Global Crossing CEO Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 2.10 | About: Global Crossing (GLBC)

Global Crossing, Ltd. (NASDAQ:GLBC)

Q3 2010 Earnings Conference Call

November 2, 2010 9:00 AM ET


Mark Gottlieb – SVP, Finance and IR

John Legere – CEO

John Kritzmacher – EVP and CFO

Dave Carey – EVP and Chief Marketing Officer

Ted Higase – Managing Director, EMEA

Gary Breauninger – CFO, North America and Worldwide Carrier Services


Michael Rollins – Citi Investment Research

Donna Jaegers – D.A. Davidson

Jason Armstrong – Goldman Sachs

Romeo Reyes – Jefferies & Company

Murray Arenson – BGB Securities

Mark Gottlieb – SVP, Finance and IR


Welcome to the Global Crossing’s third 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 Tuesday, November 2nd, 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. Good morning, everyone. Thank for joining us today for third 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 Webcast. If you go to, access the Investor site and follow the links to 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 21E 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 the actual results to differ materially from those in the forward-looking statements are contained in our reports filed or furnished to 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 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 our financial press releases posted at, which includes 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, everyone and thank you for joining us. We at Global Crossing continue to execute on our strategy to deliver advanced global IP, Ethernet, and data center solutions with an unsurpassed customer experience to enterprises, carriers, and governments around the world.

Now, before turning to John Kritzmacher for a detailed discussion of financial performance, I’m going to comment on our third quarter results and then, share our view of the market and our progress on executing our strategy.

Let’s move into a brief summary of our financial performance in the quarter. Ongoing demand for our value added IP, data center, and managed services, continues to drive improvement in our operational financial performance. I’m pleased to report that we continued to sequentially improve our core invest and grow revenue.

With the significant operating leverage in our business, our revenue growth carried through to further improvements in both OIBDA and free cash flow. We expect to maintain this operating momentum as we make our way through the fourth quarter.

We generated $648 million of consolidated revenue during the third quarter. Revenue for our strategic invest and grow services increased 2% sequentially. This operational growth contributed to a 17% sequential improvement in OIBDA to $109 million and free cash flow improvement of $12 million.

Now, let me provide further insight into the performance in each of our regions starting with Latin America. In constant currency terms, Global Crossing Impsat generated strong year-over-year invest and grow revenue growth of 12%, which translated to year-over-year OIBDA growth of 9%.

Sales orders and revenue continued to show healthy growth in most Latin American country, particularly in Brazil and Colombia. In fact, Brazil’s business has expanded significantly and continues to lead Global Crossing Impsat operations in both revenue and OIBDA contribution.

Our revenue mix in Global Crossing Impsat continues to migrate towards IP and value added services with IP VPN, network management and data center managed services as the fastest growing areas. Fifteen of our 17 global data centers serve customers with evolving requirements in the fast growing Latin American region. Market trends continue to reflect increasing demand for converged information and communications technology to enable productivity gains and cost savings for enterprises. Our exposure to these products and services in one of the faster growing regions of the world has been a significant contributor to our growth.

Let me move on now to our Rest of World region, which consists primarily of our North American operations. In constant currency terms, we reported a year-over-year increase in invest and grow revenue of 3% and OIBDA growth of 64% as we continue to scale that business while managing our cost. The enterprise market continues to perform well as we see growth coming from both new and existing customers. Order activity has increased compared to 2009 as enterprises continue to migrate to IP-based solutions to reduce cost and improve efficiency including their own adoption of higher margin managed services.

The investments we have made in network, sales, and capabilities especially in Ethernet and collaboration services continue to give us a solid platform for growth in this region. In the United States government sector, we are also seeing increasing attraction as we ramp up to serve Federal, state, and local government customers. Already, we have won contracts worth several million dollars each and continue to work hard to grow this segment.

In the UK, we continue our efforts to stabilize and grow in this highly competitive market. We continue to see opportunity in the UK as the government deploys its next generation backbone network and enterprises increasingly adopt Ethernet and IP solutions. We reported an invest and grow revenue increase of 3% year-over-year in constant currency terms. Excluding non-recurring items in the year-ago period, GC UK OIBDA is up slightly year-over-year and the region has a much larger salesforce now in place to drive future revenue.

We are committed to the salesforce investments we have outlined in prior calls and have already started to see improved order intake from non-government enterprise customers in the UK.

We had two significant contracts in the UK that were up for renewal this year: the FTN Network for FCO and Network Rail. As previously communicated, we expect the FTN Network to transition to another primary provider next year and we do not expect any impact to our revenue from the FTO in 2010. We have maintained ongoing discussions with the FCO to work on other network requirements and broaden the scope of our relationship beyond the FTN.

Our Network Rail, we are very pleased to announce that we have successfully renewed contracts valued at approximately 45 million pound sterling over the next three years.

Together, these segment results represent good progress for the company. Significant work does of cost remain in the fourth quarter. We now expect full year 2010 invest and grow revenue growth of approximately 6% with a range of $2.275 billion to $2.3 billion and OIBDA growth of approximately 19% with a range of $400 million to $415 million. We also expect full year 2010 cash flow to be roughly breakeven.

