GTT, Communications Inc. (NYSE:GTT) Q2 2016 Earnings Conference Call August 4, 2016 10:00 AM ET
Chris McKee - General Counsel and EVP, Corporate Development
Richard Calder - President and Chief Executive Officer
Michael Sicoli - Chief Financial Officer
Brian Thompson - Founder and Executive Chairman of the Board
Jonathan Charbonneau - Cowen and Company
Scott Goldman - Jefferies & Company
Barry McCarver - Stephens Inc.
Barry Sine - Drexel Hamilton
George Sutton - Craig-Hallum Capital Group, LLC
Michael Bowen - Pacific Crest Securities
James Breen - William Blair & Company, LLC
Timothy Horan - Oppenheimer & Co.
Good morning and welcome to the GTT Communications Second Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference call over to Mr. Chris McKee, General Counsel and Executive Vice President, Corporate Development. Please go ahead.
Thank you and good morning. I’m joined today by Rick Calder, GTT’s President and CEO; Mike Sicoli, GTT’s Chief Financial Officer; and Brian Thompson, GTT’s Executive Chairman of the Board.
Today’s discussion is being made available via webcast through the Company’s website www.gtt.net. A replay of this call will be available for one-month. Dial-in information for the replay, as well as access to the replay of the webcast is available on our website.
Before we begin, I’d like to remind you that during today’s call, we will be making forward-looking statements regarding future events and financial performance made under the Safe Harbor Provisions of the U.S. Securities Laws, including revenue and margin expectations, projections or references to trends in the industry and GTT’s business.
We caution you that such statements reflect our best judgments as of today, August 4, based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control.
For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC including the 8-K we filed earlier today, which contains our second quarter 2016 earnings release. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances.
During the call, we will also discuss non-GAAP financial measures, including certain pro forma information; unless we specifically state otherwise the non-GAAP financial measures we will discuss today were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release and is posted on the Investor Relations section of our website.
I will now turn the call over to Rick Calder. Rick?
Thank you, Chris, and good morning, everyone. Thank you for joining us. I am pleased to report that GTT delivered another strong quarter of growth and margin expansion. Revenue grew by 36% from last year second quarter and 4% from first quarter 2016. Adjusting for OSN and Telnes acquisitions, the purchase of a small customer base and in constant currency, organic revenue growth was 8% year-over-year and 2% sequentially, consistent with our target range of 8% to 10%.
Adjusted EBITDA grew by 55% from last year second quarter and 5% from first quarter 2016. On a pro forma basis, adjusting for OSN and in constant currency, adjusted EBITDA grew 26% from last year and 4% from last quarter. Telnes and the purchase of a small customer base did not have a significant impact on adjusted EBITDA.
Our adjusted EBITDA margin expanded by 300 basis points from last year through synergies generated from our successful integrations as well as profitable organic growth. We also delivered 30 basis points of margin expansion from the first quarter despite significant investments in future organic growth, reflecting our continued focus on balancing growth and margin expansion.
During the second quarter, we completed the integration of Telnes and are happy to report that we did achieve a post-synergy adjusted EBITDA multiple of better than 5 times for this deal. As I mentioned, in June, we purchased a small customer base of enterprise customer contracts from RealLinx, a provider of managed broadband, voice security and hosting solutions.
Over the past year, these customers generated an average of approximately $900,000 in monthly recurring revenue, or MRR. This transaction began as a discussion regarding a commercial agreement for RealLinx to be an agent for GTT and in the course of these discussions, both parties agree for GTT to take ownership of the existing customer base. Mike will summarize the key financial elements of this transaction later.
In terms of our key organic growth initiatives, we now have approximately 100 quota bearing team members, having added 20 to 25 in the past six months, moving towards our goal of 110 to 120 by year-end. We expect these new team members to ramp up to full productivity throughout the second half of 2016. We are building our indirect channel and have a number of early sales wins from our increased emphasis on agent channel partners and the integrators.
We expect to build further momentum in the second half of 2016 into 2017. We now have approximately 25 Client Account Managers. The CAM team covers over half of our revenue base, providing additional support to our largest customers with a focus on reterming out-of-term business and enabling our direct sales reps to focus more time on new sales. We also added approximately 20 additional heads in other areas to support our increase in quota-bearing sales force including quoting, order entry, sales engineering, service delivery and our network operation center.
Overall, these investments in headcount to drive organic growth add up to approximately $5 million in incremental annualized SG&A, which we paid for with synergies from OSN and Telnes, putting us in the unique position of being able to grow margins while also increasing investments and growth. We are pleased with the momentum we have right now across these various organic growth initiatives and excited about the impact they can have as we exit 2016.
In addition to organic growth efforts, we continue to look for accretive acquisitions. As you know, we have a disciplined approach to acquisition which drives us to focus on opportunities with a strong strategic fit consistent with strategy of expanding our global network, adding to our cloud networking service portfolio and adding multinational client. That can be successfully integrated quickly within two quarters and at a highly accretive purchase price as a multiple of post-synergy adjusted EBITDA.
