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Global Telecom & Technology, Inc. (NYSE:GTT)

Q2 2013 Earnings Conference Call

August 14, 2013 10:00 AM ET


Michael R. Bauer – Chief Financial Officer

Richard D. Calder, Jr. – President and Chief Executive Officer

H. Brian Thompson – Executive Chairman


Barry Sine – Drexel Hamilton


Good day everyone. Welcome to the GTT Second 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. Please proceed sir.

Michael R. 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

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

Richard D. Calder, Jr.

Thank you, Mike and good morning everyone. I will begin this morning with some key highlights from the second quarter of 2013 and provide an update on the integration efforts related to our purchase of Tinet on April 30. I’ll then turn the call over to Mike, who will walk you through the financial results in more detail, and we will then open the call to your questions.

Starting with second quarter highlights, we demonstrated strong year-over-year growth. Revenues grew 46% to $39.7 million for the second quarter. Our gross margin improved to 34%, up from 30% in the second quarter of last year. And our adjusted EBITDA grew by 55% year-over-year to $5.1 million.

The continued improvements in revenue, gross margin and EBITDA were driven by the recent Tinet acquisition and our strategic effort to drive organic on-net sales. It’s important to note that the second quarter includes only two months of activity from our April 30 acquisition.

We are very pleased by the early performance of this business and our progress on the integration. We successfully completed all client, vendor, and service integration into our Client Management Database or CMD platform and we completed all the integration into our financial and billing systems. We are fully integrated the go forward GTT organization, we eliminated duplicative functions and generated significant cost savings.

We’ve retained the best talent across the organization and have grown the sales organization to close to 50 sales employees across our two business units, Americas and EMEA. We focus our selling efforts on our network services, EtherCloud and IP Transit and approximately 80% of our revenue now comes from the service lines.

With well over 60% of our revenue traversing our core network, we have transformed the value proposition of our business. We are seeing significantly higher gross margins on our new sales. And we are experiencing lower churn rates for our on-net services.

In the second quarter, our churn rate fell under 2% of our total revenue for the very first time. Our global footprint has expanded to over 200 on-net points of presence and we are now a top five Tier 1 IP Transit backbone with close to seven terabytes of peak monthly traffic.

GTT has built a premier cloud, global cloud network platform, delivering fast and reliable Ethernet Wide-Area-Network and IP Transit services to multinational enterprises and carriers around the globe. GTT delivers simplicity, speed and agility with an absolute client focus. We continue to pursue our growth strategy through both organic sales and acquisitions of complementary businesses.

On the M&A front, our acquisition pipeline remains very strong. We are focused on continuing our growth through acquisition and have a strong universal targets. We are focused on acquisitions that will further expand our network, increase our geographic footprint and enhance our service offerings.

On the organic front, we are seeing good traction in our two business units. We have focused our selling efforts on our network centric value propositions, including enterprise cloud networking and high bandwidth IP transit for carriers, content delivery and hosting. With a healthy backlog and a robust demand from existing and new clients, we are poised for solid organic growth in the second half of the year as we look to achieve double-digit organic growth rates.

Our visibility to achieving our intermediate goals of $200 million revenue and $30 million EBITDA Company has never been clearer. Before I turn over to Mike, I’m pleased to note that we listed our stocks under the new GTT ticker symbol on the New York Stock Exchange market on June 17, a major milestone for our company and for all of our stakeholders. And we’ve already seen an increase in our trading liquidity and visibility.

With that, I’ll turn it over to Mike to provide more details on our financial results. Mike?

Michael R. Bauer

Thanks, Rick. Let me start with the income statement, revenue for the second quarter $39.7 million was up 50%, sequentially from the $26.4 million reported in Q1. Driven primarily by the acquisition of Tinet as well as significant installations of new services in the first half of this year, adjusted EBITDA of $5.1 million was up 42% sequentially, from the $3.6 million generated in Q1.

And since our business has very low capital expenditures this results in a high correlation of unlevered free cash flow. Year to-date, we spend just under $1 million in CapEx or about 1.5% of revenue yielding approximately $7.8 million of unlevered free cash flow, in the second quarter we recorded a $1.5 million non-cash mark-to-market adjustments for our warrant valuation, due mainly to the 21% growth in our stock price during the quarter.

