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EarthLink (NASDAQ:ELNK)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Louis Alterman

Rolla P. Huff - Chairman, Chief Executive Officer and President

Bradley A. Ferguson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Michael Crawford - B. Riley Caris, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Barry M. Sine - Drexel Hamilton, LLC, Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Anthony Klarman - Deutsche Bank AG, Research Division

Kunal Madhukar - Jefferies & Company, Inc., Research Division

Barry McCarver - Stephens Inc., Research Division

Operator

Good morning. My name is Janica, and I will be your conference operator today. At this time, I would like to welcome everyone to EarthLink's First Quarter 2013 Earnings Call. [Operator Instructions] I will now turn the conference over to Mr. Louis Alterman, Senior Vice President of Finance for EarthLink. Please go ahead, sir.

Louis Alterman

Thanks, and welcome to our call. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website at earthlink.net. Following our comments, there will be an opportunity for questions.

Before we continue, I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements, rather than historical facts that are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995.

These risks include a variety of factors including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them, and a reconciliation to the most comparable GAAP measures, please refer to our earnings release and the Form 8-K that has been furnished to the SEC, both of which are available on our website at earthlink.net.

After Rolla's opening comments, Brad Ferguson, our Chief Financial Officer, will discuss the quarter's financial results. Now I'd like to hand things over to Rolla Huff, our Chairman and CEO.

Rolla P. Huff

Thanks, Louis, and good morning to everyone joining us on the call. Well, we're off to a terrific start so far in 2013. New customer bookings are up considerably and we're raising our revenue and adjusted EBITDA guidance. Before I get to the part of the call where we talk about the Q1 operating results and higher full year outlook, I'd like to take a couple of minutes upfront to address our recent refinancing effort and the goodwill impairment charge we booked in Q1.

As you recall, our bookings in the second half of 2012 were soft as we saw extended customer decision cycles despite a growing sales pipeline that we've talked to everybody about. This caused the 2013 entry point and resulting financial guidance for this year to be lower than many of us had hoped it would be. Shortly following the issuance of that guidance, we had, what I described as an unforced error in our attempt to opportunistically refinance some debt. We believe the financing was poorly executed by our bankers, which ultimately caused us to terminate the financing instead of completing a financing with unattractive terms.

Now I don't say this to deflect accountability for our role in the process. We're responsible for everything that happens in this company. But I do say it to point out that the termination of the refinancing was due to tactical reasons, not because fixed income markets have an issue funding our strategy, as evidenced by the fact that we have $300 million of unsecured notes trading at a 7.5% yield today.

The combination of this event, plus the impact that 2012 sales had on our 2013 guidance, caused our stock to trade down by 16% in the first quarter. The change in the stock price then triggered a formulaic accounting process, which caused us to record a noncash goodwill impairment. I want to stress we recorded the impairment because we followed GAAP rules related to the trading value of our equity relative to the book value of the assets and not due to any sort of change in our future prospects. Our sales team knocked it out apart during the first quarter. And if anything, our view on our prospect has only improved.

And I think that's a good segue, so now let's talk about our first quarter results. I'll start on Page 2 with new customer bookings, which are the lifeblood of our recurring subscription model like ours. Throughout last year, I shared with you that we were seeing our pipeline build, the prospects were interested and wanted to talk to us about our new product offerings but that we were seeing decision cycles extend and deal closings were happening slower than we had liked. I'm very excited to report that our team materially reversed that trend in Q1, the first quarter under Mike Toplisek's leadership. We booked $3.4 million of new gross monthly recurring revenue, which was our highest quarter since we had over double the sales reps in 2011, and it equates to $84 million of total contract value. Our MRR bookings were up by 14% and was a $2.9 million improvement from Q4 2012.

As you can see on the bottom half of the page, not only were our bookings considerably higher, but we also continue to favorably evolve a mix of products that we're selling which, I think, is critical. In the second quarter, nearly 2/3 of our bookings came from our growth products, which are IT Services, MPLS, Hosted Voice over IP and wholesale. These bookings don't eliminate the fact that we still have a portion of our base made up of legacy CLEC products, but they do validate the substantial demand that's out there for the growth products and services that we offer. The sales force is on board and customer prospects are now primarily viewing us as a provider of these new growth services.

Brad will describe in a few minutes that our 20-plus percent growth business is now at over $150 million run rate. Our team has looked at a lot of potential M&A transactions, and I can tell you that $150 million business that's growing at 20%-plus a year have substantial value.

Turning to Page 3, it's important to point out that we increased our total sales with 200 less people. As we described, we exited sales force headcount in 2 dozen small markets, but retained and invested in the most productive reps. Also, as we told you we would do, in the first quarter, we took some of the savings from our efficient sales force and -- for a more efficient sales force and invested it in demand creation initiatives. We launched search engine marketing campaigns, as well as digital advertising to increase brand awareness in the IT Services space.

Since the start of our Phase 1 awareness campaign in mid-March, we have delivered over 40 million impressions across some of the most visible and highly trafficked sites, including Forbes, CNBC, TechNewsWorld, Business Insider and IT Security. We sold $1.1 million in new annualized revenue from search and advertising campaigns in the first quarter and increased the number of qualified IT leads by 94%. The value of IT services opportunities and our inside sales pipeline has increased sixfold since November, with a total annualized value in our network and IT services pipeline for inside sales now approaching $10 million.

