West's (WSTC) CEO Tom Barker on Q2 2016 Results - Earnings Call Transcript

| About: West Corporation (WSTC)

West Corporation (NASDAQ:WSTC)

Q2 2016 Earnings Conference Call

August 02, 2016 11:00 AM ET

Executives

David Pleiss - IR

Tom Barker - Chairman and CEO

Jan Madsen - CFO & Treasurer

Analysts

David Togut - Evercore ISI

Ashish Sabadra - Deutsche Bank

David Koning - Robert W. Baird & Co.

James Schneider - Goldman Sachs

Gary Bisbee - RBC Capital Markets

Bill Warmington - Wells Fargo

Denny Galindo - Morgan Stanley

Dmitry Netis - William Blair

Operator

Good morning, ladies and gentlemen, and welcome to West Corporation’s Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce you to the Vice President of Investor Relations of West Corporation, Dave Pleiss. Please go ahead.

David Pleiss

Good morning, and thank you for joining us to discuss West Corporation’s second quarter 2016 results. If you have not received a copy of yesterday’s press release, you can find one on our website at west.com. I’m joined today by Tom Barker our Chairman and Chief Executive Officer; and Jan Madsen, our Chief Financial Officer. They will discuss our results and then we’ll open the call up to your questions.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Federal Securities Laws. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated or projected. Listeners to the call are advised to review the risk factors contained in our most recent Form 10-K for additional information regarding such risks, uncertainties and assumptions. The company assumes no obligation to update any forward-looking statements made during this call.

In this call, management will discuss several non-GAAP financial measures. A reconciliation of these financial measures to the most comparable GAAP financial measures can be found in the press release or on our website.

At this time, I’ll turn the call over to Tom.

Tom Barker

Thanks, Dave. Good morning, and thank all of you for joining us on the call to discuss our results for the second quarter of 2016. I’ll start with an overview of our performance with the quarter and Jan Madsen will walk you through our financials in more detail before we take questions.

For the second quarter of 2016, revenue was $582.4 million compared to $571.9 million for the same quarter of the previous year, an increase of 1.8%. Adjusted organic revenue growth was 3.8% in the second quarter, we’ve provided details of our revenue growth in earnings press release.

West continues to generate strong profitability with adjusted operating margin of 23% and adjusted EBITDA margin of 29%. The company had a very strong quarter of cash generation with $137 million in cash from operation and a $100 million free cash flow for the quarter. Our adjusted earnings per share for the first quarter was $0.78.

Turning to the core segments, unified communication services segment had revenue of $370.2 million in the second quarter of 2016. This was down 1.2% in the second quarter of 2015 due to $16 million from the previously disclosed loss telecom services clients and $2.4 million in foreign currency exchange rate fluctuations. This segment also had $2.2 million of revenue from acquisition of magnetic North excluding the unusual items adjusted organic revenue growth this segment was 3.1% in the second quarter.

The conferencing in collaboration business was again up slightly and constant currency basis in the quarter and we continue to see growth in the large fast growing unified communications as a service market. Our UK business was up over 12% and an organic basis in the second quarter. Adjusted operating margins for unified communications services segment was 25.9%. Safety Services had revenue of $74.4 million up 12.5% in the same quarter last year. We are seeing growth from client adapting new wireless technologies like voice over LTE and voice over WIFI along with steady growth in voice over IP. Last year our second half of the year had strong call handling in equipment sales in the first half of the year. For 2016 we had very strong first half year but expect that to slow for the remainder of the year. Our guidance has mid single-digit growth for 2016 for this segment is still on track. Adjusted operating margin for the Safety Services segment was 22.1%. This is up significantly from 13.3% the same quarter in 2015 thanks to some operational and managerial changes we made last year.

Revenue from interactive services grew 15.1% in the second quarter to $73.2 million. Approximately $4.9 million of this growth came from the acquired companies. The organic growth interactive services was 7.4% in the quarter revenue growth came from several new clients in the education vertical as well as increased from existing clients in most other vertical markets. Adjusted operating margin for the interactive services segment was 17.7%. Revenue in specialized agent services was $67.5 million in the second quarter down 1.6% in the second quarter of 2015. We had double-digit growth in our health care efficacy business last year but revenue generation and cost management businesses have not performed as we expected to it in the beginning of the year. The businesses in this segment are small relative to the rest of West. There is no change to our consolidated revenue guidance for 2016.

