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Global Crossing (NASDAQ:GLBC)

Q1 2010 Earnings Conference Call

April 29, 2010 9:00 AM

Executives

Mark Gottlieb – SVP, Finance

John Legere – CEO

John Kritzmacher – CFO

Gary Breauninger – CFO, North America and Worldwide Carrier Services

Ted Higase – EVP, Worldwide Carrier Services

Analysts

Michael Rollins – Citi Investments

Romeo Reyes – Jeffries and Company

Donna Jaegers – DA Davidson

Winston Len – Goldman Sachs

Operator

Welcome to the Global Crossing first quarter 2010 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions)

As a reminder this conference is being recorded Thursday April 29, 2010. I would now like to turn the conference over to Mr. Mark Gottlieb, Senior Vice President, Finance. Please go ahead sir.

Mark Gottlieb

Good morning everyone and thank you for joining us today for our first quarter 2010 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'll open the call for some questions. Presentation slides can be viewed to help follow our prepared remarks today, they're available via webcast, which you can access through our investor relations website if you go to www.globalcrossing.com, access the investor site and follow the links of the webcast.

Before we begin, I’d like to remind everyone that statements made herein that are not historical financial results are forward-looking statements as defined in Section 21-E of the Securities Exchange Act of 1934. Our actual results could differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ materially from those in these forward-looking statements are contained in our reports filed or furnished with the Securities and Exchange Commission including our Annual Reports on Form 10-K and quarterly reports on Form 10-Q.

We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments except as required by law. Information contained herein is in summary format only and is qualified in its entirety by reference to the financial statements and other information contained in our Forms 10-K and 10-Q. We refer you to our financial press releases posted at www.globalcrossing.com, which include explanations of, and reconciliations with, the closest GAAP financial measures for our non-GAAP measures such as operating income before depreciation and amortization or OIBDA free cash flow and constant currency measures.

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

John Legere

Okay, thank you Mark. I'm pleased to report that based on the performance of the business during the first quarter, we're on track to deliver the guidance we provided in February. We continue to see healthy demand in the market and we're seeing some encouraging signs of improvement starting with strong order intake that took place this quarter. Order volumes for the quarter matched prior peak levels we experienced in the year 2008. This is an indicator of the solid demand we're seeing for our IP-based solutions and it's a result of the investments we've been making.

We continue to make targeted investments in network and product enhancements as well as sales force additions to capitalize on this opportunity we see. Our business is well positioned to take advantage of significant opportunities that will exist for our company this year and beyond. In addition, we continue to garner industry awards and customer satisfaction ratings that validate our differentiation in the marketplace and this differentiation positions us well for the next phase of IP adoption.

I'll discuss in more detail our financial performance for the quarter and follow with a brief discussion of operational highlights as well as an update of what we're seeing in the market. So let's get started.

During the first quarter, Global Crossing generated $648 million of revenue, a year-over-year improvement of 6%. This includes $554 million from our strategic investing growth services, a year-over-year increase of 9%. And while our year-over-year growth benefited from a slight tailwind from foreign currency this quarter compared to the first quarter of 2009, these results represent an increase in total revenue and investing grow revenue of 2% and 4% respectively while looked at in constant currency terms.

We generated OIBDA of $77 million in the first quarter, an improvement of 3% year-over-year. As we anticipated, free cash flow in the quarter was impacted by higher cash interest expense, typical seasonal spending, the planned reduction in cash from sales of IRU and prepaid service and from pressure on working capital. Trailing 12 months free cash flow has remained neutral to positive for seven consecutive quarters.

Our performance for the quarter is on track to achieve the guidance we provided in February. In fact we are reaffirming that guidance today. We're encouraged by certain indicators that the economic environment may be improving. We remain cautiously optimistic about the prospects for improving demand for our services and growth in our business this year.

We saw average monthly order volumes during the first quarter of $4.4 million of monthly recurring revenue, the second consecutive quarter of sequential improvement and matching our highest previous order number, which we saw in the third quarter of 2008. Of course, orders need to be viewed over time and are only one indicator of future revenue but we are certainly encouraged by the improvement we saw this quarter and we continue to be encouraged by the opportunities we see in the market. Attrition in the first quarter was consistent with historical averages and taken together with the improved order results for the quarter, we see these as good indicators of an improving market and our competitive position.

We have the right set of products and services demanded by the market and we remain well positioned to win business and take market share. For example, in March we announced a three-year contract with a Belgium-based international equipment supplier for the energy, defense and industrial sectors. The initial phase of the contract provides for the deployment of a managed IP VPN solution connecting customer locations in Europe and the US. Global Crossing was selected over several large European based providers because of the global reach of our network, our differentiated customer experience and our ability to expand the solution to other business critical applications such as voice over IP and collaboration solutions.