As a result of the higher bookings and lower headcount in the quarter, we averaged $3,100 in MRR bookings per retail rep per month. This is our highest productivity since we completed the Deltacom and One Comm acquisitions 2 years ago, and 46% better than our $2,100 productivity in the fourth quarter. Add in the wholesale productivity, and we were up 69% quarter-over-quarter. Clearly, the pipeline that we've been talking to you about over the last few quarters is now starting to pay off in a form of closed deals.

Turning to Page 4. While Q1 bookings results were terrific, I want to be clear that they were accomplished without the benefit of all the capabilities we're putting in place, and we believe we can drive the numbers higher over time. Those of us within the company who have been working on this can tell you that we're beginning to feel the effect of a positive virtuous cycle. And I'll spend a few minutes to describe the positive virtuous cycle that I'm referring to.

First, we put together products and services that are at the very beginning of secular growth, and we're investing in building a top tier nationwide cloud platform. These capabilities are in larger markets. In these markets, there's a richer density of customers who have multiple location business models and higher propensity to buy IT services. As of the end of April, we've rolled out 4 of our 5 next-generation data centers in Chicago, Dallas, Rochester and San Jose. These facilities are up and running, and our facility in Miami is in final system turn up and testing. It will be coming online in the next month or so.

Second, we've made great strides with our fiber network expansion project. To date, we've turned up routes from Memphis to Chicago, Ashburn to New York and express routes from Atlanta to Miami, Ashburn and Birmingham. We have a few projects remaining with completion dates expected in the second half of the year, but approximately 70% of the fiber expansion was complete at the end of Q1.

Third, we're actively hiring salespeople in markets around the data centers and in other Tier 1 markets like Los Angeles. We have brought on approximately 90 new sales reps so far this year that are focused on selling upmarket products like IT services, and we'll continue to round out the sales force over the coming months. Our cloud and fiber investments and the product capabilities we now offer are not only attractive to customers, but they're allowing us to attract incredibly talented sales and engineering people. The new sales talent we're hiring are accustomed to carrying much higher quotas and they come to us with quality business relationships with the type of customers we're now targeting. They come to our company because they see the opportunity and the capabilities we're building.

And even though all the capabilities are not even fully in place yet and the local sales forces have only been with the company for a short period of time, it's exciting to share with you that we've already booked over $4.5 million of annualized revenue. That's $4 million on our new fiber routes from 3 large wholesale customers, with the bulk of that revenue having just been installed at the end of April, and $0.5 million of annualized revenue on our new CloudStacks. This is all revenue that we would not otherwise have been able to compete for before making these kinds of investments.

All this is feeding on itself. The product capabilities, the better markets and the new talent we can attract, allowing us to transition not just the nature of the sales force, but also the very nature of our business motion. The booking success we had in the first quarter is largely prior to fully feeling the impact of this virtuous cycle that we're creating, and that gives us a lot of encouragement for the future.

Moving past demand creation and onto customer retention, as you can see on Page 5, churn on our business segment continues to be stable at 1.5%. It actually kicked down quarter-over-quarter by about 7 basis points, but appears flat on the chart when rounded to the nearest 0.10%. There's still room for improvement going forward as we provide our customers with a broader and more relevant mix of products. On the consumer side of our business, we posted a new historical churn low at 2.2%, and churn just continues to decrease.

As you can see on Page 6, this combination of higher sales and stable churn has led to improvements in our year-over-year revenue trajectory for business services and the total company. And while this page is designed to show year-over-year trends, you should know that on a normalized quarterly sequential basis, our revenue declines for business services are now just 75 basis points, while total company sequential declines are 150 basis points. Clearly, we're approaching the inflection point.

As you look at what appears to be a reasonably small year-over-year improvement in Q1 versus the prior-quarter's year-over-year improvement, I want to point out that we expect a larger improvement in the second quarter. I mentioned a couple of minutes ago that we installed a few large deals in April and we're also taking some pricing actions that tend to happen every 3 to 5 quarters. Both of these factors will spur further revenue improvement in Q2.

Looking past Q2, as I've indicated before, once we cross the inflection point, we'll likely have several quarters bouncing around between positive and negative sequential comparisons before we pull away into sustained growth. This business is, and will continue to be, lumpy in any given quarter. But when you step back and examine the macro trend, it's clear to us that we're making big strides.

Before I hand it over to Brad, I'd also like to briefly touch on our integration progress. We continue to make progress in the quarter with the bulk of our effort continuing to be on QE testing of the Phase 1 platform. We'll continue to have components of our integration coming online throughout the next several quarters. While we're all anxious to get to our new platform, we recognize that our business is functioning well today and we're providing good service to our customers, so we'll not put any new OSS components in place until we're completely comfortable that they're ready for production.

