Global Crossing Ltd., Q1 2009 Earnings Call Transcript.

Global Crossing Ltd., (GLBC)

Q1 2009 Earnings Call

May 5, 2009 9:00 am ET

Executives

Suzanne Lipton - VP, IR

John Legere - CEO

John Kritzmacher - EVP and CFO

Dave Carey - EVP and CMO

Hector Alonso - MD, Latin America

Gary Breauninger - EVP and CAO

Analysts

Michael Rollins - Citigroup Global Markets

Romeo Reyes - Jefferies & Company

Jason Armstrong - Goldman Sachs

Donna Jaegers – D.A. Davidson

Presentation

Operator

Ladies and gentlemen thank you for standing by, and welcome to the Global Crossing's First Quarter 2009 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Tuesday May 5, 2009.

I would like now to turn the conference over to Ms. Suzanne Lipton, Vice President of Investor Relations of Global Crossing. Please go ahead madam.

Suzanne Lipton

Thanks Tommy and good morning everyone. Thanks for joining us today for our first quarter 2009 earnings call. John Legere our Chief Executive Officer and John Kritzmacher our Chief Financial Officer are here with us today.

They will read their comments after which we will open the call for questions. Presentation slides can be used to help follow our prepared remarks today. They are available via webcast which you can access through our Investor Relations site www.globalcrossing.com, access the investor site follow the link to the webcast.

Now before we 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 material differences are contained in our reports filed and furnished to the SEC including our annual report 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 a summary 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 release posted at www.globalcrossing.com, which includes explanations of and reconciliations with the closest GAAP financial measure on our non-GAAP metrics, such as operating income before depreciation and amortization or OIBDA and free cash flow.

I would now like to turn the call over to John Legere.

John Legere

Okay, good morning. I will focus my remarks this morning on our results for the quarter and then I will share some observations on the demand environment and the outlook ahead. So let's get started.

During the first quarter, our company generated $609 million of revenue a year-over-year improvement of 6% in constant currency terms, including $510 million from our strategic investment growth services.

In constant currency terms, we also achieved the following in the first quarter on a year-over-year basis. We increased our invest and grow revenues in GC Impsat and rest of the world by 16% and 15% respectively.

We mitigated the impact of anticipated attrition of catalog on GCUK invest and grow revenues, resulting in a slight decline while demonstrating strong sales momentum and effectively backfilling lost revenue from what was a top ten account just a quarter ago.

In aggregate, we delivered 10% improvement in invest and grow revenue in constant currency terms and importantly we are on track to achieve the targets we laid out for you for the year.

Sequentially, our revenue requests the impact from a few particular factors in Q1 including the Camelot attrition and a favorable customer settlement that took place in Q4. If you look at sequential revenue movement, new order volume from prior periods that are now building were effectively offset by factors including attrition and an expected decrease in wholesale voice as we continue to optimize that business to margin performance.

Meanwhile, on a constant currency basis, we generated operating income before D&A or OIBDA of $75 million in the first quarter, an improvement of more than 90% from one year ago.

Free cash flow behaved as we anticipated in the quarter. The underlying cash from operations in the business continued to perform well, but was offset by working capital as some suppliers increased their focus on cash. We continue to expect our underlying operational momentum to yield substantial improvements in our operating results across the year, consistent with our annual guidance we provided in February.

Next, as mentioned in our previous calls, we continue to monitor leading indicators for our business very closely. There have been some concerns that some customers would be more reluctant to spend capital in a recessionary environment.

Our first quarter leading indicators indicate that demand for our services is intact and we are seeing no discernible changes from the trends we have seen in the past. In fact, we are seeing encouraging signs of relative stability that suggests enterprises continue to have requirements for IP services. For example, following a noticeable down shift in fourth quarter order values particularly as they relate to North America, we have seen new orders increase in each subsequent months, December through March with 1Q monthly orders reaching $3.8 million on average.

This lift in orders further underscores that rather than a discernible change in underlying demand, the lower orders we reported in Q4 mere is the pause some businesses were taking to adjust the economic landscape around it.

Take another key indicator we measure, attrition, which includes re-pricing at the base. Excluding Camelot, our Q1 average remained generally consistent with our prior average of approximately 1.5% per month. And finally, our sales teams have continued to focus on refilling their funnels with new opportunities for advanced IP solutions that will fuel order generation for the remainder of the year.

The take away from these three indicators is that underlying momentum of our business from a top line perspective is positive. In setting aside unforeseen potential foreign currency impact we expect our invest and grow revenue to increase sequentially in the second quarter.