Adjusted operating margin for this specialized agent services segment was 12.7%. At this time I would like to turn it over to Jan Madsen our Chief Financial Officer for additional highlights of the quarter.

Jan Madsen

Thank Tom. Good morning. I will begin my comments with an overview of our refinancing transactions followed by our review of our liquidity position and some additional detail on our financial results. With the refinancing we successfully accomplished all of our objective to extend and balance our maturities to maintain an attractive cost of debt and to reduce our risk to rising interest rates. Excluding amortization at the financing charges and unused commitment fees our weighted average cost of debt was very attractive 4.11% as of quarter end. In additional after quarter end we took advantage of favorable market pricing and executed on a five year interest rate hedge program.

With the hedge program our fixed rate debt effectively increased to 50% of our debt portfolio and we accept to be 58% fixed by July 2017. Swap pricing of these interest rates hedges is very attractive at rates that all in translates to approximately 50 to 70 basis points below our recently obtained – quarter percent 2021 senior secured notes. Our credit ratings and stable outlook remain unchanged with our recovery ratings improving to high. We access capital at attractive rates in all debt market with our current mix being 24% bank financing, 34% term loan B and 42% bond with 12% secured and 30% being unsecured. To wrap up on our debt during the quarter we drew 75 million on our accounts receivable securitization facility to pay down term loans due in 2018. The senior secured revolver with undrawn at June 30. also at the end of July we paid down an additional 34.4 million of floating rate bank debt bringing our total debt pay down for 2016 to 66.3 million as of today.

Next I will walk you through the major changes affecting our cash balance during the quarter. We ended the first quarter with cash of $133.3 million. Our second quarter cash flows from continuing operations was strong and in line with our expectations at $137 million and free cash flow with nearly $100 million. Our year to date cash flows were $197.5 million, an increase of 26% from 2015. The increase is primarily due to lower income tax and interest payment compared to last year. Our reduction in cash taxes paid is the result of an early payment of 2015 taxes being applied to 2016 and lower taxable income largely due to the accelerated amortization and deferred financing cost. Through June 30, we have invested $74 million in capital expenditures, $22 million to buyback stocks. $37 million in dividend and $10 million in acquisitions. At quarter end we have allocated just over 50% of our free cash flow generated in the first half of the year with approximately 50% of that allocated to debt pay down 35% to share repurchases and 15% to acquisitions. In addition we have reduced our loan covenant leverage ratio to 4.47 times down from 4.72 times last quarter end. We ended the quarter with a cash balance of $223.4 million including almost $77 million in foreign cash account. Our total available financing capacity is between $325 million and $355 million. Next in terms of our financial results as Tom mentioned second quarter revenue was up 1.8% our international revenue was $123.1 million in the second quarter.

On a constant currency basis our international revenue grew 7.1%. Excluding acquisitions our constant currency international revenue grew by 3.5% due largely to increased volume and our year-to-date revenue was up 1.4% to just over $1.15 million. In the second quarter our cost of services was $249.4 million an increase of 1.7%. This increase includes $1.3 million from acquisitions. We continue to carefully manage our expenses to align with our revenue growth and we are able to keep our cost of services flat as a percentage revenue in the quarter. Compared to the same quarter last year the volume of minutes used for our reservation and conferencing services which accounts for just over half of the unified communications services reporting segment revenue grew approximately 3.4% while the average rate per minute for these services declined by approximately 5.6%. Adjusted for constant currency foreign exchange rates the average rate per minute for reservation services declines by approximately 4.7%.

Despite the pricing trends in the industry the conferencing and collaboration business revenue was up slightly on this constant currency basis and remains a good business for West with strong growth margins in cash generation. Our SG&A expenses for the quarter were $209.9 million a decrease of 0.2% included in SG&A expense is $12.8 million gain on the sale of building previously used by the devastated agent business. A $6.1 million gain on one of the buildings sold was deferred and will be recognized over 12 year lease back arrangements 2 major items partially offset the decrease in SG&A. SG&A from acquisition with $7.5 million and several charges of $1.8 million which was $1.2 million more than the second quarter last year was incurred primarily due to work force adjustments related to enterprise cost saving initiatives.

