GTT Communications, Inc. (NYSE:GTT) Q3 2016 Earnings Conference Call November 9, 2016 8:30 AM ET
Chris McKee - General Counsel and EVP, Corporate Development
Rick Calder - President and CEO
Mike Sicoli - CFO
Brian Thompson - Executive Chairman of the Board
Scott Goldman - Jefferies
Jonathan Charbonneau - Cowen and Company
Michael Bowen - Pacific Crest
George Sutton - Craig-Hallum
James Breen - William Blair
Barry Sine - Drexel Hamilton
Ray McDonald - Oppenheimer
Good morning, and welcome to the GTT Communications Third Quarter Earnings Conference Call. All participants will be in a 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 Chris McKee, General Counsel and Executive Vice President of Corporate Development. Please go ahead, sir.
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 Web site, 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 also available on our Web site. Before we begin, I'd like to remind you that during today's call, we'll be making forward-looking statements regarding future events and financial performance made under the Safe Harbor Provision 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, November 9, based on factors that are currently known to us and that actual future events 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 third 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 Web site.
I will now turn the call over to Rick Calder. Rick?
Thank you, Chris, and good morning everyone. Thank you for joining us. In addition to our regular quarterly earnings announcement, we were very excited to announce the acquisition of Hibernia Networks this morning. I will provide some initial commentary on the quarter, turn the call the Mike to provide some additional detail on the quarter as well as Hibernia, and then I will provide more strategic discussion regarding the Hibernia acquisition before opening the call to your questions.
In the third quarter of 2016, GTT again delivered consistent revenue growth and margin expansion, resulting from organic growth, acquisitions, and synergy realization. In terms of our key organic growth initiatives we now have approximately 105 quarter variant [ph] team members, and expect to reach our goal of 110 to 120 by year-end.
Our backlog of sold orders ready to be installed continues to grow, and our sales rep productivity remains strong even as we continue to grow our sales force. Our indirect channel and client account manager programs continue to make good progress. And last month we were awarded an IT Schedule 70 contract with the General Services Administration, enabling GTT to sell services to a wide array of government entities, with an emphasis on civilian agencies to complement our existing relationship with the Department of Defense.
We continue to build momentum across these various organic growth initiatives, and we remain excited about this part of our growth strategy. Let me turn the call over to Mike now to provide more details on the quarter and the Hibernia acquisition. Mike?
Thanks, Rick, and good morning everyone. Third quarter revenue of $131.9 million grew 35.9% year-over-year, and 2.3% sequentially. The year-over-year increase was driven by organic growth, the acquisition of OSN, and the addition of the Telnes and RealLinx customer bases. The sequential increase was driven by continued organic growth, and a full quarter of RealLinx.
On a pro forma basis, including OSN and constant currency, third quarter revenue grew 13.5% year-over-year, and 2.9% sequentially. Third quarter adjusted EBITDA of $32.1 million grew 54.1% year-over-year, and 6.2% sequentially. Similar to the revenue, the year-over-year increase was driven by organic growth, the acquisition of OSN, and the addition of the Telnes and RealLinx customer bases, as well as realization of synergies from acquisitions.
The sequential increase was driven by continued organic growth, and a full quarter of RealLinx. On a pro forma basis, including OSN and constant currency, third quarter adjusted EBITDA grew 29.8% year-over-year, and 7.3% sequentially.
Adjusted EBITDA margin of 24.4% expanded by 290 basis points compared to third quarter 2015, and by 90 basis points compared to second quarter 2016. The primary driver of margin expansion is gross margin, which grew by 330 basis points year-over-year, and 125 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 has been relatively flat over the past year, as we've reinvested some acquisition synergies into additional resources to drive organic growth. We recognized $800,000 of transaction and integration costs in SG&A during the quarter related to prior acquisitions which have been excluded from adjusted EBITDA.
Third quarter net income was approximately $5.1 million, up significantly from $1.8 million in third quarter 2015 and from $100,000 in second quarter 2016. Capital expenditures in the quarter were $5.5 million compared to $3.5 million last year, and $4.8 million last quarter. Year-to-date our CapEx is 4.6% of revenue, in line with our target range of 4% to 5% of revenue. Adjusted EBITDA less CapEx was $26.6 million in the third quarter or 20.2% of revenue compared to $17.3 million last year, and $25.5 million last quarter.
Year-to-date, net cash provided by operating activities was approximately $33 million, a 65% increase from 2015, and includes several key items not included in adjusted EBITDA, such as $19.9 million paid for cash interest, $400,000 paid for cash taxes, $4.2 million paid for restructuring and exit costs related to prior acquisitions, $3.1 million paid for transaction and integration costs also related to prior acquisitions, $1.9 million used from changes in foreign currency rates, and $33.8 million used from working capital driven by longer payment timeframes from certain large customers, as well as an effort to become more current with our vendors.
