Global Crossing Ltd. Q2 2009 Earnings Call Transcript

Jul.29.09 | About: Global Crossing (GLBC)

Global Crossing Ltd. (NASDAQ:GLBC)

Q2 2009 Earnings Call

July 29, 2009 9:00 am ET


Mark Gottlieb – Vice President Investor Relations

John Legere – Chief Executive Officer

John Kritzmacher – Chief Financial Officer

Anthony Christie – Chief Technology Officer and Chief Information Officer

Gary Breauninger – Executive Vice President


Romeo Reyes – Jefferies & Company

Winston Len – Goldman Sachs

Donna Jaegers – D.A. Davidson

[Paul Howard] – [Kasyanov]

Tim Ozark – Aim Financial Corporation


Welcome to the Global Crossing second quarter 2009 earnings conference call. (Operator Instructions). It is now my pleasure to introduce Mark Gottlieb, Senior Vice President of Finance and Investor Relations.

Mark Gottlieb

Thanks for joining us today for our second quarter 2009 earnings call. John Legere, our Chief Executive Officer and John Kritzmacher, our Chief Financial Officer, are here with us today. They'll each share their comments, after which we'll open up the call for some questions.

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

Before we begin, we'd like to remind everyone that statements made during that are not historical financial results are forward-looking statements as defined in Section 21E of the Securities and Exchange Act of 1934. Our actual results could differ materially from those projected in these forward-looking statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our reports filed and furnished to the Securities and Exchange Commission including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

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

We refer you to our financial press releases posted at which include explanations of and reconciliations with the closest GAAP financial measures for our non-GAAP measures such as operating income before depreciation and amortization or OIBDA and free cash flow.

With that, I'll turn the call over to John Legere.

John Legere

I'll focus my remarks this morning on our results for the second quarter and then I'll share observations of the demand environment and ways that we continue to be well-positioned to take advantage of positive market trends now and into the future. So let's get started.

We're pleased with what we've achieved in the second quarter, particularly considering that it was one of the most difficult economic environments in many years. When we all last spoke, we talked about the strong operational momentum in the business and the growth we were seeing year-over-year in constant currency terms.

We said we expected our strong operational momentum to result in a return to sequential growth and that we would continue to deliver growth year-over-year at a constant currency basis. Today, we're reporting quarterly results that do deliver on those expectations.

We generated $633 million of revenue, a 4% sequential improvement, with $539 million of revenue from our strategic invest and growth services, a 6% sequential improvement. And while our sequential growth benefited from a slight tailwind from foreign currency this quarter, a factor that has not been favorable for some time, these results represent a year-over-year improvement in invest and grow revenue of 9% in constant currency terms.

As a result of the growth in our invest and grow revenue, the continued improvement in revenue mix and the careful management of costs, our profitability improved for the quarter both in absolute dollars and as a percentage of revenue.

Operating income before depreciation and amortization, or OIBDA, grew to $93 million. This represents growth of 24% sequentially and 66% year-over-year. Our OIBDA margins increased more than 600 basis points from a year ago period to 15%. John Kritzmacher will talk more about that in detail in a few minutes.

We remain very focused on achieving sustainable positive free cash flow this year while carefully and selectively investing to ensure we are positioned to take advantage of the significant market opportunities we see. Our free cash flow improved this quarter by $22 million compared to last quarter.

Taken together, these results represent our consistent progress and reflect the positive investment in our business that we've been reporting. We still have more work to do and we know that the economic environment is likely to remain challenging.

Even in the context of this economic climate, we expect our underlying operational momentum to continue to yield some substantial improvements in our operating results through the year consistent with our annual guidance provided for 2009.

Equally important, we believe we have the business very well positioned to take advantage of the significant opportunities that will exist for our company next year and results beyond when the inevitable economic recovery has taken hold, and the economy has returned to growth.

Also, leading indicators that we monitor continue to suggest ongoing demand for our services. Our order volumes, which averaged a little more than $3.6 million per month for the quarter, have recovered after the pause we saw customers take in the fourth quarter of 2008 when the severity of the economic downturn caught many customers by surprise and the orders are substantially in line with what we experienced in the first quarter.

