GTT Communications, Inc.
Q4 2019 Earnings Call Transcript

Published: 2 Mar 2020

[Operator:]

Good morning, and welcome to the GTT Communications Fourth Quarter 2019 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.I would now like to turn the conference over to Tony Hansel, Senior Vice President, Legal and Deputy General Counsel. Please go ahead.

[Tony Hansel:]

Thank you and good morning. I'm joined today by Rick Calder, GTT's President and CEO; Chris McKee, GTT’s General Counsel and Executive Vice President, Corporate Development; Dan Frazier, GTT's Principle Accounting Officer and Interim Chief Financial Officer; and Brian Thompson, GTT's Executive Chairman of the Board.Today's discussion is being made available via webcast through the company's Web site, www.gtt.net. A 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 Web site.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 statement reflects our best judgment as of today, March 2, 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 Web site.I will now turn the call over to Rick Calder. Rick?

[Richard Calder:]

Thank you, Tony, and good morning, everyone. Fourth quarter 2019 results demonstrated continued improvement in our underlying operational metrics with revenue and adjusted EBITDA growing on a sequential basis, including the KPN acquisition that was completed on December 1st.Cash flow from operations and free cash flow remained positive as our collections of accounts receivable and arrears continue to improve, and our net working capital continued to normalize. These results illustrate our incremental progress towards our objectives of sustained rep-driven growth, improved operations to drive both revenue and margins and better working capital management to drive free cash flow.The trends underneath our headline numbers remain promising. Aside from a sequential benefit from foreign currency and the inclusion of KPN, our Americas and Europe divisions continue to stabilize both new sales and installations. Both divisions closed the quarter with slightly positive net installs for 4Q '19 and one 1Q '20 is trending in a similar direction.Installs have improved sequentially as our more efficient processes, including our new SD-WAN template are proving effective. During 4Q '19 in order to strengthen our long-term revenue streams, we intentionally called nonpaying SMB accounts which resulted in slightly negative overall net installs for 4Q '19. With this process largely complete, we expect SMB net installs to normalize to historical levels in 1Q '20.As Dan will detail, we also made progress in reducing billing credits which impacted revenue to a lesser degree than in the past two quarters. Billing disputes associated with the integration are now nearly fully resolved, and we expect further improvements in one 1Q '20. Similarly, impacts in 4Q '19 revenue from non-cash deferred revenue and nonrecurring revenue were far lower than in prior quarters.Churn for the quarter was 1.6% and the year was also 1.6%. This slight elevation to our projected of 1.5% was largely related to the SMB churn I mentioned, and we expect to operate at approximately 1.5% churn in the future. A key driver of rep-driven growth is the overall size of our worldwide sales force to both expand our share of wallet with existing clients and drive new client logo acquisition.We are pleased to report that we ended the year with 436 quota-bearing reps ahead of our plan for 400 with the growth split fairly evenly between our two big divisions and a 45% increase year-over-year from the 300 quota-bearing reps at the end of 2018.We focused our hiring on teams of account managers and account representatives to provide better coverage for our existing strategic accounts, and with more focus on attracting new client logos to the GTT banner.We have also filled out our inside sales team to provide good coverage for our smaller accounts. With our rapid increase in quota-bearing rep count, our sales productivity per rep is down in the fourth quarter given the large number of untenured reps.To ramp our larger sales force, we have made investments in sales rep on-boarding and ongoing training, division marketing and lead generation programs, including our much larger sales development rep or SDR program and client analytics, all with a focus toward accelerating the productivity of our entire sales force. We will continue to grow the scale of the GTT sales force and intend to finish 2020 with approximately 500 total quota-bearing reps.We also continue to see very strong traction with our software-defined wide-area networking or SD-WAN product in both the direct and indirect sales channels. GTT is uniquely positioned to benefit and win from this multiyear shift to Internet-based SD-WAN services, which still represents approximately 40% of our install backlog.As I mentioned, we closed the KPN International acquisition on December 1st. KPN strengthens GTT's presence in Europe, deepening our cloud networking services portfolio and our global IP network adding more than 400 strategic enterprise and carrier clients and makes GTT the preferred international network supplier for several hundred additional clients retained by KPN.We have begun our integration of people, systems and network according to our template and are targeting a post-synergy multiple of EBITDA of 5x or better. We welcome these new clients, including KPN, to GTT. In addition to the progress we made in our operating metrics, we have also taken steps to strengthen our liquidity position.Dan will provide further details. However, on Friday, February 28, 2020, we closed on a 140 million incremental EMEA term loan facility that was used to retire substantially all of our revolving credit facility. Our ability to close on this leverage neutral liquidity enhancing transaction is further proof of the strength of our business and value proposition in the market.Our focus in 2020 is firmly centered on driving rep-driven growth, improving margins and delivering free cash flow expansion. As we discussed on our past two quarterly calls, we are firmly committed to balance sheet delevering.To that end, during the fourth quarter, we engaged Credit Suisse and Goldman Sachs to explore the sale of our Infrastructure Division, including our highly differentiated terrestrial pan-European fiber assets, subsea transatlantic fiber and data centers which we acquired as part of the Interoute and Hibernia acquisitions and whose diversified customer base includes some of the largest blue-chip enterprises globally.We have substantially completed the internal separation of the clients, revenue, employees and related costs into our Infrastructure Division and are preparing to launch the process with potential buyers in the coming weeks. Should we successfully divest this division, we would apply the sale proceeds to debt reduction toward our objective of 4x total net leverage or better. Dan will take you through the financial specifics of the division in his remarks.Moreover, the potential divestiture of the Infrastructure Division would enable GTT to focus on our core strategy of providing cloud networking services to large and multinational clients, as we deliver on our purpose of connecting people to any location in the world and to every application in the cloud. We would retain our global operating platform and our Tier 1 global Internet network and our unique and extensive network of last mile supplier relationships to deliver dual redundant client access anywhere in the world.Post transaction, we expect GTT's capital expenditures as a percent of revenue to be approximately 3% consistent with our historic CapEx Light business model with a significantly lower interest burden on a delevered balance sheet leading to free cash flow generation equal to or better than current levels. We also remain committed to our objective of delivering 175 million to 200 million free cash flow in 2020 after adjusting for nonrecurring transaction and transition fees we expect to incur directly related to the sale process of our Infrastructure Division.We have worked hard in 2019 to complete the integration of a seamless global operating platform with the scope and scale to address the growing cloud networking demands of large and multinational clients. We have a fantastic and talented team in 30 countries around the world that live our core values of simplicity, speed and agility for clients as we position GTT as the disruptor brand in our industry.We continue to evaluate a number of strong candidates for a permanent Chief Financial Officer with our advisor Russell Reynolds and in the meantime have had tremendous contributions from Dan as our Interim CFO.Now, I will turn over to Dan to review the financials in more detail. Dan?