Our funnel of opportunities matching these criteria is active and robust. With the completion of the Telnes integration, our financial flexibility and strong capital markets access, we are in a position to pursue another acquisition in the second half of the year, should the right opportunity arise.
We had a very strong first half of the year. The entire GTT team was honored to have our accomplishments recognized by winning Ernst & Young's Entrepreneur of the Year award for the Mid-Atlantic region in the technology services category. The dedication of our talented team over many years of effort has allowed GTT to emerge as the challenger brand in our industry.
GTT provides a better way to reach to the cloud for our multinational clients and we deliver a superior client experience versus the large incumbent telcos by living our core values of simplicity, speed and agility. We remain focused on driving continued growth and steady progress toward our next financial objective of $1 billion in revenue and $250 million in adjusted EBITDA.
Now I will turn the call over to Mike for a review of the financials.
Thanks, Rick, and good morning, everyone. Second quarter revenue of $128.9 million, grew 35.6% year-over-year and 3.6% sequentially. The year-over-year increase was driven by the acquisition of OSN in October 2015 as well as organic growth and, to a lesser extent, the acquisition of Telnes in February 2016 and the purchase of the RealLinx customer base in June 2016. The sequential increase was driven by continued organic growth of full quarter of Telnes and, to a lesser extent, RealLinx.
On a pro forma basis, including OSN in constant currency, second quarter revenue grew 12.6% year-over-year, 3.4% sequentially. We have not provided pro forma financial results for Telnes or RealLinx since they're not material transactions. That being said, if you were to adjust prior periods for Telnes and RealLinx, revenue growth would have been approximately 8% year-over-year and 2% sequentially, in line with our target organic growth range for revenue of 8% to 10% per year.
Second quarter adjusted EBITDA of $30.3 million grew 55.1% year-over-year and 4.9% sequentially. The year-over-year increase was driven by the acquisition of OSN as well as organic growth, and the sequential increase was driven by organic growth.
On a pro forma basis, including OSN in constant currency, second quarter adjusted EBITDA grew 26.1% year-over-year and 4.4% sequentially. Telnes and RealLinx did not have a significant impact on adjusted EBITDA. The year-over-year growth was above our target organic growth range for adjusted EBITDA of 15% to 20% per year and sequential growth was in line.
Adjusted EBITDA margin of 23.5% expanded by 300 basis points compared to second quarter 2015 and by 30 basis points compared to the first quarter 2016. Our margin expansion is driven by operating leverage from organic growth as well as synergy realization from the integration of acquisitions.
Gross margin expanded by 110 basis points year-over-year and 20 basis points sequentially, reflecting continued network grooming efforts, the increasing utilization of our global backbone for enterprise traffic and network purchasing scale.
SG&A as a percent of revenue also decreased by 180 basis points year-over-year, reflecting realization of synergies from MegaPath and OSN as well as operating leverage and was flat sequentially, reflecting the reinvestment of synergies from OSN and Telnes into the incremental investments and organic growth that Rick highlighted earlier.
In June, we purchased a base of enterprise customer contracts from RealLinx, which was generating an average of approximately $900,000 monthly recurring revenue. We will pay a total of $13 million in cash for this transaction, including $6 million already paid in June with the remainder to be paid over the next 18 months subject to certain adjustments.
Per the purchase agreement, the payments are structured similar to a prepaid agent commission, but we accounted for the transaction as an asset purchase in accordance with GAAP. On an EBITDA multiple basis, we expect this transaction to result in a purchase price of better than 5 times as a multiple of post-integration adjusted EBITDA.
We recognized $1.1 million of transaction and integration costs in SG&A during the quarter, primarily related to Telnes, which have been excluded from adjusted EBITDA. We did not record any exit cost related to RealLinx as we only purchased the customer contracts, but we do expect to incur approximately $500,000 of transaction and integration costs in the third quarter.
First quarter net income was approximately $100,000, up by $11.2 million compared to second quarter 2015 and down by $800,000 from first quarter 2016. Excluding nonrecurring items, such as exit costs, transaction and integration costs and loss on debt extinguishment, second quarter net income would have been $2.8 million.
Capital expenditures in the quarter were $4.8 million compared to $2.9 million last year and $7.5 million last quarter. Year-to-date, our CapEx is 4.8% of revenue, in line with our target range of 4% to 5% of revenue. Given our CapEx light strategy, we continue to expect CapEx over the course of any given year to be in the 4% to 5% range. Unlevered free cash flow, defined as adjusted EBITDA less CapEx, was $25.5 million in the second quarter or 19.8% of revenue compared to $16.6 million last year and $21.3 million last quarter.
