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Global Crossing Limited (NASDAQ:GLBC)

Q2 2010 Earnings Call Transcript

July 27, 2010 9:00 am ET

Executives

Mark Gottlieb – SVP, Finance and IR

John Legere – CEO

John Kritzmacher – EVP and CFO

Dave Carey – EVP and Chief Marketing Officer

Gary Breauninger – CFO, North America and Worldwide Carrier Services

Matt Gutierrez – CFO, UK and Europe

Analysts

Michael Rollins – Citi

Donna Jaegers – D.A. Davidson

Romeo Reyes – Jefferies & Company

Jason Armstrong – Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Global Crossing second 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 today, Tuesday, July 27th, 2010. I would now like to turn the conference over to Mr. Mark Gottlieb, Senior Vice President, Finance and Investor Relations. Please go ahead, sir.

Mark Gottlieb

Thank you, Tamika. Good morning, everyone, and thank for joining us today for our second quarter 2010 earnings call. John Legere, our chief executive officer; and, John Kritzmacher, our chief financial officer are here with us today. They'll each share their comments, after which we'll open the call for some questions. Presentation slides can be viewed to help follow our prepared remarks. They're available via webcast, which you can access through our Investor Relations Web site at www.globalcrossing.com, access the Investor site and follow the links to the webcast.

Before we begin, we'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 the actual results to differ materially from those in the 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'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 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. Good morning, and thank you everyone for joining. Before I turn to John Kritzmacher for a detailed review of our financial performance, I'm going to briefly provide you with a high level review of our second quarter results, and then follow with a brief update of our view of the market and our progress on executing our strategy.

I'm pleased to report that on an operational or constant currency basis in the second quarter, we delivered profitable sequential improvement in our core invest and grow revenue, with strong improvement in OIBDA and free cash flow. We made important progress towards our annual objectives. And we remain positioned to meet the full year guidance ranges that we provided to all of you at February.

However, I will acknowledge that on our invest and grow revenue, we expect to trend towards the lower end of that guidance range. This is due to the timing of certain shorter cycle carrier deals, which has led into the second half of 2010; and the fact that although we returned to constant currency growth in the UK, our progress in enterprise revenue growth there has been somewhat slower than expected. Now, we continue to be optimistic regarding our business in the UK. And with the UK government's emphasis on cost reduction and our ability to deliver savings, we actually see this as much of an opportunity as we do see it as a threat.

Now, our business is experiencing positive momentum from continued strength in demand as well as strong order volumes. During the second quarter, average monthly order volumes reached a new high of $4.6 million, surpassing our prior peaks achieved last quarter and also achieved in the third quarter of 2008. In fact, our first half 2010 order volumes reflect significant improvement over any period since the end of 2008. And we expect to see this momentum translate into accelerated revenue growth in the second half of this year.

Our momentum reflects an underlying trend, which we previously discussed. Customers are increasingly using more powerful networking resources like Global Crossing to support critical business applications. In many cases, they're deploying IP resources in new ways that use secure, reliable, high performance networks in a manner that would previously have been impractical or uneconomical with legacy network operators.

This trend has also been observed in a number of places. For instance, there was an article on the Wall Street Journal last week that described increased business spending on Internet infrastructure. While this article focused largely on demand for servers, hosting, and cloud services, it underscored several of the fundamental drivers we have discussed regarding our business. These include the value of reaching customers, business partners, and employees over private IP-based networks or on the Internet as well as the increased use of video streams and hosting facilities. We are seeing enterprise customers convert more of their applications and infrastructures to IP, employ IP VPN and Ethernet networks with higher bandwidth and speed, and look to solution providers who can provide transport hosting and cloud-based solutions.

To meet this demand and capture market share, we continue to invest in our network, data centers, product offerings, sales resources as well as our customer experience. We are strengthening our competitive position and building our business. This sustained demand and the investments we're making position us well for strong operational growth.

Now, let's move into a brief summary of our financial performance in the second quarter. We generated $630 million of consolidated revenue during the second quarter. Revenue for our strategic invest and grow services increased 2% sequentially in constant currency terms. All three of our segments contributed to the sequential growth, with GC Impsat growing 4% and each of our other segments growing 1% in constant currency terms. This healthy operational growth as well as our continued focus on cost containment drove a 22% sequential improvement in OIBDA in constant currency terms to $93 million.

Now, wholesale voice revenue declined sharply as we took pricing actions consistent with our strategy to manage that business for margin contribution. Importantly, our performance in the second quarter illustrates our operating leverage as the operational increase in our invest and grow revenue translated into improved OIBDA and free cash flow. In that regard, our OIBDA margin improved almost 300 basis points sequentially to 14.8%, and our free cash flow improved by $59 million sequentially.

We saw a particularly healthy demand this quarter in Latin America, especially Brazil. We're also seeing strong demand in our data center business, which primary – principally benefits our GC Impsat segment as 14 of our 17 data centers are in Latin America.

We also saw good demand in our rest of world business, principally driven by our enterprise business in North America. Demand continues to be strong for IP VPN, collaboration, and Ethernet services.