[Dan Fraser:]

Thanks, Rick, and good morning, everyone. Fourth quarter revenue increased 1% sequentially to 424 million and decreased 7% year-over-year. As approximately 50% of our revenue is denominated in non-U.S. dollar currencies, exchange rates impact our reported results. In constant currency, revenue increased 0.6% sequentially and decreased 6% year-over-year. There is no pro forma comparison this quarter.As Rick mentioned, on December 1st, we closed the KPN acquisition for cash consideration of $52 million, net of cash acquired. Similar to our small acquisitions, the purchase price was approximately 1x revenue and post integration EBITDA multiple will be approximately 5x or better.The sequential revenue increase was driven by several factors, including a $1.5 million currency tailwind, an approximate $1.5 million improvement in revenue credits issued or accrued for, which was less of an improvement than we have targeted, but is moving in the right direction, the additional revenue from KPN for the month of December and a slight increase in nonrecurring revenue.These improvements in revenue were offset by $1 million decrease in non-cash deferred revenue with the remaining $2.5 million decline coming from negative net installs. This decline compares to $3 million decline in 3Q '19 and $4 million decline in 2Q '19. As Rick mentioned, the improvement in installations that we are seeing in the Americas and Europe divisions were offset in the quarter by an increase in SMB churn as we called nonpaying SMB customers.Excluding KPN, the year-over-year revenue decline was driven by several factors, including currency headwinds which represents over 18 million of annualized revenue reduction, the increase in revenue credits issued or accrued for which represents approximately 34 million of annualized revenue reduction compared to last year, approximately 9 million of annualized revenue reduction from the runoff of non-cash deferred revenue and negative net installs which represented over 88 million of annualized revenue reduction compared to last year. These declines were offset by an $8 million annualized revenue improvement from nonrecurring and other revenue.As we noted on our last call, the decline of non-cash deferred revenue has been significant over the past five quarters and we expect this decline to be much more gradual over the next several years. Today, we have a healthy pipeline of new IRU and prepaid capacity sales which we expect to match or exceed the amortization of non-cash deferred revenue going forward.The deferred revenue footnote in our Form 10-K provides a schedule showing the outlook of this component of revenue for the next five years for all acquired and prepaid revenue contracts.With respect to billing credits, we have now resolved the overwhelming majority of large and material disputed amounts related to the integration of Interoute, which include missed disconnects, double billing or integration input errors.Billing credits, while higher than our target of year-end, did decline sharply as the number of billing disputes is now down by a further 50% from the improvements we made in 3Q '19.We expect to make substantial progress towards a more normal level of billing credits in 1Q '20, as we work through smaller disputes with a heightened level of scrutiny. As a reminder, billing credits effectively flow through to EBITDA at a 100% margin.Fourth quarter adjusted EBITDA increased slightly sequentially to 103 million and decreased 12% year-over-year. In constant currency, adjusted EBITDA increased slightly sequentially and decreased 11% year-over-year. Again, there is no pro forma comparison this quarter.Adjusted EBITDA margin of 24.3% decreased by 10 basis points sequentially as the accelerated pace of our investment in the quota-bearing sales force outpaced our SG&A savings initiative along with little to no offsetting revenue. The EBITDA margin decreased by 150 basis points year-over-year, driven primarily by the declines in revenue and the increased investments we have made in quota-bearing heads.During the quarter, we incurred $6 million of transaction and integration expenses which are included in our reported SG&A, but excluded from adjusted EBITDA. These expenses related to our closing of the KPN acquisition, amounts related to our previous smaller divestiture process and the exploration of divesting the Infrastructure Division. We also incurred $1 million of exit costs primarily related to closing legacy offices’ locations in North America.From a cash standpoint, we paid out $7 million of combined exit and integration costs in the