Level 3 Communications Q3 2007 Earnings Call Transcript

Level 3 Communications Inc. (LVLT)

Q3 2007 Earnings Call

October 23, 2007 9:00 am ET

Executives

Valerie Finberg - VP of IR

Jim Crowe - CEO

Kevin O'Hara - President and COO

Sunit Patel - CFO

Analysts

McCormack - Bear Stearns

John Hodulik - UBS

Jason Armstrong - Goldman Sachs

Chris Larsen - Credit Suisse

Frank Louthan - Raymond James

David Janazzo - Merrill Lynch

Tim Horan - CIBC World Markets

Jonathan Chaplin - J.P. Morgan

Ana Goshko - Bank of America

Tom Watts - Cowen & Company

Colby Synesael - Merriman

Howard Rosencrans - CGF

Donna Jaegers - Janco Partners

Qaisar Hasan - Buckingham

Greg Mesniaeff - Needham & Company

Presentation

Operator

Ladies and gentlemen, thank you very much for standing by. Welcome to the Third Quarter Earnings Release Conference Call. At this time, all participation lines are in a listen-only mode. Later, there will be an opportunity for questions with instructions given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I will now turn the call over to your host, Vice President of Investor Relations, Valerie Finberg. Please go ahead.

Valerie Finberg

Thank you, operator. Good morning everyone, and thank you for joining us this morning for the Level 3 Communications, third quarter 2007 earnings call. With us on the call today are Jim Crowe, Chief Executive Officer; Kevin O'Hara, President and Chief Operating Officer; and Sunit Patel, our Chief Financial Officer.

Before we get started, I would like to remind everyone that some of the statements we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements.

Please note that on today's call, we will be referring to certain non-GAAP financial metrics. Those metrics are reconciled to the most comparable GAAP measurement in our press release. The press release, including the non-GAAP reconciliation, is posted on our website.

With that, I will turn the call over to Jim.

Jim Crowe

Thanks Valerie. Our prepared remarks today will be a bit different than in the past. Kevin O'Hara and Sunit Patel are with me and will be available for questions-and-answers, but will not be giving their customary prepared remarks.

For this quarter, we have included certain of the information that generally cover in this call in the text of our press release. We are doing this because I wanted to personally take the time to discuss the reasons we reduced our fourth quarter '07 and 2008 adjusted EBITDA guidance. How the current situation developed, and what we are doing to fix the problem rapidly, and in a way, we hope gives our investors confidence that we understand and are effectively addressing the right issues.

Before I begin I want to touch briefly on a couple of other issues. Yesterday, I had a follow-up examination to determine the status of the benign pituitary tumor I had removed in August.

I am pleased to say all of the testing looks good. I feel great. I am fully engaged in my normal business schedule. I want to thank the many people who have expressed their concern and best wishes for my recovery. I also want to make a comment concerning the recently announced search for a new CFO.

Let me start by saying I've worked with Sunit for many years. He is a valued colleague, and he is my close friend. A number of people have speculated on the reasons for this step.

We started the search because of our desire to find a CFO with experience in managing a large financial organization and a $4 billion company that we want to grow rapidly. We started the search because of a change in the nature of our company and its needs, not because of any mistake Sunit made.

And although the timing of the announcement was close to this earnings call, we did not make it because we were reducing guidance or because of the provisioning problems I will discuss here in a bit.

We made the announcement at this time because of necessity we have, and we will be talking to people outside the company as we conduct the search. In that situation, the risk of leaks goes way up, and we would rather tell our investors the facts rather than have them react to rumors and leaks.

Until we announce the results of the search, Sunit remains our CFO, with the authority, responsibility and respect inherent in that role. And in the interim, I plan to work to convince Sunit to remain at Level 3 in a different role.

During the second quarter earnings call, in addition to providing guidance for the third quarter of 2007, we reiterated guidance ranges for the full year 2007 and for adjusted EBITDA for 2008. At that time we said we were having provisioning problems, but we had strong sales, and we believe we would see significant improvement in our provisioning capabilities, and that we would convert already signed orders to revenues sufficient to meet the guidance.

While we did achieve third quarter '07 guidance, the improvements we saw were simply not enough. And today, we reduced guidance for adjusted EBITDA for the fourth quarter of '07 and for 2008.

I am very disappointed by our performance, and I want to personally assure investors that we understand the seriousness of the situation. I further want to assure our investors that we are focused on correcting this situation as quickly as we possibly can.

Towards that end, we've devoted significant time to an effort to define our problem, determine the root causes of the problem, determine why the past steps we had taken did not lead to more improvement in provisioning, and why it took us longer than it should have to fully recognize the problem and its impacts.

To ensure that we have a specific measurable plan, we fixed the problem with a high degree of confidence, and we've adjusted our guidance to be in line with our current expectations.

I want to provide you with the results of each of these efforts. Simply put, our company did not increase provisioning throughput in the timeframe we had planned and expected at the end of second quarter 2007, and as necessary to meet the rate of sales we had through that quarter.

As a result, we've reduced revenue projections to match our current constraint provisioning capacity. In more specific terms, that means until we correct our provisioning bottlenecks, our near-term core revenue growth will be reduced to approximately 8% to 13%, versus a previously projected near-term growth rate of 17%.

We believe we would have met or exceeded even the previously forecasted 17% growth rate if our revenue growth had kept pace with actual sales, and we were not constrained by our current provisioning capabilities.

To be clear, we believe we are not constrained by market opportunity. So that means, viewed as a whole, we are not taking full advantage of the market opportunity that we see.

I will now turn to what we view, are the root causes of this problem.

Let me start with some definitional explanation. When we talk about provisioning, we mean an end-to-end process, starting with the signed sales order and ending with field installation; testing and activation of service necessary to begin billing.

There are several steps in between, such as designing specific circuits, and determining and assigning the individual network elements to be used. When several services in several different locations are ordered by a customer, the provisioning process can require considerable effort and expertise to accomplish effectively and at scale.

Level 3 in each of the six network companies we acquired in 2006 and 2007 had the same general process, but the specifics differed among the companies. For quite some time, we have had a plan to move all sales and service to one unified set of processes and systems called Unity.

The Unity program developed and started in 2006 and is well along. We expect to realize the benefits of this new system over the course of the next three to four quarters. A significant amount of our integration spending this year is on the Unity effort, and we expect better provisioning throughput and significantly lower unit costs as we move forward.

