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Global Crossing Ltd. (NASDAQ:GLBC)

Q2 2011 Earnings Call

July 27, 2011 9:00 am ET

Executives

Mark Gottlieb – Senior Vice President, Finance and Investor Relations

John J. Legere – Chief Executive Officer

John A. Kritzmacher – Executive Vice President, Chief Financial Officer

Analysts

Donna Jaegers – D.A. Davidson & Company

Colby Synesael – Cowen & Co.

Vincent Walden – Thornburg Investments

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Global Crossing Second Quarter 2011 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 Wednesday, July 27, 2011. It is now my pleasure to turn the conference over to Mark Gottlieb, Senior Vice President, Finance. Please go ahead sir.

Mark Gottlieb

Thanks, Tina. Good morning everyone and thank you for joining us today for our second quarter 2011 earnings call. John Legere, our Chief Executive Officer and John Kritzmacher, our Chief Financial Officer are here with us today. They will each share their comments, after which we will open the call for some questions.

Presentation slides can be viewed online to help follow our prepared remarks today. They are available via webcast, which you can access through our Investor Relations site. If you go to www.globalcrossing.com, access the investor site and follow the links to the webcast. Please note that the financial results discussed on this call are unaudited results and are subject to adjustments in our final audited results to be included in our Annual Report on Form 10-K.

Next, I would 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 these forward-looking statements are contained in our reports filed or furnished to the SEC including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments except as required by law. Information contained herein is in summary format only and is qualified in its entirety by reference to the financial statements and other information contained in our Forms 10-K and 10-Q.

We refer you to our financial press releases posted at www.globalcrossing.com, which include explanations of and reconciliations with the closest GAAP financial measures for our non-GAAP measures such as operating income before depreciation and amortization or OIBDA, free cash flow and constant currency measures.

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

John J. Legere

Okay. Thank you, Mark. Good morning, good afternoon or good evening and thank you everybody for joining us. Let me begin with a few comments on the progress that we made regarding the definitive agreement to combine with Level3 that we announced in April of this year.

The combination with Level3 is progressing in all aspects relating to the anticipated closing and successful integration. The regulatory process is moving forward, integration planning is well underway and Level3 has made substantial progress towards refinancing the Global Crossing debt at very attractive rates. We continue to expect the combination to close before the end of the year.

As I said last time, we remain very excited about the compelling strategic fit of the two companies in the value it creates for our customers and for our investors. The combined company will have increased Global product in network scale to better serve our customers while producing significant cost synergies.

This will result in the company that is more competitive and compelling alternative to the incumbents around the globe. Meanwhile, Global Crossing remains very focused on operating of business and executing our strategy. I am pleased to report that this execution resulted in strong sequential improvements in our financial performance for the quarter as well as positive leading indicators that demonstrate strong operating momentum. We continue to successfully move up the value chain and capture growth opportunities for advanced IP, Ethernet, data center, managed collaboration and Cloud based solutions and all the application they enable.

Now let me move in to a brief summary of our second quarter financial results. I’m pleased to report that in the second quarter, our strategic invest and grow revenue, which consists of our business serving global enterprises and carrier customers excluding wholesale voice increased 6% sequentially and 12% year-over-year. OIBDA increased 14% sequentially and 3% year-over-year. This growth is consistent with the annual guidance we provided in February. We also improved our free cash flow generating $10 million of free cash flow in the second quarter.

We had our second consecutive breaking record order intake with average orders of $5 million of monthly recurring revenue. This order intake surpassed our prior record volume of $4.8 million, which was achieved just last quarter. As a key leading indicator, it provides a solid foundation from future growth. The quality of our order book continues to be driven by VPNs over IP and Ethernet, broadband services as well as hosting, managed and collaboration services.

Contributing to these improvements in order intake is our continuing investment in sales resources as we have added approximately 10% to our quota bearing sales professionals since the end of last year. Revenue attrition, which includes repricing of contracts and disconnects was in line with historical levels, which was down from slightly higher seasonal attrition levels in the first quarter.