quarter, down from $8 million last quarter. At quarter end, with approximately 13.9 million in cash remaining to be paid out related to previously expense exit costs, almost all of which will be paid out through the end of 2020 and we expect future exit and integration-related expenses including those from KPN to be minimal.We do expect to incur some level of nonrecurring transaction Annex A cost related to the potential divestiture process of the Infrastructure Division that we had not previously expected to incur. Fourth quarter net loss was 19 million compared to net loss of 53 million last year and a net loss of 26 million last quarter.The net losses in each period were driven mainly by nonrecurring costs, including exit and integration costs. The net loss in 4Q '19 does include a non-cash gain due to the change in fair value of our interest rate swaps of approximately 10 million.Fourth quarter capital expenditures were 25 million or 5.9% of revenue compared to 16 million last year and 26 million last quarter. For the year, CapEx was approximately 5.9% of revenue. Going forward, we expect our CapEx for GTT as a whole to be on the lower end of our 5% to 6% of revenue target, driven mainly by success-based investments.Fourth quarter ending cash balance was $42 million, up from $40 million last quarter. Net cash provided by operating activities was 30 million, down from 46 million last quarter. Free cash flow, which is net cash provided by operating activities less CapEx, was a source of 5 million in the fourth quarter compared to 20 million last quarter.During the three months ended December 31st, we collected over 20 million in cash from the past due accounts receivable. We have now collected approximately 75% of the past due balance noted in 2Q '19, which is up approximately 50% at the end of 3Q '19.We continue to refine the collections organization and the tools at our disposal as we target collecting the remaining 30 million of our past due accounts receivable. In all, working capital was positive 2 million compared to negative 6 million in 3Q '19 and negative 8 million in 4Q '18.We expect working capital to continue to normalize as we collect the remaining past due accounts receivable and finish paying out exit and integration costs, positioning GTT to deliver our 2020 free cash flow target of 175 million to 200 million, excluding any expenses paid related to the potential divestiture of the Infrastructure Division.Our debt balance at year-end was approximately 3.3 billion, including 2.6 billion of senior secured loans maturing in May 2025 of which roughly one-third is euro denominated, and 575 million of senior unsecured notes maturing in December 2024.During the quarter, we drew incrementally on our revolver to fund the KPN acquisition and at December 31 were drawn at 140 million. Our total secured net leverage ratio in the fourth quarter increased to approximately 6x on a trailing 12-month basis, including acquisitions and unrealized cost synergies in prior periods. We remain in compliance with our debt covenants as of December 31, 2019.I am pleased to announce that on February 28, 2020, we closed and funded $140 million of incremental EMEA term loan. We have used the net proceeds to pay down substantially all of our revolver credit facility. We took advantage of favorable market conditions and demand to complete this transaction that is leverage neutral and liquidity enhancing.An additional benefit of this transaction is that the financial maintenance covenant is no longer in effect and leaves GTT in a stronger position with no financial maintenance covenants at this time and the earliest maturity nearly five years from now in December 2024. As Rick noted, we remain committed to reducing leverage to our long-term total net leverage target ratio of 4x or less through growth in adjusted EBITDA, cash flow generation and potential nonstrategic asset sales.Let’s take a moment to discuss our Infrastructure Division financial highlights. As Rick noted, we have worked towards separating the income statement and assets and liabilities of the Infrastructure Division.We anticipate the annual revenue range for the Infrastructure Division to be approximately 370 million to 390 million with an EBITDA range of 160 million to 180 million. These assets are unique and provide a generational infrastructure platform with years of attractive returns and incremental investment opportunities ahead.This concludes our prepared remarks. We will now open the call up for questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from James Breen of William Blair. Please go ahead.

