EarthLink Holdings Corp (NASDAQ:ELNK) Q2 2016 Earnings Conference Call August 9, 2016 8:30 AM ET
Trey Huffman - SVP & Treasurer
Joe Eazor - CEO
Louis Alterman - CFO
Mike Crawford - B. Riley & Company
Scott Goldman - Jefferies
Mike Latimore - Northland Capital
Ana Goshko - Bank of America
Umesh Bhandary - Jefferies
Arun Seshadri - Credit Suisse
Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink's Second Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn the conference over to Mr. Trey Huffman, Senior Vice President and Treasurer of EarthLink. You may begin your conference.
Thank you very much, Brandy. Good morning, everybody. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website at Earthlink.net. Following our comments, there will be an opportunity for questions.
Before we continue, I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are intended to identify certain principle factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not indented to represent a complete list of all risks and uncertainties inherent to the company's business.
In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them and a reconciliation to the most comparable GAAP measures, please refer to our earnings release and the Form 8-K that has been furnished to the SEC, both of which are available on our website at Earthlink.net. After Joe's opening comments, Louis Alterman, our Chief Financial Officer will describe the company's financial results.
Now, I'm going to hand things over to Joe Eazor, our Chief Executive Officer and President.
Thank you, Trey and good morning, everyone, and thanks for joining. I'll open with a few updates and then Louis will walk you through more details on our financial performance and outlook. Q2 represent another solid quarter for EarthLink. As you know, over the past two and-a-half years, we've built a much stronger company both operationally and financially. Some of the improved performance trends are highlighted on Page 4.
As a brief recap, we've established a clear strategy for the company and specific marching orders for each business unit; we have rationalized our products and divested or shut down non-core and under-performing assets; we have significantly improved profit margins and cash flow; we have generated positive net income for the second quarter in a row; we have materially strengthened our balance sheet and reduced interest expense; and we have shifted more attention to growth by investing and differentiating our products and services and undertaking a go-to market transformation.
We are committed to continually improving our performance, but our overarching goal is that of industry leadership. I've laid out a transformation plan on path of leadership before as shown on Page 5 and believe we continue to take good steps on this journey. Some recent highlights include we've hired a world-class CIO and Head of Products, Jay Ferro, who is leading our efforts to put systems, processes and solutions in place that will further differentiate us from the market. He will lead our digitization efforts that will ultimately deliver a unique customer experience versus our competitors. Jay comes to us with a long history of successful technology deployments and transformations and is already starting to make a positive impact in the short period of time.
We also acquired Boston Retail Partners in July, a leading consulting firm focused on helping the retail and similar industries utilize technology for business success. Our services via BRP will now include technology strategy, cloud migration, systems implementation and network design and optimization. BRP comes to us with clients that include many household brand names in the industry. This addition to our portfolio will help us bring further value in differentiation to our already-leading position in the retail restaurant and hospitality sectors.
We could now engage at the highest level in a customer, help them to find a path to becoming the retailer of the future, navigate unified commerce and leverage the cloud and optimize the data and cloud network and communications to realize maximum value. We have received very positive feedback from our respective customer bases and are seeing early signs of success.
We've also made good progress in the development of our SD-WAN offering. We are partnering with an industry leader of this space, VeloCloud and have had good success with a number of customer trials. We're delivering a truly differentiated set of SD-WAN and hybrid network solutions as well as unparalleled cloud voice and unified communication solutions over an SD-WAN network. We are on track for full-scale launch in Q3 with a strong pipeline already developing.
And finally, as you know, we completed the refinancing of our credit revolver -- increasing the size from $135 million to $175 million and are redeeming $90 million of our expensive and unsecured notes. This is an excellent outcome that is the culmination of significantly improved cash generation and the focus on strengthening our balance sheet that can help us facilitate growth in the future.
Turning to Page 6, each of our business units made progress in the second quarter as well. In the consumer business, churn improve to a record-low of 1.6% during the quarter and revenue continues to flatten. I continue to be impressed by the efficiency and effectiveness of this team in terms of mitigating churn and finding additional sources of revenue in what is declining sector. For example, we are seeing strong early demand for our recently launched HyperLink service, a fiber-based high speed solution for our consumer customers.