I will turn quickly now to a few types of notable first quarter wins. First, in our enterprise channel. In the first quarter, our North American enterprise team was selected as a primary provider in the 36 month agreement by a large multinational professional services firm to supply their global IP based virtual private network in 370 locations domestically and internationally.

This was awarded to Global Crossings after we outperformed the incumbent during a trial period for our services and as a result of our network reach and the competitive nature of our global solutions.

Also this contract monthly recurring revenue was double in size as the customer fully implements the network. In the UK, we signed a 36-month agreement with a large contact center management CRM solution provider, to address their objective of network optimization to be achieved through our secure IP VPN, high speed Ethersphere and co-location services.

We are connecting all of their offshore call center sites through a solution designed to their current requirements. This contract too is scalable as they grow their business, resulting in control and predictability of their costs and resulting in add-on services revenue for Global Crossing.

This customer counts the approach of our refreshing, paying my team with proactive, flexible, took the time to understand their specific needs and offered a range of options.

In addition, this month, leading European technology services company, Fujitsu, has recognized Global Crossing as a Fujitsu gold services provider as part of its services supplier management program.

Recognitions such as this demonstrates our increasing strength within the industry to partner to deliver the optimized integrated solutions required by the world’s most sophisticated enterprise.

And finally, in our carrier channel, the customer wars the cable and multi system operator or MSO segment, who previously selected Global Crossing to address their needs for high quality high speed IP services with strong latency and performance globally, has now signed on in Q1 for additional services.

Their add-on business reflects both an up tick in the IP traffic underlining their growth and their satisfaction with the outstanding network performance we deliver. I give you these examples and there are many more including in Latin America. They are like this because they underscore a few key points about the demand environment as well as our company’s differentiation.

First, they demonstrate that in 2009, our customers continue to be focus on using our services to offer savings and efficiencies to their organizations which is sure to pay back. Solutions that help them achieve these objectives are our core competencies. Our enterprise customers and the carriers who buy from us continue to capitalize on our global IP-based network solutions to lower their telecommunication cost and increase their efficiency performance and reach of their network.

Our customers are also relying on managed wide area network and outsourced IP solutions to help reduce their costs with the same or better service quality than they previously delivered in house. And our customers had said they are increasing their reliance on our collaboration services such as video conferencing to offset and lower travel cost.

Next, most recently industry analysts have revised their outlooks on worldwide telecom services to just relatively flat revenue growth for 2009. However, growth rates in data services in particular, services such as data center, IPVPN, Ethernet, and managed services are likely to be among the strongest growing products.

These core services are the sweet spot of what we offer. When you couple that with being able to service customers with these products in the fastest growing region such as Latin America, it creates significant growth opportunities for Global Crossing.

In 5 to 10 years, industry analysts IDC expects managed services in the US market will be 30% of total spend on network services as the US catches up to the more mature managed service markets in Europe, Latin America and Asia-Pacific.

In line with this trend, we are expanding our managed services portfolio with the launch of a new Global Managed Security offer in North America. We also announced an offer early in the first quarter to provide global Ethernet access to our IP-based services, affording our customers lower cost of access and increased flexibility.

We are also enhancing our self-service portal. This will allow our customers increased insight into their services with on-demand capabilities and make logical changes for increased bandwidth needs. Also their routing prioritization, see networks statistics and monitor their own network. This will greatly enhance our customer's control of their network and our customers.

Our company’s recent entry into the CDN market through resale of partnership also creates a compelling value proposition for customers seeking to layer content services into our suite of IP service. And lastly we have refined our end-office building for wholesale voice as a way of improving margin.

These are just some of the important enhancements we have made and initiatives we have undertaken which further strengthen our robust solutions portfolio and we are closely tracking to the evolution of customer requirements that will drive demand ahead.

Now our ability to grow our revenues forward is also based on the differentiation we have been able to create. We do this through a network with unique global reach, a product that delivers superior performance and the premier interaction our customers have with us through the lifecycle relationship.

All indicators continue to confirm for us, as this is a successful approach in Q1. 96% of customer surveys reported being satisfied with Global Crossing, with 65% saying they are very satisfied. This is better than our competitors very satisfied customer satisfaction scores of 55%. And our scores suggest we have a competitive advantage across five key customer satisfaction survey methods including overall satisfaction, accounts supporting, customer service center, billing support and overall costs.

