Global Crossing Ltd. Q2 2008 Earnings Call Transcript

Global Crossing Ltd. (GLBC)

Q2 2008 Earnings Call

September 3, 2008 9:00 am ET

Executive

Suzanne Lipton - Vice President of Investor Relations

Hector R. Alonso – Managing Director – GC Impsat

Jean Mandeville – Executive Vice President, Chief Financial Officer

Analysts

Romeo A. Reyes – Jefferies & Company, Inc.

[Inaudible] – Credit Suisse

Raj Patel – Farallon Capital

Presentation

Operator

Welcome to the Global Crossing Impsat second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Suzanne Lipton, Vice President of Investor Relations.

Suzanne Lipton

Welcome to GC Impsat’s earnings call for the second quarter of 2008. Jean Mandeville, CFO, and Hector Alonso, Managing Director of the GC Impsat business, have some prepared remarks, after which we’ll open the call for some questions.

Now, before I begin I would like to remind everyone that results in the report to bond holders may differ slightly from the results for GC Impsat’s segment in our consolidated report. You may see slight differences in future reports as well due to the fact that the bond holder report will have a significantly lower materiality threshold than that of the threshold applied at the consolidated level.

Furthermore, events could occur in the period of time after the filing of the consolidated results that will require adjustments in the report to bond holders that were not made in the GC Impsat segment results within the consolidated report. Any such adjustments made to the financial statements in a given report to bond holders will be reflected in the subsequent reporting by GCL.

I will also remind you that statements made in the course of this conference call that are not historical financial results are forward-looking statements as defined in section 21(e) of the Securities Exchange Act of 1934. These GC Impsat actual results could differ materially from those projected in these forward-looking statements and factors that could cause actual results to differ materially from those in these forward-looking statements. As contained in GC Impsat’s quarterly reports, to note holders, and in reports filed or furnished to the Securities and Exchange Commission by Global Crossing Ltd., including quarterly reports on Form 10Q and annual report on Form 10K for the year ended December 31, 2007. We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments except as required by law. We refer you to GC Impsat’s quarterly report to note holders for the period ended June 30, 2008, to be posted at our investor pages on globalcrossing.com.

Finally, I would like to define for everyone the non-GAAP metrics that will be referenced on this call, including adjusted gross margin, which is defined as revenue less cost of access, and including adjusted cash EBIDTA, which is defined as earnings before interest, taxes, depreciation, and amortization, and other income and non-cash stock compensation.

With that I will turn the call over to Hector Alonso.

Hector R. Alonso

Today I’ll update you on the strong financials will show that GC Impsat continues to deliver on the strong demand trends in the region that continues to support our growth. I also will provide an update on the progress of our integration efforts. Let’s get started.

The second quarter of 2008 marks our 18^th consecutive quarter of revenue growth. Our results demonstrate that our sales engine is working very well. We grew our revenue by 6% sequentially to $114 million and we improved our adjusted cash EBIDTA by more than 10% to $32 million. Our success is a result of several factors.

First, we’re positively positioned to respond to market trends at the result of our strategic product portfolio targeted at enterprise, government agencies, and carrier customers. This ranges from pure network connectivity to integrated networks, value-added solutions for business continuity and data recovery, hosting, and managing consulting services.

Our IP network services enable customers to lower the total cost of ownership and increase efficiencies by migrating from legacy data services to our complete suite of integrated services. Our value-added solutions address the emerging needs of our customers as IT and telecom converge and enable them to rely on us for management of their data centers as they centralize their operations and focus on their business. This is a trend that is accelerating in the Latin American region.

In summary, as we increase the value of services that we provide to our customers we also increase our share of customers’ wallet.

IP services in Latin America are growing at a fast pace and we are executing well against our strategy to provide advanced IP network service and value-added solutions to our customers. Sequentially GC Impsat grew data services revenues by 6%, led by IP network adoption, and data center revenues by 10%. More impressive, year over year IP transits, IP VPN, and other IP services in total grew by more than 20%.

