Global Telecom & Technology's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.15.13 | About: Global Telecom (GTT)

Global Telecom & Technology, Inc. (GTLT.OB) Q1 2013 Earnings Conference Call May 15, 2013 10:00 AM ET

Executives

Rick Calder - President & Chief Executive Officer

Brian Thompson - Chairman

Mike Bauer - Chief Financial Officer

Analysts

Barry Sine - Drexel Hamilton

Keith LaRose - Bradley, Foster & Sargent, Inc

James Dodd - Oriel Securities

Operator

Good day everyone. Welcome to the GTT, first quarter 2013 earnings call. Today’s conference is being recorded.

At this time I would like to turn the call over to Mike Bauer, Chief Financial Officer, for opening remarks and introductions. You may begin.

Mike Bauer

Thank you and good morning. I’m joined today by Rick Calder, GTT’s President and CEO; and Brian Thompson, GTT’s Executive Chairman of the Board.

Our discussion this morning is being made available via webcast through our website. A replay of this call will be available for one month. Dial-in information for the replay, as well as access to a replay of the webcast is available on our website at www.gt-t.net.

I would also like to mention that our comments today will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that involve the use of words such as anticipates, expects, intends, plans, believes, may, will and other similar expressions are intended to identify forward-looking statements.

Forward-looking statements include by way of example, revenue and margin expectations or projections and various references to trends in the industry and GTT’s business. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and other factors. Some beyond our control, which could cause the company’s actual results to differ materially from those anticipated in these forward-looking statements.

There are many risks, uncertainties and other factors that can prevent the company from achieving its goals or cause the company’s actual results to differ materially from those expressed in or implied by the forward-looking statements contained in our comments. These factors and others are more fully discussed under risks factors in GTT’s Form 10-K as filed with the Securities and Exchange Commission. Statements in this call should be evaluated in light of these important factors.

Our discussion this morning will refer to adjusted EBITDA, which is a non-GAAP measure. A presentation of GAAP financial measures and a reconciliation of non-GAAP information to GAAP financial measures is included in the press release we issued this morning, which is available on our website.

I will now turn the call over to GTT’s President and CEO, Rick Calder. Rick.

Rick Calder

Thank you Mike and good morning everyone. I will begin this morning with some key highlights from the first quarter of 2013 and provide an overview of the transformitive Tinet acquisition that we successfully closed two weeks ago. I’ll then turn the call over to Mike, who will walk you through the financial results in more detail and the financing and the acquisition, and we will then open the call for your questions.

Starting with first quarter highlights, we demonstrated strong year-over-year growth. Our revenue grew 7% year-over-year to $26.4 million for the first quarter and our EBITDA grew by 36% year-over-year to $3.6 million.

Sequentially these metrics dipped in the first quarter, very similar to what we experienced in the first quarter of 2011 and 2012. In the second quarter of 2011 and 2012, those numbers picked up back and we will see the same pattern in 2013. We also made a significant investment in organic growth mentioned in the first quarter, hiring about 15 new quarter bearing sales reps.

As I mentioned on the last earning call in March, we organized the company into two business units, Americas and EMEA. We have focused our selling efforts on our network centric value propositions, including enterprise cloud networking, high bandwidth IP transit for content delivery and hosting and carrier network extensions delivered over a network to network carrier interconnects.

The business units now own the full scope of the client experience, including sales, sales engineering, project management and service delivery and client account management, with a goal to increase client satisfaction and further accelerate our organic growth.

On April 30, 2012, about one year ago, we announced that we bough nLayer Communications, which strengthened our IP/MPLS backbone and expanded our Ethernet and IP service portfolio. The acquisition was not only as success, but also positioned GTT to be a very strong IP player.

This year on the exact anniversary date we closed the Tinet acquisition, which was in Inteliquent’s global data business. Tinet has the similar characteristics to nLayer and it strategically fits with our global business. Tinet is one of the top target for GTT as we accelerate our established growth curve as the premier cloud network provider to the world.

The integration of Tinet will continue the GTT transformation to a network based solution provider, capable of delivering complex integrated network services worldwide. GTT is now one of the top five IP transit providers in the world and one of the largest global Ethernet interconnection networks.

Tinet brought in close to $70 million of revenue in 2012. With Tinet GTT will add over 100 PoPs in 24 countries across North America, Europe and Asia Pacific. GTT now serves over 2000 customers and close to 100 countries around the world. We have a consolidated Juniper network platform, which will provide significant synergy opportunity from that we’re presenting.

