Global Crossing Limited (NASDAQ:GLBC)
Q4 2009 Earnings Call Transcript
February 17, 2010 9:00 am ET
Mark Gottlieb – SVP, Finance and IR
John Legere – CEO
John Kritzmacher – EVP and CFO
Gary Breauninger – CFO, North America and Worldwide Carrier Services
Mike Rollins – Citi Investment Research
Romeo Reyes – Jefferies & Company
Donna Jaegers – D.A. Davidson
Winston Len – Goldman Sachs
Ladies and gentlemen, thank you very much for standing by and welcome to the Global Crossing fourth quarter and year end 2009 earnings conference call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded on Wednesday, February 17, 2010. It's now my pleasure to turn the conference over to Mark Gottlieb, Senior Vice President, Finance at Global Crossing. Please go ahead, sir.
Thank you, Pamela. Good morning everyone and thank you for joining us today for our fourth quarter and full year 2009 earnings call. John Legere, our Chief Executive Officer and John Kritzmacher, our Chief Financial Officer are here with us today. They will each share their comments after which we will open the call for some questions. Presentations slides can be viewed to help follow our prepared remarks today. They are available via web cast which you can access through our investor relations site. If you go to www.globalcrossing.com, access the investor site and follow the links to the webcast.
Please note that the financial results discussed on this call are unaudited results and are subject to adjustments in our final audited results to be included in our annual report on Form 10-K. Next, I'd like to remind everyone that statements made herein that are not historical financial results are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934.
Our actual results could differ materially from those projected in these forward-looking statements and factors that could cause actual results to differ materially from those in these forward-looking statements are contained in our reports filed or furnished to Securities and Exchange Commission including our annual reports on Form 10-K and quarterly reports on Form 10-Q. We're 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 the Forms 10-K and 10-Q. We refer you to our financial press releases posted at www.globalcrossing.com, which include explanations of reconciliations with the closest GAAP financial measures from non-GAAP measures such as operating income before D&A or OIBDA, free cash and the constant currency measures we reference.
With that, I will turn the call over to John Legere.
Okay. Good morning, good afternoon or good evening. Thank you, everybody for joining us. During the call today, I’m going to review our results for the fourth quarter of 2009 as well as the full year. We will share our view of the demand environment and we will discuss our 2010 objectives.
Let's get started, I'm pleased to report to you that Global Crossing delivered results for 2009, which were within our guidance range. Here is a quick snapshot. We increased consolidated revenue by 3% and invest and grow by 6% in 2009 on a constant currency basis. We produce positive free cash flow for the second consecutive year with a total of $82 million generated in 2009.
Our performance in 2009 is the result of our continued focus on our target markets, consistent execution of our strategy and prudent cost management. We approached 2009 as an opportunity to sharpen our focus and discipline in was a challenging economy, continue executing our strategy and to deliver our advanced IP based services within unsurpassed customer experience.
We continued to invest in our portfolio of global IP, Ethernet hosting and collaboration services bringing a very robust product set to market. Most important, we continued to differentiate the customer experience that we provide. Our customer focus was validated by a very favorable 2009 customer satisfaction score as well as several industry awards.
As I mentioned, we are also aggressively managed our cost structure of the business while continuing to invest carefully in our future. Finally, we successfully completed a $750 million refinancing, simplifying our capital structure, providing more operating flexibility, improving our liquidity and extending the maturity of certain long-term debt obligations.
We delivered on each of our four main objectives in 2009, meeting our financial objectives is first among them. Our company grew revenue to $2.54 billion, a 3% increase in constant currency terms. Revenue from our investing growth services increased to $2.2 billion, a 6% increase also in constant currency terms.
Gross margin improved by 100 basis points and for the year, it was more than 30% of our revenue. This performance coupled with prudent cost management yielded $342 million of OIBDA for the year and improvement of 25% year-over-year. On a constant currency basis, OIBDA grew more than 30% year-over-year.
Finally, as I said earlier, we improved free cash flow in 2009 to $82 million compared to $11 million in 2008. We ended the year with $493 million of total cash on our balance sheet. Our second objective in 2009 was to continue to invest in the business. In 2009, we made targeted investments in products and services focused on growth segments of our market and we upgraded our core network to meet demand.
For instance, we continued to invest in Ethernet transport. We launched our EtherSphere, Ethernet LAN service in 26 countries. We also continued to roll out and expand our EtherExtendFlex service to offer customers, a cost effective and flexible alternative assetmathic [ph]. We also expanded our global data center presence in 2009 as well, opening a new facility at Amsterdam and augmenting at Buenos Aires and Santiago data centers to meet strong demand.