Sales from value-added services such as our data center solutions are among the drivers for our adjusted gross margin expansion with adjusted gross margin dollars representing 76% of revenue in the second quarter compared to 73% one year ago.

We’ve had significant opportunity to capitalize on several demand trends. Although there is competition in values forums, the market is big and we are strategically differentiated from our competitors in the region. Our focus is exclusively enterprise, government agencies, and carrier customers. Our network and data centers span the major metropolitan areas across the region and we can also connect our customers to their site across the globe. Our capabilities, the local relationships we have developed, and our conservative approach to addressing customer needs have enabled us to form unique and comprehensive solutions that are delivering real value to our customers.

We also believe that we have deployed our networking capabilities in the right mix of countries in the region. In the second quarter Brazil and Venezuela led our revenue growth, growing at rates of more than 10% sequentially. Colombia and Chile grew at rates of more than 5% sequentially. The most significant impact on absolute revenue growth has come from Brazil, where enterprises have been purchasing IP-based services, managed network security, and other value-added services such as housing, hosting, and managed services delivered in our data center.

I’ll turn now to our integration, which has also been going well. There are a number of accomplishments that we have achieved since the closing of our acquisition of the company in May 2007 that in our view demonstrates the success of our integration efforts so far. First, as we have reviewed, our financial results have continued to improve. Second, on a pro-forma basis revenue from our current top 20 customers in the second quarter of 2008 has increased by more than 50% from the same period a year ago; evidence that we are successfully increasing share of our customers wallet.

In the service of GC Impsat customers during the second quarter, nearly all participants indicated they are satisfied and almost 75% of customers said they were very likely to recommend GC Impsat to others, which is an important indicator of loyalty.

Finally, despite high competition for talent in Latin America, we have been able to retain a large majority of our managers and key people.

Each of these important accomplishments demonstrates that we have managed integration very well and that we are appropriately focused on serving our customers better than our competition. The merger into GC Impsat of the Brazilian legal entity held by our parent company Rest of World segment was completed in the second quarter. We now run one single set of processes and are supporting one set of systems in the country. This merger will provide incremental efficiencies and we expect that our plans to merge Chile and Argentina into GC Impsat will do so as well when we complete those in the future.

In summary, we are pleased with the overall performance of the business and we remain focused on executing our strategy. With that, I will turn the call over to Jean for more details in our financial results.

Jean Mandeville

Before I begin I would like to remind everyone of a couple of housekeeping items that impact the second quarter, as well as comparable periods. First, as we state year-over-year comparisons keep in mind that our second quarter 2007 results reflect GC Impsat for a partial period beginning on May 9, 2007, the date we closed the acquisition.

Second, we completed the consolidation of our Brazilian operations and transfer of the GC Brazil operations from GC’s Rest of World, or GC Impsat segment. As required under US GAAP, we have retroactively restated our segment results to include GC Brazil’s results in the GC Impact segments for all periods presented.

In our bond holders report GC Brazil is referred to as Set Brazil 2. For more complete details please refer to the bond holders report, which will be posted on Global Crossing’s website shortly after this call. Additionally, these results were included as part of the consolidated report of Global Crossing Ltd. when we released second quarter earnings on August 5.

Now turning to the results, as Hector has noted, we continue to be very pleased with the GC Impsat performance. The second quarter marks another consecutive quarter of revenue growth for GC Impsat, with revenue in the quarter growing 6% sequentially to $140 million compared to $108 million in the first quarter and $55 million in the second quarter 2008.

Second quarter revenue growth can be attributed to continued strength in the data center services and IP network services, including IP VPN and internet province, together with the appreciation of certain currencies in the region.

The distribution of our revenue across the countries in the region has remained relatively consistent compared to the last time we spoke in that Brazil, Argentina, and Colombia continue to be our largest three countries. In the second quarter they contributed more than 70% of our revenue and our top producing country, Brazil, has contributed more than 40%. This is contribution from the transfer of Brazilian assets mentioned earlier.