We very much -- I very much understand, that we're a complex story. We had an analyst to initiate the coverage on us just a few weeks ago referring to the company as an extreme makeover. And we can't really argue with that. In these types of situations, the progress is never perfectly linear. I took a little flak for making this point at our Investor Day last year, for letting people know that we were going to be -- there were going to be elements of this transition that would be difficult and that we were in the early stages. But the positive elements of the transitioning -- of the transition are happening right now before our eyes. Customers are asking for our new products and services, and they're signing contracts with us. If you'd expect our nonlinear progress to be sort of 2 steps forward and 1 step back, from my seat, this quarter felt like 3 steps forward, especially on the sales front.

We see guideposts, which are the lighting up of our new data centers and CloudStacks, the larger sales that prove we're moving up market, the rapidly improving sales productivity and the improving mix of growth products within our bookings. All these things tell us we're moving well down the path of transitioning our business, and we're confident that we're creating a set of valuable assets.

So now I'll turn it over to Brad, who will spend a few minutes diving deeper into our financial results and guidance. Brad?

Bradley A. Ferguson

Thanks, Rolla. I'll begin on Page 7. For the first quarter of 2013, we reported revenue of $320 million and adjusted EBITDA of just over $61 million. Included in these results were several settlements, which in aggregate resulted in a net favorable $3.7 million to adjusted EBITDA. $1.2 million of this was within the revenue line and the remainder was within cost of revenue.

As we said in the past, the nature of our business is lumpy and we should expect that we will continue to have these types of items, positive or negative, in the future. We reported unlevered free cash flow of $19 million in the first quarter and a net loss of $236 million, primarily related to the noncash goodwill impairment that Rolla mentioned. Adjusting out the tax affected impact of the impairment, we would've reported a net loss of $7.5 million or approximately $0.07 per share.

Turning to Page 8, which contains the components of our revenue. Our retail growth business comprised 12% of total company revenues in Q1, with $37 million in revenue or approximately $148 million on an annualized run rate basis. Compared to Q1 of last year, this revenue stream grew 21%.

Our wholesale business generated $39 million of revenue this quarter and now comprises 12% of our total company revenue. Adjusting for settlements, this business grew at 2% year-over-year, which is at the high end of the 0% to 2% market growth rate that we laid out in our 2012 Investor Day. We should be able to continue to grow this business in the low-single digits as we capitalize more on our unique fiber routes and our footprint.

In 3 months, our $280 million run rate growth business, made up of our retail and wholesale growth products, has scaled to a run rate of approximately $300 million and now represents nearly 1 quarter of our total company revenues. And it's growing annually at over 10%.

Earlier, Rolla mentioned our $3.4 million of MRR bookings in the first quarter, which included several large deals getting closed. There are more deals -- more large deals, that we're working on and are well positioned to win. And the number of large deals we can compete for will increase as our Tier 1 marketing -- market sales forces are fully rolled out. But the timing of when these large deals close will not be evenly distributed from month to month or quarter-to-quarter. We expect the total bookings number may bounce up and down a bit over the next several quarters depending on the timing of when a couple of large deals fall. Regardless of how the quarterly fluctuations play out, the overall trend is strengthening and we're seeing increased customer demand.

Focusing on the CLEC and legacy part of our business. In the first quarter of 2013, these products comprise 54% of total company revenues, down from 55% last quarter. Cable competition remains fierce at the low end of the market segment. And while we have no illusions about growing these products, we can mitigate the top line declines through implementing the right account management structure and by managing ARPU tightly.

This part of the business is particularly lumpy when viewed through a quarterly lens, because it includes usage-based revenue streams and because pricing actions we have taken historically in the late spring and early summer tend to impact the sequential comparisons all at once, rather than smoothly throughout the year. This business declined just over 10.5% in Q1 of 2013 over Q1 of last year, which is in line with the market decline rates discussed at our 2012 Investor Day.

As we discussed last quarter, we expect to discontinue certain aspects of our EBITDA-neutral systems business. Beginning in the third quarter of 2013, these actions will cause us to report approximately $4 million of lower quarterly run rate revenues. Over time, we expect the decline in the CLEC and legacy part of the business to improve, just as they have in our consumer business.

In addition to managing the revenue curve, we know from experience the importance of managing the cost structure of a business like this. We're actively applying our learnings from the consumer business to manage the cost out of this business, as demonstrated by this quarter's sales force restructuring.

As we have, over the last several quarters, we continue to provide more information on the details of the business to provide you with a deeper level of insight. As you can tell from the bookings, productivity and revenue by product information in this presentation, we continue this trend in Q1. We encourage investors to use this slide, Slide 8, as a guidepost when modeling 2013 and 2014 revenues. While we're not providing guidance for 2014, I would note that this model would currently generate a result that is generally consistent with the current external consensus for next year. Also important to note -- to keep in mind, is that we expect to get quarterly sequential growth ahead of getting to a full year growth.

The key sources and uses of cash during the first quarter are outlined on Page 9. During the quarter, we utilized $42 million of capital expenditures. Of the $45 million commitment that we outlined late last year for the fiber and data center projects, we now expect to spend a cumulative -- we have now spent a cumulative $36 million. The remaining capital will be spent over the next 3 to 4 months to complete the rollout of the data centers and the remaining builds within our fiber network expansion.

We spent approximately $10 million on integration and severance costs associated with our sales restructuring, which will lower our ongoing operating cost model. We used networking capital during the quarter related to the timing of certain seasonal payments, as well as normal differences in the timing of payments to and receipts from vendors and large customers.

