GTT Communications, Inc.
Q1 2019 Earnings Call Transcript

Published: 8 May 2019

[Operator:]

Good day, and welcome to the GTT Communications First Quarter 2019 Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Chris McKee, General Counsel and Executive Vice President 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 one 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'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 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 8, 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. GTT made good progress on a number of fronts during the first quarter, delivering significant margin expansion, growing our quota-bearing reps sales force and nearing completion of the Interoute integration. Revenue and adjusted EBITDA grew 73% and 95%, respectively, from last year, with adjusted EBITDA margin reaching 27%. Revenue declined 1% sequentially as our pace of installs was a little slower than expected due to some delays related to integration activities and training as we migrated Interoute's legacy systems and processes into GTTs single client management database system or CMD. Churn remained stable in the mid-1% range and our backlog of sold but not yet installed monthly recurring revenue remained the same at approximately $10 million monthly recurring revenue. As we have noted before, the key ingredients to driving rep-driven organic growth are

[Michael Sicoli:]

Thanks, Rick. First quarter revenue grew 73% year-over-year and decreased 1% sequentially to $450 million. First quarter adjusted EBITDA grew 95% year-over-year and grew 4% sequentially to $122 million. Our growth from last year was driven mainly by the Interoute acquisition. Exchange rates had an unfavorable impact on our reported results, as approximately 52% of our revenue was denominated in non-U.S. dollar currencies. In constant currency, revenue grew 80% year-over-year and decreased 1% sequentially, while adjusted EBITDA grew 106% year-over-year and 5% sequentially. On a pro forma basis, including Interoute in prior period results, and in constant currency, revenue decreased 1% year-over-year and 1% sequentially, while adjusted EBITDA grew 14% year-over-year and 5% sequentially. The pro forma revenue declines were due mainly to the pre-closed trajectories of Interoute and Global Capacity as well as the timing of installations and deemphasizing nonstrategic products, as Rick noted earlier. The pro forma EBITDA increases were due mainly to the realization of cost synergies. Adjusted EBITDA margin of 27% increased by over 300 basis points year-over-year and by 140 basis points sequentially. On the fourth quarter call, we said we expected to drive another 300 basis points of margin expansion throughout 2019, as we complete the Interoute integration and realized the associated cost synergies and we achieved almost half of that in the first quarter. We continue to expect to deliver adjusted EBITDA margins of approximately 29% in the second half of this year, as we fully realized the remaining Interoute synergies moving as very close to our next financial objective of 30%. During the quarter, we incurred $9 million of transaction and integration expenses, which are included in our reported SG&A but excluded from adjusted EBITDA. We also incurred $3 million of severance restructuring and other exit costs. From a cash standpoint, we paid out $18 million of exit and integration costs in the quarter, down slightly from $22 million last quarter. These exit and integration costs are mainly related to Interoute but also include Access Point. At quarter end, we had approximately $20 million remaining to be paid out related to exit costs, most of which should be paid out in 2019, and we expect to incur approximately $7 million of additional exit and integration costs related to these two deals over the remainder of 2019. First quarter net loss was $27 million compared to net loss of $31 million last year and net loss of $53 million last quarter. The net losses in each period were driven mainly by nonrecurring costs, including exit and integration costs as well as the noncash change in fair value related to our exchange rate and interest rate hedges. First quarter capital expenditures were $32 million or 7% of revenue compared to $13 million last year and $16 million last quarter. As we noted on the last call, fourth quarter CapEx was a little lower than normal due to the timing of payments, which we called upon in the first quarter. Going forward, we expect our CapEx to be between 6% and 7% of revenue, driven mainly by success-based investments in support of specific revenue opportunities. First quarter ending cash balance was $51 million and net cash provided by operating activities was $16 million, which was negatively impacted by a significant use of working capital related to Interoute accounts receivable, as we transitioned billing and collections activity into our CMD system. This resulted in some invoice delivery delays and slower payments as our clients review and validate the new billing format. This is typical during the integration process, albeit on a larger scale due to the size of Interoute, but we expect to return to normal day sales outstanding or DSO levels over the next quarter or two as we work through clients billing questions and any data migration issues. Adjusted free cash flow, a measure that shows the recurring cash flow of our business without the impact of acquisition related costs was $2 million in the first quarter, much lower than last quarter, due to the working capital issue I just highlighted, plus the catch-up CapEx. On a normalized basis, adjusted free cash flow would have been higher by at least $50 million. We continue to expect cash flow to increase throughout the year as we normalize DSOs and CapEx timings, fully realized expected cost synergies and finish paying out exit and integration costs. The main priority for this cash flow will be to repay drawn revolver and help fund small acquisitions. Our debt balance was approximately $3.3 billion at the end of the first quarter, including $2.6 billion of senior secured term loans maturing in 2025, of which roughly 1/3 is euro denominated and $575 million of senior unsecured notes maturing in 2024. During the first quarter, we drew $26 million of additional revolver, which means the net secured leverage covenant applicable to the revolver is now in effect, given that we're above 30% drawn. The maximum permitted net secured leverage under that covenant as, defined in the credit agreement, is currently 6.5x. And our calculative ratio for the first quarter was well below that level at approximately 5x. So we have significant cushion at this time. Our total net leverage ratio in the first quarter was similar to the fourth quarter at just above 6x, and we remain committed to reducing leverage over the next few years to our long-term target, 4x or less, through growth in adjusted EBITDA, cash flow generation and delevering activities. Finally, we completed the adoption of ASC 842 in the first quarter, which resulted in an increase to bill of assets and liabilities of over $400 million. There was no impact on the income statement or statement of cash flows. This concludes our prepared remarks. And we'll now open up the call for questions. Operator?