Second quarter operating income was up $6.7 million to $123.1 million primarily due to the gain on the sales of buildings partially offset by decline due to revenue mix and the higher than average margin on the loss telecom services client. Operating income adjusted for the non-cash, amortization and intangible acquisition cost the gain on sale of buildings and share-based compensation was $134.7 million this quarter compared to $140 million with the impact of the loss telecom service client being partially offset by acquisitions and cost saving initiatives.

And strength of the adjusted operating income for each reporting segment I will provide a little more detail. Unified communications adjusted operating income decline $9.9 million due primarily to the loss telecom services client and price compression partially offset by cost savings initiatives and the Magnetic North acquisition. Safety services adjusted operating income increased $7.7 million to $16.4 million due primarily to revenue growth favorable product mix and cost savings initiatives. Interactive services adjusted operating income was up 9.3% primarily due to revenue growth from new clients increased volumes from the existing clients and acquisitions. And specialized agent services adjusted operating income declined $6.2 million due to lower revenue increased labor rate and the revenue generation business, severance expense investments and sales and product advancements in the efficacy business and some additional expense required to replace resources previously shared with the business we divested last year.

Our second quarter after tax income from continuing operations declined $16.2 million. The decrease in net income was driven primarily by the accelerated amortization of the deferred financing cost partially offset by the gain on the sale of the buildings netting to $14 million impact. Our diluted earnings per share from continuing operations for the quarter was $0.39 compared to $0.58 last year our adjusted diluted earnings per share for the quarter was $0.78 a decrease of 1.3% from prior year. In the press release, we highlighted changed to four of our GAAP metric. Our GAAP guidance metric resulting from the accelerated amortization expense and the gain on the sale of the real estate. We continue to be on track to achieve all of our other guidance metric for the year in revenue, adjusted EBITDA, adjusted earnings per share etcetera.

In summary we are very pleased with our start of the year due to the solid growth from our core services along with strong expense management with another good quarter of operating cash flows and ample financing capacity we have flexibility and we will continue to prioritize a balanced approach to capital allocation that include pursuing strategic acquisitions, investing in our core businesses, reducing debts, and repurchasing shares.

This time I will turn it back over to Tom

Tom Barker

Thanks Jan. just one point I would like to make before we open up for questions. I think it's important not lose sight of the fact that West Corporation has a 30 year track record of growing and changing this business. Underlying business is really strong. We are on track with our expectations for the year and we had another quarter a very strong margins and very good cash flow generation. With that I would like to open it up for question that pertains our results that we reported for the quarter.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of David Togut with Evercore ISI. Please go ahead.

David Togut

Thank you and good morning. Good to see the strong growth at a safety and security and also the nice margin expansion in the quarter. Could you elaborate a little bit on the growth drivers in that segment and perhaps talk about whether you think low double-digit growth is sustainable in that segment?

Tom Baker

Well, we said when we gave our guidance David that we expected to have a good year both in safety and interactive services with major investments last year we made some changes in management. We have got good market dynamics so I would rather not comment on what we expect for 2017 till we give our 2017 guidance but you do have our expectations for the year. We are on track. We got off to good start. We are not changing our guidance at this point. We know there is still a lot of work left to do for the balance the year but we think the investments and changes we have made are paying off and are sticking to our numbers for the year at this point.

David Togut

Got it and just as a quick follow-up you took some actions in the quarter around the extension of some of the bank -- which was due in 2018. Can you give us a status update on where you stand with some of the larger maturities in terms of pushing them out and potentially refinancing?

Jan Madsen

So I mean at this point we have taken all of our basically the majority of the 2018 and 2019 maturities and push them out to 2021 or 2023 so essentially we are pretty much complete with what we needed to get done with respect to refinancing our debt.

David Togut

Thank you very much.