While our revenue continued to grow in the second quarter our cost of access was nearly flat at $28 million. With access costs nearly flat our adjusted gross margin dollars grew sequentially by $6 million to $86 million or 76% of revenue in the quarter. This improvement is due to a combination of higher on-net sales to carriers in the quarter, as well as continued revenue growth in our data center business which has limited access expenses compared to our other services. As a percent of revenue adjusted gross margin was in line with the prior quarter and better than the 73% of revenue in the second of 2007.

Total cost of revenue, excluding cost of access, was $24 million compared to $22 million in the first quarter and $11 million in the second quarter of 2007. The sequential increase of $2 million, largely within our real estate, network, and operations, was attributable to an increase in rent and utilities expenses, as well as [inaudible] costs. The increasing rent and utilities is related to higher data [inaudible] services while increasing salaries and related costs is driven by higher head current and adjustments for inflation.

Second quarter SG&A expenses was $33 million, relatively flat sequentially, and were $18 million in the second quarter 2007. We expect SG&A to remain relatively flat in the second half of the year.

We have continued to improve our adjusted cash EBIDTA in the second quarter, which was $32 million or 28% of revenue compared to $29 million or 27% in the first quarter and $11 million or 20% in the second quarter of 2007. For the first half of the year we generated $24 million in cash flow from operations. This reflects $1 million of cash interest payments of the $9 million primarily associated with finance charges for the GC Impsat notes and the Colombian notes.

We generated $40 million in cash during the second quarter after using $30 million for property, plant, and equipment, including capital leases. As of June 30, 2008, GC Impsat had $76 million in unreceipted cash and cash equivalent and an additional $30 million in receipted cash. We anticipate a net service reserve of $22 million associated with the $225 million senior secured loans will become unrestricted during the second half of the year.

Total debt at June 30 is $420 million. It includes $163 million of subordinated shareholder funding for the acquisition of Impsat and our third-party debt, consisting of $225 million of GC Impsat notes and $30.5 million of debt comprised of principally Colombian notes of which $11.7 million is repayable this December. A new debt arranged with commercial banks. In addition, there were $1.5 million of capital lease obligations at June 30^th.

In conclusion, the business continues to perform well and we have continued to grow revenue while managing our costs and generating positive financial results for the business.

That concludes my prepared remarks.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Romeo Reyes – Jefferies & Company, Inc.

Romeo A. Reyes – Jefferies & Company, Inc.

With respect to your top ten customers, Hector, you talk about that being up something like 50% year on year. Can you talk a little bit about what kind, like, the profile those customers maybe keep touch upon, what kind of services they’re buying from you guys, and why you’re seeing such robust demand?

And then secondly, with respect to just the last three or four or five months, how MRRs and the sales funnels are tracking.

Hector R. Alonso

Yes, I talk about the top 20 customers. Actually, the top 20 customers grew by over 50%. And you have, you know, in that team of top 20 customers you’ve got different kind of companies. Large regional companies or large Brazilian companies, so there is not one single industry in particular that is, you know, buying more than others and then become one of the top 20 customers. You find that they are customers like TV cable operators in Brazil, E-mail, shopping, electronic shopping companies in Brazil. You have coverage like British Telecom, you have coverage like Bell Canada. You have large oil companies that [inaudible]. There are a lot of different companies.

However, there is a common element among them that just pretty much they’re buying products from our top three lines of business. So they’re buying connectivity products, they’re buying internet products, and they are buying data center value-added solutions. So probably the most significant connector among all these companies is they are not concentrating just one kind of services. This is the approach that we take with our customers. We start small with them and we keep growing for years and years the relationship with them and just accumulate a large commitment with them and increasing the revenues, as we talk about in the call relating to customer wallet. As you can see from the top 20 customers, none of them was just our customer for the last year; they been with us for many years.

The second question was related to the trend in terms of new orders is pretty consistent with what happened on the first cut, the first Q and the second Q, so we are seeing no signs of any slowdown in demand and we are seeing no signs of any slowdown in our ability to capture the growing demand.

Romeo A. Reyes – Jefferies & Company, Inc.

Are you growing your sales force at all?

