Global Telecom & Technology, Inc. Q2 2008 Earnings Call Transcript

Sep.21.08 | About: Global Telecom (GTT)

Global Telecom & Technology, Inc. (GTLT) Q2 2008 Earnings Call Transcript August 7, 2008 8:30 AM ET

Executives

Mike Bower – VP of Finance and IR

Rick Calder – President and CEO

Kevin Welch – CFO

Brian Thompson – Executive Chairman

Analysts

Yehuda Fruchter – Envoy Capital

Bobby Melnick – Terrier Partners

James Dodd – Anthem Corporate Finance

Operator

Good day, everyone. Welcome to the Global Telecom & Technology, Inc. second quarter 2008 earnings conference call. Today's call is being recorded.

At this time I’d like to turn the call over to Mike Bower, Vice President of Finance and Investor Relations. Please go ahead sir.

Mike Bower

Thank you and good morning. I'm joined today by Rick Calder, GTT’s President and Chief Executive Officer, Kevin Welch, our Chief Financial Officer and Brian Thompson, GTT’s Executive Chairman of the Board.

Our discussion this morning is being made available via webcast through our Web site. A replay of this call will be made available for one month. Dial-in information for this replay as well as access to a replay of the webcast is available on our Web site at www.gt-t.net.

I would also like to mention that our comments today will contain certain 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 intended to identify forward-looking statements.

Forward-looking statements include by the 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, uncertainties, 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 10-K as filed with the Securities and Exchange Commission in March 2008. Statements in this call should be evaluated in light of these important factors.

I would now turn the call over to GTT's President and CEO, Rick Calder. Rick.

Rick Calder

Thank you, Mike. And good morning everyone. I will begin this morning with a brief overview of our progress during the second quarter 2008, and I will then turn the call over to Kevin who will walk you through the quarter's financial results. And we will then open the call for your questions.

The second quarter of 2008 was GTT's strongest quarter to-date producing solid year-over-year revenue growth of 25% on top of the 20% growth in first quarter 2008. Quarter-over-quarter we increased our gross margins at 30% and reduced our SG&A as a percentage of revenue to 27.7%.

The net result is we continued to grow our business profitably with positive adjusted EBITDA for the fourth consecutive quarter. GTT has now reported trailing 12 months adjusted EBITDA of just under $1 million. This success is a direct result of our ability to execute on our strategy as a multi-network operator.

I would like to take this opportunity to reflect on some of the major news we announced since our last conference call. We highlighted some key sales, including DataPlan, a premier IT systems integrator in Germany, and Muzicall the London-based ring back tone service provider.

We launched our network migration services to enterprise and carrier customers’ worldwide enabling customers to outsource the management and maintenance of their key network facilities. We entered several strategic agreements, including FiberLight and VTL Wavenet, expanding our extensive network of global supplier relationships.

As a multi-network operator, we provide our customers integrated network solutions with greater flexibility than any single facility-based carrier can. By combining the best network elements from multiple carriers, GTT can offer our customers, particularly those with complex or global telecom requirements, highly customized cost efficient network solutions. We have access to over 800 telecom suppliers and over 100,000 network points of presence around the world.

GTT provides a global service footprint that supports more than 300 businesses in over 70 countries worldwide. We are driving the success of our multi-network operator business through the expansion of our supplier relationships, our global sales force, and our global product portfolio.

I'd like to turn the call over to Kevin now to walk you through the financials.

Kevin Welch

Thank you, Rick, and good morning, everyone. My discussion this morning will refer to adjusted EBITDA, which is a non-GAAP measure. A presentation of GAAP financial measures and reconciliation of non-GAAP information to GAAP financial measures is included in the press release we issued yesterday which is available on our Web site.

Revenue for the quarter of $17.3 million grew 25% over the $13.8 million of revenue in the second quarter 2007. On a sequential basis second quarter revenue grew 6% compared to the $16.3 million of revenue reported in the first quarter of this year.

We had strong first half of 2008, with revenue growth of 22.5% compared to the first six months of 2007. Our revenue growth continues to be driven by our internal sales activity and we ended the quarter with 82 total employees, 28% of whom are quota bearing.

Gross margin for the second quarter of 2008 of 30.1% remained relatively stable and up slightly from the 29% gross margin in the first quarter of this year. We manage our gross margin through our sales incentive structure, effective carrier management and revenue assurance processes.

Our selling, general and administrative or SG&A expense, excluding non-cash compensation was $4.8 million during the quarter which is an increase from $4.4 million in the second quarter of 2007. While total dollars increase year-over-year SG&A excluding non-cash comp as a percentage of revenue did decrease from 31.6% in the second quarter last year to 27.7% in the second quarter of this year.

