Global Crossing Limited Q3 2008 Earnings Call Transcript

Global Crossing Limited (GLBC)

Q3 2008 Earnings Call

November 6, 2008; 09:00am ET

Executives

John Legere - Chief Executive Officer

John Kritzmacher - Chief Financial Officer

Suzanne Lipton - Vice President of Investor Relations

Analyst

Jason Armstrong - Goldman Sachs

Romeo Reyes - Jefferies & Co

Murray Arenson - Janco Partners

Donna Jaegers - D.A. Davidson

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Global Crossing third quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, November 6, 2008.

I would now like to turn the conference over to Suzanne Lipton, Vice President Investor Relations.

Suzanne Lipton

Thanks Shawn and good morning everyone. Thanks for joining us today for our third quarter 2008 earnings call. John Legere, our Chief Executive Officer and John Kritzmacher, our Chief Financial Officer are here with us today. They will each share their comments and after that we’ll open the call for some questions.

Presentation slides can be viewed to help follow our prepared remarks today. They are available via webcast, which you can access through our Investor Relations site if you go to www.globalcrossing.com, access the Investor site and follow the links to the webcast.

Before I begin, I would like to remind everyone that statements made herein that are not historical financial results are forward-looking statements as defined in Section 21-E 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 actual results to differ materially from those in these forward-looking statements are contained in our reports filed with the Securities and Exchange Commission, including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments, except as required by law. Information contained herein is in summary format only and is qualified in its entirety by reference to the financial statements and other information contained in our Forms 10-K and 10-Q.

We refer you to our financial press releases posted at www.globalcrossing.com, which include explanations of and reconciliations with the closest GAAP financial measures for our non-GAAP measures, such as adjusted cash EBITDA and adjusted gross margin.

With that, I will turn the call over now to John Legere.

John Legere

Good morning and good afternoon. Today as we review third quarter results I’ll discuss how the key drivers of customer demand for our services are trending are so far against the backdrop of the current macro-environment, and I’ll give you my perspectives as we move ahead.

I will start with our results. The third quarter of 2008 is our company’s tenth consecutive quarter of consolidated revenue growth and adjusted gross margin expansion. It is also our sixth consecutive quarter of positive adjusted cash EBITDA, which grew 14% from last quarter. We ended the third quarter with a total cash balance of $380 million, which is an increase over the prior quarter. All of this is positive news for the company.

The third quarter marks the first time all comparable quarterly periods fully reflect the combined operations of Global Crossing and GC Impsat, clearly demonstrating the organic growth our company has achieved. In Q3 we grew revenues to $667 million, despite a bit of unfavorable foreign exchange headwind this quarter. That’s an improvement of 12% compared to last year.

“Invest and grow” revenue increased to $560 million, up 17% from last year and 3% sequentially. Meanwhile wholesale voice has remained stable, and our company has maintained its discipline of managing costs, thus creating operating leverage and allowing the company to hedge against external factors that we cannot control, such as the current economic environment.

As a globally diverse company, we do and will experience a degree of impact from foreign currency movements relative to the U.S. dollar, including impacts associated with British pound, Euros and Brazilian reals, which were approximately one-third of our revenue. However, given the local nature of our global operation to a large degree, our company benefits from a natural currency hedge and this largely mitigates the impact of foreign exchange to our bottom line.

Our company continues to be strong operationally, despite the economic environment and it has made tremendous financial progress so far this year. For the first three quarters of 2008 Global Crossing hedge has generated more than $230 million in adjusted cash EBITDA.

That is an improvement of more than $150 million compared to the first three quarters of 2007 and our adjusted cash EBITDA, less gross capital expenditures has improved from a negative $139 million in the first three quarters of 2007, to a positive $55 million during the first three quarters of 2008. That is an improvement of nearly $200 million and evidence that our company is benefiting from the capital we’ve invested.

When we provided our business outlook earlier this year ahead of today’s economic environment we indicated we generate modest cash inflows in the second half. In the third quarter our unrestricted cash improved by $28 million to $346 million, clear progress towards achieving that objective despite significant adverse pressure arising from the recent appreciation of the United States dollar.

