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

Q3 2013 Earnings Conference Call

November 14, 2013 10:00 AM ET

Executives

Chris McKee – General Counsel and Executive Vice President-Corporate Development

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

Michael R. Bauer – Chief Financial Officer

H. Brian Thompson – Executive Chairman

Analysts

Mike Crawford – B. Riley & Co. LLC

Keith G. LaRose – Bradley, Foster & Sargent, Inc.

Barry M. Sine – Drexel Hamilton LLC

Jason M. Kreyer – Craig-Hallum Capital Group LLC

Operator

Good day everyone. Welcome to the GTT Third Quarter 2013 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Chris McKee, General Counsel and Executive Vice President of Corporate Development for opening remarks and introductions. You may begin.

Chris McKee

Thank you and good morning. I’m joined today by Rick Calder, GTT’s President and CEO; Mike Bauer GTT’s Chief Financial Officer; and Brian Thompson, GTT’s Executive Chairman of the Board. Today’s discussion is being made available via webcast through the company website www.gtt.net. 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 the website address I just mentioned.

Today’s comments 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 depends upon or refer to future events or conditions or that involve the use of words such as anticipates, expects, intend, plan, believe, 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 current views with respect to the 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 the Risks Factors in GTT’s Form 10-K as filed with the SEC. Statements in this call should be evaluated in light of these important factors.

Also the discussion in this morning will refer to adjusted EBITDA, which is a non-GAAP measure. The 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 the GTT’s website.

I’ll now turn the call over to Rick Calder. Rick?

Richard D. Calder, Jr.

Thank you, Chris and good morning everyone. I will begin the call with some highlights from the third quarter including our successful integration of Tinet, our organic growth and review of our growth strategy and financial objectives. I will then turn the call over to Mike who will walk you through the financial results and our recent Mezzanine Refinancing in more detail and we will then open the call for you questions. So let’s get started.

With our third quarter results, GTT is now generating annualized revenue of $180 million and adjusted EBITDA run rate of $30 million. $30 million in annualized adjusted EBITDA is an important mile stone for us that we had recently set for ourselves back in the first quarter of 2011. At that time we began to be more vocal, about our plans to grow GTT organically and through acquisition to a company generating $200 million in revenue and $30 million in EBITDA.

We have now accomplished our EBITDA target and hit better margins than we had originally planned. Having achieved this goal, we are setting new objectives for ourselves, as I will discuss later today.

Profitability continued to expand in the third quarter and adjusted EBITDA grew over a 100% from last year’s quarter to $7.6 million. The profit growth was achieved on a revenue increase of 59% to $45.1 million.

Successful acquisition and integration contributing in full quarter results in Q3, as well as the delivery of anticipated deal economics drove the majority of it’s adjusted EBITDA margin expansion. We have continued to move our business to more on-net higher margin services which is helping drive our gross margin. Our on-net revenue now accounts for over 60% of our business.

Additionally evidence that our efforts to accelerate organic growth is also gathering steam in the metrics underlying consolidated revenue. In the third quarter, new installations almost doubled from the second quarter. For both Q2 and Q3, we installed new service at over 60% gross margins as we continued expanding our IP transit in the Ethernet mix of business, together representing approximately 80% of third quarter revenue.

In addition, our churn rate continues to decline. We churned in the mid-1% range in Q3 and Q2 as compared to our historical averages about 2.5%. As important is the composition of churn which continues to change. Lower margin off-net services are churning out, being replaced churn mix as I mentioned by higher margin on-net services.

So our overall base of revenue is now more profitable.

Going forward, we look to maintain our churn rate below 2%. Acquisition integration is essentially complete and the current contributing post-synergy EBITDA makes the purchase a lower than 4 times EBITDA multiple purchase.

As we mentioned last quarter, we have completed our client, vendor and service integration on to our consolidated client management database or CMD platform and integrated all back office financial and billing systems. Our go forward market organizations are combined and duplicative functions were eliminated.

During the Q3, we began to generate network synergies, which are ongoing and we expect our fixed GTT network operating expense to decrease over time. With this latest acquisition, we have again proved the success of our acquisition template that will further expand our network, increase our geographic footprint and enhance our service offerings.

During the quarter, as part of our efforts to diver organic growth we organized our business units and our sales and marketing teams to drive growth. In the Americas business unit, lead by Layne Levine, we now have three teams. Our two strategic teams are regionally focused on driving both new sales and deepening our relationships with existing customers. These teams are winning new multinational enterprise business, particularly selling Ethernet solutions. We also have a key accounts team focused on up selling and moving more services on-net from our existing base of accounts.