On a sequential basis, our SG&A excluding non-cash comp increased slightly from the $4.6 million in the first quarter this year to $4.8 million in the second. While the revenue carries incremental commission cost the second quarter SG&A also included costs associated with the relocation of our London office to more appropriately sized space in London and employees' severance costs following the consolidation of financial operations into the U.S.

Incrementally, these contributed to just over $300,000 to the second quarter SG&A. Even with these costs our second quarter SG&A excluding non-cash comp increased as a percentage of revenue from 28.1% in the first quarter to 27.7% in the second.

As Rick mentioned, we have positive adjusted EBITDA for the second quarter of $424,000, and was our fourth consecutive quarter of positive adjusted EBITDA. More importantly, our growth in adjusted EBITDA continues to outpace our growth in revenue.

On a year-over-year basis, our revenues grew 25% and our adjusted EBITDA increased to $424,000 from a loss of $52,000 in the second quarter of 2007. This expansion of our adjusted EBITDA margin is driven by our ability to increase revenue and decrease our SG&A as a percentage of revenue, a trend we expect to continue.

Finally, as I mentioned, during the second quarter we moved our London office to space as more appropriately size following both last year's restructuring and the recent .consolidation of financial operations into the U.S. The lease hold improvements for the new office in London did increase our capital spending this quarter. We also spend additional capital in the quarter on the development of our single financial ledger and billing platform.

Total CapEx for the quarter was $400,000. With the move completed in system development finishing this quarter, we expect CapEx spend for the third quarter to decrease significantly. And we expect the savings from both our investments through lower lease and maintenance costs in London and more efficiency and scalability in our system.

And with that, I will turn it back to Rick.

Rick Calder

Great. Thank you, Kevin. Operator, we are ready to take questions now.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Yehuda Fruchter with Envoy Capital.

Yehuda Fruchter – Envoy Capital

Hi, how are you?

Rick Calder

Great.

Yehuda Fruchter – Envoy Capital

Glad to see the improvement in the results. Just had a couple of quick questions. I may have missed something, but without the charge for the moving of the office, EBITDA would have been about $700,000. Is that correct?

Kevin Welch

Yes, we had the incremental costs between the move and some severance costs associated with the consolidation of the work function that would have been an extra $300,000 to our adjusted EBITDA.

Yehuda Fruchter – Envoy Capital

Okay. So on an annualized EBITDA run rate, is it safe to say you guys are about $2.5 million excluding charges?

Kevin Welch

$2.5 million being –I mean $700,000, still times four; we’re in the $2 to $2.5 million range on a run rate basis.

Rick Calder

Yes. Yehuda, on a trailing 12 months, we've just on a million. If you just take our number 4 –24 times 4 –it would be 1.6. We haven't given future guidance in terms of where we expect to go. We do expect to be growing the business significantly. And if you take out what –our more one-time expenses, our non-recurring expenses, related to the move, and the consolidation of finance function, yes, we would expect this quarter would have been slightly better. And we expect that trend to continue moving forward.

Yehuda Fruchter – Envoy Capital

Then in terms of gross margin going forward, maybe you could just speak about that. I mean some of the any initiatives you maybe taking or may take just to improve the gross margin I know you've spoken about that in the past and whether you're working on anything right now in terms of that?

Rick Calder

I think our belief and our approach has been in the current model that we're in where we are CapEx light, and just to really reinforce the fact that the CapEx we spent in the past quarter was not related to the network in any way, shape or form it was related to tenant improvements or lease hold improvements in our new London office as well as some final sort of systems implementation for our consolidated global general ledger and billing system. So it was not network related and so, and we've had really from inception the concept of being an asset-light, facility-light model without the investment in capital to build a network. As a function of that we have historically and continue to believe that we can maintain our margins in the level that we've actually been in a facility free. We continue to look maybe optimistically whether it would make sense any way, shape or form to look at routes that might make sense –we have not done that at this stage and we would do that purely optimistically so but our belief is we can maintain the margins that we have historically reported and continue to grow revenue, grow gross margin and reduce SG&A as a percentage of revenue to drive continued bottom-line performance.

Yehuda Fruchter – Envoy Capital

So you still think in the next year at least the operating leverage from the business comes from the fixed cost of the SG&A rather than any gross margin improvement?

Rick Calder

It was that in –and as it most importantly from revenue growth. Absolutely that gross margin, while percentages maintain the same that revenue growth in we've seen it over the past two quarters, 20% and 25%, that revenue growth drives operating leverage across relatively stable SG&A, yes.

Yehuda Fruchter – Envoy Capital

Great. All right. Congratulations again. Good quarter.

Rick Calder

Thank you very much, Yehuda.

Operator

And we will take our next question from Bobby Melnick with Terrier.