At quarter end, our current liabilities were approximately $82 million, including $7 million related to acquisition hold-backs, and $3 million related to deferred exit costs. Excluding these hold-backs and deferred exit costs, current liabilities were approximately $72 million or $44 million less than current assets. Our cash balance was $15.4 million at the end of the quarter, and our outstanding debt balance was $432.9 million excluding OID and unamortized debt issuance costs. Our leverage ratio using third quarter 2016 annualized EBITDA was 3.4 times on a gross basis and 3.3 times on a net basis, down by more than half a turn from year-end 2015.
Earlier today, we announced that GTT has signed a definitive agreement to purchase Hibernia Networks for $590 million, comprised of $515 million in cash and approximately 3.3 million shares of GTT common stock to be issued to the sellers at closing, valued at $75 million.
For the third quarter of 2016, Hibernia reported revenue of $45.5 million, adjusted EBITDA of $16.1 million, and capital expenditures of $1.9 million, as well as year-to-date 2016 revenue of $138.6 million, adjusted EBITDA of $49.1 million, and capital expenditures of $12.7 million. These results are as reported by Hibernia without expected future cost synergies and without any pro forma adjustments. We will provide detailed pro forma information via Form 8-K in the coming weeks.
In the context of this highly strategic acquisition we expect to increase leverage above our normal three to four times range to take advantage of continued favorable debt terms and market conditions, and to minimize equity dilution. Investor demand for GTT in the debt markets remains very strong, and we're very pleased with the terms we received from the banks who provide underwritten financing for this transaction.
The debt issuance will consist of incremental secured term loans as well as senior unsecured notes. At closing, we expect our ratio of total net debt to adjusted EBITDA to be approximately 4.5 times, using annualized pro forma combined third quarter 2016 adjusted EBITDA plus expected cost synergies. Within one year after closing, we expect the ratio of total net debt to adjusted EBITDA to be at or below four times, reflecting continued adjusted EBITDA growth and cash generation.
In closing, I'm pleased to say that GTT continues to deliver consistent performance, and we're very excited to add Hibernia to our growing global platform. Now, I'll turn the call back over to Rick.
As Mike mentioned, we are very excited to announce the acquisition of Hibernia Networks, a leading provider of global high-speed networking services and owner of fiber assets including Hibernia Express, the lowest latency transatlantic cable system. This strategic combination as breadth, depth, and scale to GTT's global tier 1 IP network with owned and leased dark fiber assets including 5 subsea cables, 8 landing stations, 190,000 total fiber route miles, 224 PoPs, and represents over 1.5 billion of cumulative capital invested.
It expands GTT's cloud networking portfolio with the addition of optical and low latency transport and media services as world class video transport platform serving broadcasters, cable providers, and over-the-top providers grows GTT's client base adding more key multinational clients in the financial services, media and entertainment, web-centric, and carrier segments, and enhances GTT's financial position by adding a substantial highly complementary recurring revenue business with strong cash flow characteristics.
The acquisition of Hibernia accelerates GTT's growth strategy by expanding our portfolio of cloud networking services, significantly increasing scope and power of global network, and growing our multinational client base. Hibernia has demonstrated a track record of growth and brings unique strategic network assets giving GTT the benefit of owner economics in the highest traffic areas in the world, transatlantic, Northeast U.S., and Western Europe. We are very excited to welcome Hibernia's clients and talented team members to GTT. We expect the transaction to close by the end of the first quarter of 2017 subject to certain regulatory approvals and other customary closing conditions.
Following our successful proven acquisition template, we expect to complete integration within two to three quarters post close, slightly longer than our historical integration timeframe due to the size of this acquisition and to achieve a post synergy multiple of seven times adjusted EBITDA or better on a pro forma basis. We expect to deliver significant cost synergy from this transaction with an even balance between reductions in SG&A and network cost. Network synergies are expected to come from several areas including the migration of GTT lease bandwidth to Hibernia's fiber network, the migration of Hibernia's IP traffic and lease bandwidth to GTT's Tier 1 backbone, combined purchasing power, and consolidation of overlapping points of presence.
Importantly, while Hibernia's has spent a significant amount of CapEx to build its network going forward, we expect to operate our combined network with limited incremental CapEx likely in the range of 6 to 7% of revenue, enabling us to maintain our CapEx light model.
In addition, while we focused on Hibernia integration over the next few quarters, our funnel of acquisition opportunities remains active and robust, including both small and large opportunities. Going forward, we expect to continue to pursue and execute multiple small opportunities each year similar to the RealLinx customer based purchase we completed earlier this year at purchase price multiples generally around one times revenue and five times adjusted EBITDA or better.