Operator

Your next question comes from the line of Ashish Sabadra with Deutsche Bank. Please go ahead.

Ashish Sabadra

Yes. Congrats on the solid results. Question on the margins front maybe if I will start off with, we saw margins contract a bit in the quarter year-on-year basis. I think it might be a lot related to the client loss as well as some margins pressure and specialized services. So my question was how should we think about margins going forward? Is there opportunity for margin expansion once we comb those difficult client losses?

Tom Barker

Well, as we said when we gave detail around that client loss is very profitable piece of business for us and we are going to work very diligently to offset that loss two ways. One aggressively pursue new revenue and launch the number of cost management initiative. That will take some time to kick in but we are certainly doing our best to try to cover that loss of our client. In the meantime the revenues that we have added is not as profitable as the revenue that we lost so I think that's the major contributor to some of the points that you are making and it will take us some time for these cost saving initiatives to kick in and be felt throughout the entire year. But on a whole we are pleased with how the company is responding and I don't think we should lose sight of the margin and cash flow generation that we have got for the year and then when we give our guidance in just about six months or so we will try to give you a little more visibility on to what we expect from margin and what the drivers are going to be across the entire West income stream.

Ashish Sabadra

That's great. That's great and then my second question was going to be about the leverage. The leverage has come down to 4.7 to 4.47 how should we think about the leverage going forward use of cash going forward?

Tom Baker

I think Jan did a really nice job of saying our capital allocation strategy which we announced at the beginning of this year is really right down the middle. It's extraordinarily balanced. It revolves around debt pay downs, -- of the dividend, acquisitions if we can drive value and share buyback. So we are not going to stray from that course of the balance of the year. You will see our cash pile up if we don't have the opportunity deploy for acquisition then we will look at our leverage ratio. We will look at even we have got pretty low cost that even reducing the total amount of debt even further. I think the dividend is not going to be change. It's right in the line with what we said we went public. So we will look for optimizing the deployment of the cash as the year goes on. But I am grateful to see the leverage ratio come down. We would like it to be less every year. But now the two issues this company faces is how can we manage that debt and how can we increase the growth profile of this company and having that cash build up gives us the ability to attack both of those issues that I think have an impact on our evaluation.

Ashish Sabadra

That's great. And then just maybe one final question on specialized agent services. You talked about the weakness in the quarter but how just we think about the trajectory there? It looks like the demand environment seems to be pretty good. It maybe just few things that you need to do on your end. So how should we --

Tom Barker

I think it's mostly operational focus I mean the efficacy business had nice growth. We had I think we responded slower than we probably could have or should have. There is some opportunities in specialized agent. You have to I think take this in context and this is a very small part of West Corporation. But we expect continue operational improvement as the year progresses. We had we never leave some delayed implementations to the challenging labor environment. I think we are addressing that right now. And I expect over a multi-year period this to be a good growing business for West Corporation and this is one of the businesses we kept host the best for reasons and I think this also highlights the very balanced and strength of the West model that you can have be a little off plan in one of the areas and still meet or exceed expectations due to the diversity of revenue that we've got across the entire income statement.

Ashish Sabadra

Sounds great. Again, congrats on the solid results.

Tom Barker

Thank you.

Operator

Your next question comes from the line of Dave Koning with Baird. Please go ahead.

David Koning

Yes. Hey, guys, good job here.

Tom Baker

Good morning, David.

David Koning

Yes, thanks. And it looks like everything is on nice track. The one exception, I guess, the specialty agent business, it sounds like the health advocate part of it is doing pretty well. I think that's about a third of the specialty agent business.

The other two-thirds, I'm just wondering, what’s kind of driven the deterioration, because I know margins in the first half of last year were in the low 20s, in the first half of this year in the lower teens. And maybe you can just talk through why the profitability has been lower? And if there is really anything you can do, and if they should get better overtime.

Tom Baker

Yes, okay. It's just a couple of points. I'm not sure we've given the level of detail that would validate your estimate of the size, outside of advocacy.