In addition, we continued to expand our suite of VoIP services. We expanded the reach of our VoIP local service and made it easier for enterprises to implement a unifying communications platforms. We significantly expanded capacity on our undersea fiber optic cable systems and IP core network both to meet growing demand for converged services. For example, we added transport capacity on each of our five wholly owned submarine systems due to strong demands across all major routes comprising our global subsea network.
We upgraded capacity on IP core network worldwide to support traffic growth as the demand for video and other content rich applications continues to grow. Today, we are one of the top global internet backbone providers, which positions us to address and capture our share of the widely projected continued growth in demand driven by these types of applications.
We continue to expand the reach of our global network to address new market opportunities enhancing our service capabilities in Asia, in Europe and in Latin America. Collectively, these investments position us to continue to meet the demand for global productivity with IP and data-centric applications.
Our third objective was to continue building customer loyalty, as the customer experience is a key differentiator for us. In 2009, we did that as well. For instance, we continue to earn strong customer satisfaction scores, independent survey results we commissioned in 4Q, 09 indicate that 96% of our customers are satisfied and 72% are very satisfied.
We've also observed a consistent increase in the loyalty metric over the last 12 months, which is considered higher for Global Crossing than for any of our competitors. In addition, we received recognition in 2009 to be excellent customer experience we provide. We were selected for the 2009 World Communication Association Users Choice Award and receive several industry awards for excellence as a global wholesale provider.
Industry research firm, Frost & Sullivan also recognized Global Crossing as Latin America's Corporate Services Provider of the year. In addition, we received the supplier excellence award from a leading Fortune 500 global defense and technology solutions company, which cited our innovation as well as our quality products.
The ultimate test of customer loyalty is whether customers continue to buy from us and they did. This is demonstrated by the fact that approximately 70% of our incremental revenue in 2009 was generated by existing customers giving us more of their business.
Finally, we said in 2009 that we would continue to invest in our people. We successfully deployed local, regional and global employee productivity initiatives that directly contributed to the results that I'm sharing today. We also chose to invest further in our sales team, selectively adding new headcount to grow the business and increase the depth and quality of the support we provide to our customers. This investment in our people is an important factor in the exceptional customer experience we deliver and the results we are reporting today.
Now, let's discuss demand. Going forward, we believe the fundamental demand trends will continue to drive operating growth in our business in 2010. Despite continued uncertainty in the global economy. Third-party research suggested even in the face of lower IP budgets, companies would continue to migrate to a converged wide area of network for voice, video and data application solutions to generate cost savings and efficiencies.
We see globalization, productivity enhancements and compliance requirements as the key drivers of demand over the next 12 months driving the continued adoption of IP VPN and Ethernet networks. As a sharetaker, we have seen this market opportunity in our sales funnel and in the types of deals we are closing. As you know, one of the leading indicators, we track is the average level of new orders for services that generate monthly recurring revenue.
Orders for the fourth quarter averaged $3.8 million which was up from Q3, which is 3.4 million and the full year average of 3.7 million. Full year average was also a bit somewhat depressed by the impact of foreign exchange of approximately 150,000 which would have put the 3.7 million average at approximately 3.85 for the year.
We also observed attritions in the fourth quarter which was consistent with the historical averages and improved from the third quarter and we believe that both these indicators suggest continued stability of demand. On pricing, we have observed no material change in trends from those we spoke about last quarter with relative stability across most products and geographic regions and the downward pressure we have previously discussed of IP transit pricing in the U.S. and Western Europe.
As we look ahead, we believe we are well positioned. We believe that globalization and the increased use of data services and applications will continue to drive demand. Carriers, content providers and social networking companies are continuing to see increases in traffic volumes.
Broadband penetration, video application growth, large file transfer, mobile data applications, social networking and gaming all are rapidly increasing. Unified communications and cloud computing promise to drive increased use of networks and applications giving us the opportunity to leverage our global IP network and data center infrastructure.
According to estimates produced by Cisco, an industry bellwether, IP network traffic is projected to increase at an annual growth rate of approximately 40% through 2013. We expect this growth to continue to generate demand for Global Crossing Services.
Overall, our goal is to provide solutions that maximize enterprises global application performance while providing a superior customer experience. To that end, as a part of our long-term strategy, we will continue to invest in the products and services that move us up the value chain.
We will globalize some of those services where we already have an established market presence at a regional level and we will develop new offers around managed services, unified communications and collaboration as well as cloud based services.