Now let me share with you what we are seeing in the market. First, demand in rest of world region, which for us consists primarily of our North American operations remained strong, particularly in the areas of VPNs over IP and Ethernet and our portfolio of IP based collaboration solutions.

Second, in Latin America data center and IP-based solutions remained strong continuing their role as key drivers of demand especially in Brazil, which together with Columbia and Argentina has been an engine of growth in the region.

Third, in the UK we are working with customers in the government sector on new initiatives that will translate into future revenue opportunities. For example, we recently announced that GCUK has been named one of only three suppliers with the UK government’s Managed Telecommunications Convergence Framework known as MTCF, which broadens the opportunity for GCUK to sell IP and communication services to an expanded addressable market of six million U.K. users. In addition, we saw a continued demand for our IP solutions in the non-government enterprise segment where we continue to invest to diversify and grow our customer and revenue base.

During the second quarter, we continued to make strategic investments to increase capacity, move up the value chain and capitalize on growth opportunities. We have upgraded our network, increasing capacity in our subsea, terrestrial and Layer 3 network to support strong growth.

We’ve expanded our product and solution portfolio enhancing our suite of security solutions to include a new global managed securities service and security consulting service. We’re also extending the reach of our global EtherSphere VPLS service by more than 40 new locations in the United States, Europe and China by the end of 2011, which will then bring our total deployment to approximately 200 locations worldwide.

To differentiate the customer experience we deliver, we provide our customers with the tools to self manage their resources and infrastructure. We recently enhanced uCommand, our self service tool by enabling network management and monitoring capabilities for EtherSphere services. Due to constant upgrades, additions and enhancement set of products and services we delivered to address that customers business requirements are the essential underpinnings for the growth that you see.

Coupling our global portfolio of products and services with an enhanced focus on differentiating the customer experience is a powerful combination in a competitive market. In our most recent customer satisfaction survey of our enterprise customers the percentage of customers we said they were (inaudible) very lightly to recommend Global Crossing remained about 20 percentage points higher than those who were (inaudible) very lightly to recommend our competitors.

We can see in the order flow the results of our strategy of moving up the value chain to provide advanced value added solution to customers with global requirements. It includes bundling managed services or applications with network services particularly with our global requirements. For example, we are providing a globally managed network and security solution to a leading provider of high quality, high purity specialty chemical materials.

This includes a deployment of a global VPN and managed firewalls to their office located in the UK, North America and Asia. We announced also that we are providing IP services including voice and data transports, dedicated internet access and Videoconferencing to support a large multinational catering company in Brazil. These services will be laid off for their Global MPLS IP network supporting also its currently using hosting, storage and backup services through Global Crossing’s data centers.

We also are now providing a collaboration services solution to one of the largest diversified financial service organization. The solution provides for reservation-less conferencing, Web-based and operator assisted conferencing services and includes an online customized provisioning tool.

Finally as we stated last time higher end housing and data center hosting services continue to be a key focus and engine of growth for our business. Offering these services as well as bundling network solution it’s critical to our strategy of moving up the value chain. Our data center and collocation services generated $44 million of revenue in the second quarter an increase of 10% sequentially and an increase of 38% year-over-year.

We will continue to augment capacity in our data centers in collocation facilities while investing in development of capabilities on the emerging Cloud based utility service model that leverages our data center footprint.

In summary we are very pleased with our second quarter revenue, OIBDA and cash flow performance. Leading indicator show solid momentum and operational focus in the business. Over the coming months we will continue to focus on executing our plan and strengthening our unique mobile capabilities and differentiated value proposition while planning for the successful execution of our strategic combination with Level3.

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

John A. Kritzmacher

Thank you John and hello everyone. As noted in John’s comments our second quarter results reflect solid progress and accelerated momentum towards the achievement of our annual guidance. In my remarks today I’ll review our financial results for the second quarter and provide more detail on our progress.