[James Breen:]

Thanks. Thanks for taking the questions. Can you just give us any more color on the M&A process? I guess there’s been initial indications of interest and how you think about splitting out maybe the sales force there, you talked about 437 at year end? Will the majority of those remain with the core business, assuming a lot of the Infrastructure customers are more carrier-based sort of wholesale agreements? Thanks.

[Richard Calder:]

Thank you, Jim. I’ll take the second question and then turn it to Chris for the process itself. So we have largely completed the separation of the Infrastructure Division as a separate operating division together with Americas and Europe within GTT with a separate sales force and separate sales leadership, and it’s a relatively small portion of our overall sales force of the full 136 that we ended the year at, but it is segmented and unique and focused on selling the Infrastructure products of wavelength, dark fiber, co-location services to principally carrier and OTT-like clients. And let me turn it to Chris for the process.

[Chris McKee:]

Yes. So we had – I think as we mentioned in our last quarterly call, we had received significant inbound interest regarding the separation network that we’re now completing. And so as a response to that, we engaged Credit Suisse and Goldman Sachs to sort of officially kick off our process that would widen the scope of the buyers we are talking to. That process is now underway. It isn’t sort of early stages, but in sort of answer to your question there is widespread interest beyond the initial groups that had approached us about buying these assets. And now with the formal process being kicked off, we’re talking to interested counterparties.

[James Breen:]

And I guess just big picture and understanding that the income statement, balance sheet could change significantly this year if you are able to sell those assets. With the business as it is now, how do you think about the income statement trend this year, whether productivity should improve after you’ve hired all these sales people and sequentially increasing this quarter? Can revenue be sort of flat this year and then think about growth in 2021 as some of the senior sales people get more tenure?

[Richard Calder:]

Yes, as we’ve talked about on multiple calls, we feel actually great about the state of the platform. We have the right platform, we have a fantastic network and the products and the team. We actually for the first time have walked into the year with the scale sales force that’s large enough to drive growth, which is our number one objective, rep-driven growth. So while we don't forecast or give guidance on future quarters, we feel really optimistic about where we are walking into the year. We think the distraction of the Infrastructure sale will be minimal given the fact that we have actually segmented into a separate operating division at this stage. So we are very focused on driving that rep-driven growth in 2020.

[James Breen:]

Great. Thank you.

[Operator:]

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

[George Sutton:]

Thank you. I wanted to better understand your process of calling the SMBs that you mentioned, curious what are the drivers behind which SMBs you’re focused on? And then separate from that, you mentioned you were filling out your inside sales group essentially to bring in new SMBs. So just want to better understand that thought process.

