Global Crossing Ltd. Q4 2008 Earnings Call Transcript

Global Crossing Ltd. (GLBC)

Q4 2008 Earnings Call

April 8, 2009 9:00 am ET

Executives

Suzanne Lipton - Vice President Investor Relations

John Kritzmacher – CFO

Anthony Christie - Managing Director of GCUK in Europe

Analysts

Romeo Reyes - Jefferies 

Donna Jaegers - D. A. Davidson

Carl Murdock-Smith – Cazenove

Presentation

Operator

(Operator Instructions) Welcome to the Global Crossing UK Fourth Quarter 2008 and Full Year Results Conference Call. I would like now to turn the conference over to Suzanne Lipton, Vice President Investor Relations.

Suzanne Lipton

Welcome everyone to GCUK’s Fourth Quarter and Full Year 2008 Earnings Conference Call. John Kritzmacher, CFO and Anthony Christie, Managing Director of GCUK in Europe, have some prepared remarks after which we will open the call for some questions. In addition to John and Anthony, we are joined by several other members of our team today.

Before we begin, I’d like to remind everyone that statements made during today’s conference call 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 material differences are contained in our reports filed with or furnished to the Securities and Exchange Commission including GCUK’s annual and quarterly reports on Forms 20-F and 6-K.

We are not obligated to publicly update or revise these forward looking statements to reflect future events or developments except as required by law. We refer you to our press release on our fourth quarter and full year 2008 earnings posted on our website at www.GlobalCrossing.com, which includes explanations of and reconciliations with the closest IFRS financial measure on our non-IFRS metrics, such as adjusted gross margin and adjusted IFRS EBITDA.

I would now like to turn the call over to Anthony Christie.

Anthony Christie

I’d like to do three things on our call today, first I’ll briefly address our performance, second I’ll give you an overview on how our sales channels performed this past year, and finally I’ll provide some key updates on the GCUK business including my observations of current demand trends. Let’s get started.

In 2008 we demonstrated solid momentum in building our revenue performance. Revenues from our top 20 GCUK enterprise customers during 2008 grew by 7% or £13 million from 2007 to nearly £200 million. We increased our carrier data services revenues by 34% to nearly £60 million.

Our 2008 top line performance has led to an increase in our total revenues of 9% or £26 million from 2007 reaching £323 million and we experienced healthy levels of border activity throughout 2008 across our sales channels as we continue to focus on developing business in the enterprise, government and carrier data channels.

Our enterprise segment in particular experienced an increase of approximately 70% in the number of new logos we’ve won compared to 2007; another sign suggesting our focus here is having an impact. In 2008 we continued to help enterprises, government agencies, and data carriers transform the technological capabilities of their operations and their cost structures as they adopted our advanced IP network and managed solutions.

For example, during the fourth quarter we signed a new UK based enterprise customer who will be utilizing our application performance management solutions over managed IP VPN across 25 of their locations. By way of their engagement with us they are consolidating disparate legacy network platforms onto one common IP based platform that allows for better monitoring and reporting, helping them to understand utilization on the network and make informed decisions about opportunities for further cost and performance optimization.

Here are a few quick examples of our successes just in the first few months of 2009 that illustrate how we’ve continued to develop incremental business over time with our customers and why they’ve chosen and stayed with Global Crossing as their provider. When one of our UK based multi-national enterprise customers began to work with my team in late 2007 they transitioned from the legacy protocol network they built with their incumbent provider to our managed IP VPN and applications performance monitoring for APM services, deploying our solution to approximately 30 locations globally.

Now the customers’ head of IT had initially considered increasing headcount within his team to monitor and proactively tune their networks. By installing our managed VPN with application monitoring and management across the network we are instead together helping him intelligently manage and control the network negating the need for additional headcount and therefore provided a significant cost savings.

Our ability to offer a standardized product set globally and superior customer experience including flexibility to meet our customer needs locally has set us apart from some of our bigger rivals. To further the point, just in the first quarter of this year, they have chosen us again and they began expanding their use of our APM tools, deploying more managed IP VPN in additional locations and how adding voice to their existing services portfolio.