We also announced in the first quarter a new three-year contract with one of Latin America's leading airlines for an MPLS network connecting 22 of its offices worldwide. In addition, Global Crossing’s toll free and long distance services will support the airline’s reservation systems and enhance its call center operations. These two wins are recent examples of our strategy to provide advanced IP-based solutions to enterprise customers with global requirements. As we discussed last quarter we are continuing to expand and enhance our product offerings to meet the needs of our target customers.

Customers continue to seek network solutions like Global Crossing that will lower cost of ownership while supporting additional business objectives such as expanding into new global markets and improving the efficiency of their supply chain. We continue to enhance our product offering to improve our ability to meet these business objectives. During the first quarter we introduced a wide area of network optimization service that enables customers to operator their MPLS networks more efficiently and improve the performance of their business application.

In parallel, we announced the expansion of our managed service offering to give our customers a wider array of equipment option. As we continue our works to become a recognized leader in connecting businesses, people and information around the world, we're focusing considerable attention on our longer term technology strategy, which aligns to how we see market demand evolving. We believe we're in a good position to evolve our product offerings and networks to match and lead the evolution of the market.

In addition, our industry leadership in SIP trunking and collaboration services positions us favorably to expand our offerings in next generation unified communication and collaboration services. We expect continued product innovation in these areas positioning us further for long-term growth.

We've also increased our sales resources by adding 50% more quota bearing reps in the UK compared to the middle of last year and by selectively adding quarter bearing sales reps in our other sales unit. We do expect these actions to further help demand for our services and to enhance our customer experience differentiation in the marketplace.

During the quarter, we also invested in the network to meet increasing demand. We announced the upgrade of our Mid-Atlantic crossing, South American crossing and Pan-American crossing subsea cable systems to meet the rapidly growing demand for IP and Ethernet transport among our enterprise and carrier customers.

We're also investing to expand our networking data center presence by building out IP network point of presence in selected countries like Slovakia and Bulgaria, expanding our Ethernet footprint and augmenting our data center facilities throughout Latin America and Europe to meet growing customer demand.

Customer experience continues to be a vital point of differentiation for us and we continue to develop both the high touch and self service portal capability that further strengthen our customer experience and drive high level of customer satisfaction.

In most recent customer satisfaction survey, 99% of our customers were satisfied and we maintained our advantage over our competitors with 66% of our customers very satisfied compared to 52% very satisfied for our competitors. These results reflect Global Crossing’s culture as a company focused on customer service as much as network technology. They also demonstrate that customer experience and our customer satisfaction results continue to be a key differentiator for the company.

Global Crossing continues to be recognized for the competitiveness of our value proposition in the marketplace. During the first quarter, our suite of SIP trunking solutions earned Internet Telephony Magazine's 2009 Product of the Year. Also announced were the results of Atlantic ACM's global wholesale data scorecard for 2010 in which Global Crossing tied for a first place rating for the data value category. This first place distinction reflects the competitiveness of Global Crossing’s value proposition in the global wholesale data services market.

In summary we are well positioned for stronger growth. We are beginning to see signs of improvement in the economic environment and we are encouraged by improvement this quarter in demand for our service. We are differentiated in the market and well positioned competitively to take share. We continue to execute our strategy by investing in products and services demanded by our customers. We are investing in sales resources and strengthening customer experience as a point of differentiation. We continue to be on track for the financial performance we guided through in February and as the economic conditions improve, we are in a good position to capitalize on opportunities we see and we're well positioned for long-term growth.

John Kritzmacher will now give you more specific detail on our financial results for the quarter. John?

John Kritzmacher

Thanks, John and hello everyone. As John has already reported, our first quarter results reflect continued positive momentum in our operational performance and we remain on track to deliver on the annual guidance we provided in mid-February. I mean I'll walk you through our financial results for the first quarter of 2010 in further detail.

In the first quarter, the company generated consolidated revenue of $648 million, a sequential decrease of $3 million or less than 1%, a year-over-year increase of $39 million or 6%. On a constant currency basis, consolidated revenue in the quarter increased $5 million or 1% sequentially, an increase, $13 million or 2% year-over-year. The company generated investing grow revenue of $554 million in the first quarter, a sequential decrease of $3 million or less than 1% an year-over-year increase of $44 million or 9%. Movement in foreign exchange rates unfavorably impacted invest and grow revenue by $8 million sequentially and favorably impacted invest and grow revenue by $25 million year-over-year.