In the interim, we plan to increase the throughput of the seven legacy sales and service activation systems, in part, by developing temporary process and systems that made using those individual systems simpler, and in part, by assigning more people, and other resources than would be needed by a more efficient system.

Successfully increasing our provisioning throughput was key to achieving our fourth quarter '07 and 2008 financial targets.

As we reported through the second quarter, ongoing sales and existing orders in hand were sufficient to meet targets. This was important since at the time, we believed if we were to have problems meeting our financial goals, sales not operations, would be the likely cause.

And given the complexity of working with multiple systems, we expected some problems to arise, but we believed we could quickly resolve those issues.

There was nothing fundamentally wrong with this approach. However, we made several decisions, which while reasonable at the time, when viewed in retrospect today made achieving our provisioning targets more difficult.

First, we took certain processes, which had been centralized in each of the individual companies, and split them up among our customer-facing groups, wholesale markets group, customer markets group and business markets group.

For instance, order entry and project managing the installation of services were divided in this fashion.

On the positive side, we believe that this made us more responsive to different individual customer segment needs. However, in retrospect, we created a situation where we lacked end-to-end accountability for ensuring provisioning worked properly.

As part of realizing synergies, we then laid off people familiar with each of these individual order entry systems, inventory, provisioning and other systems, before we had assured we could meet our provisioning targets.

And while we paid close attention to sales and integration cost targets, we did not monitor detailed operational metrics as closely as we should have. The result is that, while growth in the rate of installs has been slightly positive, it has been significantly below our expectations.

This has required us to revise our projections of sales and resulting revenue to what we are able to provision, rather than to what our customers might wish to purchase. It took us longer than it should have to recognize the impact of the provisioning problems for a number of reasons.

First, we were overly comforted by sales through July, which exceeded our internal targets. Those targets in turn were higher than those required to meet our public guidance. We were further comforted, because at a high level we were achieving our financial integrations and synergy goals.

And historically, we would have been able to provision what we sold even if it sometimes required brute force. We had lots of data but did not develop the right understanding of the overall situation until the last few weeks.

In summary, both the root cause of the problem and the reason we remained optimistic for too long is because at the executive level we took our eye off the detailed essential work of end-to-end provisioning that is critical to provisioning success.

In order to ensure we fix these problems in the way that it gives us confidence in the outcome, with a high level, we have taken the following actions. We have reorganized to put all end-to-end provisioning authority and responsibility under one senior executive, Neil Hobbs. Neil's job is to ensure we can turn up the new orders we sell on a timely basis.

We've assigned a senior executive, Raouf Abdel, to work with Neil and the rest of the organization to assure that in the short term, we further align what we can sell with what we can effectively provision, and to look for end-to-end ways to improve both.

We have asked Lynn Refer to assume day-to-day management of the business markets group, where Raouf was previously assigned, while Raouf is focused on this effort. We've asked our Chief Information Officer, Kevin Hart to work with these and other operational executives to ensure the new Unity system is finalized, tested and deployed on as rapid a schedule as is appropriate.

We are redoubling our efforts to ensure that operational personnel are properly trained to be effective in the current environment, in the new integrated systems as we deploy them.

We are improving the systems we use to monitor detailed progress in the critical areas of provisioning on an appropriately frequent basis.

Kevin O'Hara and I are personally monitoring progress, and making sure any necessary course corrections are implemented on a timely basis.

We've asked an outside process consultant with significant expertise in these areas to independently analyze our provisioning processes and systems and to report their views, or the causes and remedies, to help ensure that institutional myopia does not prevent us from being objective.

We have their preliminary report and it's helped them form the analysis that I am reporting to you here today.

We believe that the effects of our current provisioning issues, and the causes and remedies I just discussed are all realistically incorporated in the guidance we released today. I say, realistically, because the low end of the range assumes sales installs, and thus revenues are constrained to the current rate of improvement, and that we see no change in that condition until our new integrated processes and systems are largely deployed and are effective, which we believe will occur over the next nine to 12 months.

We believe that this projection is based on the performance we are already achieving. And the result is near-term core revenue growth of about 9% -- it should be 8%, and an adjusted EBITDA of $950 million.

The upper end of the range assumes we see our rate of installs and resulting improvements in sales and revenue starting later this year, and gradually increasing as we deploy Unity.

In short, it assumes we see more immediate results from the remedial efforts I described earlier. The result is an upper end of our new guidance for our near-term core revenue growth rates of about 13%, with adjusted EBITDA of $1.1 billion for 2008.

Like many of you, I am disappointed by our performance. We can and should do better. And we realized the urgency with which, these issues must be addressed. However, certain keys to our future ability to create value have not changed.

Our market opportunity is strong and growing. Our problems are not caused by demand, pricing or our ability to market and sell our services. Our network reach, and our portfolio of services, is right for the market.

Our operating leverage continues to be industry leading. We still expect to achieve incremental gross margins of 70% to 80%, with an average of about $0.15 to $0.20 of operating expense for each new dollar of revenue. And we expect significant improvements to our unlevered cash flow over the next several quarters. However, for sometime, we and our investors have been expecting and waiting for the excellent market conditions that are now evident.

And our own challenges are limiting our ability to take advantage of that opportunity. Addressing those challenges is our number one priority.

Operator, we would like to now open the conference to questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Mike McCormack with Bear Stearns. Please go ahead.

Mike McCormack - Bear Stearns

Hey, thanks Jim. Glad to hear your health is okay. Just a couple of questions on the provisioning process. Are you saying that process, having a negative impact or impairing any relationships that you guys have with key customers?

And secondly, I think it may be solely disingenuous to talk about integration synergy run rates. I am just trying to get a sense because clearly there is a huge offset by revenue dissynergies, can you quantify in any way the impact of provisioning on the revenue?

Jim Crowe

Kevin, do you want to take that first one? I'll take a shot at the second.

Kevin O'Hara

Sure. Mike, it has had some effect on customers, myself, and on most of the senior folks on the team have been spending an awful lot of time with customers, helping manage our way through their process.

The number one measure that you would look at in that regard is in terms of whether or not it's having a material effect is churn, has churn picked up, we don't see any measurable pick up in churn.

And sales remain strong through the summer, they were a little bit slower in September, but what we're assuming going forward is that our sales are going to wretch it back to be in line with our provisioning capability, as we set different expectations with customers.

To be specific in that regard, if a customer requests an order within a certain number of days, we are not generally accepting those orders unless the request to-date is within what we feel is our current provisioning interval.