And secondly, we had, in some of the cost management business and revenue generation business there has been some pricing pressures. We have to hire people, ramp them up, train them, deploy them before the revenue kicks in. We've had some nice growth in that business over the years, so part of it has to do with where are we going to source new labor for the new opportunities and demand for the services that we had. So it's really a question of, I don't think we have operated that business as well as we possibly can or are capable of. And we're really focused on doing better there.

David Koning

Okay. So I know you don't like to guide to the out year, and certainly, I'm not asking for that, but is this current quarter -- I know you like to focus on the current quarter. Is this more reminiscent of how the business runs or is kind of the last few years more reminiscent?

Tom Baker

I think when we take a look at the long-term trend, this is a business that's capable of providing very stable, mid-to-high single digit organic growth rate at nice margins and we expect to be able to return to that overtime.

David Koning

Got you. Okay. That's realty encouraging. And then the second thought, it's just a follow-up question is, and I have probably asked this before, but over the last nine years, it's been incredibly stable. Your organic constant revenue growth has been between negative 2% and plus 2% every year. Now, good wins some year, some losses some years, good economy, bad economy, it’s just incredibly stable, probably the most stable of any company we cover. Is there anything, as we look over the long-term that changes kind of this last cycle, the last nine years growth in the future or is this kind of where we should think of it long-term?

Tom Baker

I'd like to be able to do better, David. I think when we gave our guidance for the year, we made a point that I hope people understand, and that's at the end of this year, we're going to have the non-conferencing portion of the business be about half. And that non-conferencing portion of the business has got a more aggressive growth profile.

These are businesses where scale matters, so over multi-year period, I expect increasing growth and good margin expansion out of these businesses, but we're a conservative company and reluctant to forecast that aggressively. But the dynamics of the businesses that West Corporation participates in, our proven ability to operate effectively and the incredible profitability and cash flow dynamics of the conferencing business give us a source of capital and the new markets give us good places to deploy that capital.

And I think we, to your point, we've been really good stewards of the income statement and balance sheet and I expect to get better overtime. And that's why I made that summary comment; I think people maybe have lost sight of the fact of what this team has been able to produce for literally decades.

I don't like the operational forecast that we have for 2016. Getting that bad news at the end of the last '15 was just a real blow. But I am thrilled with how this company is performing in managing its expenses, and in deploying capital and talent in new growth markets, and we're going to come out of this just fine. Does it feel good right now? No, I don't like it, but I know what we're capable of.

David Koning

Great. Well, we have a lot of confidence. Nice job.

Tom Baker

Thank you.

Operator

Your next question comes from the line of James Schneider with Goldman Sachs. Please go ahead.

James Schneider

Good morning. Thanks for taking my question. Congratulations on the solid results. I was wondering if you could maybe talk a little bit about the Unified Communications segment and the expectations for the growth in the rest of the year. Whether you expect any notable difference between Q3 and Q4? And then separately, can you maybe talk about any large client renewals you have coming up in the next four months?

Tom Baker

Thanks for the question, James. As you're probably familiar, we do not give guidance by quarter. We do give it out for the balance of the -- for a year at a time and we'll reiterate our confidence in that guidance or change if pending in acquisition. But to give quarterly guidance or really talk about things outside of a business cycle, that would be different between one quarter and another is a level of granularity, I'd rather not get into.

James Schneider

And on the renewals?

Tom Baker

Again, this is a business with literally tens of thousands of customers, James. So there are renewals every day in that business. And I think what's important that Wainhouse put out a nice report, talked about market share, and West Corporation picked up market share. So we have a very large, effective global sales force. They are really good at staying close to their customers, renewing their customers and taking business from competitors and that's a trends that I'd expect to continue.

James Schneider

Thanks. And maybe just a quick follow-up. Regarding the M&A plans, I understand the overall strategy there, but if you look at where you might consider to do more M&A, will there be more kind of additions on the margin in the Interactive Services segment, some of the faster growing kind of services, or could you imagine doing a larger scale, more scale type acquisition than one of your more traditional segments?

Tom Baker

Well, I think we've highlighted before where we would like to deploy growth capital, Interactive Services, particularly in some of the notifications and alerts markets is very, very attractive to us. That's a business where deployment of capital takes advantages of the economies of scale.

