Q2 2005 Global Crossing Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the Global Crossing second quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Wednesday, August 10, 2005. I would now like to turn the conference over to Loretta Pang, Vice President, Investor Relations.

LAURINDA PANG, VP, IR, GLOBAL CROSSING: Thanks. Good morning everyone, and thanks for joining us today for our second quarter conference call. I'm joined by John Legere, Chief Executive Officer and Jean Mandeville, Chief Financial Officer here today. They'll have some formal remarks after which we'll open up the call for some questions. Before we begin, I'd like to remind everyone that statements made in the course of this conference call that are not historical financial results are forward-looking statements as defined in section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those projected in these forward looking statements.

Factors that could cause these actual results to differ materially from those in these forward-looking statements are contained in our reports filed or furnished to the Securities and Exchange Commission including our annual report on Form 10-K as amended for the year ended December 31, 2004, and our quarterly report for the period ending June 30, 2005, which was filed on Form 10-Q yesterday. We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments except as required by law. Now I'd like to turn it over to John Legere.

JOHN LEGERE, CEO, GLOBAL CROSSING: Good morning everyone, and thanks for joining us here today. I'm going to make some comments up-front about our second quarter performance, then I'll turn it over to John Mandeville who will take you through the detail. We now have three full quarters of results under our belt since we announced late last year that we were going to focus our strategy more tightly on providing global IP services to enterprise customers. I'm very pleased with the progress we've made in terms of shifting our revenue and progress mix which has yielded significant margin improvements.

For the first half of 2005, 53% of our revenue came from our now defined, invest and grow business area. This includes enterprise, government, carrier data, as well as indirect channels. Again, this is our core business which just a year ago made up only 41% of the revenue stream during the same six-month period. Overall gross margins associated with our entire revenue stream were 38% of revenue for the past six months. That's a big jump from last year when gross margins were just 28%. Revenue growth within our invest and grow category, particularly in the areas outside of the U.K. business, is very positive in what has been a highly competitive space. We've grown 4% year over year in the first half of the year when you account for the $3 million revenue adjustment we highlight in our release, and outside the U.K. we grew 9% for the first half with the same adjustment noted.

In the second quarter we also announced multiple wins and contract renewals or extensions across the invest and grow category. These wins represent exactly the type of customers and services around which our strategy is concentrated. Some examples include the forestry commission for managed IP solutions, Serta Mattress and Sonus Networks, both for Global IPBNs and Loral Skynet for our fast track services which provides global IP solutions to Loral's end users. And today AT&T has selected Global Crossing as one of its partners as it competes for the general service administrations networks procurement. Networks is a ten-year networking and IT government contract vehicle with a potential value of $20 billion or more. And Global Crossing is thrilled to be a part of this all-star team of experienced government IT providers, Net Works provides a tremendous opportunity for us to provide high bandwidth and conferencing services to federal agencies.

Now, keeping within the revenue category, we also continued to make great progress restructuring our wholesale voice sector during the second quarter. Revenues have remained at levels above our expectations but with much better margins. Wholesale voice made up 41% of our revenue for the first six months of the year, but the real story is our tremendous improvement in gross margins as a percent of revenue and in absolute terms. Gross margin was 15% this year, a significant jump from what was last year after six months 9%.

Now, let's talk about absolute margin for a moment. Absolute growth margin for the entire revenue stream improved by 8% to $394 million in the first half, versus 365 million in the same period last year. And we delivered this improvement despite a 21%, or $269 million reduction in top-line revenue. Included in these numbers are the strategic changes we drove in the wholesale voice business. Specifically, we initiated actions that declined revenue 38%, or $258 million in the first half as compared to last year. And with that, we improved gross margins, as I mentioned, to 15% of revenue, and in absolute terms, by $5 million.

Now, let's quickly review the exit or harvest part of our business, specifically our projected access sales. The sales of the noncore assets, specifically our Trader Voice and small business group businesses, have fulfilled the cash parameters we set out to achieve. In addition, we have secured a commercial agreement with WestCom, the Company that bought Trader Voice to carry their traffic. Also, our agreement for the SBG sale also includes a network component whereby traffic associated with this business will be carried on our network. Benefiting not just the Company but also the customer to whom the sale is completely transparent.

Now let's move on to earnings. Adjusted EBITDA for the first half of the year was a loss of 55 million compared to last year when we reported a loss of 75 million. Again, we're pleased with our performance as we move closer to our targets for generating positive adjusted EBITDA in the first half of next year. Finally, cash used for the quarter. Although not meant to indicate a trend, greatly improved over the first quarter. …