In the second quarter the company generated invest and grow revenue of $622 million, a sequential increase of $35 million or 6% and a year-over-year increase of $67 million or 12%. Movement in foreign exchange rates favorably impacted invest and grow revenue by $9 million sequentially and $22 million year-over-year. On a constant currency basis invest and grow revenue increased 4% sequentially and 8% year-over-year.

Beyond the foreign exchange impacts, the sequential and year-over-year increases were primarily driven by higher sales in enterprise customers in the Rest of World and GC Impsat segments.

On a constant currency basis, Rest of World increased 5% sequentially and 10% year-over-year roughly half of the revenue growth both sequentially and year-over-year was driven by strength in our North America enterprise business including our federal government channel and our collaboration business.

In addition, the sequential and year-over-year growth included $9 million for two individually significant customer buyouts of long-term obligations under existing contracts and year-over-year Genesis Solutions contributed $9 million in revenue.

In constant currency terms, GC Impsat increased 7% sequentially and 15% year-over-year, sequentially all countries in the GC Impsat segment contributed to grow, year-over-year, revenue growth was primarily driven by Brazil, which together with Argentina and Columbia has been a consistent engine of growth in the segment. We saw particular strength in our IP based services and data center solutions.

Finally, GCUK decreased 1% sequentially and 6% year-over-year in constant currency terms. Sequentially GCUK revenue declined due to lower equipment sales partially offset by higher sales to non-government enterprise customers. Year-over-year invest and grow revenue declined principally due to price reductions associated with the recent contract renewals and extensions accompanied by lower equipment sales.

We continue to pursue broader enterprise and government opportunities in the U.K. and we expect overtime that our investment in sales resources and enhanced service capabilities will offset pressure from price reductions in the existing base.

In the second quarter, the company generated consolidated revenue of $692 million, an increase of 5% sequentially and 10% year-over-year. On a constant currency basis, consolidated revenue increased 3% sequentially and 6% year-over-year. Our revenue base continues to evolve in favor of our strategic invest and grow revenue, which increased to 90% of consolidated revenue in the second quarter as compared to 88% in the year ago period.

Wholesale voice revenue was $69 million in the second quarter representing a sequential and year-over-year decrease of 7%. We continue to emphasize margin optimization over revenue growth for this non-strategic product offering since nearly all of these revenues are in the U.S., it was not materially impacted by movement in foreign exchange rates.

Gross margins in the quarter was $224 million, a sequential increase of $19 million and a year-over-year increase of $25 million. Movement in foreign exchange rates favorably impacted gross margin by $2 million sequentially and $7 million year-over-year. The sequential increase in gross margin was primarily driven by higher revenue and improved sales mix, partially offset by higher accrued incentive compensation.

The year-over-year gross margin improvement was primarily driven by revenue growth and improved sales mix, partially offset by planned increases in payroll costs and higher accrued incentive compensation.

Sequentially and year-over-year, the margin contribution from the aforementioned customer contract buyouts was largely offset by an increase in accrued annual incentive compensation this quarter. The higher annual bonus accrual reflects an improvement in forecasted performance relative to our internal bonus targets for the year.

Gross margin as a percentage of revenue was 32.4% in the second quarter reflecting an increase of a 140 basis points over the first quarter and 80 basis points over the year ago period.

For the second quarter, we reported $128 million in SG&A expense, a sequential increased of $7 million and a year-over-year increase of $22 million. The sequential and year-over-year increases reflect higher accrued incentive compensation and $3 million of professional fess associated with the Level3 combination. In addition, the year-over-year increase in SG&A includes planned increases in payroll cost accompanied by an unfavorable foreign exchange impact of $4 million.

During the quarter, we accrued a total of $21 million for incentive compensation an increase of $7 million sequentially and $8 million year-over-year. The $21 million of incentive compensation recorded in the quarter consisted of a $4 million charge for stock-based accruals primarily for long-term incentive stock grants, and $17 million in cash based accruals primarily for the 2011 annual bonus program. As a reminder, approximately 55% of the incentive compensation accrual is reflected in cost of revenue and the remainder is reflected in SG&A.