On a constant currency basis invest and grow revenue was up 1% sequentially and 4% year-over-year. On a segment basis first quarter invest and grow revenue for Rest of World, GC Impsat and GCUK were $312 million, $129 million, and $119 million respectively. Sequentially, in constant currency terms, first quarter invest and grow revenue was flat in GC Impsat and GCUK and decreased to 1% in Rest of World. Please note that Rest of World segment revenue in the fourth quarter of 2009, included $10 million of intercompany sales for the GC Impsat segment, $6 million of which related to prior quarters in 2009. In the first quarter Rest of World recorded $4 million of intercompany sales, year-over-year in constant currency terms, first quarter invest and grow revenue for Rest of World, GC Impsat and GCUK increased by 5%, 4%, and 1% respectively.

In the first quarter revenue from wholesale voice services was $94 million representing an increase of 1% sequentially and a decline of 4% year-over-year. Wholesale voice revenues continued to perform in line with our strategy of advantaging this business for margin. Since nearly of this all of this revenue is earned in the US, it was not materially impacted by movements in foreign exchange rates.

Gross margin in the quarter was $193 million, a sequential increase of $3 million including a $2 million unfavorable foreign exchange impact. The sequential increase was due to revenue growth a recovery of $6 million in prior period property taxes and in insurance recovery of $4 million that related to losses incurred in prior periods. These items were partially offset by a $6 million increase in accrued incentive compensation and $4 million costs incurred for a subsea cable repair. Year-over-year gross margin increased $14 million including a favorable foreign exchange impact of $9 million. Excluding the foreign exchange impact the year-over-year increase was primarily driven by revenue growth and the aforementioned property tax and insurance recoveries, partially offset by the impacts of the previously mentioned cable repair an increase in real estate cost, and a $4 million increase in accrued incentive compensation.

Gross margin as a percentage of revenue was 29.8% in the first quarter compared to 29.2% in the fourth quarter of 2009 and 29.4% in the year ago period. For the first quarter we reported $116 million in SG&A expense, a sequential increase of $9 million including a favorable foreign exchange impact of o$1 million. The sequential increase was primarily due to a $4 million increase in accrued incentive compensation, accompanied by higher sales commissions and seasonally higher employee benefit costs. Year-over-year SG&A increased $12 million including an unfavorable foreign exchange impact of $4 million. The year-over-year increase in SG&A was principally driven by a $3 million increase in accrued incentive compensation, accompanied by higher sales commissions.

In the quarter we accrued a total of $18 million for incentive compensation an increase of $10 million sequentially and $7 million year-over-year. Incentive compensation in the quarter consisted of $13 million of cash accruals primarily for the 2010 annual bonus program and $5 million of stock based accruals primarily for long term incentive stock grants. Approximately 55% of incentive compensation is reflected in cost of revenue and the remainder is reflected in SG&A.

For the quarter OIBDA was $77 million a sequential decrease of $6 million including an unfavorable foreign exchange impact of $1 million. OIBDA was lower sequentially due to the increase in accrued incentive compensation, higher sales commissions and seasonally higher employee benefit costs partially offset by an increase in gross margin. Year-over-year OIBDA increased by $2 million including a favorable foreign exchange impact of $5 million, excluding the foreign exchange impact the year-over-year decrease in OIBDA was primarily driven by the increase in accrued incentive compensation and sales commission partially offset by the increase in gross margin.

On a segment basis for the first quarter Rest of World OIBDA was $7 million a sequential decrease of $19 million including a $1 million favorable foreign exchange impact. The decrease was primarily driven by a $7 million increase in accrued incentive compensation accompanied by higher sales commission, seasonally higher employee benefit costs and costs associated with the aforementioned cable repair. Year-over-year Rest of World OIBDA declined $6 million including a $2 million unfavorable foreign exchange impact.

The year-over-year variance was primarily driven by a $5 million increase in accrued incentive compensation. GC Impsat OIBDA was $40 million, a sequential increase of $7 million including a $1 million unfavorable foreign exchange impact. The sequential improvement was driven primarily by a $7 million reduction intercompany access card. On a year-over-year basis GC Impsat OIBDA increased to $1 million including a $4 million favorable foreign exchange impacts, excluding the foreign exchange impacts the year-over-year decline was primarily driven by an increase in intercompany access card and third-party maintenance. And finally GCUK’s OIBDA was $30 million, an increase of $6 million sequentially including a $1 million unfavorable foreign exchange impact.

The sequential increase was primarily due to the aforementioned property tax and insurance recoveries partially offset by an increase in accrued incentive compensation. On a year-over-year basis GCUK’s OIBDA increased $7 million, including a $3 million favorable foreign exchange impact, excluding the foreign exchange impact the year-over-year increase was primarily driven by the property tax insurance recoveries. These favorable movements were partially offset by increases in payroll costs, for additional sales resources and higher accrued incentive compensation.