We may see lumpiness from quarter to quarter due to the timing of capital expenditures, interest payments and higher used sales, but the trend in our operating results is improving, as “invest and grow” revenue continues to increase.

In the current economic environment, as you look at Global Crossing and other companies whose progress you follow, I know one of the questions many of you are asking. Are the leading indicators of what customers will buy from Global Crossing in the foreseeable future is still strong? Well the answer is they are. Our orders are still strong and looking to future sales we are still actively discussing, proposing and closing solutions for our customers and prospects. There’s a healthy level of activity still and the deal proposals and customer bids coming in remain robust today.

Our relationships with customers remain strong. Customer churn has remained at generally consistent levels this year of 1.5% on average per month. Approximately 70% of the company’s incremental orders are derived from our existing customer base and the vast majority of the services they are buying are monthly recurring in nature.

New orders, which are one key indicator of future monthly recurring revenue growth for our business, reached a record averaging $4.4 million per month during the third quarter of 2008 and October orders are in the range of the monthly figures that we are experienced in the past nine months of the year.

It may be counterintuitive in this environment, but customers are buying more from us than before. There are a number of reasons why, during the period of difficult macroeconomic conditions enterprises look to conserve cash, lower costs and become more efficient with what they have, but the telecom services they have today are not discretionary.

In most instances these services are critical to their operations and so our ability to provide advanced solutions over a differentiated IP platform gives enterprises the ability to increase efficiency and run the applications they already use at a lower cost of ownership by using our network solutions. That is very important in this environment.

Carriers are continuing to use our network to expand their global reach versus building their own in an effort to serve their enterprise customers and social networking and content providers say that global trend of new end users coming online will continue to drive traffic. These are all reasons why our customers are buying at a time, when it’s counterintuitive to think they would be.

This is how I view our business. As we’ve said, demand a key indicator of our business outlook is intact. This remains true across the diverse set of sectors we serve and the regions we operate. We continue to remain watchful of the macro-environment. There are a number of indicators we monitor normally and will continue to monitor in the months ahead, and we will continue to manage our costs, focus on strategic execution and monitor demand.

The key takeaways right now is we are not seeing any substantial impact today in the indicators you would look to for further information. In other words, we are cautiously optimistic and the fundamentals of our business remain strong.

Lastly, we previously announced Jean Mandeville’s departure from Global Crossing. Today, as I introduce Global Crossing’s new Chief Financial Officer, John Kritzmacher, I’ll tell you that we are all very excited to have him onboard. He brings a wealth of finance and industry experience to our business, and I can tell you he has come up to speed very quickly.

With that, let me turn the call over to John to discuss our results. John.

John Kritzmacher

Thank you Johan and hello everyone. It is great to be here at Global Crossing. As John has noted, the company has established strong momentum in realizing improvements in our operational and financial performance and we are well positioned to continue improving our performance in this challenging global economic environment.

Before I turn to the results, I would like to address a couple of small housekeeping items associated with the third quarter and the comparable prior periods. First, you’ll note that Impsat was acquired in May of 2007, so our quarterly year-over-year comparisons are no longer impacted by the timing of that acquisition.

Second, Global Crossing has completed the consolidation of our GC Chile operations from the Rest of World segment into the GC Impsat segment. As required under U.S. GAAP, we retroactively restated our segment results to include GC Chile’s results in the GC Impsat segment and removed them from the Rest of World segment for all periods presented. For your reference, GC Chile accounted for approximately $8 million of revenue year-to-date.

Now let me turn to our results. Our consolidated revenue has now grown for ten consecutive quarters. Consolidated revenue was $667 million in the third quarter, representing an increase of 2% sequentially and 12% year-over-year. Of the $667 million consolidated revenue, “invest and grow” contributed $560 million, increasing 3% sequentially and 17% year-over-year.

On a sequential basis, shifts in foreign exchange rates unfavorably impacted revenue for the quarter by $5 million, with most of the impact in our GCUK segment. Each of our segments continued to perform well, driven by growth in our core services. We continue to see momentum in our Rest of World segment which generated $390 million of revenue, an increase of 2% sequentially and an increase of 9% year-over-year.