Bobby Melnick – Terrier Partners

Hey, thanks. I just wanted a little bit to piggy back on the previous questionnaire. Your pro forma EBITDA margins for this quarter were in the sort of 4% range, adding back what you contributed to be the usual $300,000 odd expenses for relocation and consolidation. Would you expect that percentage to change much as you layer revenues on to the business?

Rick Calder

Thank you for question, Bobby. I would say as we continue to grow our business we would expect EBITDA margin percentages to continue to increase. And so, our goal would be to continue to see bottom-line performance on an absolute dollar and a percentage basis continue to grow. So we have sort of demonstrated that over the past four quarters, and we expect to continue to demonstrate. I would say at least from the characterization there are always nonrecurring things that occur in our business, each and every quarter, these happen to be slightly larger than normal. We did not recognize those as one-time expenses in any way, shape or form. We put them into our SG&A. As we said early on, right after I joined we took really one or two true one-time nonrecurring charges that we actually book into our financials as one-time as a function of the new initial integration of the two companies. So each and every quarter we have these types of things that are one-time in nature. I would say these that occurred in the last quarter were probably large than normal simply because of the move in the consolidation of the finance organization. So they were larger than they normally would be.

Bobby Melnick – Terrier Partners

I recognize that and in fact obviously even just a glance at your income statement shows that you did have the nonrecurring broken out last year's June quarter of a $4 million and that you did flow this one through. So I think that's obviously the –I mean Pricewaterhouse, but that’s the conservative way to do it, and then you break it out in the discussion so it's helpful to do that. I just wanted to reiterate and I recognize again a year ago, this company was on EBITDA positive and now you’re. So one doesn’t want to suggest that you've peaked. I'm just trying to get a sense as you look out across your business in the competitive climate what might be an appropriate EBITDA margin for the company as you look out –I don't know six quarters, eight quarters, whatever period which –one hates to use the word mature, but you get the business humming to where it's producing the kind of EBITDA margins that you think it can.

Rick Calder

Yes, I think that's a great question, Bobby. I think in general, as we look forward, albeit not to give the sort of specific numeric guidance, but we see no reason why this business can't be in the teen that we're in the small single digits right now, there is no reason we continue to grow that we should be –as you put it peaking out or capping out that we expect the business to be growing quarter-over-quarter we expect that true revenue and gross margin grow on an absolute basis though we expect margin to maintain in the ranges that we have been reporting with a reasonably fixed SG&A. Some portions of it will grow, as Kevin mentioned, commissions and other things. But reasonably fixed SG&A that we can get a leverage in the model to the bottom-line and grow both EBITDA on an absolute and on a percentage basis...

Bobby Melnick – Terrier Partners

Okay. So you're in the early innings now in terms of starting to ramp up the profitability of the business?

Rick Calder

I would say that's correct. We continue to expect to grow.

Bobby Melnick – Terrier Partners

Another question if I may –and I don't know how many people are in the call, but maybe you can address this and I will come back in queue if necessary.

Rick Calder

Please.

Bobby Melnick – Terrier Partners

Talk a little bit about your working capital and working capital management even with sort of a $3 million or $4 million in deferred revenues you still operate with the working capital deficit and obviously the company still has $8 million or $9 million of long-term debt versus a couple million in cash. Where are you in terms of working capital management and how would you like the balance sheet to change over the next again, 4, 6, 8 quarters?

Kevin Welch

Thanks for the question. Our working capital deficit –we've had a working capital deficit since really the two companies were combined, even in the predecessor entities, did operate at a working capital deficit. So our view is we are continuing to work down our working capital as business improves. We start to generate free cash we can use to manage our liabilities. We do watch cash closely. We stay on top of our receivables very closely. We did our debt restructuring towards the end of the last year that took a lot of the pressure off the near-term, maturities we put those out in 2010, and from a balance sheet standpoint, we are going to continue through the performance of the business to improve or try to work on lowering that working capital imbalance as much as we can. We are sort of in a steady state –we're not increasing that working capital balance. We're bringing it down I think as long as we're headed in that direction. We've shown the ability to manage through that, we'll continue on that path.

Rick Calder

And I think in terms of the balance sheet restructuring that we did at the end of last year, Bobby, I think we put the business on a path that we don't need external financing to continue to grow the business, and that we push the maturities of all of our debt and to bear in mind that $4.8 million of the $8 million or $8.8 million that is convertible debt. So that we believe that through the progression of the business over the next eight to ten quarters that we would be able to grow into that multiple options that we would have to be able to either retire, refinance, et cetera better our debt loads.

Bobby Melnick – Terrier Partners

Thank you.

Rick Calder

Thank you, Bobby.

Operator

(Operator instructions) And we will take our next question from James Dodd with Anthem Corporate Finance.