On a constant currency basis, orders would have been equal to 2Q a year ago at the $4 million level. The order levels that we have experienced in the first half of the year are consistent with what we assumed we'd need to achieve in the guidance we set out at the beginning of the year.

The revenue attrition for the quarter ran slightly higher than our historical average of approximately 1.5% per month, largely due to write-downs early in the quarter that were isolated to a few large customers.

Because the trend improved during the quarter, and we exited the quarter a little better than the historical average, we do not believe the slight uptick this quarter is a cause for concern or a trend. Our sales teams continue to build their funnels with solid prospects for the range of our advanced IP solutions, and continue to see a healthy level of activity.

These indicators lead us to believe that we are maintaining momentum from operational growth in our invest and grow revenues, and we expect to see continued sequential growth in invest and grow revenue on a constant currency basis.

Now, let's turn to the market environment and the demand trends that we believe explain the momentum in our business and the demand we are seeing for advanced IP services. We have continued growing on an operational basis for a couple of reasons. First, the markets we are focused on are continuing to grow. Second, we offer a differentiated value proposition in the marketplace that enables us to earn our share or more of that business. Let's look at the market growth first and then the differentiation.

Although the downturn in the economy may be dampening prior forecasts of growth in the broader markets for worldwide telecom services, analysts still expect growth in the data services in which we specialize.

IP, VPN, Ethernet, managed services and hosting are likely to be among the strongest growing areas. These are product lines and market segments in which we are well-positioned to grow with market or more quickly than the market.

The buying patterns we see are consistent with the analyst's expectations. One, enterprise customers and the carriers who buy from us continue to capitalize on our global IP-based network solutions in order to lower their telecommunication costs and increase their efficiency, performance and the reach of their networks.

Two, our customers have said they are increasing their reliance on collaboration services such as video conferencing to increase productivity or to reduce travel costs in today's challenging economic environment.

And three, increased usage of new applications such as video is driving significant increases in the volume of IP data services worldwide. These trends are continuing to drive demand for our services, even during the economic downturn and will continue to do so as the economy recovers.

We continue to see pricing trends that are similar to those we have spoken about previously. We see stable pricing trends across the key flagship product lines in our portfolio which comprise the majority of our growth.

And we see some downward pressure in high-speed Internet access which is not a high percentage of our revenue. We don't see anything that suggests irrational pricing or a return to a time at the beginning of the decade when there was an imbalance of supply in excess of demand.

Taken together, these trends we are seeing in the market segments we serve present a strong opportunity for us to continue the momentum in the business year, in our business this year and beyond. We differentiate ourselves from our competition with a network that has a unique global reach, product that delivers superior performance and enables increased productivity, along with best-in-class interaction our customers have with us through the lifecycle of our relationship.

To ensure we continue to be well-positioned to take advantage of the growth trends we discussed with selectively investing where we see demand, we're expanding our managed services portfolio. We're expanding the global data center offer with the recent opening of our data center in Amsterdam. We're rolling out global Ethernet access to our IP-based services.

And we are upgrading the capacity available at Atlantic Crossing, South American and Mid-Atlantic Crossing's subsea cable feed systems just in time to meet demand for additional capacity as traffic across the Atlantic and to and from Latin America has continued to grow very rapidly.

In addition, we are continuing to enhance our customer network management portals, allowing our customers increased direct control over their services, utilization management and real-time performance monitoring.

We believe we're offering the right products on a global basis with the highest quality network performance and superior customer experience that supports our differentiation and drives high levels of customer satisfaction, as demonstrated by the metrics we use to monitor the experience we are providing our customers.

So halfway through 2009, our company is performing well despite the current environment. Our position and approach to the markets have not changed, and we expect to continue to drive improvements in our invest and grow revenues this year based on demand trends and our differentiated value proposition.

As a provider with relatively low penetration of the market relative to our peers, our company remains well-positioned to gain share. We can't continue to carefully manage to the full year performance goals we have set at the beginning of the year with a high priority on achieving sustainable positive free cash flow and we are on track to deliver these full year results.