[Operator:]

[Operator Instructions]. The first question comes from Jon Charbonneau of Cowen & Company.

[Jonathan Charbonneau:]

You noted the pacing of installs was a bit slower in the first quarter. I appreciate you don't provide guidance, but how should we be thinking about revenue growth in the second quarter and maybe in the second half of 2019? And then could you just talk a little bit more about the booking trends you saw in the quarter? Any change in the contribution from Europe and may be any particular verticals worth calling out?

[Richard Calder:]

Okay. Thanks, Jon. Just to give you more color on - we generally have cutover to our client management database as we said in the prepared remarks, and we did that in December of last year. So first quarter of '19 was the real sort of cutover for all the employees. We now formally retired the major client relationship management system that existed in Interoute and so we had all of our employees trained and up to speed, but it was a natural slowdown. We see it in most of - every acquisition that we do. Obviously, Interoute was larger, so that slowdown was a little bit larger. We feel, as we said in the prepared remarks, well positioned to return to growth. We continue to grow the rep-driven sales force. We're at 320, on our target to get to 350. We feel that our churn has been very stable in that mid-1% range. And even as we have increased the number of reps that productivity per rep has remained stable, and we feel very comfortable with it. And as we think, we said on the last call, really it's a main game of adding productive reps to our equation. We've seen good traction in our bookings last quarter. It was, again, our highest bookings quarter of all time, and so our backlog has remained really stable. Our real opportunity now is to install very rapidly that backlog, which represents $120 million in annualized revenue and that's really what we're focused on.

[Operator:]

The next question comes from Frank Louthan of Raymond James.

[Frank Louthan:]

Can you walk us through some of the nonstrategic products that you say you're de-emphasizing in sort of the margin profile of those? And how long will that take to work its way through? And are you able to quantify that in any way?

[Richard Calder:]

Sure. Let me start Frank with the products that are strategic to us. We're very focused on providing cloud networking services to large multinational clients. We lead with wide-area networking, and of course, the lead product for us there is software-defined wide-area networking. We are one of the largest Internet backbones, which is the second major category for us selling high-capacity dedicated Internet access, IT transit, broadband internet services to clients around the globe. We provide - we have a deep core infrastructure to provide transport and infrastructure, like wavelength, dark fiber, select co-location in a few co-location areas that we're in, so that tends to be a big part of our revenue stream. And then finally, unified communication, relatively small part, but big growth potential for us. And so that's what we have our sales force focused on. With the Interoute acquisition, we acquired a base of clients who are fantastic, and we provide cloud services, traditional hosting and compute service to them. We are really focused on providing an outstanding experience for those clients, but we're not focused on selling new cloud services, new hosting, new compute services and that has been a real shift with respect to legacy Interoute and the directory they have been on, as we really focus on our purpose of helping companies connect their people to any location in the world and any application in the cloud and not focus as much on providing those exact cloud services and being excellent in connecting to any cloud services in the world.