Now, let me share a few observations on some of the key leading indicators we track. We had strong average monthly order volumes during the quarter of $4.4 million in monthly recurring revenue. This is the third consecutive quarter in which we saw orders in excess of $4 million. In fact, average order levels of $4.4 million for the first three quarters of the year are 24% higher than the average of $3.6 million in the same period last year.

In the third quarter, attrition defined as price erosion and customer disconnects, remained stable and consistent with historical averages. As we approach year end, we anticipate a normal uptick in erosion as certain customer contracts come up for renewal in the near term. Together, our ongoing momentum in order levels and our relatively stable attrition offers a positive indicator of future revenue growth and we have seen no major changes in pricing trends in the last quarter. Overall, the pricing climate is relatively stable.

As I mentioned earlier, we are investing in and expanding our global product and network capability as we continue to move up to value chain to support our customers evolving global requirements.

From a product perspective, we continue to develop and expand our global offers through delivery of innovative new products and services that enable customers to improve their collaboration, enhance their productivity and achieve maximum performance of their bandwidth intensive applications.

For example, we significantly enhanced our global Ethernet service with innovative technology that enables more efficient service performance plus greater control and flexibility. Our global Ethernet product portfolio is well-positioned to capitalize on this growing segment of the market as customers seek increasingly efficient network transport capability to enable data center connectivity in high speed applications.

We also introduced several new global collaboration products and solutions that enable enterprises to enhance worker productivity as well as reduce travel cost. We launched the telepresence solution with Teliris, which enables customers around the world to experience one of the most life-like virtual meeting environments available anywhere today. We launched Global Crossing connect solutions, which offers customer the ability to more efficiently launch their collaboration applications from their desktop as well as mobile devices. We also added some unique social media interfaces and other enhancements to our web meeting offer. Finally, we now provide video conferencing service in 4,000 public video conference rooms around the world.

From a global network perspective, we expanded our core network in Central and Eastern Europe, deploying IP points of presence in Bucharest, Bratislava and Sofia. In parallel, we continue to expand our service reach in other emerging markets such as the Middle East and Africa through interconnect partnerships. In addition, we further expanded our global VOIP local service by adding more than 80 new cities in three new countries including France, Mexico and Poland. For the eighth consecutive year, we were also ranked in the Information Week 500 annual listing of the United States most innovative users of business technology. We earned the ranking as an early adopter of innovative unified communications technology, which we used to enable us to maintain a competitive advantage.

Now for the remainder of the year, we will continue to invest to meet future demands, including enhancements to our portfolio of structured bandwidth services, and new managed services and cloud services. We will also continue to look for ways to add applications to our product portfolio that leverage our assets and enable us to address high growth segments of the market with value-added services.

Now on that topic, as many of you know, yesterday we announced the acquisition of Genesis Networks. Genesis was a privately held company that is an innovator in high performance video transmission services, serving the world’s major broadcasters, producers, and aggregators of specialized programming. The Genesis Networks stretches across 70 cities on five continents and links important international media centers through 225 on-net points.

The market for the video services Genesis provides is growing. This acquisition provides unique expertise for us to be a player in this growing market. Genesis Networks’ global customer base includes some of the most recognizable broadcast and program distributors in the world, including leading sports networks, news broadcasters, sports rightsholders, news agencies, and international broadcasters.

The purchase of Genesis will help leverage Global Crossing’s assets and accelerate our current efforts to build even stronger business relationships within the video transport sector. The combined company can now take Genesis Networks’ product expertise in this market to offer value-added solutions to our customers. This acquisition advances Global Crossing’s existing strategy of investing in emerging areas, deepening penetration into vertical markets, furthering the differentiation of solutions and services, expanding customer relationships, and leveraging the company’s global assets to cease new opportunities. We welcome Genesis Networks into the Global Crossing family.

Customer experience also continues to be a very important part of our differentiation. In the third quarter, we achieved customer satisfaction scores that continue to show strength and demonstrate our competitive edge. For instance, we announced several customer experience initiatives that are continuing to differentiate Global Crossing from the competition by offering a best-in-class consistent global customer experience. We announced our Seven Touch Points of customer excellence framework that delivers exceptional customer support and value in every aspect of our relationship with customers. The Seven Touch Points cover the spectrum of customer experience life cycle from network design support, to customer on-boarding, to ongoing customer care. We also expanded our uCommand customer portal, which now provides our customers with enhanced tools for network management and inventory management.

All of these investments, enhancements and improvements have led to customers voting with their dollars, proving that Global Crossing is able to meet their demanding global communication needs. Here are the couple of examples of customer wins in the third quarter.

In North America, we secured a three-year contract with a large biotechnology company that includes global WAN data connectivity and VOIP for international services. In Latin America, we (inaudible) a multi-year agreement with one of the fastest growing telecommunications operators, providing them fiber optic, infrastructure and services for collocation in Chile, Argentina, and Brazil.

In Europe, we secured a three-year customer win with a large financial company for managed IP VPN and dedicated Internet access services connecting multiple office locations throughout Europe, the United States, and Asia. And in the U.K., we secured a four-year contract with the U.K.’s largest transport operator, FirstGroup, to provide a fully-managed data network for more than 700 sites in the U.K.