K-12 is a very good example of how we've been able to drive new services and expand our presence in a market that's attractive to us. We'd like to continue to make more acquisitions there. We think Safety Services also is a market that has a lot of potential.

And to your point, in terms of size, when you take a look at the capacity that Jan outlined, which was in the low-to-mid $300 million of capacity, plus the cash that we're sitting on, plus our ability to generate additional cash, we certainly have the capacity to make an acquisition that will hopefully accelerate our growth profile.

So we're always looking. We've got a team that has a very long track record of proving that they can drive value through acquisitions. And it's an area I would like to be able to deploy cash in. But we'll look at businesses where scale matters, where that business can grow faster, and be more profitable as part of West, and where we can drive extraordinary value over a meaningfully short period of time to our shareholders.

James Schneider

Thank you very much.

Operator

Your next question comes from the line of Gary Bisbee with RBC Capital Markets. Please go ahead.

Gary Bisbee

Hey good morning. Just a bigger picture question. I know you have differing levels of labor in the different businesses, but can you give us just some thoughts around labor inflation. Obviously, labor market was tightened quite a bit. And is that something you're seeing in both, the more call center like businesses, but also broadly throughout the organization?

Tom Baker

Yes, I think if you take a step back and revisit why did we divest the businesses that we did, those were certainly labor-intensive. They had intuitive client demands. It was taking more CapEx to satisfy the demands, quality and infrastructure for clients who wanted.

These were not high margin business to start with. And I didn't expect long-term, cost of labor to go down. We've got states raising minimum wages. We've got cost associated with Affordable Care Act. So we see labor as something that is not inexpensive and it's very difficult to find big pools of high-quality correctly priced labor. So it's certainly a challenge for us, and was the main driver of that divestiture.

That being said, the markets that we have drawn from for our Specialized Agent services have proven effective. We're expanding them and increasing the diversity and access to different pools of labor. And that's just something we know we have to do.

But I really like the fact that we are so much less dependent on large pools of labor. I mean, we were in the low 30,000 employees, and now we're about 10,000, but extraordinarily high revenue per employee, which allows us to attract and retain and educate an entirely different profile employee for West Corporation.

Gary Bisbee

Okay. And then, Europe, it sounds like the international did a little better in the quarter in volumes there, I guess, any color on that? And specifically, I know your 10-K said that the UK was 13%. What are you thinking about Brexit other than the FX impact, which we all understand? And are you seeing change in volumes, since the end of the quarter because of that? Thank you.

Tom Baker

I don’t -- I mean, we looked at Brexit, I think we were as surprised as everybody else, but I don't think it's had any impact on volumes or our growth expectations for that business. With that last decent size acquisition we had, Magnetic North, is a UK based company. I'm really excited how they're performing. I think they have the ability to impact our results, not just in Europe, but also in North America. And we're fully focused on taking advantage of that specialized asset and broadening its exposure to the rest of our sales force, particularly in North America.

Gary Bisbee

Okay. Thank you.

Operator

Your next question comes from the line of Bill Warmington with Wells Fargo. Please go ahead.

Bill Warmington

Good morning, everyone.

Tom Baker

You too.

Bill Warmington

And congratulations on a strong quarter, and congratulations to Jan on redoing the balance sheet.

Jan Madsen

Thank you.

Bill Warmington

So couple of quick ones for you. The first is, just wanted to get a sense for how much revenue we should expect from that last remaining lost client in Q3 and Q4? And then we'll be done with this conversation, right?

Jan Madsen

Right, we will. We will.

Bill Warmington

Yes.

Jan Madsen

Yes. There is just under $12 million to go on that. I think the bulk of that will be in the third quarter.

Bill Warmington

Got it. Okay. And then on the Safety Services side, I was hoping you guys could give us an update on how the next-gen services rollout was going and how the partnership with AT&T was going?

Tom Baker

Yes. That AT&T partnership, that was a long, long-term contract. It's front-ended by a lot of development work and CapEx to put a network in place for the AT&T Corporation, that's going to take the balance of this year and part of next year certainly. So that's a long term play. That's one of the reasons why we are confident about our ability to grow and grow profitability for a long period of time. I think AT&T is excited about this opportunity. And their sales force is gearing up to sell it. And I don't expect this to have much of an impact this year.