In parallel, we will look to invest and expand our presence in emerging markets in Latin America, Eastern Europe and Asia. This is critical since multi-national corporations will increasing have requirements in those geographies.
Now let's discuss our specific objectives for 2010. Global Crossing entered 2010 with solid momentum. We are targeting to increase invest and grow revenue by 7% to 10% while improving margin and continuing to invest in our business.
We will do that in part by increasing our investment in quota bearing head count and by leveraging functions that support sales. We are also targeting more than 20% OIBDA growth at the mid point of our guidance range in 2010.
Now, we opportunistically refinance the majority of our debt in Q3 which added great flexibility to our capital structure as well as increased our cash balance. This will require an additional $55 million of interest expense in 2010 compared to 2009 but again this was a very positive refinancing for Global Crossing.
In spite of this additional cash interest, we expect another year of positive free cash flow driven by improvements in the operations of our business. This expectation is also inclusive of planning for a lower level of sales of IRUs and prepaid services as compared to 2009.
I want to be clear. We are focused on achieving positive free cash flow again in 2010 as a top priority. We will also continue to invest in products, services and network assets that will support our goals for growth. Key areas include expanding and upgrading the network where demand requires expanding the global reach and capabilities of our EtherSphere, IP VPN and VoIP services, strengthening our suite of collaborations services and globalizing and augmenting our managed services portfolio. We also will expand our data center presence while leveraging our managed hosting platform to develop client based services.
In addition, we plan to deliver significant enhancements to our online customer service portal which should further strengthen our customer experience value proposition. We will also continue to focus on our people who are critical to our differentiation and future success, investing in their skills, their knowledge and their professional future.
In 2009, we delivered good results in a tough year. We delivered on our guidance and commitment and we're planning significant financial progress again this year. We leveraged our strengths. We remain disciplined and we executed well.
The differentiated value proposition we offer resonated with customers. We are continuing to focus on positioning the company for long-term growth while pursuing the precision execution needed to meet our more immediate business objectives.
I will now turn the call over to John Kritzmacher now for more detail on our financial results as well as our 2010 guidance. John?
Thanks John and hello everyone. As John has already reported Global Crossing delivered on annual revenue, OIBDA and free cash flow guidance we provided last February.
In my remarks today, I will review our financial results for the fourth quarter and full year of 2009 and I will outline more detail on our expectations for 2010. In the fourth quarter, the company generated consolidated revenue of 651 million, a sequential increase of $8 million or 1% and a year-over-year increase of $7 million or 1%.
On a constant currency basis, consolidated revenue in the quarter increased by $4 million or 1% sequentially and declined $6 million or 1% year-over-year. The company generated invest and grow revenue of 557 million in the fourth quarter, a sequential increase of $4 million or 1% and a year-over-year increase of 14 million or 3%.
Movement in foreign exchange rates favorably impacted fourth quarter revenue by $4 million sequentially and $13 million year-over-year. On a constant currency basis, invest and grow revenue was essentially flat sequentially and year-over-year.
On a segment basis, fourth quarter invest and grow revenue for rest of world, GC Impsat and GCUK were $316 million, a $131 million and $123 million respectively. As Shown in the presentation, foreign exchange movements had a smaller impact on the sequential comparisons and a more significant impact on year-over-year comparisons.
Rest of world reported a sequential revenue increase of 4 million, including a favorable foreign exchange impact of 1 million, GC Impsat reported a sequential revenue increase of 4 million including a favorable foreign exchange impact of $3 million and GCUK reported sequential of revenue increase of $6 million including adverse foreign exchange impact of 1 million.
Please note that rest of world segment revenue in the fourth quarter of 2009 included a $9 million increase in inter-company sales to the GC Impsat segment, $6 million which related to revised the estimates for prior quarters in 2009. GC Impsat recorded these inter-company charges as cost of access. Also, as a reminder, rest of world segment revenue in the third quarter of 2009 included a $4 million non-recurring benefit from a customers' buyout of certain obligations under a long-term contract.
Sequentially, in constant currency terms, fourth quarter invest and grow revenue increased 1%, in rest of world and GC Impsat and increased 6% in GCUK. Year-over-year and constant currency terms, fourth quarter invest and grow revenue increased by 5%, in rest of world and decreased by 2% and 5% in GC Impsat and GCUK respectively.
On a constant currency basis, I would know that rest of world and GC Impsat demonstrated annual improvements in invest and grow revenue of 10 and 9%, respectively. GCUK invest and grow revenue declined approximately 5% for the year primarily due to completion of the Camelot contract at the end of 2008.