In summary, we continue to see growth in customer demand for next generation IP, Ethernet-based services, and data center-managed services, and are pleased that our order levels remained in the mid-$4 million range. We delivered growth in our core invest and grow revenue with improved performance in Latin America and rest-of-world operations. We continue to invest in and expand our global network capabilities and products as we move up the value chain to support our customers’ evolving global requirements. We are well-positioned competitively to take share in growing markets that we target. We have good operational momentum and we are well-positioned for a strong fourth quarter as we look into 2011.

I’ll now turn to John Kritzmacher who will give you more specific details. John?

John Kritzmacher

Thanks, John, and hello everyone. As John has already noted, our third quarter results reflect further sequential improvements in our operational and financial results, with continued revenue growth falling directly through to improved OIBDA performance. Our results also include impacts related to foreign exchange movements and an adjustment to our annual incentive compensation accruals. As always, I’ll provide some detail on these items in order to help you understand underlying momentum of the business, and I’ll start off with a review of our revenue performance.

In the third quarter, the company generated consolidated revenue of $648 million, a sequential increase of $18 million or 3% and a year-over-year increase of $5 million or 1%. On a constant currency basis, consolidated revenue increased $15 million or 2% sequentially and $13 million or 2% year-over-year. Both sequentially and year-over-year, revenue growth was primarily driven by increases in our invest and grow business.

In the third quarter the company generated invest and grow revenue of $568 million, a sequential increase of $13 million or 2% and a year-over-year increase of $15 million or 3%. As a reminder, invest and grow in the year-ago period included a $4 million benefit in the Rest of World segment for one customer’s buyout of certain long-term obligations under an existing contract. By comparison, there were no material non-recurring revenue items recorded in the current period. Movement in foreign exchange rates favorably impacted invest and grow revenue by $3 million sequentially, and unfavorably impacted invest and grow revenue by $8 million year-over-year. On a constant currency basis, invest and grow revenue increased 2% sequentially and 4% year-over-year. On a segment basis, third quarter invest and grow revenue for rest-of-world, GC Impsat and GCUK was $317 million, $145 million, and $112 million respectively.

In constant currency terms, Rest of World increased 1% sequentially and 3% year-over-year. The sequential growth in Rest of World was primarily driven by our North America region where we are capitalizing on continued IP adoption and conversions to MPLS networks through increased penetrations in IT, high tech, and healthcare sectors. These sectors complement our prior success and growing base in the travel, transport, and manufacturing sectors in North America.

Meanwhile, GC Impsat increased 7% sequentially and 12% year-over-year. As John noted earlier, we continue to experience solid growth in GC Impsat especially in Brazil and Colombia. In addition, we continue to improve our revenue mix with IP VPN, network management, and data center-managed services, all growing at very strong double digit rates on a year-to-date basis.

And finally, GCUK decreased 4% sequentially, but increased 3% year-over-year. Sequentially, GCUK experienced wider short interval demands particularly for purchases of equipment and professional services. In addition, sales credit in GCUK were somewhat higher in the period after being lower than average in the prior quarter. Year-over-year, revenue increased due to growth on both new and existing customers. The new customer growth was primarily in the enterprise VPN market and reflects progress in our strategy to invest in sales resources to diversify and grow our UK revenue base.

Moving on to wholesale voice revenue in the third quarter was $79 million, representing a sequential increase of $5 million or 7% and a year-over-year decrease of $10 million 11%. As we previously stated, we closely manage this business for margin and we may experience fluctuations in revenue from quarter to quarter. Since nearly all of this revenue was earned in the U.S., it was not materially-impacted by movement in foreign exchange rates.

Gross margin in the quarter was $208 million, a sequential increase of $9 million. The sequential increase in gross margin was driven by higher revenue and lower accrued incentive compensations partially offset by an increase in access cost. Year-over-year gross margin increased $8 million. The year-over-year increase was primarily driven by higher revenue and improved sales mix partially offset by certain items that favorably impacted the prior year period by $5 million. These items included the favorable impacts of a $4 million customer contract buyout and a $6 million regulatory ruling related to access cost paid by GCUK largely upset by retroactive property tax assessment of $5 million in the UK. Foreign exchange did not materially affect gross margin either sequentially or year-over-year.

Gross margin as a percentage of revenue was 32.1% in the third quarter compared with 31.6% in the prior quarter, and 31.1% in the year ago period.

For the third quarter, we reported $99 million in SG&A expense, a sequential decrease of $7 million, with no material sequential impact from foreign exchange. The sequential decrease was primarily due to lower accrued incentive compensation, and lower non-income tax expense, partially offset by an increase in accrued real estate restructuring charges. Year-over-year SG&A decreased $10 million, including a favorable foreign exchange impact of $2 million. The year-over-year decrease in SG&A was primarily driven by lower non-income tax expense as well as lower provisions for bad debt and accrued incentive compensation.

In the quarter, we accrued a total of $3 million for incentive compensation, a decrease of $10 million sequentially and a decrease of $3 million year-over-year. The $3 million of incentive compensation recorded in the quarter consisted of a $2 million reduction in cash accruals, primarily for the 2010 annual bonus program; and a $5 million charge for stock-based accruals, primarily for long-term incentive stock grants. As a reminder, approximately 55% of the incentive compensation accrual is reflected in the cost of revenue and the remainder is reflected in SG&A.