In our small business unit, we continue to deliver consistent operating performance and enhanced deficiency. Our level of intelligence in our analytical six-box approach to managing our customer-base has enabled to improve performance. As such, we have increased our gross bookings year-to-date by 24% versus 2015. However, the reality of the small business CLEC market is that legacy products will continue to decline across the industry and we need to accelerate our development and launch new products and services aimed specifically at the small business customer in order to mitigate this decline, much likely we continue to do in the consumer business.
Our carrier and transport business continues to perform well. Bookings remain high as demand for transport services in our unique routes are strong. We are seeing some price compression for lit [ph] services and we're also seeing some of our social media customers moving to dark fiber rather than lit service. As an example, we had one customer to turned some lit services in Q2, but also acquired some dark strands from us over the last few quarters. Sales of dark fiber don't show up in a same way on a P&L as lit service, but they generate cash and provide a significant overall economic return.
Finally in our enterprise and mid-market business, we've made progress in a number of areas related to our go-to-market transformation. I've already mentioned the early progress on our SD-WAN solution, but we're also seeing signs of progress on unified communications and in our sales transformation efforts. Some good leading indicators include a stronger pipeline and as I've mentioned before as part of our refocusing this business unit on WAN, UCAS [ph] and value-added services, we spend some time cleaning up the pipeline and are in the process continuing to transform our sales motions. This is starting to bear some fruit with pipeline growth of 36% from Q1 to Q2.
We were also improving our sales productivity, up 6% last quarter and up 14% from the year ago. And we have driven a 23% decrease in our install intervals while focusing more and more attention on the customer experience. This is all good stuff, but we still have a significant room to improve to build a strong and sustainable growth engine, overall while we are making progress on pushing the team to accelerate this pace of our improvements.
I would like to make a few more comments in closing. We've transformed EarthLink into strong consistently-performing company, strategically operationally and financially. This has been accompanied by the significant strengthening of our balance sheet and reduction in leverage. We have a world-class team in place and are shifting more and more attention and effort beyond basic operating improvements to delivering net growth. Even with all of these progress, we have significant room to improve and are committed to building a leading networking and communications company in the cloud world.
With that, I will turn it over to Louis to walk you through the financial details and let Louis go. Louis?
Yes. Thanks, Joe. As Joe said, we've made progress in a number of areas of our business in the second quarter. Many key performance drivers are improving productivity pipeline install intervals. Of course I'm eager to see those improvements and leading indicators translate to revenue results, but the foundations in place with the right team and disciplines. I'll begin with revenue and gross margin on Page 7.
A few reminders about this presentation. First, we sun-set our tech care product last year and sold our remaining IT services assets in Q1 of 2016. Both actions impact the sequential and year-over-year comparisons. Second, dispute settlements on our non-recurring items do regularly impact our results. In Q2, those items improved the revenue by $700,000 and cost of revenue by $3.7 million, the prior quarter in Q1, the improved revenue by $3.1 million and cost of revenue by $3.9 million. Finally in Q1, we did take targeted pricing actions that improved sequential comparisons at the beginning of the year, but those pricing actions were not repeated in Q2.
With that context, I'll start with enterprise in mid-market. Total revenue from enterprise in mid-market was $98 million. When you normalize for settlements in our IT services actions that I just mentioned, underlying revenue declined about 3% sequentially and 8% year-over-year. I won't repeat all Joe's comments. Obviously, we're on the same page. The go-to-market transformation is taking hold, operating disciplines in the associated metrics are all improving, but we do need to accelerate that progress to improve that revenue trajectory.
Small business revenue was $57 million for the quarter which on normalized basis was down 6% from Q1 and 24% year-over-year. The analytical tactics the SB team has deployed have given us more targeted and surgical ways to understand our customers to improve their profitability and the increased renewal rates. Those actions have strengthened the business, but there still is real secular pressure hitting our top-line and we've got more work to do to flatten the small business revenue trajectory. Launching new products and services is an important item for that team.
We recorded $35 million in carrier transport revenue for Q2. That's a slight sequential decline as we experienced the churnment in April that Joe mentioned. However, it was still a 3% year-over-year increase as the team had a lot of success in the marketplace over the past year and-a-half. We've got unique routes, we have the best service levels and customer churn up process in the industry and in addition, we're adding new products to the carrier and transport portfolio. So all churn events can have a lumpy impact on sequential comparisons, the businesses performing well and has room for further growth.