And we continue to be well-positioned to capitalize on the market opportunities in future years and when the economy has returned to growth. John will now give you more specific details on our financial results in the quarter. John?

John Kritzmacher

Similar to previous quarters, my comments today will include some detail on foreign exchange impacts to our results. Unlike other recent quarters, sequential foreign exchange impacts in the second quarter were slightly favorable to our consolidated results.

Nevertheless, the year-over-year foreign exchange impacts continue to be relatively large and unfavorable. I'll give you a clear sense of our operational performance as we move through my presentation today, where you will see that we continue to grow and improve the profitability of our business at a solid pace. And with that brief introduction, let me now turn to our results.

The company generated revenue of $633 million in the second quarter, a sequential increase of $24 million or 4%, and a year-over-year decrease of $21 million or 3%. Movement in foreign exchange rates in the quarter favorably impacted revenue by $11 million sequentially, but unfavorably impacted revenue by $58 million year-over-year.

On a constant currency basis, revenue in the quarter increased by $13 million or 2% sequentially, and increased by $37 million or 6% year-over-year. Excluding foreign exchange impacts, the sequential growth in revenue was primarily due to an $18 million or 4% increase in our invest and grow revenue. Rest of world invest and grow revenue during the quarter included $8 million for one customer's buyout of certain long-term obligations under an existing contract.

Increases in invest and grow revenue in the quarter were probably offset by a $4 million sequential decrease in wholesale voice revenue, due to the pricing changes we implemented last quarter as part of our strategy to manage this business for margin.

Our year-over-year revenue growth of 6% on a constant currency basis was primarily driven by continued expansion of invest and grow revenue in the rest of world and Impsat regions partly offset by attrition of the Camelot contract in the U.K. and a decrease in wholesale voice revenue driven by the aforementioned pricing actions.

Invest and grow revenues for the GCUK, GC Impsat and rest of world segments were $113 million, $121 million and $309 million respectively. As illustrated in the presentation, foreign exchange continued to impact our reported segment revenues. Sequentially, in constant currency terms, invest and grow revenues in GCUK, GC Impsat and rest of world increased by 1%, 3% and 5% respectively.

Year-over-year in constant currency terms, invest and grow revenues in GC Impsat and rest of world increased by 16% and 13% respectively, and declined by 4% in GCUK, again, primarily due to the Camelot attrition.

Revenue from wholesale voice services was $94 million in the second quarter, representing a decline of $4 million sequentially and $12 million year-over-year. We continue to expect revenues from this segment to decline by 10% or more as compared to the prior year, as we continue to optimize the wholesale voice business for margin performance.

We continue to manage our costs carefully as we grow our revenue base. Cost of revenue was $432 million or a sequential increase of $2 million and a year-over-year decrease of $37 million. The sequential increase was primarily due to an unfavorable foreign exchange impact of $6 million, partly offset by operational improvements in our access costs.

Included in access costs this quarter is $2 million, related to a final settlement of the FCC disputes regarding universal service fund payments as set forth in the FCC notice we received in April 2008.

Looking at cost of revenue on a year-over-year basis, the variance was primarily due to a favorable foreign exchange impact of $39 million and lower incentive compensation costs partially offset by an increase in third party maintenance costs and higher equipment and professional services costs.

Gross margin in the quarter was $201 million, a sequential increase of $22 million, including a favorable foreign exchange impact of $5 million. Excluding the foreign exchange impact, the increase was primarily due to increased invest and grow revenue, including an $8 million benefit for the aforementioned customer contract buyout, as well as improved revenue mix and lower access costs.

Year-over-year gross margin improved by $16 million, including a 1$9 million unfavorable foreign exchange impact. The year-over-year improvement was primarily due to higher invest and grow revenue, improved revenue mix and to a lesser degree, lower incentive compensation costs.

As a percentage of revenue, gross margin was 31.8% for the second quarter, as compared to 29.4% in the prior quarter. Year-over-year the gross margin rate improved by approximately 350 basis points.