Within this segment, “invest and grow” revenue was $289 million, an increase of 3% sequentially and 18% year-over-year. GCUKs total revenue was $155 million in the third quarter, a decrease of 1% sequentially and an increase of 8% year-over-year. On a constant currency basis GCUK revenue would have grown $2 million or 1% sequentially.

Overall operations continued to perform strongly at GC Impsat. Revenue grew to $125 million, an increase of 6% sequentially and an increase of 29% on a year-over-year basis. Meanwhile our wholesale voice business generated $106 million of revenue, flat sequentially and down from $115 million in the third quarter of 2007. We continue to expect this business to remain relatively flat going forward.

As John mentioned before, our order levels continued to be strong. In the third quarter we achieved a record average order intake of $4.4 million per month in terms of anticipated monthly recurring revenue. This compares to $4.0 million in the prior quarter and in the same quarter of last year. Our adjusted gross margin dollars continue to expand through increases in “invest and grow” revenue and continued optimization of our access costs.

As a percentage of revenue, adjusted gross margin was 53.5%, an improvement of 40 basis points sequentially and an improvement of 200 basis points as compared with the same period a year ago.

On an absolute basis, we generated $357 million of adjusted gross margin compared to $347 million in the prior quarter and $306 million in the third quarter of 2007. “Invest and grow” represented $344 million, or 96% of our total adjusted gross margin. On a segment basis Rest of World, GCUK and GC Impsat contributed 153 million, 107 million and 97 million of adjusted gross margin for the third quarter respectively.

Cost of access in the quarter was $310 million, which represented an increase of $4 million sequentially, as compared to an increase of $14 million in revenue. Year-over-year access expense increased $22 million as compared to a $73 million increase in revenue.

Year-to-date we have captured $46 million in savings from our cost of access initiatives and we are well on track to achieve the $70 million in savings we previously projected for the year. We continued to aggressively manage our cost structure. Our adjusted operating expenses as the percent of revenue were 40.3% as compared to 41.3% in the last quarter.

For the third quarter of 2007 this operating expense ratio was 39.1%, including the $11 million or 190 basis point benefit from the reversal of a real estate restructuring reserve in that period.

Moving on to our cost components; excluding cost of access, cost of revenue was $162 million for the third quarter, an increase of $4 million sequentially and $15 million year-over-year.

The majority of the sequential increase was due to higher utility charges. The year-over-year variance was primarily due to higher maintenance and equipment cost, as well as higher rent and utilities expense, partly driven by the company’s European co-location and hosting business.

SG&A expense was $125 million in the third quarter, which was an $8 million improvement from the previous quarter. The sequential improvement was driven by lower pools for stock-based incentive compensation and to a lesser degree lower restructuring charges.

On a year-over-year basis SG&A increased by $27 million. The year-over-year variance was primarily due to a $10 million increase in compensation cost and the $11 million real estate restructuring reserve reversal reflected in the year ago period as previously mentioned.

Adjusted cash EBITDA was $88 million for the third quarter, an improvement of 11 million and 14 million over the year ago period. On a sequential basis the impact of currency movement on adjusted cash EBITDA was approximately $1 million for the third quarter.

On a segment basis, Rest of World adjusted cash EBITDA improved $3 million to $7 million on a sequential basis and declined $1 million year-over-year primarily due to the upper mentioned $11 million restructuring reserve reversal in the year ago period.

GCUKs adjusted cash EBITDA stayed flat sequentially at $39 million, despite unfavorable movement in foreign exchange rates. On a year-over-year basis GCUKs adjusted cash EBITDA declined by $1 million.

Meanwhile, GC Impsat generated $42 million in adjusted cash EBITDA, reflecting a sequential improvement of $8 million on a revenue increase of $7 million. The improvement was primarily driven by a sequential increase in on net and value-added service revenue, along with the sequential decline in real estate, network and operations cost. On a year-over-year basis GC Impsat’s adjusted cash EBITDA grew by $16 million or 62%.

Our adjusted cash EBITDA, less gross CapEx continued to improve. It was $30 million in the third quarter, representing an improvement of $11 million sequentially and $49 million on a year-over-year basis. The continued improvement demonstrates our company’s progress toward achieving sustainable, free cash flow.

