GTT Communications' (GTT) CEO Richard Calder on Q1 2018 Results - Earnings Call Transcript

GTT Communications, Inc. (GTT) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Christopher McKee - General Counsel and EVP of Corporate Development

Richard Calder - President and CEO

Michael Sicoli - CFO

Brian Thompson - Chairman

Analysts

Scott Goldman - Jefferies LLC

Jonathan Charbonneau - Cowen and Company LLC

Timothy Horan – Oppenheimer

Walter Piecyk - BTIG

Frank Louthan - Raymond James

James Breen with - William Blair

George Sutton - Craig-Hallum

Brandon Nispel - KeyBanc

Operator

Good morning, and welcome to the GTT Communications First Quarter 2018 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris McKee, General Counsel and EVP of Corporate Development. Please go ahead.

Christopher McKee

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 telephonic replay of this call will be available for 1 week. Dial-in information for the replay as well as access to a replay of the webcast is also available on our website.

Before we begin, I want 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 provision of the U.S. securities laws, including revenue and margin expectations, projections and references to trends in the industry and GTT's business.

We caution you that such statements reflect our best judgment as of today, May 3, 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 SEC filings. 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, which 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 in the Investor Relations section of our website .

I will now turn the call over to Rick Calder. Rick?

Richard Calder

Thank you, Chris, and good morning, everyone. 2018 is promising to be another terrific year for GTT. In the first quarter, we delivered revenue and adjusted EBITDA growth of 40% and 23% from last year respectively. We also completed the integrations of Global Capacity, Transbeam and Custom Connect, and we completed the acquisition of Accelerated Connections in Canada. We made significant progress on obtaining regulatory approvals for the Interoute acquisition, which we now expect to close this quarter.

On the rep-driven growth front, our sales force now stands at 180 quota-bearing reps on pace for our target of 200 reps by mid-2018 and 250 reps by year-end. These targets will be adjusted to include Interoute post-close, but we remain very optimistic about our potential to increase rep-driven growth going forward. We expect to continue to complement rep-driven growth with small acquisitions to target double-digit growth inclusive of both.

In March, we acquired Accelerated Connections, a Toronto-headquartered provider of managed networking, voice-over-IP and co-location services, serving large distributed Canadian enterprises. This transaction creates one of the largest non-incumbent network footprints in the Canadian market, extending GTT's market presence and unique network assets in Canada, including our GTT Express landing station; contributes complementary connectivity, VoIP and managed service offerings to our cloud networking service portfolio; and brings GTT's strategic clients in the key hospitality, retail and financial services market. We expect integration to be complete within the next two to three months.

Moving to the Interoute acquisition, as I mentioned earlier, we have made good progress on getting the necessary approvals, and we now expect to close sometime this quarter. I have spent most of the last six weeks traveling with Gareth Williams, current Interoute CEO, meeting with employees and key customers in every major Interoute office.

I came away with an even deeper level of respect and appreciation for the business, the people and the strategic fit combined with GTT. The combined organization will have significantly enhanced global scale, the most comprehensive and competitive global cloud networking platform in the industry with enhanced infrastructure, edge and hosted services, a large base of marquee multinational clients, balanced across geographies and verticals, with very high levels of recurring revenue, strength and leadership in software-defined wide area networking, SD-WAN, and world-class sales operation and customer service teams.

We have made good progress on integration planning since we announced the deal, which should help us proceed quickly with integration upon close across the three dimensions of organization, systems and network.

We continue to expect to complete the Interoute acquisition within three to four quarters post-close and to achieve a highly accretive post-synergy purchase price multiple of 7 to -- 7 to 8 times adjusted EBITDA. The Interoute acquisition will position us to achieve our next financial objectives of $2 billion in revenue and $550 million in adjusted EBITDA, well ahead of schedule.

We are very excited about our momentum as the disruptor brand in our industry, extending our global platform to take share from the large incumbents through our comprehensive portfolio of cloud networking services and differentiated client experience built on our core values of simplicity, speed and agility. Moreover, we are committed to delivering on our purpose of connecting people across organizations around the world and to every application in the cloud.

With that, I'll turn over the call to Mike to provide more details on the numbers. Mike?

Michael Sicoli

Thanks, Rick. First quarter of 2018 revenue of $260.7 million grew 40% year-over-year and 5% sequentially. First quarter adjusted EBITDA of $62.7 million grew 23% year-over-year and 3% sequentially.

Our growth was driven mainly by acquisitions with Global Capacity having the biggest impact on the year-over-year increase. On a pro forma basis including Global Capacity in prior period results and in constant currency, revenue grew 7% year-over-year and 4% sequentially, while adjusted EBITDA grew 14% year-over-year and 3% sequentially.

Adjusted EBITDA margin of 24.1% was slightly lower than last quarter and approximately 300 basis points lower than last year. The year-over-year reduction was primarily due to Global Capacity, which had a lower stand-alone margin.

On a pro forma basis, adjusted EBITDA margin grew by approximately 100 basis points from last year. The sequential reduction was due to the timing of certain expenses which tend to be higher in the first quarter and our continued investment in headcount to increase rep-driven growth.