So, in some cases -- in many cases, in fact, we're trying to set a different expectation with customers on the front-end. One that we can meet rather than simply taking an order based on their request and then disappointing after the fact.

We think that in the long run, that's a better way to manage the customer relationship, but it does create tension in the short-term.

Mike McCormack - Bear Stearns

Okay. Kevin, can you just give us a sense for what those provisioning times look like today versus six weeks ago, eight weeks ago?

Kevin O'Hara

Mike, they move all over the place, and then we spend a lot of time trying to figure out how to inform, how those processes are improving in a way that made sense rather than further confuse the issue, and the conclusion that we have reached is short of handing out a 100-page document.

We are best to focus on the rate of core revenue growth, which really incorporates the sales rate, net installs, et cetera, and that's the best indicator of how we're doing in that area, the rate of core services growth. We've seen some improvement in some areas. Clearly, we have not seen the rate of improvement that we had expected a couple of months ago.

Mike McCormack - Bear Stearns

So when you are looking internally, is that yardstick you are using internally as opposed to the revenue numbers coming in?

Kevin O'Hara

We have a whole series of both leading indicators and lagging indicators Mike, but there is a fair amount of detail, that's difficult to boil up for, that doesn't beg more questions, without a deep understanding of the processes. Suffice to say, a fair number of pretty rigorous and detail of both leading and lagging indicators from an operational perspective that we are tracking.

Jim Crowe

With respect to your second question, Mike, I mean you are quite right, the benefits of operating leverage of the kind I described, are apparent in growth. And if you are not growing as fast you get the negative effects of that operating leverage. I would refer you to Sunit's prepared text in the press release to discuss the individual cost targets and synergies we achieved, and we are, I think, achieving our cost targets, that's not the issue as you quite rightly point out. Next question.

Operator

Thank you. Next question will be from the line of John Hodulik with UBS. Please go ahead.

John Hodulik – UBS

Hey good morning, thanks. Two quick questions, if you would. Looks like the guidance for EBITDA for the fourth quarter looks to be about $245 million, and if you compare that to the '08 number, looks like you are in about of the $1 billion range. I would like to hear some commentary on the fact that it doesn't seem to be growing throughout the year if you annualize the $245 million add in another $20 million for say lower integration issues, you are about at that $1 billion dollar run rate now?

And I would like to know if that's a function of continued slowdown in revenue growth maybe, or some just overall, a conservative approach to your guys' outlook for margins?

And then I guess getting back to Mike's questions. Kevin, have you seen any issues with the backlog, in terms of customers having signed up and then said we can't wait the 45 days or whatever it is the average job installation period is?

And then one more quick follow-up related to that, you said that Raouf is going to work to look to align new sales, with what you can provision -- if you could, Kevin talk a little bit more about that? I mean are you guys going to try to focus on different areas? Are there some products where you are having more success than others in terms of your ability to get the lines installed, and what areas are those that you may be focusing on? Thank you.

Kevin O'Hara

This is Kevin. I will take the last two first and then defer to Sunit on the EBITDA outlook.

John Hodulik – UBS

Okay.

Kevin O'Hara

In terms of the backlog, we've got measurable change in the rate of cancels. We've got two issues that we are working our way through John which are quite separate. One is establishing revised expectations with customers for new business to make sure that the customers are coming in without unrealistic expectation about what we can deliver.

The second is for orders that have been expected, previously being 60 days or longer behind. We're circling back on a customer-by-customer, order-by-order basis and working those orders through the process separately.

Again, we haven't seen it manifest itself in any material pick up in cancellations, that's not to say that as we go forward, as we reset expectations of some of the other orders that we may not see that. We believe that's all factored in to the guidance that the Jim and Sunit have addressed.

In terms of the alignment that Jim mentioned with regard to Raouf, it's not necessarily where we are seeing the greatest traction but where the current constraint provisioning capabilities and the needs in the marketplace best align.

Specifically, there are some services that might be attractive in the marketplace, in fact some that are attractive in the marketplace that are particularly hard to provision in this environment, particularly services across multiple legacy networks and to rely on multiple databases, where the rationalization of those has not been completed yet.

What we're making sure is that what our sales folk sell, and the appropriate entrance criteria to make those orders fully actionable is what is making it to the factory. And in some cases, the information that's required to provision similar services across different systems, the information required to complete that work is quite different.

So we're going back, and we're really making sure that the product criteria -- the entrance criteria from sales into the factory, and the ability of the factory broadly to execute against all of those orders are more tightly aligned.

The sales folks have been having a good year. They've been doing good stuff, but in some cases, the information that's been getting into the systems was not sufficient to make the orders actionable, not because our sales people did anything wrong, but it was relying on an underlying system to perhaps what they had previously been working on. It caused re-work and then contributed to the issue. So that's broader stepping back beyond just the operational factory, if you will that Raouf is really tempting to take on. Sunit.

Sunit Patel

Yeah, John on the guidance, probably the key point to realize is that the $245 million midpoint in the fourth quarter includes $15 million from bonus payments from SBC, and that goes away next year. We've been recognizing that last year and this year, it's about $3 million a quarter plus $12.5 million in the fourth quarter of last to end this year.

So you would have to adjust for that to kind of get to a baseline anyway as you think about next year. Obviously, we do have some level of volatility in the growth rates in any given quarter, but I think that's probably the most important point.

John Hodulik – UBS

That makes sense. Thanks.

Jim Crowe

Next question?

Operator

Thank you. Next from the line of Goldman Sachs, we go to line of Jason Armstrong. Please go ahead.

Jason Armstrong - Goldman Sachs

Great, thanks. Maybe just a question on sort of the end market operational trajectory. Many tech companies act as sort of as an example here threatening to really compress pricing again.

I am wondering – we've spent a lot of time in the call sort of focused on sales to revenue conversion. I am wondering if you can, sort of step back and talk about the end market real quickly, where you're seeing the pricing, and is there anything materially changed?

Kevin O'Hara

Yes, Jason, this is Kevin again. And I think perhaps the most frustrating part of our current situation is that we continue to see a very strong marketplace. While we do see some competitors that are choosing to compete on price, we are not seeing it have any material affect at all on our ability to continue in a solution sale mode.

We've not seen pricing have an affect on our results, it is provisioning. And we continue to close new business at pricing levels that we are happy with. The kind of pricing trends by products that we've talked about over the course, or less I guess four or five quarters at this point have not changed despite the actions of some limited number of competitors.