We are targeting 10% to 20% annual top line growth from this two-pronged strategy of organic growth and smaller acquisitions. We expect to continue to pursue larger acquisitions as well which will be on top of this 10 to 20% annual growth target. With our third quarter results combined with the Hibernia acquisition, we are well on track to achieve our next financial objective of 1 billion in revenue and 250 million in adjusted EBITDA, earlier than our original 5-year timeframe established in the fourth quarter of 2015.
Now, we'll open the call for your questions. Operator?
[Operator Instructions] Our first question comes from Scott Goldman from Jefferies. Please go ahead.
Hey, good morning guys, and congratulations on the next deal. I guess, just on the Hibernia, a couple of questions there. Rick, maybe talk a little bit about the complementary product side of the equation and the ability to cross-sell, and how well positioned your sales force may be to leverage the assets that they have and vice versa. And interesting listening to the comments around the deal as well around slightly higher CapEx in asset ownership, that's something that -- you've typically gone with asset-light model. Wondering whether or not you've sort of changed the view a little bit on that, as you mentioned owner economics?
And then lastly, just on the deal, on the subsea market, seems like a few companies talking about that area heating up, maybe just talk about the attractiveness of the subsea market going forward? Thanks.
Great, thanks Scott for the three questions. The thing that I say really excites us about the business is the complementary nature of the product line, that adding the optical transport capability into our mix is clearly for our high-capacity bandwidth clients, web-centric financial services, et cetera is a very complementary nature of what we can do. And we see pretty much a non-overlapping, some overlap in the client base, but a lot of good wedges in each of the complementary client bases that we'll have in aggregate, and our ability to sell the EtherCloud wide area networking services to some of the clients that Hibernia has is equally attractive to us. So we think it really extends our portfolio.
We also see continued growth in the video component, the media and entertainment clients, and being able to sell them a broader set with the video transport platform, whether it will be picking up, we've had a whole series of clients who have been looking for those types of products as well. So we're very excited about those -- the complimentary nature of what we're going to be doing. And to be very clear, it's not just our sales force. We've known the Hibernia team for many years; we are very excited to add them to the broader mix of GTT. They've been a trusted supplier to us for year.
I think to your second question about owner economics, we've always talked about opportunistically looking at fiber ownership. We've never really felt that it was compelling, particularly as we were smaller. As you know, over the past 10 years we've grown from a business that was $50 million to a business that's now at $527 million on an annualized revenue basis, moving toward $1 billion. And we felt that when the Hibernia assets came on to the market that it was literally the ideal profile for assets that would fit with our global tier 1 backbone, where our highest utilization of our network has been in the Atlantic, the eastern part of the United States, and Western Europe. So, the overlap of these assets on top of ours made that sort of make-buy decisions very straightforward to us.
And then lastly, when we look at the opportunity in the Atlantic, we see that as one of the fastest growing markets for bandwidth. And most industry analysts think it's growing in the 40%-plus per year range on a usage basis. So you've seen more assets in the Atlantic recently, and so we see a real nice opportunity with assets it will own that are underutilized to be able to grow very aggressively into that growing market.
I would also add this one has differentiation relative to other cables that are already in the water or are planned. They have the lowest latency path from London to New York, and really from Europe to the East Coast of the U.S., so in addition to the benefits that Rick just described, we actually have differentiation to go with it here, which is great.
Great. And just one follow-up, obviously this I think is probably the largest or one of the largest deals you guys have done probably slightly -- perhaps a little bit different than some of the more recent ones. Just wondering, you mentioned obviously integration may take an extra quarter or so versus others, but just your comfort level around the ability to integrate since this is a bit of a different type of acquisition? Thanks.
Yes, I think we've had a very proven template with respect to acquiring and integrating businesses. I would say from an employee account this business is smaller than some of the other acquisitions that we've looked at. From a complementary nature of the business it has offices in Ireland, in the Netherlands, in the United Kingdom, places that are very complementary to where we are, as well as in the United States and in Canada, we'll be actually starting that process over the next couple of days, talking with all of the employees at Hibernia to introduce ourselves. Again, we know them very well. We have been business partners for many years, so we understand this business. We believe that the cultural fit between the two companies are very similar.
If you think about it, about our business and their business, I think an important point to note is we're taking two businesses in our industry that have been growing very nicely, and combining them together to what we believe will be accelerating growth. So we see the opportunity here to take two excellent firms in our industry, and put them together very smartly and grow our business more over time versus some of the other integrations that you see going on into our business right now. So we're very excited about it, and we think we have a proven way to integrate these businesses within the next two or three quarters post close.