For the second quarter, we reported $108 million in SG&A expense, a sequential increase of $4 million, including an adverse foreign exchange impact of $2 million. The sequential variance was primarily due to higher professional services fees. The year-over-year decrease of $21 million in SG&A was primarily due to a favorable foreign exchange impact of $12 million, lower incentive compensation accruals and benefits from the cost savings initiatives implemented during 2009.

In the quarter, we accrued a total of $11 million for incentive compensation, an increase of $1 million sequentially and a decrease of $10 million year-over-year. Incentive compensation for the quarter consisted of $6 million of cash accruals, primarily for the 2009 annual bonds program, and $5 million of stock-based accruals primarily for long-term incentive stock brands. Approximately 45% of the incentive compensation accrual is reflected in SG&A and the remainder is reflected in cost of revenue.

For the second quarter, OIBDA was $93 million. Sequentially, OIBDA increased by $18 million, including a favorable foreign exchange impact of $3 million. Year-over-year OIBDA increased by $37 million, including an unfavorable foreign exchange impact of $7 million.

On a constant currency basis, OIBDA improved year-over-year by 79%. As a result of the operational improvement in our invest and grow revenue and management of our costs, our OIBDA margin improved from the year ago period by more than 600 basis points to nearly 15%.

On a segment basis, GCUK's OIBDA was $21 million, a decline of $2 million sequentially, including a $1 million favorable foreign exchange impact. The sequential decrease was primarily driven by higher access and real estate costs, including an increase in real estate restructuring reserves.

On a year-over-year basis, GCUK's OIBDA decreased by $16 million including an unfavorable foreign exchange impact of $7 million. Excluding the foreign exchange impact, the year-over-year operational change was attributable to lower revenue driven by the Camelot attrition, as well as an increase in equipment and professional services cost.

GC Impsat's OIBDA was $44 million, an increase of $5 million sequentially, including foreign exchange benefit of $2 million. Beyond the foreign exchange impact, the sequential increase was driven by higher revenue, probably offset by higher payroll costs.

On a year-over-year basis, GC Impsat's OIBDA increased by $13 million, including a $4 million unfavorable foreign exchange impact. The year-over-year operational improvement was driven by revenue growth.

And finally rest of world OIBDA was $28 million, an increase of $15 million sequentially. The sequential variance was primarily driven by the increase in invest and grow revenue and lower access costs. On a year-over-year basis, rest of world's OIBDA increased by $40 million, including a $4 million foreign exchange impact.

The year-over-year operational improvement was primarily driven by higher invest and grow revenues and an $8 million reduction in incentive compensation accruals.

Although the timing of certain items like IRU sales and capital expenditures, as well as swings in working capital can cause some variation from one quarter to the next, our trailing 12-month free cash flow has shown improvement since the beginning of last year. In fact, our trailing 12-month free cash flow has been breakeven to slightly positive for the past four quarters and we will improve upon this performance in the second half of 2009.

Free cash flow was negative $10 million in the quarter compared to negative free cash flow of $32 million in the first quarter and negative free cash flow of $33 million in the second quarter of last year. We generated $44 million of cash from operating activities. Cash receipts for IRUs and prepaid services were $27 million, including $8 million for the previously referenced customer contract buyouts.

Operating working capital was a $5 million use of cash in the quarter. We used $54 million for purchases of property and equipment for the second quarter, which included approximately $12 million for upgrades to our Atlantic and South American subsea systems. We expect lower capital expenditures in the second half of this year compared to the first half and we continue to anticipate spending approximately 20% less net capital in 2009 than we did in 2008. Net capital leases in the second quarter total $20 million.

As implied by our annual guidance, we expect to generate substantial positive free cash flow for the second half of the year. The improved free cash flow will be driven by three key factors. First, we expect continued improvement in OIBDA performance for the second half. Second, we expect working capital to shift from being a large use of cash in the first half of this year to being a smaller source of cash in the second half. And finally, we expect capital expenditures in the second half to be lower aligning with our annual guidance for net capital expenditures.

We ended the second quarter with a total cash balance of $289 million, including $21 million in restricted cash. This compares to an ending cash balance of $322 million in the first quarter, including $16 million of restricted cash. Our unrestricted cash decreased by $38 million in the second quarter, including a favorable foreign exchange impact of $6 million.