Jim Crowe

I might just add, when Kevin talks about solution sales and frustration, our strength is offering customers services which include multiple locations across and multiple services.

By definition that means services which include facilities from various companies that we'd acquired and Level 3. Those are the kind of services that Kevin mentioned we are struggling a bit well. So that's the frustrating part. We have very strong market demand for those services and I assure you we are going to focus and get that particular issue behind us.

Jason Armstrong - Goldman Sachs

Okay, great. Thanks. And one more question on the CDN business, can you just sort of talk to us about your approach to that business, is there an opportunity to really sort of drive share gains here through aggressive pricing, since you obviously have the rest of the underlying components here, and you can look at that business, maybe be more aggressive there and subsidies it with rest of the network, just sort of the approach to that business?

Kevin O'Hara

Yeah, I'll take a step back. We view our CDN1 not as a separate and distinct business. We don't use CDN as a separate distinct business, nor do we view the current CDN business that is defined by what the current market leader and the hands full of other companies compete for as what we are trying to achieve with our CDN offering.

We believe that fundamentally the world is moving much more towards network-based distribution of larger and larger files, video as the poster child for that phenomenon where you are going to see much more network distributed video, and we believe that no company in fact has carved out a position with the records and technical and network assets required to deliver video and other large files effectively.

When you take a step back, and say that our objective is to be the primarily provider of kind of moving very large files amounts a bit, our goals with CDN is to recognize that some files will require different technical parameters that are better served from the edge, some files are better served more centrally located, and distributed over a network. We want to make sure that we make a very simple economic and technical proposition to customers that are trying to weigh the best way to move their files, or move their content.

Today they are typically forced to pick between a CDN company versus a high speed IP company perhaps, or an underlined transport company and a metro company in many cases.

Our goal is to bundle all of that together in a way that is economically compelling for our customers, and makes their traffic management, their network management much simpler.

We believe that our cost position by owning our underlined transport network and our underlined IT network which is a very big component of cost in a CDN network makes us uniquely positioned to bundle those products in a way to make it easier for our customer. So we view the world going a little bit different than perhaps your question would have intimated.

We believe that our set of assets makes us uniquely positioned trying to change the way customers buy that combination of services. We don't view it as a distinct business necessarily.

Jason Armstrong - Goldman Sachs

Okay thanks.

Jim Crowe

Kevin is making an important point that's worth underlining. Over time we are of the view that the difference between what is now called CDN and what is now called high speed IP, and at times optical transport is going to blur and perhaps disappear, that is a very key observation. Next question?

Operator

That will come from the line of Chris Larsen with Credit Suisse. Please go ahead.

Chris Larsen - Credit Suisse.

Hi thank you. I guess my question is just how as we, as investors, how can we gauge the success of the integration. Are there metrics so we can look at, I think in the last quarter you mentioned sales to install intervals of about 90 days. Is there a way we can measure that? And secondly, how do you keep the sales force from losing its sales momentum and how do you restrain them from over selling your product that it will take too long to deliver, but at the same time not once you can begin to deliver that product keep that ability to sell the product through?

Kevin O'Hara

Sure, couple of observations Chris. We use short hand sales force for the folks at around the point of attack with our customers; In practice we look at them as much more account managers, client, executives and in fact number of years ago, may be four or five years ago now we changed their compensation schemes such that our sales force if you will is compensated based on revenue, collected revenue from an account not sales.

So a number of years ago we made a lot of actions to really align the interests of our sales force with the interest of the company, and we believe that has had positive affect.

Clearly, when you get in the kind of environment that we are in today, making sure that both our customers and our sales force remain confident in the future is a critical matter. With customers its a case of communicating, communicating, communicating, we believe that we are communicating effectively; and with the sales force its a case of looking at them on a case-by-case basis and making sure that they are being properly addressed for the results that they are delivering.

It’s important to keep in mind that while we are talking about the current issues we are talking about pretty healthy revenue growth, even though we have lowered expectations, there is still actually a pretty good year for most of the folks in our sales organization.

One other comment that I will make, and these two do go hand-in-hand, we hold ourselves I believe to a very high standard. We typically and historically have viewed ourselves as a premier provider of services. The anecdotes that we’re getting from the marketplace, and I get these pretty repeatedly, are that our performance, relative to past performance has slipped.

Our performance relative to many of the alternatives available in the marketplace is probably approaching parity, that's an important point. There are other companies going through consolidation which puts pressure on customers, and they are rather a kind of macro trends that are changing in the marketplace as well.

So, all of the issues that I am describing are not isolated to Level 3. That gives us a little bit of either air cover, or a window of opportunity to work our way through these issues. I believe that the sophisticated customers recognize that, and I believe that many of the folks in our sales organization also recognize that.

Chris Larsen - Credit Suisse

Thank you.

Jim Crowe

Next question.

Operator

Thank you and next we go to line of Frank Louthan with Raymond James. Please go ahead.

Frank Louthan - Raymond James

Great, thank you. Just on the provisioning times, you mentioned that when you made the change to the organization and spread that out some more you would, like those from the folks that had a little bit more of the intellectual capability on provisioning times.

What are you doing to replicate that, those folks that have left, that were more involved in that process? And then looking forward to leverage free cash is that going to be more of a ’09 event where we see some levered free cash. It looks like that there is probably questionable for ’08 at this point. Thanks.

Kevin O'Hara

This is Kevin, I will take the first question, Frank and then I'll pass it to Sunit. The state of sophistication accuracy, there is probably a couple of other words that would describe the relative states of all of the various provisioning systems, inventory database et cetera from where it's coming.

It ranged fairly widely, as we consolidated those into less operational centers, it was going to rely much more on process and data. The part of where we got wrong is, we didn't map over where some of the data or information gaps existed.

And in a number of the companies, there was a great reliance on tribal knowledge in order to get some of the work done, as we mapped some of the processes and mapped some of the data what we didn't do was map some of the tribal knowledge. We are far enough into it, so as when the folks went home, some of that tribal knowledge went home with them is the short answer.

Part of what we've done over the course of the last handful of weeks and months is, take a step back and look at all of the processes, look at the data gaps, look at where the data gaps or the processes were causing problems, and in some instances we stopped selling some of those services where the information gaps were processed, complication was too high.

And in other cases, we've found interim steps that allow us to go and gather the information or put a temporary process in place that allows us to work our way through that. So, there is not an easy answer, there is not a silver bullet it really is a case of going network by network, process by process and service by service, and kind of mapping that into the current operating environment.