Also during the first couple of months of 2009 a long standing carrier data customers in the UK purchased additional waves to support the growth of their converged voice and data broadband business. They shared with us that our ability to deliver on our service quality commitment including consistently delivering superior quality network support as they deployed their services across the country was a significant factor in selecting us as a partner in what was a highly competitive bidding process.

When we spoke last quarter I shared that while we are not immune to the impact of the global macro economic climate we had not yet seen any impact to our business. I’ll follow that up today by saying that despite some degree of delayed decision making GCUK is closing business, our funnel is strong, and demand trends have in our view remained favorable for us in the UK market since the last time we spoke.

We believe this continues to be the case for the same reason as before, largely that enterprise, government and carrier customers are turning to our solutions to increase capabilities and drive efficiencies within their own operations. We continue to see demand from enterprises including government customers in the form of managed services which lower their total cost of ownership and help our customers increase productivity.

I’m also pleased to report that customers continue to turn to GCUK because of our differentiated value proposition including our deep national network, our global solutions portfolio and as a third party tell us; due to overall value and the exceptional customer experience we deliver. This is particularly true for UK based upper midsized enterprises that value having a dedicated account team with deep IP solutions experience.

In the carrier space our UK data sales pipeline also is strong. The value of the deals we’re targeting in that channel are healthy and the team’s extremely active as they address the sales opportunities before them. As a result, our sales remained healthy despite some delayed decisions among our carrier customers as well.

Wholesale data demand on our network is being driven by, among other end user needs that of the mobile providers as their customers access the internet on the go at increasingly high speeds and fixed line internet service providers also are adopting our services to respond to demand for increased speed from their end users.

Additionally, our customers in this channel and their enterprise customers are seeking out cost savings and are more prepared to look at IP convergence before because it saves money, reducing the number of loops, for example, needed by shifting from a legacy standard based Synchronous Digital Hierarchy or SDH to IP while also improving their operations. It is this prevailing environment and our execution in it that has allowed us to deliver on our goal to replenish Camelot’s revenue which as of the end of the first quarter are substantially nill.

Although we anticipate a dip in our GCUK revenues ahead as a result, we also expect that new orders already signed during 2008 and those we signed in the early part of this year will mitigate that impact as they are installed and billed in the months and quarters ahead. We expect GCUK to return to quarterly year over year top line growth as we move through the back half of ’09.

In closing, the solid momentum we built has been driven by our highly focused approach to aggressively addressing our target market. Additionally, our momentum has been fueled by our seasoned sales force, our solid positioning within the competitive UK landscape, continued demand for our services, and as I stated earlier, the value and efficiency that our global solutions brings to our customers.

Further, to our 2008 results, we generated adjusted gross margin of £222 million or 69% of revenue, and adjusted IFRS EBITDA of £77 and our cash from operations after interest payments was £41 million. We continue to have some work ahead of us in closely managing our costs in parallel to our top line successes. We are focusing on doing so during 2009.

With that, let’s turn to John for more detail our fourth quarter performance.

John Kritzmacher

As a reminder, the results I’m about to discuss are prepared under IFRS in Pounds Sterling. These results were previously reported under US GAAP in US Dollars as part of the parent companies consolidated financial results report on February 16.

GCUK continues to perform in line with our expectations and we were again pleased with GCUK’s results in the fourth quarter of 2008. GCUK revenue was £82 million for the quarter, flat on a sequential basis and higher year over year by £6 million or 7% despite partial attrition of the Camelot contract. The year over year increase was attributable to continued growth of our enterprise and carrier channels, including the addition of a significant government sector contract in October 2007.

In the fourth quarter, revenue from Camelot decreased £1.2 million to £5.4 million. At the end of the fourth quarter actions to wind down the Camelot contract were essentially completed. In the first quarter 2009 we expect Camelot revenue to decline by substantially all of the £5.4 million recorded in the fourth quarter. The sales engine is delivering on our goal to replenish Camelot’s revenue. We expect new orders signed during 2008 and the early part of 2009 to mitigate the Camelot attrition impact and return GCUK to quarterly year over year revenue growth as we move through the later half of 2009.