And in the UK, we saw a modest growth. That market remains very competitive, but we saw our opportunity there. We've invested in quota-bearing sales resources and we're working to get them in the position where they are contributing to our order flow in the UK in the second half of the year.

Now, let me share a few observations on some of the key leading indicators we track. We had record average monthly order volumes during the second quarter of $4.6 million in monthly recurring revenue, exceeding the prior peak levels achieved last quarter. The average order levels of $4.5 million for the first half of the year, in total, is more than 25% higher than the average of $3.6 million for the second half of last year. This order levels are a positive indicator of future revenues.

Since the end of last year, we've invested in sales resources, selectively augmenting our quota-bearing headcount. We continue to make progress of getting the new sales people ramped up to full productivity. Ensuring we are able to recruit and train the right people to become productive is one of the keys to capturing new opportunities and revenue growth. Overall, the team is well-tenured and knowledgeable in our service offerings.

There have been no major changes in the pricing trends in the last quarter. And the overall pricing climate is relatively stable. Looking at our attrition, which covers both price erosion and customer disconnect, our experience in the second quarter remains stable and consistent with historical averages.

The ongoing success of our customer experience initiatives is being reflected in our customer satisfaction scores, which trended upwards and indicates satisfaction levels that are higher than our competitors. In fact, in the customer service satisfaction service for the second quarter, we achieved scores among the highest levels recorded to date across our enterprise business. These results are important as a leading indicator because customers' future buying decisions are highly influenced by their prior experiences and a high proportion of our growth comes from existing customers.

Now, the dynamic sides discussed all contribute to the customer wins we've achieved. A few of which include Major League Baseball and their division mlb.com, for whom we are providing an IP-based transport solution that enables them to distribute live streaming of their games in high definition video, a Canadian-based transport and solutions company that used our services to broadcast live high definition video coverage of the World Cup matches to several Latin American countries, and a converged services solutions for a global law firm to connect their offices around the world.

Now, to ensure that we continue to capitalize on these opportunities, capture market share, and serve our customers, we are investing in our network capabilities, products, and other resources. According to the most recent Gardner [ph] estimates, average bandwidth consumption among enterprises will grow between 30% and 40% annually through 2014 as they load new applications on these networks for both internal purposes, and increasingly, for connecting their customers and suppliers.

From a network perspective in the second quarter, we added capacity on our North American and European terrestrial networks and our subsea networks in the Atlantic and Latin America. These upgrades are serving increasing demand across our networks and provide the platform for our IP network services.

On selected routes, the upgrades also enables to capture new demand driven by a low latency and diversity requirements. We continue to develop innovative new products and services that enable customers to achieve maximum performance of their bandwidth intensive applications and to enhance productivity. For example, during the second quarter, we augmented our suite of collaboration services by partnering towards introducing on demand video streaming service and by upgrading our Web conferencing services. In addition, we enhanced our CDN offering in partnership with Limelight Networks. This investment strengthened our ability to provide our customers with collaboration applications and the delivery of rich media content.

During the second half of the year, we will continue to invest to meet future demands. These investments include enhancements to our portfolio of Ethernet, IP VPN, collaboration, and managed services, such as adding new telepresence in global managed security services. They also include augmenting our data center and hosting platforms. In addition, in anticipation of increased customer requirements for on-demand cloud services, we are well-positioned to build on our existing network and service capabilities to develop a unique set of cloud services. Finally, we are investing in our sales resources to focus on large opportunities, principally in the UK and US government markets.

Now, customer experience is a key point of differentiation. We continue to develop our self-service portals to enhance our customer's ability to monitor, maintain, and manage their networks, resulting in an improved user experience. We have begun to migrate customers to our new portal, which includes new and better functionality. It has complemented the streamline process we have instituted and systems we have deployed to provide a more efficient and responsive high-touch customer service experience, offering customers the choice they've requested in how we support them.

In summary, we have made significant progress this quarter towards our annual objectives. We continue to see strong demand, with record order volumes. We are investing in networks, products, and sales resources to meet that demand in the near terms and our deploying our pipeline to ensure we are positioned for long term growth. We are differentiated in the market not only by our network and by services, but by the superior customer experience we deliver. We are well-positioned competitively to take share. We have good operational momentum and are positioned for a strong second half of the year. We remain on track to achieve our financial guidance for the year. And we are positioned strategically for strong long term growth.

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

John Kritzmacher

Thanks, John, and hello, everyone. As John has already reported, demand for IP-based services continues to fuel solid operational momentum in our core business. And our second quarter results reflect significant sequential progress towards achievement of the annual guidance we provided in mid-February. I'll walk you through our second quarter financials in a bit more detail.

In the second quarter, the company generated consolidated revenue of $630 million, a sequential decrease of $18 million or 3%, and a year-over-year decrease of $3 million or roughly flat. On a constant currency basis, consolidated revenue decreased $9 million or 1% sequentially, and decreased $10 million or 2% year-over-year. In both cases, the decreases in revenue were entirely driven by pricing actions taken in our non-strategic wholesale voice business or we continued to focus on optimizing margin performance.