What we've also done in the short-term, and we started this in the third quarter was put some additional resources back into those critical functions. We have actually increased staffing in many instances at various elements of the service delivery function to try in, there is still next question from Jack Waters substitute trust for aerodynamics and some of these areas, but it does have an effect.

Sunit Patel

On the question on levered free cash flow, I think, your comment is fair, what I would say is that we are not, while we are not giving any specific guidance on free cash flow, our cash flow losses are expected to narrow quite a bit in 2008 versus 2007, you are seeing some of that happen just during the course of 2007 and with our guidance showing EBITDA increasing over the next year that those losses should continue narrow over the course of next year.

Jim Crowe

Next question?

Operator

Thank you. And next we'll go to the line of David Janazzo with Merrill Lynch. Please go ahead.

David Janazzo - Merrill Lynch

Thanks, good morning. In the past, you've talked about capital spending relative to your revenue growth and in a constrained revenue growth environment, does that relationship with capital spending stay at the same or should we think about it as changing?

Sunit Patel

Yeah, I mean, we've said in the past that our capital spending is about 12% to 14% of our communications revenue and your point say, which is when you have lower revenue growth you would have lower capital expenditure.

So, I think yeah, we'll be in that lower end of the range, but also keep in mind, next year we'll continue to have some level of integration spending with what's happening with project Unity. So, still within that range for capital spending even next year.

David Janazzo - Merrill Lynch

Thanks.

Jim Crowe

Next question?

Operator

Thank you. And next we'll go to the line of Tim Horan with CIBC World Markets. Please go ahead.

Tim Horan - CIBC World Markets

Thanks, guys. Kevin, the steps you've taken in the last few weeks, the kind discussed here. Have you seen a material improvement in your provisioning?

And can you, just give us a little bit more color on your competence for improvements in the next few months because you guys were fairly confident on the last quarter conference call, and it seems like your guidance at this point assumes that you are going to see relatively quick improvement, I mean, you are not going to see much impact to sales at this point? Thanks.

Kevin O'Hara

Yeah, I think, what Jim said is that, the low end of our guidance assumes that things don't get better from what we've actually been doing this year. So, it doesn't assume an improvement at all, in fact, in terms of the rate of progress over the course of 2007.

Tim, it's too early to tell. We had taken what in retrospect were insufficient steps, in the past we took half steps. Obviously, we didn't believe that they were half steps at the time but with the benefit of hindsight we didn't go far enough.

These steps that we have taken recently go much, much further, I believe, are comprehensive from an end-to-end standpoint but its going to take a little bit of time before we start to be able to measure the affect in aggregate.

We can measure internally some of the intermediate steps and whether or not we are seeing improvement there. But at the end of the day, all of those things add up to the rate of growth in our core services revenue and that's what we're going to track and report on most clearly. All of the other things are kind of bit parts in the big story, the big story is core services revenue growth. Jim said out, you know what, how that might play out over the course of next year.

Jim Crowe

Let me emphasize what Kevin said, because I think it's important that we have clarity around it. The guidance range is that we provided or predicated at the low end on performance that we've been experiencing already, we define performance.

That is net installs, to use Kevin's term the rate at which our core revenue is growing quarter-to-quarter. It is another way of saying what's our net installs, how much of our sales add to revenue and we're not assuming at the low end improvement in our net installs until, we see Unity become effective, we believe over the next three to four quarters. So, we are not seeing any kind of heroic improvements.

The higher ends of the range do assume some improvements starting later this year and into next improvements that of the kind that I sketched out in my remarks and those improvements we assume will become effective at the high end of the range but not the low end.

Tim Horan - CIBC World Markets

Thank you.

Operator

Thank you. Next question will come from the line of Jonathan Chaplin with J.P. Morgan. Please go ahead.

Jonathan Chaplin - J.P. Morgan

Good morning guys. I think a lot of the discussion so far on the call has kind of missed the point. So I thought a number of times both Kevin and Jim you said that the core business is doing -- the fundamentals in the core business are great.

There is tons of demand. The pricing is firm. Many of my peers have been writing that that's just not the case, and investors don't believe it's the case, and it's impossible to look at the results that you give us and determine whether it's the case or not.

So until you give up some metrics that give investors confidence that core revenue or rather the pricing is relatively stable, that XO isn't demolishing the market for pricing. And the demand generally in the market is very strong, but the churn isn't going up and XO and others, aren't taking share from you. This is essentially an uninvestable story.

And then I think the second issue that really needs to be focused on is the conversion of revenues to EBITDA. So, when I look at the general guidance you've always given is that you should generate incrementally EBITDA margins of around 60%.

It's very difficult for us to get to that 60% based on the guidance that you have given us, based on the -- we're seeing revenue grow sequentially  -- sequential revenue growth in core communication services. And if we look at the change in revenue and apply 60% to that, we just don't get that increase in EBITDA that we'd expect.

So, we really need lot more data than you are giving us at the moment around what the integration expenses are, where synergies are coming in. To be frank, Kevin you mentioned, there would be 100-page release.

Given the lack of confidence in the commentary that's coming out of management at the moment from the investors, 100-page release wouldn't be all that bad. So anything you could give us on those data points would be really useful?

Kevin O'Hara

Well, I don't hear a question there, I appreciate your comments and I believe that the tone of my remarks were aimed at showing investors that we take our shortcomings seriously.

Investors will have to judge, as a whole, whether our remarks today, our admission of the difficulties we have had, and our reestablishment of targets, and the reasons we think those targets, we at least have confidence in them is credible. Obviously, you have a point of view.

I would also point out that the rate of growth that we have experienced and continue to experience at 8% to 13 % is a -- well, I think it's not comparable to the companies your are talking about, and it's obviously a result of some kind of a combination of pricing, demand and growth. 8% to 13% in our market given our set of processes, systems and the difficulties we have met is a real growth rate. It's one that we are not happy with. With respect to your comment about operating leverage, Sunit?

Sunit Patel

Yeah, Jonathan, if you look at just our second quarter to third quarter performance, our total revenues, total communication revenues were up $8 million, and our gross margin was up $7 million. So, I think that shows the operating leverage, shows the synergies we are achieving on a  net side. Obviously, we do have some level of inefficiency in there as we talked about how we pre-provisioned capacity would be with much higher revenue growth that we haven't seen. But the operating leverage is clearly evident there.