[Michael Sicoli:]

And in terms of the magnitude, as Rick said, we see this in just about every acquisition. The companies that we buy always have some piece of business that may be a little bit different than our core strategy. It's typically 5-ish percent of revenue. We're not talking big numbers, but in the case of Interoute, that product that Rick was talking about, was roughly 5% of revenue - of their revenue. So it's less than 5% of our combined revenue today. But importantly, it was a much higher percentage of their sales in the year or two leading up to the acquisition because the Interoute had made a strategic priority shift that we did not maintain. So there is a bit of sales momentum that you lose when you shift strategy, like we did, and that's part of the equation in terms of why organic growth is sometimes challenging in the quarters or first year after you do an acquisition.

[Frank Louthan:]

Okay. And the margin profile on that hosting product, relative to the rest of the business?

[Michael Sicoli:]

Yes, it's consistent, I would say, might be slightly higher than the average from an EBITDA margin standpoint because it is more capital-intensive, but it's not significantly different than the overall margin.

[Frank Louthan:]

Is there a CapEx benefit to letting this go as well? And then I assume these customers are around contracts. I mean, should we watch this roll off over, say, the next 2 or 3 years? And how long do you think that's going to be - and are there any other nonstrategic assets of any sort of material size that we should know about or nonstrategic products?

[Michael Sicoli:]

Yes. I think these contracts are typically fairly long term in nature. And to be clear, we're not saying we're exiting the business, we're saying we're just not focused on selling new to the degree that the prior company was. So the clients we have today, we will continue to invest whatever is necessary to keep them happy and well served, and I would expect that many of them would continue to renew over time. In terms of the other nonstrategic products, there's nothing as big as the legacy sort of hosting and compute platform that Rick was talking about on the Interoute side. There's a small tale of things from other acquisitions that are still in the base, but that would probably be less than 1% of revenue at this point in time. And again, it's not a full on exit, it's just a de-emphasizing, meaning, not focused on selling new, just focused on serving the base we have well.

[Richard Calder:]

And in the past year, we've had tremendous sort of re-term and renewal activity from the base of clients that we acquired. So as I and Mike noted, it's really more of a focus of new. So we really don't want to be focused on growing the cloud services business outside of the base of clients we have already.

[Michael Sicoli:]

And related to the CapEx point, if you just took the pro forma Interoute capital intensity plus legacy GTT, the number would have been north of 7% of revenue, part of us guiding initially towards 7% of revenue as the new target for CapEx was an acknowledgment that we don't intend to do as much of that spending going forward. And you might also note, we've even lowered that range a little bit now, instead of just saying target of 7%. We are sort of back to that 6% to 7% as an acknowledgment. Again, the capital intensity is coming down a little bit from the run rates that existed in 2018, as we shift our strategy more to just those core products, the networking products that Rick talked about, that are less capital-intensive on average than cloud services products.

[Operator:]

The next question comes from Walter Piecyk of BTIG.

[Walter Piecyk:]

Rick, I think, at the end of the year, you had mentioned the quota-bearing reps is around 300. I may have missed this is in your prepared comments Did you say - I know you said it grew. What is it up to at the end of the quarter? And are you still on target to hit 350 by the end of the year?

[Richard Calder:]

Yes. Thanks for your question Walt. We grew to 320 of quota-bearing reps from - before end of fourth quarter to end of first quarter. And so we do believe we are on track to hit the 350. Interestingly, there is a little color on that. As we noted on the last call, we made a big investment in sales development rep, nonquota-bearing, as a farm system effectively. And we've promoted our first class of folks to account representative, quota-bearing account representative out of that. They carry lower quotas, but they will be our account executives and account managers of the future, and we feel really comfortable with that program and in fact have looked now to expand it both in North America and in Europe moving forward.

