EarthLink Holdings' (ELNK) CEO Joseph Eazor on Q2 2014 Results - Earnings Call Transcript

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 |  About: EarthLink, Inc. (ELNK)
by: SA Transcripts

EarthLink Holdings (NASDAQ:ELNK)

Q2 2014 Earnings Call

August 05, 2014 8:30 am ET

Executives

Louis Alterman -

Joseph F. Eazor - Chief Executive Officer, President and Director

Bradley A. Ferguson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Donna Jaegers - D.A. Davidson & Co., Research Division

Michael Crawford - B. Riley Caris, Research Division

Anthony Francis Klarman - Deutsche Bank AG, Research Division

Arun Seshadri - Crédit Suisse AG, Research Division

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Operator

Good morning. My name is Charisse, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink's Second Quarter 2014 Earnings Call. [Operator Instructions] I will now turn the conference over to Louis Alterman, EarthLink's Senior Vice President of Finance, Investor Relations and Treasurer. Please go ahead, sir.

Louis Alterman

Thanks, and welcome to our call. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website at earthlink.net. Following our comments, there will be an opportunity for questions. Before we continue, I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks the protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business. In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them, and a reconciliation to the most comparable GAAP measures, please refer to our earnings release in the Form 8-K that has been furnished to the SEC, both of which are available on our website at earthlink.net. After Joe's opening comments, Brad Ferguson, our Chief Financial Officer, will discuss the quarter's financial results. Now I'd like to hand things over to Joe Eazor, our President and CEO.

Joseph F. Eazor

Thank you, Louis, and good morning, everyone. I felt like I just started here, but I'm now over 6 months into the job. On my first 2 earnings calls, I communicated that we at EarthLink would do a few things: That we would materially improve our cash flow, that we would execute a structured operations transformation plan, that we would narrow our growth focus around managed network services and network-related cloud services, and that we would optimize our product and business portfolio. And today, I'm glad to say that we are making progress in all fronts. First, I'm pleased with our Q2 financial results. Let me start with our revenue. We all know there are declining revenue segments to this business, but we are taking actions to shore up revenue in the short term as well as steps to drive better long-term performance. For the quarter, our revenue was flat versus Q1 and it met our expectations. Additionally, we made solid progress in our bookings. And because of this, we remain committed to delivering full-year revenue within our guidance. From a profitability perspective, we made good progress. With improvements in both cost of revenue and operating expenses. As a result, we are narrowing and increasing our adjusted EBITDA guidance for the full year. Our strong focus on cash flows resulted in significant improvement. From the adjusted EBITDA increase I just mentioned, to our CapEx, where we are aggressively improving our capital productivity. Based on these drivers, we have increased our free cash flow expectations by almost $30 million from the beginning of this year. Brad will walk you through all the details of our Q2 performance and our guidance for the year in just a few minutes. But before I turn it over to Brad, I wanted to spend a few minutes on specific areas of progress. I would like to highlight progress in 3 areas: Success in our managed network services; our efforts to simplify and improve our operations and our portfolio optimization work. First as I said last quarter, we must improve our focus on our growth activities. Spending more of our effort in managed network services where we have strong capabilities that align very well with market demand. Some recent key wins this last quarter highlight this that the value of this focus and these are shown on Page 2.