I would also just add one more follow-up point to your earlier question about did this signal some type of change in the CapEx light model. I think, as Rick indicated in his prepared remarks here, we do not think that that's the case here. Our current run rate of CapEx is 4% to 5% of revenue. I think this would take that up a little, as Rick mentioned, maybe to the 6% to 7% range. But as you look across the industry landscape, 6% to 7% is still very CapEx light.
And our next question is from Jonathan Charbonneau from Cowen and Company.
Great, thanks for taking the questions. Just in terms of your core business, a very nice EBITDA margin expansion quarter-over-quarter, Mike, maybe how should we be thinking about further margin expansion over the next quarter or two? And then longer term with Hibernia, how should we be thinking about the potential for a longer term EBITDA margin? Thanks.
Yes, so I think we've been pleased with the gross margin expansion this year. We've indicated for a while that we thought there was room in that line, particularly as we really leverage our global backbone, and also execute on some of the longer tail grooming associated with the string of acquisitions that have happened historically. We think that can continue. On the SG&A line we've highlighted that this year wasn't going to show much improvement on SG&A as a percent of revenue because we were investing in sort of the next leg of organic growth. As we move forward, we would expect to show some leverage on the SG&A line as well. In terms of what can the number be when you fold in a business like Hibernia that's got network assets, historically the 25% or mid-20s range that we thought about could go higher, whether that's 30 or something above 30, don't know yet. But I think it could clearly be higher from a margin standpoint than what we were thinking about standalone.
Great, thank you.
And the next question is from Barry McCarver from Stephens Inc. Please go ahead.
Hi, good morning guys. Congratulations on the quarter and the deal, and thanks for taking my questions. I guess first question is -- I'm looking at your slide there, and it seems like the tremendous increase in the growth rate of Hibernia over the last, call it, three or four quarters, is directly related to the completed build of the Hibernia Express. And I just kind of want to get your take on what that run rate might look like a couple of years down the road, can we expect it to continue at a high level? And then, would that need more CapEx to maintain?
Yes, a good question. I think there's definitely a spike element to growth that they've experienced over the past year. A lot of pent up demand for that new system when it came online in September, the results of some overlap when it first came online between some customers on their legacy system, known as Classic, who then up-sold or up-purchased to the new Express cable. So they showed 20%-25% growth year-over-year from that spike. We do not expect that type of level of growth going forward. The way we thought about their business going forward, as Rick mentioned, was pretty consistent with how we think about our own growth profile going forward. We're not providing specific guidance around that, as you probably know. But the way we thought about it at least initially is, where as a baseline is similar to our growth rate going forward. And as Rick mentioned, we see potential to accelerate that, but our baseline is thinking about it in similar terms to how we thought about our own business.
I think the other important point to note is that the initial spike used very little of the capacity. So we have a very underutilized set of assets here, so that can really take advantage of the growth that's occurring both on the subsea and some of the [indiscernible] that's out there. So we see nice growth potential. And as we mentioned before in the earlier question about the complementary nature of the product, we see with the clients we have a deeper product portfolio and service portfolio of cloud networking services to continue to grow the wedges of businesses we have with some of these clients. So definitely see both companies together growing very nicely.
And one other point I should just mention, globally, for everyone on the call, Barry mentioned in the slides, we did put a few additional slides in our Investor Relations presentation that's posted on our Web site specific to Hibernia has very similar information to what we described on the call today, and also in the press release. But there are also some slides for those of you who would like to go check that out.
And if I could just have one more follow-up question, Rick, I want to talk about acquisition. Not your acquisition, but other big deals in the industry, because there's been a lot of activity recently CenturyLink and Level 3, Windstream just announced an EarthLink deal, a private equity deal that I think probably a direct competitor of [indiscernible] was taken out. Can you comment on any potential positives you see from some of these bigger deals? And as well as -- I don't know if you would've taken a look at [indiscernible] or did. Certainly a very high -- a multiple, if I recall, for that company which again looked very similar to GTT.
So, I'll probably reecho, Barry, the comment I made before. So if you think about CenturyLink, EarthLink -- excuse me, CenturyLink, Level 3 or EarthLink Windstream, I mean, I think those are defensive plays. You have two players that all four of whom have reported numbers that are shrinking. And I think that scale will help them, they'll take costs out. But I think it's a defensive play. I would say we're very much on offense.
We believe that these -- a combination with us with Hibernia really establish us very much as the challenger brand in our industry that has a fantastic position to attack the incumbents, whether it's the ones I mentioned or whether it is some of the older legacy incumbent telcos. I think we are in a perfect position. And while I wouldn't comment on other deals in the industry, there clearly are very high premiums paid for companies that are on offense in growing, and are out there taking share. So I think you see that in some transactions that occur in the marketplace, and I think that will represent us as well.