Hector R. Alonso

Actually, we are pretty much stated at the full, at the sales force level. Remember that a large majority of our new orders are coming from our current customers. So that’s pretty much the big engine of growing the orders.

Romeo A. Reyes – Jefferies & Company, Inc.

And what percentage of revenues are your top 20 customers at this point?

Hector R. Alonso

As a percentage of total revenue, I think it’s less than 25%, but I have to confirm because I think it’s less than 25%.

Operator

Your next question comes from [inaudible] – Credit Suisse.

[Inaudible] – Credit Suisse

I just put in what was your [inaudible].

Jean Mandeville

[Inaudible] $30 million. Three-oh. There’s $76 million in unrestricted cash and $30 million in restricted cash.

[Inaudible] – Credit Suisse

And you drew from $6 million from the first quarter way, that’s right? I just wanted to confirm if, in first quarter rates was $6 million then it grew from $6 million to $30 million. The restricted cash part.

Jean Mandeville

No, because the restricted cash of that, $22 million fits in the receipted cash, $22 million is that interest result account that we have. So that was put in place when we issued the bonds in 2007.

[Inaudible] – Credit Suisse

The $6 million was the current version only, right?

Jean Mandeville

Correct.

Operator

Your next question is from Raj Patel – Farallon Capital.

Raj Patel – Farallon Capital

Can you talk a little bit about how much of your revenue is contracted and recurring? And returning. On a monthly basis.

Jean Mandeville

I would say that the vast majority is probably about over 90% of the revenue that we have is that the recurring revenue we got contract that stand from 12 months to five-year contracts. So over 90% of that it is on a recurring revenue mood, let me put that way. Of course we’ve got about 10% of business coming out of telephony that it is difficult to say. That is, monthly recording is a kind of a usage. So it is different.

Raj Patel – Farallon Capital

Then can you describe a little bit about the magnitude of the global crossing Chilean and Argentinean properties that will get placed into Impsat in the next period of time?

Jean Mandeville

In terms of?

Raj Patel – Farallon Capital

In terms of revenues and EBIDTA or whatever.

Jean Mandeville

Let me, I don’t have that information exactly here, but let me see if I can get it. [Inaudible] do you have the information in there?

[Inaudible Executive]

I am, if I understand the question, what you want to know is approximately what kind of revenues and EBIDTA have the operations of [inaudible]?

Raj Patel – Farallon Capital

That’s correct.

Facula

No, I don’t have that information yet. I’m not sure if we provide information by country. I’m not sure. Because that is under the rest of the work at this moment.

Raj Patel – Farallon Capital

Is it similar, how much smaller than the Brazilian operations would it be? I assume it’s smaller than Brazil.

Jean Mandeville

Yes, they’re both smaller than Brazil, yes.

Raj Patel – Farallon Capital

How much cash is remaining in Venezuela after the bond purchase and sale that was detailed in the parent financial?

Jean Mandeville

Approximately, let me give you the right number in here. It’s about $20 million as of June 30.

Raj Patel – Farallon Capital

And that was the bond purchase and sale. Is that prior to June 30^th or was that in July? I can’t recall.

Jean Mandeville

The bond was done before June 30.

Raj Patel – Farallon Capital

Can you give us an update on the cost savings from the acquisition as far as the cost [inaudible] to date and what you believe is remaining?

Jean Mandeville

Just as we anticipated before the total synergy on the run rate date is over $10 million. That’s the cost savings synergies that we obtained after the integration. Of course, going forward is there going to be more? Well, we believe that these merged activities that we’re doing will provide additional efficiencies, but just not going to be as important as the total run rate of $10 million that we obtained.

Raj Patel – Farallon Capital

So you’ve already achieved that $10 million at this point?

Jean Mandeville

Right.

Operator

We have no further questions at this time.

Jean Mandeville

Thank you, all, for participating in the GC Impsat earnings call. Very clearly, a very strong quarter and we do look forward to continuous strength in the results and we will talk about the [inaudible] in November. Thank you very much and speak to you soon.

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