[Walter Piecyk:]

So the type of business that you're in, I assume these are not like a Cogent low-end salesperson. These are people that are experienced in what they do, right, and bring probably existing relationships to be able to the company when you hire them?

[Richard Calder:]

When we hire new reps from the outside, absolutely. Our average productivity per rep is in the high single-digit monthly recurring revenue, 1,000 monthly recurring revenue range. So yes, we have a significantly higher rep profile in terms of the number of reps we have and the sale productivity we expect for them. That's said, we see an opportunity to not only hire from the outside but to grow the existing base from sales development reps, which are helping us generate new appointments with our target market of large and multinational clients. And then of course, the other main way is we acquire reps as we do acquisitions as we just did with Interoute.

[Michael Sicoli:]

And maybe just to drive that point a little bit further. I think we've talked about this on prior calls as well. Our prior model in terms of increasing sales head count relied 100% on hiring from the outside. And as we get bigger and have more of a global presence, we recognized we have to be growing some of that talent from within as well and that is the FDR program that Rick was talking about that we - was little more than just a trial in 2018. We made a significant investment in that, but it's nice to see that vision become reality now in 2019. And as Rick said, now we're going to increase resource on that. So we have more of a balanced mix going forward as we grow headcount from a quota-bearing standpoint where we're promoting from within and also hiring from the outside.

[Walter Piecyk:]

So you're hiring experienced salespeople that's up, let's call it, 5% sequentially. Obviously, they need to find the bathroom and that type of stuff and get their stuff ready to go. You're maturing some of these acquisitions that were declining in revenue, but organic still down 1% sequentially. So - and you haven't acquired anything. We are five months into the year, there has been no acquisition. So I'm just kind of looking forward trajectory. I mean, by the way, Rick also in your prepared comments, you mentioned highest bookings ever. You're really comfortable with trajectory. When is all this actually result in not seeing a decline in sequential revenue? I thought we were expecting that to happen this quarter. Obviously, you did okay last quarter after a horrible Q3. But when is this actually going to result in revenue not declining sequentially because if you can't keep that flatter even grow it a little bit, let's say, you make $100 million in acquisitions, for the year, your revenue is going to basically hit a cliff. And then you're - then now you're running out of synergies, right? You don't realize you're synergies by the third quarter and your EBITDA is going to lap that and be at 0% growth by, what, second quarter of next year. So what's the strategy here, given that the leverage prevents you from making very large acquisitions right now?

[Richard Calder:]

Yes. The strategy remains exactly the same Walt, to grow organically through two dimensions

[Walter Piecyk:]

So - but with all the things that I just mentioned, shouldn't you at least be able to look out and say, your sequential declines are at least going to moderate in the second quarter? Because again you added 5% sales force, you just talked about having record bookings. So I get that you can't say here is the quarter that we're going to return to growth, but can - I mean I was - and looking in the June quarter, you could at least give some indication whether you can moderate the declines.

[Michael Sicoli:]

Yes. As you know, we don't provide quarterly guidance or annual guidance. And so I think that for now the statements we've made are pretty clear, which is that we expect to return to growth in 2019. And there's three quarters left in 2019. So you can sort of predict, if you like, which one of those quarters it will happen, but what we're doing here is on a pretty significant scale, with just integrated, the largest acquisition in the company's history, that's incredibly disruptive on many dimensions and the pre-closed trajectory was negative. So predicting with precision the exact quarter worth all these things come together is pretty much impossible. So I appreciate the desire to know the answer to that question, but that's just kind of not where we are right now.

[Richard Calder:]

Right. We feel that the platform that we now have, particularly in North America and Europe, to provide service to large multinational clients, to take share from the incumbents, is the best we've ever had in our corporate history. So the point end where we'll continue to achieve those synergy targets but then to grow from there. We are clearly committed to growing this business to that next financial objective, the fifth that we've established and execute it across all three dimensions of rep-driven, small nonmaterial acquisitions as well as a periodic larger transaction, like Interoute.

[Operator:]

The next question comes from George Sutton of Craig-Hallum.