In the second quarter, the company generated invest and grow revenue of $555 million, a sequential increase of $1 million, and a year-over-year increase of $16 million or 3%. Movement in foreign exchange rates unfavorably impacted invest and grow revenue by $9 million sequentially, and favorably impacted invest and grow revenue by $7 million year-over-year. On a constant currency basis, invest and grow revenue was up 2%, both sequentially and year-over-year.

On a segment basis, second quarter invest and grow revenue for rest of world, GC Impsat, and GCUK was $314 million, $134 million, and $113 million, respectively. In constant currency terms, rest of world increased 1% sequentially and 2% year-over-year; GC Impsat increase 4%, both sequentially and year-over-year; and, GCUK increased 1%, both sequentially and year-over-year.

Meanwhile, order trends have continued to improve in the second quarter, March, our third consecutive period of increased order volume. Given the strength of order level through the first half of 2010, we expect the pace of invest and growth revenue growth to accelerate in the second half of the year. Nevertheless, our expectation is that our invest and growth revenue will trend towards the lower end of our annual guidance range.

As John, noted earlier, our view reflects two challenges. First, certain anticipated second quarter wins in our carrier business have moved out to later in the year; and, second, in the UK, our traction in enterprise revenue growth has been somewhat slower than we expected.

In the second quarter, revenue from wholesale voice services was $74 million, representing a sequential and year-over-year decrease of 21%. And our continued emphasis on managing this business for margins, with surprising actions in the quarter that lowered volume, but improved profitability. Since nearly all of this revenue was earned in the US, it was not materially impacted by movements in foreign exchange rates.

Gross margin in the quarter was $199 million, a sequential increase of $6 million, including a $2 million unfavorable foreign exchange impact. Excluding the foreign exchange impact, a sequential increase in gross margin is primarily attributed to higher invest and grow revenue, lower cost of access, and lower accrued incentive compensation, partially offset by net benefits in the previous quarter, primarily arising from property tax and insurance recoveries.

Year-over-year gross margin decreased $2 million, including a favorable foreign exchange impact of $3 million. Excluding the foreign exchange impact, the year-over-year decrease was primarily driven by a favorable margin impact from an $8 million customer contract buyout in the year ago period. Gross margin as a percentage of revenue was 31.6% in the second quarter, compared to 29.8% in the prior quarter and 31.8% in the year ago period, which again included a benefit from the previously mentioned customer contract buyout.

For the second quarter, we reported $106 million in SG&A expense, a sequential decrease of $10 million, including a favorable foreign exchange impact of $1 million. The sequential decrease was primarily due to lower bill commissions and accrued incentive compensation, accompanied by a decrease in bad debt expense. Year-over-year SG&A decreased $2 million, including an unfavorable foreign exchange impact of $1 million. The year-over-year movement in SG&A was primarily driven by lower professional fees and bad debt expense, partially offset by higher accrued incentive compensation.

In the quarter, we accrued a total of $13 million for incentive compensation, a decrease of $5 million sequentially and an increase of $3 million year-over-year. Incentive compensation in the quarter consisted of $8 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 the incentive compensation accrual is reflected in cost of revenue and the remainder is reflected in SG&A.

For the quarter, OIBDA was $93 million, a sequential increase of $16 million, including an unfavorable foreign exchange impact of $1 million. Year-over-year OIBDA was flat, including a favorable foreign exchange impact of $2 million. OIBDA as a percentage of revenue was 14.8% in the second quarter, compared to 11.9% in the prior quarter and 14.7% in the year ago period, which again included a benefit from the previously mentioned customer contract buyout.

On a segment basis for the second quarter, rest of world OIBDA was $32 million, a sequential increase of $25 million, including a $1 million favorable foreign exchange impact. The increase was primarily driven by an improvement in gross margins, accompanied by lower accrued incentive compensation and sales commissions, and a decrease in bad debt expense. Year-over-year rest of world OIBDA increased $4 million. The year-over-year variance was primarily driven by decreases in allocated corporate overhead costs, bad debt expense, and professional fees, partially offset by a decrease in gross margins due to the previously-mentioned customer contract buyout in the year ago period.

GC Impsat OIBDA was $41 million, an increase of $1 million sequentially and a decrease of $3 million year-over year. Foreign exchange did not impact the sequential trend, but did have a $3 million favorable impact on the year-over-year comparison. Excluding the foreign exchange impact, the year-over-year decline was primarily driven by increases in inter-company access charges and allocated corporate overhead costs as well as slightly higher payroll costs.

And finally, GCUK's OIBDA was $20 million, a decrease of $10 million sequentially, including a $2 million unfavorable foreign exchange impact. The sequential decrease was primarily due to non-recurring benefits in the prior quarter from property tax and insurance recoveries totaling $10 million. Excluding the foreign exchange impact and prior period tax and insurance recoveries, GCUK's OIBDA improved sequentially, driven primarily by revenue growth. On a year-over-year basis, GCUK's OIBDA decreased $1 million, including a $ 1million unfavorable foreign exchange impact.