In addition to cash interest paid, which is higher in the second and fourth quarters, other significant uses of cash in the quarter included $11 million of cash used to repurchase GCUK notes in connection with the excess cash flow offer, as well as $8 million used for withholding taxes on the 2008 stock-based incentive compensation payments we issued in April.

Before turning to your questions, let's take a brief moment for an update on the company's capital structure. As of June 30, we had 60 million common shares outstanding. In addition to these common shares, our fully diluted share count includes 18 million preferred shares. And finally, potentially diluted shares include 6 million shares underlying a 5% convert and 3 million of outstanding awards under our stock incentive plan, excluding performance-based stock awards.

At the end of the quarter we had total debt of $1.32 billion, including major maturities totaling $1.14 billion in capital leases and other debt of $181 million. Movement in the pound to dollar exchange rate unfavorably impacted the translation of our external pound-denominated debt by $35 million during the second quarter. We currently have no near-term maturities. Our next major maturity is the $144 million of convertible debt due in 2011.

In summary, sustained demand for our services continues to enable growth. In the second quarter, we returned to sequential growth and continued to deliver year-over-year growth in revenue and OIBDA in constant currency terms. Invest and grow revenue in OIBDA increased year-over-year by 9% and 79%, respectively, in constant currency terms, and we continue to gain operating leverage from our growth as our OIBDA margin improved by more than 600 basis points year-over-year to nearly 15%.

Meanwhile, our free cash flow improved sequentially and our trailing 12-month free cash flow has now been breakeven to slightly positive for the past four quarters. Overall, we think we're in a good position to deliver the full year results we outlined in the revenue OIBDA and free cash flow guidance we provided back in February.

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

Question-and-Answer Session


(Operator Instructions). Our first question comes from Romeo Reyes – Jefferies & Company.

Romeo Reyes – Jefferies & Company

What was the CapEx for Impsat and for U.K., number one? And then number two, John K., you talked about equipment and professional fees being a little bit higher at the U.K. level. We noticed also SG&A was a little bit higher than we had expected. Can you just give us a little bit more color or granularity on that that would be great? Just another quick question on the sales the $3.6 million number that you put up there. How has that trended over the last three or four months?

John Kritzmacher

Romeo, I was having a little bit of difficulty hearing you, but I believe your first questioning was around CapEx by segment. Second question is around spend and the high performance inside of the U.K., and then the last piece?

Romeo Reyes – Jefferies & Company

The last piece was around that trajectory of the $3.6 million average that you noted on new sales.

John Kritzmacher

Let me take those in order. First, with regard to capital expenditures, let me give you the breakdown of our net capital expenditures by each of the segments. Rest of World was $31 million, U.K. was $8 million a little bit higher than is typical in the U.K., and Impsat was $15 million for total net capital expenditures of $54 million. With regard to your question around spending in the U.K., there were a couple of things happening there, one is the overall cost of sales.

We are seeing a slight change in mix a bit more value added content in some of the sales that we see there. So equipment costs and professional fees have trailed up a slight bit in the overall mix of our revenue there. That's one of the impacts, but just a small piece. And then along with that we had, as I noted, both impacting our cost of sales, as well as impacting our SG&A expense in the U.K. we had higher real estate costs, including an adjustment to our real estate restructuring reserves in the period.

Gary Breauninger

I'll start off with the points John made earlier in the presentation that the numbers themselves have been pretty consistent, particularly if you look at it on a constant currency basis. And consistency defined as whether it be geography of the world or by sales segment in those geographies, i.e. our enterprise business versus our carrier business.

And the composition of those orders have been consistent as well, Romeo, to comprise primarily of VPN both managed and unmanaged services, our traditional point-to-point services, as well as our data center business. So our trend's been really consistent. We try not to look at it month-to-month more so on the trend and, again, it's been very consistent for some time now.

John Kritzmacher

If you think, Romeo, we reported $3.8 million per month in Q1, which we said was on track with what we needed. You'd think we round it down to $3.6 million so relatively flat is the way I would call orders Q2 over Q1, both of them being in the zone of the order volumes that were required for us to meet both our numbers for the year, as well as our jump-off point expected into next year.