At September 30, our total cash balance was $380 million compared to a cash balance of $377 million at the end of the second quarter. We ended the quarter with $346 million unrestricted cash, a $28 million increase including currency translation losses of $11 million, offset by the release of $22 million in debt service reserve funds for the GC Impsat notes.

These reserve funds were released after successfully meeting certain performance requirements in the GC Impsat bond indenture. On a year-to-date basis, we have used $51 million in cash.

For the quarter the Company generated $84 million in cash flow from operating activities, after $24 million in interest payments and IRU proceeds totaling $42 million. I would like to remind everyone that our cash interest will be approximately $20 million higher in the fourth quarter due to the timing of the payment on our U.K. bonds.

We continued to effectively manage working capital despite the challenging economic environment, and we have not observed any degradation in our receivable collection intervals. During the quarter we incurred $68 million in cash capital expenditures, which includes repayment of capital lease obligations and capital debt.

As of September 30, we had 56.3 million common shares outstanding. In addition to these common shares, our fully diluted share count would include 18 million preferred shares, 6.4 million shares underlying 5% converts and 1.6 million of outstanding awards under our stock incentive plan, excluding contingent performance share awards.

I have touched upon foreign exchange a number of times in my comments. Let me come back to this topic briefly and give a more complete picture. As a global company we conduct our business in many currencies around the world. For the most part the local nature of our operations provides a natural currency hedge for the revenues collected and costs incurred in matching currencies, where we generated cash in local currencies in excess of our operating requirements. Our policy is to convert excess currencies into U.S. dollars or British pounds as soon as economically practical and subject to local regulations.

Appreciation of the U.S. dollar in the third quarter had a relatively small impact on our reported revenues. Should the relative appreciation of the U.S. dollar be sustained through the fourth quarter, we expect a more significant impact on our fourth quarter reported revenues. Approximately 55% of our revenue is collected in U.S. dollars, and as John noted roughly one-third of our revenue is collected in British pounds, euros and Brazilian reals.

With the benefit of a natural hedge to our operations, the flow-through impact to our profitability is largely mitigated in terms of our EBITDA as a percent of revenue, but not as fully in absolute U.S. dollar terms. With respect to our cash balances, cash in excess of our operating requirements is held primarily in U.S. dollars and British pounds. These balances have helped us to support our operations and to service our debt.

I noted earlier that foreign exchange movements adversely impacted our unrestricted cash balances by $11 million in the third quarter. At the same time, I would note that the translation of our external debt, denominated in British pounds was favorably impacted by $34 million. I should also note that our Q4 interest payments include a payment of GBP15 million related to the pound denominated debt.

Turning back now to our debt structure, we ended the third quarter with 1.4 billion of debt outstanding, including 157 million in capital leases. We entered into $7 million in new capital leases. We have no major debt maturities prior to 2011.

In summary, we exited the third quarter with strong results, continuing momentum in our “invest and grow” revenue up 17% year-over-year, coupled with our cost management programs. This is a result of a continued improvement in our adjusted cash EBITDA performance and despite the challenging economic environment; demand continues to be strong as evidenced by our record order levels during the third quarter. We are navigating through the current economic environment with due care and focus and we continue to capitalize on the strong fundamentals of our business model.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jason Armstrong - Goldman Sachs.

Jason Armstrong - Goldman Sachs

Good morning, couple of questions. Maybe first on the EBITDA trajectory, another good quarter of sort of sequential performance there, as we sift through the moving parts it looks like you really benefited both on the top line and sort of from a cost structure prospective. Maybe specifically if we can hit SG&A, obviously there was a reversal of from stuff in 3Q which made SG&A a lot lower.

That obviously contributed to the EBITDA growth. Is that sort of a baseline to think about going forward, is there anything sort of non-recurring in that number that maybe causes a little bit of pressure on EBITDA as we head into 4Q? And the second question, just on the FX hit, you gave us some pretty good detail around natural currency hedges, but I think you did mention that there will be a more material hit in 4Q which we seem to be hearing from a lot of carriers, obviously.

Can you help us think through maybe be sort of put percentages behind it, what percent of revenue hit would you expect sort of given what you know right now? Thanks.