OIBDA in the second quarter was $96 million, a sequential increased of $12 million and a year-over-year increase of $3 million. OIBDA as a percentage of revenue was 13.9% in the second quarter compared to a 12.7% in the first quarter and 14.8% in the year ago quarter.

Note that both the sequential and year-over-year OIBDA comparisons accrued approximately $9 million of benefits from the aforementioned customer contract buyouts, which was more than offset by additional accrued incentive compensation in the current quarter and $3 million of professional fees related to the Level3 combination.

The year-over-year movement also includes expected increases in payroll costs, which we discussed when we provided our annual guidance at the beginning of the year. These costs are related to increases in sales headcount, merit and inflation driven salary increases and restoration of the company’s 401(k) match.

On a segment basis, rest of world’s OIBDA was $29 million, an increase of $12 million and a decrease of $3 million year-over-year. The sequential increase was primarily due to the higher revenue and improved mix including $9 million from the aforementioned contract buyouts in the quarter, partially offset by an increase in accrued incentive compensation and $3 million of professional fees associated with the Level3 combination. The year-over-year decrease was attributable to an unfavorable foreign exchange impact of $3 million.

Higher revenue and improved mix including the aforementioned contract buyouts in the quarter were offset by the planned increases in payroll costs including higher accrued incentive compensation and $3 million of professional fees associated with the Level3 combination.

GC Impsat’s OIBDA was $50 million, an increase of $1 million sequentially and an increase of $9 million year-over-year. The sequential increase was primarily driven by sales growth and improved sales mix partially offset by an increase in payroll costs, accrued incentive compensation and a favorable adjustment to provisions for continued liabilities in the prior quarter.

The year-over-year increase was primarily driven by higher revenue and improved sales mix as well as the favorable foreign impact of $4 million, partially offset by increases in payroll costs, accrued incentive compensation, and real estate costs.

And finally, GCUK’s OIBDA was $17 million, a decrease of $1 million sequentially and $3 million year-over-year. The sequential and year-over-year decreases were primarily driven by lower EBIT revenue resulting from pricing pressure on contract renewals and extensions.

For the second quarter, we reported free cash flow of $10 million compared with free cash flow of negative $93 million in the prior quarter and free cash flow of negative $13 million in the second quarter of 2010. The sequential increase in free cash flow was largely due to improved working capital performance, higher receipts from IRUs and prepaid services, increased OIBDA and a timing-driven decrease in cash interest.

Please keep in mind that due to timing of interest payments on our major debt instruments our cash interest payments are higher in the first and third quarters of each year.

The year-over-year increase in free cash flow was principally driven by higher receipts from IRUs and prepaid services and an increase in OIBDA.

Cash flow provided by operating activities for the quarter was $56 million, including cash used from operating working capital of $21 million after interest payments of $37 million. We received $38 million in proceeds from the sale of IRUs and prepaid services, and we used $59 million for capital expenditures and principal payments on capital leases.

In addition, we entered into $23 million of new capital leases and other financing arrangements during the second quarter to fund various equipment purchases and software licenses.

Turning briefly to our capital structure, there were no material changes during the second quarter. We ended the quarter with a total cash balance of $269 million and including $10 million of restricted cash. This compares to an ending cash balance of $274 million at the end of the first quarter including $9 million of restricted cash.

In summary, our second quarter results reflect solid progress and accelerated momentum toward the achievement of our annual guidance. Invest and grow revenue increased 4% sequentially and 8% year-over-year on a constant currency basis.

Revenue growth and improved mix drove improved profitability. OIBDA increased to $96 million for the second quarter representing 14% growth sequentially. We generated positive free cash flow of $10 million reflecting strong improvement both sequentially and year-over-year.

We had another quarter of record order intake and we expect the improved order intake in the first half of the year to fill revenue growth as we make our ways through the second half of the year. Clearly, we are building strong operating momentum in our business as we continue to prepare for our strategic combination with Level3.