Moving to the balance sheet on Page 10. We ended the quarter with $192 million of cash and marketable securities, and we have approximately $593 million of gross debt outstanding. We remain underlevered relative to our peers at 1.8x net debt-to-EBITDA. I'll talk more about our balance sheet and capital allocation strategy in a minute.

Now I'll discuss some of the operating results and metrics in a little more detail. Moving on to Page 11. Of the $320 million of total revenue in the first quarter of 2013, business services comprised $248 million or 77%. Our total cost of revenue was $154 million in the first quarter of 2013, yielding a gross margin rate of 52%, which was down slightly from 53% last quarter. Note that both quarters, the fourth quarter and the first quarter of 2013, included favorable settlements within revenue and cost of revenue. Excluding these items, our normalized gross margin rate is approximately 51%. Revenue churn on the business segment as a whole was 1.5%, which is flat to the fourth quarter and down materially from pre-acquisition levels.

In the consumer segment, net subscriber losses were 45,000 in the first quarter of 2013, consistent with last quarter's decline and improved from 54,000 in the first quarter of 2012. Total consumer churn improved sequentially to an all-time low of 2.2% in the first quarter of 2013, down from 2.3% in the fourth quarter and below the 2.5% levels from the year-ago quarter. We expect seasonality to impact some of the quarterly trends, but generally expect consumer churn to continue to decrease over time. Nearly 70% of our consumer subscribers have now been with us over 5 years or more, and these customers churn at rates that are down in the 1s.

Total selling, general and administrative expenses were $108 million for the first quarter, down approximately $3 million sequentially, driven largely by the sales force restructuring that the team successfully executed this quarter.

Now for the updated financial outlook for 2013, which begins on Page 12. As discussed earlier, we had a strong -- we had a very strong new bookings this quarter. And this, along with a solid operational performance in other areas, is causing us to increase the outlook for the remainder of the year.

For the full year 2013, we're raising our revenue guidance range to $1.255 billion to $1.268 billion, which is up from our previous guidance of $1.250 billion to $1.265 billion. A large portion of our business is highly recurring in nature. This caused us to have increasing visibility as we progressed throughout the year. And so in addition to increasing our guidance, we're also narrowing the width of the range. In fact, we calculate that we can deliver well over 90% of our revenue guidance just on the customer bookings we've already completed through Q1.

The impact of any bookings we made subsequent to Q1 can materially impact our exit rate as we approach 2014, but is less impactful to this year's P&L. The arithmetic works in both directions and as part of why it takes time to turn a declining $1 billion revenue stream into one that's growing.

We're also raising and narrowing our adjusted EBITDA expectations to a range of $214 million to $227 million. The higher bookings do come with incremental commission expense. However, we can offset this through other actions we're taking to improve the cost structure of the business.

For the full year 2013, we're projecting a net loss of $276 million to $282 million. This reflects an approximately 12% tax rate, which differs from the approximate 38% rate that we have typically booked, primarily due to the impairment of the nondeductible goodwill. A reconciliation of our adjusted EBITDA guidance to our net loss guidance is provided for your reference on Page 19.

We're maintaining our previous capital expenditures guidance of $140 million to $155 million for the full year 2013. Of the $9 million remaining on our fiber and data center investments, we will likely spend the bulk of that in Q2 with a couple million dollars in the second half of the year. Otherwise, we expect to return to normal CapEx spend rates, which on an annualized basis, equates to approximately $125 million to $135 million.

Before we open things up for Q&A, I'd like to briefly discuss our capital allocation strategy on Page 13. I'll start with the dividend. We have a 3.5% yield and we like the amount of our dividend today. Right now, we're not spending any time discussing or debating changes to it.

On buybacks, we do them opportunistically. While we believe there is upside certainly from the current trading levels, there are times when we're prevented from buying shares. That was the case during the first quarter. When the trading window is open, we will continue to opportunistically pursue buybacks. But we have no intentions to do a large tender or to recap the company through buybacks.

In terms of our outstanding debt, we think the 10.5% coupon on our Deltacom notes is too high for the nature of our business, and we believe the market agrees, which is why the notes are trading well above par. We continue to consider our options around refinancing.

And lastly, we think the best use of our capital is to help get our business to a point where it's not declining. That can be through organic investments, like the fiber and data centers that we're already beginning -- that are already beginning to pay off, or inorganic investments that would improve our growth profile. You'll likely see us aim to preserve flexibility on our balance sheet to consider these investments, where we believe there's a financial return. Our last material acquisition was in 2011. Although we have considered dozens of potential transactions since that time, we're remaining disciplined and price-sensitive on this front.

With that, operator, let's open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Mike Crawford from B. Riley & Co.

Michael Crawford - B. Riley Caris, Research Division

You attributed 1/3 of your new MRR to your recent search advertising and the digital advertising?

Rolla P. Huff

No. I don't think it was 1/3 of the new MRR. We were talking about annualized values. So the point was that we're absolutely seeing search drive more leads into the inside sales organization, and they've been very successful in closing it. So I think the real point there, Mike, is that as we've talked about in the last several quarters, we fundamentally believe that the business motion for a lot of the new products that we have can be done through an inside selling motion versus having hundreds and hundreds of people behind windshields knocking on doors. And so we're starting to see the lead generation activity work, and we're seeing it in the inside sales results.