We estimate that there's approximately $30 million of annualized adjusted EBITDA not yet realized in our reported results from our most recent acquisitions, including Global Capacity, Transbeam, Custom Connect and Accelerated Connections. The majority of this additional adjusted EBITDA is expected to come from the completion of cost synergies, with the remainder from full run rate of pre-synergy results for Accelerated Connections, which closed in March.

During the quarter, we incurred $5.9 million of transaction and integration costs related to acquisitions, including Interoute, which are included in our reported SG&A, but excluded from adjusted EBITDA. In addition, we recognized $1.9 million of severance restructuring and other exit costs primarily related to Custom Connect.

First quarter net loss was $13.5 million compared to net loss of $13.1 million last year and $49.5 million last quarter. As you may recall, fourth quarter 2017 net loss included several nonrecurring costs associated with acquisitions and tax-related items associated with the change in tax law.

Capital expenditures in the quarter were $13.2 million or 5% of revenue compared to $8.5 million last year and $15.2 million last quarter. Adjusted EBITDA less CapEx was $49.5 million in the first quarter or 19% of revenue.

First quarter net cash provided by operating activities was $12 million, a $10 million increase from last year. This figure is net of several key items not included in adjusted EBITDA such as cash interest; exit, transaction and integration costs; prior prepaid capacity sales; taxes; and changes in working capital.

During the quarter, we paid $35 million in cash and issued shares of GTT stock valued at approximately $4 million for the Accelerated Connections acquisition. In addition, we paid $6 million for holdbacks related to prior small acquisitions. At quarter-end, we had a balance of $14 million related to future holdback payments, of which $11 million is in current liabilities.

Our cash balance was $54 million at quarter-end. And our outstanding debt balance was approximately $1.3 billion, including $691 million of term loan B and $575 million of senior unsecured notes. At quarter-end, we had $95 million of availability under our revolver, net of $5 million in letters of credit issued. Our net leverage ratio using first quarter annualized adjusted EBITDA was 4.9 times on an as-reported basis, 4.3 times on a pro forma basis, including the additional post-synergy annualized adjusted EBITDA highlighted earlier from recent acquisitions that's not yet reflected in our reported results.

With respect to our progress on the Interoute acquisition, last week we completed the financing for the transaction. The debt portion of the financing will consist of a new $2.9 billion credit facility comprised of a $1.8 billion U.S. term loan facility, a EUR 750 million EMEA term loan facility and a $200 million revolving credit facility. This new facility will replace the existing credit facilities at both GTT and Interoute and will become effective at the closing of the acquisition, which we expect to occur during the second quarter.

The maturity for the loans on the revolver will be 7 years and five years respectively from the effective date, and principal can be repaid at any time without penalty. Similar to our current credit agreement, this new credit agreement is considered covenant-light, containing a net secured leverage covenant only to the extent that the revolving credit facility is 30% utilized.

The interest rate for the U.S. term loan will be LIBOR plus 2.75%, which is 50 basis points lower than our current facility. The interest rate for the EMEA term loan will be Euribor plus 3.25%. LIBOR is currently at around 2% and Euribor is currently at around 0%, which puts the current all-in interest rate on this new facility at just over 4%.

Demand for this new facility was very strong, which enabled us to upsize by $575 million to eliminate the need to issue any unsecured bonds for this transaction. This new credit agreement, combined with the $425 million previously announced equity commitments from Spruce House, Acacia and Aleph Tiger investors, completes the financing needed to fund the Interoute transaction.

At closing, we expect the ratio of total net debt to adjusted EBITDA to be approximately 5.3 times using pro forma combined adjusted EBITDA plus expected cost synergies. Over time, we continue to expect to reduce leverage to our long-term target range of three to four times through growth and adjusted EBITDA and cash flow generation.

We are targeting $100 million of OpEx synergies from the Interoute combination to be achieved within three to four quarters, with a rough breakdown of 60% from headcount, 20% from other SG&A and 20% from network. In addition, we're targeting $10 million in CapEx synergies from eliminating duplicate activities and fully leveraging our combined asset base. We expect to spend approximately $70 million to $80 million to complete the integration and achieve these synergies, most of which will be incurred in the first year post-close.

We continue to expect post-synergy combined adjusted EBITDA margins to be around 30% with some potential upside into the low 30s in the following years. We also continue to expect -- to remain CapEx-light post-close, targeting CapEx of approximately 7% of revenue, driven by success-based CapEx from specific client contracts and overall demand growth. This should position us to generate significant referring -- recurring cash flow once the integration is complete.

This concludes our prepared remarks, and now we'll open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Scott Goldman with Jefferies. Please go ahead.

Scott Goldman

Hey, good morning guys. Just a couple of questions for me. One on the Interoute, Rick, if we go back to maybe Hibernia last year, I think we saw some churn that may have impacted some growth coming out of that. How do you think about, given the size of this deal, the potential for any disruption in sales, and how you think about mitigating that potential churn sort of in advance?