In EMEA led by Andy Johnson we have five teams including four strategic and one key accounts team. We see great opportunities for growth in Germany and Central Europe, which lends itself to multinational business. In the Middle East where there are significant IP Transit opportunities. In the UK and Ireland, were enterprise Ethernet and wholesale IP Transit are areas of focus. And in the Asia-Pacific region where we see opportunities in IP Transit for EMEA and U.S. routes as well as in Ethernet background services. We now have over 50 sales employees focused on our expanding value proposition.

To reinforce our sales process and improve our sales enabling and support, we’ve also strengthened our marketing efforts under our new Chief Marketing Officer, Corey Eng. We have solidified our services to facilitate the client experience process from quoting, through to ordering, installing, invoicing and servicing our clients.

We have strengthened our enterprise service portfolio including managed services and improved our client portal. We’re also driving cloud networking services by tightly integrating IT applications, infrastructure, and private networking and improving performance with strong data security and high touch client service. And we are building the GTT brand from upgrading our website to positioning GTT as the authority in our markets.

GTT’s positioning in the market place in unique. We focus on serving multinational enterprising care clients that are underserved by the largest incumbent telcos, clients that have growing needs for bandwidth, virtualization and security, who need to source these services across borders and who require quick implementation and flexible pricing. This is a very specific and growing customer profile and GTT’s objective is to establish the leadership position providing unparallel service in terms of world wide scope of services, reliability and price.

Our key strengths are as follows. First, the premier global network platform that we have built, delivering unmatched global speed and reliability through scalable and versible [ph] cloud networks, including our Ether-Cloud and IP Transit services with expansion for private, secure Layer 2 connectivity to cloud computing providers around the globe. Second, we have the right team for growth. We have strengthened our senior leadership team including the folks I mentioned previously and our Chief Technical Officer, Richard Steenbergen and Senior Vice President of Operations, Geoff Hicks.

Third, our sales and marketing strategy is demonstrating organic growth by focusing absolutely on the customer and communicating our value proposition that is differentiated by our simplicity, speed and agility. Fourth, we have strengthened our balance sheet through our own execution and the commitment, support and expansion of our lending groups we increased our financial flexibility and lowered cost of capital through two weeks in action, the expansion of our senior credit facility syndication that we announced in October and just last week the completion of our mezzanine refinancing. Overall, we have created an environment that enables us to raise liquidity while decreasing dilution.

Fifth, we have a proven acquisition strategy. Our acquisition pipeline remains very strong and we are prepared for another acquisition in 2014. Our results during 2013 and continued strong execution positions us to end the year on a very strong note. As I mentioned, we have achieved our objective of a $30 million adjusted EBITDA annual run rate. Through a mix of accelerated organic growth and making selective additive acquisitions, we have set new three objectives to more than double our current annualized run rate to a $400 million level and more that triple our annualized adjusted EBITDA run rate to $100 million.

This revenue objective is intentional at $400 million. GTT will be unique in our marketplace with an established market position, leadership position in the Ethernet and IP Transit markets, the brand awareness to drive continued organic growth and increased scale to compete effectively in the market. For now, the remainder of 2013, we are focused on solidifying our platform to accelerate our growth next year.

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

Michael R. Bauer

Thanks, Rick. Let me start with the income statement. Revenue for the third quarter of $45.1 million grew 58.8% year-over-year and 13.5% sequentially, driven by the inclusion of Tinet for the full three months of Q3 as well as positive organic net installs during the quarter.

Gross margin of 34.5% expanded from 29.7% last year and 34% last quarter. As Rick indicated, we are seeing gross margin expansion as we sell more and more on-net services at higher margins.

Adjusted EBITDA at $7.6 million increased 104% year-over-year and was up 49% sequentially from the $5.1 million reported in Q2. Given our adjusted EBITDA growth in very low capital expenditure needs, unlevered free cash flow generation continues to be high. Year-to-date we’ve spent $2.3 million in CapEx or about 2% of revenue, yielding approximately $14 million of unlevered free cash flow.