Bradley A. Ferguson

Yes. Mike. The inside sales numbers is more like $100,000 on a monthly basis, which would equate apples to apples versus $3.4 million that we said we sold overall.

Michael Crawford - B. Riley Caris, Research Division

Okay. And I don't think -- we didn't hear too much about, so far today, as to what's going on with your channel. I know that's something you've been focusing on more in the past year.

Rolla P. Huff

Are you talking about the partner channel?

Michael Crawford - B. Riley Caris, Research Division

Yes, partner channel.

Rolla P. Huff

We're -- look, it continues to be an important part of our distribution strategy. I think a lot of our recent efforts have been training to -- for our channel partners around our new IT services products. So I know there was a lot of activity that way. But in terms of the proportion of our business, I would say the channel is still roughly 1/3 of our business, of our new business, but I will tell you the retail motion is giving them a run for their money. If they want to hold on to 1/3, they'll have to step up their game.

Michael Crawford - B. Riley Caris, Research Division

Okay. And then on the inside sales, so just to recap, at the end of last year, you let go some, I think, 200 reps in smaller markets and you've already replaced nearly half of them in the larger markets, where you now have your data centers up and running? Is that...

Rolla P. Huff

No, no. So we let go of 200 people in 2 dozen small markets, most of which were sales reps. But of course, they were supporting sales engineers and there was that kind of support that went on with it. And what we have been doing is we've been opening markets in Chicago and San Jose and Dallas around our new cloud platforms. And so we've brought on, outside of our traditional footprint, about 90 -- well, some of them are a new footprint too, but we had 90 net new hires. But remember, that's opening new markets.

Operator

Your next question is from Donna Jaegers of D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

Can you talk a little about your install process and your timing? I've heard some horror stories recently of just sort of transition from some customers, not really horror stories, you guys did really well, but it seems like there's a lot of moving parts. So can you talk a little about just the process and then how long it takes to install an MPLS order?

Rolla P. Huff

Well, the length that it takes to install an MPLS order is clearly driven by the size of the order. So we just, for example, completed a month or 2 ago a 4,000 location. That took 18 months and that's customer-driven. So the metrics are not like the old CLEC model, where you're publishing how long it takes to bring up a T1, because we're bringing up much bigger footprints and much more complicated solutions. I will tell you that I think it is more awkward right now because we're not through the OSS -- through the OSS center integration. I think that's one of the reasons that we're as excited as anybody about getting to the new platform, because we think that smoothes things out and gives us the opportunity to take cost out. Because the way we deal with that right now is we just have more people, making sure that things don't fall through the cracks. So does that help?

Donna Jaegers - D.A. Davidson & Co., Research Division

Yes. That's helpful, yes. And on the OSS integration, I mean you obviously said in the script that you weren't going to rush anything. When do you -- is that still sort of set for second half or when are you expecting that?

Rolla P. Huff

Yes. Well, I think there are different components of it that we'll bring up over time, and some of the stuff we just put it in -- we just went live with a new contract management system, for example, that's completely integrated across the whole company. Some of the core network inventory stuff will happen, we think, in the second half. But just to give you a little more detail, we've identified -- the way we're thinking about this, we've identified about 60 order types that we want to run through in a test mode from proposal to build. And we're -- so we've just got a lot of work around running through all of these user-defined types of transactions, and we're doing it off to the side until -- and we'll continue to tweak that until we feel comfortable that it's ready for prime time.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then one other quick question. On M&A, you sounded a little more open to it than you have in the last few quarters. Obviously, you've been disciplined. What won't you do again? I mean, is the lessons you've learned from One Comm that, yes, sign us up for more regional CLECs?

Rolla P. Huff

Well, I think that the lesson from One Comm is that there's a level of how broken you're willing to -- how much you're willing to shop in the scratch and dent section and expect to have it not wear you out. But one thing I think that we believe is, we want to see our growth business continue to accelerate. And our view has not changed 1 iota, frankly, from Investor Day where we said, we'll look at investing in capabilities, we'll look at investing in customer bases, but we have to stay disciplined. And I go from being hopeful to not hopeful, really, based on the type of price talk that we get around some of these assets that come to the market. I just -- we just can't go out and pay 10, 12x for some of these assets and have it work for us. So we continue to look at everything, and that's -- it's really the same story that we have been telling for the last several quarters.

Operator

Your next question is from Barry Sine from Drexel Hamilton.

Barry M. Sine - Drexel Hamilton, LLC, Research Division

Obviously, very good results in terms of sales force productivity and very different -- one of your competitors, Cbeyond, reported last night and they had a bit of a challenge there. I wonder if you could dive in a little bit more in terms of what you're seeing and what's driving that improved sales force productivity? Is it the economy picking up? Are you changing sales incentives? Is it different training? Is it just the cycle, a long sales cycle and now you're getting to the actual sales closings?