We are well underway in the integration activities, which we expect to complete in the next two quarters. The existing Tinet IP/MPLS network will remain in place and will be integrated with the GTT global access network of over 130 PoPs in North America, Europe and Asia and our network extensions with over 800 partners worldwide. We will utilize GTTs Client Management Database or CMD for our core business processes and integrate all operations into CMD.

As we integrate the two businesses, we expect to generate significant cost reduction opportunities in both cost of revenue and SG&A. On the cost of revenue front we look to eliminate redundant and overlapping backbone circuits, reduce peering cost and realize cost savings of PoP consolidations.

On the SG&A front we expect to drive synergies from elimination of redundant professional fees, contracts and other operating expenses, and as we have demonstrated, we have a track record of successfully identifying and integrating accretive acquisitions, realizing synergies within one to two quarters.

The purchase price for Tinet was $52.5 million. As we have for all previous acquisitions, we looked at the value of this acquisition in terms of post synergy EBITDA multiple of roughly four to five times. Beyond the immediate economies, the combination of GTT with Tinet will add new strategic and marked key customer relationships with numerous Fortune 500 companies, provide an even stronger GTT network asset base to serve our enterprise and carrier clients and expand our value proposition and service portfolio as a premier cloud network provider of the world.

We are very excited with this opportunity. Our visibility to retain our intermediate goals of a $200 million revenue and $30 million EBITDA company has never been clear and we look forward to building our global cloud network platform and enhance our value proposition for our clients and for our investors.

I’ll now turn it over to Mike to provide more details on our financial results and the financing of the acquisition. Mike.

Michael Bauer

Thanks Rick. Let me start with the first quarter results. Revenue for the first quarter was $26.4 million, up 7% from Q1, 2012. The year-over-year growth was driven primarily by our acquisition of nLayer in April of last year, as well as significant instillations of new services in the second half of 2012.

Gross margin increased significantly to 33.2% in Q1, from 29.3% a year ago. The gross margin increase is attributed to network cost reductions, higher gross margins from IDC Global customers and a shift in our business to more on-net services.

SG&A expense excluding non-cash comp was $5.1 million compared to $4.6 million in Q1, 2012. As a percentage of revenue, that represents an increase from 18.5%. The increase is primarily attributed to additional sales reps in our Americas and EMEA business units, in an effort to build our organic sales engine.

Adjusted EBITDA was $3.6 million, a 36% improvement over the $2.7 million generated in Q1, 2012 and since our business generated very low capital expenditures, this results in a high correlation of unlevered free cash flow.

In Q1 we spent about $800,000 in CapEx or about 3% of revenue, yielding $2.8 million in unlevered free cash flow. In the first quarter we reported a $1 million non-cash mark-to-market adjustment for our warrant valuation, due to the significant growth in our stock price.

We began 2013 at $2.80 and grew 30% up to $3.65 at quarter end. That charge is recorded in other expense net line item in the income statement. We reported a $191,000 cash provision in Q1, the majority of that came from a $145,000 non-cash differed tax liability, resulting from the treatment of good will for tax book purposes.

In the first quarter and in anticipation of the Tinet acquisition, we issued $2.3 million shares at $3 per share, raising $6.8 million in equity. Of that issuance, just under 1 million shares to retire $2.9 million in sub note principal and accrued interest. As a result we reported debt extinguishment expense of $706,000.

Turning to the Tinet acquisition financing. We arranged a $70 million senior credit facility with Webster Bank. Webster Bank was a participant in our previous indication and is now the lead. The credit facility includes a $65 million term loan and a $5 million revolver, which was undrawn at close.

The interest rate in our senior debt is LIBOR plus 550, which is 125 basis points lower than what we were previously paying. The company paid in full all outstanding debt under the existing senior credit facilities, which consisted of approximately $27.5 million in principal and accrued interest.

Also we expanded our existing mezzanine financing arrangement with BIA digital partners and Plexus Capital to add BNY Mellon-Alcentra Mezzanine Partners. The new mezzanine arrangement provides for an increase in the total financing commitment by $11.5 million, of which we drew $8.5 million immediately to fund the acquisition.