Bill Warmington

Okay. And then last one, just wanted to ask about the cash balance. You mentioned $133 million. How much of that is offshore? And then to ask, as you go through the year, this year, how much of the cash is being generated offshore, free cash flow guidance?

Jan Madsen

I think I said, we ended with, what, $223 million at the end of the quarter.

Bill Warmington

$223 million, I got that wrong.

Jan Madsen

And $76.8 million within foreign cash.

Bill Warmington

Got it. And then in terms of, how much is actually being generated of the free cash flow for the year? How much of that is typically being generated offshore versus onshore?

Jan Madsen

Yes, I don't think I have that right here handy, Bill, to answer that question.

Bill Warmington

An assignment for David for the future. All right. Well, thank you very much.

Tom Baker

Thanks Bill.

Jan Madsen

Thank you.

Operator

Your next question comes from the line of Denny Galindo with Morgan Stanley. Please go ahead.

Denny Galindo

Hi, there, good morning.

Tom Baker

Good morning.

Denny Galindo

Just a couple of quick housekeeping questions first. I think previous quarter you've mentioned that UCaaS was growing around 12%. Did you give an equivalent number for this quarter? And did it accelerate or decelerate?

Tom Baker

No, I think we put our number that matches that.

Denny Galindo

Okay. Still the same. Okay. And then going back to the AT&T contract, AT&T recently bid on the FirstNet network on June 01 and given your relationship with them if they win that contract is that something that kind of translates into off-site for you guys or --

Tom Barker

FirstNet is a big project. There are a lot of people bidding on that. There are a lot of sub-contractors, I think it's fair to say West Corporation be considered as sub-contractor for that. And given the role we have in this country's emergency response and safety services profile, we are in discussions with the people to see how we can participate in that.

Denny Galindo

But it wouldn't only be – you don't only depend on AT&T when you could work with anyone that wins that contract is what you are saying?

Tom Barker

Correct.

Denny Galindo

Okay, good. Okay and then a couple of other ones. I noticed that Microsoft Skype was planning to roll out the Australia PSTN product in September I mean they are solely been adding countries to their footprint. Have you lost any business to them? Maybe you can comment about what type of pitch you are given to your customers that might be looking at a Microsoft product when they say upgrade to Windows 10 –

Tom Barker

There is a constant discussion over how we can help that communication internal and external per company. Microsoft is part of those discussions but what we found is that organizations particularly larger ones are really like the ability to use West Corporation as a vendor to handle a lot of the conference and collaboration needs having one [indiscernible] being able to deliver managed services internally with Microsoft, with CISCO, with an external network is very, very effective as we help them figure out how they can continue to collaborate. We have got a very strong position in this market. And it's rare for a company to go to just one platform for all their need because they are not all easy to use, they are not all worldwide are available. So we think we have got a very strong role to play for years and are in good position.

Denny Galindo

Okay. That's helpful. And then lastly on [indiscernible] something that made the flash in the markets in the last several months here. Is this a threat or an opportunity for you guys? On the services it seems like it was – it will be a threat if they can transfer data that's going across your network to go over the web instead, but I know that you also work with a lot of companies like [indiscernible] maybe you could discuss how you would interact with [indiscernible] and how that might impact your business?

Tom Baker

Yes, I think again that's getting into a level of granularity on this call that is beyond the state of scope which is really to discuss our results what we're doing. But we have relationships as you can imagine being a multi-billion global service provider with a lot of companies to accommodate how that data and voice reach and leave it at desktop. And we're a good partner and they see our worldwide distribution as something that’s correct.

Denny Galindo

That’s it from me, thanks.

Operator

Your next question will come from the line of Dmitry Netis with William Blair. Please go ahead.

Dmitry Netis

Thank you. Nice quarter, gentlemen.

Tom Barker

Thank you.

Dmitry Netis

And ladies, apologies. But again, wanted to zoom in on you see and kind of build off of previous question. Tom, is the expectation still for kind of a flat to up gross in the UC segment this year and maybe next year as well?