This completes my prepared remarks for today, and now I’ll turn to our operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question comes from the line of Donna Jaegers with D.A. Davidson. Please go ahead.

Donna Jaegers – D. A. Davidson & Company

Hi, good morning guys. Thanks for taking my questions. Just a few on the customer buyout, can you give us a little more color on that as far as obviously there was all margin that was in the rest of world business, are they still continuing customer, can you give us any more color around that, and then I got two others?

Gary Breauninger

Yeah. Donna, it’s Gary. How are you? Thanks for the question. In the case for this quarter much like previous quarter what we’ve had these buyouts when your stepping significantly call them up. In the cases for this quarter, particularly two events, they are existing customers and will continue to be existing customers. And in both cases, what we’ve done is work with the customers to not only return some facilities in which we can review them and sell and which we’re still seeing demand for. But also for the customer themselves to rework their networks and groom their networks which should unlock future business, so it’s sort of give and take. We’re trying to work with our customers while controlling and make some things so we optimize the economic benefits but also allowing the customer to expand and chain their configuration and groom their network.

Donna Jaegers – D. A. Davidson & Company

Okay, great. And then, on IRUs, the increase in sales this quarter, anything particularly you can mention about the length of the IRUs or the location on the IRUs?

Gary Breauninger

Okay, Donna, Gary again. Yeah, nothing that’s off trend. I mean we maybe this quarter had a some more IRUs than expected in Europe for facilities, but the same type of tender you’ve seen as far as the traditional IRUs are concerned, anywhere between 10 and 15 years for the structured capacity, in some cases for some of the prepaid more in the two to five year range, but the vast majority of it looks like it have in prior quarters.

Donna Jaegers – D. A. Davidson & Company

Okay. And then, the second request from the DoJ; can you give us any color on what that was concerning and do you anticipate any issues for closing the deal?

John B. McShane

Hi Donna, it’s John McShane. On that, I think we’ve said a couple of times we continue expect the transactional close by the end of the year as we previously announced. Too much more detail on that, I don’t think we’re going to give on this call or later if anything significant develops we’ll consider further disclosure in that regard?

Donna Jaegers – D. A. Davidson & Company

Okay, thanks. That’s all my questions.

Operator

Thank you. Our next question comes from the line of Colby Synesael of Cowen & Co. Please go ahead.

Colby Synesael – Cowen & Co.

Hi, great. I have two questions. The first one, I was just curious if you’re seeing any impact on your business whatsoever it relates to the pending deal with Level3 and I guess some of the things I’m thinking about are, are you seeing any churn already perhaps some people just like telling about redundancy issues when the two companies merge or even new revenue opportunities as people consider if any deal with you and what that could actually imply for them when you merge with public or even in an opportunity to partner with Level3 perhaps on some opportunities before the deal actually closes.

And then my second question, this is much more broaden, you could take it how you like, but I wanted to know if you’re seeing any change in the industries that relates to trans agreements, and more specifically, if we’re seeing increasing demand for bandwidth and more specifically over the top video is beginning to alter how the ecosystem is that you work with them? Thanks.

John B. McShane

Let’s try. This is John. Let’s try a couple of things, and then I don’t know if Neil is on an open mind. We’ll try that if not Gary – I think Gary can comment. I think the parts of our results that you have to look at is, remember, the deal was announced in April, so that our customer purchase behaviors can be seen both in the order volumes that have been consummated in the first and second quarters or the last two quarters. And as we’ve announced, we’ve had record order volumes in the last two quarters including our largest order volume ever in this quarter and the attrition rate in Q2 we announced is down from where it was in Q1 so seasonally down.

And those were some of what we are seeing naturally you know in communicating with Jim Crowe as well there are small groups of customers from each side who have done business with either side and customers that do business with both, but in general I’ve seen a reaction from our customers that our deposit is far off way any question that they have and they have had questions and you know I would say that in general the ability to go out and answer those questions turned out to be a good selling opportunity for our sales teams both for current and for future periods and so far I think it has positioned us both very well I don’t know Gary can comment further on that as well as on the transit question.