The remaining $3 million (Audio Gap), the raise in terms for the additional Mezzanine financing are similar to the ones that we’d raised previously. In addition to participating in the mezz debt, Alcentra purchased $2 million and the street commented $3 per share on the same terms as the equity raise completed in Q1, bringing the total equity raise for this acquisition to approximately $9 million.

We are very pleased with the efforts of our lending partners to complete this acquisition financing; Webster Bank, BIA, Plexus and Alcentra, all worked very swiftly and proficiently to provide the support needed to close in a very short time frame and I want to thank them for that. These commitments demonstrate the strength of GTT and the economic potential of this acquisition and we look to unlock that potential in the coming quarters.

I’d also like to mention that we are continuing to pursue and uplifting to a national exchange. Given the importance of the Tinet acquisition and financing, we delayed efforts in order to ensure a successful closing, but are now aggressively working through the review process to list on the national exchange.

With that, let me turn it back to the operator, who will open the call to your questions. Jennifer.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions). First, we’ll hear from Barry Sine with Drexel Hamilton.

Barry Sine - Drexel Hamilton

Good morning gentlemen.

Rick Calder

Good morning Barry.

Barry Sine - Drexel Hamilton

Hey, do you hear me okay? I’m on a cell phone in an airport.

Rick Calder

We can.

Mike Bauer

That’s fine.

Barry Sine - Drexel Hamilton

Okay, great, thank you. First question, very good quarterly results. How much of the first quarter growth in both revenue and EBITDA was organic versus the nLayer acquisition.

Rick Calder

So, first thank you very much Barry for your question. The first quarter results was a combination as Mike mentioned, of selling efforts quarter-over-quarter, as well as the integration of the nLayer business and I would say the majority was the nLayer acquisition. We did have positive organic growth year-over-year.

We did disclose the reason we saw a tick down in timing from quarter-over-quarter as we disclosed in the previous call. It was the loss of a large, low-margin, government service of over $500,000 and that was the principal area of decline with that large government service, but beyond that we’ve continued to win government businesses at a nice clip and our organic business is (inaudible).

We made as we noted, a significant investment in this quarter, which actually reflected somewhat in slightly our SG&A of a significantly larger sales force and with the Tinet acquisition we now have a significantly larger sales force again. So we believe that with the global platform that we have, we have a significant opportunity to invest much more aggressively in organic growth than we have historically.

Barry Sine - Drexel Hamilton

Just following up on that, how many quarter bearing sales reps do you have now in total with Tinet and what’s the breakdown between North America and EMEA.

Rick Calder

We pre acquisition had over, close to 35 and we acquired approximately another 30 and so I would say they are split roughly two-thirds, one-third – actually probably more 40% EMEA pack and 60% U.S., roughly mirroring, closely mirroring our revenue distribution.

Barry Sine - Drexel Hamilton

Okay, and then on the acquisition, could you talk a little bit more in terms of what is involved in the integration process, both on the network side and then on the SG&A side. You’ve given us some timing and maybe also talk about what type of margins or what type of percentage of revenue for those expense categories we would get to.

Rick Calder

Sure. As we have a very illustrated track record of very quickly integrating acquisition, we look to achieve our post synergy targets within the first two quarters of integration activity and the integration really revolves around three major areas.

The first one is network and network consolidation and for us we see the opportunities as we had mentioned in the prepared remarks for network consolidation on overlapping backbone between the two networks we operate now. Two, which we could very quickly consolidate to one global backbone network and there are some dependencies in the backbone facilities that we have and those we can take out in the first couple of quarters.

Two is in peering costs. We clearly see some opportunity as we consolidate the networks together with the autonomous systems that were running, that we have the opportunity to reduce some of our peering cost that we have in the business.

And the third one is PoPs consolidations. It generally take a little bit longer, because we want to make very certain that we do that, do any of the PoP consolidations with the point of presence consolidations without impacting our clients, but there are clearly some point of presence consolidation that we see as an opportunity over the first two quarters and then ongoing beyond that. So that’s one major area.

The second area is in headcount. We’ll have some relatively minor redundancy across the organization as we have in our previous organizations, so we’ll identify those and move forward very quickly with that, as well as in other SG&A items, contract costs, legal expenses, accounting expense, things that are clearly duplicated between the two firms, so that’s really the third area.