That charge is recorded in the other expense net line item on the income statement. Also in the second quarter, we recorded a restructuring charge related to the Tinet acquisition of $7.4 million. The largest component of that charges were severance and other employee termination costs associated with the headcount reductions Rick mentioned earlier. Other costs included professional fees for legal accounting tax advisory services as well as integration, travel and early termination costs for planned network. Turning to the balance sheet the most significant fluctuations during the second quarter relate to the Tinet acquisition as well as the debt financing that funded the deal.

The purchase price for Tinet was $52.5 million with $49.2 million paid in cash at closing net of the preliminary $3.3 million negative working capital assumed. With the allocation of the purchase price of the balance sheet, we added $11.6 million of customer accounts receivable, $15 million of property and equipment consisting primarily of state-of-the-art Juniper Networks switching gear, $25.8 million of intangibles related to customer relationships, $24.8 million in current liabilities largely accounts payables and accrued vendor costs, and $24 million of goodwill.

As we discussed at our Q1 call, we arranged $70 million senior credit facility with Webster Bank and increased our existing mezzanine financing by an additional $8.5 million subsequently we assisted Webster to sell down the senior facility to four other lenders.

Our new financial partners include Brown Brothers Harriman, EastWest Bank, Business Development Corporation of America or BDCA and Fifth Third Bank. With this new syndication, we expect to have additional liquidity at a lower cost of capital to pursue future acquisition opportunities.

The successful syndication has proved that GTT’s ability to access the capital markets when needed, we now believe that our company – with our company listed on the NYSE market, we will be able to further accelerate our growth plans and increase shareholder value.

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

Question-and-Answer Session


(Operator Instructions) We’ll take our first question from Barry Sine, Drexel Hamilton. Please proceed.

Barry Sine – Drexel Hamilton

Good morning, gentlemen. Couple questions if I may, first of all Rick on the integration of Tinet, what’s still left to be done and what are the potential risks involved in completing that integration?

Richard D. Calder, Jr.

Great. Good morning, Barry. Thank you for the questions. First the primary function of the integration is complete with the go forward organizational structure and the integration into our system. So that is the piece that we would like to complete within the first quarter.

So we have the nice opportunity to be able to take the best talent from both organizations and create a very strong go forward organization that is built upon the two business units for organic growth, one in EMEA and our business unit in Americas with very bullish about our ability to grow our business organically.

Moving forward, we have up tick again, the size of organic sales force. And we have basically completely moved our business into our core systems and process using our Client Management Database of record. So we feel very good about that.

The piece that remains Barry, which will always remains is the network integrations and so that will take a little bit longer. We’re actually well along on the integration of the two legacy backbones, the Tinet one, the GTT one to maintain and go forward with one consolidated network. That has made significantly easier by the fact that we both used a similar or the same technology platform.

So the state-of-the-art Juniper switching platform and so the integration of those two core networks is actually proceeding at pace and will take the next couple of quarters to sort of complete the sort of full integration of the networks. That does allow us the opportunity to continue to take out cost of revenue. As we eliminate overlapping, point of presence overlapping backbone capacity in our core and redundant peering capacity that we have with some of our partners.

So those are proceeding very well, and we think with the strength of our combined engineering team, we will make very good progress through the end of the year on the integration of the core networks.

Barry Sine – Drexel Hamilton

Okay. And then also zeroing in you had some pretty positive comments in terms of what you’re doing with the sales force, I think you mentioned 50 now sales reps if you could give us a little more color on that what does that look like versus vis-à-vis where you started the year, what’s the breakdown U.S., EMEA what does the funnel look like, backlog look like visibility and then I think you said you’re on track for double-digit organic growth if I recall not too long ago, you were below 5% that’s a pretty significant uptick if you could kind of clarify on that?

Richard D. Calder, Jr.

Sure, we at this stage have the sales force as you noted, as we noted in the prepared comments of roughly 50%, it’s pretty evenly distributed our business and we always like a balance, between the work that we do in the Americas and the work that we do in EMEA and I would say our sales force is very balanced across both geographies and we see good opportunities as our revenue is generally pretty balanced now across both geographies.