Our trailing 12 month free cash flow has remained neutral to positive for seven consecutive quarters. At the end of the first quarter, our trailing 12 month free cash flow was $42 million. For the first quarter, we reported negative free cash flow of $72 million compared with positive free cash flow of $72 million in the prior quarter and negative free cash flow of $32 million in the first quarter of 2009.

The sequential quarterly decrease in free cash flow was largely due to use of cash for working capital primarily driven by an increase in accounts receivable in the first quarter, following very strong collection in the fourth quarter of last year. As anticipated higher cash interest expense and lower sales of IRUs and prepaid services also unfavorably impacted the sequential comparison.

The year-over-year decrease in free cash flow was primarily attributable to $24 million increase in cash interest expense and a $9 million decrease in sales of IRUs and prepaid services. Cash flow used by operating activities for the quarter was $31 million, after use of cash $72 million for operating working capital and interest payments of $47 million. We received $23 million in proceeds from the sale of IRUs and prepaid services and we used $41 million for purchases of property plants and equipments. In addition to fund various equipment purchases and software licenses we entered into $16 million of new capital leases and other financing arrangements. Most of these financing arrangements were sponsored by the equipment and software vendors.

Looking ahead we continued to expect to generate positive free cash flow in 2010, however certain interim quarters may have negative free cash flows due to uneven timing of capital expenditures, sales of IRUs prepaid services and fluctuations in working capital. Turning briefly to our capital structures, there were no material changes in the company’s capital structure in the first quarter. As of March 31, we had $60 million common shares outstanding, in addition to these common shares, our fully diluted share count includes $18 million preferred shares and $3 million of share based awards not including performance based awards.

At the end of the first quarter, our debt level was $1.46 billion including major maturities closing $1.3 billion and capital leases and other debt of $160 million. As previously noted we entered into $16 million of new capital leases and other equipment financing arrangements. We also made principal payments of $18 million on capital leases and other debt. Please note that our only near term major maturity is the $144 million original principal amount of the convertible debt which is due in May of 2011. We ended the first quarter with a total cash balance of $373 million including $14 million of restricted cash. This compares to an ending cash balance of $493 million at the end of the fourth quarter, including $16 million of restricted cash and $322 million in the first quarter of 2009, including $16 million of restricted cash.

Our unrestricted cash balance decreased by $118 million in the first quarter, including its unfavorable foreign exchange impact of $27 million due to the devaluation of the Venezuelan Bolivar. In summary, first quarter results were in line with the expectations underlined in the annual guidance we provided in mid February. Demand for IT based services continues to fuel solid operational momentum in our core invest and grow business. Invest and grow revenue increased 4% year-over-year on a constant currency basis driven by 5% growth in Rest of World, and 4% growth in GC Impsat. We will continue to focus on growth and diversification of our monthly recurring revenues in the coming quarters particularly in GCUK.

We are investing in our network and service offerings as well as sales resources. All the trends in the first quarter showed improvement for the second consecutive quarter, and we expect continued demand for IT based solutions to drive stronger growth and improved profitability during the year. Although we have some work ahead of us to achieve our objectives, we are off to a solid start in 2010.

This completes my prepared remarks and with that let me turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question coming from the line of Michael Rollins from Citi Investments. Please proceed with your question.

Michael Rollins – Citi Investments

Hi good morning. Just wanted to follow-up on the booking commentary that you described earlier in the call. As we move to the year, is there a level that, level crossing needs to achieve to get to the low-end of the guidance range versus the high end of the guidance range so, if it comes in that whether its average to next four for quarter for the next few quarter or 4.5 or 3.5. Can you just help us saying through the mechanics of how that might relate to where revenue will flow roughly within that guidance range? And then secondly I was just wondering if you could talk a little bit more on the cost side and how do you see for every dollar of revenue that you add, given the product mix. What kind of contribution to cash flow should investors expect from that? Thanks.

John Legere

Thanks for the question. As leading to it, I’ll reiterate a couple of things which is and this is why we’ve been so firm in what we’ve outlined. Q1 was as expected for us, and I know in some of the way people put their views relative to our guidance, they were looking for more, but this is what we were looking for Q1 from a standpoint of our results. Second is that the rest of the year ramp, is what we’ve designed our business plan around and the order volume that we’ve seen in Q4 and in Q1 are consistent or better than the underlying revenue demand or order demand that’s required. So it’s a solid quarter with the comments we made about the economic environment and demand being a positive statement by us about what we had hoped to see and forecast to see.