We achieved OIBDA in the quarter of a $109 million, a sequential increase of $16 million, and a year-over-year increase of $18 million. On a consolidated basis, foreign exchange did not materially impact the sequential or year-over-year improvement. OIBDA as a percentage of revenue was 16.8% in the third quarter compared with 14.8% in the prior quarter and 14.2% in the year ago period.

On a segment basis for the third quarter, Rest of World’s OIBDA was $38 million, a sequential increase of $6 million. The increase was primarily driven by higher revenue, lower accrued incentive compensation, and lower non-income tax expense, partially offset by an increase in access cost. There was no material sequential impact from foreign exchange. Year-over-year Rest of World’s OIBDA increased $16 million including a favorable foreign exchange impact of $2 million. The year-over-year increase was primarily driven by higher revenue and improved sales mix, accompanied by lower non-income tax expense, and lower provisions for bad debt, and accrued incentive compensation. These gains were partially offset by the previously-mentioned customer contract buyouts in the year-ago period.

GC Impsat’s OIBDA was $49 million, an increase of $8 million sequentially and an increase of $5 million year-over year. Foreign exchange did not have a material sequential or year-over-year impact. The sequential improvement was primarily driven by an increase in revenue and improved sales mix, accompanied by lower accrued incentive compensation. Year-over-year, the increase was primarily driven by an increase in revenue, improved sales mix, and lower accrued incentive compensation partially offset by an increase in payroll cost.

And finally, GCUK’s OIBDA was $22 million, an increase of $2 million sequentially. Foreign exchange did not have a material sequential impact. The sequential increase was primarily due to lower accrued incentive compensation. On a year-over-year basis, GCUK’s OIBDA decreased $3 million, including a $2 million of unfavorable foreign exchange impact. Excluding the impact of foreign exchange, and a net $3 million favorable impact in the year ago period arising from a favorable regulatory ruling related to access cost, and an unfavorable retroactive property tax assessment, OIBDA improved operationally by $2 million on a year-over-year constant currency revenue growth in GCUK.

Again in the third quarter, our trailing 12-month free cash flow with negative $14 million. We’ve noticed throughout the year that our 2010 free cash flow will be lower than last year due to a combination of lower sales of IRUs and prepaid services, and higher cash interest cost primarily due to the refinancing of some of our debts in late 2009. As compared to 2009, year-to-date sales of IRUs and prepaid services are lower by $15 million, and our interest payments are higher by $39 million. The remaining difference in the year-to-date performance as compared to 2009 is largely attributable to unfavorable movements in working capital.

For the third quarter, we reported negative free cash flow of $1 million compared with negative free cash flows of $13 million in the prior quarter, and free cash flow of $52 million in the third quarter of 2009. The sequential improvement in free cash flow was largely due to improved OIBDA, higher sales of IRUs and prepaid services, and lower capital expenditures partly offset by higher cash interest payments in the quarter. The year-over-year decrease in free cash flow was primarily due to higher cash interest payments in the current period, and a sequential improvement in the collection of receivables in the prior year period.

Moving on, cash flow provided by operating activities for the quarter was $29 million, after cash use of $32 million for operating working capital, including interest payments of $48 million. We received $31 million in proceeds from the sale of IRUs and prepaid services, and we used $43 million for capital expenditures and principal payments on capital leases.

In addition to fund various equipment purchases and software licenses, we entered into $19 million of new capital leases and other financing arrangements. Most of these financing arrangements were sponsored by equipment and software vendors.

Looking ahead, we expect to see significant sequential improvement in free cash flow driven by continued OIBDA growth, and as we saw in the fourth quarter of last year, significant improvement in working capital.

Turning briefly to our capital structure, there were no material changes in the company’s capital structure in the third quarter. At the end of the third quarter, our debt level was $1.48 billion, including major maturities totaling $1.31 billion and capital leases and other debt of $167 million. As previously noted, we entered into $19 million of new capital leases and other equipment financing arrangements. We also made principal payments of $13 million on capital leases and $2 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. We continue to monitor market conditions, and we currently expect to refinance that debt prior its maturity in 2011.

We ended the third quarter with total cash balance of $330 million, including $19 million of restricted cash. This compares to an ending cash balance of $343 million at the end of the second quarter, including $15 million of restricted cash. During our call last quarter, we reaffirmed guidance based on expectations of revenue growth in the second-half of the year that replaces at the low end of our annual guidance for invest and grow revenue at approximately $2.3 billion. We also noted that a revenue growth would come from our revenue momentum exiting the month of June, higher new orders taken in the first half of 2010, and certain individually significant non-recurring items including project revenues and early termination fees expected in the second half of 2010.

Our current view for the year now anticipates lower 2010 revenue in GCUK where we are experiencing somewhat lighter, shorter demands for equipment and professional services. We’re also now expecting lower revenue for usage driven conferencing services distributing conferencing services in North America primarily due to stronger seasonality impact than we had previously anticipated.

Meanwhile, we are continuing to pursue certain significant non-recurring revenue opportunities, including project revenues and early termination fees. Our updated forecast reflects a range of potential outcomes for these items in the fourth quarter.