Very good. Thanks guys.
The next question is from Michael Bowen, Pacific Crest. Please go ahead.
Okay, thank you very much for taking the question and congratulations as well. One of the things, Rick and Mike, that stands out is, obviously on page 19 of the presentation. And I think you touched on it a little bit. EBITDA margins of Hibernia jumped quite a bit from 2015; I think 23% to the mid 30s. So I understand your comments with regard to some of that was driven by Hibernia Express. But can you talk to us a little bit about perhaps where you think margins now can go for that standalone business as we think about integrating that within the company.
And the second question, as you'd mentioned that there's going to be network cost synergies. I'm looking at the map here on page 18, I think you guys have said that Asia-Pac would be possible another target that you would be looking at. So are there any specific areas you might be able to point us to where you've got some redundancy in networks. And Mike, we assume those cost synergies would be used in the next acquisition, possibly over in Asia-Pac? Thanks.
Sure. I mean, from the perspective of EBITDA margin, we've historically, and while we've been open to the concept of putting owned fiber into the network, the economics of it were never quite ready for us at our lower scale. At this scale they make sense. We've historically said we've traded more OpEx and less CapEx. The interesting thing that we see with the Hibernia acquisition is we think we can get the best of both, where we actually take out some incremental OpEx, and the incremental go-forward CapEx is actually quite small for us. So as Mike mentioned, we clearly see the opportunity to have EBITDA margins grow without having significantly more CapEx in our business model. So we think that is the right trade for our investors, and we think it sets ourselves up very well to expand our portfolio to optical transport for our clients, and gives us an even more powerful backbone network to serve clients with globally.
And I think two other points. One is related to the synergies. As Rick mentioned in his prepared remarks, the biggest piece of synergy from this transaction comes from those high traffic areas of Northeast U.S., Transatlantic, and Western Europe. That's where most of our spend is, that's where most companies spend is. And so having these very strategic boned assets in those specific regions is compelling. Their bandwidth into Asia is least today, similar to ours, and actually is probably more just of a synergy opportunity for us to combine their leased bandwidth with ours, but there are interesting strategic opportunities that you can do now that you own fiber cables. We haven't -- Hibernia hasn't lit all of the pairs of fiber, so there are opportunities to monetize that in different ways, potentially trade it for other bandwidth of South America or Asia, or other places.
So, there's strategic value in the excess capacity that Rick mentioned earlier that we could use to drive additional synergy, but that's not part of the base case. As it relates to the margins, one thing to consider with Hibernia, the '15 numbers really reflect -- they were kind of depressed from the fact that they had a lot of operational costs associated with standing up the new system. They didn't have any of the revenue yet.
Now that they're live you see an EBITDA margin that I think more reflects the go-forward for them. But remember that this is primarily a regional fiber play not a metro fiber play, and they do still lease a fair amount of capacity and a fair amount of last mile to complete some of their solutions. So they're more of a hybrid fiber player, so not -- whereas you might see from a pure fiber provider EBITDA margins in the 40s and the 50 percents. For a hybrid provider it looks more like this, sort of mid 30s call it. So hopefully that helps put it in a little more perspective.
And then to your second question, Mike, on other cost synergies, just to reiterate to what I probably said in the prepared remarks, as Mike mentioned, they're leased outside of their core owned footprint is thinner than ours. And so we see some synergy being able to combine the leased network outside. We also see significant synergy potential in combining the IP transit backbone, ours is a top-5 ranked IP transit backbone. And we see lots of very interesting client additions that we'll take from their clients, but on to a consolidated core network. And then clearly, in this space there's a significant number of overlapping points of presence where we'll be. Those take some time as we've said before, and as we mentioned, the reason we continue to see incremental, good movement in EBITDA, and gross margin in particular, is the fact that we continue to take out overlapping points of presence. We do that very carefully because it's client affecting. So, some of that would be reflected in the first two or three quarters, but more would appear after the first two to three quarters as well, as an upside to our models.
And one other quick one if I may, did you divulge or can you tell us how many sales people are at Hibernia?
We did not, and we won't do it today. But as a part of our combined sales force, we clearly see it being -- hitting that goal of 110-120 ourselves. And I think as we've said in the past, we want to keep growing. I mean, we are on offense at this stage, and we see some tremendous opportunities to take share. So we don't see slowing down in terms of the growth of our organic rep-driven sales platform, and we've known the Hibernia team for a long time, and we think they have some great talent to add to GTT.
And our next question is from George Sutton from Craig-Hallum. Please go ahead.
Thank you. First, you mentioned that you've known Hibernia for years. I'm just curious what the catalyst was for this transaction to happen?