Another data point is if you look at what we have reported for third quarter's actuals and the midpoint of the fourth quarter guidance, in the third quarter we reported total communications revenue to $1.043 billion. And if you look at the fourth quarter midpoint, it's about $29 million higher. Even if you back out -- and if you back out the $12.5 million SBC bonus, it shows a revenue increase of about $17 million. And if you look at the EBITDA increase from a midpoint-to-midpoint, it's $30 million and you back out $12.5 million at $18 million.

So, we are again showing a 100% incremental improvement in terms of revenue versus EBITDA, and obviously some of that's explained by we are going to continue to get some benefit from some of the synergy reductions we are talking about. So the operating leverage is clearly visible looking at Q2 to Q3, and even looking at Q3 to the midpoint of our fourth quarter guidance.

Jonathan Chaplin - J.P. Morgan

Sunit, how much of the improvement in the 3Q, and then in the 4Q guidance is coming from synergies?

Sunit Patel

Yeah, if you look at what we have talked about the synergies, we had about a $5 million annualized improvement on the net side on a quarterly basis, and then similarly on the operating expense side we had some improvement but recognize that from that we have to subtract the inefficiencies we talked about with respect to us pre-provisioning capacity.

So it's a few million dollars, and you back that out altogether, most of it is coming from incremental margins and revenue is growing.

Jim Crowe

Okay. Next question?

Operator

Thank you. Next we got to the line of Ana Goshko with Bank of America. Please go ahead.

Ana Goshko - Bank of America

Hi thanks very much. Two questions, first just on the balance sheet and liquidity position. As Sunit has been with the company for I think for about four years now, and we have gotten accustomed to the way that company manages its balance sheet, its maturity profiles.

They are very conservative about addressing maturities in advance, keeping a lot of cash on hand and have been committed to reaching three to five times EBITDA within the next 18 months or so. I would like to hear whether that is something of the same mind set that you are looking for in a new CFO or to any extent are you looking for potentially new ideas on how you might manage your balance sheet?

Jim Crowe

I will now speak for my own point of view, and I think this is representative of our Board of Directors from the start of the company through Sunit's excellent management of our balance sheet and our position in the capital markets. We have had a philosophy which I think you have described and I would sum it up this way.

We tend to be conservative. We tend to believe that liquidity gives us opportunities and we believe that achieving free cash flow, and then increasing free cash flow is the best measure of the value of a company. We believe that achieving the kind of credit profile that had you described three to five times EBITDA gives us flexibility in good operating environments, and bad and in good credit environments and bad.

So, I would re-emphasize that we are seeking someone with that same view about the conservatism we think of the appropriateness of balance sheet and capital markets position, the rest I think I explained earlier.

Ana Goshko - Bank of America

Okay, and then, that’s helpful. And then I had a follow-up on your liquidity position you have got a decent position now you've had 700 in cash, but as Sunit described that there's still a forecast to cash burn, and even if it is diminishing at about 50 to 100 a quarter, or the time to get to till the end next year.

You are probably going to be below your 500 million, sort of previously stated cash comfort level. So, wondering if you are looking ahead and thinking about potentially bolstering your liquidity position? And then you have got about 360 million of notes that begin to come to about two years from now, so wondering what your plans are on a fast-forward basis for addressing those?

Sunit Patel

I mean Ana even if you look at the cash-flows over the next year, we still expect to be plus or minus, and obviously they can be a fair bit of variability working capital. But plus or minus in that 500 range, you’re right we do have 360 plus million of maturities in 2009, but as we sit in 2007 I think the point Jim made earlier is, and that the point you made, I think that team will you can expect to continue with us, which we expect to address those sorts of things, well before they come due.

Ana Goshko - Bank of America

Okay, and then if I could just follow-up on some operational items. When you dig a little deeper on the different revenue segments transport performed frankly very well quarter-to-quarter, IP and Voice were about flat.

So I am wondering is that because of provisioning issues on the transport and infrastructure side are not as complex, and you really are feeling the complexity of them more in IP and data segment and then on the Voice side you made reference in your press release to declined by the Voice Service providers segment, and I just wanted more color on that and is that sort of in the Vonnage camp of some of the fastness that you are seeing there?

Jim Crowe

Yeah Ana there is really a series of unrelated things that are going on there. The softness in the Voice business is unrelated to the provisioning issues that we described. There were a few VSP customers, Voice Service Provider customers that either saw their businesses decline in some cases, decline pretty dramatically, and in one case we had to disconnect a customer due to the bad debt issues. So we saw a couple of discrete events in Voice Service provider really depressed that business, and offset growth that we are seeing from the cable and the wireless segments.

So they were unrelated to the provisioning. In terms of the provisioning issues, TNI is actually a more complicated set of provisioning challenges than our IP Services. What you are seeing there in terms of strength in TNI relative to IP is the substitution that we’ve talked about for the last few quarters where large customers are increasingly buying underlying optical transport services even for their IP networks.

So I think that what’s going on there is in fact I am quite sure that what’s going on there is a substitution of certain transport products, and services for certain IP products and Service s again unrelated to provisioning TNI is actually the more complicated set of products to provision.

Jim Crowe

Yes, I would emphasize Kevin's point. I think we talked back at our Analyst and Investor Conference about things like Ethernet based services, and other substitutions that we're seeing. We are of the view that the IP, transport, and infrastructure really should be added together and viewed as data services because of the blurring lines between them.

And I further think that Kevin's comments about CDM services and transport should be kept in mind. We are going to see a further blurring in substitution effect.

Sunit Patel

One other point into Kevin's point. If you look at our IP data line, half of the revenues are high-speed IP, the other half are more sort of data type revenues. And the high-speed IP revenues in itself grew at more than a 2% sequential growth rate. So, the rest of the data side which is the other half of that line speaks to the provisioning issues that Kevin was talking about.

Ana Goshko - Bank of America

Great, thank you very much.

Jim Crowe

Next question?

Operator

Thank you. And we will go to line of Tom Watts with Cowen & Company. Please go ahead.

Tom Watts - Cowen & Company

Yes, just following on a little bit more, in terms of provisioning issues impacting different parts of the businesses. Are there some parts that have been relatively unaffected at all? And then secondly, clearly provisioning systems has been a big issue on a merger integration front. If we set that aside, where are we in terms of merger integration for everything else in terms of people networks et cetera?

