GTT Communications, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Good day and welcome to the GTT Communications First Quarter 2016 Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Mr. Chris McKee, General Counsel and Executive Vice President, Corporate Development. Mr. McKee, the floor is yours, sir.

[Chris 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 replay of this call will be available for one month. Dial-in information for the replay, as well as access to the replay of the webcast is available on our website. Before we begin, I’d like 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 Provisions of the U.S. Securities Laws, including revenue and margin expectations, projections or various references to trends in the industry and GTT’s business. We caution you that such statements reflect our best judgments as of today, May 5, 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 filings with the SEC including the 8-K we filed earlier today, which contains our first quarter 2016 earnings release. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we will also discuss non-GAAP financial measures, including certain pro forma information; unless we specifically state otherwise the non-GAAP financial measures we will discuss today were not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release and is posted on the Investor Relations section of our website. I will now turn the call over to Rick Calder. Rick?

[Richard Calder:]

Thank you, Chris, and good morning, everyone. Thank you for joining us. GTT executed very well in the first quarter extending our track record of revenue growth and margin expansion. On the strength of both organic growth and the successful integration of several acquisitions, revenue doubled from last year’s first quarter and increased 8% from fourth quarter 2015. On a pro forma basis, as if we had owned MegaPath and OSN in all historical period and in constant currency, revenue grew 12% from last year’s first quarter, and 4% from fourth quarter 2015. We have not prepared pro-forma financials for the Telnes acquisition, since it is not material, though the Telnes acquisition contributed approximately 3% of our 12% year-over-year growth, and approximately 2% of our 4% sequential growth on a pro forma basis. Our sales momentum has continued to build over the past several quarters, and we are seeing good performance across all of our channels and geographies. In addition to delivering strong revenue growth, we are delivering even more impressive adjusted EBITDA growth, which grew 159% from last year’s first quarter, and 13% from fourth quarter 2015. On a pro forma basis, as if we had owned MegaPath and OSN in all historical periods and in constant currency. Adjusted EBITDA grew 48% from last year’s first quarter and 9% from fourth quarter 2015. We are also demonstrating the benefits of scale, as we continue to expand both gross margins and adjusted EBITDA margins. We’ve grown adjusted EBITDA margin by over 500 basis points over the past year from 18% to 23%, as a result of profitable organic growth as well as the realization of cost synergies from the successful integration of our acquisitions. We are very proud of our ability to balanced growth with profitability and margin expansion. During the first quarter, we completed the integration of OSN. and I am happy to report that we did achieve a post-synergy adjusted EBITDA multiple of better than seven times for this deal. As we discussed on the last call, we closed the acquisition of Telnes Broadband, a provider of high-availability managed network and cloud communication services to enterprise client back in February. Telnes is a small acquisition, but a strategic one as itself entirely through the indirect channel with a good reputation, which we are building upon as a key organic growth initiative. The Telnes integration is well underway with the organizational piece already complete, and we expect to complete the systems and network integrations by the end of this quarter. Turning to our organic growth initiatives. We now have approximately 95 quota bearing headcount and we continue to target 110 to 120 quota bearing reps by year-end. We are adding talent across all sales channels to position GTT to capture a higher share of industry spending going forward. The market for our services is large and growing. Our value proposition is quite strong, so adding more sales reps will help accelerate our organic growth. We also made good progress on our Client Account Manager program during the first quarter ramping the team to a total of 20 heads, with a goal of adding 5 to 10 more by year-end. The Client Account Manager or CAM team enables our sales reps to focus more on new sales opportunities, while ensuring an even higher level of service for our existing customers. In addition, the CAM team is expected to have a positive impact on churn reduction, as a focus on driving renewals in the client base. During the quarter, we also formerly watched our channel program with initial focus on North America. We are leveraging the strong team we brought on from the Telnes acquisition to lead and expand this effort. We’re investing in a larger channel team and expanding resources to enhance our day-to-day capabilities in the channel, including coding, service delivery and ongoing support. We are focused on developing and expanding relationships with master agents and subagents, as well as integrators and other key channel partners. A meaningful portion of industry spending is influenced by these partners. So we plan to have a strong presence in this key distribution channel. I am very pleased with the momentum we have right now across these various organic growth initiatives, and excited about the impact they can have on our revenue growth as we exit this year into 2017 and beyond. In addition to our organic growth efforts, we continue to look for accretive acquisitions and our funnel of opportunities remained very active. As you know, we have a disciplined approach to acquisitions, which drives us to focus on opportunities with a strong strategic fit consistent with our growth strategy of expanding our global network, adding to our cloud networking service portfolio and adding multinational clients. That can be successfully integrated within two quarters and at a highly accretive purchase price as a multiple of post-synergy adjusted EBITDA. We are off to a great start in 2016. We remain focused on delivering our organic growth goals of 8% to 10% for revenue and 15% to 20% for adjusted EBITDA and on continuing our steady progress towards our next financial objective of $1 billion in revenue and $250 million in adjusted EBITDA. Now I’ll turn the call over to Mike, for a review of the financials.