And then secondly, maybe one for I guess either Mike or Chris, now that you're going to be a much larger company, and doing smaller tuck-in deals are still part of the strategy for growth, how -- do we have to think about doing bigger, smaller deals, if that makes sense, in order to move the needle on the growth side?

Richard Calder

Great. Thanks, Scott, for the question. So first on -- I did have a chance to see, as I mentioned in the prepared remarks, all of the major offices of Interoute. And one of other interesting things I had a chance to see is almost 20 different large clients. And I think the uniform reception from the client base was extremely positive, given the scope and scale of the combined company, and specifically, while we talked historically about things like cross-sell. This particular acquisition, I think, gives us tremendous opportunity for cross-sell. Interoute was significantly focused in the European market and had built a tremendous network and asset in the European market, trades very well with the -- all of the key last-mile vendors in the U.S. market.

The European market had not, as deeply, looked in the U.S. and in North America and the combination of North America, the U.S., Canada, Brazil, Latin America, the ability to cross-sell locations, which large multinational clients of Interoute had not really been willing to give to Interoute in the past, we see lots of receptivity to do that and much to the degree that people are saying, how do I do it today?

Not that we are allowed to do it today, but there clearly is, as we look towards close in the very near future, an opportunity, we think actually to accelerate our opportunity moving forward with the combination of the two firms. And we've seen equal receptivity from our clients as well, given the depth and breadth of the asset that they will have throughout Europe. So we're quite bullish in our ability to enhance our growth moving forward versus to detract or slow down any of the progress that we have.

Michael Sicoli

Yes, and I'll take the second question. Just mathematically, as a much larger firm pro forma for Interoute, there would need to be more dollars of small acquisition revenues to have the same percentage impact. I think we've talked before about the quality and the size of the small acquisition funnel. It continues to get bigger over time, not smaller. I do think that the concentration of those smaller deals tends to be at the $50 million level and lower.

And so the probability would be may be a couple more of those deals a year, as opposed to the size of the small deals getting bigger. There's probably going to be a combination of the two. I'm sure there might be a $75 million deal out there that previously would have been considered big, but now isn't. But I think the probability is, there will probably be a few more small deals.

Christopher McKee

Yes, and just to add color to what Mike said, obviously as we've gotten bigger and our scale has gotten bigger, that includes internally the group that we have to handle integration. So as Mike said, we still think there's a very large funnel of nonmaterial smaller deals and rather than just sort of look at doing the same number of deals at much larger, you can just do more frequent smaller deals, including with having a larger purchase scale internally to handle the units of work that generates.

Michael Sicoli

And the funnel specifically just got a lot bigger pro forma for Interoute. There were deals that we either wouldn't have been aware of, or that now make a whole lot more sense, because there's more synergy pro forma for Interoute as well.

Scott Goldman

That makes a lot of sense, but how do we think about that in terms of where your leverage is today? Does that mean that we sort of hold off on doing more deals of this size until you're sort of further integrated and leverage comes down? Or are you comfortable doing some of those now?

Michael Sicoli

I think the governor is typically where are we in -- with respect to the integration of the large deal that we're involved in at the time. So initially, we will be really focused on the integration of Interoute and making sure that goes well.

So it isn't so much a financial or a leverage question, it's more of an operational or bandwidth question. Later this year, early next year at some point that we will be over the hump on that and able to absorb additional work, as Chris was just mentioning.

I'll also point out that the smaller deals, first of all, can be paid for out of a combination of free cash flow and sometimes some seller equity. But also, the purchase price on those small deals tend to be five times or less from a post-synergy multiple standpoint. So relative to a starting leverage point of just over five times for the deals, the overwhelming probability is that these deals would actually be delevering in the near term.

And even as we approach the four times level again, that's pretty much the incremental leverage capacity of these deals anyway when you add in the free cash flow and some occasional seller equity. So it doesn't have a big impact on consolidated leverage. It's more a matter of operationally, what can we handle?

Scott Goldman

That’s helpful. Thank you guys.

Operator

The next question comes from Jon Charbonneau with Cowen & Company. Please go ahead.

Jonathan Charbonneau

Great, thanks for taking the question. Can you provide an update on sales rep productivity this quarter? And excluding Interoute, when would you expect an acceleration in sales rep-driven growth from current levels, particularly given the meaningful increase you've seen in your sales force the past couple, several quarters? Thank you.

Richard Calder

Yes, Jon. Thank you for the question. Productivity, we didn't mention in our prepared remarks, but we had another record quarter in terms of both sales and sales rep productivity. We're at 180 reps. We continue to see productivity marginally improve even as we add reps on an average basis.

So we will continue, as we noted, to grow the scope in the sales force from 180 that we are at today, to 200 by midyear, to 250 by the end of the year inclusive -- or exclusive of Interoute, as we look at the Interoute team and traveling around to visit with all the leaders and the country managers throughout Interoute.