Kevin O'Hara

Yeah, that the last part is easy, the integration is going well in all the other areas. They are really complicated stuffs there was the service delivery, and service management those two are related because of their reliance and underlying system. So, the physical network integration, the real estate integration all of the people side of things are all progressing well.

Tom Watts - Cowen

Do you have a timeline for that, or are we 50% of the way through, or is there a point where you expect that will be done with that?

Kevin O'Hara

There is a long tale in some of those items, I think, we said, all along, that the financial benefit of that, the great majority of it is realized this year, and we continue to track towards that.

In terms of segments of the business, it's not the segments that create complications, its much more about the services themselves. Transport products that cut across multiple of the legacy networks are the number one source of complication. They are also the number one opportunity for us as we present an end-to-end offering out into the marketplace. Simply put, if you were to provision a service that was originally originated on one particular company’s network but then was carried over, say, the Level 3 intercity network and terminated on a third company's network.

That is where the complication comes in and that you have to rely on very different data bases, three different provisioning systems, in many cases, three different and lot of things in order to provide that end-to-end. And it's that complication that we are trying to sort out, particularly acute at the transport in the transport product set.

Tom Watts - Cowen & Company

And just to clarify, in terms of having everything integrated on the single platform. Is that end of Q2 '08?

Jim Crowe

Well, when you say platform, what do you mean?

Tom Watts - Cowen & Company

Of the provisioning system.

Tom Watts - Cowen & Company

A provisioning system.

Jim Crowe

Provisioning platform, I think, you should view that because I've mentioned in my remarks that provisioning is not one step, its several steps including order entry project management, several steps of service activation, determining inventory available or signing inventory test activation. Those are whole series of processes with underlying databases.

The process of moving from multiple systems to one, isn't a single step, its multiple steps, will occur overtime. And you should think about the effectiveness of the integrated system increasing, and we said, we expected it to be effective over the next three or four quarters. But there are individual steps along the way it's a process, not a single event.

Tom Watts - Cowen & Company

Okay. Thanks very much.

Operator

Thank you. And next we'll go to line of Colby Synesael with Merriman. Please go ahead.

Colby Synesael - Merriman

Great, thank you. Have some of the recent problems uncovered some more core issues with the communications between some of your customers’ facings groups. And then also more of a housekeeping question, can you just give us what deferred revenue and headcount work end of the quarter?

Kevin O'Hara

Yeah, I will let Sunit take the last two. The complications that we had with communications really -- it started with our customer-facing groups and extended into the factory. We effectively took a process that was existed in seven different places but we centralized, and we disaggregated that process into three or four different customer-facing groups. And it had kind of a multiplication effect if you will that is where the complication came in. The steps that we have taken recently are combining that back into a single organization, with a single voice, and overtime a greatly reduce set of processes, and we would expect that would further improve the customer communications. But that contributed because of the way we broke up the group.

Sunit Patel

On your question of headcount, I think, we're in line with what we said at the beginning of the year. We had said that headcount would come down by more than a 1000, I think; we are sort of in the mid 900 at this point. So, we are largely done with that, and currently we have about 6,600 employees.

Colby Synesael - Merriman

And, what about the deferred revenue?

Sunit Patel

The deferred revenue I think that came down in the quarter because of the amount of IRU sales we had in the quarter was lower than the amount of amortized revenue we are booking that does move around a little bit based upon the IRU sales, and how much we deliver in completed IRU sales, so that's why they came down.

Colby Synesael - Merriman

Is that in the press release? I just didn't see it there.

Sunit Patel

Yeah, it's in the press release. Yeah.

Colby Synesael - Merriman

Thank you.

Jim Crowe

Next question.

Operator

Next, we will go to the line of Anton Anikist with Morgan Stanley. Please go ahead.

Anton Anikist - Morgan Stanley

Hi, how are you, it is Anton Anikist. I guess lot of my questions have been asked, so let me ask a kind of stereotypical bond  analyst question, and follow-up with one more. On the $700 million of liquidity just in light of the relatively high profile lawsuits that some of the corporate borrowers have filed recently in terms of cash equivalents not really being equivalent to cash, I am curious if you could parse that $700 million for us. I believe that includes your stake in Infinera which obviously is public now. So, if you could just give us the various buckets, how much is really cash, how much by chance could be exposed to some of the new SIV volatility? And then I have got a follow-up. Thanks.

Sunit Patel

Yes. So, if you look at our cash position, roughly about $50 million or so is the Infinera position, it’s in the marketable securities line. And the rest of the cash, we think we are pretty clean on the cash. We don't have SIV's with most of the cash, all the cash has to be invested in U.S. treasure or money market funds that are US treasury backed if you like. So, we don't really have any exposures into SIV funds that you are talking about. We do have some level of commercial paper, which is direct corporate, very high-rated A1, B1 type commercial paper but not any exposure to any SIV vehicles.

Anton Anikist - Morgan Stanley

Okay, that's helpful. I appreciate that. And then secondly, I know Jim you touched on this in your opening comments, and I hope you guys don't interpret this as grave dancing exercise. But Jim you mentioned that Sunit's departure has nothing to do with the missed guidance, and you did talk about Raouf and Neil being assigned to oversee the provisioning side of things. But your market cap is down about a $1.2 billion in the last half hour. Can you give us some idea of what actions you have taken to reassign or potentially terminate some of the executives that were directly responsible for the logjam? Thanks.

Kevin O'Hara

Yes. I'll say again the responsibility for the provisioning issues, which I've tried to be clear about, and the consequences, which I've tried to be clear about flows up through the operating organization to Kevin and I.

If I thought there was a lack of recognition of the problem, I thought there was a lack of understanding about the causes or seriousness of the problem. I think it'd be completely appropriate to have answers to your questions.

I see none of those and I can assure you by the way if I didn't feel that way, our Board would. I am not of the school that says a mistake in and of itself is a cause to start terminating people. We are moving quickly. We are an organization that has covered a lot of ground in a short period of time. We have made mistakes in the past. We will make mistakes in the future.

Jim Crowe

First of all, your question I hope you realize the product that I think is incorrect MFS was an enterprise company. We sold to enterprises large and small, we were a classic CLEC and considerably larger than any of those we’ve acquired, and the people who are with us at MFS cut their teeth on enterprise sales.

To answer your question we have certain individuals that we rely on, but I mentioned our Chief Information Officer, that's not an MFS individual. Our Chief Technology Officer is not MFS and I could go down a long list. The folks from MFS tend to have a spotlight on them occasionally because they have been around for quite a long time, but they are far from being the even the bulk of our management talent.