In the third quarter, we recorded a $2 million non-cash mark-to-market adjustment for our warrant valuation due mainly to the 22% growth in our stock price during the quarter. Additionally, we recorded a $1.3 million non-cash mark-to-market adjustment related to the nLayer acquisition earn-out. The sellers of nLayer elected to take 100% of the equity earn-out component available in the $1.5 million earn-out paid on October 30.

Based on that election and the rise in our stock price we have estimated that they will elect again in their final $1.5 million earn-out in April 2014. Those charges are recorded in the other expense net line item on the income statement.

Subsequent to quarter end, we announced the amendment to our $25 million mezzanine financing reducing the 13.5% interest rate down to 11%. This amendment also permitted the additional takedown of $3 million at the new lower rate as well as the wave the warrant issuance in connection with the draw. This 250 basis point reduction lowered GTT’s overall weighted cost of capital from 8.45% to 7.75% resulting in annual interest savings of $700,000.

Both our senior mezzanine banking groups have expressed interest in growing their investment in GTT. With our proven track record to access capital, our increased borrowing capacity and a lower cost of debt, we are well-positioned to support our growth strategy and pursue future acquisition opportunities. We are focused on our growth plan as Rick outlined and appreciate our financial partners Capital Markets support.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Mike Crawford with B. Riley & Co. Please go ahead.

Mike Crawford – B. Riley & Co. LLC

Thank you. B. Riley & Co. On the last mile access, is there any efforts you can do to reduce the tails that you need to connect from your on-net to get right to your customers or what’s going on in that regard.

Richard D. Calder, Jr.

Mike, well thanks for the question, I appreciate. I think one of that things that makes the GTT network and our value proposition unique is the fact that we actually work very aggressively to establish relationships with over 800 cable providers around the globe, and we generally maintain through our client management database a inventory available last mile providers and have established through our points of presence, network to network interconnects to allow ourselves to extend our network through our vast reach and point of presence. We have two enterprise buildings around the world.

So we think it’s a key differentiator in our business. We have been doing it for over 15 years, being able to extend network presence and we work very diligently as we have grown to establish great pricing models with all of the network vendors that we actually use. So we think the pricing structures that we have with those vendors are quite competitive and to be very clear, we actually establish the tail contracts that are back to back with our client contracts. So each one is the same volume and term as for example, clients who want to extend a 10 Mb Ethernet tail, 100 Mb Ethernet tail or even a gigabit Ethernet tail to their location.

So we think that the pricing, the availability and our ability to implement and execute on these tails is great. So we actually think that part of our business is the cost structure is very aligned with our revenue structure and we think the ability to offer multinational networks to our clients are very strong.

The point that I mentioned Mike about network integration is in the core. Today, we have a significant network expenses, probably about little less than half of our cost of revenue, now is the fixed operating expense to maintain and manage the core network, all of the capacity is very diverse capacity we have that interconnects our hubs together as well as the point of presence expenses well to actually maintain and manage the points of presence we have around the network.

We as we have done successful integration as we mentioned in the prepared remarks, see real opportunity to continue to further integrate our network together and we will expect to see that expense in our core business continue to decline over the next 12 months.

So we think the balance of being able to extend our network to client premise is done at very attractive and leasable terms for our clients and be able to continue to see network synergy by continuing to expand on the integration of our network. We will continue to drive cost of revenue and margin expansion of our business over the next 12 months to 18 months.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you. Your current scale is 50 sales reps above, right are you still hiring?

Richard D. Calder, Jr.

We have mentioned over the last couple of quarters that we continue to expand. We historically have maintained a much smaller sales force in the 20-25 range. So we have now expanded very rapidly over the past three four quarters to a business over 50 and I’d expect that we’d continue to look for selective expansion beyond that in both our Americas and our EMEA business units driven predominantly by the great reception we are having for the value proposition in the cloud networking services that we are selling to multinational enterprise and carrier clients. So yes, we would expect continued incremental investment in direct sales force around the globe.

Mike Crawford – B. Riley & Co. LLC

Okay. And then related to CapEx, how much would you characterize as success based and is about $1 million a quarter from here a starting point to think about?

Richard D. Calder, Jr.

Yeah, I mean roughly, I mean we have historically said that we would intend to spend roughly 2% to 3% of revenue on CapEx. So at $180 million run rate, you would expect $4 million to $5 million of CapEx. In terms of it being success based, the overwhelming majority of the capital that we put into our network is success based new business coming into the network.