Sure, right, thanks for the question, George. So, Hibernia has been in business since 2003, originally from - the original assets were from the original 360 network, the Original two, Hibernia North and Hibernia South. As we mentioned, the opportunity for bandwidth growth in the Atlantic and the opportunity to put in what is truly the low latency route, which has significant value was a major project that was put on the table in 2010. And it came to completion in September of 2015, and has had tremendous success. Taking that business and making it part of a bigger hole, I think was the appropriate time that this does for them to look at that. So I think that is really one of the driving forces that is a fantastic network that is part of a bigger platform, it could be even more powerful. And so, we -- and we think the combination with us is one of the major opportunities, and I think you saw that in the -- the real interest of the sellers in taking GTT equity. And so, they are very, we believe, bullish about the opportunity of the combined firm, and as a function of that have agreed to take 75 million of the consideration in equity at this stage.
So I have consistently to find you as a disruptor, I noticed in a recent article you defined yourself as the "Attacker," which I like. I'm curious thinking from a competitor's perspective this morning, what do you think their response to this transaction would be?
Well, we hope they take notice. I mean one of the things that you always want to be as a competitor is that someone does look at us and say I should take more notice of GTT. They are truly on the radar screen and are growing. So we welcome that, and we are certainly trying to get noticed. So we think we are very much the in-attack mode and we see bandwidth demanding growing, we see every CIO in the world think how do I solve my growing bandwidth demand with players that live the values that we live: simplicity, easy to business with, be fast and responsive, speed, and say yes to client's agility. And we see that in Hibernia and we think the combined organization will be very formidable against some of the incumbent telecos.
And that being said, one of our biggest market opportunities against these large incumbents is their lack of attention to this market segment, generally, the multinational segment. The big AT&T and Verizon are focused on consumer and mobile, CenturyLink and Level 3 are going to be consumed with their own merger and multiyear integration, wind streams digesting earth link, you know, Verizon and Accel. I mean, there is all kinds of the distractions going on with some of our peers and competitors in this market. And so, I think it's just a further opportunity for us to take more share.
And our next question comes from James Breen from William Blair. Please go ahead.
Yes. Thanks for taking the question. Just a couple, one, Mike, on the financial side, this owning some fixed assets changed the way you think about the right leverage levels for the company over the long-term, and then on the sales force side, how Hibernia went to market and their customer base in terms of enterprise versus carrier mix. Can you just talk about sort of the difference between the core GTT business and what Hibernia is doing there? And then maybe the international exposure, there is a huge difference between Hibernia in excess of GTTs? Thanks.
Yes, I will take the one and three. I will let Rick take two. In terms of leverage, you are right that asset-heavy businesses can often carry more leverage. That being said, and I think what we have articulated here that this does not change us into an asset-heavy firm. We are still just as nimble and flexible as we always were. We just happened to have a little bit of strategic bond to network inside now. So, while there might be more leverage capacity available to us from owing these assets. I don't think our view of leverage has changed and that the sort of right normal course leverage for us is three to four times. We are going to go a little above, as I mentioned earlier, on the content of this deal, mainly just to minimize dilution and take advantage of good debt markets. But we expect to be back in that three to four times range within a year, and that's kind of very consistent with how we've talked about it previously.
In terms of the international exposure, they bill about 80% of their revenue in dollars. So from a peer currency standpoint, little bit; more international, as a percent of the total than us, but you know, not that much different, and I think we are about 15% non-U.S., so, close.
In terms of the traffic profile, I think they are a little more concentrated outside the U.S. Concentrated is probably a long word, but about 60% of their revenue is in A location in Europe, and a C location in the U.S. And then about 20% each is within Europe or within the U.S., if that helps. So it's a pretty healthy mix. Most of their clientele are built in dollars and are U.S-centric customers.
On the sales force question, Jim, they take a very similar approach to us, direct to market. And we historically have talked about enterprise, carrier, and government. And so, they are less representing government, I will talk about that in a second, but clearly an enterprise, they talk about the financial services, vertical, the media and entertainment vertical and the web-centric, the high content companies; very similar to us. We have had good success in those markets, so we think it's very overlapping and we think some great opportunity to add a really marquee set of clients, many of which are not ours already at this stage.
The service provider market, we both served that, and we think we have a couple more things to sell into the service provider market now since we historically have not sold optical transport. The last that's interesting for us is -- as we mentioned in the past, we are one of the contract awardees for the $4 billion plus global network services contract to the Department of Defense, and that these assets give us tremendous benefit there. That contract is exclusively for services outside the continental U.S. and we think we will be very well advantage with these assets to be able to serve some of the highest capacity needs of the Department of Defense, and interestingly there are now -- there were originally eight competitors for that contract, there are now seven, because Century Link and Level 3, which were both contract awardees have now merged.