Finally, consumer-generated $50 million of revenue in Q2. A year ago, we have recorded a $600,000 favorable revenue settlement. When you adjust for that settlement, consumer revenue is down 9% year-over-year. That's an improvement every quarter basically and it improves. In churn, this quarter improved to another record-low of 1.6%. Revenue continues to flatten. The addition of HyperLink is only going to help.
After the quarter ended, we did sell about 12,000 subscriber relationships, consumer subscribers to one of our network providers. These customers currently contribute about $500,000 of revenue and $150,000 of gross margin per month. In Q3, we'll receive just under $4 million of cash proceeds for that sale and begin a six-month transition plan. For the second half of 2016, we'll record about $350,000 less revenue per month than we have been recording. The gross margin will be flat to what has been and then the customers will be completely transitioned beginning in January of 2017.
In total, the company generated $240 million of revenue in the second quarter. We have taken to account the adjustments and settlements shown at the bottom of the page, along with the impacts of IT services actions. Revenue in gross margin declined about 11% year-over-year. Gross margin faces a natural pressure in small business enterprise and mid-market because we tend to add new customers at lower risk margins than legacy customers. However, thus far we've been able to more than offset that with access management and network grooming activity, along with targeted pricing actions. So our gross margin rates are well above levels we saw a few years ago. Over the long run, we know these actions will only take us so far and that's why we continue to be focused on flattening and ultimately growing the top-line.
Page 8 represents the rest of the income statement. SG&A improved $5 million or 6% sequentially and $17 million or 18% year-over-year. Just under a third of the cost reduction was due to the IT services sale. The rest was good old fashioned managing the cost structure and we remain highly proactive and focused on doing so. We generated $57 million of adjusted EBITDA in Q2. That's down slightly from the recent peak of 24.3% in Q1. We had 23.6% in Q2, but it does represent an increase over a year ago on lower revenue and is still about 400 basis points higher than the levels of a couple of years ago.
We invested $17 million of CapEx in Q2 and about $35 million year-to-date. The first half of the year is seasonally lower than the second half and an addition over time, higher customer installs will naturally come with success-based CapEx. But we've made capital efficiency an important measure in our company as we've added focus and we're disciplined and our processes have matured. We've been able to get significantly more efficient with each CapEx dollar even as we invest to maintain and grow the business.
In Q1, we produced our first quarter of positive net income in four years. We've built on that success in Q2 with net income of $4 million. Amortization expense continues to decline. It will tick down again in Q3 as historical acquisitions get further in the rear view mirror. In addition, we incurred less interest expense in Q2 as a result of our ongoing debt reductions.
Page 9 gives a view of the balance sheet in our cash flow. We added $16 million of cash to the balance sheet in the second quarter. As Joe pointed out, we refinanced our credit facility in late June. That was an important step for our balance sheet. The prior facility was within 12 months of maturity, so we needed to extend it to give us more flexibility and we did so.
We initially marketed $150,000 million facility. We received strong support from our banking partners. The facility was well over-subscribed, therefore we were able to upsize it the $175 million -- $50 million of the new facilities in the form of the term loan, the remaining $125 million is structured as a revolver. Since we closed the facility, we repurchased $90 million of rate in 7/8 [ph] senior notes. To do that, we used the $50 million term loan, $10 million of revolver and about $34 million of cash on hand. That repurchase closed last week. As a result, our run rate interest expense is now another $6 million lower than it was three months ago and a total of $18 million lower than it was at the beginning of last year.
Our growth leverage ratio of debt to adjusted EBITDA remains right around 2 times and we all remember those in 3s not that long ago. With the year half-way behind us, we are updating our 2016 guidance. We showed that on page 10. We're trimming $5 million on the top-end of the revenue range and now guiding the $950 million to $970 million of revenue. We're increasing the bottom-end of the adjusted EBITDA range by $5 million and now guiding $210 million to $220 million. We're also improving our CapEx guidance by $10 million, so the new range is $85 million to $95 million. And lastly, we're improving what was originally net loss guidance and we're now guiding to $3 million to $9 million of net income.