Net cash provided by operating activities was approximately $13 million in the second quarter, which includes $7 million paid for cash interest; $2 million paid for restructuring and exist costs relating to OSN and Telnes; $1 million for transaction and integration costs, primarily relating to Telnes; and $1 million of use from changes in foreign currency rates plus the working capital use of approximately $9 million, driven by reduction in AP and accrued expenses as we made a conscious effort during the quarter to get more current with our vendors.
At quarter end, our current liabilities were approximately $85 million, including $12 million related to acquisition holdbacks and $4 million related to deferred exist costs. Excluding these holdbacks and deferred exit costs related to prior acquisitions, current liabilities were approximately $69 million, which was $34 million less than current assets. We expect this working capital surplus to be a source of cash in the second half of the year.
As of June 30, our cash balance was $15.4 million and our outstanding debt was $435.1 million, excluding OID and non-amortized debt issuance costs. Our outstanding debt increased by approximately $16 million during the quarter, as we drew our revolving line of credit to fund the $10 million holdback payment from MegaPath in April and a $6 million payment to RealLinx in June.
As we announced on our first quarter call, on May 3, we entered into an incremental term loan agreement, which increased our outstanding term loans by $30 million, and we used the proceeds to repay our outstanding revolving loans, which at the time were $29 million.
In addition, on June 28, we completed the repricing amendment to reduce the applicable rate for both our term loans and revolving loans by 50 basis points. Each of these transactions indicates very strong support for GTT in the debt markets. Our outstanding debt now consists of $428 million in term loans with an interest rate of LIBOR plus 475 basis points and a 1% LIBOR floor; $6 million of revolving loans drawn against our $50 million revolving line of credit with an interest rate of LIBOR plus 425 basis points with no LIBOR floor and $1 million of capital leases, which will be repaid over the next 2 years.
Our leverage ratio, using second quarter 2016 annualized adjusted EBITDA was 3.6 times on a gross basis and 3.5 times on a net basis. This is within our target leverage range of 3 to 4 times, and we continue to expect to delever organically going forward through a combination of adjusted EBITDA growth and free cash flow generation.
We remain comfortable with our current debt levels, credit profile and liquidity. And we continue to see a strong demand for GTT in both the debt and equity markets should the need arise to raise additional capital in the future. In closing, GTT continues to deliver consistent performance and we remain on track for a great year.
With that, I'll turn the call back over to the operator. Operator?
Thank you. [Operator Instructions] The first question is from Jon Charbonneau of Cowen and Company.
Great thanks for taking the questions. Can you talk a little bit more about the booking trends you saw in the quarter and then maybe relative to what you saw in the first quarter? And then from a macro perspective, how and what sort of impact have you seen from Brexit? Thanks.
Sure. Thank you, John, for the questions. First, our booking trends are up. We actually had, I would say, the best total sales quarter we've had in our history in the second quarter up from the first quarter, driven by two things; clearly, as I noted in the prepared remarks, we've increased the size and scope of the sales force 1Q to 2Q and so we've seen that. But more interestingly, even as we add new reps, our sales rep productivity per rep is increasing as well, which is sometimes unusual when you add a lot of new reps, where we're not looking at tenured or untenured, just overall productivity per rep is increasing.
So we feel very good about the booking trends and the ability to take what is now our largest backlog in our Company history and flow that through with total installs and to the net revenue growth. And I would say, we have investment both in the wholesale carrier space as well as the enterprise in Europe, and we're seeing some good traction there, performers there, quarter-on-quarter is up. It's a smaller team than we have here in the United States. But we still see good signs of progress in Europe and Asia Pac and Europe across and our carrier group as well.
And I'll just add to that on the macro side, we only have about 14% of our revenue that's denominated in non-dollars, and a little bit more than half of that is euros and the other piece is pounds. However, we also have a number of expenses denominated in those same currencies. So the net impact to us of currency shifts is very small.
And then in terms of – if I could just follow-up. In terms of just kind of the conversations you've had with kind of your customers from an international perspective following Brexit, has there been any change in deal signings or bookings?
No. I think, as I said earlier, booking trend first quarter to second quarter is up, so we do see that. Relatively speaking, it's on a small base. So we definitely see the booking trend up. And I would say that there is more uncertainty in Europe. Most of our quota bearing sales force is in the UK for the United Kingdom for multinationals, where the big headquarters are in London, generally.
But we also believe the complexity of a more complex world adds to a firm like GTT, which is here to provide simplicity and global solutions for that multinational base. So we expect that booking trend would continue into the second half, that we would see growth.
Great. Thank you.
The next question is from Scott Goldman of Jefferies.
Hey, good morning, guys. I guess a couple of questions on my end. One, can you give a little bit more detail on the purchased contracts? What attracted you to this portfolio? What sort of the outlook or opportunity for maybe you guys to upsell some of your services perhaps to these acquired contracts that may not have some of these services?