Let's segue into those questions, I think a good target look at to the type of order volumes that we would need would be in the four range. So we’ve announced 4.4, we also don’t see, I’m not calling 4.4 as an anomaly, I am seeing as we go into the next quarter that the activity level is consistent with what we saw in the first quarters volume. So if you think about four, in that range as what we would need to do to attain our targets and 4.4 was therefore quite a solid number, attrition as I said was at the historical averages, so there is no offset to be concerned about and I see nothing that would force me to say to you at this point that the 4.4 was spike as opposed to consistent with the volume. I’ll let John comment on that and maybe Gary on the second part of the question.

John Kritzmacher

So Michael, it's John. Let me comment on first on the climb to guidance from the results that we delivered in the first quarter, in terms of what that implies for revenue and OIBDA growth and then come back to your question around what should we expect to see the flow through on incremental revenue. If you jump off of our first quarter results and look at the expected climb in investing grow revenue, sequentially to get to the low end of our revenue guidance range you'd be in the zone of about $14 million per quarter and to get to the high end of our investing grow revenue guidance, you'd be looking at about $27 million in revenue per quarter. So those are the book ends around revenue growth sequentially for our investing grow revenue guidance.

To get to the OBIDA guidance ranges, our growth on the low end of the range would have to be about $14 million. So $14 million of OBIDA growth and we talked about just a moment ago $14 million of revenue. On the higher end of range, the OBIDA growth sequentially would need to be on the order of $22 million. So, on the low end of the range, the flow through from revenue growth of OBIDA is quite high; on the higher end it's still high but it's at a lower rate.

Let me then frame for you how we actually get to what we've guided in terms of our operational flow going forward. The expectation around incremental OBIDA directly related to the incremental revenue is north of 60%. We expect to see -- typically we would see about 60% and we're seeing some favorability in the mix of the revenue that we are anticipating for the balance of the year.

So the OBIDA rate on the incremental revenue will be north of 60%, that's part one. Part two is we expect to improve on the profitability of the base, so we have additional work that we see could be done inside the revenue base that we delivered in Q1 around improving access. So we continue to focus on access cost optimization and in addition we've got a number of procurement initiatives underway that will help us improve our cost base and cost of revenue as well.

So between the combination of improving mix and continued focus on improving cost, that also supports our climb to guidance. And then finally in the climb to get to our targeted OBIDA performance, we expect to hold our SG&A expense relatively flat for the balance of the year in absolute terms.

John Legere

Let me add -- I appreciate this question as a platform and we'll move on in a second. But I'm going to ask Gary to comment on one more thing because inherently your question is a lot of the roadmap that you need for the year. You see our revenue for the first quarter, you see what we're projecting, the order volume to give you an idea of why we have some confidence that there'll be incremental revenue, you've asked about the correlation of the flow through down to margins so that you can see the OBIDA growth, we’re talking about various components that will drive that improvement including as John said mix and that's not all mystery either. So one of the variables that we can point to that will suggest why we're confident about an improving mix in a better flow through is what are those orders. So maybe I'll ask Gary to just comment on the quality of that order volume that we already see, which will make up the next phase of revenue growth that's coming through, which will tell us something about the mix and the flow through of margin. Gary?

Gary Breauninger

Yes, hey, Mike, it’s Gary. To John's point to punctuate the point on quality, we looked across our four selling units, we got good positive uplift from all the units. It wasn't as John suggested an anomaly in one or two of our units we had solid improvements across all units across all our geographies and most importantly if you look inside of the order book the products that were being sold in that order book in Q1 were -- majority of those products were VPN both managed and unmanaged as we talked previously you get a lot more pickup in the margin when you start to sell those premium based products.

So as we looked at what made up that order book in Q1, well, we were encouraged by the quality of it, the products that were sold and the fact that we're getting more contribution from all of our reps on the street and in fact even the deal side has started to pick up across the board. So all encouraging signs and again, suggestive of the fact that Q1 was not an anomaly.

Operator

Thank you. Our next question coming from the line of Romeo Reyes from Jeffries and Company. Please proceed with your question.

Romeo Reyes – Jeffries and Company

Yes, my question is around expenses. You talked a lot about the topline and the flow through, are there any opportunities to kind of improve margins through streamlining some of the expense items? That's the first question and then secondly with respect to CapEx, is the first quarter is likely to be, I mean an anomaly, it seemed to be like it was a little high. Normally the CapEx tend to be higher in the fourth quarter rather than the first quarter. So I was just trying to figure out if you are looking at CapEx being closer to, maybe in excess of $200 million because the run rate is 220 right now.