Despite the current environment, our business model is intact and our company is performing. Our ability to drive improvements in our invest and grow revenues this year is based on demand trends that I’ve commented on today and the differentiated value proposition we offer to our customers.

As a provider with relatively low penetration of the market relative to our peers, our company remains well-positioned to gain market share. We continue to closely manage to the full performance goals we set out on the last call and these elements provide a solid platform for the road ahead.

John Kritzmacher will now give you much more specific detail on our financial results for the quarter. John?

John Kritzmacher

Thank you John, and hello everyone. Before we begin I would like to take note of two relatively minor cost reclassifications related to GC Impsat. These reclassifications had no impact on our reported net loss and are reflected in all periods presented in our report today.

Further information on these reclassifications can be found in footnote number 2 to the consolidated statement of operations included in our first quarter earnings release. Similar to our report on year-end 2008 results, my comments today will include considerable detail on foreign exchange impacts to our results. The intent here is to provide you with sufficient information to understand the underlying momentum of our business. And with that introduction let me now turn to the results.

The company generated consolidated revenue of $609 million in the first quarter, a sequential decrease of $35 million or 5% and a year-over-year decrease of $23 million or 4%.

Movement in foreign exchange rates unfavorably impacted revenue in the quarter by $20 million sequentially and $63 million year-over-year. On a constant currency basis, revenue in the quarter decreased by $15 million or 2% sequentially and increased by $40 million or 6% year-over-year.

Outside of foreign exchange impact, the sequential decline in revenue was primarily due to a long-awaited attrition of the Camelot contract in the first quarter and one time customer settlement recorded in the prior period with sequential revenue impacts of $8 million and $3 million respectively.

Revenue from new orders implemented in the quarter was effectively offset by assorted factors including attrition and an expected decrease in wholesale voice revenues as we continue to optimize that business for margin performance.

Our year-over-year revenue growth of 6% on a constant currency basis is consistent with our annual guidance for mid-to-high single digit revenue growth in constant currency terms. Setting aside potential foreign currency impacts in the weeks ahead, we expect to achieve a sequential increase in invest and grow revenue in the second quarter.

Revenues for the GCUK, GC Impsat, and Rest-of-World segments were $110 million, $116 million and $387 million respectively. As shown in the presentation, foreign exchange continued to impact our reported segment revenues. GCUK reported a sequential revenue decline of $24 million including an adverse foreign exchange impact of $18 million.

GC Impsat reported a sequential revenue decline of $8 million including an adverse foreign exchange impact of $1 million and Rest-of-World reported sequential revenue decline of $7 million including an adverse foreign exchange impact of $1 million and lower inter segment sales of $4 million.

Year-over-year in constant currency terms, invest and grow revenues in GC Impsat and Rest-of-World increased by 16% and 15% respectively, but declined slightly in GCUK.

Given the impact of Camelot attrition, our results in GCUK reflect our strong sales momentum over the past year, having now effectively back build most of the revenue lost from what was once a top GCUK account.

In the first quarter, revenue from wholesale voice services was $98 million, representing a decline of 2% sequentially and a decline of 13% year-over-year. Consistent with our strategy of optimizing this business for margin performance, we have implemented pricing changes that will place further pressure on our wholesale voice revenue, which we now expect to decline by 10% to 15% as compared to the prior year.

Looking at the first quarter, cost of revenue was $430 million or a sequential decrease of $2 million and year-over-year decrease of $27 million. The sequential decrease in cost of revenue was primarily due to a favorable foreign exchange impact of $13 million and a reduction in excess cost on lower revenues. These cost reductions were largely offset by a $10 million increase in incentive compensation accruals following a net reversal of incentive compensation accruals in the fourth quarter of 2008 and to a lesser degree, severance charges or planned workforce reductions.

Seasonal increases and benefits were offset by savings attributable to the unpaid leave and 401-K measures implemented in the quarter. Looking at the cost of revenue on a year-over-year basis, the variance was primarily due to a favorable foreign exchange impact of $38 million and lower incentive compensation accruals of $6 million as compared to the first quarter of last year. These favorable cost impacts were partially offset by higher cost of access equipments and professional services and higher payroll costs, all associated with the underlying revenue growth.

As we move ahead, we will no longer be referring to our traditional adjusted gross margin measures, in its place we will now make reference to gross margins which is shown on our statement of operations and follows the GAAP definition of revenue minus total cost of revenue.