In the fourth quarter, revenue from wholesale voice services was $93 million, representing an increase of 4% sequentially and decline of 7% year-over-year. Wholesale voice revenues continue to perform in line with our strategy of managing this business for margin. And clearly all of this revenue is earned in the U.S., it was not materially impacted by foreign exchange.
Gross margin as a percentage of revenue was 29.2% in the fourth quarter and 30.4% for the year. Our gross margin percents for the year proved to revenue growth in constant currency terms, favorable shifts in revenue mix, lower cost of access and lower accrued incentive compensation for the year.
Invest and grow revenues represented 86% of total consolidated revenues in the fourth quarter of 2009 compared with 84% in the fourth quarter of 2008. Gross margin in the quarter was $190 million, a sequential decline of $10 million including $1 million foreign exchange impact. The sequential decline was primarily due to unfavorable changes in revenue mix including $4 million nonrecurring margin benefit in the third quarter from a customer's buyout of an existing contract. In addition, an increase in accrued incentive compensation had an unfavorable growth margin impact of $2 million.
Year-over-year gross margin decline $22 million, including a favorable foreign exchange impact of $5 million. Excluding foreign exchange impact, the year-over-year decline in gross margin was due to a $10 million increase in accrued incentive compensation and unfavorable changes in revenue mix including higher sales with third party equipment and service content in the current quarter and impact of certain high margin nonrecurring sales in the year ago quarter. As a reminder, the year-ago quarter included a net reversal in accrued incentive compensation that benefited gross margin.
For the fourth quarter, we reported $107 million in SG&A expense, a sequential decrease of $2 million including an unfavorable foreign exchange impact of $1 million. The sequential decrease was due to lower commissions, professional fees and real estate restructuring costs in the period partly offset by increases in miscellaneous other costs.
Year-over-year SG&A declined $3 million including unfavorable foreign exchange impact of $2 million. The year-over-year decrease in SG&A was driven by lower commissions and professional fees, partly offset by $4 million increased in accrued incentive compensation. Consistent with my comments on gross margin, SG&A in the year-ago quarter also benefited from a net reversal in accrued incentive compensation.
For the quarter, OIBDA was $83 million, a sequential decrease of $8 million. OIBDA was lower sequentially due to lower gross margin primarily driven by revenue mix and higher accrued incentive compensation, partly offset by lower SG&A. Year-over-year OIBDA decreased by $19 million including a favorable foreign exchange impact of $3 million. The year-over-year decline in OIBDA performance was primarily driven by the aggregate $14 million increased in accrued incentive compensation. In addition, lower gross margin was only partly offset by improvements in SG&A.
On a segment basis for the fourth quarter, rest of world's OIBDA was $26 million, a sequential increase of $4 million including $1 million unfavorable foreign exchange impact. The improvement was driven primarily by a $9 million increase in inter-company sales to the GC Impsat Segment and lower real estate restructuring charges partly offset by an unfavorable shift in revenue mix and the non-recurring benefit in the prior quarter from one customer's buyout of an existing contract.
Year-over-year rest of world's OIBDA declined $11 million including a $1 million unfavorable foreign exchange impact. The year-over-year variance was primarily driven by net reversal of accrued incentive compensation and a favorable annual adjustment to allocation of corporate overhead cost in the year ago period.
In addition, an unfavorable shift in revenue mix was more than offset by a $4 million increase inter-company sales to GC Impsat Segment and lower payroll cost and professional pays.
GC Impsat's OIBDA was $33 million, a sequential decline of $11 million including a $1 million favorable foreign exchange benefit. The sequential decline was driven primarily by a $9 million increase in inter-company charges cost of access as well as higher cost of equipment and other sales.
On a year-over-year basis, GC Impsat's OIBDA declined $7 million including a $4 million favorable foreign exchange impact excluding foreign exchange impact, the year-over-year decline was primarily driven by a $5 million increase in inter-company charges to cost of access, increased accrued incentive compensation and higher payroll costs partly offset by decrease in allocated corporate overhead costs.
And finally, GCUK's OIBDA was $24 million, a decrease of $1 million sequentially and year-over-year. The sequential decrease was due to the non-recurring net $3 million benefit in the third quarter from a favorable regulatory ruling and an unfavorable retroactive tax assessment partly offset by higher fourth quarter revenue.
The year-over-year decrease was primarily driven by the completion of the Camelot contract at the end of 2008, mostly offset by a decrease in allocated corporate overhead cost. For the fourth quarter, we reported free cash flow of $72 million, compared with $52 million in the prior quarter and $30 million in the fourth quarter of 2008.