And I actually had a question this morning with somebody who was asking when do we think they'll return to the level they were at in 2Q '08, which was $4 million, and on a constant currency basis, they are. So the $3.6 million this quarter 2Q '09 is in a constant currency basis equivalent to what we saw a year ago in 2Q '08. So, good strong orders and that should serve us well.

Romeo Reyes – Jefferies & Company

Can I just ask you a quick follow-up on that? How has the profitability of that changed over time, the incremental sales? Do you have to sacrifice margin at all to keep the sales levels at those levels or call it gross margins are still pretty much unchanged?

Gary Breauninger

No material change for what we've seen in prior trends from the acquisition margins to bring those services on as compared to once we get them on layering on new services and building the profitability from there, again, no matter where you go region of the world. Again, you have to also remember the target market we're going after is really aimed to stay away from the price sensitive services. We're going after the wide area networks, which is comprised of high quality value added services that helps remaining focused on where we sell and what we're selling to those customers.

John Legere

As you've followed us for a while, Romeo, we've seen no major break in the percent of incremental gross margin that comes from new sales and we're still getting, as we said, 70% to 75% of orders from existing customers, which also enhances profitability because you're building on a base. So both of these pieces of the model maintain themselves well, which is certainly part of the assumptions that we're confidently calling out the rest of the year and beyond.


Our next question comes from Winston Len – Goldman Sachs.

Winston Len – Goldman Sachs

So first of all, can you give us a bit more color on the customer attrition you saw such as which verticals they are and why are they flat? And do you expect the higher attrition to persist into the second half of the year? And then maybe just to touch on CapEx, can you maybe be a bit more specific on what would be cut in the second half of the year to help with your full year guidance. Do you expect lower maintenance CapEx or is it success-based CapEx or was there other discretionary CapEx in the first half of the year outside of the Atlantic and South American network upgrades? Thanks.

John Legere

Okay, well let me introduce it then I'll give it to Gary and maybe John to cover. I think, you know, as we've outlined, and Gary can give you a little update – I'm not sure if we'll give you names – but we follow attrition extremely closely as one of our key leading indicators along with orders so we can see what should be happening in future revenue streams.

And as I'm calling out attrition right now I'm calling it relatively flat. And the reason for that is there's a slight uptick in the 1.5% but it was very specific, it was early in the quarter. The trend had returned in June and is expected to be the same in Q3. So I am calling that attrition will be the same in Q3. It already was in June. It was very targeted. I'll give it to Gary to give it some specifics and then we'll talk about CapEx.

And from a CapEx standpoint it's not like we have to cut something. It was timing and it was project related of some money that we spent earlier in the year because of the pay back that could actually happen also within the year. But Gary, why don't you start on the specifics you want to give on attrition and then I'll kick over to John.

Gary Breauninger

I guess the one thing that's important about the attrition itself is it's revenue attrition, so I know your trailing sentence sounded like you said customers had left. They did not leave and in many cases what we did was actually optimize the customer base of things they're buying from us and locked them up for a longer term.

That's resulted in a little bit of a write-down of their current base but we locked them up for a longer period of time so extending their current contract to a future set of buying behaviors for the customers. So that's the – that was the behavior. It was a conscious decision. It wasn't a surprise on us in that we worked with each of our big customers to optimize their spending and help them get through some of these rough economic times.

It was isolated through a few select customers, both on our enterprise and our vertical side. But again, the conscious, and again, the customers have not left the network. They have actually locked up for longer period of time with a renewed set of purchases beyond what they currently do.

John Legere

And I guess what I would add, and maybe we'll get some stability to announce this expanded relationship of that customer and then we'll be able to talk about the details. But the items that actually caused the attrition to pop up only slightly in Q2 was a very positive reinforcement of a customer that over time will enhance greatly the profitability of the company because of maintaining that customer with a much smaller cost.

Do you want to cover any detail on CapEx, John?