Mike Crawford – B. Riley & Co. LLC

Okay. Thank you. And then just a last question on the capital structure, so well, congrats on the mezzanine financing, do you still have negative working capital or is that something that your business structurally can support for a long time or is that or do you need to get more current assets?

Richard D. Calder, Jr.

No. We believe it’s something that we can’t digest. It typically gets larger as we do a deal as we digest. The network continues to reduce that working capital that’s it. If you go back and look historically at the deals we have done, usually spikes up after a deal and then we will work it down over the course of generating the free cash flow. As I mentioned in prepared remarks with $30 million EBITDA base and high on free cash flow, we will continue to chip away at that working capital, that’s it.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you very much.

Richard D. Calder, Jr.

Thank you Mike.

Operator

Thank you. And our next question is from the line of Keith LaRose with Bradley, Foster & Sargent, Inc. Please go ahead.

Keith G. LaRose – Bradley, Foster & Sargent, Inc.

Good morning, nice quarter.

Richard D. Calder, Jr.

Thank you.

Keith G. LaRose – Bradley, Foster & Sargent, Inc.

With respect to your longer term objectives of doubling revenues over the next three years, can you quantify or give an estimate as to what you mean by some organic growth?

Richard D. Calder, Jr.

Sure. Thank you, Keith for the question. We have said publicly that we would like to see double-digit organic growth and to put sort of a finer point on that, we’d like to see our organic revenue growing top line in the 10% range and in the bottom line EBITDA basis at 15% to 20%. We see some nice leverage in our business, particularly as we noted that we are selling services that much higher margins and we are returning our services at the lower more historic margins. So we see some nice leverage in the base of business.

We are making investments in SG&A to actually playable more rapid growth, but we do believe that we can grow the bottom line at a fast rate than the top line. So that would be our objective in that range.

We have not achieved that historically, but we believe with the expansion of our sales force while it's maturing at this stage, the great receptivity we're seeing with the value proposition as I just noted to Mike and our ability to keep our churn rates which have historically been 2.5% or higher, under 2% that we see the opportunity to grow much more aggressively organically over the next couple of years.

Keith G. LaRose – Bradley, Foster & Sargent, Inc.

Thank you.

Operator

Thank you. And our next question is from the line of Barry Sine with Drexel Hamilton. Please go ahead.

Barry M. Sine – Drexel Hamilton LLC

Good morning gentlemen. I want to follow-up on that question previously on that sale circuit. On the [indiscernible] conference call last week, they talked about domestic in the U.S. because of extensive build out by folks like Verizon and AT&T on fiber circuits seeing sales circuit pricing come down pretty meaningfully, they can pass that on to be more competitive. What are you seeing in the domestic market there?

Richard D. Calder, Jr.

Yes. I would agree Barry. Thank you for the question. That we are seeing domestically and when we say domestically meaning the United States that we are seeing reduction in higher speed Ethernet services. So we have created also established even deeper, what we describe as network to network interconnect to be able to more seamlessly deliver 10 Gb, 100 Gb connectivity to our customers as the available inventory from various incumbents and newer local telecommunication players open up opportunities for us to be more aggressive in local market.

One of the real value is the local U.S. market, one of the real values again of the GTT value proposition is serving multinational enterprises, not only in the domestic U.S. market, but in the broader European market, in the Asia-Pacific market, and Africa, in the Middle East, in the Latin America, in Australasia. So we are very focused on not only delivering higher capacity services in the United States, but any service, anywhere, to any building, in our enterprise profile around the globe.

Barry M. Sine – Drexel Hamilton LLC

Okay. And then that's helpful. My next question, now that you guys had a much larger sales force, you target to grow more rapidly organically. Could you talk a little bit about what you're seeing in terms of the competitive environment, where do you seeing price lies, what is your winning proposition of prices, service and combination thereof, what is your sales pipeline look like and then what is the backlog, one but not yet fall contracts collected?

Richard D. Calder, Jr.

Thank you for the question. Barry, I will try to say if I can get them in order. First, in terms of pricing, I think as we have said over time we continue to see and will see I think for all time in the communications market price per bit continued to decline and we see it declined different rates, across the different services, but as technology continues to advance, we would see price per bit decline, it is out weighed by the general trend of significantly higher traffic volumes. And so that we see the general revenue trend in our industry to be up as traffic outpaces the price per bit declines.