Free cash flow was $82 million for the year. Our trailing 12 month free cash flow has shown improvement over the last two years and we have now completed our second consecutive year with positive free cash flow. The Sequential quarter increase in free cash flow was primarily driven by stronger working capital performance and higher sales of IRUs and prepaid services partly offset by higher capital expenditures. The $71 million increase in full year free cash flow was due to increase in OIBDA, improvement in working capital and lower capital expenditures.
Cash flow provided by operating activities for the quarter was $121 million after interest payments of $31 million. We received $38 million in proceeds from the sale of IRU and prepaid services and we used $49 million for purchases of property and equipment.
I would note that our purchases of property and equipment in the fourth quarter included $9 million for prepayment of certain higher cost capital leases. In addition, we entered into $10 million of new capital lease agreements to finance various equipment purchases and software licenses.
We ended 2009 with a total cash balance of $493 million including $16 million in restricted cash. This compares to ending cash balance of $449 million at the end of the third quarter including $20 million of restricted cash and $378 million at the end of 2008 including $18 million of restricted cash. Our unrestricted cash increased by $48 million in the fourth quarter including an unfavorable foreign exchange impact of $2 million.
I would note that at December 31, 2009, $53 million of our unrestricted cash balance was held in Venezuelan bolivar. At January 12, evaluation of bolivar will have a $27 million unfavorable impact on our 2010 opening cash balance and its impact will be reflected in the first quarter 2010 results.
Before we get in to 2010 guidance, let me take a brief moment to summarize our 2009 full-year results. In 2009, we generated consolidated revenue of $2.54 billion, representing consolidated revenue growth of 3% year-over-year in constant currency terms. We continue to make progress in shifting our annual mix to higher growth and higher margin investing growth services. For the year, invest and grow increased by 6% in constant currency terms and accounted for 85% of total revenue that compared with 84% in 2008.
Global Crossing's OIBDA grew to $342 million in 2009, a year-over-year improvement of 31% on a constant currency basis. And free cash flow grew to $82 million for 2009, a year-over-year improvement of $71 million.
Cash flow from operating activities in 2009 totaled $256 million after interest payments of $117 million and sales of IRU and prepaid services of $130 million. In 2009, our gross capital expenditures were $233 million including $59 million of new capital leases and vendor financing resulting in net purchases of property and equipment of $174 million.
Now, let's turn to 2010. Our 2010 plan assumes relative economic stability. In such environment, we expect continued improvements in our operational and financial performance. We expect healthy annual revenue growth again in 2010 and our revenue mix will continue to evolve through our core IP based services. As our revenue grows, our sustained focus on aggressive cost management will enable further expansion of our OIBDA margin and capital expenditures will continue to be managed carefully as we again emphasize the importance of our free cash flow and performance for the year.
As John outlined earlier, our main financial objectives for 2010 and to again improve our OIBDA at a strong double digit growth rate, we're generating positive free cash flow for our third consecutive year. Achievement of our free cash flow objective contemplates sustained investment to enable revenue growth. We're covering a substantial year-over-year increase in cash interest expense.
Now with that introduction, let's turn to more specifics on our 2010 performance expectations.
Based on exchange rates as of February 15, 2010, we are targeting investing and grow revenue of $2.3 to $2.375 billion, representing growth of 7 to 10%, over 2009. We are targeting an OIBDA range of $390 to $440 million, representing more than 20% growth over 2009 at the midpoint of that range.
We expect OIBDA improvement will be driven by revenue growth of sustained shift to a favorable product mix, continued network optimization and aggressive management of operating expenses in 2010. And finally we are targeting positive free cash flow of $10 to $60 million. This free cash flow target includes the absorption of additional $55 million in cash interest in 2010, primarily driven by the refinancing of our debt in 2009.
In addition, 2010 free cash flow performance will be pressured by lower sales of IRUs and prepaid services. We will continue to carefully deploy capital in 2010 and we expect our gross purchases of equipment including lease capital to be approximately flat compared to 2009, as we remain selective in prioritizing our investment for projects offering near-term returns to business.
We also plan to augment our strategic data center capabilities in Latin America and Europe. Meanwhile we anticipate a reduction in new capital leases in 2010.
Meanwhile our 2009 results included an annual incentive compensation accrual of approximately $15 million or just over 30% of target, looking into 2010 the full year accrual for annual incentive compensation is expected to be approximately $49 million for performance at target levels.