Gary Breauninger

Yeah to the point what we’ve talked the vast majority of our enterprise customers they are clearly excited about the ability to for the – bringing the case of Global Crossing to be able to start selling that deeper material footprint perhaps the CDN product at a point in time. So the question is more about when can we start cross selling the product as opposed to anything else have been received very positively and across the board we’ve had a lot of conversations on the enterprise side. Can you repeat the question on the transit side if you don’t mind?

Colby Synesael – Cowen & Co.

Sure I mean there has been some talk essentially if you will index essentially I guess left over from the Level3 and Comcast issue that surfaced I guess later last year, and there has been some chatter I guess in the marketplace that would guarantee a change in IP trend agreements and more specifically that the increasing demand – the demand with more specifically over the top video may be beginning to alter the ecosystem in terms of with actually paying who and to what degree and I was just curious if you’re actually seeing any of that.

David Carey

Colby, this is Dave Carey. I’ll take that one. I think our observation is that it is still quite early and we’ve not any material change in the sources of demand in terms of the clients whether they be on either side of the ecosystem if you will. Now clearly volumes have been increasing and I think you know it is an observation that you know as each of us is consumers are watching more content online over the top as you characterize if that clearly is a source of that demand but it can be originated on the other side of the ecosystem by a CDN or even an enterprise who is pushing that over the top video. So we have so to sum it up, we have seen the increased demand but we have not really seen shift in terms of the sources of that demand vis-à-vis eye balls or the content side of the ecosystem.

Colby Synesael – Cowen & Co.

Okay, thank you.

Operator

Thank you. Our next question comes from Vincent Walden of Thornburg Investment. Please go ahead.

Vincent Walden – Thornburg Investments

Good morning. My question is for John Legere regarding the Impsat business. Could you comment a little bit more on why the pickup in growth this year versus last year even though I think the macro backdrop is similar over that time period? And then I have one follow-up.

John Legere

Yeah, I can do one better; I can let Hector Alonso down from Latin America to tell you specifically. So Hector do you want to comment on your business?

Hector R. Alonso

Sure. Sure. As assets you mentioned a part of that of course the back half of it in reality, but this is a pent-up demand in general terms, number one from bandwidth and broader penetration is increasing, there is a lot of excellence coming out of different countries (inaudible) but losing heart and to increase and [drive on] the penetration, are really also on mobile, it is also source of driving new opportunities and of course, the enterprise markets, which is basically the largest contributor to this growth is also demanded for new services in particular in Brazil, which is really the engine of our growth together with Colombia and Argentina and of course, the integrated services that we provide including data center on the pent-up demand and data center certainly in all the other service data center are really responsive for this interesting growth.

Vincent Walden – Thornburg Investments

Okay. Thank you, Hector. Anything in particular that’s different this year though versus last year or maybe there is one or two lumpy kind of contracts there?

Hector R. Alonso

No. I think that is one of the particular elements have been that there have been a lot of opportunities in the data center probably, larger than in the past and I think that the trend of components outsourcing the service is expert on the combined IT and Telecom services are really going up. So that’s I think (inaudible) that would probably a source of something little different than in the past.

Vincent Walden – Thornburg Investments

Okay, great. I appreciate that. And John on the UK, how do you feel about progress there, now do you see signs of UK stabilizing or are there additional measures we should take from here?

Gary Breauninger

I think, you’ve described it well. I would call the UK stable. I think we’ve put significant amount of activity including a tremendous amount of focus on additional sales headcount into the non-governmental side. We’ve been holding our own in the government space including as the [Colin] track that I outlined where we were in the top three providers that will give us an expandable base of $6 million in UK additional government customers. But we need further accelerated productivity in our expanded enterprise sales force and the funds look good, the activity looks good. It’s a tough competitive market. I think we’re in a good position with anybody in the UK, but UK it’s certainly an area of continued focus for us.