Our trailing 12-month free cash flow has remained neutral to positive for eight consecutive quarters. At the end of the second quarter, our trailing 12-month free cash flow was $39 million. For the second quarter, we reported negative free cash flow of $13 million, compared to a negative free cash flow of $72 million in the prior quarter and negative free cash flow of $10 million in the second quarter of 2009. The sequential quarterly improvement in free cash flow is largely due to higher OIBDA and improved working capital performance, primarily driven by better collections performance. In addition, the quarter also included lower cash interest payments.

In connection with sequential and year-over-year comparisons, I would note that free cash flow was impacted in the second quarter by $16 million in payments for the 2009 annual incentive plans, compared with no annual incentive payments in the last quarter and $2 million in the year ago period. Cash flow provided by operating activities for the quarter was $36 million, after cash use of $14 million for operating working capital, including interest payments of $29 million and employee bonus payments of $16 million.

We received $23 million in proceeds from the sale of IRUs and prepaid services. And we used $49 million for purchases of property, plants, and equipment. In addition to fund various equipment purchases and software licenses, we entered into $14 million of new capital leases and other financing arrangements, an amount equal to the principal repayments our existing capital leases in the quarter. Most of these financing arrangements were sponsored by equipment and software vendors.

Looking ahead, we continue to expect to generate positive free cash flow in 2010. However, certain interim quarters may have negative free cash flows due to the uneven timing of capital expenditures and interest payments, variances in sales of IRUs and prepaid services, and fluctuations in working capital.

Turning briefly to our capital structure, there were no material changes in the company's capital structure in the second quarter. As of June 30, we have $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 second quarter, our debt level was $1.45 billion, including major maturities totaling $1.29 billion and capital leases and other debt of $160 million. As previously noted, we entered into $14 million of new capital leases and other equipment financing arrangements. We also made principal payments of $14 million on capital leases and $3 million on other debt. As we have noted before, our only near term major maturity is the $144 million original principal amount of convertible debt, which is due in May of 2011.

At the end of the second quarter, we had total cash balance of $343 million, including $15 million of restricted cash. This compares to an ending cash balance of $373 million at the end of the first quarter, including $14 million of restricted cash, and $289 million in second quarter of 2009, including $21 million of restricted cash. Our unrestricted cash decreased by $31 million in the second quarter. In summary, we made significant progress towards achievement of the annual guidance we provided in mid-February.

Invest and grow revenue increased 2% sequentially on a constant currency basis driven by growth in all three segments, coupling this revenue growth with continued focus on cost management. Our operating leverage provided significantly improved profitability. And our OIBDA increased to $93 million for the second quarter, representing 22% growth sequentially on a constant currency basis, and an OIBDA margin of nearly 15% for the quarter. Free cash flow was negative $13 million for the quarter, reflecting a positive improvement of $59 million and following in line with cash performance in the year ago period.

Looking ahead, we expect that our strong order intake in the first half of the year will give rise to accelerated growth in our invest and grow revenue base in the second half of the year. Nevertheless, we expect invest and grow revenue will trend towards the lower end of our guidance range. Meanwhile, our cost management capabilities and significant operating leverage will yield strong improvements in OIBDA and free cash flow consistent with our annual guidance for those measures.

This completes my preferred comments. And with that, let me turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from the line of Michael Rollins with Citi. Please proceed with your questions.

Michael Rollins – Citi

Hi. Good morning, and thanks for taking the questions. I really just wanted just to drive down a little bit more on revenue, and you showed some improvement in the order flows in the first quarter. I think in your commentary you talked about maybe some of the push-out of when you expect that revenue to hit. Can you talk a little bit more about what's driving your expectations for an acceleration in revenue at the back half of the year?

And as part of that, as we think about your revenue guidance from the beginning of the year, can you size the total FX impact to date that's affecting that number on annual basis just because there's been so much movement in currency over the last – for three months? We just want to make sure we understand what the rate constant currency comparison is to the full year number. Thanks.

John Legere

Okay. Let's do a few things. This is a very important topic. And I appreciate you bringing it up. And I know it's one of the items that everybody wants to understand. Why don't we start, John, why don't you give them some of the constant currency items as well as mechanics of the second half revenue? And then maybe, Dave, Gary, if you'll also comment on what's actually happening in the business in the order flow.

John Kritzmacher

Sure. Hi, Michael. Let's start then with the question around foreign exchange. If you go back to the guidance that we provided for the year, it was underpinned by FX raise that were, in effect, at around the middle of February, in fact, on February 15th. And if you look at how foreign exchange rates have moved since that point in time, I would describe the rates in the first quarter as you might you expect as then, on average, in line with the basis for guidance since, of course, we reported in mid-February.

In the second quarter, we saw a slightly unfavorable movement on balance and foreign exchange rates. In particular, we saw the pounds devalue considerably against the dollar. Meanwhile, the real actually has performed just slightly favorable to the assumptions that underlined our guidance for the year. So on balance unfavorable impact, think of it as being in the second quarter's results on the order of about $10 million unfavorable to our results relative to the underpinnings to our guidance, so a bit in the whole through the half in terms of where we are.