In closing, first of all, look, it's easy to skip past it, but the team has made a lot of improvements to our business. It shows up in our cash flow, it shows up in our net income and it shows up in our balance sheet. That said, we're not satisfied with the top-line. We know we have to accelerate the sales churn and revenue improvements that we're making in all segments of our business and we've set that expectation with our team. In the meantime, the BU model is proving to be effective at driving accountability, focus and operating efficiency. As a result, we continue to generate strong levels of cash flow and we continue to be disciplined in how we use that cash and how we finance the company. Finally, we strengthen the team by adding Jay Ferro in the talented resources of BRP. I've said it before, it's difficult work to flatten to top-line and to do that while simultaneously maintaining profitability in cash flow, but we have a strong team. They're up to the challenge and excited about our future.
With that, Brandy, I'd like to go ahead and open up the line for questions.
Thank you. [Operator instructions] Your first question comes from the line of Mike Crawford of B. Riley and Company.
Thank you. What was the impetus for the consumer subscriber sale and what was the basis that you made with the sale?
Yes. Thanks, Mike. We had 12,000 subscribers with one partner. It was something where basically it was probably more trouble than it was worth at that point for the partner. So we came to a joint agreement of something that was a fair deal, simplifies things from our perspective so it works out for us and works out for them in terms of just eliminating a small thing that had to keep up with everyone. It was not a partner where we're adding new subscribers, it was just a run-off scenario.
And then on the lit services pricing pressure, is that across the board, or is that just from some more sophisticated customers like the one churn in April?
Well, certainly there's different levels of price sensitivity and it depends on the route. Some of our unique routes have less, we're able to command a premium. But overall, people moving from 10gigs to 100gigs, that created a pop and then over time, you're going to see deflation of 100gigs and that's what we're seeing, but they need more and more of them. So there's this offset where we're thinking of more volume, but obviously lower rate and I think that's pretty pervasive in the marketplace. But again, where we have the unique routes, it doesn't hit us quite as much and also, those same customers will occasionally get such demand that they want to flip to dark and obviously if they're buying lit services on the route, we have dark strands on that same route and can be there to support that if that's what it ends up needing to be.
Okay, thanks, and the last question is on the SD-WAN strategy. It seems like you're working with more than one partner to help you bring this to market. How much of it is really proprietary, what EarthLink brings to the table? Or is it more of you're using these partners to bring proprietary partner? You're just putting together a service package?
Yes. With any services business, Mike, its how you deliver the technology that's the differentiator. We partnered, we think with the best in breed technology at VeloCloud in terms of just solid SD-WAN, the equipment and software technology that the layers of service in how we deliver it in automation and digitization software on top of that is where the differentiation comes in. How we deliver that, our own intellectual properties, how we deliver the service, the software tools that we use to interact and to facilitate the SD-WAN services to our customers, the data analytics that go with that and the level of support that they get all the way from the install to the care and repair. There's significant EarthLink value add on top of the technology, but we feel like we did partner with the best of breed technology out of the gate in VeloCloud.
Great. Thank you very much.
Your next question comes from the line of Scott Goldman of Jefferies.
Hi. Good morning, guys. Joe, maybe you could comment a little bit – I know in the prepared remarks, you guys mentioned the small-medium business bookings, but maybe if you could just talk a little bit more holistically about bookings in the quarter and then I think the last quarter on the CapEx guide, you mentioned that that was ultimately dependent on bookings and you guys brought down the high end of CapEx this quarter by about $10 million. I'm wondering if that, Louis, ties into capital efficiencies you talked about, or if that's maybe a function of some of the booking trends that you're seeing year-to-date in going forward? Thanks.
Yes. I think there's multiple components to driving the CapEx. One is we do much more focus on capital productivity and capital efficiency and how we deploy our capital. I think that is the biggest driver of our improved overall capital deployment in the level we're getting on our capital productivity. Bookings are a significant source or use of capital and we have changed the nature of our bookings and just to be honest with you, I feel like bookings are a little behind where I'd like them to be for the year. But the nature of the bookings are changed because if I look at an SD-WAN or some of the newer solutions around UCAS and others, the capital of intensity is lower for those solutions, than it is for traditional CLEC, or MPLS type services, or growth products, or strategic products have a lower capital intensity required.