And so across all of those, we’d be able to see as we reflect, as we’ve discussed in the past, the opportunity to grow our margins as we’ve seen our gross margins clearly from where we are today 33%, significantly higher than we mentioned in the conference call last quarter that we would like to see ourselves in an intermediate target of north of 35% and then continue.

Although we saw some incremental investment this last quarter, continue to see SG&A on a consolidated bases, continue to decline as a percentage of revenue over time. So we expect to see both of those as we look to over time achieve upwards of 20% EBITDA margins.

Barry Sine - Drexel Hamilton

And just the last question on the integration; was there a NOC that you acquired with Tinet and what’s the status of the NOC you guys are building in the plain of Virginia.

Rick Calder

Yes, there is NOC. It’s in Cagliari, Italy and (inaudible), so there is a high functioning NOC there. We have a very well functioning NOC in London and we are building as we mentioned on the last call a NOC facility also in the U.S. So we will continue to operate out of all three of those facilities, both the U.S., London and Cagliari as one integrated global NOC that actually can have a headcount in three different geographies to allow us to provide the best possible service to our clients.

Barry Sine - Drexel Hamilton

And lastly, a couple of financial questions, maybe Mike wants to take this, on a pro forma basis, with the closing of the Tinet transaction, if you could just give us a snapshot of what the balance sheet looks like from the standpoint of debt, cash and then shares outstanding.

Mike Bauer

Okay, in terms of the debt, as I mentioned we raised $65 million in the senior trench, taking out the existing approximately $25 million. So we basically added about $38 million, $40 million of senior debt and we added $8.5 million of mezz debt. So a total of about $48 million new debt.

We raised $9 million of equity, some of it is reflected in the first quarter, the first quarter numbers you see there, $6.6 million we raised in the first quarter, the additionally roughly $2.5 million that was raised at closing, that will be reflected as you see us report the second quarter. So in terms of share count, we ended the quarter at 22.5 million shares roughly, and then we added with the additional equity we added an additional approximately 800,000 shares.

Barry Sine - Drexel Hamilton

Okay, those are my questions. Congratulations gentlemen. Thank you.

Rick Calder

Thank you Barry.

Operator

And next we’ll hear from Keith LaRose with Bradley, Foster & Sargent Incorporated.

Keith LaRose - Bradley, Foster & Sargent, Inc

Good morning. I think you mentioned that the deal positioned you for stronger organic growth going forward. Could you address the split or emphasis on that versus non-organic growth and opportunities for bolt on served with this combined platform going forward.

Rick Calder

Sure Keith, thank you for the question. Our growth strategy and it will remain a two-fold growth strategy, will continue to look to grow the business through acquisitions. We maintain a very active funnel of acquisition opportunities that we believe will be very creative for other business, so we continue to explore those and would expect to concentrate more in the future.

We are very focused as we noted earlier in the call, to discuss the integration of the Tinet acquisition as this stage, but second, we really have placed a much more aggressive emphasis on inorganic growth and are focused on actually growing the size of our business units and the sales force in the business units across the America and EMEA to take our organic growth rate to levels that we have not been to in the past.

We are kind of a single digit grower. We would expect to be able to grow our business organically with double-digit rates as we make the investments in the organic sales growth engines.

Keith LaRose - Bradley, Foster & Sargent, Inc

And what are some of the drives that are enabling you build out the size of just bodies to achieve that double-digit growth rate going forward.

Rick Calder

We clearly believe that the value proposition we have that can serve the two principal segments of the market that we are in, present us with the unique position of the market place.

Our ability to provide cloud network solutions to enterprise clients globally, on the global platform we have right now that spends 250 PoPs with one of the largest Ethernet interconnection backbone networks on the global, provides us the opportunity to be very differentiated in the market place, to compete against the largest and even the smallest of competitors around the globe, to be able to provide a solution that serves worldwide demand for our clients. So we are investing in the sales resource, to be able to take advantage of the now very unique proposition we have.

Separately, we’ve always had a very large and vibrant business in the carrier market, providing high end IP transit solutions to carriers, content delivery companies, (inaudible), etcetera and we believe as one of the top five IP transit networks in the global, that we have an opportunity to continue to grow very aggressively in that segment as well.

So we see real opportunity with the emergence of a very powerful network based value proposition to continue to grow much more aggressively. So not only in sales, there is engineering, service delivery, client account management, we clearly see the opportunity to differentiate ourselves and provide a utmost focus on client experience, which will help us I think grow much more rapidly as we have in the past.