As a function of that one of the real benefits for value proposition is that almost every enterprise in the globe needs more capacity and it creates a unique environment that at almost at any point in time year-over-year, every enterprise has a reason to look to replace their incumbent solution, to say I need more bandwidth at better speeds, more flexibly delivered that can scale with my needs.

And we think GTT is uniquely positioned company in the industry to be able to address the growing demand for bandwidth in the industry and it is equally as we talked about the concept of cloud networking that we provide to give CIOs the ability to have private Layer 2 connectivity to cloud computing and cloud service applications over the global GTT network for many of their locations including our headquarters and any branch locations if they have around the globe.

So we see that value proposition continuing to resonate. It is the reason we actually significantly address and upgraded our sales organization and expanded the scope and scale of being able to deliver services around the globe and we are very heartened as we said with the early success we had in being able to continue to sell and install at ever increasing rates than we historically have and keep our business at better rates than we ever have in the past.

So that said, we carry a nice healthy installation backlog, a net installation backlog of net installs above the churn, well, over probably $354,000 at this stage moving into the fourth quarter and we would expect that our backlog will continue to grow as we move forward.

I am not sure, did I get all those, let me see if I address all of them directly, I am happy to take a follow-up.

Barry M. Sine – Drexel Hamilton LLC

Yes, you did. As usual I'm going to have a follow-up on that. Just a number question, some of you peers companies throw out numbers in terms of what they're price per bit is, across their network can you share that information with us?

Michael R. Bauer

We have not historically, we may consider doing that in the future. We provide generally a package set of services across our Ethernet and IP Transit services. So it is something we may consider we have not historically done it in the past, but it is something we may consider in the future.

Barry M. Sine – Drexel Hamilton LLC

Okay. And my last question turning to acquisition, you guys I can hear you talked a little bit to get another acquisition under your belt, could you talk about what’s on your shopping list, whether sector wise should we expect to see something similar Ethernet transport like a Tinet and then also geographically, Rick, you’ve talked in your comments about the number of geographies, Asia-Pacific, Africa, Latin America, lot of acquisitions Europe. So where do you thinking about by product wise as well as geographically.

Richard D. Calder, Jr.

Sure. A couple of points, one, we believe that we have a very successful acquisition template, while the past we not predict the future. We have done in 2011, 2012 and 2013 an acquisition in each of the second quarters and we think we can prudently integrate, identify, acquire and integrate acquisitions within one to two quarters, that can deliver in the 3 to 5 times post-synergy EBITDA range and we believe that we have successfully integrated the last acquisition. So we will be prepared to do another acquisition in the first half of next year.

With respect to our template and what we're looking for, I think it fits many of the things. It really is focused on trying to deliver across the three main areas that we as the business want to continue to explore as our key initiatives removing the business forward. First, would be expanding the network itself, keeping pace with the growing scope and scale of our client demand and that would include particularly geographic expansion.

So we continue to look for interesting things whether they are in the Asia-Pac region, whether they’d be in Latin America, Middle East, Africa, things that will be complimentary to the existing network we have, to expand the scope and scale and the points of presence we have around the globe. So that clearly is one.

Second would be acquisitions that continue to expand our cloud networking service portfolio. We believe we have one of the largest worldwide global backbones and the ability to add incremental services on top whether it’s connectivity to the cloud computing ecosystem, whether it’s adding more traditional IP, IP-voice, managed video conferencing and other managed services that we could add on top very relatively easily and help through acquisition do those. Those are type of things that we’ll be looking at in sort of the acquisition universe. There we do have as we noted in the prepared remarks a very deep funnel of highly strategic things that are very focused on our core markets. As we have in the past spend specifically about anything until it actually is consummated we would expect that it would be a key part of our acquisition strategy because we have proven our ability to successfully identify, integrate, continuously show the result in one to two quarters for our investors.

Barry M. Sine – Drexel Hamilton LLC

Okay, those are my questions. Thank you, very much Rick.

Richard D. Calder, Jr.

Thank you, Barry.

Operator

Thank you. And our next question is from the line of George Sutton with Craig-Hallum. Please go ahead.

Jason M. Kreyer – Craig-Hallum Capital Group LLC

Hey, guys. Thanks for taking my question. This is Jason on for George Sutton. Just wondering on your new churn expectations, you’ve been able to move churn down over the last couple of quarters below its historic levels and just wondering if you can talk about what is driving the reductions there. And then if you think there is room for additional improvement from current levels and where you think that could go to.

Richard D. Calder, Jr.