Michael Kors needed a reliable way to connect its distribution plants and warehouses. We would leverage our network partner relationships to design primary and secondary MPLS layer that gave them a cost-effective and secure solution. BD Brands was unhappy with their existing provider, to provide better service in their 58 locations, EarthLink designed a blended access MPLS network and layered in Hosted Voice, Hosted Network Security, Wi-Fi and PCI compliance solutions. We won this business because we have a proven track record of success for retail customers. Genesco, a retailer with approximately 3,000 locations, has long been an EarthLink customer. We worked with Genesco to enable better connection with shoppers via mobile, to gather better data on in-store activity and to ship one to many advertising to one-to-one targeted offers. This has extended our services partnership with Genesco for another 4 years. As a result of these and other wins, our new customer bookings during the second quarter were at the highest level in 3 quarters and our contract renewals continued at a very fast clip, nearly double the pace we were in '13. Additionally, we are enhancing our capabilities in VPN, or IP site tunneling as well as other managed network services products around the areas of security, customer network operation centers, network and other data analytics and so on. Our network related IT services products also saw success last quarter, including Hosted Voice over IP, disaster recovery and hosted industry relevant applications. Bookings of these products increased more than 50% from the first quarter. The second area I would like to discuss on Page 3 is the progress we are making to simplify and improve our operations in the customer experience, access management, product rationalization and our go-to-market focus. Our service delivery team has been streamlining processes like service installation and customer support. As we've seen market improvement in our service delivery intervals and customer satisfaction performance as a result. We believe these improvements and others like them will continue to lead to a better customer experience, which should lead to improve revenue, reduced operating costs and better customer retention. We've talked before about our efforts to manage our cost of revenue through focus access management activities. These efforts have continued to yield additional benefits in the second quarter. We believe that there is still more opportunity to reduce the cost of our network and we will continue to pursue these gross margin improvements aggressively, while improving our network performance. The focus on operational excellence is not limited to service delivery and network. We are simplifying our product catalog and better aligning the organization to support our strategy. For example, we continue to rationalize thousands of products SKUs out of our catalog and workflows. And have a more focused and standard product set that will be represented in our new automated coating system that is rolling out now. And finally, we are carefully segmenting the market and prioritizing our go-to market activities. As an example, we are shifting demand generation activities from the markets with the very smallest customers, where our products are less competitive in favor of managed network services in the mid-market enterprise segments, with a particular focus on multi-location businesses, such as retail. This product in market simplification should yield significant improvements throughout the organization. From sales and marketing, to order management, to service delivery, to customer care, to improve our support functions.

Page 4 is the same slide we showed you last quarter. And the 5 different parts of our portfolio, share a certain infrastructure like network elements and systems, but each products that has its own economics, growth prospects and competitive dynamics. We have committed to investing and then growing parts of our portfolio, while others make more sense to be optimized and run for cash flow. And as promised, we are evaluating a range of possible alternatives that can accelerate our path to growth and create the most value for our shareholders. As I spend more time here at EarthLink, I become more and more convinced of the tremendous opportunity that's before us. We have outstanding employees and the assets, resources and capabilities to create significant value and to become the great company I know we can be. We've made good progress and we have much work to do, but we have plenty of opportunities to further improve our performance. Now I'll turn it over to Brad to dive into our financial results and our guidance for the year. Brad?