Then looking ahead for the balance of the year, these, in fact, are the rates that we saw – I guess the market closed yesterday where it prevails for the balance of the year. Those quarters for the remainder of the year would, again, can be roughly in line with the assumptions that underpinned our annual guidance for the year, so in the whole, about $10 million right now. And then, we'll see where we go at this point further through the year.

And then again, on the balance, what you see is pound slightly unfavorable towards assumptions, real slightly favorable. So that's the FX impact so far in the–

Michael Rollins – Citi

To just isolate that for a moment because sometimes there's a compounding effect that happens. In other words, if you loose $10 million sequentially in the second quarter, when one thing's about full year guidance being that was in the second quarter, you may want to multiply by three because you lost $10 million in the second quarter, but that carries forward for the rest of the year. So as we think about your full year guidance range, should we just take 10% off of each of the ranges? Or should we be taking closer to 30% off each of the bookends of the range just as we're trying to triangulate on that expectation?

John Kritzmacher

So I would suggest for the moment, given where the rates were at the close of the market yesterday, then in fact, we will see some pickup on – if those would have prevailed for the quarter, we would see a pickup in the quarter. So that would be reflected in our results. I would suggest that the moment we're 10%, where thereabouts in the whole for the year, not 30%, if in fact the rates that we saw at the market close yesterday were to prevail for the balance of the year.

Michael Rollins – Citi

Okay. That's really helpful. And then, sorry again, more to the fundamental question for the acceleration.

John Kritzmacher

Yes. So then let's go on from there. Let's assume for the moment that we don't make any adjustments for foreign exchange. Let's just talk about the work that remains ahead of us in order to deliver on our invest and grow revenue guidance for the year. As we've said, we believe we're tending towards the lower end of the range. And we noted the reasons for that.

In terms of support that underlies our view for revenue for the year, there are really three key components to the revenue growth that we will experience for the balance of the year. First is as we left the month of June and we make our way into the third quarter of the year, we have an improved jump-off rate that gives us considerable momentum going into the balance of the year. So while we saw, in constant currency terms, 10% growth in the quarter, our exit rate from the second quarter gives us improved momentum as we make our way across to the third quarter, and then to the fourth. So that's the key component of growth.

Second, the improvements in order intake that we've seen in the first quarter of 2010 and the second quarter will make their way into revenue over the third and fourth quarters. There's a little bit of a lag time from the time those orders are received until they translate into revenue. Those orders enhanced are also a key contributor to the growth that we now see in the latter part of 2010.

And then finally, we are expecting to earn some revenues in the third and fourth quarters that are somewhat nonrecurring in nature, project-oriented in some cases. In other cases, we may see a contract buyout such as we have noted we saw in the year ago period. Those are nonrecurring in nature, and they contribute. Those are the three key factors that will fuel our growth over the second half of the year and underpin our confidence around our revenue performance being in line with the lower end of guidance for the year.

John Legere

Maybe just a little – go ahead, Mike. You have more addition?

Michael Rollins – Citi

Sorry, one more follow-up. I'm sorry, just if you could also maybe specify the amounts your (inaudible) is nonrecurring that would be really helpful.

John Kritzmacher

It is expected to be less than – I gave you three components, right? It's expected to be less than a third of that.

Michael Rollins – Citi

Great. Thanks. Sorry to interrupt.

John Legere

Yes. And I guess I'll ask a couple of guys here to comment. But the color of our business and what's happening underneath it is we say the first half order volumes, talking about an average of $4.5 million, up from $3.6 million in the second half of the year. And I would categorize that as not being driven by a one-time event that would suggest that the trend had temporarily moved to a new level and it will be moving back; pretty strong across the board, nothing happening artificial in the end of the quarter that would say that the trend is lumpy; Latin America and North America, in particular, having a very strong consistent business. Our carrier business having a solid period of growth, I would say, the recurring data business is solid. IP transit is somewhat stabilizing. We've have volatility around the voice market. But all-in-all, demand trends seems to be in track – intact.

We talked a lot about building the UK. You see the UK numbers were fairly strong. The trick in the UK for us is, of course, this team that what we're putting in place and getting them up to speed by the end of the year so that 2011 can be a strong year there. We've seen no 2010 impacts to our business because of government questions that have been raised by other carriers, and we can talk some about that. But certainly, the UK government business is a big part of our business. We see the UK government business as a big part of our business. We see the UK government desire to save money in line with their new budget to be an equal opportunity as it is a threat, but none of which would be a 2010 item for us.

And building into the end of the year and beyond, we see the United States federal government as being an opportunity that we're investing now for the future. Don't anticipate it being a big 2010 item, maybe towards the end, but certainly in 2011. So the business from the standpoint of a very highly satisfied customer base, a very strong customer order flow, and an underlying demand trend that matches our offers seem to be something that, along with the algebraic mechanics that John just outlined for us, give us the confidence for the rest of the year.

Did you guys want to make any comments real quick? Dave Carey?

Dave Carey

Good morning, Mike, and good morning to everyone. I would just share an insight that the majority of these new orders are coming in through principally Ethernet services, IP VPN, and its various value adds around that, managed security, managed router. And then, on the voice side, it is principally in the zip area, again bringing that voice-over-IP on top of this VPN infrastructure.