We see significant opportunity to increase the scope and scale of that sales force as well and continue to grow given the addressable market opportunity we have to target large and multinational organizations. We still believe collectively, we're too small as a sales force. And so as a function of that, I think the key ingredient for us is maintaining a churn rate in the mid-ones where we're at and keeping sales rep productivity high and growing and increasing the scope and number of sales reps we have.

That said, as we've said on previous calls, we see great receptivity to fantastic reps in the industry who would like to join our banner. We think we are the disruptor to take share away from the incumbent telcos. And as a function of that, it really is a really focused effort to hire some of the best talent in the industry to go after some of the largest, great clients who we think will benefit from the GTT value proposition.

Michael Sicoli

In terms of when that will show up in the numbers and when we would expect to see that in the numbers, we've been talking for a couple of quarters about the second half of this year is when that would likely occur. Because, while as Rick said, the ramp in the actual number of reps is good and the productivity is good, still, there's a large chunk of the rep base that is really new to GTT, whether it's 3, six months or even up to 12 months.

So not -- it's not just about hitting the 200 and the 250 numbers, it's about also bringing those new hires along to the point where they're hitting the similar levels of productivity as the more mature reps. So no change in our view in terms of that really happening in the second half of this year as the teams' ramp.

Jonathan Charbonneau

And then in terms of Accelerated Connections, how much did that contribute to revenue in the quarter?

Michael Sicoli

Yes. So as you know, we don't disclose the specific revenue and EBITDA numbers for the small deals. But we did mention on the call the purchase price was around $39 million. We tend to pay around 1 times revenue. In this one, the revenue multiple is a little higher than 1 but rounds to 1. And it's another five times deal or better for us. So between those two data points, you guys can get a real good estimate around what it contributed. And it was done in March, so there was 1 month of activity in the quarter.

Jonathan Charbonneau

Great, thank you.

Operator

The next question comes from Tim Horan with Oppenheimer. Please go ahead.

Timothy Horan

Thanks guys. Rick, did you learn anything else over in Europe? Maybe what's the competitive environment like, the demand environment? What's our state of migration to the cloud? And did you -- yes, just any other color would be great.

Richard Calder

Sure, Tim. I think the main thing, give me a chance to talk about software-defined wide area networking. We think they were actually even a little bit further ahead in terms of their rollout, and launch of software-defined wide area networking. And the conversations I had with the teams and the clients.

We think that is a huge trend in our industry, and the ability to utilize the power of the Internet to take legacy technologies, and combine some of the capabilities they have with the Tier 1 Internet backbone that we are, and be able to deliver traffic across client locations, to any public Internet destination, obviously to the hyperscale cloud service providers, AWS, Azure and the like, at significantly reduced cost. So we see acceleration of that. I saw it in the clients that I met with, and the funnels of opportunity that they have.

And we think we will be positioning it very differently from the incumbents who have enormous spaces of private MPLS networks to protect. And the other thing we really saw or at least asking about, who looks like us? And we think we truly are -- at close to $2 billion in pro forma combined revenue, still the small player, but with scope and scale, geographic reach.

And the depth of assets in network to be able to be the incumbent that can take or the -- take a share from the incumbents of AT&T, BT, Verizon, Orange and the like, and we're really, really confident about our ability to do that. That's why we felt that this transaction, as we had originally announced it, paired together two incredibly like-minded companies that live similar values, the anti-incumbent values of simplicity, speed, agility. And in combination with each other, we think, make us much stronger to go after that base of business.

Timothy Horan

And just at the high level, was there anything that concerned you in the quarter? The stock is trading down quite a bit this morning since you reported numbers. I'm not sure what -- frankly what the street is concerned about, but did you guys have any concern in the quarter?

Michael Sicoli

No, thought it was yet another solid quarter, lots of great news, and particularly around completing the financing at a very attractive level on the Interoute transaction. And that -- the transaction is expected to close within the next month or 2. So that's all very positive. I thought the results were positive as well. So no idea.

Richard Calder

Yes, I agree. We -- Okay. Great, thanks Tim.

Timothy Horan

Thanks guys.

Operator

The next question comes from Walter Piecyk with BTIG. Please go ahead.

Walter Piecyk

If you were able to go back to stripping out Global Capacity or Hibernia, looking at kind of where they are now, have they returned to growth? Because I think right around the time of closing, both those companies, based on churn or for whatever reasons, were in decline. Hopefully, you should get them back to growth. Is it possible to break them out, even qualitatively, to let us know that's actually happened?

Michael Sicoli

Yes, as a function of the way we do the integration, there isn't a way quantitatively to answer that question. So I can give you a qualitative answer, which is, I do think that Hibernia stabilized at least in the middle of last year, I think. I don't think GC would have stabilized yet. I think it's still pretty early in that and their trajectory -- in the case of Hibernia, there was kind of a 1-quarter surprise in trajectory that kind of settled itself down quickly.

In the case of Global Capacity, the trajectory is a multiyear trajectory driven a lot by the tail of SMB clients. But -- so that didn't change just because we bought them. And I think we had talked at that time we did that deal that we felt like it would probably be at least a year before that base would stabilize. But again, there's no way to know definitively, because we don't track it that way after we do the integration.