[George Sutton:]

You mentioned that the M&A funnel remains robust. You also mentioned you hope to delever through the process. I just wondered if you could walk through where you feel you are operationally relative to larger acquisitions at this point. And can you give us a sense of the delevering process you envision?

[Michael Sicoli:]

Sure. In terms of operationally being ready, we are very close if not already there at this point with the overwhelming majority of Interoute integration being complete at this stage. That doesn't mean we're going to rush out and do another big acquisition anytime soon. I think as Rick just mentioned, it's probably unlikely that, that would happen at least for the balance of this year. Our primary focus is on smaller acquisitions, which is the normal course for our strategy. The larger deals have been much more episodic and fewer and farther between and that's more likely to occur and that's really more part of the three-year vision of how we get to the $3 billion number by 2021; not so much part of the vision this year. In terms of the delevering associated with a smaller acquisitions, we typically are buying these companies at around 5x EBITDA on a post-synergy basis or less. And the post-synergy number being achieved typically within two quarters because we can integrate the smaller acquisitions more rapidly. So the starting point for the purchase price itself is about 5x EBITDA or lower. Our average, actually for the smaller deals, has been below 5x over time. But if you just take 5x, as an example, relative to our current leverage that would be delevering even if we did those acquisitions all debt. However, our history also shows that we typically issue some amount of seller equity associated with those acquisitions less from a corporate finance standpoint, more from an alignment of interest standpoint to make sure the seller still has skin in the game to make sure the transition goes successfully, typically 10% to 20% of the acquisition price. So just rough numbers if assume 20%, then 5x becomes 4x, which is our long-term target leverage. And the more deals we do at 4x from a leverage standpoint, the faster we get back to the 4x target from a long-term perspective we have on the consolidated business.

[Richard Calder:]

Yes. In terms of the funnel itself, particularly on the nonmaterial acquisitions, I think the mantra for GTT remains the same, which is to be involved in every relevant process. And so I think we're well known as a buyer. We're well known in this industry as a potential destination for owner operators that are ready to sell. And so we think we have good insight into the available opportunities and engage - we're always engaged in those discussions in any given day sort of talking to a number of counterparties. And as Rick said in the prepared remarks, we remain very happy with the state of the funnel of nonmaterial acquisitions, and we'll look to do several of those and what remains in 2019.

[George Sutton:]

Got you. Wondered lastly - and I'll hang up and listen to the answer, can you update us on your UC strategy, which I believe is reselling Cisco and BroadSoft. I'm just - I'm curious, a, what's you pitch is in that area? And how much growth can you envision there?

[Richard Calder:]

Sure, George. I mean, we - as I've said on multiple calls and reiterate today, we see it as a great opportunity for us. We have not prosecuted on it as well as I think we can. We are actually establishing, for the first time, an overlay of sales force to actually add it on to our WAN, particularly SD-WAN sales and install base. We think it's tremendous opportunity for clients once they move to SD-WAN to move their traditional and legacy voice services, most of which is still TDM to unified communications or SIP Trunk. I mean, obviously, as you've noted, we use a Cisco-based unified communications platform, and we have a very deep SIP Trunking platform for those who do retain IP PBXs around the world. So we see it - we clearly see it as a big part of our total addressable market and an area that we should be a share taker in the business as other players continue to attack the legacy TDM part of that market.

[Operator:]

Was there a follow-up Mr. Sutton?

[Richard Calder:]

I don't think. He said he was going to hang up after that.

[Operator:]

The next question comes from Tim Horan of Oppenheimer.

[Timothy Horan:]

Sorry, if I missed this. Did you say when the provisioning got back to normal levels, may be one month or are we there yet?

[Richard Calder:]

Right, so the main cutover, as I said earlier, occurred in December. And so most of the retraining of the organization was occurring in November, December and through the first quarter as we reappoint the entire service delivery organization, particularly in Europe, both the U.K. division and the Europe division to our client management database and formally retire all of the legacy systems, which is now complete. And as a function of that, where we took sort of the slowdown, the hit, if you would take it, in install provisioning in the first quarter, I think that most of that is now, in terms of training, most of that's behind us. Our backlog still remain still quite large at the $10 million in monthly recurring revenue. And so we would expect that to come in over the next couple of quarters as we work through that backlog, which is why we feel we're well positioned to return to the rep-driven component of growth.