[Richard Calder:]

Sure. The SMB – just to give you a sense of scale, the SMB business represents under 3% of our overall business at this stage and it truly is accounts that are in the average revenue per client of under 500. There is a group of them that are in the 500 to 1,500 range, but it is the very small tail that we deal – that we actually handle in a completely separate and small operating division within GTT. I think as Dan mentioned in his prepared remarks, we had been focused on resolving effectively almost all of the larger billing disputed transactions. So when we turn to the SMB, we simply had to turn off a number of SMB clients who we were unable to either resolve or had not paid us in a long period of time. So it is generally pretty non-material to our business moving forward. To your question about inside sales, those are representatives that are covering clients that are on average of $2,000, $3,000, $4000 per month. Slightly too small to have dedicated account teams of account managers and account directors and account representatives that are covering the much larger accounts that we serve, but still a part of that farm system of sales development rep to inside sales rep to account representative to account manager. So those are all in the larger – the inside sales reps are all in the larger divisions; Americas and Europe and are in country, in region and form the basis of future account managers in the next several years.

[George Sutton:]

Okay. I appreciate the increased detail. And one other detailed question relative to your SD-WAN template that you mentioned. Can you just give us a sense of the things you’ve been doing to speed up your implementation capability which obviously would include that template?

[Richard Calder:]

Sure. A couple of things. A, we still believe – just to give you some color – that we’re in the very early migration phases still to SD-WAN. However, there’s not an account, a client that is not thinking about the ultimate transition to a more effective networking technology as they move their applications to the Internet and to cloud service providers, providing dual redundant access to every location in the world for them using predominantly Internet-based technologies, although there are other access mechanisms are useful as well, is absolutely what they're thinking about. We have announced we support three different software platforms; Silver Peak, VeloCloud/VMware and Fortinet, and we think each have different use cases in the marketplace. The primary template, I’ll give you two big things that we have done. One is the implementation of a standard design template given that it's a new technology for most clients. We've implemented standard initial application designed for application routing, security and firewall capability that has significant ability and agility for clients to change and modify the design as they get a deep experience with this new technology. We can provide them professional services to help with that post install. But it significantly increases the pace of initial installations. The second we actually had – actually internally to the entire GTT team, we had our field services organization also give a great tutorial last Friday about the work we’re doing with our field services team, both our own internal employees plus third party contractors that do with one touch with a professional service install the complete test and turn-up on client premise through the complete testing through our internal EtherVision and CMD-based system so that we can get clients up and running with dual diverse access with one truck roll effectively for clients. So those are two of the things that really helped accelerate the pace of our installs of SD-WAN.

[George Sutton:]

Great, stuff. I appreciate the details. Thanks.

[Operator:]

The next question comes from Colby Synesael of Cowen and Company. Please go ahead.

[Colby Synesael:]

Great. Thank you. Two topics, if I may. First off on the asset sale, I was wondering if you could provide any of the growth rates across those three different segments, the fiber which I guess is mostly terrestrial in Europe, the data centers and then the subsea cable. And if you’re not able to give us so that you could at least give us some color in terms of how you think those compare to industry comps? And then as part of that also, those are all very unique businesses. I’m just curious what your conviction is that you’ll be able to sell all of them wrapped up in one transaction opposed to having to be required to break them up? And then the second topic is on free cash flow. I’m just curious what the key puts and takes are that we should be looking for to achieve that $175 million to $200 million goal? It’s obviously a significant step up from what we saw in 2019. And what’s your conviction in achieving that $175 million to $200 million maybe versus just a quarter ago? Thank you.

[Chris McKee:]

So I think I’ll handle the first two questions. Then I’ll kick it to Dan. This is Chris. In terms of the growth rate of the Infrastructure business, it has been a grower. It’s been a low single digit grower, but it’s been a steady grower. The churn is quite low in that division. There’s long-term contracts that just don’t come out of service that often. So it’s been a low single digit grower. In terms of your sort of sum of the parts analysis, our position has been we are creating a separate Infrastructure company that’s going to be sold and it really is going to be a standalone platform. And so it has the ability to operate outside of GTT with its own back office systems, with its own ability to exist as a standalone platform. Because of that, further separating that into – as you described a data center company versus a terrestrial fiber company or splitting out the subsea separately from that, we, GTT, wouldn’t contemplate that. I think that’s part of the underwriting case that certain buyers may look at that a further divestiture after the transaction is completed, but that wouldn’t be something that GTT would be doing prior to completing the sale.