And secondly and honestly, I feel like we've got room to improve. We've seen good traction on the pipeline, we're seeing good progress in some areas of bookings, small business and some areas of our growth products that I think the key is to continue to drive bookings further and faster.
Great. And then maybe just an update, Joe, on your thoughts around near-term improvements you can make and can you make progress on the enterprise go-to-market strategy? Are there some plans in place in the next three to six months and you think it can move the needle a bit quicker?
Yes. I think we've got all the right foundational elements going. We've made good progress in our partner channel, we're seeing good pipeline, have closed some good deals through our partner channel. Remember a couple of years ago, right after the acquisitions when the companies were put together, we stumbled a little bit out of the blocks after the acquisitions and the partner channel dial is back, so we've been slowly recovering that ever since over the course of our transformation. Like I've told you last quarter, we're seeing good progress there and we continue to see good progress there on pipeline development and bookings.
We have started a transformation about four to five months ago in our direct sales force. We're starting to see good traction and a number of good deals in the pipeline on direct sales force – a lot of them are SD-WAN deals honestly and a few good old fashioned MPLS and UCAS deals as well. That transformation is under way under a new leader. I see good signs of progress there. Again, good pipeline development. The booking should start to materialize for the back half of this year and well in the next year and I feel good about where that's headed. Starting that transformation over with a new leader four or five months ago probably set us back a little bit, but I start to see the momentum building there.
On the inside sales front, in our smaller mid-sized market, as well as in our small business customer segment, we need to continue to develop products that are relevant in new revenue streams for those smaller customers. Like I mentioned, the legacy CLEC products are in secular decline, we have our SD-WAN product, we'll also play down market as well so we feel good about that as well as we scale down and have an automated cloud voice product or a unified communications product that will help us in the smaller customer segment. More products are needed there though, so we have a lot of work to do.
But I would say in every element of our go-to-market transformation, I see signs of progress. Even if it's not quite as fast as I would like it, it's coming and I'm confident that we'll be on the right trajectory in that growth in the not-too-distant future.
Great. Thanks a lot, guys.
Your next question comes from Mike Latimore of Northland Capital.
Great. Thanks. Nice job on the profitability end. On the bookings, what percent of the bookings come through partners versus direct to this point?
Yes. Partners are around the third. Obviously I'm not counting carrier and transport when I talk about that, but if you look at our enterprise in mid-market and small business, but in particular enterprise, about third partner.
I think you said you expect bookings to improve in the latter part of this year, or should we think more kind of fourth quarter? Or do you see some developments in the third quarter?
There should be some developments in the third quarter and the fourth quarter, Mike.
Okay. And then on SD-WAN, just trying to get a sense of how big those deals might be? What would be an annual contract value of a good-size SD-WAN deal for you, guys?
It depends on the size of the customer and the number of locations. SD-WAN deals are similar in size because they're often hybrid network deals. Meaning, SD-WAN is deployed alongside an existing network to get more value out of the network. Maybe bringing in broadband and pure SD-WAN for new locations et cetera. So the content or the size of the deals are very similar to what we've seen so far in terms of content, our dollar value per store or per location. Over time, as people deploy pure SD-WAN deals, they're often bundling in UCAS with that because the reliability of a voice solution on SD-WAN is enormously better than without it. Again, our current pipeline doesn't show material degradation inside the deal or dollar per location on SD-WAN at this time.
Got it. And then on your UCAS deals, are you going to be using meta switch as well for the SD-WAN, UCAS solution?
We are and we're continuing to invest in our UCAS capabilities in that scenario. I think we can do a lot more and I think we've talked about that before. So we're continuing to look for different features, functions and maybe additional solutions to add to our kit, if you will, in our UCAS world. We see a great demand. Like I mentioned, the combination of SD-WAN, UCAS for 100% uptime on voice at a lower cost than even possible lines is a big deal. I think voice will be a huge benefactor of SD-WAN.
Okay. Thanks a lot.
[Operator instructions] Your next question comes from Ana Goshko of the Bank of America.