So we see good opportunity for growth in each of the things that we participate in right now. The EMEA Group to be clear also includes several core bank folks in Asia-Pac as well. So we actually do extend into three points of presence in Asia-Pac, Tokyo, Singapore and Hong Kong. We see some nice growth opportunities to continue to grow our business in Asia-Pac as parts of the EMEA a business unit.

So again back to the organic growth piece, we historically have maintained a sales force as we mentioned previously that was about churn replacement. We basically replaced our churn and we were a single-digit, low single-digit grower for many years. We’re successful and replacing our churn, but not being a fast organic grower. As we have moved our value proposition to be much more network centric, we’ve seen our churn rates fall nicely.

We have transformed our business into one that is architecture around on wider Ethernet, cloud networking service and our IP Transit services both core network services for us. We see our percentage of network base services growing from well over 60 that it is today, the 70 to 80 over the next several quarters and years. And now we’ll see continued reduction in our churn rate. We believe and continued to grow in our sort of organic value proposition.

To that point, to the specific comment, we were probably in the 20%, 25% range organically, so we’ve really doubled. I would say we’re probably just around 30% or so at the end of the first quarter. So we see a significant uptick in the ability to actually add incremental organic sales much quicker moving forward.

Lastly, on your question about backlog, we actually carrying probably the largest net installation backlog, pending installations, less pending disconnects that we’ve ever had well over roughly about $1 million, $0.5 million in monthly recurring revenue coming into the second quarter or the third quarter of this year.

So we see not only the nice positive backlog we have, but the sort of new sales traction we’re getting from organic sales force across in EMEA and Americas, to be able to take our organic growth rates significantly higher moving forward.

Barry Sine – Drexel Hamilton

And that’s very, very helpful. Next question you gave some information in terms of what you’re looking at inorganically in terms of acquisitions, could you give us a little more color what are you looking for geographically I know the last acquisition you went over to Europe. Anything different product wise or is it more just adding additional traffic that you can put on your existing network and get synergies out of that, what kind of size might we be thinking of how would you think about financing that whatever you can tell us about that acquisition coming up?

Richard D. Calder, Jr.

Sure. As I mean we are now the amalgam of 14 different companies, so we’ve been able to successfully identify, integrate and make a much stronger hold GTT through our acquisition strategy. We want to – we absolutely are committed to continuing that, we maintain a deep and active funnel of perspective prospects and it really fall to your question about focus, we’re focused most on those acquisition targets that add to our cloud networking, IP transit service portfolio.

So that are consistent with our existing business that are data focused, that are focused on medium to large sized clients and that have larger geographic reach and are not focused on a big region, hub or territory in the world. And we see some good and very interesting acquisition targets that fit that mould. We generally had stayed away from voice in small, medium business type targets and probably we’ll continue to do that but because we see enough active and attractive acquisition targets that are bigger in nature.

Besides, we historically have said if you probably playback a year or two years ago $50 million and below interestingly the Tinet acquisition was $70 million plus acquisition candidate for us. And so as we approach a business that will be $200 million in revenue and $30 million in EBITDA, we believe that we have capacity to look at larger opportunities that are above the sort of less than $50 million before, not to say, we still look at ones that are in that range. But we see the ability to search for targets that are slightly larger size that will help us grow our business even more quickly as we go.

As Mike mentioned, we believe that combined with our senior facility with Webster, we’d now syndicated with availability on our second lien or mezzanine level financing as well as the ability to use equity financing potentially over time, now that we are listed on the New York Stock Exchange. We see the ability to take financing from all three sources in the capital structure to finance deals moving forward.

Barry Sine – Drexel Hamilton

And I guess for Mike, a couple of relatively quick financial questions. First, what was the CapEx in the quarter?

Michael R. Bauer

CapEx in the quarter was $200,000 in the quarter. In the first quarter, we were about $800,000 in the first quarter, so $1 million year-to-date.

Barry Sine – Drexel Hamilton

Okay. And then the restructuring charge that you booked in 2Q, is there any tail on that where we see continued restructuring charges booked in future quarters was that one and done everything taking care of, and that’s going to be a one-time item?

Michael R. Bauer

That’s a one-time item.

Barry Sine – Drexel Hamilton

Okay, great. And my last question, Mike you gave a lot of great details in terms of what the balance sheet is going to looks like now with some of the items you’ve added with the Tinet? If you could kind of go through and kind of help me think about depreciation and amortization, what is gross PP&E? What has already been depreciated? And then how should we think about the amortization on both the client list as well as the goodwill that you’ve booked on the balance sheet.