Taking these factors into consideration, we now expect full year 2010 invest and grow revenue to be at more than 1% of the low end of our original guidance range. More specifically, we expect our fourth quarter invest and grow revenue to follow the range of approximately $598 million to $623 million. This implies full year invest and grow revenue of $2.275 billion to $2.3 billion, representing approximately 5% to7% growth, as compared to 2009. At the high end of this range, we expect up to $30 million from significant non-recurring revenue item.

We expect OIBDA to be within our original guidance range, but more specifically from $400 million to $415 million, representing approximately 17% to 21% growth over 2009. And finally, we expect free cash flow to be roughly breakeven for the year. This outcome will be significantly impacted, not only by fourth revenue and OIBDA, but also by the sale of IRUs and prepaid services, and much improved working capital performance.

In summary, we achieved significant sequential growth in invest and grow revenue and OIBDA. Invest and grow revenue increased 2% sequentially on a constant currency basis driven by growth in GC Impsat, and Rest of World.

Coupling this revenue growth with continued focus on cost management, our operating leverage yielded significantly improved profitability as our OIBDA increased to $109 million for the third quarter, representing 16% growth sequentially on constant currency basis and an OIBDA margin of nearly 17% for the quarter. Free cash flow was negative $1 million for the quarter, reflecting a sequential improvement of $12 million.

Looking to our company guidance, as I mentioned, we expect full year invest and grow revenues to increase 5% to 7% compared to 2009 with full year revenue in the range of $2.275 billion to $2.3 billion. Our annual OIBDA is expected to range from $400 billion to $415 billion, representing growth of approximately 17% to 21%. And while we expect free cash flow to be roughly breakeven for the year reflecting the year-over-year pressure from higher cash interest costs and lower sales of IRUS and prepaid services, we are clearly aiming to be free cash flow positive for our third consecutive year.

We are very encouraged by the underlying momentum of our business, our global reach, differentiated customer service and portfolio of value-added services including data center managed services, continue to position the business for strong, profitable growth as we look ahead toward 2011.

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

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question is coming from the line of Michael Rollins from Citi Investment Research. Please proceed with your question.

Michael Rollins – Citi Investment Research

Hi, good morning and thanks for taking my question, actually two. One is I was wondering if you can give a little bit more detail on the project or one-time revenue benefits that you highlighted as part of your guidance in terms of geographically where they might be, what type of work it is? And then, secondly, as you think about 2011 just looking ahead a little bit, how should investors think about growth in, I guess more normalized economic backdrop? I know there are some things on the investment levels or early signs of growth that we should be thinking about for next year. Thanks.

John Legere

Okay. John, I know you wanted to talk a bit more about the non-recurring distribution. You want to start with that.

John Kritzmacher

Sure. Sure. There are really two elements to what I refer to when I speak of significant non-recurring items. They fall in the category of project related revenues and then in the category of what we call early termination. In the category of project oriented revenues, we will see some significant revenue related to project startups and in some cases, project transitions but implementation related fees. And then, we also see on some projects some equipment sales. And there are a couple of specific items that I have in mind and geographically, they will be spread.

In terms of terminations, think of this as long-term agreements, long-term lease agreements with customers where perhaps their needs have evolved over time and their existing leasing arrangements are no longer serving their priorities. And they have an interest in terminating those agreements and the ongoing fees associated with them returning facilities to us and then, in most cases, undertaking new facilities that are better aligned with their networking needs.

We have a couple of those cases again, geographically spread that under discussion with customers that would allow them to move toward, set of services that better suit their needs today that would allow us to realize revenue and cash in the near term for the termination of those agreements. Those are the two key elements and again, in both cases, irrelevantly widely, geographically spread.

John Legere

Mike, let me try to make some comments about how we look at things going into 2011. And frankly, this is just an updated momentum view of our business with the end of 2010 being a somewhat artificial line that we’re running through. If you hear the view as to how we see the year coming through now and you look at the relatively strong growth that we’ll be portraying over 2009, it’s important to start breaking down.

When we talk about revenue and invest and growth, there’s various items that you can look at. One is the new orders that we’re putting on in the business, which we have pointed out have been quite strong this year including being up as much as 24% over the last year. And then, there’s the erosion and we’ve clarified what that is and there’s no change to that. It’s been relatively steady. They are usage sensitive pieces of our business that vary quarter to quarter.

As we pointed out, there have been some softness, some of it seasonality wise in the conferencing services which is a usage sensitive component of the building blocks you need to look at, and as John has been outlining, we do have a portion of our business that are non-recurring onetime items, equipment [ph] related, professional services et cetera. And we’ve said many times that the biggest way to look at the core engine of our business is to look at the new orders on the business and what’s happening with the erosion and what’s happening with pricing. And I think our outline for today suggests that particularly in the biggest growth parts of our business, which are Latin America and North America, those businesses are at strong endeavor driven by significant growing demand for Ethernet services, for IP services, for data center managed services and the core of what we do and there will be some correlation to the economic growth that can be expected and the investment people we’re making into their business. And as we continue to point out, some of these economies, let’s use Brazil for an example, are, I’ve seen others in the industry use the term of on fire; and I think that is somewhat similar to what we see, various Latin American countries that are growing very strongly. North America is showing very strong signs of growth and our panel [ph] activity continues to be one that replenishes strongly. And we do anticipate in 2011 continuing to be a sharetaker.