GCUK’s cost of access expense was flat sequentially at £26 million and increase £3 million year over year. The year over year increase in access expense was driven by revenue growth inclusive of the large government contract I mentioned earlier. Adjusted gross margin was essentially flat sequentially at £56 million in the fourth quarter and increased by £2 million over the same quarter last year. The year over year variance can be attributed to the same revenue and cost drivers just mentioned.

On a percentage basis our adjusted gross margin was 68% of revenue in the fourth quarter, compared with adjusted gross margin of 68% in the third quarter and 70% in the fourth quarter of 2007. Cost of revenue excluding cost of access was £25 million a decrease of approximately £1 million from the third quarter and an increase of £3 million year over year. The year over year variance was primarily due to higher equipment and professional services costs associated with the increased revenue.

SG&A was £14 million an increase of £4 million from the third quarter and an increase of £6 million from the year ago period. The sequential and year over year increases were primarily attributable to an adjustment in the annual allocation of corporate overhead expenses. For the full year 2008, the annual allocation of corporate overhead expenses was roughly flat. The year over year SG&A variance also included the higher payroll costs and an increase in real estate costs arising from a property tax rebate realized in the year ago quarter.

GCUK generated adjusted IFRS EBITDA of £13 million in the fourth quarter a decrease of £8 million sequentially and a decrease of £9 million year over year. Sequentially and year over year, the declines reflect the aforementioned adjustment to the annual allocation of corporate overhead expenses as well as adverse foreign exchange impacts from translation losses on working capital. Additionally, the year over year decrease included higher payroll costs and an increase in equipment and professional services costs.

We generated a net loss of £25 million for the quarter including a foreign exchange translation loss of £28 million on the US Dollar denominated senior secured notes. We generated cash from operations of £25 million after interest payments of £16 million, capital expenditures of £5 million and principal payments on finance leases of £3 million. The business ended the fourth quarter with a net cash position of £36 million, an increase of £2 million versus the prior quarters cash balance.

Before we get to your questions let me take a brief moment to summarize our full year 2008 GCUK operating results. In 2008 GCUK generated revenue of £323 million representing an improvement of 9% year over year. In absolute terms we realized a 6% expansion of adjusted gross margin this year through improved sales and further optimization of our network costs. In relative terms, cost of access grew by £13 million as compared to revenue growth of £26 million in 2008. For the full year, our adjusted gross margin was 69% of revenue compared to 70% of revenue in the previous year.

GCUK’s adjusted IFRS EBITDA was £77 million in 2008 compared to £78 million in the previous year. In 2008 we generated cash from operations of £74 million after interest payments of £33 million, capital expenditures of £22 million and principal payments on finance leases of £10 million. The business ended 2008 with cash and cash equivalents of £36 million an increase of £12 million compared to the final net cash position in 2007.

We expect to announce later this month our annual offer to purchase a portion of the senior secured notes as required under the terms of the indentures. In accordance with the terms of the indentures the offering will be for an amount equal to 50% of our operating cash flow as defined by the indentures or approximately £7 million at a price equal to par plus accrued and unpaid interest to the purchase date.

In closing, I would note that GCUK continues to be a strong business and an essential element of Global Crossing. We are committed to strengthen and grow GCUK’s market position while maintaining a steady focus on profitability and cash generation.

Anthony and I will now be happy to take your questions. Operator please open the line for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Romeo Reyes - Jefferies 

Romeo Reyes - Jefferies 

I’m trying to normalize your EBITDA numbers. Looking at the real estate restructuring charges that you mentioned in our 10-K plus the higher corporate allocation and the FX impact on working capital, can you give me a sense of what those three different pieces were? Historically we’ve talked about the Camelot revenue being somewhat lower margin then the rest of the company, we’re talking about around the 50% or are we looking at around £2.7 million of sequential drop in EBITDA relative to Q4?

John Kritzmacher

First with regard to the variances around OpEx, a couple pieces, in the year ago period the rebate related to real estate was a little over £1 million. With respect to the annual adjustment on worldwide allocations that was an adjustment in the period of about £3 million and it’s an impact both relative to the third quarter and relative to the year over year period of about £3 million as well. Then in the case of the foreign exchange impact on working capital that was approximately £2 million.