John Legere

I’ll let John walk you though the SG&A question, start the FX and I’ll come in behind you.

John Kritzmacher

First, with respect to your question with regard to SG&A, there was really nothing unusual about our SG&A results for the third quarter and we continued to control our operating expenses including SG&A, so we continue to gain leverage as we grow the business. So you can think of that as a reasonable proxy for our cost of SG&A on an exit basis from the third quarter.

With respect to foreign exchange, let me put a little more color around our foreign exchange. Obviously as we’ve said, we collect 55% of our revenue in U.S. dollars and that’s a reasonable proxy for the profile of our cost structure as well. The other currencies that are important to the operation of our business are the pound, the euro and the Brazilian reals.

We described the impact of the pound in the quarter. I felt that with regard to the Brazilian reals, for the most part over the period, Q3 as compared to Q2 the reals was appreciating relative to the dollar and then it moved very quickly in the opposite direction toward the end of the third quarter. So there was a relatively modest impact there.

When you think about the profile of our business in Impsat, you should think of the business there as being roughly half conducted in dollars and half conducted in other currencies, the most significant currency there being the Brazilian reals. You may now our revenue in Brazil is roughly 7% of our total consolidated revenue, so I’ll have to give you a feel for the size of our business there.

Obviously rates off for the reals, and the pound has continued to move. To try to characterize for you the sensitivity of our performance to the relative appreciation of the dollar that we have seen recently, let me cast that in the context of our Q3 performance and the exchange rates that prevailed at the end of the third quarter on September 30.

If you were to look at our results for the third quarter and to run the foreign exchange rates at September 30 as though they had prevailed through the entire period, the impact for our results for the third quarter would have been an adverse impact to revenue of approximately $20 million, and an adverse impact to EBITDA of approximately $4 million.

Jason Armstrong - Goldman Sachs

That is really helpful and just if you ran that same exercise with the rate resets as of October 30. Can you help quantify what that would mean to the business?

John Kritzmacher

Obviously the result for the rates as of October 30 continued to move, so there would be an additional impact. Yes, I think you could probably run some projections to get a sense of it, but there has been obviously some additional movements since the end of September.

John Legere

I think Jason, obviously rates move both directions during the month of October. What we tried to do, with what John just went through is a couple of things. I think a very important the relative size.

I know people have had certain projections about what the currency impact could be and they’ve all been far greater than what our forecasts have been and we are not hiding behind not knowing about FX, but we’ve looked at all versions of it and we think we can give you good guidance by just what we did looking at the September 30 rates back across an entire quarter.

The second important point was look at what the flow-through is. If you take an entire quarter, what we’re trying to show is that the relative flow through down to the EBITDA line is certainly not as much as people would suspect for a company with less relative operational hedge.

I think the third point that’s important is we have factored in what we think the various versions of FX impact can be into Q4, as we’ve made our outlook for the rest of year and the positive nature of it relative the guidance that we had set earlier in the year.

Jason Armstrong - Goldman Sachs

Just one more question for you on M&A. Obviously, you guys are sort of constantly speculating in terms of looking at assets. How are you thinking about the current environment?

I guess one approach would be, this is a great environment to be picking off assets on the cheap, especially giving given the balance sheet positioning. The other approach would be, let’s conserve cash, lets be more conservative here because most of our peers are doing that. Maybe conceptually how do you think about that and then the add-on question would be how do you think about minimum cash balances you want to keep on the balance sheet?

John Legere

Two things; I’m glad you asked the question. There was an article in this morning’s Wall Street Journal that had the phenomenal headline of “Global Crossing on the Hunt” and yours truly was quoted and I believe their quote which I will correct, was “we are in talks with everyone.”

The reality of what I said is what I’ve said to all of you many times before, which is that the synergies in our industry as it consolidates between any two players are so great that we are all always having discussions with each other just to understand what those synergies are and I do believe that over time with the synergies being $250 million to $500 million annually between several of the players even in the Tier 2 and Tier 3, at some point, those synergies need to be attained and that’s the kind of things that we as CEOs talk about.