John Legere

I'll let John comment. Those are both good questions because there is a required bridge in expenses to outline what happened in last quarter versus this quarter especially as it relates to compensation and we'll give you the jump off for CapEx as well, John?

John Kritzmacher

So first with regard to cost and expenses, as I noticed a moment ago, in terms of driving improvement in our OBIDA margin over the course of the year, of course, you can get lift off revenue but from a cost containment perspective again, we'll be working very hard on our access initiatives to drive down access cost and optimize our access cost, and we'll continue to get more aggressive in the procurement space we have some initiatives we're working there that'll drive down revenue as well.

Then beyond that from an operational perspective a couple of points; one is some of the movements in our OpEx as John noted is being driven by changes in the accrual for incentive compensation. That could fluctuate over the course of the year depending upon our performance relative to our goals for the year and whether in fact we remain on track as we are now to achieve our goals for the year and accrue the incentive compensation at target. As you know last year we accrued well below the target at about 30% of target for the year.

We are continuing to look very closely at opportunities to save expense, in fact outside of our sales resources on overall population of just under 5000 (inaudible) resources. We've in fact reduced the workforce by over 100 since about a year ago. So we continue to look at opportunities to take expense out of the business, we'll keep doing that over the course of this year. And then I would also note from a run rate perspective around the first quarter spend level, there's this seasonality impact in that first quarter spend of about $2 million related to employee benefits, and so that should fade away as we make our way through the next quarter and on to the rest of the year.

That splits between margin and SG&A but again it's about $2 million in the aggregate cost rate that should fade away as we make our way into the second quarter.

Question then with regards to CapEx, you commented that you thought our CapEx number was running a little bit hot coming out of the first quarter; I would say it's actually on track for what we said about 2010 spending. We said that 2010 capital spending at a gross level would be roughly flat with 2009, that was in the 227ish kind of range if I recall correctly, somewhere around that 225, 230. We said in gross, it'd be roughly flat. We said that capital leasing that we would net out would be slightly lower than what we experienced in 2009 and we leased $59 million of equipment in 2009. So we're sort of in that zone. And seasonally we actually tend to be a bit hotter on capital at the front end of the year than toward the backend of the year. So from a momentum perspective, I actually feel pretty good about where we are right now relevant to what we said about the year.

John Legere

Romeo, both of your questions are good ones. Just a lot of people talk this first piece but we have a bit of a self adjusting component in our plan, which is if in fact our targets which are quite aggressive targets are not met, there's a self correcting component of the compensation that we paid and last year for example, we were short of our objectives internally, so we paid out bonuses and the range of 31% across the company. In Q1 as we said, we're on track for our plans, so we're forecasting and accruing for 100% bonus payout. But if we slip at all that self corrects and we will lower that accrual and lower the amount that's paid out. So it's a true performance based culture. And as you know, on capital as John said, if you go back in history for us as well as most companies, Q1 is a period of investment in capital. So you'll be able to see those changes throughout the year on both categories as you've outlined.

Operator

Thank you. Our next question coming from the line of Donna Jaegers from DA Davidson. Please proceed with your question.

Donna Jaegers – DA Davidson

Hi guys, thanks for taking the question. A few of them. Could you talk a little about competition because obviously it's good news that you're starting to see the economy pickup and bigger deal size, but what are you seeing on the competitive front?

John Legere

You want to start, Gary.

Gary Breauninger

Yes, Donna, no big changes from prior trends at least as far as we're bumping up against in the market whether it be on the enterprise side or on the wholesale side in any of the geographies. I think there is pretty much as we talked consistently in the past and we're taking share from the incumbent not necessarily as the primary provider but as the enterprises convert to IP adoption and lay your services on the IP network, we're winning more than our share of that conversion.

As far as the competitive landscape in regards to pricing again, no material changes from prior trends we've talked about. We don't see anyone doing anything irrational as far as pricing in the market to go buy share, if you will. It's been pretty much the same trends we've seen over the last four to five quarters around price declines whether it be in the premium products, basic data products or in the high speed bandwidth products.

John Legere

Yes Donna, I think if you look at parts of the world, we focused a lot of our discussion here on North America but just a quick jaunt around. Our competitive position in Latin America remains as strong or stronger than it's ever been. No one has made any inroads in duplicating or replacing the position that we have there. So I see that position getting stronger competitively over time and I don't see anyone who has got significant plans to invest in competing with us there, so our team continues to do quite well.

In the UK and Europe, as you can see we talked about as much as a 50% increase in our feet on the street in the UK specifically and that's because of the competitive opportunity we see. Our competitors seem to be not floundering but just not gaining any ground on our position, and this is both in the government space that we felt some positive movement there or some faltering of others as well as a continued opportunity for us to expand our position in the enterprise space.