[Timothy Horan:]

So it sounds like the ability to provision is just returning right now after kind of 4 to 5 months of some slower pace of provisioning, but I mean that would kind of suggest that the second quarter should be weak also from a revenue perspective, given the compounding of the services business. Is that a fair way to think about it?

[Richard Calder:]

I think as Mike said earlier, we don't generally predict as to which quarter we would return to growth on the rep-driven component of it, but we have all the ingredients. As we said, we like productivity. We like the product force. We like the size of the sales force. We like where we stand in churn rate, particularly after this large acquisition. So it is first and foremost exactly that point, get that backlog installed. It's hard to get it all installed at once. And so that's why I said it'll take a couple of quarters to work through. But we do believe we are past the training effort, and everyone is now fully aligned into one system, which is generally a huge victory for GTT. We have retired well over 30 CRM and provisioning systems across the organization and everyone uses our one client management database.

[Michael Sicoli:]

And maybe just take a minute to reiterate our integration strategy, which is a bit unique, which is to cutover all systems and processes to the GTT systems and processes as quickly as possible. That does create short-term pain for clients, employees, even suppliers, but we think it is significantly better for all of those constituents over the long term. Others who don't have the rapid integration strategy that we do, just prolong that pain over years and years, and you have a gradual degradation of experience. And we feel like it's much better to take the pain right away and be good at fixing whatever didn't cut over cleanly, quickly and move forward with one platform, one GTT, one way of doing business, which is much better for everybody over the long run. I would also say, in terms of your question about the timing of when we get back to normal, it's not like 4 or 5 straight months. It's at a significantly depressed level and then magically in month 6, it's snaps back. You take a few months there early, so I would say, December and January were sort of the low points of a productivity perspective. And as we have progressed from there, we got better and better. And I feel like, in April, certainly by sitting here in May, we're back to normal. What date was it exactly that happened, I couldn't tell you, but at some point over the last month or so I feel like we got there.

[Timothy Horan:]

No. That's real helpful. And just to reiterate, I mean historically, I think you used to grow organically with your sales force in the 5% plus range. With 350 salespeople and the numbers we're talking about in terms of churn and provisioning, can you become a 5% grower at some point, again, in the next 1 to 2 years with the sales strategy?

[Michael Sicoli:]

Yes. It's a great point. Just as a reminder for those who may not have been following us over a longer period of time, prior to the acquisitions of Hibernia, Global Capacity and Interoute over the past two years, we were growing organically at 1% at 2% per quarter clip sort of, call it, 4% to 8% organic. And so we had a business that was producing at those levels. Our expectation is, we will once again be producing those levels in the future. And absolutely, at 350 reps, with stable churn and stable productivity, we would be in at least that sort of low to mid-single digits range with an expectation of growing from there as well in 2020 and beyond.

[Timothy Horan:]

And lastly - sorry for the multiple questions. The universal box, could you talk about how important that is? How much lower is that than an SD-WAN box? And can that help you upsell other services pretty quickly?

[Richard Calder:]

Yes. I mean the real opportunity with Universal CPE is to make the transition to SD-WAN really seamless because it allows us to put the two most important virtual network functions, the actual SD-WAN control software itself and the local firewall into one piece of CPE. Today, most clients actually use two. And if they want significant diversity of their CPE, they buy four. And so we have a real opportunity to consolidate that and put their wide-area networking on a software platform. That gives them both security and deep visibility into the flow of their traffic throughout our core network. We also firewall it in the core of GTT's network as well, but the universal CPE box has a significant ability to reduce cost for clients that are making a transition from hybrid networks, where they have legacy MPLS networks and legacy bespoke and standalone Internet connectivity and put them into one controller that provides diversity because we're right, we're in the business of providing two diverse Internet access lines to each location on one piece of CPE.