Bradley A. Ferguson

Joe, thanks. I'll begin on Page 5 with an overview of the financial results for the quarter. For the second quarter, we reported total revenue of $297 million, a decrease of 5.1% from the second quarter of 2013. Revenue in our Business Services segment, consumer services segment and company as a whole, was flat to the prior quarter. Again, this quarter, we benefited from some pricing actions we took in the first few months of 2014, on targeted business and consumer products. We also recognized approximately $800,000 in revenue, resulting from a dispute settlement. Settlements like this happen from time to time and tend to have a lumpy impact on the P&L. Gross margin was $153 million for the quarter, up almost $2 million from the first quarter. This is the second consecutive quarter we have expanded our gross margin in terms of both percentage and dollars. As we've mentioned on previous calls, we have taken -- we have a team dedicated to reducing our cost of revenue, by aggressively managing our telecom spend in auditing thousands of vendor invoices we processed each month. Again, in the second quarter, our success in this area favorably impacted our results by a few million dollars. Gross margin was also favorably impacted by the pricing actions in settlement I mentioned earlier. Adjusted EBITDA for the second quarter was $51 million, up $1 million, or 2% compared to the first quarter of 2014. The improved adjusted EBITDA this quarter was driven by the gross margin expansion and continued focus on managing our operating expenses. The net loss for the second quarter was $22 million or $0.21 per share, which includes a fixed asset impairment of $5.4 million. As we progress in our integration plan, we continue to look for the most cost-effective way to improve the efficiency and functionality of our platforms. We also are focused on simplifying and narrowing our product portfolio to keep products that will deliver our growth -- our future. As a result, during the second quarter we wrote off certain capitalized cost for partially completed projects and products that are no longer -- that no longer fit within our plans. And we will also avoid some future cash outlays as a result. Adjusting the net loss for this charge, the quarterly loss was a $16 million, or $0.16 per share. As Joe suggested in the introduction, our focus on cash flow yielded a significant reduction in capital expenditures for the second straight quarter. We spent $26 million in the second quarter, 24% less than in the year-ago quarter and a few million dollars more than in the first quarter. The increased focus on managing capital expenditures resulted in another strong quarter of unlevered free cash flow, producing $25 million this quarter. This is the same amount of unlevered free cash flow we produce in the second quarter of 2013 and down only slightly from the $27 million we produced in the first quarter of 2014. I'll say more about CapEx and cash flow in a minute. Our revenue components are shown in more detail on page 6. During the second quarter, we made some pricing changes for certain consumer services products. Partially as a result, the revenue decline rate for consumer service slowed to 10% compared to the second quarter of 2013. We expect the revenue declines in the consumer business to continue to improve over time. Moving to our traditional CLEC offerings. We generated $148 million in revenue from these products during the second quarter, down from $151 million in the prior quarter. For the first time, this product line constituted less than 50% of our total company revenue. As we continue our transition towards managed network services, traditional services will be -- will continue to decline as a share of our total revenue. Our carrier and transport revenue increased to $38 million in the second quarter, up from $36 million in the first quarter. Our managed network and cloud services revenue grew to $49 million in the second quarter. This represents a growth of 26% from the second quarter of 2013. Our overall growth product portfolio expanded to $346 million run rate during the second quarter. Our revenue trajectory on Page 7 illustrates continued improvement in our overall revenue performance. The figures on the right side of the page show revenue normalized for dispute settlements that can cause noise in the numbers in any given quarter. As mentioned earlier, the benefit of our revenue trajectory from customer price increases will be more pronounced earlier in the year. On Page 8, we have some information on churn. As we have discussed, the price increases early this year, which extended into the second quarter led to slightly higher levels of churn. However, our revenue results demonstrate the price increase contributes more value than was loss through a small increase in churn. During the second quarter, we formed a separate internal team to focus on analyzing and managing churn. We have a lot of experience understanding churn in the consumer business and believe many of the lessons we learned in that business will apply to our small business customer base as well. We also continue to make good progress on extending the contract terms of our customer base, which should yield churn benefits in the future.

Turning now to a discussion of cash flow on page 9. Much like we did in the first quarter, we maintained a relatively low level of capital spending during the second quarter. We achieved this reduction through a variety of improvements, including more efficient use of internal and outsourced labor for installs and more efficient procurement and deployment of CPE. We have not turned away any capital investments that will produce a long-term financial return. We're just getting better at doing things more efficiently. The chart at the bottom left of the page shows how our capital spending has decreased from the run rate of late 2013. While capital spending will continue to flex up and down with sales volume, we're confident the improved capital run rate is sustainable beyond 2014. During the second quarter, we also paid interest for our bond of $24 million. Integration and restructuring payments for the quarter was $6 million and we purchased about 700,000 shares during the quarter. Looking at the balance sheet on Page 10, we ended the quarter with $98 million in cash and we have $600 million of gross debt outstanding with maturity dates in 2019 and 2020. We also have access to $135 million through our undrawn revolving credit facility. On Page 11, we provided our update to business outlook. We are not adjusting our previous guidance on revenue and still expect full year results for revenue between $1.16 billion and $1.18 billion. However, given the success of our cost and capital expense management efforts, we're raising guidance for adjusted EBITDA and net income and we are reducing guidance for CapEx. We now expect adjusted EBITDA for the full year to be in the range of $190 million to $200 million, and the net loss to be in the range of $83 million to $90 million. We are improving our CapEx guidance by another $10 million to a range of $105 million to $115 million and expect unlevered free cash flow to increase accordingly. With that, operator, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

On the growth in orders that you had on the growth business products, can you -- I think Joe, you said they were up -- the bookings were up 50%. Can you give us a little more color on sort of what the term of those -- or when the install of those will happen?

Joseph F. Eazor

Yes. So, Donna the 50% up in bookings was specific to the IT services product portfolio, I didn't quote a number for the overall growth products. But indeed, it was an improved quarter for us from a bookings perspective over all. So there's a mixture -- just like its -- there was no lumpiness in that booking in a sense -- in those bookings in the sense they were -- they weren't carried by just a few large deals, so the installs will be ratable, as you might expect on a normal course and speed of business over the coming months. And obviously, some will extend in the next year but there was no 1 or 2 major deals that carried the day for bookings. It was pretty even and a strong quarter -- a stronger quarter for us.