And then, two, maybe for Rick. One of your peers that already reported earnings talked a little bit about weakness in the low end of enterprise. And certainly, it doesn't seem like there's any issues within your results here. But I wondered if maybe you could talk a little bit about the trends that you may see within different size, customers or different verticals that you are catering to? Thanks.
Sure. When one of the things we've said as we've continue to grow, when we look at acquisitions, larger acquisitions over time has been to both increase the scope and scale of our global network and expand our service portfolio. Over the past six, seven years, we feel really good with where we are right now with the service portfolio and the scope and scale of our global [indiscernible].
I think we have whacked it in effect and we look for the most for now is adding we call with potential prospects. So in conversation with RealLinx where they've cracked a whole number of accounts with a relatively narrow product set, we had the discussion about them becoming an agent for us. It's difficult to grow a relatively smaller business to the next level of scale, and that was very attractive to us. So we're very excited about the contracts and the new clients that we purchased and the ability to cross and upsell them on a global platform that we have.
So that will be attraction. We do see others who like that in the market, to add at very attractive acquisition prices, so to speak, relative to even direct selling new wedges of accounts that we can take our sales force against and grow very attractively. So that's a sense of why we approach businesses like that. Telnes [indiscernible] were very much into that camp as well.
On the enterprise side, we are very focused on multinational clients. So while we have a tail of small medium business, it is very much a small part of our business. I would say the top 800 to 900 accounts represent 90% of our business. And that's what we're really focused on. We have a very small to large tail that only represents about 10% of our business.
So we see in the top end of the multinational secular trends that continue our drive bandwidth demand, which, in our mind, makes every CIO of a multinational client addressable because they need more bandwidth across three major pieces. First, the access to the public Internet. Second, the file size, both voice and data of information that flows between their offices.
And then finally, the movement of IT applications into cloud service providers puts tremendous pressure on the corporate network to get secured connectivity to cloud service providers. So all of those are - cause CIOs around the globe to say, I need more bandwidth. Who can I use in addition to my incumbent telco? And that creates real opportunity for us at the high end, which is why, as we continue to grow towards an exponential objective of $1 billion, we're squarely focused in that multinational market.
Great. Thanks very much.
The next question is from Barry McCarver at Stephens Inc.
Hey, good morning guys. Good quarter and thanks for taking my questions. I guess, first off, Rick, in your prepared remarks, you mentioned your channel partner improvement. Channel growth revenues have improved. I was wondering if you could give us a little bit more color on what specifically you've done on that side of the business maybe compared to where it was just a year ago.
Okay. Great. So, once again, it's a little bit like Europe. It started very small in the first quarter. We had very small presence in it. And we announced, as we purchased Telnes and we put Jason Ness in charge of our channel program, and he has grown his team significantly. It still is one team. And our booking trend, just like it is in Europe, is up quarter-over-quarter, but still very small number.
So I still say it represents only about 10% of our bookings at this stage in [indiscernible] with the channel program. So we still believe this represents one of the big growth opportunities for us as we continue to grow our business. We built a very successful and direct sales force, direct to enterprise and direct to carrier.
And we see this is a highly complementary part of our business, to add agent channel partners who have great relationships with clients that we simply over time have not build major relationships with. We think we have the right product and service proposition for them. We have the great reach globally. And we simply have not built, at this stage, deep relationships with a number of channel partners. That's changing, and our booking trend is going in the right direction. But it's still, as an opportunity, a very small part of our business and a huge opportunity to grow.
The other thing I would add is Rick also mentioned in his prepared remarks that we're not adding quota bearing headcount. We're adding the support resources around it, and that's for both the direct and indirect channels. You have to invest in all aspects of the experience with the agents and the customers to be successful. And that takes a bit of time as well, but we are investing there, too.
That's helpful. And just one follow-up, Mike, probably for you. Really nice margin improvement again in 2Q. I know your long-term goal suggests 25%. So I'm kind of curious as to where you think margins could be in a reality over time. Are we coming to a plateau? Or do you still think there's a - there are steps up for the company?
Yes. We're committed to continuing to grow the margin while we grow the topline. As we've highlighted before, I think the margin expansion will be more moderate this year because of the investments we've made and the incremental headcount to drive future growth. But we still very much feel the 25% goal is achievable. And we don't have to be at $1 billion of revenue to get there. I think we could definitely get there sooner.
As a reminder, that $1 billion goal, which had the 25% margin attached to it, also implies that there's some future M&A as well. We don't know exactly what that will be and what its margins would be. So part of that is the uncertainty of that. I think all of equal, I would expect us able to hit the 25% margin and probably do a little bit better over the next few years. But in the near-term, we're more focused on making sure we're set up for more organic growth and still doing some margin expansion. But we're definitely not optimizing for margin expansion in the near-term. We are definitely investing for long-term growth.
Very helpful. Thanks guys.
The next question is from Barry Sine with Drexel Hamilton.