And finally with respect to cash performance, you should note that while annual incentive compensation for 2008 was paid in common shares during 2009, the annual incentive compensation for 2009 will be paid in cash during April of 2010.
Before turning to your questions, let's take a moment to review company's capital structure. As of December 31, we had $60.2 million common shares outstanding. In addition to these common shares, our diluted share count includes $18 million preferred shares and $3 million share-based wards, not including performance based awards.
At the end of the year our debt levels of $1.47 billion including major maturities totaling $1.31 billion and capital leases and other debt of $165 million. During the quarter we entered in to $10 million of new capital leases and made principal payments of $33 million on capital leases and other debt including $14 million related to capital lease buyouts.
We currently have no near-term maturities. Our next major maturity is the $144 million of convertible debt due in May of 2011. In summary, our 2009 results were in line with our annual guidance r for revenue, OIBDA and free cash flow. Our full year results demonstrates sustain momentum in improving our financial performance.
In particular, our OIBDA increased to $342 million, a 31% improvement in constant currency terms and our free cash flow increased to $82 million. For 2010 we are squarely focused on achieving strong profitable growth and delivering another year of positive free cash flow. Overall the underlying business is strong and we have solid operational momentum entering 2010.
This completes my prepared remarks and with that I will turn the call over to the operator for questions.
Thank you, sir. Ladies and gentlemen, we will now proceed to the question-and-answer session. (Operator Instructions) Our first question comes from the line of Mike Rollins from Citi Investment Research. Please go ahead, sir, your line is open.
Mike Rollins – Citi Investment Research
Thanks. Good morning. Just a question on the revenues, looking at the constant currency revenue for 4Q, it was flat sequentially, in invest and grow that is, how should we think about the progression of invest and grow over the course of 2010? Is this a year where you feel like it will be back and loaded, or do you think the revenue growth on a sequential basis will actually show some progress beginning in the first quarter of the year? Thanks.
Okay. Thanks Michael. John, do you want to start?
Hey, Michael, it's John. As you know, Michael, we don't generally guide on a quarterly basis, so I won't comment specifically on the first quarter but as you look at our guidance, clearly there is an expectation around growth over the course for the year.
In order to reach our guidance for the year we will need to get on the pace of growth, fairly promptly, so. Without being specific to the first quarter, surely, we expect growth over performance in the now fourth quarter and we will get to that straightaway.
And I think, Michael, just a few things to think about driving into that momentum, sequential type of growth that leads to 7 to 10% invest and grow, revenue growth. Important is to look at the order trends, which of course we reported were up in Q4 from Q3, so giving us good momentum from a standpoint of orders that are booking on the business in Q4. Also looking at the -- what I would call the rate of replenishment of the funnel, so, does this demand that we see in the marketplace and budget being set for I.T. department, is it leading to an amount of opportunities that will allow our funnels to continue to be replenished and that is something that we see. As well as the other key items including attrition which we reported on, is there any discernible change in that attrition trend, especially since as we have said 70% of our revenue comes to us from existing customers and that trend is also positive and favorable.
And, I think very importantly on this trend of sequential improvement for our business, it's important for everybody to remember that about 70% of enterprise customers have not gone through this adoption convergence of IP cycle. And so, although it seems like a story that's getting tired and people want to know about the application explosion at the end of this curve, very important to note that we are very early still in the cycle of adoption of IP, convergence of networks and applications around those IP networks, explosive growth on those applications to be enhanced by these new sets of applications that are being named and focused.
So we see a lot of room and legs in that in the future and so far driven by economic recovery possibly, but also by targeted sales force increase. We are seeing a good funnel replenishment and a good growth that leads us to believe that the revenue growth you have outlined now, looking like it needs to be sequential throughout the year is something we are forecasting for the future.
Mike Rollins – Citi Investment Research
And just a follow up, can you give us a refresh as to what percent of our revenue growth comes from existing customers versus new customers?
Yeah. 70% comes from existing customers still, that trend. We've talked about it between 65 and 70%. And the trend seems to be almost exact again in 2009 and again, I use this opportunity to point out about 72% of our customers listed as very satisfied and 96% as satisfied, statistics suggested that our competitors have a rate of about 54%.
So this cycle as you know of having very satisfied customers, maintain the attritional levels to be low, having a high volume of new revenue being a low share player, being possibly a disaster recovery of specialized solution, VoIP and IP. We now have a healthy balance sheet. We are in a great position to have a relatively low acquisition cost without being disrupted to the major players, incrementally gaining customer share in a way that should provide us either with a small share of overall wallet spend by customers but a very healthy improvement in our topline.