[Timothy Horan:]

I appreciate you are saving them a lot of money and it's a lot easier to do, but is this a higher sell for you and high margin? Can you get more revenue per sale transaction?

[Richard Calder:]

Well, certainly, most of what we're doing is getting new revenue. So we see it as a real growth engine for us, given the fact that we're a very small share player in this overall market. And so from our perspective it's a new revenue at high margin. From the client's perspective, it's cost savings. We clearly see an ability to reduce cost and operational complexity and add incremental visibility in terms of their networking and the connection of their people to cloud services around the world. So we really think it's a win-win, and we see it accelerating now as we move into '19 and into '20.

[Michael Sicoli:]

Just to be clear, I don't think the box itself unlocks additional ARPU for us, at least in the near term. It's much more about removing barriers and costs for clients to make the switch in this early phase of adoption. Over the long term, having it all on one box that we own and control could enable us to add features or services that increase ARPU relative to the mode we're in today, where we're using sort of vendor supported hardware.

[Operator:]

The next question comes from James Breen of William Blair.

[James Breen:]

Just a couple. I know you gave constants of currency growth rates. Can you talk about the absolute impact sequentially year-over-year, just from the currency impacts and just thoughts about that going forward, given how much revenue you're getting out of Europe now? And then as we think about the spread between U.S. and euro, in terms of where the growth is coming from, is a sort of a combination of the two just one favoring the other?

[Michael Sicoli:]

Sure. In terms of the absolute dollar impacts, it's also listed in the press release in bullets. But from a year-over-year perspective, which is the real headwind as it relates to currency, revenue would have been higher by $18.1 million, EBITDA would have been higher by $7 million. And sequentially, not that big of an impact, there was a lot of volatility within the quarter, and we ended the quarter lower than we started the quarter. But actually, during the quarter, that was actually stayed flat or even - there was just a period where it actually went up but then it went down more significantly in March. But in terms of the specific impact, it was only $100,000 for revenue and about $300,000 for EBITDA, sequentially.

[Richard Calder:]

And in terms of growth potential, I think it really points out why we felt and we are so excited about this combination of platform we have because we see equal potential in North America and Europe, and that our - you're broadly defining, including the United kingdom. And this platform, we have, allows us to very effectively sell to those large multinational clients who generally have the significant amount, super majority of their locations across those geographies. And to basically buy networking, wide-area networking, software-defined wide-area networking services, we've seen incredible attraction and pickup from client say, "Ah, you're really relevant to us," and our ability to move away from the incumbent and we think this has been a real linchpin in the strategy to ensure that we are the disruptor to those incumbents. And we have the global scope and scale with 3,000 employees across 30 countries and 60 offices around the globe to be really relevant to all major, large and multinational clients. To your direct question, it's about equal. If I think we have four divisions, the fifth is a very small one for medium business across the world, but the four divisions, two are in North American and two are in Europe. And the plan that we put out in place is very balanced between all of them to be able to grow on a balanced basis and we see both headcounts, quota-bearing, continued investment across those organizations being very balanced between North America and Europe. And clearly, being able to deliver locations to any location in the world across those two geographies and anywhere else in Asia Pac, Latin America, Middle East, et cetera.

[Operator:]

The next question comes from Brandon Nispel of KeyBanc Capital Markets.

[Brandon Nispel:]

I guess, I'm going to keep hopping on the provisioning issue. I guess the churn is staying relatively costing quarter-over-quarter, it's a gross install issue, but you also have a U.S. business, which I wouldn't have expected would been impacted by this service provisioning change. So I guess maybe can you comment on why that impacted the U.S. business so much? And for Mike, you mentioned the working capital headwind this quarter, can you maybe outline your target for DSOs, going forward, so we can get our cash flow statement in line?