Good morning. Hi, gentlemen. A couple of questions. First of all, I wonder if you could talk about churn. What was it in the quarter? I believe you're a little bit higher to some of your peers in the industry. If you could talk about efforts to bring it down. I think that's what the CAM organization is all about. Or where are we in the process? And does that represent a reasonable growth opportunity over the near-term?
Thanks, Barry. Great question. I would say churn in the quarter is stable. We've been in the mid 1% range, and we're very, very much stable in that range. So we have not seen a downtick in churn yet, although we've now ramped significantly, first quarter to second quarter, the client account manager, or CAM program.
And their charter, the principal charter is to work on re-terming the existing book of business we have with our major accounts, that 800 to 900 accounts that I mentioned earlier. And it is very early days with that with respect to that investments. And that is what we believe can be a major source of opportunity to take that churn rate from the mid 1% range down over time closer to the low 1%, if not 1% range.
We are also, as I mentioned earlier, while we have 800 to 900 accounts, we do have a long tail of accounts that we manage as well and we do see probably slightly higher than that average churn rate with those accounts that are not our strategic focus, not on toward that churn rate, but slightly higher than we would see in the mid-ones.
And that's balanced by our strategic accounts of lower churn rates. But we do expect that that CAM program will have significant opportunity in helping us invest and achieve higher rates of organic growth, simply by freeing up the sales force to focus on more new opportunities and doing a better job of re-terming the out-of-term base that we have.
Okay. And then I would also wanted to ask about sales. Rick, you pointed out that it's pretty unusual to have strong sales force growth and good productivity numbers. Usually, they're reversely related. Where are you getting the sales people that you are bringing in? Are you bringing them in from competitors and maybe, they're able to bring some customers with them representing good productivity? Or are you bringing in sales people from outside the industry and training them on your products?
Well, no. We're definitely bringing them in from our industry. And as I mentioned at the end of my prepared remarks, we really have emerged as the challenger brand in our industry, and we are attracting some of the best talent, we believe in our industry to our banner. And we think, as we look at our ideal profile of a rep, is in the advertisement for the folks – for the reps who might be listening, we are looking for folks who have deep experience in our industry, like they understand communications, cloud networking business.
And they have good relationships with a roster of multinational clients that they can bring to our banner again. And we can train them on us, on our unique culture, our unique values of delivering an outstanding experience for clients with simplicity, speed and agility. And that doesn't take a tremendous amount of time. And I think you've seen that ability to ramp to reasonable productivity some of our new hires pretty rapidly.
So we feel pretty comfortable about our market opportunity, more than comfortable as I said earlier that the opportunity for addressing the increasing bandwidth demands for CIOs is there in multinational clients, and our ability to attract talent to actually go attract that opportunity is great now, which is why we're making this investment. Not only as Mike said in quota bearing sales force, but in all of the support resources, presale specialists, quoting managers, sales engineers, client account managers, et cetera, that can help us go attack this opportunity.
The other thing I would add to that is that we have the most opportunity for a rep to sell in the industry. The people who are coming to us from other places had constraints on them, only try to sell on net, only try to sell to this type of customer, only sell this product in these locations. We pride ourselves in being able to deliver every product we offer in any location in the world. And so that's obviously very refreshing for new reps coming in and also speak to their ability to drive more revenue per month because they have more ability to sell.
Great. The last thing I wanted to ask about is acquisition and a couple of aspects of this question. First, are there any product areas that you still see an interest in? You've added managed broadband. You've added voice. Second part of the question, what geographies are you looking at? I know you mentioned that the revenue is less in outside the U.S., but at the same time, you're seeing economic weakness in places like Europe and Latin America.
And then the third part of the question, are you still seeing attractive valuations for sizable acquisitions? The last think you've done have been relatively small? Are you still seeing the large type of acquisitions with GTT has been known for add valuation levels of comfortable?
Got it. So three sub-questions there. First of that, product, geography and value on size. So let me see if I could talk through each one. On the product side, I think we feel very comfortable with the scope and scale of our service portfolio. And I would say that the element that we've seen and the most increase in demand as we continue to grow is all around security.
And that while we have a very deep multi-tiered offering in the security space, there are always incremental things that we continue to look at with respect to bolstering that part of our managed service portfolio. So we think we are a leading provider at this stage of multi-tiered security solutions.
And there is clearly additional things that are of interest to the CIO community that we serve. We also continue to expand the scope and nature of the cloud services connectivity we provide to our clients, as multinational clients are now accelerating their movement of IT applications outside the four corners of their enterprise into cloud service providers.
Having a neutral cloud networking partner like GTT is a tremendous advantage for them, as they look to get connectivity to cloud services anywhere in world on secure private EtherCloud networks that we can provide them. So in the sphere of geography, years if we go back to our acquisitions just a few years ago, we're very balanced between acquisitions in the U.S. and acquisitions outside the U.S.
We simply have done several in the U.S. over the past. It doesn't say that we would look and we continue to look at acquisitions outside the U.S. I would say, given the currency change, we've probably been fortunate that we focused somewhat on acquisitions in the U.S.