North America is hitting on all cylinders. As a competitive environment here, I would call neutral to positive. The order volumes that we talked about had a very strong North American component to it and most interesting to us was that with an order volume level of this type one of the things you check is did you empty out all your pockets and I would tell you that we actually had some flow over into April and we had funnels that were as strong as we've had at any point in time. So I think that reflects the activity.

Competitively, we continue to look at this business in two ways organically, which is what we're talking about and inorganically, which is the opportunity level that exists. Most of what I just talked about suggests that the organic opportunity is as good or better than it's ever been. Our sales teams are as enthusiastic as I've seen them in a long time.

Inorganically we continue to believe that there is tremendous opportunity to accelerate, staying focused on our strategy and our customer set but to accelerate our growth various ways through consolidation of the industry. And on that landscape, I would say our inorganic options are neutral to positive of the great place they were last time we talked. The only major activity that's taken place, certainly the announcement of CenturyTel and Qwest, which was a further statement that opportunities exist and people will take them and the market will respond positively to them.

The Qwest classic component, which is one of those piece parts on a strategic board that we play in like where are the various people in the long-haul business going to wind up, if you're think about that Qwest classic piece rolling into that new combined entity, that is one of the least threatening places it could have wound up from our standpoint and I would say that it possibly raises the strategic value of one of the remaining components, which is Global Crossing, and is neutral to positive from a standpoint of how it could have threatened us in our options going forward.

So both organically and inorganically, I think Global Crossing’s competitive position is at least as good if not better as it was last time we spoke.

Donna Jaegers – DA Davidson

Okay, and then just one quick follow-up. I know we always ask the question about the FCO contract, and I don't think they're going to make a decision until May but anything new to report on that front?

John Legere

I'll turn to Ted to see if there's anything we can report but all I can say is two things. I can say is two things. I continue to have my own personal meetings with the FCO and I know that our position in serving them in various way remains very strong, I see them as a very strong customer, I see no changes in our business with them in the fiscal period or shortly after. And at least in the competitive front for the long-term serving of that customer, I would say that the environment has either stayed the same as last time we spoke or gotten better because of various competitive scenarios in the market. And Ted, I don’t know if there is anything you want to carefully add on that front.

Ted Higase

Thanks John. Donna, again, I think John covered most of the points. Really, no real changes there, we continue to an excellent relationship with the FCO and at the same time as you probably know as well, as you said, the contract does end in May but we have an extended arrangement to continue the services for a period as well. So the whole procurement effort continues and I don’t think we are at this position able to share much other than the fact that we are continuing to have these discussions with the FCO.

Operator

Thank you. Our next question is coming from the line of Jason Armstrong from Goldman Sachs. Please proceed with your question.

Winston Len – Goldman Sachs

Hey, this is Winston Len, on for Jason. Thanks for taking the question. So, given all the puts and takes, just wanted to hit EBITDA once more, make sure I get it straight. So on 1Q EBITDA, starting at a reported $77 million, sounds like there is about negative $6 million impact from the fiber cut and seasonal benefits and then there is part of $10 million of property packs and insurance recoveries. Assuming you hit the targets, the (inaudible) changed that much quarter-over-quarter. So net of all these – this has the (inaudible) about $73 million. So that doesn't sound right. And are they other large non-recurring items on the horizon, they did any help or hurt your EBITDA guidance. And then I have a follow-up question as well.

John Kritzmacher

Hey, Winston, it’s John. So in terms of thinking about the Q1 results from a momentum perspective, we are reported OIBDA of $77 million. Included in the $77 million is net non-recurring items of about $6 million favorable that I would remove. Those items being $6 million from the property tax recovery, $4 million from insurance recovery offset by $4 million adverse impact from the fiber cut – the subsea fiber repair. So net $6 million takeaways, the $77 million goes down to $71 million.

And I would add back a few millions for a couple of things. One in particular the seasonality of benefits, that’s about $2 million of non-recurring, that would get you back to $73 million and then there were small items that would have you normalized to a momentum rate that's around $73 million to $75 million kind of range. That’s the way I would think about OIBDA momentum at the current revenue level leaving the quarter.

Winston Len – Goldman Sachs

Okay. And are there other large non-recurring items for the horizon?

John Kritzmacher

Yes, so that's the second part of your question. Other large non-recurring items, nothing that we are anticipating inside of our guidance, no.