John Kritzmacher

Yes. Let me just comment just a bit more with regard to capital expenditures. First, I want to emphasize with regard to realization of our prior forecast around capital expenditures for the second half of the year, there's nothing in particular that we're going to cut. It simply was a bit of a skewing of our spending for the year, toward the front end of the year. The heavier concentration on some builds around network infrastructure as well as some of our maintenance programs. So there's more of a timing matter than anything else.

I would also note that with regard to equipment that will be leased during the course of the year, we said that that would be similar to what we had leased in 2008 which was about $50 million. We're about half way through that this course of the year so we will both have a gross spend in the second half of the year that is lower while we will have a rate of leasing inside that gross spend that is about flat with the first half. So it's really just around timing. It does not affect anything that we're cutting out of our program in order to hit the number.


Our next question comes from Donna Jaegers – D.A. Davidson.

Donna Jaegers – D.A. Davidson

Hi, just a quick follow up on the CapEx. Did I hear you correctly that it's going to be $28 million less in '09 than in '08. Was that the number you guys gave out?

John Kritzmacher

Actually what we had said, Donna, previously was that the spend for the year 2009, the net spend, would be about 20% less than last year and just to frame that, 20% less than what was about 192 last year, gets you down into the slightly above 150 kind of a range. Do the math.

Donna Jaegers – D.A. Davidson

I'm trying to listen to three calls and take notes at the same time so. Not, not as good at multi-tasking. A few other quick questions, your gross margins were a lot better than I'd been looking for. Obviously you talked about 70% to 75% of new sales coming from existing customers so that helped. Can you talk a little bit about the sustainability of this level of gross profits going forward?

Gary Breauninger

Yes. I guess, Donna, to that point is link it back to the discussion around the makeup of the order book, of the recurring revenues, as well as blocking and tackling we do on the cost of access side. Again, I think we've continued to produce growth in that gross margin through the product mix, through the layering on of services to our existing base of customers, i.e. the access infrastructure is already there so we're optimizing the access platform. As well as, again, finding ways to be creative around the providers we use to get to the end customer location.

So again, I think it's in line with the bumps here and there throughout the quarter, but I think it's in line with what we talked about as far as execution of growing that gross margin through things we control as well as what the customer's buying.

Donna Jaegers – D.A. Davidson

Okay, and then AT&T made a big stir about announcing that they had DHL as a customer in the U.S. and Puerto Rico. I know you guys serve DHL and Latin America. Can you comment on whether you expect to lose traffic or lose business from DHL in the U.S.?

Gary Breauninger

Donna, it's Gary again. The expectation for us, at least in what we've seen with our DHL customer is that we're growing well with the customer. I'd leave it at that. We are definitely not losing traffic.

Donna Jaegers – D.A. Davidson

And then just a quick comment, I know you guys – I just picked up Limelight so I know you guys sell them most of their backbone network, and you're also reselling their service. Can you talk a little bit more about what your strategy is in the CDN sector?

Gary Breauninger

Yes. I guess as you know Donna, we've talked about entering that space earlier in the year selectively with the resell program. We're two or three months into it. Both sides, ourselves, our partners, are committed to it through training, through on-site support. We've built a robust set of funnel opportunities.

It's still pretty early in the process to gauge how successful we've been. But I will tell you we'll continue on the resell path that we gave to the scale and then decide what to do next with it about bringing it in-house. But I wouldn't see any material changes to the resell strategy for the next 6 to 12 months.


Our next question comes from [Paul Howard] – [Kasyanov].

[Paul Howard] – [Kasyanov]

I wonder if you could just elaborate a bit further on the fall in the EBITDA from the UK. How much of that fall year on year was due to Camelot? And perhaps quantify the real estate provision and sort of say what that related to, if you can give any more detail on that. And finally, just chat about the outlook for U.K. margins going forward. That would be kind, thank you.

John Legere

You guys want to structure it and then let Anthony call in?

John Kritzmacher

Yes. Let me just frame some of the numbers for you Paul. In terms of the impact of Camelot on a year-over-year basis, Camelot was $13 million of revenue in constant currency terms as compared to the revenue that we realized in the current quarter, so a full $13 million impact, of which in terms of recovery replacing a bit of it but obviously not all of it given client constant currency terms year-over-year.