As a result of movements described previously, gross margin in the quarter was $179 million, a $33 million decline sequentially. The sequential decline was primarily due to foreign exchange impact, the aforementioned increase in accrued incentive compensation and a decrease in revenue.

Year-over-year gross, margin improved by $4 million including a $25 million unfavorable foreign exchange impact. As a percentage of revenue gross margin was 29.4% for the first quarter as compared to 32.9% in the prior quarter. Year-over-year, gross margin rates improved by 1.7 points.

For the first quarter we reported a $104 million in SG&A expense, a sequential decrease of $6 million and a year-over-year decrease of $26 million. The sequential variance was primarily due to a favorable foreign exchange impact of $4 million and savings attributable to the unpaid leave and 401-K measures implemented in the quarter as well as a decrease in professional fees.

These expense reductions were somewhat offset by higher incentive compensation accruals of $6 million. The year-over-year decrease in SG&A was primarily due to a favorable foreign exchange impact of $13 million, lower incentive compensation accruals of $4 million, a decrease in professional fees and savings associated with the unpaid leave and 401-K measures previously mentioned.

Let me pause for a moment to clarify certain points with respect to the 2009, annual incentive program at Global Crossing.

First, I would note that our 2009 annual incentive is expected to be paid in cash and to the extent the annual incentive is earned, it is expected to be paid in March 2010. That said the Global Crossing Board has reserved full discretion on the amount, form and timing of this incentive payment.

Second, I would note that our internal targets for achieving a 100% bonus funding are aggressive relative to the external guidance set by the company. Our accruals for the incentive compensation in the first quarter represent partial achievement of our annual bonus targets.

In the quarter, we accrued a total of $10 million for incentive compensation which consisted of $5 million of cash accruals for the 2009 annual bonus program and $5 million of stock-based accruals primarily for prior long term incentive stock grants.

In April, the Board approved a long term incentive stock grant for 2009. Looking ahead, we expect our quarterly incentive compensation accruals for the remainder of 2009 will be similar to those recorded in the first quarter.

For the first quarter, OI before D&A was $75 million, sequentially OI before D&A decreased by $27 million including an unfavorable foreign exchange impact of $3 million and an increase in accrued incentive compensation of $16 million.

Year-over-year OI before D&A increased by $30 million including an unfavorable foreign exchange impact of $12 million and a decrease in accrued incentive compensation of $10 million.

On a constant currency basis, OI before D&A improved year-over-year by 93%. On a segment basis, GCUK's OI before D&A was $23 million, a decline of $2 million sequentially including $5 million unfavorable foreign exchange impact. Beyond the unfavorable foreign exchange impact, the sequential increase was primarily driven by lower access cost and a decrease in allocated corporate overhead cost.

These reductions were partially offset by lower revenues primarily due to Camelot attrition and increased equipment and professional services cost. On a year-over-year basis, GCUK's OI before D&A decreased by $12 million primarily due to an unfavorable foreign exchange impact of $12 million.

GC Impsat's OI before D&A was $39 million, a decline of $1 million sequentially. The sequential decline was driven by lower revenues and higher incentive compensation cost, somewhat offset by a decrease in allocated corporate overhead cost.

On a year-over-year basis, GC Impsat's OI before D&A increased by $12 million including a $5 million unfavorable foreign exchange impact. The year-over-year improvement was primarily driven by higher revenue, coupled with lower professional fees and incentive compensation costs.

And finally, Rest-of-World's OI before D&A was $13 million, a decline of $24 million sequentially, including a $2 million favorable foreign exchange impact. Beyond the favorable foreign exchange impact, sequential decline was primarily driven by an increase in incentive compensation accruals as well as an increase in allocated corporate overhead costs.

On a year-over-year basis, Rest-of-World's OI before D&A increased by $30 million, including a $5 million favorable foreign exchange impact. The year-over-year operational improvement was primarily driven by higher revenues and to a much lesser degree, lower incentive compensation accruals.

In line with our expectations, free cash flow was a negative $32 million in the first quarter compared to positive free cash flow of $30 million in the fourth quarter and a negative free cash flow of $19 million in the first quarter of 2008.

We generated $6 million of cash flow from operating activities after interest paid of $23 million. In the current economic environment, we anticipated and realized considerable pressure from suppliers that shortened our payment intervals. Over the period, a net reduction in our accounts payable had an unfavorable cash impact of $50 million.