So as we've got the platform positioned to focus on those fundamental demand drivers coming out of the enterprise market, that's the essence of where it's coming from. And that phenomenon is relativity equal in terms of the take operates in Latin America, North America, and the UK. So we think we've got this thing positioned right in the mainstream of where those demand trends are. And it's showing up in the order volumes.

Mark Gottlieb

Okay. Tamika?

Operator

Thank you. Our next question is from the line of Donna Jaegers with D.A. Davidson. Please proceed with your questions.

Donna Jaegers – D.A. Davidson

Hi, guys. Thanks for taking the question. Two questions I guess, one, follow-up on Dave's comments. AT&T talks about their strategic revenues growing 15.8% year-over-year coming from Ethernet data centers, IP VPNs. Your total growth is still pretty lackluster. What else can you do to improve – you focus more on those new services than any of the legacy carriers. What can you do to improve the revenue trends? And then on the cost side, can you give us a little more detail? Obviously, the OIBDA progress on the rest of world was better than most people expected. Is that sustainable now at this margin level? Or can you give us a little more color what happened during the quarter? Thank you.

John Legere

Let's go with Gary. Gary, then Dave's comments.

Gary Breauninger

Hi, Donna. It's Gary. In particular, on the rest of the world, particularly in the invest and grow business, as you know, it is an ongoing program for us. So to answer your question in a short way, yes, we believe it is sustainable based upon the things we have underway, in about four or five-part program of initiatives that we've doing for five or six years now. It's an extension and continuation of the grooming and optimization of the access network where we can gain scale and additional LFOs.

You mentioned some new technologies in the form of turning TDM circuits in the Ethernet circuits, and ordering in that fashion allowed to be more efficient; selective extension of our core network to get closer to our customers, whether it be in a very, very select smaller bills where we have scales; or, in the case of some of our partnerships with some of the fiber – metro fiber providers and being able to get close to the big, shiny buildings where our customers exist. Internally, we've done some reorganizations that separate the blocking and tackling from our design work, which allows the more creative folks that identify areas of dispute with the (inaudible) games attraction there.

And then finally, in our continued exercises around, we route our own traffic, whether it be from a wholesale voice perspective, a voice-over-IP perspective rerun, even our enterprise business. We got a lot of gains in Q2. And we believe, for the most part, based upon the quality of the funnel as well with that product mix that could continue into the rest of the year.

John Legere

Dave?

Dave Carey

Yes, hi.

Donna Jaegers – D.A. Davidson

Again, just specifically on that, I'm sorry to interrupt, but the billing settlement with the ILEC, can you give us the ballpark number on that, how much that benefited the quarter?

John Kritzmacher

Yes. It's not a huge number, Donna. It's a small single-digit million number from an increment perspective. But what happens in those cases is you identify areas where you believe you've been overcharged and you put those in place. And it has a recurring impact into this rest of the year. So for us, it's about the continual grooming of that network, whether it be through how we route – how we optimize, or in this case, in places where be believe we believe we've been incorrectly charged.

Donna Jaegers – D.A. Davidson

Thanks.

John Legere

Dave?

Dave Carey

Hi, Donna. Well, thanks for the question. Let me pick it up this way. I think when you narrowed the – or decomposed the revenue streams down and you look at the revenue growth that we've actually seen on things like Ethernet, IP VPN data center, I think the growth rates that we see with that narrowed focus down on those revenue streams would be very equitable to what you were – referencing in your comments relative to a couple of the others.

How do you continue that growth and maybe even accelerate it a bit more? I think that's largely a function of matching your investment very carefully to where you want that growth to go? So augmenting those data centers, bringing new product capabilities onto that VPN set, leveraging the combination of transport and the hosting infrastructure into some of the new cloud-based services that are out there, those are the kinds of things.

So generally speaking, I think the ability to accelerate growth is the equation of investing smartly, investing both in capacity and feature, and then making sure the channels are equipped to deal with it. But overall, I think the growth that we're actually experiencing in the business is coming from those key areas. And I think it's equal to what we're seeing some of the others achieve as well as. It's not actually beating it because we don't have to cannibalize a lot of our business.

Donna Jaegers – D.A. Davidson

Thank you.

John Legere

Donna, you've been working with us for a long time and the mechanics of what happens in our business; how we acquire new customers; what the initial revenue stream looks like; what the flow through revenue and margin is and how it makes its way down to OIBDA or in cash, and that it's some 70%, 72% of new revenue, and therefore, incremental gross margin comes from existing customers; and, the fact that in the short term, our customer satisfaction level is driven by some of our self-serve portal, another initiative, are at an all-time high. And showing that we truly have about a 23% – a 23-point advantage over the competition and what our very satisfied customers – in a time phase where you would see many customers starting to deploy additional applications on IP network. I think that puts us in very good stead to start to shift the balance of some of that share of wallet from our competitors to us very carefully without high acquisition costs.

So I think the mechanics are intact, satisfaction levels are high. The flow through at this point, in the state of application deployment, will be heavy. And I think the mechanics of how that flows down through incremental gross margin and cash for us seem to be well intact. So we look forward to that.