I certainly feel that deals either with us as an acquirer or as others as an acquiree of us; are certainly not on the front burner at this point in time. The discussions are the learning is there, but I think our focus that we’re lucky to be able to have right now is to focus on our organic business, focus on our cost control which we always do, focus on as we have outlined continuing with a very good level of organic growth and in continuing to do that through any period of the macroeconomic environment, we are looking at additional ways to control cash. This is not for Global Crossing this has been a longtime effort of ours to control costs and to conserve cash and yes, as we plan into 2009, we will look at further ways.

So to balance the two, Jason I would say we are acutely aware that this is an environment where you watch your cash very carefully, and we’re ramping those efforts up. The discussions about things that would be an attractive use of Global Crossing assets as an acquirer to provide inorganic synergies and discussions by others that see us as a way to possibly enhance their own growth in this period, we continue to have those, but more so to make sure that we understand and are aware if the environment to create those synergies comes clear in 2009, but I would see cash conservation, organic business growth being the top priorities for the Company at this point.

Jason Armstrong - Goldman Sachs

Then minimum cash balance that you feel comfortable with on the balance sheet?

John Legere

I think we’ve got a good cash balance at this point in time and as you saw, we generated cash in the quarter and, John I don’t know if you have any additional comments to make.

John Kritzmacher

As John noted, we have a substantial cash cushion and we’re comfortable with our position.

Operator

Your next question comes from Romeo Reyes - Jefferies & Co.

Romeo Reyes - Jefferies & Co

A couple of questions, actually I have quite a few. Just can you please give me the three by three metrics on cash, CapEx and cap leases for GCO, GC Impsat and GC UK, that’s the first one.

Then secondly, IRR thresholds on new business John, can you comment on what you’re seeing and what type of discipline you’re seeing across the industry? It seems to me that it is possible that as some of your competitors start to feel economic pressure that the IRR thresholds on the new business are going to start to come down.

Then thirdly on new orders in the order book that you mentioned, are you seeing bigger deals. You mentioned 70% of business is from your existing customers, but are you seeing more business from existing customers or are you seeing longer cycles? If you could just give us a little bit more of a description on the new order book that would be helpful.

Then last two very quick ones. Additionally, financial services exposure, number three I guess and then ALLTEL exposure? Thank you.

John Legere

I think your quarterly seven-part questions are one of the reasons we started to release earnings the night before the calls. I can see that tactic has failed miserably. Let us attempt; I’ll give the guys a second to prepare the cash, CapEx and cap leases and IRR questions and maybe I can comment on reversal and Gary jump in.

Starting from the end, I don’t believe or know if we have any ALLTEL exposure, so I think the answer to that is none. Financial services, I would say very easily low single digit percentages of our revenue are from the financial services industry. I would tell you however, that double-digit growth in that area and by the way currently and anticipated.

So without getting into specific customers, I wouldn’t, especially in my base, write off the financial services industry as a source of revenue growth for us. It is not a major part of our base, which therefore means we won’t be part of any cost reduction programs, but we are seeing spending take place that is a cost improvement program for the financial services industry. So single digit percentages, good growth and I would anticipate and I can see in our orders and funnels, continued growth in the financial services space.

Moving upwards, well, let’s jump around a bit. You guys want to jump in on the first one?

John Kritzmacher

With respect to just some of the numbers here, with regard to cash balances per segment; for the UK our total cash balance was $61 million, all in unrestricted. For Impsat our cash balance in total was $115 million, $105 million unrestricted, $10 million restricted and for the rest of the world cash balance was $204 million in total, with $180 million unrestricted and $24 million restricted.

Romeo Reyes - Jefferies & Co

I’m sorry, I missed the last one. GCO?

John Kritzmacher

$180 million and $24 million, total of $204 million.

Romeo Reyes - Jefferies & Co

Then the $10 million restricted in GC Impsat, is that in Venezuela?

John Kritzmacher

It is actually in Colombia. With regard to cash CapEx, in the UK it’s $21 million; Impsat, $14 million; and Rest of World, $33 million.

John Legere

Let me weigh in with Gary here. Gary, why don’t you jump in and I’ll comment behind you. You can talk about IRR and the economics.