So we see some really interesting opportunity there, and that is now finally as we have a new government contract year ramping up, we still believe that will take a significant amount of time to ramp up to sort of full revenue value, but we are very excited about our opportunity to be even a fear sore competitor for that business with these assets.
Great. And then just one follow-up on the organic growth side, obviously there are some moving pieces, given some of the recent acquisitions in May-June timeframe. What's the best way to look at it from a sequential basis in terms of how the company grows organic in this quarter in apples to apples basis? Thanks.
Right. So I think we historically have done a series, and I think as we mentioned in our prepared remarks we will continue to do more and more of these smaller acquisitions, which effectively are books of business we add to our base. So we will try to report to you the sort of pro forma with the material acquisitions and pro forma without them. And so, if you look at those pro forma numbers, we were 13.5% year-over-year, and a 11.6% sequential, annualized, you know, 2.9. And I think if you -- and we will provide some color commentary on the organic part, and we think the organic part sequential was about the pure piece was about 8% of that, or 2% sequential on that 11.6.
Yes. And I think the way to think about it relative to what we have talked about previously is you had three months of RealLinx in the third quarter versus one month in the second quarter, but you also had 800,000 of sequential headwind from currency. So, you net those two together, you get to the number that Rick was just talking about.
And I think one of the things I mentioned at the end is we feel and really have put out sort of a new yardstick to say we think with the combination of the strong rep-driven sales plus the sort of non-material books of business we have been adding that we will grow pretty consistently in the 10% to 20% range. And as a function of that, we see this next goal even without a material acquisition in very much in our sites at this stage to get to a billion in revenue and 250 million in adjusted EBITDA. So, not to say we wouldn't, we clearly see some good and interesting larger acquisition opportunities. We are very focused obviously at this stage on making sure Hibernia is a success, we all believe it will be, but we still see really great opportunities in the market for both small innovation style acquisitions we've been doing as well as the large strategic deals like Hibernia.
Our next question comes from Barry Sine from Drexel Hamilton. Please go ahead.
Hey, good morning folks. I want to continue discussion on organic growth and tie that into the sales force growth. I guess, first of all, I think I missed it; can you give the number of sales reps at the end of the quarter? Secondly, with all this M&A taking place, my understanding there is a lot of very good sales reps that are out available for Hibernia, and may be you can talk about the recruiting environment and how that may help me grow the sales force? And then just in terms of how that drives organic, Mike, I think you just said that in the quarter, you are at 8% organic growth, your new kind of guidance range that 10 to 20 assume some organic, some acquisitions, could you be a little more specific on what kind of organic growth you think you can drive, because organic growth is generally of higher quality than acquired growth?
Right. So, let me take the first two, and I will let Mike take the third one. The number of sales reps was 105 at this stage, and we see we feel very comfortable obviously getting to the 110 to 120. You are absolutely right, the opportunity, I think we mentioned it at length at the last call, the opportunity to attract great talent to a growing organization that is winning in the marketplace, has never been better. And we believe that the brand opportunity we have to attract great sales talent in our industry is at the best that it's been. I mean it is always competitive, but -- and we believe that now is the opportunity to be aggressive to attract folks to our banner at this stage.
Yes. And as it relates to organic growth, I mean, the shift or the emphasis, Rick placed on talking about the 10 to 20s really align the way we talk about our goals internally with the way we talk about them externally. So the 10 to 20 is actually how we think about things internally and we think about these small customer base acquisitions as more organic than true M&A. There's lots of basis out there. There's compelling economics for us to roll those up, and it is a great area in terms of, you know, what's "Organic" and what's not. Internally we blend them together. And so, we do think about this as a combined strategy and we don't focus as much on specifically what came from [indiscernible] versus what came from a customer base acquisition. I would highlight something you said a second ago that the acquired bases are not as compelling as the organic rep-driven sales. That's not necessarily true. That's not consistent with our experience.
Many times the true value in acquiring customer base is either it hasn't been paid attention to by the previous owner, and we give it some TLC and grow it, or it's been run by a relatively small proprietor that has very limited capabilities that now is part of GTT, you know, it's open to a much broader set of products and a deeper relationship. So, we think there is just as much benefit and upside and economic rationale to the customer base acquisitions as there is for organic.
Okay. And then just to follow on, I guess for Mike, more familiar finance side on the Hibernia transaction, I know in that business lot of times there is significant amortization or deferred revenue, if we look at the numbers you have given in the slide deck, is that EBITDA close to what cash flow generation is, or is a lot of that just amortization of previously sold capacity?