Hi. Thanks very much. Just on the competitive environment, could you just update us on what you're seeing both on SMD side and on enterprise side? Clearly, you talked about on the SMB side for the legacy customers, but to which degrees is still cable? Do you see increased competitiveness from the ILEC and then generally the same question on the enterprise side, to the degree that customers are turning, where they're going and what are the major reasons?
Yes. I think it's the same trend that we've seen with respect to the small business in any peer CLEC services whether that's a small business CLEC customer or even a larger CLEC customer. People are transitioning off of expensive T1 lines and LAN side voice to fiber and digital solutions. Especially on the small business sector, cable cos and others have been sort of making that transition and have accelerated that transition and that's where a lot of the CLEC revenue is going in those small business sectors.
Again, hosted voice solutions, SD-WAN solutions, CLEC, some other things that we have that we're working on to develop and take those markets will be good revenue streams to help offset those declines, but those declines away from traditional legacy copper-based services to fiber-based services is going to continue. So we're working hard to mitigate that with new products that leverage newer technologies.
In the higher end, the enterprise in mid-market space, wherever there's copper deployed and copper-based solutions, obviously there's that same kind of effect, but there's so much more opportunity when it comes to migrating workloads to the cloud, generating a very significant requirement for upgraded network and the reliability of the network, the ability to manage the network in a way that it optimizes how applications perform on the network and SD-WAN is a great solution for that, but there are other solutions that optimize an MPLS network to do the same thing.
So we have a low market share of relatively speaking given our size and the opportunity in front of us on the network and UCAS side for weighing Hybrid WAN, SD-WAN, for UCAS as well as value-added services in the enterprise space is wide-open to us. There's not a market challenge there, in my opinion.
Okay, thanks. And then just as I'm looking at this sequential performance, I know last quarter you highlighted that there's the price of [indiscernible] that's an annual chain. Is there a signal in churn that we see in this quarter? Is there a spike in churn after you implement those pricing increase typically?
Yes. Typically there's a little bit of elevation in churn revenue, something that we anticipate and as we've gotten smarter with the six-box, not on the small business side, we have a better ability to be more surgical on how we implement the price increases and have a less of an impact and better ability and handle customer calls if we get them and save them. There is a little bit of an increase in churn that you have, following a price increase, but what we saw was consistent with what we expected.
Okay, great. Thank you very much.
Yes. Thanks, Ana.
Your next question comes from the line of Umesh Bhandary of Jefferies.
Hi, guys. Thanks for taking my questions. Maybe the first question on I guess the balance, you guys have done a pretty nice job in terms of producing leverage, now that leverage are around two times. What are sort of positive in terms of how low you want to get and how you want to use your free cash flow -- are there some cash from shareholders or debt [ph]? Give your thoughts on that. Thank you.
Yes. Thanks, Umesh. As long as we've got these 8 and 7/8s, they've kind of got a bull's eye on them from my perspective. I sort of said on every call that I didn't like them. We started with 300 million of them, we're down now to 77-80 range and so never say never, but as we get excess cash, I'd say my probability so far has been and will continue to be to take those out. We monitor the markets really closely. We talk about how deep we know what's going out there and if we get an opportunity to do something bigger with the balance sheet, that will be interesting, but right now we've got 105 plus call on our 7 to 38s and so thus far we haven't seen a business case or a NPV calculation that works to do something bigger, but obviously we're paying attention.
As far as the dividend, we've got a dividend, we think it makes sense given the profile of our company and then obviously we did the BRP acquisition and we want to preserve flexibility to do anything that will accelerate our business. From an M&A perspective, provided it passes the [indiscernible] that we have talked about which has to make sense strategically. We have to be able to fiddle in and run it well and integrate it operationally and there has to be a financial return that makes sense. Try to preserve flexibility for those things, but else, equal. I've got a 9% guaranteed return by taking out those 8 and 7/8s. That's something we're leaning towards.
Got it. And then one sort of related to the business, just given all the chatter going around special access, how that potentially impact you guys positive or negatively and just maybe you can even quantify the potential positive impact if that were to happen? Just your thoughts around that?
It's a good question. Unfortunately, I'm not in the position to quantify to this point. I think the rule-making process for these things, you see the wind blowing in a certain direction and you feel pretty good about it, but then that takes a long time for all the dust to settle and to really understand how it impacts your business. We're staying close to it and paying attention, but at this point, obviously we feel like we need access to copper. Obviously we feel like we need it on terms that are fair and competitive, particularly where we're talking locations where there's only one provider, so that's important to us.