Meanwhile, our own performance in collections continued to be strong with DSOs not materially changing from last quarter. Pressure on our working capital was somewhat offset by healthy demand for IRU and prepaid services in the quarter. Cash receipts for IRU and prepaid services totaled $32 million in the quarter. We used $38 million for purchases of property and equipment for the first quarter. New capital leases in the first quarter totaled $5 million.

On our last call, I indicated that we expect to secure approximately $50 million in capital leases and vendor financing during 2009. To-date we have secured financing commitments from various vendors and other lessors for approximately half of our annual targets.

Looking ahead, on our path to free cash flow for the year certain uncertain periods may have negative free cash flows. Nevertheless, we continue to expect to generate positive free cash flow of $50 million to $100 million for the full year.

We closed out the first quarter with a total cash balance of $322 million including $60 million of restricted cash. This compares to an annual cash balance of $378 million in the fourth quarter of last year including $18 million of restricted cash. Our unrestricted cash decreased by $54 million in the quarter including an unfavorable foreign exchange impact of $2 million.

Before turning to your questions, let’s take a brief moment for an update on the company’s capital structure. As of March 31, we had 58 million common shares outstanding.

In addition to these common shares, our fully diluted share count includes 18 million preferred shares. The distribution of common shares to employees under the 2008 annual bonus fund were completed on April 8 with the issuance of 2 million net shares to employees on that date. And finally, potentially diluted shares include 6 million shares underlying the 5% converts and 2 million of outstanding awards under our stock incentive plans excluding performance-based stock awards and the affiliate bonus shares I just mentioned.

At the end of the quarter our debt level was $1.28 billion including major maturities totaling $1.12 billion and capital leases and other debts of $167 million. During the quarter, we entered into $5 million of new capital leases, movements in the pounds to dollar exchange rates favorably impacted the translation of our external pound denominated debt by $3 million during the quarter. Currently, we have no near term major maturities. Our next maturities is $144 million of convertible debt due in 2011. Please note that all periods presented today have been adjusted to reflect the retrospective application of APB 14-1.

The standard requires us to record a discount on a 5% convertible notes and non-cash increase to our quarterly interest expense of $2 million for the amortization of this discounts in the current and prior periods. The unamortized discount at March 31, 2009 is $20 million.

In summary, we remain confident about the outlook ahead as demand for IP based services continues to enable growth. Order trends in the first quarter showed improvement and attrition excluding Camelot remains relatively stable.

Financial results in the first quarter were inline with our roadmap for annual guidance. In constant currency terms, revenue and OI before D&A grew by 6% and 93% year-over-year. And while our period may have negative free cash flowa, we continue to expect positive free cash flow generation for 2009.

This completes my prepared comments and I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Michael Rollins of Citi Investment Research. Please go ahead with your questions.

Michael Rollins - Citigroup Global Markets

Hi, good morning. Just a few questions if I could. First if you could talk a little bit more about the revenue profile in Latin America and maybe just some of the sequential trends that impacted the business there beyond the FX, with a little bit more granularity and how we should think about that going forward?

And then the second question is as you think about your annual guidance and you think about the FX impact then incrementally hitting the first quarter, how should we think about where you might fall in that guidance range? And if you could talk a little bit more about your conviction in where you see the ramp in revenue over the course of the year that would be great? Thanks.

John Legere

John, why don’t you talk a little bit about FX and how we saw that and then I will queue up few of the guys to talk about Latin America, both from the carrier perspective as well as enterprise.

John Kritzmacher

Sure. So with respect to the movements we have seen in foreign exchange, while the foreign exchange movement subsequent to the fourth quarter had a significant impact on our sequential results, at this current point, having completed now the first quarter and looking into the second quarter the FX rates have been relatively speaking stable and relatively close to the rates that we used as a basis for our guidance.

So, for example, as of yesterday, the pound was at 1.5. And in our guidance we said that the assumed rate was 1.44 and there were similar trends across the euro and the Brazilian Real, the three currencies that have the most significant impact on our results.

So on a go-forward basis, so far in this quarter, relatively little movement in, relatively little impact therefore on our reported earnings, and therefore again back to your question around how does the movement in foreign exchange rates at this stage affect our view of guidance for the year. Again, I would say, relatively little movement and so at this point, subsequently, have a material impact on our guidance for the year.

John Legere

Let me ask Dave Carey, Chief Marketing Officer to start the conversation on the revenue profile and then maybe involve Hector Alonso and or Omar Altaji.

