Global Telcom & Technology, Inc. (GTLT) Q4 2007 Earnings Call March 20, 2008 8:30 AM ET
Mike Bower – Vice President of Finance and Investor Relations
Richard Calder – President, Chief Executive Officer, Director
Kevin Welch – Chief Financial Officer, Treasurer
Brian Thompson – Executive Chairman of the Board
Tony Pollick - Maxim
Good day everyone. Welcome to the Global Telecom & Technology, Inc. fourth quarter 2007 earnings call. Today’s call is being recorded. (Operator Instructions) At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Mike Bower, Vice President of Finance and Investor Relations. Please go ahead sir.
Thank you. Good morning and welcome. I am joined this morning by Rick Calder, GTT’s President and Chief Executive Officer, Kevin Welch, the company’s CFO and Brian Thompson, GTT’s Executive Chairman of the Board. Our discussions this morning are being made available via webcast through our website. A replay of this call will be made available through April 20th. Dial-in information for the replay as well as access to a replay of the webcast is available at our website at: www.gt-t.net.
I would also like to mention that our comments will contain forward looking statements within the Private Securities’ Litigation Reform Act of 1995. Statements that are predictive in nature and that depend upon or refer to future events or conditions or that involve the use of words such as anticipate, expects, intends, plans, believes, may, will and similar expressions are intend to identify forward looking statements.
Forward looking statements include by way of example revenue and margin expectations or projections and various references to trends in the industry and GTT business. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and other factors. Some beyond our control, which could cause the company’s actual results to differ materially from those anticipated in these forward looking statements.
There are many risks and other factors that can prevent the company from achieving its goals or cause the company’s actual results to differ materially from those expressed in or implied by the forward looking statements contained in our comments. These factors and others are more fully discussed under risks factors in GTT’s most recent Form 10K as filed with the Securities and Exchange Commission on April 17, 2007. Statements in this call should be evaluated in light of these important factors.
I would like to now turn the call over to GTT’s President and CEO, Rick Calder. Rick.
Thank you, Mike. Good morning and welcome to Global Telecom & Technology’s conference call to discuss the company’s performance during the fourth quarter and full year ending December 31, 2007. I will begin our prepared comment this morning with an overview of our progress during the fourth quarter, our accomplishments during 2007 and our initiatives for 2008. I will then turn the call over to Kevin who will walk you through the quarter and yearend financial results. We will then open the call for your questions.
During the fourth quarter we achieved many milestones, both operational and financially. We achieved very strong quarterly revenue growth of 14.7% year-over-year and we report increased positive adjusted EBITDA in fourth quarter and continued on the path to grow our business profitably moving forward.
I would like to highlight four major accomplishments to summarize the progress we made during 2007, particularly during the second half of 2007. We completed the integration of the Legacy Companies into one global operating business. 2. We established a growth culture and achieved solid sales and revenue growth with a majority of that success occurring in the second half. 3. We achieved positive adjusted EBITDA in successive quarters and we are now positioned for future profitable growth without the need for external financing and 4. We successfully restructured our balance sheet and increased liquidity with our new credit facility that we announced this week.
2007 was definitely a transition year for GTT and we made great progress. Moving forward in 2008, we see two key trends in our industry. First, firms, in particularly multi-national firms will continue to expand globally into both developed and developing parts of the world. This expansion will first drive the demand for more bandwidth at higher speeds into more places. It will create increase network complexity as benefits integrate emerging and Legacy Technologies and it will require more managed services to handle this increased level of network complexity.
Second, firms will still demand strict control over their telecom call structure. Moreover, firms will rely on their suppliers to help deliver savings, particularly given our current worldwide economic environment. GTT is very well positioned to address these trends by first helping business provision and maintain global wide area networks and extend the reach of our telecom carrier customers into their off-network locations.
We also, can leverage our 600 plus supplier relationships, our global network footprint, our internal network design expertise to deliver integrated multi-carrier solutions to our customers worldwide. And, of course, provide our services at very competitive prices that deliver important savings to our customers.
In 2008 our key initiatives will be first to expand our portfolio of services including private line services, Ethernet services, managed network services and wireless mobility products and services among others. Second, to drive new acquisition and new business acquisition. During the second half of 2007 alone 20% of our new sales were from new customers representing over 25 new logos for GTT and we expect to be sharing externally many of our new customer wins throughout the year. And, finally three, to continue to provide excellent, outstanding customer experience to superior operations and through an ever expanding set of supplier relationships worldwide.
In summary, we exited 2007 with at a very strong position. We achieved the goals we set out for ourselves at the mid-point of the year and we’ve positioned the company for success in 2008.
I would like to turn the call over to Kevin now to walk you through our financials.
Thank you Rick and good morning everyone. Before I begin my comments on the quarter, I would like to formally introduce Mike Bower to you. Mike recently joined GTT as a member of our finance team and will be our primary investor contact. His contact information is included in the press release, so please, feel free to reach out to him with any company inquiry. Welcome Mike.