Jason, great, really appreciate the question. Couple of things we think that are driving, we truly have transformed the business over the past two to three years, from a business that was predominately off-net to a business now that is predominately on-net and we see the value proposition that we provide to our clients with on-net services at sustainability higher, recognizing of course for these on-net services we extend from most of our clients to reach through the off-net tail partners we described through their location. But we control the traffic flow of that client over the core of our network.

As a function of that, the longevity of those clients is significantly greater than the longevity of completely off-net clients. And so as a function that we’ve seen the natural churn rate come down as a function of that shift in mix.

At the same time, there have been two other drivers of reduction in churn rate. One, our traditional mix had been a heavier concentration of carrier clients. We remain committed to serving the needs of multinational carriers around the globe. We have a much higher percentage of enterprises in our mix at this state. And we have seen the churn profile of enterprise business lower than the churn profile of carrier business. Both remain important to us but as the mix of enterprise business is greater in our mix, we’ve seen our churn rates come down.

And the third major trend Jason is that we have moved our business from a predominately Layer 1 private line business, TDM based business to a Layer 2, Layer 3 Ethernet and IP services mix. And as we’ve seen more clients churn out Layer 1 in favor of Layer 2 and Layer 3 particularly our legacy carrier clients, where we did not have the end user relationship, we have now seen our churn rates come down relative to private line versus Ethernet and IT which now represents as I mentioned 80% of our business.

So we’ve seen nice performance in churn as we noted over the last couple of quarters in the mid ones. Our goal is to maintain, we think that is a reasonable churn rate for our business and it will always be a factor in everyone’s business whether our clients are closing offices, whether they are being acquired et cetera.

So we will have some level of churn to the degree that will reduce it through outstanding client experience we love to and our business plans we are as we noted planning to keep it below two, do we have opportunity there, absolutely. We have been in the mid ones in the past and that is one of the key drivers of being able to grow organically at a faster rate which is why we are now projecting our ability to grow much faster organically moving forward, not only through the increased pace of sales and installs, but the reduction in the percentage of churn over a larger base of business.

Jason M. Kreyer – Craig-Hallum Capital Group LLC

Okay, perfect. Thank you, Rick. I appreciate the color on that. And then just one more on that on-net that you were just talking about, I think you said in your prepared remarks that you are up to 60% on-net right now. And then just wondering if you can maybe give some sort of an outlook, where you think that could grow to in the next say like two to three years?

Richard D. Calder, Jr.

Yes, we’d expect that there are that over this three year horizon where we plan to more than double the size of the top line to $400 million and more than triple the size of the bottom line to $100 million in EBITDA we would expect that our on-net mix would grow from over north of 60% range to probably in the 75% to 80% range. We continue to expect one of the large clients we have is the U.S. federal government, much of the business we have with them is off-net.

We think that profile of that client is great for us, churn profile as well. We will continue to support and grow that base of business we have with the government. So we would never expect it to approach 100, but we have and we have select opportunities we do for clients that are not good fits for our network and we do off of our network. So we have the flexibility to be able to support any potential demand that our clients have by doing things both on-net and off-net, but absolutely we would expect that the mix of our business to grow from what was zero five, six years ago to in the 75% to 80% plus range.

Jason M. Kreyer – Craig-Hallum Capital Group LLC

Okay, great. Thank you very much.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Howard Rosencrans with Performing Capital [ph] please go ahead.

Unidentified Analyst

Yes, hi guys, thank you. Sorry, I was on and off the call. You commented that you are targeted now to get revenue to decline in the $400 million to $500 million level and EBITDA to $100 million, is that right?

Richard D. Calder, Jr.

Thanks for the question, Howard. Yes, we said that our next objective over the next three years by run rate by the end of 2016 is to more than double our revenue stream to $400 million and more than triple our adjusted EBITDA from $30 million to over $100 million and to grow effectively our EBITDA margins from where they did today, slightly below 17% to in the mid 20% to 25% range.

Unidentified Analyst

Okay. Most of that happened at the – I think your gross margin was 35% in the quarter just reported?

Richard D. Calder, Jr.

34.5%.

Unidentified Analyst

Okay. And is there more room there or will be more so from operating expense synergies?

Richard D. Calder, Jr.