Gary Breauninger

Just a quick piggyback on top of your comments, John. You probably have other questions around the quality of the deals in the order value. Clearly as you know Romeo, our target market being the middle market to the low end of MMCs, most of our wins are in the transactional level, not the big deal wins, if you will. Obviously, one or two big deal sneak in there every month, but it’s a lot of midmarket selling and closing and proposing those IP solutions.

I will tell you the size of the deal is probably up about 15% over last year, but again, these are smaller and transactional levels as opposed to super sized deals where we continue to see that, as I place singles and doubles progress each quarter.

We have not experienced any length in sales cycles, frankly. We’ve been looking and kicking the tires on what comes into our base group as far as transactional types, what those volumes are doing; how that lags to the time that we can propose it out the door, and how that lags the actual closing on the orders and it is pretty consistent with prior periods, so no change in the trend there.

As you mentioned, 70% of our growth comes from existing customers. We continue to see customers grow with us. Our top 50 customers grew about 43% year-over-year. So we continue to get traction and layer on this value-added services on top of the NPL’s platform, so no change in trajectory there.

If you think about your question on the IRR and payback, particularly in the rough economic times, most of the customers have some sort of equipment deployed from an IP perspective. The IP migration is well within its evolution. So as we come in, we allow the customers to move at their own pace as far as the migration. We can go fast with them and migrate on the same level or we can go slower and what we’re helping the customer do is lower that total cost of ownership and work with a view that allows them to reap those savings mid year and get a payback on the investment they are doing with us within a 10 to 12-month timeframe.

That has all been pretty consistent. We haven’t seen any change in trend, even in these rough economic times.

John Legere

Just a few things and believe me, we have spent tremendous amounts of time in the last week or so talking amongst ourselves to be careful that we’re not providing any overly optimistic information here.

If you go back about six months, I think you heard many of the players who serve enterprise customers, as they started to see softness in their consumer bases, pointing out clearly that the enterprise customer could and may continue to be a source of growth through bad economic times as IP adoption, IP expansion can provide real cost of ownership benefits and decreases and productivity improvements and therefore a benefit to companies that are trying to lower costs, maybe lower employee base, etc.

Additionally to that, in that space that’s dominated by larger providers, we are a low share player; we are a specialty provider and we are part of, a lot of times, competitive bidding process that are an attempt to lower the spend with some of the larger providers and we play into that as a potential recipient.

As Gary said, in North America especially, the IP adoption curve is in the mid to later phases, so the early capital required to migrate to IP, a lot of it has been spent previously, and we’re talking about migrating additional applications, consolidating around IP applications.

Then even further, there are some very specific small applications where you can see. I’ll just use a tiny one where fuel prices temporarily had gone very high, which dives a lot of requirements for remote access, utilization of audio and video conferencing and we can point with those examples right down to parts of our business that are continuing to grow and then we back stopped that with here’s what we see.

Again, as Gary said, 70% plus of our business comes from existing customers. Customer satisfaction surveys say our customers are still very pleased. Erosion levels are staying at the same level or better than they have been before. Q3 orders were at a record level. October orders staying at the same level we’ve seen periodically throughout the year. Sales cycles and funnels not showing any change yet, we look at them weekly and I would tell you that one of the things that is very important is that companies don’t let this become a self-fulfilling issue. People long enough believe things are going to slowdown, they slow down. We are dealing with the data, we are reporting it as we see it, we don’t see it yet.

Lastly I point out to you, remember we are a recurring services business. The average contract length is about three years, longer in the UK because of the government business, two or three years in North America. So when we talk about the forward-looking revenue, it’s our base, it’s our erosion and that it is orders that we have sold previously. So we’ve got a pretty good outlook moving forward. Sorry for the length of the answer.

Operator

Your next question comes from Murray Arenson - Janco Partners.

Murray Arenson - Janco Partners

I wonder if you could talk a little bit about capital expenditures and the extent to which you’re managing those or those are an indicator of growth and what you’re looking at over the next few quarters?

John Kritzmacher

In terms of the fundamentals, the capital expenditures for the year we had previously guided that our capital expenditures on a cash basis would be at or slightly below what we had spent in 2007 and that was $269 million. So you can expect that going into the remainder of this year, in the fourth quarter our capital expenditures will be roughly flat.