We continue to have good opportunities to look at in EMEA and continue to look at opportunities there that would be good strategic fits for us from a value perspective. So as we talked about a very robust and active funnel, there are clearly opportunities there that we would think about, similarly to Lat-Am, that there are opportunities that we would think about there as there are many opportunities here in the U.S. also.
With respect to size, I'd answered the question that we're very disciplined in our view of acquisitions on a post-synergy basis, looking at things that are shaped to fit our strategy, that can integrate into our organization systems and network within one to two quarters and pay after those two quarters on an accretive multiple on investors. So we're very focused on that. We do see. We believe good opportunities in the marketplace, both on a small, medium and large basis.
And that's why we remain reasonably bullish that there are opportunities for us in the second half of this year. Let me be very emphatic to that. There's no [indiscernible] acquisition we feel very good about our nation and our ability to grow our business organically. We simply are good at acquisitions, identifying them and delivering their value by integrating them effectively and in many respect to paying the right price for them.
Thank you. Barry.
The next question is from George Sutton of Craig-Hallum.
Thank you. Just a follow-up on the productivity question earlier. Is it possible to break this out? I know this is a hard-to-answer question. But there are functions of productivity cross-selling, maturity of the sales force and then the upgrading of talent. Is there a way to break out where you're seeing those benefits? Or is it just a mixture of the three?
Well, there may be. We have - we do not do it internally in terms of looking across exactly those three. Maturity, we do look at maturity and look at reps as they come in simply because we do have, as we've said in the past, some so-called infant mortality where folks aren't maturing along the right path and don't end up remains. So you have a sales force churn. The majority of that sales force churn comes in that early maturity curve, so we watch that very rapidly.
We look at cross-selling. We don't strictly measure it, but we look at cross-selling across what products both our sales force is selling and which products and services our clients are buying in terms of cross sell. And we have seen, particularly after the OSN acquisition, some very significant uptick in the cross-selling of voice. So we historically had not been in the voice business really until 2015. And now, we've seen some real nice uptick in the cross-selling of voice services, both SIP trunking and hosted seats, which are natural add-on products to many of our core EtherCloud and IP service customers.
Likewise, we're seeing cross-selling in broadband. And that many of our large high-capacity clients have unique needs for smaller-capacity broadband internet services in many of their locations. And we've seen some nice cross-selling in that product as well. And we've also seen cross-selling in some of our more traditional customers who've only brought broadband services to buy high-capacity Internet and large EtherCloud connection. So we've really seen it across the board, which is why we feel really good about our current product portfolio. But in terms of strictly measuring it, we are very much focused on productivity per rep measured as M in an MRR term.
Yes. In terms of the reps that we're bringing on board, you have asked sort of upgrading talent. I think part of it is we're only targeting reps who have a demonstrated track record of selling $10,000 to $20,000 a month consistently. And so that is part of how you can maintain productivity as you ramp the sales force because unlike some other players in our industry who hire more junior people and train them and there's a much longer ramp, frankly, to even get to a much lower number, we just have a different model.
The - if we - to the extent we have folks to have quotas below $10,000, generally, they came from an acquisition that may have had a slightly different strategy. Rick mentioned we do have some smaller customers in the base that we've acquired over time. That's not our strategy going forward.
Perfect. One other question relative to the RealLinx deal. That sounds unique and sounds clever. And I'm curious if it's opened your eyes a little bit relative to some of your other relationships that could turn into similar-type opportunities.
Definitely, George. And we - as we approach smaller firms around that have interesting books of business, that have - that may have been trading with us somewhat as well as often extension clients, we see real opportunity to continue to add books of business on a small basis, so we call them contract innovations. And so that has always been part of our interest. And we do what we'd expect that we would continue to do some of that at very highly accretive acquisition effective prices.
The platform we built at this point doesn't require much, if any, incremental headcount to bring on a base of that size. And as you look at the landscape, there are dozens of companies, perhaps even more than that, across the U.S. and in EMEA that look similar to RealLinx and Telnes.
And I think that this is something that we could continue to do every quarter for a while. As we talked about before, you - we are - you're likely to see a balance from us of, clearly, always the organic growth piece, but also some smaller acquisitions and ones - some larger ones. I don't think that we're in a point where we're not doing larger ones, only doing smaller ones. We kind of still look at everything that's in the funnel and gauge what's actionable at the right price, at the right time and kind of that dictates which ones we do in which order.
Perfect. Thanks, guys.
The next question is from Michael Bowen at Pacific Crest.
Okay, thanks. A lot of questions have already been answered, but I'll go a little different direction. Rick, can you talk to us a little bit around the carrier wholesale pricing trends compared to kind of your pricing trends? There's always been that positive arbitrage between length to contracts. So wanted to see if you could talk to a little bit of any incremental positive or negative change there. And then as you look to higher reps, second question would be, is that typically linear? Do you think for the back half of this year? Or would it be weighted? We try to do – or do you see the visibility to bring in reps sooner or rather than later? Thanks.