No. We absolutely see Howard gross margin expansion. So as we see in our business, we are adding new business at greater than 60% gross margins and we are churning out more of our legacy off-net business that is in the 30% gross margin range. So we definitely see margin expansion. We also see the ability to continue to take out the fixed GTT network operating expense and continue to have that decline over the next 12 months. So those two factors would help increase our gross margins over time. So if you think about ranges for that three objective we have we would expect a business that would be in the 40% to 45% gross margin and maintaining a business in the 15% to 20% SG&A as a percentage of revenue.

Unidentified Analyst

Okay. That’s better, it’s very helpful color. And what has been your organic growth rate? I know you said you’re going to hopefully target 10% going forward, but what has been your organic growth rate…

Richard D. Calder, Jr.

We’ve been a very nominal organic grower 0%, low single-digit percent organic growth. We kept the sales force that effectively has been able to replace the churn that we have had in the business at the 2.5 plus percent range, but have not invested prior to actually increasing the value proposition of the business with the core network asset that we have now created with the ability to extend it for cloud networking solutions anywhere in the group.

So we kept our revenue stream sort of at par and have grown the business predominately through acquisition over the past three, four years. We now expect the ability to be able to drive double-digit organic growth at the same time that we prudently, identify on a pace similar to what we have done in the past, a good strategic acquisition once a year, add an acquisition to add the benefits that I described when I answered Barry’s question. So I think we see the ability to continue to grow through acquisition and add a very nice and sustainable organic growth component to our business.

Unidentified Analyst

Okay. And it’s turning sort of a liquid and I’m just wondering if you have any thoughts on how that might be addressed or some of the larger holders interested in potentially doing a secondary or just that you had any thoughts along those lines.

Richard D. Calder, Jr.

Sure, Howard. I think it’s a great question. I’ll turn the call over at the end to our Chairman, Brian Thompson who is our largest holder of our equity. He may want to comment on that question as well. We’ve been very privileged to have a set of investors that have actually very much enjoyed the acquisition that we’ve had and historically have bought our shares as we’ve actually grown our business. So we just hadn’t helped our liquidity profile. We continue to look at lots of different options that are in the best interest of our shareholders, whether that would be to, as Mike noted in his prepared remarks, make sure that we have the best and most flexible debt spending sources available to us to continue to grow our business through senior and mezzanine financing sources and we see lots of possibilities there.

We continue to explore and think about opportunities to use equity. We actually, as Mike mentioned, don’t need for the base of our business must incremental capital. We simply are a very high free cash generating company. So to do the organic pieces of our business it is not really a requirement.

We will work down. We historically have always maintained a working cap in balance and work it down over the subsequent quarters of doing acquisitions. That said, having incremental financing flexibility and being able to – and we have recently moved our listing to the New York Stock Exchange.

We’ve seen some increase in our liquidity. So to the degree that it is a beneficial thing for us at attractive rates to our existing investors, it’s something we would explore, and as a function of continuing to look for acquisition, financing it’s something we might explore as well. So we’ve had a lot of success in being able to fund our acquisitions through debt financing as well.

Unidentified Analyst

Thank you for the color. Just to go back to the organic growth targets you’ve established. I’m not sure that you breakout – please correct me if I’ve mistaken [indiscernible] the organic growth that you achieve in each quarter, will you be doing that on a going forward basis, I’m assuming you haven’t been, and when would you expect to move closer to even submitting this, I guess that 10% is a longer term target or…

Richard D. Calder, Jr.

Yes, Howard, as we mature our sales force 10% over this growth strategy, over the next three years 10% would be our strategy over the next three years to achieve a 10% organic growth rate as we grow our business to reach our $400 million and $100 million EBITDA growth, 10% on the top line, 15% to 20% on the bottom line.

We think we can achieve that over this next three-year phase of our growth strategy, recognizing of course that our sales force growth has been relatively decent and so they are coming up the sort of 10-year curve at this stage, but we clearly see that to your question. We have not. You are accurate. We have not broken out the two. It’s something we would consider and clearly in the quarters that we have no acquisition it will be very easy to report organic growth on the top and bottom line.

Unidentified Analyst

And last question. Any thoughts on what you seriously impediment the risk, what you sleep over in terms of your business and what comes along the year?

Richard D. Calder, Jr.

A couple of things. One, we think about our growth strategy being two-fold organic and through acquisition. The organic is a relatively straightforward equation of making sure that we are selling and installing new business at increasing cliffs and churning at lower rates. And so if I had say that the piece that is the one that we – to Jason’s question a little bit ago from Craig-Hallum, to the degree that we can maintain our churn rates in the mid-1% it creates great opportunity for us to grow much more rapidly even at the mid 1% versus even the 2% range, which is our goal to maintain below 2%.