So as you look at the economic recovery and the various forecasted growth and the investments that enterprises will be making in their business, we do anticipate accelerating our growth over that economic growth. So we’re quite positive about what we see. We think there is no change in the legs of our product portfolio and/or the industry going into 2011.

And items like we did yesterday with Genesis Networks suggests that there are an evolving set of value added applications that fit very nicely on our platforms that could change the profit portfolio of what you do with this unique asset that we have.


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

Donna Jaegers – D.A. Davidson

On Genesis, can you give us a little more color as far as current revenue run rate and or are they profitable or are they generating cash flow? And then, I have two other smaller questions.

John Legere

Okay. John or Dave, do you want to start on Genesis, our new exciting acquisition?

Dave Carey

Well, thanks for the question about Genesis. We’re pretty excited about this one. From a strategy point of view, just let me touch on it that way. I think this is a logical extension and execution of the strategy with that we’ve been following by focus very deeply on target markets and clearly, the broadcaster and producer segment and all that’s going on with video demand is right up that channel.

The second part of it is bringing value added IP-based solutions to these particular market segments and clearly the solutions that they have developed that has a customer controlled component to the network tools set that they have called IRIS is all IP based. It’s global. It’s all about service delivery and a passion for delivering with excellent service. We went down and did our screening on this one, it checked all of the boxes in the way that we would want to continue to go up market in terms of targets, types of solutions that draw value adds, leverage the asset and of course, contribute to profitability.

In terms of just the economic profile of Genesis today, the purchase price that we paid for it was $27 million. That was approximately one-time current period revenues. As we look at what they will be contributing in the first year, it will be roughly neutral on the OIBDA side and the cash side. So this one is really all about what we can do with this capability by investing in it, growing it very clearly into the double digit range and north of that. And then, it also has legs that go beyond just the broadcaster and producer market segment into our tangential industries as well as bringing some of the additional product sets that we have to bear for these customers. So this one is really about accelerating growth then continuing to execute the strategies, we go up market.

John Kritzmacher

And Donna, just two tactical things. We will be consolidating two months’ worth of Genesis revenue into the 2010 results. Because of its size being relatively small, we did not take that into consideration in the guidance numbers that we put forth. So we didn’t assume a chunk of that guidance because of them. And that’s Dave has kind of given you a run rate. Think a run rate revenue into 2011 of $30 million, but also think about a business that we haven’t really factored in what we can do with our customer base or our product portfolio from a synergy standpoint, but we also haven’t factored what kind of constraints their growth may have been under because of the way their business had been very conservatively run in the interim period before we acquired them. So I hope that helps.

Donna Jaegers – D.A. Davidson

On access charges, for John Kritzmacher, you mentioned that they were moving up in Rest of World. Can you give us a little more color there and is that the trend that you expect to continue?

John Kritzmacher

The movement in access cost really is driven in part by the movement in wholesale voice businesses concentrated in North America. That was the biggest thing to factor in terms of movement there. We also did have very strong access performance in the second quarter particularly around some of the disputes and charges that we were reviewing and scrubbing. So we had a little bit more favorable than typical performance on access, we went back to a more normal rate on disputes and billing adjustments inside the periods. So those are really the two key factors, the pressure that comes from wholesale voice, which is very access intensive, and then a very strong performance around driving down access cost in the second quarter, third quarter getting to a more normal rate, and then slightly gone ahead, we see some good opportunities for access again in the fourth quarter in North America.

Donna Jaegers – D.A. Davidson

On contracts in the U.K., can you give us a little more color about when you think the FCO contract will transition over to cable and wireless? And then also you have another contract with Royal Mail via Lockheed Martin that comes up next year. Can you tell us when that comes up and any other color on the Royal Mail contract?

John Kritzmacher

This is John, Donna. Let me start out with respect to FCO. Our current expectation thus far in the dialog with cable and wireless and with FCO is that the transition will begin to get underway sometime mid-2011, and then it will progress at a more accelerated pace through the balance of the year. Overall, we would anticipate that through the end of 2011, as compared to 2010, our revenue will be down year-over-year by something on the order of $10 million to $15 million depending on how timing plays out. As you know, that contract is about $40 million a year in revenue to us. So it’s a portion that will wind off in 2011.

John Legere

Let me just add to that. We’ve been very clear about the FCO award and the potential timing of it and we just continue to try to give you an update of what we’re actually seeing. As of this point, we clearly see no impact in 2010. We’re actually seeing orders still put on the business by the FCO signifying some delay in the process that they’re going through, and we continue to expand our relationship outside the scope of this contract and discuss options with the FCO. We continue to discuss opportunities to become the service provider in various components for the FCO.

So as John said, we’re now thinking about the second half of 2011, we gave you an updated number, but we’ll just keep you posted as to the actual activity that we’re seeing take place as the period moves forward.