In terms of cost I did take note of real estate. The impact of costs on a sequential basis related to real estate was on the order of low single digit millions. Think of it as plus or minus $2 million.

John Legere

Paul as you know, we made a change in the leadership of the U.K. and our new CTO/CIO is sitting with us now in our corporate headquarters, Anthony Christie, who had been running it throughout the period that we have been speaking about has handed off now to Ted Higase, who's over there leading Q3. But since Anthony's here with us now, maybe Anthony you want to comment on this.

Anthony Christie

Yes, Paul I'd be happy to. Thanks for the question. I guess your question around margins sustainability in terms of the U.K., the way we think about that, and we've mentioned this on previous calls, as we have backfilled the Camelot revenue, there were a number of customers that we had novated onto our network and when we do that, we typically do that at what would be a lower gross margin than the run rate in the U.K. As we migrate that customer, or those two customers, onto our backbone, you would see that revenue trend return to normal for what you've seen in GCUK revenues in the past, the margins in the past.

I'll make a couple of other comments, too, to kind of give you a sense for the overall trading environment. We still see that as positive for GCUK, principally because what we market is efficiency. And when we look at a couple of representative periods, for example, the first half of 2009 compared to orders in the second half of 2008, we saw our orders increase by over 30%. And one of the things that we're doing rather quickly here in terms of what we've sold is bringing back – bringing those customers onto our network.

Typically what we have been selling are more complex managed services that take a little bit longer to implement. So that's part of what you're seeing here as well. Once the customers are up and running we don't see any appreciable change to the margins in the U.K.

[Paul Howard] – [Kasyanov]

Can you just clarify, what was up 30%, orders in the first – I missed what you said was up 30%.

Anthony Christie

I'm happy to do that. Orders, our order intake from enterprise and government customers and carrier customers in the U.K. was up 30% in the first half of 2009 compared to the second half of 2008.


(Operator Instructions). Our next question comes from Tim Ozark – Aim Financial Corporation.

Tim Ozark – Aim Financial Corporation

Yes could you just address for me what your thoughts are even thought it's two years out of how you are going to either refinance the existing maturity on the $144 million convertible notes?

John Kritzmacher

In terms of our thinking around both the convertible notes as well as the term loan, which comes due three years out in time, we are currently in process of assessing alternatives. One thing that I think is a very positive development since the last time we reported on Global Crossing's progress is the credit markets have opened considerably.

Whereas we would have had relatively few options available to us the last time we spoke, now there seem to be a good number of very attractive options available to us. Clearly, we will refinance some portion of that debt given that in the aggregate we're talking about roughly $500 million that comes due in two and three years out.

But again, plans in process, I think some very appealing opportunities now available to us and we'll be sorting through those options over the coming weeks.


Our next question is a follow-up question from Donna Jaegers – D.A. Davidson.

Donna Jaegers – D.A. Davidson

Yes, this is a question for Anthony. I was struck by your 30% increase in order transfers versus the second half of '08. We haven’t seen those install yet I'm assuming, so those will install in the second half?

Anthony Christie

Yes, that's the point I was attempting to make earlier, so I appreciate you asking the question again. What we have – the focus has been that mid-tier multinational in the U.K. that has connectivity outside of the U.K.

And what we have been doing in terms of our acquisitions is increasingly selling what I would characterize as more complex offers to these customers, whether that's hosted IP telephony, whether that is managed a IBPM with VoIP inside and increasingly hosting solutions like we did for domestic and general, which is a [mirror] posting application in the U.K. backed up by our Amsterdam Data Center.

These take longer than four to five months to implement and that's really what I was pointing to in the earlier comment.


Speakers, we have no further questions at this time, you may proceed with your presentation or closing remarks.

John Legere

Okay, well we'll wrap up then. And once again, let me state that we're pleased with our momentum as demonstrated in the results we reported today. We take a lot of pride in what we achieved in the second quarter but realize our work isn't done.

We continue to expect our momentum will yield substantial improvements in our revenue in constant currency terms and in our annual earnings free cash flow. So thanks everybody for joining us and we look forward to speaking with you again next quarter.


Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly as that you please disconnect your lines. Have a good day, everyone.

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