Thank you, Michael, for the questions. First, in terms of pricing trends overall. We absolutely see the same thing playing out, where the costs that we are generating on the buy side, buying from suppliers is decreasing at a greater rate than the price that we give, and the effective price reductions that we see. We clearly continue to see the pricing trends has been, the entire time for an industry to come down on a price-per-bid basis and revenue in our next-generation EtherCloud IT services growth because bits are growing faster than price decline, but we clearly see it.
We continue to look at the concepts of owning fiber in particular areas, we don't see being economic for us. We'd like to be on every single fiber path in the world, major fiber path between our major carriers into tool data centers and our points of presence and being able to buy bandwidth now as we buy it on 100-gig lease waves with significantly a much better buying decision to buy and lease them on your terms and it would be to own any of that particular asset as we own and control one of the largest IT backbones on the globe.
So we clearly see playing out and the absolute magnitude of the cost of our core network actually has declined quarter-over-quarter. We spend less on maintaining and operating the core network than we did in the second quarter, than we did in the first quarter.
With prospect to reps, I would say it is opportunistic. So to the degree that the advertisement I made a second ago about great reps who are in our industry, if they decide to come join us, we'd be happy to have them joined. I mean, we have a detailed interview process we go through. But we would say it is opportunistic with respect to folks who are proven, as Mike said earlier, proven sales performance in our industry, understand our industry and have great relationships.
The door is open for us. The guidance that we gave with respect to getting to 110 to 120 by the end of the year is simply guidance at a steady progressive rate. To the degree that we see more talent earlier, we'd be happy to hire it earlier rather than later. But I still see us on that path of getting to 110 to 120 by the end of the year, and then growing beyond that into 2017.
Okay. Thanks. One quick one. Telnes, do you happen to have a year-over-year growth rate excluding that?
The Telnes is roughly $1.4 million, $1.5 million of monthly revenue. I think we have reported previously, it's about $17 million of revenue that they generated in 2015. And that deal brought them on February of this year. So that's a reasonable proxy for the adjustment for that one specifically.
Okay. Thanks Mike, thanks Rick.
The next question is from James Breen at William Blair.
Thanks for taking the question. Rick, can you just talk generally about the industry as we've seen the level 3 time where the deal closed. They had some churn there this past quarter, some of the Time Warner customers. And then with XO and Verizon attempting to get together, are there any changes you're seeing in terms of either impacts on the customer base or the opportunity in terms of hiring new employees? Thanks.
In short answer, yes. I mean, when – and I think I'll answer in the context of the color that Mike gave earlier. And when you're at a large corporation, particularly large corporations where two universes are colliding, your ability to stake out your territory becomes much more difficult. And so that's where we see that – the great reps who've had great relationships with certain accounts may no longer be on those accounts or have that opportunity to be on those accounts.
One of the great opportunities at being at a challenger brand like GTT is that, while we do have 800 to 900 great multinational enterprise accounts, there are 10,000 opportunities for us to go, most of them are on a site or do not have a rep covering them. So we have great opportunity with a great value proposition with a tremendous global reach and a great opportunity to differentiate on client experience. And we see tremendous opportunity for other reps in the industry to come join us as we continue to grow GTT.
I'm not sure if the question was more around he client side churn versus rep, but were you thinking more on the client side?
And I think, to a lesser extent, we would see that as well. I mean, TW Tel was more focused on smaller enterprise clients. So if there's fall out there, it's probably less likely to come our way, XO, Verizon there might be a little bit more there from XO had more of a multi-site Client base or has more of a multi-site client base, but still, they tend to be a little bit more focused on smaller clients than our target. So I don't see a huge lift for us from potential follow-up there on the client side. I'm sure there's at least some, but that's not a big driver for us.
The interesting thing for us, Jim, is that mostly, we attract the global incumbent telco, the legacy monopolies. And they are very much working to reinvent their business to move away from our business. So if you think about Verizon, for example, in their public statement about buying Yahoo, it is very explicitly to move away from becoming a communications Company to becoming a next-generation media company. So that actually is a very interesting opportunity for us as we love our business. We think it is our sole focus. And it is not lost on CIOs around the globe about what is transpiring at many of the large incumbent telcos.
The next question is from Timothy Horan at Oppenheimer.
Thank you, guys. Rick do you see anyone else doing what you guys are doing? I mean, the strategy at this point seems like it's still obvious and you're obviously performing really well.
I missed the first part and do we see any...
Anybody else doing like that.
Do you see any new competitors coming in the market? Who are you competing with right now than in the incumbent? Does anyone else kind of pursuing your strategy, which, at this point, seems fairly obvious?