[Dan Fraser:]

And with regards to the free cash flow, we are definitely very committed to hitting the $175 million to $200 million range. And in terms of the key puts and takes and Colby I’m guessing you’ve done the analysis of just annualizing the fourth quarter of '19, ultimately the improvements in EBITDA which would be driven by a continued improvement in the revenue credit as well as KPN unrealized synergies and the full year impact. And then our focus on reducing churn certainly improved EBITDA by a fair amount over 4Q '19. We would also have slightly lower CapEx expenditure as I noted in my prepared remarks at the lower end of the 5% to 6% range. And then the improvements in net working capital would be another key driver, which would include the pipeline are prepaid, IRU and capacity deals. And then finally I think the transaction and restructuring expenses if you take the annualized view, that’s obviously well overstated when you exclude anything that we would have to pay for the Infrastructure Division, it’s a much lower number. And when you tally all those improvements from 4Q '19 up, we do end up in the range.

[Colby Synesael:]

Great. Thank you.

[Operator:]

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

[Tim Horan:]

Thanks a lot. Rick, maybe can you just describe the environment for the underlying kind of legacy business? What the demand environment out there look like? What’s the demand look like for higher speed and higher quality networking? And maybe a little bit on the competitive front, any more color, and any more color on the pricing would be helpful then? I have a quick follow up on the sale.

[Richard Calder:]

Okay. Again, I think the environment for our business is phenomenal. We don’t see – it’s probably every 20 years or so you see a technology transition that would occur over the next four, five, six, seven years that the last major networking technology transition to MPLS took 8 to 10 years to complete and we’re still in the very early stages of movement of networking technologies to help enterprises connect their people in better ways. We’re in very early stages of that. And we believe we are uniquely positioned to assist in this. It is deflationary to the overall market, we would agree that, but the main driver that we see is bit growth that it is deflationary to revenue over time, but it’s a very large total addressable market for a firm the size of GTT and we can be the attacker in that environment, so to speak, as we help clients in these digital transformations as they look about – historically, most of their network traffic was private. Now, the vast majority of their traffic is going to either the public Internet or to more and more extensively private cloud service providers whether it’s AWS, Azure, Google Cloud platform or other unique SaaS applications. And the network technology that they have today is simply not fit for purpose. So we have that right platform as a large Tier 1 Internet backbone with a huge private IP MPLS core, the ability with a very deep set of relationships built over 20 years of understanding how to deliver diverse connectivity to any location in the world with a deep and experienced team on how to help clients make this transformative – technology transformation in their business. And so we’re very encouraged about it. We historically didn’t have the right size platform in terms of number of people addressing the market just even to take care of our existing accounts. That said, we still believe we’re about 1% penetrated. And so our ability to be disruptive over the next decade effectively is in front of us, not behind us. So very excited about the environment right now, Tim.

[Tim Horan:]

That’s great color, Rick. And the ARPU, how are you thinking about like revenue per customer or revenue per location? Is your revenue per location going to decline through this process here?

[Richard Calder:]

Even the initial clients that we’ve had that have moved to SD-WAN, generally we’ve only had one connection. So one of the interesting parts is we’ve actually generally held our revenue because we’ve now been able to get the second location which – or the second connection which is historically haven’t had. And most of the new applications that we’re winning in clients like Captivate, which we announced recently, are greenfield to us. So even where we are our own cannibal, so to speak by moving clients from legacy technologies to new, the ability to deliver the second access line helps us keep our revenue per unit, per location reasonably stable. While we see some declines over time, it’s reasonably stable, but it is a share shift opportunity for us to take clients that we don’t have. We have a very small number of material clients at this stage and so our ability to penetrate new, and that’s one of the things we’re really excited about, the scope and the scale of the sales force. And that historically we had enough time and energy to talk to our existing clients. Now we have enough to not only do that, but to penetrate new logos and bring them to GTT.

[Tim Horan:]

Very helpful. Lastly, can you give us the free cash flow breakdown between the new businesses, if possible?

[Dan Fraser:]

Between – when you said the two businesses --

[Tim Horan:]

I know you gave the EBITDA number for the potential asset sale. If there’s any kind of free cash flow number related to that or what do you think about the --?