As a reminder on the presentation of historical comparative information the company did not have meaningful operations until it acquired the U.S. and European companies in October of 2006. To give you a more useful view of the company’s results, we have provided combined historical performance information for the fourth quarter and full year of 2006 through the periods prior to the acquisitions along with the post acquisition results.
This is a non-GAAP measure and simply adds the historical results of the two acquired companies together with GTT’s results for the same period.
In addition, the combined information includes adjustments related to the purchase accounting treatment of deferred revenue and deferred costs that occurred in the fourth quarter of 2006. All to provide more accurate period comparisons.
Today, most of my discussions and comparisons will involve this non-GAAP combined information. Our presentation of GAAP financial measures and reconciliation of this non-GAAP combined information to GAAP financial measures is included in the press release we released yesterday. Unfortunately, this is the last quarter we’ll have to do these non-GAAP comparisons given that our next quarter will be year-over-year comparisons.
Revenue for the quarter of $15.5 million grew 14.7% over the 2006 fourth quarter non-GAAP combined revenue of 13.5%. Fourth quarter revenue also grew 5.3% on a sequential basis compared to the $14.7 million in revenue reported for the third quarter of 2007.
For the year, revenue grew 10.7% to $57.6 million, which represented an increase in the annual growth rate compared to the 4.1% annual non-GAAP combined growth rate reported in 2007. Revenue growth was driven by increased new sales and installation activity. Year-over-year growth for the fourth quarter also benefited by the increase in the exchange rate of the British pound against the U.S. dollar of $2.05 up from $1.92 in the fourth quarter of 2006.
For the full year, the average exchange rate of $2.00 was up from $1.84 in 2006. Adjusting for the exchange rate impact year-over-year revenue growth for the fourth quarter was 10.2% and full year revenue growth of 5.3%.
Gross margin for the fourth quarter 2007 of 29.0% remained relatively stable and essentially flat compared to the non-GAAP combined gross margin of 29.1% in the fourth quarter of 2006 and down from the 31.1% reported in the third quarter of 2007.
For the year, 2007 gross margins of 30.3% were up slightly from the non-GAAP combined gross margins of 29.1% for the full year of 2006.
Our selling, general administrative expenses, excluding non-cash compensation, were $4.2 million during the fourth quarter of 2007 down sequentially compared to the third quarter of 2007 of $4.4 million in essentially unchanged from the non-GAAP combined $4.1 million in SG&A in the fourth quarter of 2006, even with the revenue growth of 14.7%.
Our largest expense headcount through the end of the year was 78 employees down from 84 employees at the end of the third quarter. We do expect our headcount to increase mainly through the addition of sales employees. Although, we expect to continue the trend of decreasing SG&A as a percentage of revenue.
For the fourth quarter of 2007 SG&A as a percentage of revenue excluding non-cash compensation was 27.4% compared to 30.0% in the third quarter of this year and 30.5% in the fourth quarter of 2006 on the non-GAAP combined basis.
As Rick discussed, we continue to generate positive adjusted EBITDA during the fourth quarter of $235K. This was a continuation of the trend we reported throughout 2007 and is an improvement from the adjusted EBITDA in the third quarter of $157K. The improvement in adjusted EBITDA was even greater compared to the combined non-GAAP adjusted loss in the fourth quarter of 2006 of minus $116K and for the full year of 2007 we reported an adjusted EBITDA loss of $262K. Although for the second half of 2007 our total adjusted EBITDA was a positive $403K. And, this highlights our strong trends in the second half of the year.
Compared to the non-GAAP combined adjusted EBITDA loss in 2006 of minus $936K we feel we’ve made significant progress in the performance of the company as we grow the business profitably. Going forward we expect to continue to show positive adjusted EBITDA, however, we do expect our first quarter 2008 adjusted EBITDA to be slightly lower given a higher level of public company expenses related to our yearend audit and tax work, which must be recorded during the first quarter.
Please see a reconciliation of the non-GAAP adjusted EBITDA information to GAAP financial measures included in the press release issued yesterday.
Also, as Rick noted, we completed an important step in the fourth quarter with the restructuring of our debt in addition to the new financing for working capital. Our nearest maturity, the $5.9 million in principal and $500K in accrued interest due in April 2008 was reduced by $3.5 million dollars due the issuance of $2.6 million shares of common at a price of $1.37 per share.
The remaining $2.9 million was exchanged for a convertible debt instrument with maturity date of December 2010. The convertible security carries a 10% interest rate and can be converted into common at $1.70 per share. Interest is accrued and payable upon maturity or conversion. In addition, the company has the ability to require the debt to convert to equity when the company’s stock reaches $2.64 per defined measurement period.
The $4 million dollars in notes previously due December2008 were amended to extend the maturity date by two years to December 2010. The interest rate on the set remains at 6% until January 2009 when interest increases to 10%. The company also issued $1.9 million in convertible debt under the same terms as a convertible notes due December 2010.