There is some amortization in there. However, they have also brought in a significant amount of cash from a prepaid sale as well. So, there are puts and takes. We will provide all of that detail when we file the 8-K that has their historical financials as well as the pro forma information. It's as you know complicated to sort of get through. And we felt like it was more appropriate to at least start with the high level numbers and then provide the details in a few weeks when we can get all of the appropriate filings done with the footnotes and all the explanation.
And our next question is from Tim Horan from Oppenheimer. Please go ahead.
Hi, guys. This is Ray McDonald on for Tim. I think you mentioned strong bookings in the quarter, can you just comment a little bit more on the pace of bookings in general, have they accelerated throughout the year or remained generally consistent?
And just as a follow-up when you look at the client base from Hibernia, where do you think the low hanging fruit is so to speak on the cross-selling opportunities? And overall do you think the revenue growth rate can accelerate in the first year of growth when you look at those opportunities? Thanks.
Sure. In terms of the pace of bookings, yes, it has grown but it's grown predominantly because we have increased the number of reps. And I think as I have noted in my prepared remarks, the productivity has remained pretty stable which is actually we believe a nice accomplishment because generally if you grow your rep force pretty quickly, your average productivity goes down. We have actually hadn't seen that.
So, we've seen the average productivity remain relatively constant. So, we have seen bookings grow. And I would say our sales rep bookings have been setting sort of new marks every quarter relative to -- relative to the growth of the overall sales force. And we think that can continue which is why as I mentioned in the sort of previous comment, we see some real interesting opportunity to continue to grow our sale force very rapidly if we can maintain our productivity. And overtime as we get more mature, even grow productivity.
On the question of Hibernia, there are just lots of interesting things for us to cross sell. We clearly historically have not as I mentioned before sold a lot of optical and we now have the real opportunity to do that. And so, we see that as a big opportunity in the expanded service provider web-centric base that we've been selling to. The opportunity -- but 70% of the business of Hibernia historically has been optical, very little on the layer 2, layer 3 transport services, Ethernet, MPLS, BPLS.
The opportunity to extend to any location in the world, which is key part of strategy, is something that we can deliver to many of the existing Hibernia client. So, we see the opportunity to be able to add the ether cloud portfolio to their services as well as a whole portfolio of managed and broadband internet services to some of the smaller location. So, we absolutely see some interesting cross sell opportunity. And as I mentioned in earlier this concept of media and entertainment has been a nice product set for us. They have been asking us to move up the value chain. So, we see some really interesting things we could potentially do with the video transport platform. So I mean -- and then you've got a third question? I think you are going to take?
No, just those two.
And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Richard Calder for any closing remarks.
Thank you, Operator. As we've always done, I am honor to turn the call over to our Executive Chairman Brian Thompson for some concluding remark before we wrap up the call.
Thank you all. This is an interesting and exciting day notwithstanding the political chaos that seems to be taking place. I think the real interesting part of announcing on a day like today is that it reminds me of in the past so many international economic turmoil periods that I have been involved in. And one thing that I have learned over the past 30 years in this business is international economic turmoil sometimes brought by political discontinuity really telecommunications and connectivity become critical and probably one of the most important expenditures both of businesses and governments.
I recall wondering why when I bought a telex company we were serving Iran right after the chaos in Iran, and I was told that they would pay their bills immediately because connectivity to the outside world is so important in chaos of that type. Perfect day to be announcing the Hibernia acquisition, because I think that it does speak to the question of what's going on in the world, especially in international economic centers.
I think this asset and the position that we are in, gives us a great opportunity to deal as Rick pointed with the offshore requirements of our defense department of the opportunity to see what happens with Brexit in London. Is that going to move to Dublin? Is it going to move to other places? We're perfectly positioned for that change that is going to happen in some ways with some very large companies. And I think that makes this a very exciting day.
Having been part of my life in the bomb disposal business, I am hoping that a portion of my history can rub off on this team because they have done exceptionally well through the process of both very large acquisitions, chaotic turmoil within organizations that we are a part of. But more importantly, stable and consistent application of a template of acquiring companies, merging them and creating one big very competitive and very interesting company going forward.
I am very proud of the team that we've got here and what they have been enabled to do. I am really pleased with this acquisition of Hibernia, not just because I am of Irish heritage and was involved as the chairman of the Irish telephone company, which I think gives us another great opportunity here, but I am really pleased about the position of the company not to overlook the performance in the last quarter which for those of you who are very interested in a clean quarter, if we could use that term, the team continues to perform, continues to improve. And I think our future is very bright. Thank you very much for joining us, and I'll turn it back to Rick.
Right. Thank you, Brian. We're very excited about both our quarter and the announcement of Hibernia and remain very excited to share our results with you in the future. So, thank you for joining today.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.