To the degree churn rises, it becomes more difficult to grow organically. So I think that’s one of the real piece for us is to maintain an outstanding client experience to the degree we’re keeping – are delivering great solution to our clients that keep our churn rates at the rate that we have experienced over the past couple of quarters. So that’s the real investment.

And then making sure that when we look for acquisitions that we are taking the same playbook that we have successfully executed over the past four years to find acquisitions that are absolutely correct for us, that meet our investment profile, that meet our strategic profile of things, that will expand consistent with our enterprise and carry our data networking focus that are the right size for us to integrate and that we can see the acquisition and integration synergies within the first two quarters and manage within the global system and client management database that we have successfully integrated the six major companies that we put into the system today. So making sure that we keep to that playbook and we have been a very diligent and focused team to be able to do that very successfully. We want to make sure that we execute that consistently in the future.

Unidentified Analyst

Thanks. I appreciate all the color. Thank you gentlemen.

Richard D. Calder, Jr.

Yes.

Operator

Thank you. (Operator Instructions) And our next question is from the line of Jack Canter, a private investor. Please go ahead.

Richard D. Calder, Jr.

Operator?

Operator

And it seems he has removed himself from the queue. I am showing no further questions. I will turn the call back over to management for any closing remarks.

Richard D. Calder, Jr.

Great, thank you very much operator. I’d like to turn the call over now for a few minutes to Brian Thompson.

H. Brian Thompson

Thanks Rick. And my remarks will be very short, but obviously sweet. I think what I would note for everybody is the change in this company is very well parallel to change it takes place in our industry which is very rapid and that the demands of the people that are using telecommunications and information technologies changes about that fast. If you look back six months ago, you will see a huge change in this company in moving as Rick pointed out to acquire more sophisticated service package that we’re offering to people.

More importantly, I think we used the term authority in relating to what’s going on especially in the cloud services, Ethernet and IT Transit business. And that’s the objective that changes the nature of the company just as the industry is changing. Probably the most promising future that will affect our change over the next six months and the next year and year and a half is going to be how the enterprise customers that we’re dealing with demand and are interested in moving to cloud computing, moving to very secure and very virtual private use of that cloud computing, which is something that’s critically important especially in a very sensitive field of financing and information.

And where we are positioned now as a company? I think tells you a bit about what the attitude is of the management team and what we’ve done over the past six months, over the past year, is to bringing together a group of people that are now a very different team than they were a year ago, and they are able to not only establish that network and not only sell new and fairly sophisticated services to our customer base, but their listing to the customer is they’re creating a very customer centric view of what our product stream model look like.

And what you should be looking towards in the future. It is how this team not only can grow domestically and internationally on an organic basis, but how they are able to integrate the new requirements of our customers into that offering and I think our cloud Ethernet offering is just one of those that’s going to have a great promise and it’s going to create a base of business for this company going forward and that will only be enhanced.

So we’ve got the team that not only can do that organically but they also have shown a unique capability of not only acquiring companies but merging them and integrating them. We are one company today. We don’t have pieces of five companies. We are one company.

Each time Rick looks at a new strategic acquisition is with that in mind, how can we benefit both from the people and the skills that have put that company together, but how can we integrate those with what we are already doing, so that we have efficient and a very effective company going forward.

GTT is just at the beginning of what tends to be a great future in its role in serving people’s needs in the telecommunication and information technology business and are very proud of what they have done.

The question of equity came up and I am the large equity holder in the company and I continue to be and I hope I am for the sometime to come and I think that equity is going to be a very useful tool as Rick said as people begin to recognize the true value of the company, and that is the true value of the company shown in the share prices, we will see a lot more trading taking place and you will see us using that equity to expand both the opportunity for the Company as well as results.

With that, thank you all for being on the call. I thank you for your interest and I am as excited looking forward to the next six months as you should be. Thank you.

Richard D. Calder, Jr.

Thank you Brian and thanks everyone again for joining our call. For the remainder of this year, we will be very strictly focused on execution to make sure that we build this platform to achieve our growth goals not only for 2014, but for the next three year growth strategy that we have through 2016 and we look forward to reporting our progress to you at the end of the year. So thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes our conference call for today. We thank you for your participation and you may now disconnect.

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