[Richard Calder:]

Not yet. So given that we’re early in the sale process, we felt it was appropriate to give everyone guidance on the scope and scale of revenue and EBITDA within the ranges that Dan talked about 370 to 390 in revenue and 160 to 180 in EBITDA. We do believe CapEx, as we’ve said, is a higher percentage of revenue for the business, but gross margins are generally higher as a function of the trade of CapEx to OpEx. But in terms of the marketing process at this stage, we’re not providing any additional color but we felt it was important to at least give you a sense of the scale relative to GTT of the Infrastructure Division.

[Tim Horan:]

Thank you.

[Operator:]

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

[Frank Louthan:]

Great. Thank you. I apologize if I missed this, like what was the deferred revenue as a percentage of overall revenue in '19 and the expectation in '20? And can you give us an idea of how much of that is in the Infrastructure business versus the rest of the business? And then I wanted to talk about your confidence in net install positive in 2020, particularly with the continued rapid ramp of the sales team. Walk us through what you’re doing there that will – that gives you confidence you’ll continue to get that as those guys are getting more productive?

[Dan Fraser:]

Great. Thanks, Frank. With respect to the deferred revenue, as we reported in the – will report in the 10-K, the revenue was approximately 53 million that we had recognized as revenue for contracts that are greater than a year old. And that’s really the population of the prepaid IRUs and capacity deals. As you’ll see in the 10-K, that is expected to drop to about 42 million, 43 million in 2020. And then in terms of – effectively all of the deferred revenue will go with the Infrastructure sale, because all the product lines underlying the deferred revenue are being moved over.

[Richard Calder:]

Yes. And in terms of the net install, back to the points we had before. It is the single most important thing we focus on. It’s probably the key performance indicator that we look at not only at the corporate level, but the division level, the region level and the team level. And it drives compensation mindset around driving growth. We said – as we walked into 2019 a year ago, we didn’t have a large enough sales force. We do now. We are around the zero range. So as we dance around zero, it is one of those things that we look at each day to say, how do we drive productivity improvements at this stage? We’re looking at more modest increase in the size of the sales force in the long term. We clearly have an opportunity to have a significant larger sales force, but we’re still thinking about a sales force that grows from 436 to about 500 by the end of the year versus 300 to 436 by the – from the end of '18 to the end of '19. So now it’s more a focus on productivity improvement and taking the untenured reps and tenuring them rapidly. We’re seeing good progress on that, and it gives us confidence that we can drive growth, as I mentioned earlier, in 2020 rep-driven organic growth. It is a constant progress as we say internally [indiscernible] incremental constant improvement. We have now the time, resource and attention to drive operational excellence in both our sale processes or service delivery processes or incident management and trouble management processes, our billing and collections and making all of those available to our clients through our portals and EtherVision to really drive an outstanding client experience to earn more wallet share from existing clients, and as I mentioned a second ago to attract new logos to GTT. So we think we have the platform, the scope and the scale at this stage to drive rep-driven growth. And that’s what we’re looking to deliver and report on in future quarters.

[Frank Louthan:]

Okay, great. Thank you very much.

[Operator:]

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

[Brandon Nispel:]

Hi. Thanks for taking the question. Along the lines of Colby’s question, but Rick could you give us relative growth rates of what would be RemainCo and potentially how that’s trended over the years? And then I might have missed it, but could you provide the total backlog in MRR not yet installed at the end of the fourth quarter? Thanks.

[Richard Calder:]

Sure. So if we think about '19 specifically, we think Infrastructure Division, a much smaller revenue stream, the 370 to 390, it was a grower in '19 and the remaining business as the overall business declined, it was a decliner, the negative net installs that Dan talked about in the prepared remarks. That said, as I just mentioned to Frank, we expect that all the businesses moving into '20 and beyond can be growers at this stage. We’re very focused since one of the rationales to establish these businesses as separate operating divisions within GTT, Americas and Europe really focused on driving the remaining cloud networking business. That is our core and Infrastructure being very focused on remaining a grower, and as we work through the sale process of Infrastructure Division. So we believe all of the businesses can be growing businesses moving forward. And I’ll turn to Dan for the backlog question.