Donna Jaegers – D.A. Davidson

Thanks, John.

Operator

Thank you. Our next question is from the line of Romeo Reyes with Jefferies & Company. Please proceed with your question.

Romeo Reyes – Jefferies & Company

Hi, good morning. Just a couple of quick ones, particularly on the UK, I'm trying to get a sense of what kind of visibility you have in terms of new sales or in terms of installations, or any type of turn that you see here. What I'm trying to figure out here is – clear enough, we've seen the bottom in terms of profitability, margins, and OIBDA for that business.

John Legere

John, do you want to start?

John Kritzmacher

Sure. Hi, Romeo.

Romeo Reyes – Jefferies & Company

Hi.

John Kritzmacher

With regards to the UK business, of course, today, we did see sequential growth and year-over-year growth of 1% in cost in currency terms. We've been investing quite a lot to business there in the form of sales resources in order to augment our capabilities to win new enterprise business. And we've said that we expect to see the fruits of that investment come later in 2010, first, in the form of improving orders. And then, we should do that translate into revenue late in the year.

So to your question, are we expecting now to see improvements in the revenue base there going forward? The answer is yes. Does that mean that we leave, or we're at, or about at the bottom? I guess we were expecting to begin to improve revenue and improve profitability as we move out through the balance of the year for our UK business.

Romeo Reyes – Jefferies & Company

And the second question is with respect to the inner company loans that the UK has. I think some of them are coming due in the not too distant future. Where does that stand? Is that business and, I think, borrowed money at the end of the year from one or the other subsidiaries? Where do those transfers stand at this point, the applications from the–?

John Kritzmacher

There are a couple of loans outstanding from the parent entity into UK. And similarly, the parent company has a loan from UK. So there are a few loan exchanges between the entities there. None of those inter-entity facilities have near term due dates on them. They all go out a couple of years in time. And then we have a good bit of flexibility around when we choose to repay those debts between the companies, so nothing pressing on the horizon going in either direction.

Romeo Reyes – Jefferies & Company

And the last question.

John Kritzmacher

Just go ahead, Romeo.

Romeo Reyes – Jefferies & Company

Yes, the last quick question, on Venezuela. How much cash is still trapped there? And how much was the OIBDA?

John Kritzmacher

Roughly speaking, Romeo, we have approximately $30 million in cash inside Venezuela. And in terms of the OIBDA performance, we've said for the year, we expect to be at about $25 million for the year. We're still on track for that in terms of our performance for that unit. I don't have a specific number in front of me, Romeo, for the quarter in Venezuela. But we're tracking for the annual number we've talked about before.

John Legere

And Romeo, not to take you away from one of your favorite topics about Venezuela, but back on the UK real quick. I want to make sure that you get the right impression about what we're talking about in the UK. Because certainly, we have a set of guidance metrics that I know you're trying to understand. We commented in the beginning about the invest and growth revenue and how we believe we'll make it. We are guiding you towards the low end of our range, however, still in the guidance metrics that we gave. And right after I spoke about that, I spoke about the UK. And I want to be very careful that you don't link my comment on the UK to any other comment that had been made competitively about what's happening in the UK. I also want to be clear that we are still guiding towards our guidance range.

Now that said, in the UK, we have a significant amount of opportunity. And we have been investing heavily in sales resources. And the other reason we bring it up is that we haven't yet seen the full fruits of the investments that we're making. And we're looking towards those for the end of the year. It's not to say that the customer opportunity or the demand isn't there. And that's on the enterprise side. For a while, we've said that we need to grow significantly our enterprise just to balance out our portfolio and our participation in the market.

On the government side, as you know, about 50% of our revenue is from the government. And there is a lot of activity in the UK. And I would characterize a couple of things. In 2010, we don't see any significant impacts by any of the actions that the government is taking through our 2010 revenues committee. I think that's different from the noise you've been hearing over there before.

The most likely impacts over there include a potential extension of some of the work that we're doing as decisions possibly get delayed, and that would include existing contracts. But also, we see this period of any ideas that can be given to help the UK government save money. It's usually a significant opportunity for a carrier like us. And we are providing a number of innovative ideas to various levels of the government as to how Global Crossing could be a solution to some of their desire to save a significant amount from a budgetary standpoint. So as we say, we see the process over there as being an opportunity.

So all-in-all, the UK is an investment time for us. And it's an opportunity that we believe we could do better on and look towards that the rest of the year. It's not something that we are pointing to as a lack of demand or even a lack of underperformance for us yet just more that we believe can be done by the end of the year. We're calling it out.

John Legere

Tamika?

Operator

Thank you. Our final question comes from the line of Jason Armstrong with Goldman Sachs. Please proceed with your question.

Jason Armstrong – Goldman Sachs

Hi, thanks. Good morning. Just a couple, one, just following up on the austerity program, especially in UK, John, can you talk about what sets you apart from others that are seeing pressures? Is there something different about the nature of your contracts with the UK government that means you will not be pressured this year?