Donna Jaegers - D.A. Davidson & Co., Research Division

Great. And then on those -- on the growth in wholesale? That was somewhat of a surprise given the notch down in the wholesale revenues last quarter, I guess or late last year after the Sprint iDEN termination. What's driving the growth in wholesale now?

Bradley A. Ferguson

Yes. So certainly, the transport revenues have continued to have some success there. There's also a usage component of that, which that can pop up in any given quarter. And certainly for the year, we're still saying that's a 3% decline year-over-year, so that would indicate a step down in Q3 as there are some usage, some of the intercarrier compensation rates decline starting in July.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay and the $0.8 million settlement, was that in the wholesale area?

Bradley A. Ferguson

Actually, it was in the retail.

Operator

Your next question comes from Mike Crawford with B. Riley & Co.

Michael Crawford - B. Riley Caris, Research Division

Could you comment at all on progress on divesting some of the non-core businesses? As well as your take on putting on fiber assets in your REIT structure?

Joseph F. Eazor

Yes, so Mike, on the first point, we're continuing -- let me just back up. The first order of business was to lay out the strategy for the company and look at areas we want to focus on for growth. And those we want to manage for cash flow and then also, to improve near-term operations performance and lay out a transformation plan to improve our long-term performance. And as I said last call, we're considering strategic alternatives for a variety of our assets and to see if there's anything we should be considering that would accelerate our path to growth or increase value for shareholders. We're continuing down that evaluation process and just continuing to do the work and so, I don't have any specific comments or updates on where we are in that process at this time. On the second question, obviously, we've looked at the REIT structure. If you remember, we don't pay cash taxes. So it has -- we'll continue to evaluate and see if there's benefits for us, but it's a bit of a different scenario for us than it is for Windstream, as an example.

Michael Crawford - B. Riley Caris, Research Division

But presumably, someone like Windstream with a REIT would be able to pay more for your assets, if you would choose to maybe sell the fibre to someone else, and then too more lease back and be a primary tenant on the asset?

Joseph F. Eazor

Honestly, Mike, I can't even speculate on that at this time.

Michael Crawford - B. Riley Caris, Research Division

Okay. And with the operational improvements and simplification of all the SKUs, what's going on, what the sales of organization itself? It looks like employee count was down, slightly?

Joseph F. Eazor

Yes. So we continue -- I'm little -- having a little trouble hearing you, Mike, but I think you asked about what's going on in the sales area, is that right? The employment count, down?

Michael Crawford - B. Riley Caris, Research Division

Yes.

Joseph F. Eazor

So we are continuing to -- continuing that next phase of transformation for our go-to-market model. And that includes how we operate our branches, as well as how we assign our sales force to each market segment. And so, there will be continuing evolution there, but as I mentioned in my comments, what we're trying to do is take a much more deliberate approach to how we cover each market segment. And so, the small -- the very small business customers we are taken a bit of a lighter touch approach, much more like we've done with consumer and the mid-market and enterprise will be a mixture of our channel-led activities, as well as our direct, and as we move up the food chain more direct sales involvement. So a very deliberate coverage model by market segment and we're lining up products that way. And so, the changes you see in headcount are a natural evolution of that driving to more productivity, but also, a narrower focus from a product perspective. And there'll be more to come on this. This is a journey that's going to take through the rest of the year to get executed, and see the improvements through the rest of this year and into next year.

Operator

Your next question comes from Anthony Klarman with Deutsche Bank.

Anthony Francis Klarman - Deutsche Bank AG, Research Division

A few questions on the Business Services side. So you've reached a relative point of stability, if you look at the normalized run rate activity revenue slide on Slide 7. I guess, I was wondering if you could talk about sort of what you see as the trend line there? Clearly, your growth products are starting to catch up to the churn you've experienced in what I would call the legacy CLEC business? And I think you mentioned on one of the slides that the price increases, even though they lead to higher churn had a net positive impact. How should we think about the run rate there for that business and when can we expect to see those sequential declines actually improving on a sequential pace as opposed to just year-over-year moving out the 2013 churn period?