Mike Rollins – Citi Investment Research
Thanks for taking my question.
Thank you, sir. Continuing on, our next question comes from the line of Romeo Reyes from Jefferies & Company. Please go ahead, sir.
Romeo Reyes – Jefferies & Company
Good morning. Just a couple of quick ones, John can you talk a little bit about the attrition rate and what that includes? Is it all inclusive number, does it include credit, disconnect, recontracting pressure, any other, is it an inclusive number or is it just disconnect? And then for John K, CapEx, can you go in to the 09 and may be possibly 2010 number, can you just aggregate for us how much of that CapEx is kind of compulsory CapEx versus customer can hook ups towards success rate. Thanks.
Okay. I’ll let Gary answer the first part but I do want to put it over on me. You’ve gone from six part questions to four part questions down to two. So I look forward to next quarter when you have a single part question. Gary?
Romeo, it's Gary. To answer your question, we define attrition as revenue attrition. That would be inclusive of pretty much everything you defined in your question in market re-pricing when a customer comes up for renewal on his contract. The Inclusive of a disconnect and or a change in usage pattern from those customers, I will remind that we have been running at above 1.5% historically and the vast majority of that is re-pricing and not disconnect other than obviously we did announced obviously Camelot contract coming out of the base in 2009 but the vast majority that is revenue attrition based on market re-pricing.
I think, Romeo, this is John. That's a very important point that you brought up because it became clear to us last year that our definition of attrition is different than what is being reported by a lot of folks and a lot of peoples attrition rate levels don't include price downs we very rarely lose a customer. From a standpoint of customer attrition, we very rarely lose one and as Gary brought up Camelot was a very unique technology shift, I mean they moved to a satellite based solution they moved away from us.
And It's highly unlikely that large customers of ours will ever be such an on off switch and in general as I say our results are all inclusive including write downs in general with every great offering additional add on services at the same time as there may be a price down of existing customers contracts change and again importantly and if we were to report and you would see it's very rare that a customer comes to end of term and just leaves us as provider which is shown in some of our customer satisfaction metrics.
Romeo Reyes – Jefferies & Company
Question was regard to the composition and drivers for capital expenditures, the pattern that we talked about in the past continues to hold so about 80 to 85% of our capital spend is success based meaning, this is either very directly related to a specific requirement on customer contract or is directly related to near and clear capacity requirements that we have on more general nature in order to meet demand in the marketplace our spend with regard to maintenance and I.T. typically is the result of give or take around 15% of the overall program.
Thank you. Our next question comes from the line of Donna Jaegers from D.A. Davidson. Please proceed with your question.
Donna Jaegers – D.A. Davidson
Hi. Guys, just as a follow up since you're bragging on the attrition rate being so low can you give us any visibility on the FCO contract because that’s one where it seems like they will make a decision later this year but they start moving away earlier this year. Any sort of visibility on that?
Yeah. I would question your last part about that. Here is all I have to say or can say about FCO if you were speaking to them I'm sure they would reiterate the same, we remain a very, very strong, very close partner of the FCO and plan to remain a major provider of theirs for as far in the future as we can see and in general, I would anticipate no impact in 2010 at all from changes of that relationship with the FCO and there will be more to report on this and the expanding relationship with them overtime but in 2010 you can look for a consistent relationship and revenue stream from the FCO to global crossing.
Donna Jaegers – D.A. Davidson
Great. Thanks, John. Just as Romeo is only doing four part questions I’m throwing a few more. Can you talk a little about what the IRU level was in 2009 and what your estimate -- what a good estimate is for 2010 and then also you mention -- John Kritzmacher mentioned the change in intra-company access charges. I know we all want to see rest of world margins go up but can you clarify a little on what exactly happened with intra-company access charges.
Yeah. On IRUs, Donna, I'm glad you brought that up, we are not I don't think I'm going get a specific numbers of, remember in this line is IRUs and prepaid services, we pretty clearly had a strong 2009 in that line and we are not forecasting any change to the demand level of IRUs for say. And I can tell you that we are the number that we put in to our business plan is lower than we had in a good amount lower than we had in as results for 2009.
I will tell you that the number we are planning in 2010 is the same level we have planned in each of the prior years so in general we start a year looking at the demand forecasting a certain amount of IRUs and the amount we are forecasting this year in the plan is similar to the number we forecasted last year. Last year, we significantly over-ran that number but the IRU situation is one where you want to count on something that is consistent with demand if customers come around in a format that is positive for your company and for the cash associated with our business without sacrificing future periods you take them and you have the over-run.