Walter Piecyk

Got it. And then on SG&A, I know you've got like seasonal things that impact the quarter for a company your size. Is there anything else in terms of timing of integration costs or other kind of onetime expenses that when we start thinking about how SG&A progresses over the course of the year that we should think about for Q2, Q3?

Michael Sicoli

Yes, in terms of the transaction and integration related costs or exit costs, while geographically they show up in the SG&A section in the base of the financials, we do pull those out in the definition of EBITDA. So those wouldn't be impacting EBITDA. The things that do impact EBITDA, as you mentioned, are the timing-related items, so payroll tax, annual merit increase, the bonus accrual on a much larger group of employees starting the first of the year versus previous, and then just certain fees like audit and legal that tend to be front-end loaded. So that's all very much normal.

And in terms of the go forward, we have made a significant investment in sales resource or in overall resources pointed at growing our rep-driven sales. So that's probably the big one where we've been talking for a while now about the fact that, that was going to mute some level of margin expansion, as we realized synergies from prior deals. And frankly, the -- we've outperformed on synergies historically to fund a lot of this growth.

But the magnitude of the growth this time around is big enough where it does have a little bit of a muting impact on the margins. We obviously still think that there is a lot of margin expansion in front of us, and we don't expect to be ramping the investment in organic growth at this level continuously. We had a big spike where we needed to sort of get caught up on the size of sales force as Rick mentioned that we think we need to be. But that will fall back into something more normal at some point either later this year or early next year.

Walter Piecyk

How does that convert into -- or how quickly does it convert into revenue? Because I think Rick was also mentioning that you think that 180 is not enough, right, and you want to take that higher. So how do those things kind of come together in terms of leveraging that SG&A into better revenue? And then I guess matching Rick's comments with yours in terms of he wants to get sales higher, but you seem to say that it's like -- maybe that SG&A is moderating a bit.

Michael Sicoli

No, I think the two statements are actually entirely consistent. I think it's just basically the question I answered for Jon. It's a timing issue, right? So you have a -- the SG&A comes before the revenue and EBITDA generation because you have to build the foundation and then you have to add the reps and they have to ramp and become productive. And any company in this space, when you're talking about bringing new people onboard, regardless of their prior level of experience, it takes six to 12 months for those folks to hit their stride generally.

And we're not even at the 12-month mark for the first batch of that increased hiring. So that's why we said the second half of this year is when we would expect to start seeing some of the revenue lift associated with that SG&A investment. That, combined with, at some point, later this year or early next year, that really heavy ramp in reps will subside. We will continue to add lots of reps, but not at the same rate that we've done over the past 12 months.

Richard Calder

I think the other thing ...

Walter Piecyk

And obviously the 24% margins are still pretty impressive, given the business model. Rick, maybe you could also comment, if you don't mind, in terms of the tax cut? I mean you guys have access to the largest enterprises in the country. Any feedback from the sales reps in terms of the tax cut maybe getting these guys to accelerate new applications, upgrading their technology, anything that might benefit you guys? And how do you think the time line on that plays out?

Richard Calder

Well, I mean, I'll make one more comment on rep productivity and then address the one on tax cuts. Mike might speak to it as well. But I think one of the things we've also done, we talk about sales reps, quota-bearing sales reps. But as we've mentioned on previous calls, there was big investment in the infrastructure associated with building out the support teams, leadership, client account management, presale support, quoting, service delivery, sales engineering, which we felt we've gone most of that ramp.

So as we increment our sales teams, there's not a lot of fixed cost investment to add around the sales reps that we actually have the infrastructure in place across our carrier enterprise divisions in North America.

Obviously, as we integrate Interoute into our EMEA division, we'll create more infrastructure there across our divisions in Europe. But we see our ability to take that sort of more fixed investment across all of the support resources and be able to add reps now to continue to grow to address the opportunity we see before us. In terms of, do I see receptivity from clients to upgrade technology as their connectivity needs to grow, absolutely, and whether they can take advantage of that, given more favorable tax environment?

Potentially, yes. But I think there's clearly, with or without tax impacts, there's a significant interest in saying if my traffic is growing in my enterprise at 20% to 30% a year across a combination of moving my IT applications into the cloud, direct need to access the public Internet applications, and increasing file and data size across company locations. I need to increase the size and scope and scale of my wide area network and I want to do that at more competitive and economic rates and get more visibility and application control.

Those are all great trends that perfectly position us to move in and upgrade wide area networking technology with software-defined wide area network that take advantage of the scope and scale of our business, our last mile access options and the Tier 1 IP backbone that we own and control.

Walter Piecyk

Yes, and that all makes sense. It's just sometimes, obviously, getting a little bit more money from the government is a nice kick in the ass to get that stuff accelerated a little bit faster, right?

Michael Sicoli

Agreed. I think we just have not heard that as a major source of acceleration in our clients' decision-making. I think as Rick mentioned, there was plenty of incentive already before the tax cut for them to be moving in this direction because it's just -- with the proliferation of apps and data virtualization, mobility, all of those things are way more impactful I think on a day-to-day basis than a tax cut.