The more competitive the access, the better for us. We work hard to make sure that that stays the case.
Right. That makes sense. I figured that's the way. And then one final question may be, and I know we haven't sort of talked about in a while here, the symptoms of fiber asset seems like you guys want hold on to them and at one point I think you guys are sort of looking at potentially disposing them. Just what are your thoughts around it? I know potentially some non-core assets to the business you may still have and how you may want to sort of monetize them?
We took a strategic decision. We made those comments or I made those comments where it was a year and-a-half, two years ago now about looking how to maximize the value of those assets and basically, refocused. We spent a lot of time refocusing the sales and marketing teams in our carrier transport business unit on basically growing transport revenue in EBITDA and as you see, we've done a nice job with that and we've continue to enhance the value and the underlying intrinsic value of our fiber assets by doing that. We do monetized our fiber when it makes sense as we mentioned earlier, but we continue to see an opportunity to grow revenue in EBITDA to maximize the value that those transport assets internally. Never say never like Louis said earlier. We'll constantly weigh what the options are, but I'm pleased with how the team has responded and what they're doing in that area. I think we've created more value by holding on to it.
Great. Thank you so much, guys. That's all I have.
You bet. Thanks.
Thank you and your final question comes from the line of Arun Seshadri of Credit Suisse.
Hi, guys. Thanks for taking my questions. Just a couple. First, I didn't catch all the numbers to the list on the consumer sale. Did you say that the revenue was about $300,000 less and then gross margin would be flat? Is that on a quarter unit?
Yes. Thanks, Arun. Here is the deal. It was $500,000 a month of revenue. That will go down to $150,000, but it will all be gross margin. We'll have six months where we'll record $150,000 of revenue, which is $350,000 less than the $500,000 we have been recording. That will be a difference in this factor to enter our guidance, but the gross margin will be the same. Now, once you get into next year, you'll lose all of it, but we'll have the cash proceeds.
We're confident the additional revenue streams will get online with the consumer. So we're comfortable with our guidance.
Got it. Okay, that's helpful. And then as far as carrier transport, could you remind us again how much of that revenue would you consider recurring revenue? I just wanted to understand. It sounds like you're pretty comfortable at the impact churn events. Did you have it pretty much racketed? But I just wanted to understand the recurring revenue portion and then what gives you confidence that you're sort of in the right trajectory there?
Yes. Recurring revenue for carrier transports, probably 80% to 85% of the revenue stream. That's not all recurring high growth transports, some of it is recurring for more legacy like products, but the vast majority of the carrier transport business is recurring.
Got it. Great. And finally on the SG&A side, obviously we've seen some fairly significant reductions. I just wanted to get a sense. Was there anything sort of one-time that would have made your Q2 SG&A sort of not comparable or not usable from a goal-forward basis, on a sequential basis? And are you confident you could continue to sort of find the opportunities there?
I think it's pretty clean. We did have a favorable recovery in the tax area that gave us close to $1 million of benefit. If you're being super-precise, you could probably normalize that out, but we're working hard to getting on the benefits all the time and our history has been to have some. I think it's pretty clean.
Yes. One other point. I don't want to sound like we've declared victory on SG&A. I still feel personally that we have a healthy SG&A expense as we invest in growth and feel like there are opportunities for us to even become more productive on our SG&A over the course of the next six, 12, 18 months.
Okay. Thanks, guys.
There are no questions at this time. I will now turn the floor back over to Joe Eazor for any closing comments.
Yes. Again, thank you guys for joining the call and your questions and look forward for the follow-ups. But just to reiterate what we've said, is we feel like we took another good step in the transformation of this company to be a leading networking and communications company in the cloud world. We have made good progress in all the areas that we've outlined to you in the past as part of this transformation and we'll continue to drive that. We will accelerate our pace to change and improvements as we go in our go-to-market efforts as we launched SD-WAN and improve our UCAS and other services as well as continue our sales transformation.
So I look forward to giving you another update in the quarter and providing you more insight and outlook to our future beyond that. Thanks, guys.
Thank you. This conclude today's conference call. You may now disconnect.
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