Allstream Posts Q2 Profit

Revenues for the three months ended June 30, 2003, were $336.6 million, compared to $384.9 million in the same period of 2002, and $353.3 million in the first quarter of 2003. Long Distance revenues represent 37% of total revenue down from 38% in the same period last year and the previous quarter. Revenues from all other products including Local, Data, Internet, and IT Services represented 63% of total revenue in the current quarter versus 62% in each of the second quarter 2002, and the first quarter of 2003.

Revenue from Data and Internet in the quarter of $149.2 million declined by $20.5 million or 12.1% from the same quarter in 2002, and $9.3 million or 5.9% compared to last quarter. The Company experienced growth in next generation data services and managed network hosting and security services, however softness in enterprise and wholesale demand, pricing pressures in certain legacy product categories, and weakness in IT Services revenue resulted in the overall decline.

Local revenue in the quarter of $57.5 million declined by $2.2 million or 3.7% as local access lines in service decreased by 41,817 from the second quarter last year to 514,311, reflecting the strategic re-positioning of the Company's local services business to focus on profitable local line growth. The percentage of these lines that are either on-net or on-switch increased to 55% from 52% in the same period last year. Compared to the first quarter, local revenue increased by $0.6 million or 1.0%.

Revenue from long distance services in the quarter of $124.6 million declined by $22.4 million or 15.2% from the same period last year, the result of an 8.4% reduction in average price per minute, and a 6.8% decrease in minute volume. Compared to the first quarter, long distance services revenue declined by $9.3 million or 6.9%, the result of a 4.5% reduction in average price per minute, and a 2.4% decrease in minute volume.

The Company's earnings before interest, taxes, depreciation and amortization (EBITDA as outlined in the attached supplementary financial information schedule) for the quarter totaled $69.1 million, including $4.4 million of re-branding costs, an improvement of $18.6 million from the second quarter of 2002. This increase in EBITDA is primarily due to lower SG&A expense of $11.5 million as the effect of the Company's efficiency initiatives exceeded re-branding costs. In addition, the gross margin improvement of 710 basis points to 41.9% of revenue contributed $7.1 million. This improvement in gross margin was the result of lower settlement costs, lower service costs from operating efficiency gains, regulatory savings, and the Company's emphasis on higher margin products and services, partially offset by lower revenues.

Compared to the first quarter of the year, second quarter EBITDA increased by $2.8 million or 4.2%, the result of a $3.6 million improvement in gross margin, partially offset by a $0.8 million increase in SG&A expenses, including the re-branding costs noted above.

Income from operations for the quarter totaled $41.2 million, the fourth consecutive quarter that the Company and its predecessor has recorded positive income from operations. The $1,355.6 million improvement from the loss from operations of $1,314.3 million in the second quarter of 2002, was primarily due to the write-down in the carrying value of property plant and equipment and goodwill, and from workforce reduction and restructuring costs. Also contributing to the improvement were lower depreciation and amortization costs of $63.2 million as a result of the capital asset write-down, and from increased EBITDA of $18.6 million.

Compared to the first quarter of 2003, income from operations increased by $4.7 million. This change was the result of the $2.8 million increase in EBITDA, and $13.8 million from reduced depreciation and amortization expense, reduced by the reversal of workforce reduction costs and provision for restructuring of $11.8 million recorded last quarter.

Allstream's Net Income for the quarter totaled $24.4 million, compared to a Net Loss of $1,353.4 million in the same period last year. This $1,377.8 million improvement was primarily the result of increased income from operations of $1,355.6 million. Also contributing to the improvement in Net Income was a reduction in net interest expense, partially offset by a reduction in the non-cash foreign currency translation gain, both the result of the Company emerging from its restructuring on April 1, 2003 with no long term debt.

Net income in the second quarter of $24.4 million compares to $229.8 million in the first quarter. Contributing to this change was improved income from operations of $4.7 million and an increase in the provision for income taxes of $17.7 million. The remainder of the change is due to factors that with completion of the Company's restructuring are no longer relevant, including the non-cash foreign currency translation gain, and the reduction in net interest expense and reorganization costs.

The Income Statement for the current quarter includes a Provision for Income Taxes of $17.7 million. This charge does not give rise to any cash income tax liability, as the Company was able to begin to utilize its over $1.8 billion in tax loss carry-forwards to offset it. The rules for fresh start accounting require that the utilization of tax loss carry-forwards from predecessor companies be recorded as contributed surplus on the balance sheet. Absent this accounting treatment requirement, as there is no cash tax payable due to the utilization of the loss carry-forward, net income would otherwise be increased by the amount of the tax provision.

At June 30, 2003 Allstream had cash on hand of $248.3 million, generating cash of $73.1 million in the quarter. This increase in cash can be attributed to operating profitability, to a partial recovery of Competitive Digital Network Access regulatory credits, a return to normal payment terms with a major supplier, and to continued strong management of working capital.