John Kritzmacher

And if I could, just please do let me clarify. My comments around $10 million to $15 million change in revenue year-over-year with FCO is very specific to the current contracts. So to John’s point, we are pursuing other opportunities and there are may be other opportunities that we will not – we will back down some of that, but I wanted to just make sure crystal clear specifically to that contractual agreement. And then with regard to the agreement with Royal Mail, this is not a large contract for us, to start [ph] in, let’s just say, our top 20 accounts. So I don’t expect that that will have material impact on the business as it evolves in 2011.

Donna Jaegers – D.A. Davidson

Great. And then just one last point on FCO. Currently the contract that you have, do you have an idea of about how much of the pie that represents for their whole telecom spend?

John Legere

I don’t. Ted, are you on?

Ted Higase

Yes, I am. I couldn’t add color to that, Donna. I wouldn’t know.


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

Jason Armstrong – Goldman Sachs

Great, thanks. Good morning. A couple of questions, maybe first on LatAm, another good revenue uptick this quarter and also good scale. I think access costs have been flat for three quarters now despite the good revenue growth. So can you help us think through the trajectory there? I would have thought maybe you’d have to absorb a little bit more on the access cost side to drive that type of growth. Is this a margin expansion business? Is that the way we should think about it in next year? And then maybe, second question, just on the rebound or stability and wholesale voice in the carrier side, sort of for a while, competitive pricing and low margins had forced a number of carriers to de-emphasize this business resulting obviously in declines, but it looks like you’ve leveled out this quarter, kind of through period of sharp declines there.

Gary Breauninger

Okay, which piece do you want to do first? Jason, it’s Gary Breauninger, how are you? On the wholesale voice piece, I will take that first (inaudible) and then come on the Lat-Am business. I take your point. The business thus far is, the whole voice market, it ebbs and flows from quarter to quarter depending on who’s got the most competitive rates in the market. Clearly in Q2 we saw a (inaudible) in our revenues as we were more selective about the margin threshold that we chose to attack in that space. Q3 came back a little bit, as certain to your point, I believe certain competitive profiles out there, i.e. some of our competition backed off from some of these competitive rates and more business flowed back to us. It’s all driven via the LCR, it’s not a big acquisition market for us. We maintain it for the margin, run it through the out of capacity that we have. So, your point (inaudible) not a high level of concentration, other than they continue to use that platform as a way to let some of our customers dual operated a TDM and a voice over IP network until they’re ready to fully go to the voice over IP.

Dave Carey

Jason, this is Dave Carey. Let me take the other part of that question that related to access cost in Latin America. This part of our business has a very robust product line in it, and a substantial amount of the growth that we’ve had there is actually coming off that capability set. And clearly, there are no access charges associated with that. So the dynamic you have is a product mix driven dynamic with a lot of that revenue growth coming off the data center. Couple it with the growth that is coming on the network side is then being offset by the cost of access reduction. So you actually have a couple of very positive dynamics there working toward the profitability of that region.

Jason Armstrong – Goldman Sachs

And does that type of mix shift continue for the foreseeable future?

Dave Carey

Yes, actually I think it does (inaudible) what John’s observation was and maybe what some of the others in the industry are seeing, particularly in countries like Brazil, Colombia, Chile, and also Argentina. So that data center’s strength is actually very powerful. And one of the interesting observations we have in that particular region is we lead with the data center offer in an ICT type of format and it drags the network. So that way that we go to market in that particular region of the world does look very strong as we look forward (inaudible).

John Legere

Well, I would actually say, for the specific question, the trend either continues or accelerates, and it’s because also of the add-on services that are driving a lot of their growth for existing customers in the data center. So I would expand, Jason, say, it either continues or accelerates.

Jason Armstrong – Goldman Sachs

Okay. Can you help us think through the data center footprint in that region, maybe square footage, but then also utilization rates and do you have business-to-business you will have to – we should think about you investing in 2011 to sort of augment what you have right now?

Dave Carey

Well, there are 15 data centers in region. So to deal with the statistics on each one of those would be a bit of challenge here. But let me broadly say that we are running relatively high utilization rates in the key data centers in Colombia, Brazil, Chile. Argentina, we’re actually in a reasonably good position. So as we think through our plans for 2011, we would be actually looking to expand the footprints that are in Brazil and Colombia initially to be able to maintain the growth rate accelerated as John said. But these are incremental investments, so the thing that I would really want you to walk away with is the thought that we’re talking the kinds of dollar capital investments like you’ve seen with some of the Greenfield developments here in the U.S. In these locations, we already own the land, much of its foundation work is already in, it’s putting additional floors on additional buildings. So it’s much more of an incremental program which means that the economics are much more favorable with the greenfield type of operations.


Thank you. Our next question is coming from the line of Romeo Reyes from Jefferies & Company.

Romeo Reyes – Jefferies & Company

Hi, good day. Just a couple of questions here. I wanted to get a little bit more granularity on the new order volumes that you talked about, specifically, I’m trying to figure out if this percentage that’s coming from existing customers is kind of the same as it’s been the last couple of quarters? Trying to figure out also if you have, your FDI average ticket side just getting a little bit bigger, and then whether or not the contract length is getting shorter, we’re hearing from others that contract lengths are shortening a little bit. And then John, I think you talked a little bit about pricing pressure, that has been kind of constant. Are you seeing any contracting pressure at all? (Inaudible) kind of the first set of questions.