Rolla P. Huff

Barry, I really think it's just sales cycle. These are really big moves that customers make when they start virtualizing applications and moving things out of their core functions, out of their IT organizations and moving them on to a different platform. And it takes customers longer to get comfortable with that. And so there have been times when I was wondering whether what we were doing was just providing free education to a lot of the mid-market, but we're -- customers are very engaged around the idea, they put one foot in at a time. And so I think it's really cycle time. The education stuff that we've been doing is not materially different. I will say, and as I mentioned in my remarks, that as we actually have been putting customers on our new cloud platforms and these things have gone from a plan to a reality, getting salespeople that are just -- they're higher-level salespeople that are used to solution selling and they have relationships with the types of customers that we're now targeting, that has clearly changed. The salespeople that we're hiring right now simply won't go out and knock on doors to sell T1. It's just not what they do. But we've got solutions for them now to sell, and I think that helps. But it's a longer cycle than just selling commodity-based products, no doubt.

Barry M. Sine - Drexel Hamilton, LLC, Research Division

And on the commodity-based products, your legacy base on the business side, you talked about opportunities for cost reduction there using some of the learnings you've had on the consumer side of the business. Could you expand upon that a little bit more and talk about what type of cost savings there are, where are they coming from?

Rolla P. Huff

Well, so yes, a couple of different ways. One was what we talked about last quarter, the idea of having a bunch of people in small markets that -- where there aren't the opportunities to sell into bigger customers that are out there competing every day for that single T1 account with the cable company, where we just don't have any advantages. We've taken -- we're in the process of taking that cost out, and we pretty much gotten there. I think the other thing that, for people that have been around over the last 4 or 5 years will tell you, we are constantly challenging ourselves around how to make fixed cost more variable. That's the key thing in a business that's declined, you can't have -- you've got to get fixed cost infrastructure down and variabilize the cost. You can't get it down by running customers away, but you've got to be more creative around variabilizing cost. And so those are the, I think, sort of 2 things that we've done. I've been very pleased to see our ability to even sell at the low end more efficiently through inside selling. I think we're right on the precipice of seeing our inside sales group just explode. We're really seeing the progress almost on a weekly basis now.

Bradley A. Ferguson

But I just -- one thing to add there. I mean, I think what we've really found on the consumer side was that there was a thousand little things that added up to something meaningful. It was just people having the mindset, trying to do things better, but more cost-effective as well. And I think the way we've kind of segmented our organization and have people that are focused on that lower-end legacy revenue stream will start driving those behaviors, and that's exactly what we saw on the consumer side.

Rolla P. Huff

I'd say the last thing that's happening that is so critical is that, as we've worked our way through this integration, and you're seeing it in what we're showing you, the level of management information that we're now starting to generate across the company is giving us the ability to set targets around 1,000 little things and measure execution, and that's hugely important.

Barry M. Sine - Drexel Hamilton, LLC, Research Division

Okay. And my last question, just in terms of integration, I think next year, the key goal is billing system integration. If you can kind of update us on that? Is that still on track? And then what do you expect to see, are there synergies, either from a revenue cost side, are there products you can't offer today in the existing billing platforms?

Rolla P. Huff

One of the other big learnings around IT services is that billing is not a strategic weapon. So I think there's some thinking going on right now about -- we've got billing systems that work for the legacy. And then when you got rated LD minutes and those types of products, billing becomes pretty important. That's not where our business is moving. And in fact, with myLink, we're giving customers the ability to slice and dice their invoices any way they want and configure their invoices the way they want. So I'm not willing to make a final determination on this call, but we are constantly asking ourselves whether the old paradigm that was -- whatever it is that was associated with CLEC business motions that we all agree don't have a lot of future value, whether they applied to these new business models that we're transitioning to. And so billing might not be as important as we thought it was when we first started this.

Bradley A. Ferguson

But just one follow-up on that. I mean, there are certainly -- we've probably had 13 billing systems coming into this, and we've integrated and migrated all to one platform, some of them probably about 8 we've eliminated. So certainly, there's a lot of progress on some of the smaller systems and rolling that in. But to Rolla's point, getting to one system for the total company just may not be the goal that we're shooting for.

Operator

Your next question comes from Mark Kelleher from Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

I had a couple of questions. If you look at the wholesale business, that was flat Q4 to Q1, but the bookings were up pretty nicely. What products within there are driving that increase in bookings? And is there an element of the new facilities that have come online that are driving that?

Rolla P. Huff

So the bookings absolutely were impacted by the new IP networks that we're investing in right now. And as we mentioned to you, there's a good part of those networks that are now online, so we saw -- actually, some of those bigger deals actually get provisioned at the end of last month. I was talking with Louis about this earlier this morning. A lot of the wholesale business is -- or a meaningful chunk of it isn't wholesale in the traditional sense. We're seeing more content providers, social media types of people putting together their own facilities. I don't know that I would call that wholesale, they're just very large -- they're very large customers, but they're not carriers, the way I sort of think about it. Going the other way on carrier is from our New Edge business, we still have old aggregation circuits that we're turning down. So net-net, we're seeing what we call our wholesale side of our business actually outperforming what we had expected a year ago when we were talking to people. And I think the big difference is that the nature of what we're selling and the nature of the customers we're selling it to are evolving.