[Dan Fraser:]

Sure. In terms of the backlog at the end of the quarter, we ended at 8.5 million, which is down slightly from the 9 million that we had talked about last quarter, but we view that as just a lot of the templates and the improvements that we made in the service delivery actually bearing fruit. And as the sales reps start to grow their productivity in 2020, we should see that decline slow and start to stabilize.

[Brandon Nispel:]

Thank you.

[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. And I’d like to turn the call over, as we always do, to our Chairman as he ends the call with some closing remarks.

[Brian Thompson:]

Thanks, Rick. I was driving in this morning and heard two things on the radio that kind of highlighted some thoughts that I wanted to pass along. The first was the great concern about coronavirus and what it’s doing to the world in terms of shutting down conferences and closing off shows and creating more and more requirements of business to continue using communications rather than visits. And it struck me that this is a critically important thing in our industry and has been for many years, and it will only continue. And this is just one of the stimulus that caused us to do that efficiency and just operating your business is another one.The second thing I heard was an ad from Qualcomm and they called it – and it was basically around the 5G developments that are underway. And of course, they’re playing a major role. But beyond that they tried to coin the expression that this wasn’t going to be an invention era going forward. And I got the thinking, well, it’s not just invention. It’s really application.The 5G bauwave [ph] wave that we’re trying to deal with right now is something that’s critically important in communications to be sure, because it’s a new access technology that gives us huge capacities wherever it’s applied, but those huge capacities have to have a way of getting around the world.The most important thing that’s happening with 5G is it’s going to be a significant capital requirement and that capital requirement is going to cause major financing sources to be allocated toward the development of the technology and the implementation of it. As Rick said, we are on the wave of SD-WAN. It followed up on earlier waves of technology.And the way we started this company was to assume that we could bring together the finest thinking on what’s happening in technologies to be able to apply it to our clients and to give them the kind of network that is both complex, sophisticated and secure, so that they could feel comfortable in enhancing all their communication needs and providing data communications around the world. When we started that, our whole approach was to have an asset-light model and one that said we can lease and we can develop and we can provide to our clients these networks worldwide.What we are doing right now, it gives me great, great future interest in and shows that this company has gotten to a point now that as we look ahead, we are – we found out with the acquisitions of Interoute and Hibernia that the development of capital-intensive infrastructure is not our real forte. Our forte still is using technologies to connect people around the world.And therefore, we came to the conclusion last fall that it was time to take those assets, put them into a division and see what attractiveness there was for people who really do understand and want to be a financial source for the future of the development of technologies that we’re on the forefront of right now.And I’m excited about that because I think that’s what’s happening. I see it happening in countries and states and communities that have said we need to develop infrastructure that is broadband that will allow our people to play a part in this whole economic development that’s taking place.The Government of Ireland just agreed to provide over €3 billion of support to the development of fiber to 500,000 plus homes in the underserved parts of their country. We have states that are providing broadband. Our Federal Communications Commission has finally gotten to the point, along with our Department of Agriculture to recognize that huge amounts of capital are going to be required. And in deploying those amounts of capital, they need people that are really comfortable with and understand the long-term implications of that.That’s not what we’re about. What we are about is making the connections. Therefore, I think our Infrastructure Division sale that we’re talking about is ideal for two reasons. The first is that it will put the development of those properties that we have in the hands of people that really are going to take the long-term view and be able to provide the financing that’s necessary.It will give us financial freedom as we reduce our debt structure to allow us to expand what we’re doing and what we did well and what we are hoping to do well in the future. That’s take the technologies, take the new needs of our clients, especially the complexity and the security that they are looking for in their networks and who allow us to really provide them a unique company that’s looking at their needs worldwide and can bring that to their party.I’m excited about our future. I think the fact that we’ve been able to stabilize after the difficult year of 2019 of integration that we’re able to stabilize where we are and to provide in our sales force the capability of doing what I was saying just a minute ago for our clients puts us in a great position. And with this divestiture, if it takes place the way I fully expect it will, the reasonable amount of value that we can generate from that to reduce our debt and to create the opportunity for us to move forward I think is spectacular.I thank you for joining us. And I’d like to turn it back over to Rick and thank you for being a part of the investment community that watches us.

[Richard Calder:]

Great. Thank you again for joining us. And we look forward to reporting in future quarters. Thank you.

[Operator:]

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