[Michael Sicoli:]

Okay. Sure. I can start with the working capital point. As I mentioned in the prepared remarks, we had a delay in sending invoices out during the cutover of roughly a month. And the impact from a cash flow perspective of widening out AR was roughly $50 million, which is about one month worth of recurring revenue, monthly recurring revenue from Interoute. And so we would expect to sort of get back to normal, perhaps as early as Q2, but most likely across Q2 and Q3, in terms of getting caught up from a collection standpoint as clients not only receive their invoices on a timely basis but digest those invoices, which are all in new format than they were used to previously. And this is very typical for us in terms of the rapid integration strategy that I talked about a minute ago, and it's a short-term issue that will resolve itself soon. In terms of target DSOs, the Interoute client base does have typically a longer contractual payment timing in their contracts. So the most common payment terms you would see in and out of it face would be net 30, although there are some clients that have a little bit longer today. In Europe, it's closer to 45 to 60 days. So on a blended basis, probably 45 is the right target, based on the contractual payment terms that clients have. However, obviously, our teams work very hard to get clients to pay even more timely. And so it's possibly you could see less than that, but I think the more likely scenario is the mid-40s, based on the contractual timing of payment.

[Richard Calder:]

And on the provisioning issue, it definitely had a much bigger impact in Europe, may be less in the U.S. than our North American divisions of Americas and carrier. We did given that many of our folks that came in Europe, both Europe and U.K. provision, due to us from Interoute, we actually use most of our experienced folks in the U.S. So there was a minor effect in the North American division as we basically sent them to Europe for that December, January and part of February, to actually November and December part of January and February time frame. More minor, but most of the impact was in Europe.

[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 would like to turn the call over to our Chairman, Brian Thompson, for some concluding remarks.

[Brian Thompson:]

Thanks, Rick, and I appreciate the opportunity for everybody to be on the call. We, this last week, we held a Board meeting in London. The Board had decided that based on the fact that the Interoute acquisition was going to have a huge impact on the company and wanting to have a better sense of both the integration activities as well as the future activities being planned for a big chunk of the business we held our meeting last week. And I would like to refer to that meeting in saying that the Board came away, and I'm confident that each member would say the same that we were both impressed with the fact that this was a significant shift in our company from the standpoint of going through a process of integrating. It was, as the team, has pointed out, it was a major move that we had done in smaller acquisitions and the size of it just created a lot more discontinuities in the company. We also came away feeling that it was clear, as Mike pointed out and Rick, that this is behind us that we did indeed do what we have always pledged to do and that's to fully integrate companies so that six months after an acquisition to nine months after an acquisition, it's very difficult to say this person is an Interoute person or this person is a legacy GTT person. And where we're going forward, we also tried to call out of the organization those things that are not strategic to us, both in terms of the way in which people are selling as well as the people as well as the customer base; and therefore, it's a process. The Board came away I think quite confident that the platform is solid, that the way in which we have done what we have done is once again very consistent. It was very time consuming and very difficult for the team of people. And we're very proud of the way in which the people from both sides of the acquisition that are a part of the new GTT going forward have acted in the greatest interest of coming into the organization to make it one. The second thing is that I know that there's an enough lot of things going on in the industry with what was going to be acquired. And interestingly, wanted to note that the Irish have just yesterday approved of building a fiber-to-the-home network at great cost as a public policy in a public-private partnership, which will only accrue to value as we in our Hibernia acquisition had acquired a good deal of facilities in the north of Ireland, and our fibers are landing in the Irish areas. So we have really changing times, and changing times that we are part of. So I'm really interested in what's going to happen going forward in the business that we're providing. Finally, I wanted to reiterate that as I have almost on every call, that I view this not as a short-term race but as a really long-term one. And I think our whole team looks of it that way. And very importantly, this quarter, our friends who have invested in us from Spruce House, which is a very large piece of our company now at some 22% ownership, have agreed that Ben Stein will come on our Board. The Spruce House team is very much of the long-term focused organization. They believe in watching the people who are doing the business and being committed to what they are doing and the future is very important for them. In the long term, they will be a great addition to our Board in understanding and providing additional input from the investor community to ensure that we're all aligned. Therefore, we're really looking forward to Ben Stein joining our board and moving forward. I think we will continue to do what we're doing. And as Rick said, our strategy is correct. We believe it's correct. We think the marketplace is beginning to believe that we are correct and the echo chamber is building. I look forward to our next call, and thank you all very much.

[Richard Calder:]

Great. Thank you very much, and we look forward to reporting on our next call.

[Operator:]

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