The net results is that the company has benefited significantly by extending maturity to 2010 adding $1.9 million in additional liquidity, issuing shares at a premium to market and reducing total debt by $1.1 million.
In addition, to lower interest expense, the company has much greater financial flexibility. The debt restructuring included the ability for the company to establish a secured credit facility, something we previously did not have the ability to do. And, earlier this week we announce the $2 million dollars secured credit facility with Silicon Valley Bank. 364 day facility and will provide us with additional liquidity and flexibility in managing our growth and capital structure.
We ended the second quarter with over $3.3 million in cash on our balance sheet, up from $2 million dollars at the end of the third quarter. The increase was due primarily to the cash raise and the issuance of new debt.
And, finally, we did report a positive net income in the fourth quarter as a result of the gain on the debt restructuring, the issuance of equity at a premium to market and a full year tax benefit over reported 2007 net loss.
So, with that, I’ll turn it back to Rick.
Thanks Kevin. Before opening it up for questions, I would like to briefly talk about our expectations and in 2008 we will provide directional guidance as to what we believe are our four key financial matrix.
First. Revenue. We expect strong revenue growth in 2008 and we expect to grow at a faster rate in 2008 than we did in 2007.
Second. Gross margins. We expect to maintain our gross marginal levels in 2008.
Third. SG&A. Excluding non-cash compensation as we continue to leverage the platform that we have built and as our revenue continues to grow, SG&A will continue to decline as a percentage of revenue.
Fourth. Adjusted EBITDA as we see revenue and gross margin growth and SG&A decline as a percentage of revenue, we will grow positive adjusted EBITDA and grow our adjusted EBITDA margins throughout 2008.
We are building on the momentum we generated in the second half of 2007 and expect to continue to grow our business profitably in 2008. And, we very much look forward to sharing the results on each of these key matrix with you on our subsequent quarterly calls.
This concludes our prepared comments for today and, Operator, we are ready to begin taking your questions.
(Operator Instructions) We’ll take our first question from Tony Pollick from Maxim.
Tony Pollick - Maxim
You talked about the comparison of the first quarter now versus last year. Could you give us a comparison from the last quarter, the December quarter and the first quarter you expect for this year?
I’m sorry Tony, could you ask the question again. I wasn’t clear on…
Tony Pollick - Maxim
Yes, you talked about that the numbers would be somewhat less for the first quarter this year versus first quarter last year due to public, being public and the cost of being public. I was wondering, if you could do a comparison of what you expect this quarter from the December quarter?
I think what I meant by my comment that the first quarter would be slightly lower, I was comparing that to the fourth quarter. So, we do expect to have positive EBITDA in the quarter, but because we have all these yearend costs that come in the first quarter our trend for the third quarter, fourth quarter won’t continue for the first quarter, but we expect that overall our trends for the year will continue to be positive after the first quarter.
Tony Pollick - Maxim
I’m not sure if I understand what you said. Why is this quarter going to be worse than the December quarter?
Mainly because we have a lot of yearend public company costs related to our audit and tax work that are a period cost and they are recorded in the first quarter of the year as opposed to being spread out for the duration of the year. That will impact our SG&A in the first quarter of 2008.
Tony Pollick - Maxim
Are those 2007 costs or 2008 costs?
While they are 2008 costs being that they were being recorded in the period but they do relate to our yearend audit and our yearend tax work for 2007.
Tony Pollick - Maxim
And, you don’t expense those for the year?
We don’t accrue those for 2007 and unwind it as we pay them. Those are incurred in the period and they are recorded in the period of the first quarter.
Tony Pollick - Maxim
Can you give us any guidance in terms of revenue for the first quarter?
For 2008 our approach, given the size of our company and the lack of any public analyst coverage at this stage, although we are working as a matter of our investor relations policy, we are giving directional guidance, but not specific numeric guidance. But, we do expect to grow our business strongly and grow at a faster rate than we have grown. And, I think we have seen in the second half of the year that we have started to grow the business much more rapidly than we had historically and we expect those trends to continue.
Tony Pollick - Maxim
I guess much more rapidly is still not sufficient for the long term investor that’s been in for a while. We’re talking about $700K - $800K gains per quarter. Is there anything to make us more comfortable that the gains can be a lot bigger than that quarter-to-quarter going forward?
We believe we will grow more rapidly than we have in the past and will look forward to sharing those results when we actually achieve them.
Tony Pollick – Maxim
At this time, we have no further questions in the queue.
Alright. Thank you, Operator. In closing I want to take this opportunity to thank our employees, our investors and our customers who have helped with the transition of GTT into a healthy and growing multi-network operator. I am very enthusiastic about reporting great things to you in the quarters to come and I look forward to sharing our progress on these calls each and every quarter. Thank you very much.
And, that concludes today’s conference. We thank you for your participation. You may now disconnect.
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