Keith LaRose - Bradley, Foster & Sargent, Inc

Thanks and do you have any comments on your gearing objectives in the intermediate term?

Rick Calder

Keith, I missed the word, what objectives?

Keith LaRose - Bradley, Foster & Sargent, Inc

Gearing, with your cash flow what is you – do you have plans for debt pay downs and stuff like that over the next 24 months.

Rick Calder

Mike, why don’t you answer that one?

Mike Bauer

Yes, I mean our senior debt, we will pay that down over the course of the term. So we’ll pay about $1.6 million in senior debt principal payments each quarter. The mezzanine debt is a bowl of maturity in 2016, so there is no principal payment at that level. So in terms of scheduled principal payment, it would just be the senior trench that we would have scheduled to pay.

Keith LaRose - Bradley, Foster & Sargent, Inc

Okay, thank you very much everybody. Have a good day.

Rick Calder

Thank you Keith.

Operator

(Operator Instructions) and we have no other questions in queue. So I’ll go ahead – I’m sorry, we just had one come up. So we’ll hear from James Dodd with Oriel Securities.

James Dodd - Oriel Securities

Hi. I recon to you, its James Dodd here in London. Congratulations, tremendous progress and very well done. Can I ask just how the Tinet acquisition will sort of change the balance between carrier and enterprise customers and what your track is going forward in between the balance between the two.

Rick Calder

Absolutely James, thank you for the question. I appreciative hearing from you. As I just mentioned in my question to Keith, we see equal opportunity in both the value propositions, so right now we actually think the business is pretty much in balance between the two.

That the enterprise side of our business, well probably slightly less than 50% and the carrier side of our business slight more than 50% are pretty much in balance, that we would see as we growth the revenue stream, we would expect over time the enterprise piece to become slightly larger than the carrier piece, but it will be interesting to see as it developed.

But we clearly believe with the core network asset we have, we have the opportunity and the capability to serve both of those segments of the market very successfully and I would say, we are making move of an incremental investment in hiring enterprise, sales representatives worldwide to serve global demand for enterprise clients, which is why we would expect over time that the enterprise piece would pick up slightly ahead of the carrier piece, not to say that they are equal focuses for us moving forward.

James Dodd - Oriel Securities

That’s great. Thanks very much. And look forward to keeping in touch.

Rick Calder

Absolutely. Thank you James.

Operator

And we have no further question in queue. So at this time, I’d like to turn the conference back over to Rick Calder for any additional or closing remarks.

Rick Calder

Thank you very much Jennifer. I’d like to turn the call over right now to our Chairman, Brian Thompson for a few concluding remarks as well.

Brian Thompson

Thanks Rick. I’m really appreciative of the questions and I have very little to add, because I think that the results speak for themselves. But I will say that what we have been trying to do here is beginning to really take shape and that’s to build a really powerful enterprise that’s not just a company that goes out and acquires businesses and we are a company that simply tries to do anything it can to grow, but rather it’s a company that has found a way to integrate and to manage, as well as to acquire capabilities. That’s a very rare thing in this industry for sure.

But I think that the team inside has shown the ability to not only manage both things at the same time, it’s a rare case inside the beltway of Washington, where people can chew gum and walk at the same time, and what we’ve got is we got a team that has shown they can acquire and manage and integrate enterprises, so that they operate more efficiently, more effectively and give great opportunity to the people that come along with it.

We have shown how we can get people both developed from inside the company. We have this last quarter added two key executives from outside the company in the sales and marketing organization, and we have simply just acquired another group of people that are very oriented to the business that we are doing and have another opportunity to growth from within, by becoming key parts of the combined organization.

To me that’s the unmated test, is can you put together an organization that both has the value proposition that Rick talked about, has the ability to acquire and integrate and has the ability on a key basis to service markets with excited and interested people that really care about the client relationship.

We are getting there. We are doing very well and we have a whole lot more to do going forward. I appreciate your interest. Thank you very much. Rick, back to you.

Rick Calder

Great, thank you Brian. Thank you very much for everyone on the call and thank you for your support over time. We are very excited about sharing our future results in the next couple of quarters as we integrate this acquisition and look to continue the growth path for GTT. So thank you very much.

Operator

Thank you. That does conclude today’s conference call. We do thank you all for your participation.

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