that's a great opportunity for the company. The growth rate, year over year is double digits now. And, the capital program, as you can see, year over year has increased mainly to fuel that opportunity. If you continue, going forward, at that kind of pace every quarter is meaningful for us in terms of expansion in data centers. What's interesting in Canada and Australia is there is pent-up demand for data center space. Not just in traditional co-location but in more advanced data center services such as managed services and even cloud services.

Our Canadian team, especially, is very experienced in upper end services. The types of customers they are now attracting are very encouraging. The certifications that their centers have been awarded, very, very encouraging. What I see in that whole sector is that as we invest in human resources and technology and additional infrastructure, and stay ahead of the demand to the best of our ability, it's also balanced because you're still trying to maintain a free cash flow profile. It is somewhat capital intensive to continue to expand data centers. However, the returns are phenomenal.

And, to the extent competitively we can hang with the competition or exceed in certain markets, and in the case of Canada, our eight centers are spread across the country. Some of the markets we're basically it and we can own that market. But, it takes a constant attention to that to stay ahead of demand, meet customer requirements, and I think at double digit growth that's one of our best prospects for the company in both of those countries. The only difference I would add, in the case of Australia, you're able to own transport services in Australia. We basically have above net Time Warner telecom like facilities in five major markets in the country. That's another area, besides data centers, where we think addressing our expertise towards the enterprise and government sector, we could really build some upside there through the capital program.

Having the glass already in place is really the secret sauce there. But, both of those opportunities take some capital expenditures, as I said, we've put some capital towards this. But, we want to continue to stay ahead and fuel this opportunity.

Okay. Thank you, for that. Would you think that the $50 million run rate, do you think that is still accurate or do you think we should think of that number as a little bigger now?

Well, I hate to give guidance. But, I almost danced around the whole thing today by saying we did $12 million this quarter. We did 22% increase year over year, and we love the opportunity. You will have to put two and two together to figure where that goes. But, it's a function, I'm telling you we're focused on it. And, we're good at it.

And, we have, including Brazil, we have 12 of them. And, including the new Toronto data center it's 13. We have 13 centers that we are personally committed to, trying to create some opportunities here for shareholders. You could put a lot together and make your own forecast. I really can't give you more guidance than that. But, we're very, very excited about the opportunity.

Okay, thank you for that. I have one more quick question. Do you see any further room on the cost cutting?

Ken?

A couple areas we continue to look at, and I think that we talked about a little bit in the call. In Australia, I think Tom has done a good job of looking at how we streamline our customer delivery process. And, I think he's made some good inroads in that. I think you've seen some of that in the quarter. And, I think you'll continue to see that.

In regard to the carrier services, again, we are on track, as we said, or ahead of really, in terms of integration, of the Arbinet into the carrier services. And, we said we are ahead of the $3 million for this year and we expect the $7 million, I think, I hope and believe that we will do better than that. In addition to that, as we move the US retail operations into management by the Canadian team, we do expect to see some additional synergies there. This summer, we're continuing to look at, and I think that this is a company that has opportunities which I think is part of exciting piece here to continue to look at that. And, I think there's continually things that we are looking at that we've not really verbalized yet but that you'll hear about in the future.

Okay, thank you, very much.

Ross Taylor, Somerset Capital.

Thank you, my questions have been answered. I was looking for some more color on Australia, but you provided more than I had hoped for. Thanks.

Thank you.

That concludes our Q&A session for today. Please proceed with your presentation or any closing remarks.

Thank you, operator, and thank you all for your attention this morning. And, we look over to updating you again at the fourth quarter call. Have a nice day. Thank you, very much.

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