Joseph F. Eazor

Yes, Anthony. We give full year guidance for '14 and we don't beyond that, and we'll give guidance for '15 in early next year, beginning of next year. So I'm not going to be able to answer your question directly at a level of specificity. But let me tell you all the things we're doing there. One, is we look at net revenue and we balanced the actions from price increases and the apparent or possible impact on churn and make sure we're doing what we can to have the best outcome on a net revenue basis. And I think you saw some of that in Q2 between the price increases and churn and the net benefit that that had for us. And we'll continue to do that. The rate of decline continues to attenuate, as you see on the revenue charts from the deck. And we expect, again, to continue to drive that forward as we both, improve our net revenue picture on a declining businesses but also accelerate the growth in our growth businesses. So it's a little bit of a set of actions that we're taking in each one of those areas that will have a cumulative effect to accelerate our path to revenue growth as a company. And from my perspective, we still have those declining businesses we got to manage more effectively and manage better for cash, especially in the small business segment. But yes, there are some exciting stuff going on the growth side and I don't know if Louis or Brad, you want to add anything to this but...

Bradley A. Ferguson

Yes, I would just refer to the Slide 6, which gives the guidance by component that ties to our overall guidance. I think that helps explain just directionally what should be happening and fits in to our guidance for 2014. And as Joe said, really, we're making the progress, you see that on the overall revenue trends, but certainly the price increases helped in the first couple of quarters. And we'll be able to talk more about what happens over time. When we talk about 2015 in early next year.

Anthony Francis Klarman - Deutsche Bank AG, Research Division

Great. And then a few balance sheet related question. So Q2 is a big working capital usage quarter for you as is 4Q because of the bond interest. And I guess, you went below $100 million in cash, which was, I think, sort of what the expectation was given the timing of the interest payments. Should we expect you to sort of manage the business at roughly this liquidity position now with call $100 million in cash and a revolver available? And Brad, if you could just confirm that the 135 there, which is undrawn, you have access to the full undrawn amount.

Bradley A. Ferguson

Yes. That's correct on the last question and really on the first question to -- yes this -- Q2 is when we pay the interest on our notes will see that again in Q4. But there's kind of around the $100 million is what we're working to do.

Joseph F. Eazor

Yes, just one other thing on that, Anthony. And we're continuing to drive cash flow as way of life and here, I mean, we measure it as part of our compensation scheme now, both on the bonus pool as well as the equity. And we put tighter processes in place for how we deploy our capital from hard assets to cap labor without concerning our growth. So it's a way of life for us. So now and I think as that gets more and more ingrained, I have hopes that we'll continue to make good progress on the cash flow line. And subsequently our cash balance.

Operator

Our next question comes from Arun Seshadri with Crédit Suisse.

Arun Seshadri - Crédit Suisse AG, Research Division

I just wanted to ask -- start off on gross margin. We saw a year-over-year increase in gross margin, and on a sequential basis pretty good performance. How -- can you please talk broadly about your goals for gross margin, you're sort of targets, are you trying to sort of sequentially come to a cadence of growing gross margins sequentially? Is that something that was sort of you had all one-time impacts that help you in Q2 and Q1? Or is that something we can sort of look forward to?

Joseph F. Eazor

Yes. So a couple of things happened in there, we mentioned price increases, a dispute settlement in the revenue side. And then, all the benefits that we're getting from this team working on cost of revenue and driving a lot of improvements in the network cost. But certainly as your revenues declining, there's a lot of pressure to take out costs as quickly as the revenue declines. So we'll be fighting hard to preserve and keep gross margins as high as possible. Certainly, there will be some pressure around that but certainly in the guidance or what we've laid out here, I do expect to improve that or keep that in these levels for the foreseeable future. But certainly overtime, that just -- there will be a little pressure there as is with the revenue declines.

Arun Seshadri - Crédit Suisse AG, Research Division

Okay. That's helpful. And then, as far as sort of broader question regarding leverage targets. I noticed that you bought a small amount of stock back in this quarter. Maybe just a question for Joe, but how do you think about bond buybacks versus stock buybacks? And what leverage level are you comfortable with or what absolute dollars of debt level are you comfortable with?