And then secondly, for John Kritzmacher, just trying to figure out your ability to do a parity [ph] debt deal on the turf, seems like the parity leverage ratio test is dropping at the beginning of next year, you probably lose about a $100 million of parity debt capacity. Is that an incentive to actually try to get something done this year? Thanks.

John Legere

Let me turn to Gary but on the way in, I’m going to say the answers are no, no, no, and no. I mean there’s no difference in the percentage for getting from existing customers versus new, which is a positive; no change real in the contract length and no change in the size of the ticket items. We are seeing some bigger ticket items in the tunnel [ph], so that may be a trend overtime, and nothing dramatic, and no change that we saw over the last quarter at the pricing environment, and be clear, my comments were that it was a fairly stable pricing environment, i.e., the pieces of the business that were under pressure seem to have – no increase in the slope of the decline but those are also pieces of the business that we’ve adjusted our participation in accordingly, and the pieces of the business that are strong and/or a favorable, have stayed strong and favorable, but Gary, if you want to add any detail?

Gary Breauninger

I will start a few more levels of details. If think about that Romeo, as far as the orders themselves, new and existing revenues is roughly the same. We look at about 70% to 75% of the growth from our existing base but it does vary a little bit as you go around the globe but on average that percentage still holds. That’s a great balance of taking current set [ph] of base customers and growing with them or expanding their capability as well as new logos that we do, one in particularly here, if you look at North America in the healthcare sector, but across the globe, we can gain new logos.

To John’s point, we saw roughly the same size of orders themselves and with the same contract rate, but we will tell you that some of the experience we’ve had that we’re getting more contribution from our (inaudible). So at that percentage of growth [ph], that absolute number of order should continue to hold. But again, pretty consistent trends we’re across all segments for the last three or four quarters.

Romeo Reyes – Jefferies & Company

Gary, what about breakage, is breakage improving all?

Gary Breauninger

I would say, again, we got, as far as breakage, defined, as from the time the customer order (inaudible), is that what you’re defining as breakage?

Romeo Reyes – Jefferies & Company


Gary Breauninger

Yes. It is pretty consistent. Usually, the customer makes the decision to give us the business for (inaudible) VPN network, and they’re not going to break off too much of that. You might get a change in the site A or B as they think about some of the remote sites but there’s a vast majority of that order value should translate.

John Kritzmacher

Hey Romeo, it’s John. If I can move on to your question with regard to the UK debt. First, yes, we would like to reaffirm, we continue to be interested in further simplification of our capital structure which in this case would imply, looking at the opportunity to refinance the debt that we currently hold in the UK and doing that at apparent level. Second, in terms of opportunity, at least in the context of current market conditions, there is an opportunity for us to lower interest cost and one that we think is, reasonably attractive.

You notice that in terms of limitations around our existing debt and leverage test that you would expect that we should be in the position to do that refinancing in the first quarter of next year, and I would agree that seems to be one, we should expect to be within the limitations to refinance that debt with some portion of that on an unsecured basis, some on a secured basis but the timing is about right, your estimates are about right. And so we’re going to continue to monitor the market conditions and until we find as we make our way into 2011.

Romeo Reyes – Jefferies & Company

Thank you very much.


Thank you. Our last question is coming from the line of Murray Arenson from BGB Securities. Please proceed with the question.

Murray Arenson – BGB Securities

Thanks, good morning. I just wanted to follow up a little bit on Genesis and may be ask you to speak to that in the context of your CDN efforts maybe how those are going if you see a relationship between those initiatives. And if you see the sales and implementation process on the video side moving in lock step with what you do, traditionally or there are specific challenges that tie into more on the video side?

Mark Gottlieb – SVP, Finance and IR


Dave Carey

Murray, this is Dave Carey. Let me try to create this portrait for you. Genesis, think of it as an ecosystem first and on one side of this ecosystem, they’re picking up programming content from producers, these would be major event producers, they could be ESPN, it could be Wimbledon, it could be Formula One racing, it could be the World Cup for example. The other content source would be the traditional broadcast community who has been packaging their content for localized audiences that distributed around the world.

Now, on the other side of the ecosystem would be the cable operators at the MSO level and also the satellite DTH providers, the Dish Networks et cetera. So that’s their business right there. Now, the other alternative to distribute that content would be to the online community, which would be delivering it to the likes of the CDNs whether it be the limelights of the world, the (inaudible), et cetera. So it’s a growth opportunity.

Now, you can see how we positioned ourselves as a transport provider to the CDNs also taking that CDN offer to our enterprise customer base. So I think you’re seeing the picture the same way we are. It’s a bit like a jigsaw puzzle that we’re bringing these pieces together to solidify an overall position in this video market by bringing the individual pieces of the puzzle into a mosaic that will allow us to bring more and more of that traffic on a network. We have some additional work to do in that CDN space as I think you point out accurately, so that clearly fits into the overall picture in the way we’re architecting that strategy.

John Legere

Okay. Suzie, I guess that’s our last question. So I’ll just thank everyone for joining and we look forward to updating you again with our year-end results. Thank you all very much.


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

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