Dave Carey

Good morning, Mike thanks for the question. First of all, let me just touch on the demand trends that we are seeing and address it in two broad market segments basically the Enterprise and the Carrier company. On the enterprise side, from a demand point of view, let me just refresh that we are focused on the upper end or the middle market of the Enterprise segment and lower end of the top, and that’s a pretty important relative to the risk and exposure to the mean market which you are seeing with lots of deal economic factors and certainly the purchasing power of the large multi-nationals that will allow us the margin incumbent services of the primary end carrier.

So fundamentally what we are seeing there is that on the Enterprise side, the segment that we are focused on is still in the migration path -- movements in IP networks.

About 35% to 40% of those companies have already began their migration so there is plenty of market potential in the range of 50% or so in the market that is yet to adopt. IP VPN segment network and that’s true pretty much around the world relative to the segments we are addressing. So the demand and attitude to the segment remains very strong with what we are seeing relative to previous quarters.

Clearly on the carrier side of the Web 2.0 company, proliferation of content described in IP demand IP transit various subsequent products like clear channel and even [hardware] in some cases be able to support that proliferation of demand.

We have seen some sensitivity to pricing in the segment but overall that demand continued quite strongly and that’s true in every sector of the world.

John Legere

Yeah Hector do you want to comment briefly on the demand turns you are seeing in Latin America?

Hector Alonso

As Dave was describing, it is pretty much what we have seen here is that demand as of today as a result of the first quarter that’s what we saw in the first quarter and what we are seeing today. It is not different from what we saw over the last, I would say the quarter over the last couple of years.

Of course there is a dangling effect of this crisis generally factored in the customers on perhaps you may see that lately some of the decision have taken a little longer than in the past.

But overall when you see the funnel, when we see the way we are just replenishing every month the funnel. We will see the same development that we have been seeing in the past in the past year of course. When you look at the exchange rate impacts as you can imagine in Brazil more than 50% of the revenues and the impact on the FX when you see July '08 Brazil Real against dollar at 1.6, and now 2.18.

So, there is lot impact on that just on the sequential growth you can see the difference year-over-year, but other than that from fundamental business there is no changes that we have seen and we serve in many sectors, we serve in financial, we serve in oil industries, we are serving retail, we serve in all different sectors. So we do not see that across the industry.

John Legere

And Michael, just had a couple of summary comments and I know you as well as others on the call are mostly kind of looking for how do we bridge to the fact that we are maintaining our annual guidance. I think there are a few pieces I tried to highlight in my comments and pretty clearly in the first quarter on a year-over-year basis Rest-of-World and Latin America was growing very strong in the 15% to 16% range.

The Camelot attrition is now factored in and that was anticipated, had some impact on the sequential movement of revenue. Importantly, the orders were quite strong and I think one of the uncertainties coming into Q1 was that, that pause that we noted in Q4 and the uncertainty around order volumes, it’s clear that the orders in Q1 were in the range of what our guidance would require and were up quite strongly from Q4 and the attrition, there was another question mark, I know lot in the industry had, attrition which includes negotiated write downs on existing contracts.

There was a question out there to whether that would cause a spike up in the attrition and outside of Camelot that has not, was the major demand factors along with the sentence that I put in which is as these orders are flowed through in the first quarter, another question remains would sales teams be able to regenerate the funnels of new opportunities and they have and those three demand factors are very important.

From a cash stand point it's important to note although we may have been out of sync with a number of you on how the cash performance of the year would unfold. The cash performance in Q1 would not out of sync with what we anticipated. And so I think we had a bit of a synchronization issue that hopefully will be intact with now and there was a lot of FX noise in our results, clearly as we outline them. It is important to note that now into May, FX as John outlined, if we can call it neutral, it's temporarily slightly positive, but its neutral to positive. So we will keep our eye on that factor as well.

So those are the major barriers over that I would ask you to pull-out when you try to bridge what's happened, and if you listen today and then you listen to Hector it is what it sounds like. It's another year of IP demand from the types of customers that we anticipated continuing at the heightened level that we had seen in the past and that is an update.

Michael Rollins - Citigroup Global Markets

Thank you for the detail.

Operator

Thank you very much. The next question comes from the line of Romeo Reyes of Jefferies & Company. Please go ahead with your question.

Romeo Reyes - Jefferies & Company

Hi I just need a little bit more color on that John. Can you talk a little bit about installation intervals, how those are trending and whether or not you have seen any meaningful breakage from the order to the installation? And then just a couple of quick number items here. What was the Q4 '08 settlement at GC Impsat? Then the CapEx by each of the three segments I'm sorry if I missed that. And then John maybe a bigger picture question on [Camelot] asset. What do you think what happens to that asset?