Joseph F. Eazor

Yes. So I'll start this -- I'll start the answer Arun, and then let Brad or Louis chime in but again, it's been 6 months in, I'm a little over 6 months in, I've kind of followed a play where I said, the goals to improve our near term operating performance, improve our cash flow, why not the strategy and it'll make sure that we're starting to wind our go-to-market activities to the strategies, so we can accelerate our path of growth. So as we move forward and we consider strategic alternatives that we'll constantly revisiting what kind of capital structure we look at in the company that we want to carry forward with. But as of right now, I'm comfortable with where we're at. And I feel good about our opportunity to continue to improve with the balance sheet that we have today and as opportunities come up, we will evaluate them and look for -- look to see if they made any changes to our leverage model or our overall capital structure will help us accelerate our path of growth and ensure our valuable will consider.

Bradley A. Ferguson

Yes, but we're really focused on the denominator, so making sure that we're getting this up and we'll see what happens with the balance sheet there. But yes, certainly, the current situation we wouldn't be looking at taking out leverage and over time we'd look to be taking that down.

Operator

Your next question comes from Lance Vitanza with CRT Capital Group.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

I guess, I just had 1 question, really left. The economy was weak in Q1. It was obviously much stronger in Q2. As we think about the back half of the year, are you seeing much or any impact from overall economic conditions one way or another? Or is it really more just about execution on your part?

Joseph F. Eazor

Yes. For us, it's a still about execution. We don't see any evidence from the economy, our pipeline is strong. The progress we are seeing with our existing customers is strong. And the -- our operational performance improvements are dependent upon us. So it just could be where we're at in our cycle that right now, the economy is not having a direct effect or impact on our ability to deliver our performance.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

I did have one other one that sort of a housekeeping item, and I apologize if I missed this. But the $6 million that you spent in the quarter on cash integration and restructuring, that seems high for any given quarter. Can we expect that to be lower in subsequent quarters or is that a run rate?

Louis Alterman

Yes, Lance, Louis. So it's coming down. Actually, if you look in the back of our presentation or the back of our earnings financial tables, you'll see full year guidance there and the implication is the second half should be substantially lower than the first half.

Operator

And our final question is a question or a follow-up, and it comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

On -- you guys resell Microsoft 365 and obviously, they're having a lot of success with that. How much did that drive your IT sales in the quarter? And what sort of margins do you get on that compare to your other cloud and IT services?

Joseph F. Eazor

So it's a very small part of our IT services portfolio, Donna, and but our margins are reasonable margins on that business. But again, it's a small piece of what we do in IT services.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then, you mentioned product exiting certain products. Can you give us a little more specifics on what you're no longer doing?

Joseph F. Eazor

Well, we're still conducting that analysis, Donna and I guess, I'll just say more to come on that front.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay, 1 last question since I didn't get an answer on that one. On the collocation network that you have...

Joseph F. Eazor

It was an answer.

Donna Jaegers - D.A. Davidson & Co., Research Division

Well it's an answer, but it's still in progress. So not a definitive answer.

Joseph F. Eazor

That's work in progress, its WIP right now. Yes.

Donna Jaegers - D.A. Davidson & Co., Research Division

So in your colocation network, as you lose scale with these small business customers, how do you -- do you -- how do you max -- how do you optimize that or how do you verbalize that cost structure to try...

Joseph F. Eazor

So I'll start. That was a good question, not the other ones weren't. But it's something that we have to actively and proactively manage. And so we've got the team, the access management team and the network operations team are aggressively rationalize colos, not just for declining businesses, but also to optimize our cost of revenue, and cost structure and our capital structure. So Brad...

Bradley A. Ferguson

Yes, and I mean, there's a -- as Joe indicated, there's active products where we just exit colos, just monitor and when you get to a point where its -- the economics don't make sense of the volumes of customers that we have in a particular colo will get out. Yes and that seems doing a lot more than just [indiscernible] they are making sure things are getting installed in the most cost-effective way that helps optimizing all sorts of lease facilities. So a wide range of activities that's helping drive that. [indiscernible]

Joseph F. Eazor

[ph] This will access I mean, there's a lot of things that they're looking at.

Bradley A. Ferguson

Very actively managed, Donna, making good progress there.

Operator

And that was our final question. Are there any closing remarks?

Joseph F. Eazor

Yes. So let me just close by saying thank you to everyone, for joining the call today. Let me wrap up by saying, I'm pleased with the progress we made in the second quarter and even more excited about the potential that lays before us. And look forward to communicating you -- with you on our progress as we continue forward. And thank you, again for your support and time today. I think we're done.

Operator

Thank you. Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. That does conclude the conference. You may now disconnect.

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