The facts are we have a broad and deep bench and one that we think is the reason we are here today, and the reason we do have the opportunities we have, and the reason we continue to grow, and I’ll say again we are not happy with our growth. We expect more of ourselves as I am sure everyone on this call does, but we think we’ve addressed the issues. We think we’ve identified the problems. We think we’ve taken steps to fix them, and we think we’ve reported on those steps to you.

Donna Jaegers - Janco Partners

And one other quick question, maybe for Kevin. On the volume in the voice business, I know you said earlier that it was mostly due to one customer I think investors saw your entry into the VoIP business as sort of a razor, razor blade but you get into the business with sort of an aggressive pricing model, but then you would capture the volume going forward. Is that still the premise that you are seeing with the cable and the wireless customers?

Kevin O'Hara

Donna, there is couple of comments in there, one I didn’t say, it was one customer. I said one in particular we cut off because of bad debt. But that there was a few kind of large customers whose businesses came under pressure that offset the growth.

When you look at our voice business, you really have to break down the wholesale voice business from what I would call kind of higher margin voice business, our local voice services. Our local voice services, they were very much driven by, for lack of a better term kind of legacy Level 3, based on our soft switch architecture and some of the co-carrier infrastructure that we rolled out. And that’s a good business.

We don’t see the same kind of volatility that we're seeing in the wholesale voice business. The trends that I was describing in that, I think you are referring to a much more on the wholesale side of the house. And the wholesale voice business was much more a product of the WilTel and Broadwing acquisitions.

Level 3 did not have a substantive wholesale voice business. Those came along, so it wasn’t some strategic push that we made based on pricing, they came along. Our goal at this point is to -- we think it's still a good business, but it’s a business that needs to be run for cash. We’re attempting to run that business for cash.

Donna Jaegers - Janco Partners

Okay, thank you.

Jim Crowe

Next question.

Operator

Thank you. And that comes from the line of [Robert Norwegick with Tenor Capital] . Please go ahead.

Robert Norwegick - Tenor Capital

Hi, good morning. My question was already asked and answered. Thanks.

Jim Crowe

Okay. Next question.

Operator

And the next question will come from the line of Qaisar Hasan with Buckingham, please go ahead your line is open.

Qaisar Hasan - Buckingham

Hi, thanks lot. I had a couple of housekeeping questions. One just on the SBC WilTel contract, I think you guys came in above your initial guidance for the third quarter on the revenues. Is it safe to assume that the gross profit contribution from this contract in the quarter was also above your expectations?

I think last quarter some of you had indicated there was only about $10 million in gross profits left under this year's contract. I assume you've sort of gone above that, and now sort of eating into part of the 2008 gross profit commitment, is that correct?

Kevin O'Hara

Yes.

Qaisar Hasan - Buckingham

And can you sort of quantify how much of the sort of 2008 commitment you booked in the third quarter?

Sunit Patel

I think we have eaten some into it, and how much it depends a lot also on what happens in the fourth quarter. I think that the key point on the SBC contracts has been tough to predict. This year it's been better than what we thought and we'll see what happens over the next year, but just looking at the trends, we have seen in the contract fourth quarter, we put out the guidance where we think. So that's different and higher than what we thought last quarter.

Qaisar Hasan - Buckingham

I think the margins on this contract so far for the first half is running about 37% or so, is that still the sort of run rate we should be assuming for third/fourth quarter?

Sunit Patel

No. I don't think we ever talked about the margin. I think, the more important thing is the change. Most of the change in the revenues with the SBC contract in terms of the decline have been in the low margin voice side of the SBC contract, which as you said in the past have been more in the 20s.

Qaisar Hasan - Buckingham

Okay. And then just on loan covenants, I just wanted to find out to the extent that you have lowered '07, '08 EBITDA guidance, could you remind us of some of the covenants on free cash flows and EBITDA? And how much room you would still have on those in light of your lower guidance?

Sunit Patel

We have no, and I will repeat, we have no maintenance covenants of any kind on any of our debt arrangements. We have debt incurrence covenants, but we have no maintenance covenants. So that not a consideration for us.

Qaisar Hasan - Buckingham

Okay. Alright, well done, that's fine, thank you. And Sunit, just wanted to wish you the best of luck. It's safe to say the company wouldn't be in the position it is in today if it wasn't for you, so best of luck in whatever you do.

Jim Crowe

I think we have time for one more question.

Operator

Thank you. And the final question will come from the line of Greg Mesniaeff with Needham & Company. Please go ahead.

Greg Mesniaeff - Needham & Company

Thank you. Just a quick question for you Kevin, I was wondering, if you could just give us a quick update on the colocation and data center business within the organization. And given the recent successes of the carrier neutral model, I was wondering, if there have been any thoughts to structurally realign that business to make it more conform to that type a of business model?

Kevin O'Hara

A couple of comments, one is while we own the facilities, we allow our customers to use any carrier that they desire. So, in many ways our customers are in fact, excuse me, our centers are in fact carrier neutral. Shame on us if we can't come up with an economic proposition for the customers but they are free to use alternatives.

That continues to be a good business for us. Pricing in the co-lo and data center business tends to be going up not down. In fact, we do see price increases for new orders. It is a product and service that continues to be under demand, and many customers are looking for larger and larger colocation and data center spaces,  spaces in many cases would require tens of million of dollars or more to kind of build out. And just due to the capital intense nature of it, the more real estate like returns that come along with that we are looking more and more to work with data center providers rather than constructing new spaces. But for the spaces that we have, we like the business. Prices are going up, and it's a key part of the portfolio.

Greg Mesniaeff - Needham & Company

Do you consider that as strategic assets for your content delivery business too?

Jim Crowe

I think what we consider is that having sufficient space for Level 3's needs, and for our customers' needs is strategic. Who owns the underlying real estate is a whole another question. And as the business matures, I guess, we wouldn't be surprised to see a separation of real estate and real estate returns from the higher level services and facilities.

Greg Mesniaeff - Needham & Company

Thank you. It's very helpful.

Jim Crowe

Alright, well, I will end this way. We had some news today that we would have preferred not to present. We understand that we have had a number of shortcomings that caused us to have to deliver that news. And we are focused on correcting those shortcomings as quickly as we possibly can and we will continue to report on the results of those efforts to you. Thank you, operator. That's the end of the conference.

Operator

Ladies and gentlemen that does conclude the call for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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