John Legere

Okay as usual from some unforeseen location Romeo has only four questions this quarter. Why don’t Mat or John, you cover the CapEx and then Dave maybe you can start on the Q4 items that’s in the Latin America and I'm not sure the question on installation intervals, but we can certainly talk about that as an incoming positive to some of the certain words that’s going on in and I’ll make a limited comment on the question of --

John Kritzmacher

Romeo this is John, so first you asked about Q4 customer settlement, and specific to that settlement was a Q4 event related to the unwinding of one specific contract impacted results by $3 million. That's the same item that was referenced when we did our readout in the bondholder report on Impsat back a few week ago. With regard to CapEx by segment, our cash CapEx by segment was $36 in the Rest-of-World which includes purchase requirement of 24 along with $10 million of principal payments on leases. In UK, cash CapEx was 8 and in Impsat cash CapEx was 11.

Romeo Reyes - Jefferies & Company

Okay.

Dave Carey

Romeo, this is Dave. Let me step in on the installation question that you had. Generally speaking, we are actually seeing a little bit of shrinkage in the interval associated with installations and that's result of lot of the process reengineering work that we’ve handled way now for over a year. So, typically in the enterprise space if something short of 45 days now from the time of receipt of order to actually turn off in revenue utilization beginning.

So that is actually moving in a positive direction for us. On a related note, relative to sales cycle, after the pause that we saw in Q4 we’ve actually seen that begin to ramp up as is reflected in the order activity. Some decisions are cycling a little bit longer in a customer environment but we are beginning to see those orders come back into the desk, pretty much at the same flow rate that we saw in last year. So, overall while we are somewhat cautious about it, the overall signals that we are seeing are beginning to show positive strength in those areas.

Romeo Reyes - Jefferies & Company

The Latin America customer settlement in Q4?

John Legere

Okay. I will just reiterate the update that we have had a multiyear program called customer experience reengineering that has been going on and a lot of it has to do with the cycle times associated with recognizing from the time of getting an order to the bill. There is nothing in our results thus far meaningful but as we go forward, I would anticipate the impact of installation intervals to be clearly a neutral but a positive going forward. It would be a positive to our results because we have not factored those in.

Your last question was related to certain expense discussed in the media as it relates to an activity that may or may not be going on as it relates, because I really do not dare to comment on that Romeo.

Romeo Reyes - Jefferies & Company

What about breakage, can you touch upon and break, if I guess in the fourth quarter with the weakness, you probably would have seen spike would be my I guess maybe you can talk about that?

Gary Breauninger

Romeo, it's Gary. You are saying the breakage from the time the customer orders to billing?

Romeo Reyes - Jefferies & Company

Yes.

Gary Breauninger

Yeah, no we have seen no changes in the trend that we have experienced, Dave highlighted the interval. The intervals have been coming down pretty much with all the customer experience reengineering work that John mentioned. We have not seen a large amount of cancellations, in fact if you think about what we are offering from a strategic point of view, the projects we offer save the customer expenses. So they want to push those projects to reap those benefits and they are less likely to cancel once they have said yes from an order perspective.

Romeo Reyes - Jefferies & Company

Thank you.

Operator

Thank you very much. And our next question comes from the line of Jason Armstrong of Goldman Sachs. Please go ahead with your question.

Jason Armstrong - Goldman Sachs

Okay, thanks good morning. First with respect to the revenue guidance and sort of this bridge, can we talk through the pacing of the bridge to get into the range you sort of need $10 million in sequential improvements per quarter for the rest of the year, you said 2Q revs should be up at least in the sort of core invest and grow segment. Should we be thinking about level improvements through the year as it relates to sort of $10 million per quarter or is there sort of in your mind more of a back end loaded pick up here implied to get into the guidance range?

And maybe second question just on the margins up again this quarter sort of back out some of the one timers for 4Q. So strong results there, just if we look at where the forecasts are set for '09, you are implying that you sort of go from low 12 consolidated EBITDA margin right now to potentially exiting the year around 15% or so. Can you help us build the bridge from a cost structure perspective in terms of what contributes to that? Thanks.

Gary Breauninger

Hi Jason it’s Gary. From the savings perspective on the revenue, you have done the math at least what we saw in your notes, clearly back-end vis-à-vis from a perspective of the year. We have as you know from past experience of our revenue growth we are consistently grown -- have shown that over the past quarters in 2008. Also as you know our Q1 is little heavy from the seasonality perspective on the contract anniversary. So it’s a little bit of seasonal pattern there.