Walter Piecyk

Got it, thank you.

Operator

The next question comes from Frank Louthan with Raymond James. Please go ahead.

Frank Louthan

Great, thank you. What is sort of the optimal mix going forward between enterprise and carrier revenue? And how does Interoute impact that split? And then sort of post-Interoute, is there any additional M&A that you might need in Europe that -- as you've gotten bigger there and what are some of the headwinds to getting more scale there?

Richard Calder

Yes, great, and I also thank you, Frank. In terms of mix, our business will be approximately two-third, one-third. That's about two-third of our business will be sold to a multinational enterprise clients. And about one-third of our business will be sold to carriers, inclusive of the large OTT, over-the-top players, the largest infrastructure technology companies who behave very much like carriers and we think that's a healthy mix for our business.

We think having a majority of our business sold directly to the largest multinationals in the world complemented by selling really three value propositions to carriers: wavelengths of layer 1, optical wavelengths inclusive of dark fiber services and ducts that we can sell, high-capacity Internet access, IP transit services to some of the largest ISPs and content delivery companies in the world.

And interestingly, one of the biggest and probably fastest growing parts of our carrier mix is what we call off-net extension delivering last-mile services to carriers who extend their networks, given the clear scope and scale of our business. We're able to sell last-mile extensions to other carriers to help them serve their large enterprise clients.

We see, with Interoute, that mix being very similar. And we see the ability to add to their portfolios to carriers, one, a deeper wavelength network, particularly given our assets in the Atlantic that pair very nicely with the deep fiber assets across Europe and the eastern part of the U.S.; two, adding the transit product as a Tier 1 Internet backbone to their carrier clients; and lastly, adding the off-net extension product to their clients as well.

I'll start on the acquisition question and maybe have Chris and Mike comment as well. One of the things that -- I think we mentioned in another question is the sheer scope and scale of the number of smaller acquisition opportunities in Europe really is additive to our funnel. We see our funnel as a much larger funnel of opportunity. Europe has remained more fragmented even than North America.

And the opportunity to add on other accretive companies to our mix that are consistent with our strategy of selling cloud networking services to large multinational clients, extending secure connectivity everywhere in the world, has just deepened. And you noticed at the beginning of the year, we did add one Custom Connect in The Netherlands. And we see a very deep opportunity, I think as maybe Mike mentioned, things that may not have been -- we haven't been aware of before. So they are really additive to our funnel of selected acquisitions that we can do to complement our strategy.

Christopher McKee

Yes, I think industry consolidation just in terms of what stage it's at in Europe, is not as far along as it is in the Americas. So that's a great opportunity for us with lots of additional sort of targets in the funnel in Europe. And now, post the acquisition and integration of Interoute, our ability to garner large synergies obviously increases. You mentioned headwinds. I think the only thing that's sort of -- it's quite different than the U.S. market is, some of the targets tend to focus only in a particular country.

And they'll do our core business and other businesses only in a particular country. And so those can -- sometimes aren't as good a fit. That's probably the way that the European M&A market is different, or the European M&A targets are different than some of the ones we traditionally looked at. So it becomes a little bit more sharpshooting at ones like Custom Connect that fit right in with our core mission. But our ability to now have synergies and look at a larger sort of group of targets in the funnel is obviously much better with a larger European presence.

Michael Sicoli

And I'll add just one more thing, which is, just to remind everybody that this is all opportunistic, right? We're in a great position of having already a tremendous global reach and a tremendous portfolio of products and services.

So there's no holes that need to be filled. The primary focus -- I'm sure each of those things can and will be enhanced on the margin over time, but there's no big hole. So this is really about opportunistically finding highly accretive deals to build scale and really add logos, add more client relationships. We're still a very small share player. And the most valuable thing to it -- to us at this stage is more client relationships.

Frank Louthan

Great, thank you.

Operator

The next question comes from James Breen with William Blair. Please go ahead.

James Breen

Thanks for taking the question. Just a couple sort of on the mechanics of the Interoute deal. When would you get the equity from the private equity and your shareholders? And have that impact share count? And given the financing that you completed at the end of last week, can we assume now that there will be no more equity issued to fund that deal?

And then just going forward from an M&A perspective, as you're talking about these deals being, on a relative basis, smaller, will those be funded with just cash on hand and some incremental debt? And can we expect them to be somewhat delivering from this point forward?

And then just for Rick, as you've been out in Europe and met with some of the Interoute employees and salespeople, are -- their customer base relative to your customer base, is it very European-centric, and so is that where there's some opportunity where those customers are looking to reach out more into the U.S. markets where you obviously have some strength as well? Thanks.

Michael Sicoli

Sure. So on the equity, it's committed, but contingent upon closing the acquisition. So it will show up at close. The -- in terms of whether we intend to issue any additional equity as it relates to the Interoute acquisition, the answer is no. We're done. The financing is done. It's locked at this point. In terms of the cash-debt mix going forward, I did address this on an earlier question, which is our past practice with respect to small acquisitions is to use free cash flow, some leverage and often, some seller equity.