And that could well be the situation in 2010 but we are just trying to provide a cash bridge that says when you look at cash for 2009 and 2010 before you get disappointed with the amount of positive free cash flow, you need to look at the interest expense that was -- might be very well spent of $55 million more of interest expense for a much more positive balance sheet and a cash plan that has a lower IRU cash expected but then at that particular point in time, we are still going to be targeting for positive free cash flow.
Donna Jaegers – D.A. Davidson
Thanks, John. And then the inter-company access charges?
Yes. So Donna, inter-company access charges are affectively transfer pricing that we have between the various entities the intent is for the transfer pricing mechanisms to represent arm's length transaction as we transfer pricing for the year as we reach the close of the year we found a revision to prior estimates was required between the rest of the world segment and Impsat so that's we can see in the form of incremental sales in the period 9 of its company sales are much between rest of world and Impsat is truly nothing more than update transfer pricing that we did late in the year and again in 2009 six related to prior periods.
Donna Jaegers – D.A. Davidson
Thank you. (Operator Instructions) And our next question comes from the line of Jason Armstrong from Goldman Sachs. Please go ahead sir. Your line is open.
Winston Len – Goldman Sachs
This is Winston Len on for Jason. Thanks for taking the question, which is on the EBITDA outlook. It looks like EBITDA has been trending down over the last three quarters sequentially while the 2010 guidance implies high single digit sequential growth. So may be you can just help us to reach the especially GAAP sharing and things to the different drivers of EBITDA growth in 2010.
Sure. Let's talk about, let's talk about where we find ourselves Q4 versus Q3 first and then we can talk about how we progress from year towards the guidance that we talked about for 2010 if you look at the comparison of our results, Q4 versus Q3. There were a couple of drivers that were important. One is the -- and by the way just as a reminder OIBDA was down sequentially from Q3 and a Q4 by $8 million.
Look at the piece parts of that a contributor was mix and in particular I noted in my comments that we had in the third quarter a one-time customer contract buyout impact or non-recurring impact of $4 million. We also had you may recall a couple of items in the U.K. that swung in different directions. We had a regulatory ruling in our favor that had a $6 million benefit to the quarter. We had retroactive tax assessment and unfavorable impact by '09 to the course.
Net one, nonrecurring items there that other things been equal would take our sequential OIBDA down by 4 and to beyond that we got back to revision to our in terms of compensation could have an impact of 2 and then somewhat of offset here by the some of the items that we spoke of that had impact on the lower SG&A, serviced in the mix more in the way of non-recurring items in Q3 that led to decline in Q4.
So didn’t take Q4 run rate and talk about how we progressed towards our guidance for 2010. As you roll out across the year and model our performance improvements in 2010, there were important things that will happen. One obviously is improvement in revenue and we’ve talked about invest and grow revenue improving in 2010 on the order of 75 to $150 million, at the high and low end of our ranges here as compared to the run rate coming out of the Q4. Then beyond that, there are some other items that will impact our profit performance.
We have some known improvements they were expecting to realize in the form of access costs we have some improvements in mix that we anticipate including GC Impsat and services such as conferencing picking up over what we saw in the fourth quarter and we have some other variations around how we will manage expenses including how to manage compensation both in the form of sales and incentives been in our annual incentive award, so those are some of the moving parts. It's all around progression on revenue, managing our cost managing the mix and continuing to very, very carefully manage our operating expenses that will get us there.
And I think there is a lot of moving parts especially on a quarterly basis but it's very important that we just pull out a couple of numbers because the long-term trends for our company and the underlying operations have been clear and consistent over several years. In 2008, the OIBDA was $273 million for the full year of 2009 the OIBDA was $342 million, $69 million improvement and we are guiding off of this 7 to 10% investing grow, growth a range of $390 to $440 million in OIBDA.
If you took the same $69 million growth that we had last year, you end up being even lower than the mid point of our guidance. So, certainly there are some anomalies on a quarterly basis but the '08, '09, '10 guidance trend is very consistently in the same direction. That's driven by some of the underlying mechanics in trends of incremental gross margin and contribution of growth to our business.
Winston Len – Goldman Sachs
Great. Thank you.
Thank you. Mr. Armstrong. There appears to be no further questions from our audience. Mr. Legere, I will turn it back to you to continue or for concluding remarks.
Okay. Pamela. Thank you very much. Thank you very much everyone for joining. We hope you found this to answer most of your questions and we really do look forward to updating you again with our first quarter results relatively soon. Thank you very much.
Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you all for your participation and ask that you please disconnect. Thank you once again and please disconnect.
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