Vincent Walden – Thornburg Investments

But you see like this, stabilization is with insight at this point. I guess it doesn’t look like that so far based on the reported numbers.

Gary Breauninger

I would say the business in the UK is stable, and I would say stabilization is the outlook.

Vincent Walden – Thornburg Investments

Yeah. Okay, great. Thanks very much.

Operator

Thank you. (Operator Instructions) We do have a follow-up question from the line of Donna Jaegers of D.A. Davidson & Company. Please go ahead.

Donna Jaegers – D.A. Davidson & Company

Hi. Thanks, guys, just two other quick questions. On one of the synergies with the Level3 deal is obviously moving to shorter access loops in the US. Can you talk a little about the length of the contracts that you have for access now in the US. How long are those contracts?

Gary Breauninger

Hey, Donna, Gary again. As you know, they vary depending on obviously the incumbents depending on whether we’re using one of the big guys if you will, versus mainly some of the more competitive access players and which internal plan you might sign up for. I think what we’ve done, and we’ve done it prudently since really about four or five years. As we signed up for longer term plans, longer term is defined as no longer than two to three years. We ensure that, that’s a place where we believe we’ve optimized the access, footprint as much as we can. As we, and as our contracts come up for renewal now, we’re clearly and will be a little more cautious on how long we enter into those agreements, but its really good same blocking and tackling we’ve done for about six to seven years and trying to not enter into too many long-term contracts where we have scaled.

Donna Jaegers – D.A. Davidson & Company

Okay.

David Carey

Yeah, Donna this is, Dave, just one other footnote on that. Underneath each of those master service agreement type contracts with our individual circuit terms which are obviously tailored to these contracts with the customer, so those will come up on a regular basis. When we actually did the synergy planning between the company related to access, we did at a granular level on a circuit by circuit basis, so that the pro forma that we’re working towards on the integration plans are styled right down at the individual circuit level not just up at the macro contract between the service provider.

Donna Jaegers – D.A. Davidson & Company

Great. And then on the data center capacity utilization, you guys had a slide in your deck, but it was too small and my eyes are getting too old to see all the numbers. Can you give us just a quick read on where you are at as far as capacity utilization in your data centers?

Gary Breauninger

At an aggregate level, the chart read somewhere in the 90% utilized space. I would read to anything into that other than our plans, our continued expansion clearly in Latin America and even in our Europe data center footprint. The way the data center build has gone over the past six, seven, eight quarters it’s similar to our long haul network in that the modular approach to the smaller build outs when we recognized demand we could do it pretty quickly and augment pretty quickly through out the year. Dave, if you’ve got any additional comments as far as that utilization.

David Carey

Just maybe a little bit of color to point around that. On average for the tighter centers, we’ve got six to 12 months worth of inventory and we are closer to that six month there augments in flight right now. So for example, in London and Amsterdam there are flights in, there is work going on in the Tier data center in Sao Paulo as well as prep work foreign expansion in Colombia and potentially in Rio. Those would be the ones where we see the utilization and demand riding the highest. But we normally try to manage that inventory level with a forward view on it for 12 months or so which gets us into a replenishment cycle.

Donna Jaegers – D.A. Davidson & Company

And you have room, in the slide you mentioned London, Amsterdam, Sao Paulo, Columbia and Rio you have room within those data centers to create more spaces modularly?

David Carey

That’s absolutely correct. And then there are, when we dig into more detail in South America, we cannot, within the planning horizon actually see [moving] expansions in Sao Paulo and Colombia on the planning horizon.

Donna Jaegers – D.A. Davidson & Company

Great. All right. Thanks guys.

Operator

Gentlemen there are no further questions at this time. I’ll turn the conference back over to you for closing remarks.

Gary Breauninger

Okay. Well, thanks everyone for joining and we look forward to updating you again with our third quarter results. I appreciate your time. Thank you very much.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.

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