Murray Arenson - Janco Partners

Are you willing to reach out beyond that and talk; is that an ongoing trend we should be looking for or is that a number that can move discernibly into next year?

Gary Breauninger

Maybe I will give you some of the qualitative and then we can answer the quantitative. I think to the perspective of how much of our CapEx is success based versus maintenance or infrastructure, as we’ve said many a times, 80% to 85% of our CapEx is success-based, i.e. based on that order value that we see coming through the pipeline.

If you think about order value, they are three to four to five months prior to billed revenue. Working our CapEx real-time processing, the network is so modular. We never really exposed more than that same exact timeframe, so we are never too far ahead of our skis if you will or over our skis if you will, on our CapEx deployment versus what we see is the demand, so we can throttle the two together.

To your point, I think that’s a pretty good proxy of about what we’ve been growing over the last year, year and a half, on an organic basis. It has been in the high teens, the 20% range. So that CapEx is staying out in front of that revenue by again three to four months and keeping us moving on the success-based front. I don’t know if that answered your question Murray.

Murray Arenson - Janco Partners

That was great, thank you. Are you guys seeing any discernible trend in terms of IRU business at this point?

Gary Breauninger

Discernible in the fact that the underlying demand is still strong. Whether it comes in the form of the customer requiring a lease arrangement or a upfront cash to pay for an advance, we still see a lot of opportunities to pay for it in an IRU vehicle, but the underlying demand is what we have been watching, that’s been very strong, particularly as you look at the Latin American region, and even in some of the old routes if you will, going across the Atlantic, across terrestrial North America.

John Legere

IRU business has been strong. It’s not the core of the business that we run. It’s certainly been a nice addition to cash where the assets being utilized were excess capacity, but I think the real focus looking forward in the business I think is best seen by the order volume, the enterprise business focus that we got, along with the carrier recurring data business.

Murray Arenson - Janco Partners

The last question; I missed the numbers regarding the UK bonds and the impact on cash flows next quarter.

John Kritzmacher

The payment due on the UK bonds is GBP15 million due in the fourth quarter.

Operator

Your final question comes from Donna Jaegers - D.A. Davidson.

Donna Jaegers - D.A. Davidson

There are not many questions left to ask, but good quarter guys. Just a few quick ones; on the SG&As, you mentioned I think $8 million savings because of lower stock-based compensation or that added to that was part of the $8 million in savings. We’ve seen you guys before do this and then there’s retention bonuses. So I’m just trying to get is this $125 million in SG&A really a good sustainable level to sort of project off of going forward?

John Kritzmacher

As I said earlier, I do think it’s a solid level to project off of and we’re not in the space of seeking retention bonuses or anything of the like. We’re performing well in accordance with our expectations for the year.

John Legere

I think Don, we’ve been open, as our results obviously are, each time as to what the accrual in our cost structure is associated with the bonus. Currently our cost structure includes an anticipated performance that would drive a cost structure for a payout of a bonus consistent with what we have talked in the year. So certainly it is in the cost structure so far for this year and as John said, there is no reason to anticipate any deviation from that.

Donna Jaegers - D.A. Davidson

And just one other quick question; on the FCC and the penalty that they had threatened you guys with earlier in the year, what is the status on that?

John Legere

We are continuing to work on the matter; there’s no resolution of it yet, but things are progressing well.

Donna Jaegers - D.A. Davidson

Okay and then on IRUs, I know John you said that obviously the market is strong for them and you guys are using excess capacity. $42 million was higher than it has been tracking for the year. Any sort of guidance for fourth quarter? Will that fall back somewhat, or how much visibility do you have in the IRU pipeline?

John Legere

Obviously we’ve got tremendous visibility to the projects and ideas that both enterprise customers and carriers would like to do throughout the year. We don’t have fleet visibility as to how many of them we would choose to do at this point in time, but it is a very strong pipeline of business, as is the carrier environment in general. I guess at this point the only guidance that I have on Q4 is that which you can anticipate from understanding our yearly guidance and our fortitude in making it for the year.

Donna Jaegers - D.A. Davidson

Thanks a lot.

John Legere

Thank you everybody for joining and we’ll talk to you again as we report full year results in early 2009.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.

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