Romeo Reyes - Jefferies 

Does the FX impact on working capital, where do we see that on the P&L? Is that below the line or above the line, it seems to me that it would be below the line.

John Kritzmacher

It shows up in the IFRS P&L format it shows above the line and the IFRS impact.

Romeo Reyes - Jefferies 

But in US GAAP it would be below the line correct?

John Kritzmacher

That is correct.

Romeo Reyes - Jefferies 

CapEx was down I guess quite a bit year on year for this segment, are we looking at a similar number for 2009?

John Kritzmacher

With respect to CapEx I would expect to see CapEx in 2009 to be down slightly to flat, approximately on that trend. I think I did not answer your question with regard to Camelot. As we’ve said in the past in terms of the roll of impact of Camelot going into Q1 you should think of that as having a margin rate that’s slightly below the average for the business overall, but a substantial margin I think we talked about that before.

Romeo Reyes - Jefferies 

Was there any IRU cash on the fourth quarter for GCUK?

John Kritzmacher

No material amount.

Operator

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

Donna Jaegers - D. A. Davidson

On carrier sales can you comment, Telephonic’s announcement that they’re going to use Vodafone’s network for their wireless operations as well. Does that impact your sales or since you guys were selling IRU’s to Vodafone does that increase the demand that they might have?

Anthony Christie

We’re working closely with both players as you can imagine. At the present time we view that as an opportunity given the imbedded base that we have both with Vodafone and O2 here, Telephonic being the parent company of O2. We presently look at that as an opportunity for the carrier sales team.

Donna Jaegers - D. A. Davidson

On carrier sales are you selling primarily waves or is that moving more to Ethernet now?

Anthony Christie

It’s a combination of both. We’re seeing above market growth rates in both areas. Again, as I mentioned in my comments, the demand drivers behind that are twofold. In the mobile space chunky files for folks that need it on demand and the ever increasing file size of landline users as well for wireline ISPs. Demand drivers from both of those segments and you’re right, both of those products as a result of that.

Donna Jaegers - D. A. Davidson

On Camelot, some of the costs of Camelot were in lease circuits to the different lottery outlets. How quickly can you turn back those lease lines to BT so that you can shed those costs?

Anthony Christie

They’re for the most part almost entirely off the network. We had a very specific back to back tariff with BT and the program management that we put in place for that business to attrite off of the network was almost mapping that one for one. Literally as we saw a disconnect coming in the lag time between that and order being issued was almost simultaneous and then the tariff that we were working with were approximately two week tariffs.

Operator

Your next question comes from Carl Murdock-Smith – Cazenove

Carl Murdock-Smith – Cazenove

I was just wondering whether an addition to the active actions that you’ve taken that you went through whether there’s been any visible change in market competition given BT Global Services current position. I was wondering whether you witnessed more rational bidding within the enterprise contract space by the largest player and whether you’re seeing the benefits of that currently or expect to.

Anthony Christie

We are watching with sympathy some of the challenges that BT Global Services are dealing with right now. I think it’s important to answer your question in the context of where we target our enterprise sales force and where we win. We really don’t compete with BT Global Services head on. They’re really in the high end of the market here and as you may have heard me reference before we really focus on that mid tier multi-national with some level of global needs that for the most part has been underserved in this market.

When I referenced the growth in new logos 2008 over 2007 it was in that mid tier multi-national that we had been successful. That being said, you’re right. Because of the level of consolidation that has started here and because of some of the restructuring that some of the bigger players are going through right now, while I’m not suggesting it’s benign, the pricing environment is rationale.

Operator

There are no further questions at this time. I’ll now turn the call back to you. Please continue your presentation or closing remarks.

John Kritzmacher

Thanks all for joining us today. In closing let me just again note that GCUK continues to be a strong business and an essential element of Global Crossing. We’re committed to strengthen and grow GCUK’s market position while maintaining a steady focus on profitability and cash generation. Thank you all for joining us today. We look forward to talking with you again at the end of the first quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!