And I would not expect that mix to be any different going forward and I would expect that the pro forma leverage impact of the smaller deals, when you net all that out, is probably at or even below four times. So certainly in the near term, it would be delivering and over the longer term, it would sort of be consistent with that higher end of our target leverage range.

Richard Calder

Yes, in terms of talking with the Interoute employees, sales teams and clients, I mean just to reiterate what I said in the prepared remarks, just I came away incredibly impressed. It's a fantastic team, deeply tenured in Europe. To actually try to build that from scratch would take us a decade or more. So being able to step into an existing, highly performing team across all of the major economies in Europe is just a fantastic combination with us.

And as we look through their top clients on the enterprise side, it is almost completely non-overlapping. It's no clients that we have and the ability, I think as I said earlier, to significantly increase the share of wallet with those clients by addressing their needs outside of Europe creates tremendous opportunity for us. There is some overlap in the carrier client base. We do have a little bit of overlap, but not on the product level.

So the types of services generally that have been sold to the carriers in Europe have been for the European asset, particularly the fiber asset. So we don't see that as a risk or a churn risk. Frankly, we see the ability to represent ourselves to carriers with a much deeper portfolio of fiber, wavelength, transit and off-net extension products than we have been able to either as separate stand-alone companies.

James Breen

Great, thank you.

Operator

The next question comes from George Sutton with Craig-Hallum. Please go ahead.

George Sutton

Thank you. We've talked a lot about direct sales efforts. I was at the channel conference -- channel partner conference. And Eric Warren from GTT spoke, and I'll kind of summarize, but I thought it was interesting. He said, we're a massive consolidator. We integrate quickly. We add those acquired features and functions into an offering that benefits the channel partners. And I thought that was a compelling pitch to the channel. I'm curious what progress do you think you are making there?

Richard Calder

Hey -- actually, Eric is here today, and I'm actually meeting with him right after this call. And he has told our team, he says probably the -- not to say that the direct opportunity is not great for us, and we continue to scale there. But probably the single best opportunity for us is in the channel, given its force multiplier effect, and the fact that we tap into existing sales forces at the channel partner level that are significantly bigger than ours even at this stage.

And so we are making significant investment in it. We are hiring more channel managers, leadership, dedicated service and support investment for the channel. I think you saw some of that in the incremental SG&A as we build up our sales and support organization for the channel.

Particularly in the North American market, the consolidation has left the channel partner community with fewer options. And we think we represent one of the best options for the high end of that market, where channel partners have deep ingrained relationships with large multinationals who are looking for new technology solutions, SD-WAN and others to help their clients migrate their existing and legacy networks to next-generation networks.

And so we think we represent a great option for the channel community. And if we had to put the dollar investment in, it's one of the first places we're putting investment in is to grow the scope and scale to be an outstanding service provider for the channel and their clients.

George Sutton

One quick question, if I could, just relative to SD-WAN. With Interoute coming over with their own offering, have you made a decision as to what your plans would be going forward for SD-WAN?

Richard Calder

We have not yet. I mean so to be clear, publicly, we've initially selected VeloCloud as a partner for SD-WAN. We use Fortinet as a security option, long-standing network, another investment in that. We have other investments in Cisco, in Cisco Meraki, and Juniper and multiple vendors that we've used. Interoute selected Silver Peak and they use Palo Alto.

We think having a multivendor strategy for the software layer and the security layer makes sense for us. We haven't made any final decisions, but continuing to represent different technology options that can run on the core network access and be delivered to any location in the world, represents us, we believe very powerfully, to clients, all of whom have slightly different interests in these.

George Sutton

Perfect, thanks guys.

Operator

The next question comes from Brandon Nispel with KeyBanc. Please go ahead.

Brandon Nispel

Thanks for taking the question. Couple if I could, one for Rick. I guess, Rick, in my experience, the U.S. market is generally ahead of Europe in terms of overall cloud adoption. So I was wondering if you could comment on where you think European enterprises are in terms of moving their application and connectivity requirements to the cloud relative to that of the U.S. And then maybe one for Mike, Mike, was there any impact from some of the accounting changes in the quarter? And then maybe you could just update us on what your pro forma FX exposures will be post-Interoute? Thanks.

Richard Calder

Okay. I mean, I'd probably answer it by -- the first one by saying, I'm not sure I see necessarily either market being either ahead or behind. I'd probably answer the question on adoption of cloud services being still in its early phase for very large multinational clients. I think the early adopters were smaller businesses, and that there had been more hesitation in the largest, our target market, the large and multinational enterprises, to move many of their applications. That is accelerating. There has been this sort of, "We want to keep control over it.

I think the cost compelling nature of using the cloud service providers, whether it's for the core infrastructure application AWS, Azure, Google Cloud, et cetera or for the specialty applications, I think that is very much accelerating which is actually a great trend for our business there.