Bradley A. Ferguson

And just one thing to point out, Mark, actually the settlement. So we had $3 million of settlement in Q4 and then $1 million favorable in Q1. So actually, the relative increase was about a couple of million bucks.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And then just turning to your CapEx, you've completed a lot of these build outs. Your guidance is $140 million to $155 million. What's that going toward this year?

Rolla P. Huff

Well, the guidance is $140 million to $155 million, as we said. It's just we're going to get back to the $125 million to $135 million type of spend rate for our business that we were historically on. We had, as we said, there was this incremental $45 million spend that we saw as being optimal in terms of getting our nationwide cloud platform built and the underlying IP network. And so we're just about done with that and we expect to get back to more normal CapEx spending immediately.

Bradley A. Ferguson

You could probably think about $20 million or $25 million going towards the fiber and data centers, maybe $80 million or so is success-based and then $40 million or so in maintenance projects and integration, pretty consistent with what we've talked about before in terms of the 2/3 success-based and 1/3 the rest. It's sort of at the midpoint.

Operator

Next question is from Anthony Klarman from Deutsche Bank.

Anthony Klarman - Deutsche Bank AG, Research Division

I wanted to go back and make sure I understood the impairment charge. You mentioned that it was obviously caused by the change in your market capitalization and it required you to do an interim impairment test. But multiples in the industry are sort of fairly strong. How big of a discount were you testing -- were you applying your multiples versus sort of the industry multiples which have all traded up? And how is the charge allocated between the -- I assume it's around the 2 big primary acquisitions you made of ITC and One Comm?

Bradley A. Ferguson

Yes, certainly, we can kind of take you off-line and dive deeper in the calculations. But yes, so it started with the stock price and a lot of the factors into that is we didn't change our outlook of ourselves, but the thing that we did have to change which is the discount rate for the assessed risks that the market is building in. I mean, that was really the difference in the modeling. And in terms of how to allocate in between Deltacom and One Comm and there's -- it's kind of a goofy thing just for the accounting, so they're actually wasn't an impairment if you just look at Deltacom standalone. However, a lot of the goodwill at a corporate level was allocated to Deltacom, so that's where a lot of the impairment went against. And again, I could take you off-line and go through all that. But just because we had a lot of the goodwill coming out of the Deltacom transaction at the corporate level, that's where a lot of the impairment went.

Anthony Klarman - Deutsche Bank AG, Research Division

Got it. Understood. And then sticking with the business side. So at the time of those 2 big acquisitions, which sort of really started the retransformation of the company, you had talked about $40 million or so in annual run rate synergies over 24 months and 36 months. Have all those synergies at this point been realized? And how many -- and how much of that is being masked by the additional investments you're making in some of the fiber and the data center projects as we try to look at, really, the underlying core EBITDA of the business? I think a lot of investors, at least on the debt side would have thought that with $40 million of synergies essentially being realized by now that the run rate would look a little bit differently. But how much of that is being masked by the level of investment that's being made?

Bradley A. Ferguson

Yes. So I mean, really, we came out of last year with our measurement at the $40 million level, but we have, to your point, we've been investing back in the IT services. So kind of the things you have, there's like we got the synergies and then the businesses to continue to decline a little bit, and then it's really the investment that we're making in IT services, which is over $20 million is kind of what we talked about. We've done some walks, I think in the prior quarters, but...

Rolla P. Huff

Yes. When we did those 2 deals, let's face it, as you know, Anthony, we didn't articulate an IT services strategy. We wanted the stability of fiber assets underneath the acquisitions. We thought that was absolutely critical. So we know there's terminal value for those assets, but we've also never -- we've never believed that the right answer is to just try to run these businesses for cash like we did the consumer business. Because unlike the consumer business, the fiber and the customer relationships could be used in a different way to create a growth business. And so we've invested a fair amount of money in this IT services motion and feel like it's starting to pay off for us now.

Anthony Klarman - Deutsche Bank AG, Research Division

And if I can, maybe one more. As you think about capital allocations and maybe just to challenge that slide a little bit? The market doesn't seem to be rewarding you for the dividend that you've been paying. Obviously, at the time when you declared the dividend, I think it was sort of meant to be a signal to the market about how strong the balance sheet and the capitalization was of the prior EarthLink, and you've maintained that dividend now over several years. But now that you've identified a growth business that's sort of $125 million or $150 million run rate growing at 20% per annum, why isn't the better sort of capital allocation strategy to be to dedicate as much capital as you can to that business and ultimately, achieve better, faster revenue and EBITDA growth?

Rolla P. Huff

Well, look, we talked to a lot of our constituents who believe that they like to see the dividend go up. We think that the dividend works while allowing us to pursue the business strategy that we've been talking about. So as Brad said in his remarks, we're not -- there's not a lot of active dialogue around the dividend, either raising it or lowering it. We think it's about right for what our business is and we don't see it as hindering our ability to execute on our business strategy. If we did, we'd look at it differently, but we just don't see it that way.

Anthony Klarman - Deutsche Bank AG, Research Division

Got it. Understand. And one final one, you mentioned inorganic opportunities that you've looked at, I think, several dozen was the term that you used. Just given where your multiple is right now and the fact that business services hasn't quite yet made the turn, how sensitive are you in terms of the size and the multiples that you're looking at for these acquisitions and how transformative would you think in terms of doing something or are these acquisitions that you think would be almost more tuck-in, as opposed to transformational for the business?