Well, I'll come back to the point. We see a tremendous playing field, as Mike says, dozens and dozens of small players because it is relatively – if you have a great relationship with a couple of clients, two, three, four clients to build a business of $5 million or $10 million. That's where it gets difficult because you can do – a great sales person can sell one, two, three clients, and that's what we see with many of these smaller businesses, but then it becomes difficult.
It's difficult to add that value proposition without a global network backbone, without global REITs, without great power against suppliers as we have to continue to scale that business. So I would say, at the scale we're at, no. We see, as we look upwards from where $515 million in annualized and revenue, I mean, level three is probably the next closest as we look upwards as really playing in the multinational market. And they're good competitor in some aspects but very large, much, much, much larger than we are.
And so we see a really great opportunity as this challenger brand to walk into CIOs around the world and begin to take part of the share spend that they have because most of them are very happy to use more than one supplier. They, very much as a corporate strategy, want to use multiple vendors. So it's one of the reasons that we're investing so heavily in organic growth initiatives because we see that market opportunity for us.
Not to say there aren't some smaller - there are smaller businesses than ours, that a few of them have reasonable scale, as we've talked about in the past, and they - in some respect, some of them are good acquisition opportunities for us, if we - if they come at the right price. So we really are excited about the opportunity and over the past nine years – nine, 10 years, the - our opportunity continue to grow from this point forward, we think, is better than it was when we were significantly smaller firm.
And I would also say when you look at what we do, we are solving the hardest problems in telecom when you compare us to other providers. The multinational business is much more challenging because it involves, regardless of who you are, even if you're Verizon, it involves a lot of coordination with other providers all over the world and that's tough.
And so the longer we go by perfecting this model, the more attractive we become to lots of different players in terms of this platform we've built because the secular trends are definitely in our favor, as we've highlighted. And the notes aren't changing. So we have a nice window of opportunity here to build meaningful scale, both organically and through acquisitions, and really cement that challenger status and potentially emerge even above challenger, whatever that next step is.
Rick, can you maybe just - you don't have to give the exact number. But roughly, what percentage of your growth or incremental growth comes from existing customers? And it seems like you're just scratching the surface in cross-selling these new products and services. Maybe just talk about from your larger customers what percentage of their spend do you think you have now of ultimately what you can capture.
Sure. I mean - I think, by and large, for the $800 million to $900 million that I mentioned, I think we're well under 10% on average of their spend across the top clients. So we clearly have growth opportunity. There are many that were more highly penetrated and some that were less. But I would say we're under 10% of their total spend. And on average, I think, we've commented in the past, we generally see our new sales mix at 70-30, that 70% of our business still comes from that existing base of client and 30% as we crack new clients in any calendar year and continue to grow those.
And they become existing clients in our parlance in the subsequent year. So yes, we see tremendous opportunities in both areas to continue to penetrate the client base that we have and then to add and start to penetrate new global opportunities as we continue to grow.
End of Q&A
That is all the time we have for questions today. Now I would like to turn the conference back over Mr. Calder for closing remarks.
Great. Thank you, operator. And I'd like to turn the call over to our Chairman, Brian Thompson, for some concluding remarks.
Thanks, Rick. And Mike, thanks for a good call. I would like to chime in by saying that once again, we've seen this team put in place a terrific quarter of growth and improvement. And the one thing that we don't often go into, as this team is building this worldwide IP, broadband, cloud infrastructure technology and machine is to support the worldwide enterprises and carrier needs is that behind the scenes, this is not a western movie set. You're not just buying companies and then letting them run, as I have said many times.
This team is fully dedicated to any acquisition, either of new customers or new companies to integrating them directly into a single company that really drives for the successful support of those companies and carriers. And to do that, the one thing the team has not spend a good deal of time on, and I'd like to bring forward for all of you on the call to understand, they have taken this company from a smaller company around $50 million to about $500 million in revenue and complexity from being a fairly straightforward one or two product company to a very sophisticated company.
Doing that, building on the inherent systems that we had and have is a huge task so that the beauty of what they've been doing is to not only acquire, integrate and expand the kinds of margins that we have, but to use those expanded margins to create the support structure and systems and the capacity and strength of those systems to ensure that not only can we serve those clients well, but we can grow because we can scale and we can expand our strength and our capability worldwide to deal with the issues. And I have to say, in the last six months, though most of you have not been aware of it, we've changed the engine. We've put in new technologies into all of these systems. And we will continue to do so.
So that we're looking forward rather than trying to solve problems looking backward. This team has been uniquely capable in my experience of doing both at the same time, using the balance of the development of new customers and new strengths and, at the same time, building the backroom systems and support that make sure that we've got the capacity and capability to continue the growth and even expand it.
With that, I want to kudos to team. But thank you all for being on the call. And I'll turn it back to you, Rick, for closing.
Great. Thank you very much, Brian. And we very much appreciate everyone's participation, and we look forward to reporting our results for the second half of 2016. So thank you very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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