Some of our best clients and best partners are all of the cloud service providers, our ability to deliver network and client traffics diversely and securely to every instance of every one of the major cloud service providers is what we make our network available to clients for and as they move applications out, so relatively thinking, I think they're about the same across the two geographies.

Relatively speaking, as they move applications out of their enterprises, the bandwidth demand at each client location grows. And so the need and interest to have a much better, more flexible, more cost-effective and more agile network solution really puts pressure on the CIO. So we see ourselves -- we see this trend of early adoption of moving IT applications at the large multinational helping us, because that's our target market. And that provides a compelling forcing function for CIOs, IT managers, et cetera, to upgrade their networks.

Michael Sicoli

I'll also point out that one other encouraging trend that we see in Europe is the willingness of clients to bundle managed services into the connectivity package, as opposed to trying to do some of that on their own, which is more prevalent in the U.S.

So I think that's a positive sign as well. It goes hand in hand with the trends Rick was just talking about. In terms of the accounting changes, we're very fortunate in that our existing practices were pretty close to what the new rules required. So there's minimal impact to the -- to our trajectory in the way we report numbers, more disclosure, as you'll see when we file the 10-Q, but no material change in the way we were accounting for things.

In terms of the pro forma FX exposure, we will obviously be introducing a lot of non-U. S. currency and reported results and virtually all of Interoute's results are either in pound sterling or euro, and their reporting currency has been euro. So they have had exposure between the pound and the euro, which we'll inherit a little bit.

But the majority of the currency that we'll have going forward will be in euros as opposed to dollars. Because on a pro forma basis, there will be more non-U. S. revenue than U.S. revenue, because all of Interoute is non-U. S. effectively. I will also point out though that there's a lot of matching of dollars -- of expenses as well in those relative currency -- currencies.

And if you think through the capital structure that we just talked about, there's a decent amount of debt in euros as well. And so we've tried as much as possible to match the expenses with revenues, but I'm sure there will be some additional hedging needed to more optimally match the different flows of currencies. But materially, the expenses and revenues should be pretty well matched on their own.

Brandon Nispel

Thanks for taking the questions.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Rick Calder for any closing remarks.

Richard Calder

Great. Thank you, Operator and I'd like to turn the call to our Chairman, Brian Thompson, for some closing remarks on the call.

Brian Thompson

Thanks, Rick. Good session. I have four things. I started with two, but after the call, I have four things I'd like to quickly cover and make comment on.

The first is, somebody asked a question about whether we knew if there was something because of the way the trading was taking place this morning. If anybody understands how the day traders move up and down with their computer-aided manipulation and rumors, I'd like to understand that better. But it looked to me like there were an awful lot of people creating and then covering shorts. And obviously, the way things go, that happens without respect to anything that's going on in the companies.

From my point of view, I would just underscore what was said by Mike and Rick, there is virtually nothing that we know that would cause anybody to act that way. And therefore, I leave it to you on the call to try to understand that. I -- my only comment would be, boy, this going down 5% or 10%, as it was a little bit earlier, is a great buying opportunity.

The second comment is that frankly, there are two things that I really enjoyed about the fact that we're doing both Interoute and the other acquisitions that we've done in Europe. And that's we are going back to an original approach that we took, which was a belief that both in the European markets and in the U.S. markets, there are going to be leaders and laggards, and there are going to be people that care about the kinds of communications, interconnections that we can bring.

And I believe the Interoute acquisition is, as Rick put it, it's probably going to prove to be one of the best things that we've done. We have great power now when we get this underway in both Europe and the U.S. and a great background of people steeped in the markets to be able to understand those markets well.

Too many of the companies in the past from the U.S. went over and created their own things, and it didn't work very well because they weren't sensitive to it. We have been, since the day we started the company, been sensitive to what goes on in the Europe markets and the U.S. The opportunities were greater in the U.S. to do some acquisitions, and this one gives us some real balance and opportunity.

The two things that are really what I would consider watershed events that I wanted to underline: The first is, something that wasn't covered here, and something that we've talked about in the last few weeks. For the first time in the company, and I think it's fair to share that with you, we're beginning to see the clients or would-be clients approaching us rather than our salesmen having to make cold calls and create an understanding of what's with GTT.

That tells me that we've turned a corner in terms of reputation, beginning to be moving around in the industry and the echo chamber, starting to generate a following that says people will desire to find us as the disruptor. And that's a very important thing that we're starting to see now.

The second event that I think is really a watershed is, as Mike pointed out, this financing that we have just done to put Interoute into our company was some of the best execution from people that really understand and are detailed and knowledgeable and very much dig into the basis for the debt being raised. And for us to have the kind of response that we got, to do the kind of financing we did with world-class financial organizations behind us, I think it's a great step forward for this company in terms of our future opportunities.

With that, I wanted to compliment the questions and our team for what they have been doing. And I think we've got a great future, and as I said, a good buying opportunity. Thank you very much.

Richard Calder

Great. Thank you, Brian. And thank you, to everyone, for tuning into our first quarter and dialing into our first quarter call. We look forward to sharing our results in the very near future. Cheers.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.