Rolla P. Huff

Well, I don't know exactly how to define transformational anymore. But we looked at things to broaden our technology, and those come at horrifically high multiples because there's generally no EBITDA. So we've gone more to technology agreements as opposed to acquisitions. We certainly looked at the data center business that was growing. We loved the growth profile of it, but it was -- that was trading at 14 to 15x, and we didn't feel good about that. We've looked at other bases of customers and fiber networks, and we just haven't seen those at valuations that we believe represent -- or where they should be. And so I don't know what much -- how much more to talk about than that. We're going to continue to look at things. And if we can get the right combination of price and improving our business, we're positioned to do more, but we don't feel like we have to do it quickly. We can be patient.

Operator

Your next question comes from Kunal Madhukar from Jefferies.

Kunal Madhukar - Jefferies & Company, Inc., Research Division

A quick one on you are variabilizing the cost. How much of the sales force cost structure is variable at this time?

Rolla P. Huff

I'm sorry, how much of the sales force cost has been taken out?

Kunal Madhukar - Jefferies & Company, Inc., Research Division

No. How much of the sales force cost structure is variable versus fixed at this time? And in terms of the old rates that you have versus the new ones that you're bringing on, what is the difference in the fixed variable components?

Rolla P. Huff

So generally, we see that, basically, the base salaries are roughly 50% of the targeted compensation. So think of it as 50% fixed, but that's not really fixed because if they're not productive, they leave. The other 50% of their compensation is based on -- is success-based. I think we stuck with that 50-50 split roughly. The thing that is different is that as we move to getting higher level reps, we've seen the base salaries go up, but the quota that they carry has gone up more than the base salary that we're paying them as a percentage. But the 50% base, 50% commission level has been -- roughly, stayed the same.

Kunal Madhukar - Jefferies & Company, Inc., Research Division

And a quick follow-up on that. If you tweak your compensation or the commission structure on growth revenue dollars versus legacy revenue dollars or wholesale revenue dollars, would that potentially improve your growth rate or is that masked by the long sales cycle?

Rolla P. Huff

Well, I think that my experience is that sales organizations are certainly coin-driven and where you put incentive, that's where they sell. And so we've -- just as we did in the consumer business, at the low end of the business, we're not giving people a lot of incentives to sell our low-end products. So it's not that we don't pay them for it, but they can make a lot more if they're selling our growth products, especially because we're selling them too into bigger accounts. So what we're trying to do is to be able to be more competitive at the low end by a completely different sales motion. And so that's really driven by our inside selling motion. And there, clearly, we'll have people that are selling T1s and so on and so forth. But it's a much lower acquisition cost than trying to have dedicated sales forces that are carrying low quotas.

Operator

Your final question comes from Barry McCarver from Stephens Inc..

Barry McCarver - Stephens Inc., Research Division

Just 2 quick questions. First off, Brad, on the higher commissions you're expecting from the revenue ramp, you mentioned that there were some improvements in the cost structure that you can make during the year to offset some of that higher commission costs. Can you give us a little more specifics about that?

Bradley A. Ferguson

Yes. I think it's similar to the things we talked about before. I mean, it's looking at the network cost and fixed versus variable and things that we can take out there. It's focusing on the low end and how do we provide lower support costs. And I mean, it really is these thousand little things that, as Rolla said, kind of building on the point we talked about earlier. We get better and better information. We're organizing ourselves differently to really go after that, so I think we're just better equipped to continue to address those things in addition to continuing to make integration progress and the ability to take cost out with that.

Rolla P. Huff

One of the things, Barry, that we've actually invested in over the last year, we've brought in a lot of Six Sigma process people that -- and beyond just integration, just -- and we saw this in the consumer business by just driving process improvement, you take down cost.

Barry McCarver - Stephens Inc., Research Division

And my second question relates to that. I mean, you talked again about the OSS platform in the quarter. It sounds like we're still at least a few quarters away from having that issue put to bed, and we've been talking about it for a while. And I guess, that's something that's a little bit concerning, because it certainly feels like you've got the right product mix, the market is responding. Is that system in that integration something you expect to get put to bed this year? Can you give us -- do you have a deadline in mind you can share with us?

Rolla P. Huff

Well, I had a deadline of by now. And so making a prediction, I think it will happen this year, but it's not that we're having to -- our situation right now is not that we're still developing new code, it's making sure and testing ourselves 2 and 3x that the business that we put on this platform will ultimately flow out the way it does in our current platform, just more efficiently. And so there's just an enormous amount of testing that has to happen. And then once we're done with a testing, we're going to bring in somebody from outside the company to test it. It's just too important to put a deadline down and say, get it in by then. We're not going to put it in until it's right, but nobody should be at all confused by whether or not we're committed to getting through it. We are. We're going to do it, but quality means everything here. The last thing I want to do is take a step backwards in terms of the momentum we've got in our motion now.

Well, I'd like to thank everybody for listening today and for the continued support that you've given our company. Clearly, we're excited about the strong customer bookings in the first quarter and the new markets that we're opening up as we speak. I think our company has considerable financial strength, and we believe we're on a solid path to creating value. So thanks again for joining us this morning, and take care.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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