And then second question is just on the capital spending trajectory, AT&T had just announced this morning another subsea cable. How should we think about your outlook, either subsea or continental as we look at the CapEx trajectory over the next couple of years? Thanks.

John Legere

Okay. A couple of things, on the UK, as you know that we have one contract in particular with the FCO that was set to end in May or on decision process. That decision process is ongoing. And we do have extension vehicles in place to continue to provide them service throughout the period in which they make further decisions. Our relationship with them is excellent. The service we provide them continues. And we see multiple ways to continue to provide them services in the future. So for example, on that particular contract, we don't see any 2010 downside at this particular point in time, similar with the network rail agreement. And the rest of our contracts with the UK are such that we're under contract, and therefore, don't see any implications for 2010.

Now, what I'm referring to is as the UK sits down and starts to look at all of their vehicles from a going-forward standpoint and look at the money they've been able to save with global processing under their existing contract, there are ways to leverage some of these vehicles for other purposes other than the ones that they are currently using. And we're proposing those unique applications to the government. As you know, although 50% of our revenue comes from the UK government, we are certainly not the biggest beneficiary of spend by the UK government, and therefore, would see ourselves in the overall game as a share taker with some potential upside.

But Matt, do you want to comment at all further? This is Matt Gutierrez who is now the CFO over there.

Matt Gutierrez

Hi, Jason. It's Matt. No, I think, as John stated, as we look at our revenue stream, it's under contract. And we're in active conversations with all areas of the government as to where we can help out the government and reduce costs for them. And also, as John stated, when you look at where we play on that market, it's a big revenue stream for us. But relative to the overall spend of the government, it's very small. So we see it as an opportunity equal to others that we see, and don't see an impact in 2010.

John Legere

Yes, it's more so, Jason, from a standpoint of where the billing will happen in 2010, we don't see anything that the government has announced or would do that will impact our ability to make our numbers for this year.

Let's talk a little bit about your second question and it relates to – I think you were linking together announcements that AT&T have made in building infrastructure, and then linking that to our outlook from a standpoint of looking forward. Dave, you want to start?

Dave Carey

Yes, hi, Jason. What I would just share with you is that in terms of the ultra-long haul demand that we've seen on our submarine systems, not only those that are trans-Atlantic, but those that, in particular, go around South America to other point in the world, we have been, on a regular basis, augmenting those annual fees, and can see that in the foreseeable future. Some of the specific trends in the Atlantic, of course, have to do with the low latency requirements that have been emerging by many of the algorithmic traders. And as you know, we have one of the premiere routes being the civics of it – being the shortest that has put that in fairly high demand. And we've actually reflected that in the pricing back into the market.

Now, it all doesn't stop and end, of course, on the submarine systems. And that's driving upgrades in our terrestrial systems both here and the US, which we did one augment this year and have pretty much sold that out as we look into advanced – some additional capacity as well as in Europe and throughout the UK. So overall, these demands, driven by both the public network, the private networks, and the IP range, video transmission in particular, is certainly consuming this bandwidth. And many of the opportunities that we can capture in the video or broadcast segment, directly or indirectly, have been consuming that demand. So those are the fundamentals that we're seeing.

John Legere

I think, Jason the important part for us is in some other players – not necessarily AT&T, but others, are still trying to build the portfolio of infrastructure that they need to serve their customers. And for the most part, save some potential additional data set of capabilities that we would like to have over time to match the capabilities we have in Latin America and possibly some additional Asian infrastructure, we have the portfolio of data center, local facilities were necessary, Ethernet capabilities, ultra-long haul, subsea capabilities to serve our customers. And our capital is being deployed into additional capabilities of what we have to meet customer demand.

So it's not necessarily building something new that builds a hole, but our existing customers and the existing capabilities on the platform they have for the foreseeable future are driving such a significant amount of our demand. And our capital is very, very targeted, and therefore, the return on it should be fairly predictable.

Jason Armstrong – Goldman Sachs

That's great. So that is 9% to 10%, you've been on that range for the last couple of years. Is that a good range think about CapEx arrest?

Dave Carey

That's right. We're not expecting any material change in that trend.

Jason Armstrong – Goldman Sachs

Okay. Great. Thanks.

John Legere

And I would – I'd just had a footnote to that last piece, Jason, before we wind up. Now, a lot of these percentages and a lot of the short term, we as well as others continue to talk about with our existing business. And we see the organic development of our business being something that can provide a tremendous return.

However, it is important to note that I believe that the inorganic applications, both on a small set of capabilities that are coming to market as well as for years that we've been taking about the synergies available in the inorganic deployment of multiple sets of players' capabilities coming together, still exist. They're still as strong as they've ever been. And I believe that as we look at the future of things like you've just talked about, we need a piece of our brain also looking at the potential combination of multiple players' capabilities accelerating some of those statistics in serving those customers because that aspect of our industry still needs to play out over time also. Tamika, did you have any other questions?

Operator

There are no further questions. And that will conclude the Q&A session, Mr. Legere.

John Legere

Okay. Thank you everyone for joining, and we look forward to giving you an update soon again with our third quarter results. Thank you very much.

Operator

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation, and we ask that you disconnect your lines.

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