Winston Len – Goldman Sachs

Okay. And then on Venezuela, looks like there was less foreign exchange impact there than we expected given the bolivar devaluation. Can you help us understand the situation with the (class), the customers down there. And I know a lot of the contracts are denominated in U.S. dollars, which has blunted impact, but it sounds like that the customers are disputing that charge as well. Did the disputes have an impact on the quarter, and maybe on accounts receivable and do you see any impacts in future quarters? Thanks.

John Kritzmacher

Sure. So with regard to Venezuela, it’s a very good question. The devaluation of the bolivar in Venezuela had a substantial impact on our reported cash balance and we noted that, that had a $27 million impact on our balance. Beyond that looking at the operational performance of the business, in the quarter and across the year, our expectation is that the devaluation of the bolivar is going to have a relatively modest and non-material impact on revenue and on our OIBDA performance. As you noted, most of our contracts in Venezuela while in –paid in bolivars are pegged to the dollar at the official exchange rate. And so that translates into when the bolivar devalues the billing in terms of bolivars just is the inverse.

In most cases, we have forcible terms that will allow us to collect at the new exchange rate and maintain revenue but that will not be true in all cases, there will be some resistance in some cases. Our experience through the first quarter so far has been fairly good around collecting on the increased bolivar billing terms. That said there are some cases where we will run into difficulty collecting, most of that from a profit perspective will be offset by lower cost that we will in fact have as we incur considerable cost in bolivars and enjoy the benefit out as well.

So anticipating a relatively a milder impact on revenue across the year and a non-material impact on OIBDA across the year. And to your question around bad debt and as collectability in bolivar been an issue, as I said there is some customers that are contesting the increased invoicing, but it is not material and that our reported bad debt expense for the period did not change materially.

Operator

Our last question coming from the line of (inaudible) from RBC.

Unidentified Participant

Hi guys, two part question. One, on the ARs and working cap consumption, should we assume that we are going to see working capital more of a source in the next quarter or two, just looking at that component of cash burn in the quarter, I would like to understand it better going forward. And then secondly, on GC UK, I guess I suspect the real estate benefit was probably at that level. I guess could you provide color, $30 million in the quarter, how do we look at that going forward, is it more like a last year seasonality or I am trying to understand what’s happening at that unit.

John Kritzmacher

So first with your question on working capital specifically related to AR and AP, we do expect that much of the working capital that was a use of cash in the first quarter will be recovered in subsequent periods. That’s been our typical experience, we typically – our use of cash for working capital in the first quarter. This year’s balance is a little bit different than last year. Last year the use was entirely around the accounts payable. We had a significant paydown of the accounts payable. We had about $50 million impact – adverse impact on working capital. This year is a little bit more of a balance, frankly primary driver was accounts receivable, we had very, very strong collections in the fourth quarter and then coming out of the first quarter where we returned to our more normal range. That impact as a consequence of an increase in our day sales outstanding of about five days and then there was a little bit of add on to that around payables.

Some of the add-on in terms of days related to specifically the billing cycle that were not in our favor going out of the first quarter, and things of that nature, but again, we expect that we will recover that working capital over that coming quarters and over the course of the year. So we would expect it to be a source of cash from this point forward.

With regard to your question around UK results, it’s important to note that in the UK, OIBDA performance for the quarter, the UK benefited from both the property tax, a recovery as well as the insurance recovery. So there is about $10 million of incremental benefits, OIBDA in the GC UK results for this period.

That would take you back of off the 30 OIBDA reported this period back to a run rate that is something more in the zone of 20. And then again, UK like the other units is from a momentum perspective incurring some additional cost associated with the higher incentive compensation accrual as compared to periods last year. Sequentially the higher incentive compensation accrual in the UK is about $1 million and as compared to the year ago period, it’s about $1 million higher as well.

Unidentified Participant

Yes, there is $1 million. So I mean going forward, is the UK participating in that – the kind of growth you are seeing, kind of the sales growth you alluded to at that beginning and we are talking about the annualized monthly. Is that – are you find that in the UK as well or is it lagging the company or –

John Kritzmacher

We are full expecting the UK to participate in the growth of our business over the coming quarters. As we have said a number of times, we are working very hard to build and diversify our customer base in the UK. We have increased the sales force in the UK by about 50% since the middle of the last year and specifically we are focusing most of those resources in the enterprise space where we will have nearly double our quota bearing resources. So we have and these, clear expectations around improving our revenue growth in the UK as we make our way through the year.

Operator

Thank you. Mr. Legere, there are no further questions at this time. Please continue with your presentation or closing remarks.

John Legere

Okay, thank you. And I guess that just leaves me to thank everybody for joining and we really look forward to updating you again with our second quarter results towards the guidance that we have outlined for you for the year. Thank you everybody for joining.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.

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Source: Global Crossing Q1 2010 Earnings Call Transcript
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