Michael R. Bauer

Okay. In terms of the depreciation and amortization expense that will definitely pickup into the third quarter. We recorded about $4.4 million this quarter and that only includes two months worth of the Tinet acquisition. So I would expect approximately $5 million a quarter in depreciation and amortization expense. I would say ballpark $3 million of amortization expense and $2 million of depreciation.

And that I mean as I mentioned before, we picked up significant fixed assets with the purchase of additional $15 million of property and equipment related to Tinet. So we’ve got a much larger PP&E balance that will be depreciated and the intangibles as you mentioned the $25 million of customer relationships will hopefully we got over five years as well so.

Barry Sine – Drexel Hamilton

Just lastly on the asset the PP&E, what’s the gross and what’s the net? What has already been depreciated?

Michael R. Bauer

In terms of purchase price accounting, we need to record the fair market value of those assets. So we had a valuation study performed on those assets and was valued at $15 million fair value, fair market value.

Barry Sine – Drexel Hamilton

So for the balance sheet you’ve just reported, could you give me the breakout? You have the net PP&E there, what does that look like? How does that break up to the gross and accumulated depreciation?

Michael R. Bauer

I’m going to ask you to get back on that Barry, I would have to look in, I mean we’ll have that number in our Q, which we’ll file later today, which will show the gross and net as well. But I don’t have that number at the top of my head.

Barry Sine – Drexel Hamilton

Okay. Those are my questions. Thank you very much, gentlemen.

Michael R. Bauer


Richard D. Calder, Jr.

Good, thank you very much, Barry. I need two other points about the CapEx. As we mentioned, we’re continuing the integration of the networks that will allow us the opportunity to put some new capital into the business to consolidate the network infrastructure together to also allow us to accelerate our cost of revenue savings. So we would expect as we’ve mentioned before our CapEx to be in the range of 2% to 3% of our revenue moving forward. So we’ll see more CapEx spending in the second half of the year.

As we ramp up some of the integration efforts and as we grow our business organically, we expect to see some incremental CapEx, the beauty of our business is we’re still CapEx light, we are a network-based business but we are generally CapEx light because it is really the switching infrastructure that we maintain and grow as a function of that we have very high flow through from the adjusted EBITDA to unlevered free cash flow, so we would expect that to continue in our business moving forward.


And at this time, it appears there are no further queues in the question. (Operator Instructions) And it appears there are no further queues in the questions at this time.

Richard D. Calder, Jr.

Right. Well, thank you [Lassie]. I would like to turn over for any remarks to our Chairman, Brian Thompson.

H. Brian Thompson

Yeah. Thanks, Rick. I wanted to make note of something that Rick said which I think is very important for the future of the company and that’s our ability to amalgamate these acquisitions to actually have the capacity and the capability of bringing on whole new organizations and integrating them but not just integrating them from the standpoint of financially or business base but the people and it’s critically important to note that what we’ve been able to do is not simply pack on acquisitions and increase the revenue stream and other aspects of the business but we pick from the organization the best talents and we added the capabilities that we didn’t have before the Tinet acquisition.

So what we’ve done is we’ve taken both out of the exciting organization and the new organization. The best and the brightest and we do that very quickly and we do it very fair and have shown the ability of building an enterprise rather than simply growing an organization.

So I think that the beauty of where we are right now is we’re in even a better position than we were three months and six months ago to grow both organically and through acquisition, and that’s a rare case. And our industry as a matter of fact, in the business world that companies focus on that and do a good job of that building an enterprise and acquiring other companies.

So it’s a strategy that I think is unique to GTT, a lot of people would like to do that, we’ve shown the ability to do that. We will continue to do it. We’ll continue to create real value for the underlying shareholders in this company and being one of the large ones, I appreciate that as well as enjoyed working with the people that are doing it.

With that, I’ll turn it back to you.

Michael R. Bauer

Great, thank you, Brian. And we’re very excited about the second half of the year, as you know from our comments and very much looking forward to sharing our progress in our upcoming earnings call. So thank you again for all of your support for GTT and we look forward to sharing future progress with you in very near future.


This concludes today’s call. We thank you for your participation.

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