James Dodd – Anthem Corporate Finance

Good afternoon from London, both Rick and Kevin. And congratulations particularly on a very healthy revenue increase in the quarter reported. My question is to do with Vanco, the London-based VNO which collapsed and was put into administration. Can I ask with regard to the U.S. operation has that provided any opportunities in terms of customer fallout or in terms of access or contract acquisition?

Rick Calder

James, thank you very much for the question. I would say in general that the U.S. portion of Vanco which was a regionally called Universal Access and bought by Vanco and I think it was that 2005, had a very similar business model to the GTT. James, if you can put yourself on mute that would –I think we’re getting feedback. So we had a fairly complementary customer base with them. One of the things we have seen in and we have shared some of the similar customers with Universal Access and we have seen some nice continued business from those customers. And so from the perspective of their business model and what has happened to them at the market I would say in general that's had somewhat of a positive impact on us. I would like to point out very specifically that to the degree that they are parents of Vanco Plc, we believe our business was significantly different from their business and that –in particular in the conversation we just had in the last question that we believe we have put our business from the very beginning and the last –at the end of last year in a position to grow profitably without incremental financing. And I think from –through the history of looking at Vanco Plc, and the parent company their business have been growing, but with the addition of significant amount of debt and which ultimately drove them into administration. So I think that the capital light nature of our business and the ability for us to continue to grow our business profitably without the need for external financing is a real strength of our multi-network operator business model and we expect that that trend in that to continue.

Operator

And we will move on to our next question from Yehuda Fruchter with Envoy Capital, another follow-up.

Yehuda Fruchter – Envoy Capital

Hi, just a quick follow-up. I was wondering in the quarter what in terms of the sales, what percentage was recurring and what percentage was one-time sales?

Rick Calder

Generally all of our sales in a quarter are recurring in nature, our business model is one that all of the new business that we sell in a particular quarter is mostly recurring. We have a subscription-based business where our sales force is incented on month of recurring revenue and I think we reported in our press release interestingly that from real positive sign that 28% of our sales in the quarter actually came from new customers that we are seeing some real traction particularly with the carriers, with the enterprise accounts, with channel partners, integrators and VARs, the ability to really take our multi-network operator model and the bandwidth experts for folks who need bandwidth in diverse places around the globe. So we have actually seen some real traction and are being able to take our intelligence and our knowledge as a multi network operator with all the suppliers and the availability of bandwidth worldwide and really start to grow our business with lots of different clients.

Yehuda Fruchter – Envoy Capital

When you get the –when you sign up those new customers, is there an up front fee that you're getting paid or immediately you just getting them on sort of a monthly recurring revenue based?

Kevin Welch

Yehuda, this is Kevin. That was going to put a finer point on that, to that point exactly. Typically, when customers install there is an upfront installation fee and the accounting treatment for that is to recognize that revenue associated with that fee, over the life of the contract. So our contracts are 12, 24, 36 months. And if there is an upfront fee say $12,000 for a 12-month contract we recognize the $1,000 a month over the term of that agreement.

Yehuda Fruchter – Envoy Capital

So in theory your cash flow –if you're signing up a lot of customers your actual cash flow will be stronger than the accounting treatment?

Kevin Welch

From the sense that we do get the cash upfront for those installation fee, yes.

Yehuda Fruchter – Envoy Capital

Okay. Great. Thanks.

Kevin Welch

Yep.

Operator

(Operator instructions).

Rick Calder

Operator, as we wrap up the call I'd like to turn the call over to our Executive Chairman, Brian Thompson for a few closing remarks.

Brian Thompson

Thanks, Rick. I appreciate the interest in the company and the questions. I think we’re spot on. I wanted to comment today because this is kind of the first anniversary of Rick and his beginning of the development of the management team, leadership team of the company and I wanted to first of all compliment the management team of this company of doing all those things. We said we're going to do when we initially decided to put these two companies together in the development of GTT. Beyond that I wanted everybody on the call to understand that this is as somebody said in their questions this is the early innings of a game that we believe is extremely positive game, as the technology of communications continues to increase in its sophistication and its difficulty and globalization I think that GTT has put itself into a catbird seat from which it can really take advantage of relationships with carriers, relationships with large users of communications and to continue to develop and grow. In addition to that, we will – now that we have a stable base so we will continue to look at opportunities out there to broaden the base of the company, keeping in mind the very fundamentals that make it successful. So with that, I'm going to turn it back over to you, Rick, and thank you very much for a great year

Rick Calder

Great. Excellent. Thank you very much, Brian. We appreciate every one's interest in the company, attendance on the call and we very much look forward to reporting our next quarterly results to you next quarter. So thank you very much.

Operator

That does conclude today’s call. Thank you for your participation. Have a good day.

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