Tom Barker

I think we've given you our forecast for this year and that's probably all we're going to comment until we give our a more holistic look for next year. And we're just a couple of quarters away from that.

Dmitry Netis

Okay. But where to up in sort of the trajectory where you feel comfortable with?

Tom Barker

Yes.

Dmitry Netis

Okay. And then on the competitive front and you see specifically the conferencing, I think you addressed in Microsoft these, but what are you seeing out there from the carriers that there are more less aggressive now with sort of Microsoft stepping in, what are you seeing out of PGi and other competitors of yours, now that they are clearly gone private and doing some stuff maybe?

Tom Barker

Yes. I mean, I think that we said in years passed, if you're really looking to understand what the competitors doing and how they get in the marketplace. That's a question that's given to them. We know conferencing is a big marketplace, we've driven world-class leading margins from it always. We understand and take our competitors very seriously and will change and adapt based on what we see a competitor, how we see a competitor behaving and the competitors don’t all behave the same way across the globe. The dynamic of a career conferencing business is certainly different than US based carrier to be put in different than PTT in Europe.

PGi went private, I think they're focussed on raising money and I think they're going to be focussed on guiding an aggressive margins as they can because they've got substantial more depth in these two. But that's a question that's script up to them.

Dmitry Netis

But your ability here is definitely to just bundle different services into one big bundle to the enterprise.

Tom Barker

Oh, yes. I think our conference and collaboration team have an extraordinarily strong and deep and robust set of assets and are seen as a world class partner for collaboration.

Dmitry Netis

Can you talk about the cross sell opportunities, you mention that a lot of your sales folks will be engage more in selling these additional services and has that met your expectations exceeded, your expectations, how is that track?

Tom Barker

We always set goals that are going to top I hope to achieve. But I think we again we've got a decade long track record of showing how we can take a collaboration relationship and drive more services into that relationships. Look at we've done with streaming video, look at we've done with event services. I think the latest example I'm extraordinarily excited about is to use the conferencing collaboration relationships as non-traders to launch their unified communications as a service discussion. We've got a large percentage of our pipeline and new opportunities coming from our install base of conferencing subscribers and partners. And also that salesforce out there prospecting for new opportunities for unified communication service.

And it's hard for me to overestimate what I think we're capable with that business. This is a market that's big, this is a market that's growing aggressively. We've proven we can grow this business aggressively. And one of the things I'm most proud of is we proven we can grow this company an opportunity aggressively and profitably. When you look at the peer place we compete against, we're more profitable, we've got steady growth and I expect that to get better and better every year.

Dmitry Netis

Very good. One last thing on the Magnetic North if I may. Just wanted to get a sense of the direction in that business. I think you disclosed it was up, it was 2.2 million in the quarter. Is that something kind of tracking along your expectations? I don’t know what they did last year but I believe there was a number there. But what is, is this business sort of taking a little pause before it breaks out, how are you seeing this Magnetic North acquisition going to transpire?

Tom Barker

Dmitry, I see the Magnetic North acquisition has bring to West Corporation a team and a set of product solutions that are really attractive. And is nicer position they have in UK. This is still a pretty small organisation within West Corporation. It will take a while I think or its results to be to really make itself that within West but there are so many of these nice attractive opportunities that together they give us confidence in our ability to grow and not reliant on one product, one service, one market. And Magnetic North has the ability to impact Unified Communications Service, I think over time it has the ability to impact interactive services. It's a great product and it has little to no exposure to North America and now it's getting it, and I believe we already have some wins there. So, pretty exciting.

Dmitry Netis

Got you. All right, very good. Thanks. That's it for me and keep up the good work, gentlemen.

Tom Barker

Thank you.

Jan Madsen

Thank you.

Operator

At this time there are no further questions. I will now turn the conference back over to management for any closing remarks.

Tom Barker

Well, I just want to thank all of you for participating on this call and for those listening. And I look forward to discussing results with you in the third quarter in just a few months. And thank you all for your interest and your support.

Operator

Ladies and gentlemen, and this concludes today's conference. Thank you all for joining and you may now disconnect.

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