But from what we can tell from the strong order values we have seen in Q1, the startup of the services that we mentioned about the intervals, we are pretty confident in that path and that wide path to get to our guidance -- again lot of the services being turned up have a lot of layered approaches to them. You will see additional pick up even on top of the order value that we have talked about.

John Kritzmacher

And then Jason if I can pick up on the question with regards to our improvement in profitability over the course of the year, there is a number of dimensions that will play out over the course of the year in terms of driving the earnings improvement probably you should walk in through one at a time.

First with regard to access and our cost of access, as you know, we had a well established structure around driving positive access improvement each year. In 2008, we drove for $70 million in cost of access improvements and we said that we would do that again in 2009.

We are off to a good start on that, we realized savings in cost of access of $7 million in the quarter which will contribute $28 million in margins for the year and continue to drive towards and above $7 million target what we had in 2008.

All with that we noted that we implemented unpaid leaves and suspended our 401-K match, we noted on the last call that would save us approximately $10 million for the year.

In the first quarter, we realized less than $3 million of those savings and still good bit of that in front of us we are working very hard on discretionary spending. In the aggregate, discretionary spending in the first quarter was down, I would say by about $2 million and we will continue to squeeze that over the course of the year. We have been working on a number of supplier negotiations including negotiations in place of professional fees.

We made good progress there those benefits will show later in the year. And then finally we have also begun to implement some selective work force reduction in areas where we believe we can drive productivity gains and at the same time not impact work for our customers and so some of that's rolling out, not yet realized in the furlow savings in the first quarter, but those savings will come in subsequent periods.

It’s something that looks like something on the order of restructuring, but rather surgical work around improving productivity in specific functions, which we believe will not be customer impacted.

John Legere

And Jason I don’t want you to leave that first answer thinking that the revenue growth from the year is anything at all like a hockey stick. It is a pretty good growth as you have outlined in Q2 and then a small uptick in Q3 with that same rate into Q4. So it's much closer to a flat [small] than it is a hockey stick and most of what we have to do to uptick to that growth happened in Q2 and is certainly well underway.

Jason Armstrong - Goldman Sachs

Okay, that’s great. Thanks guys.

Operator

Thank you very much. I will proceed to our next question from the line of Donna Jaegers from D.A. Davidson. Please go ahead with your question.

Donna Jaegers – D.A. Davidson

Great. Two quick questions, John, the granularity that you just gave us on growth, can you talk a little a bit more, you have already said that you expect to be free cash flow for the year but you have periods there where you won't be free cash flow, can you talk a little bit more about, is days payable stable now and do you expect to be free cash flow in Q2? And then another note, what was your mix of sales between existing customers and new? Thanks.

John Legere

John you want to start first.

John Kritzmacher

With regards to cash flow, as I noted in my comments, the pressure on payables in the quarter was anticipated given the focus among all the companies around managing carefully their cash. And so, no surprise for us there. We believe in the quarter with the reduction in payables, as I said of about $50 million in the quarter, we believe we have relieved the pressure around payables. So, we should see relative stability around that moving forward here.

In terms of comments just on the quarterly flow now, the free cash flow, we do expect to see significant improvements over the coming quarters sequentially. I would stop short of providing you with our cash flow forecast for the second quarter. But we clearly suggest we expect to see a significant step up as we see stability around payables in the coming quarters.

Gary Breauninger

And then, on where the revenue is coming from, no change, Donna, 70%, 75% existing customers with the rest from new customers. And I think that’s a great trend. You know that our existing customer volume continues to be very strong as well as the funnel of sizeable new customer opportunities which of course has a tremendous amount of add-on growth to it, so the same trend that we've seen which is another good positive.

Donna Jaegers – D.A. Davidson

Great thanks John

Operator

Thank you very much Mr. Legere there are no further questions at this time. I will now turn the call back to you.

John Legere

Okay well thank you. Despite a challenging environment we are quite pleased with the underlying momentum of the business. We expect this momentum to yield substantial improvements in our revenue in constant currency terms and in our annual earnings and free cash flow and we thank everyone for joining and we look forward speaking to you again next quarter. Thank you very much.

Operator

Thank you very much. Ladies and gentlemen that does conclude the conference call for today and thank you for your participation. And ask you disconnect your lines. Have a good day everyone.

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