[Michael Sicoli:]

Thanks, Rick. And good morning everyone. First quarter revenue of $124.4 million grew 99.6% year-over-year and 8.4% sequentially. The year-over-year increase was driven by the acquisitions of MegaPath and OSN as well as organic growth and to a lesser extent the acquisition of Telnes. The sequential increase was driven by the inclusion of a full quarter of OSNs results, as well as continued organic growth and Telnes. On a pro forma basis, as if we had owned MegaPath and OSN in all periods presented and in constant currency, first quarter revenue grew a 11.6% year-over-year and 4.4% sequentially. As Rick mentioned earlier, since it was not a material acquisition, we will not be providing pro forma financial results for Telnes. That being said, if you were to adjust prior periods using the summary Telnes financial information we provided previously, revenue growth would’ve been approximately 9% year-over-year and 2% sequentially consistent with our target organic growth range for revenue of 8% to 10% per year. First quarter adjusted EBITDA of $28.9 million grew 158.9% year-over-year and 13% sequentially. The year-over-year increase was driven by the acquisitions of MegaPath and OSN as well as organic growth. The sequential increase was driven by a full quarter of OSNs results, as well as continued organic growth. Telnes did not have a meaningful impact on adjusted EBITDA on a year over year or sequential basis. On a pro forma basis, as if we had owned MegaPath and OSN in all periods presented and in constant currency. First quarter revenue grew 48.6% year-over-year and 9% sequentially. Well above our target organic growth range for adjusted EBITDA of 15% to 20% a year. Adjusted EBITDA margin of 23.2% expanded by approximately 500 basis points compared to first quarter of 2015. This year-over-year increase was driven by several factors. Gross margin increased significantly by approximately 700 basis points primarily due to the addition of MegaPath higher margin managed services as well as the completion of several network grooming initiatives. This margin increase was partially offset by a 200 basis point increase in SG&A as a percent of revenue. As both MegaPath and OSN and higher levels of SG&A than GTT prior to these acquisitions. On a pro forma basis, however, we’ve driven SG&A as a percent of revenue down significantly primarily from our strong execution around integration and realization of cost synergies. Sequentially, adjusted EBITDA margin increased by approximately 100 basis points compared to the fourth quarter of 2015. This sequential increase was driven by an increase in gross margin from the completion of network integration and grooming efforts as well as a decrease in SG&A as a percent of revenue from the realization of synergies from the OSN acquisition, partially offset by the investment in growth as Rick highlighted above and the timing of certain taxes and audit fees. We remain committed to driving margin expansion, even as we ramp up our investments in longer-term growth. We recognize the restructuring charge of $1.5 million during the quarter related to severance and other costs associated with the Telnes acquisition. In addition, we recognized $1.3 million of nonrecurring transaction and integration expenses and SG&A during the quarter, primarily related OSN which have been excluded from adjusted EBITDA. We expect to recognize an additional million in transaction and integration expenses related to Telnes in the second quarter. First quarter net income was approximately $1 million flat, compared to first quarter 2015 and down from $28 million in fourth quarter 2015, which included a $34 million non-cash benefit from the release of our valuation allowance. Excluding the valuation allowance release, exit cost as well as transaction and integration costs, which are all nonrecurring items. First quarter net income would’ve been approximately $4 million compared to $1 million in both first quarter of 2015 and fourth quarter of 2015. Capital expenditures in the quarter were $7.5 million compared to $3.4 million last year and $4.2 million last quarter. First quarter CapEx was 6% of revenue above our target range of 4% to 5% of revenue simply due to the timing and purchases. Over the past four quarters combined, our CapEx has been 4% of revenue and we continue to expect CapEX over the course of any given year to begin the 4% to 5% range. Unlevered free cash flow, defined as adjusted EBITDA less CapEX was $21.3 million in the first quarter or 17.1% of revenue compared to $7.7 million last year and was flat compared to last quarter. Net cash provided by operating activities was approximately $6 million in the first quarter, which includes $7 million paid for cash interest and taxes, $2 million paid for restructuring and exit costs relating to MegaPath and OSN, $1 million paid for transaction and integration costs primarily relating to OSN. $1 million used from changes in foreign currency and a working capital use of approximately $12 million, some of which is due to the normal timing and payment on items such as employee taxes and bonuses, as well as an $8 million used related to an increase in our accounts receivable, which we expect to reverse over the course of the year. At quarter end, our current liabilities were approximately $95 million including $14 million related to acquisition earn-outs and holdbacks and $7 million related to deferred exit costs from prior acquisitions. Excluding these earn-outs, holdbacks and deferred exit costs, current liabilities were approximately $74 million, which was $24 million less than current assets. On February 4, we acquired Telnes broadband. Total consideration was $18.2 million comprised to $13.7 million in cash and 178,000 shares of GTT stock delivered at closing plus a one year holdback of $1.8 million to cover undisclosed liabilities or indemnification claims. We funded the cash portion by drawing an additional $14 million from our revolving credit facility. And we expect to complete the integration during the second quarter and continue to expect to generate annualized synergies of $2.5 million or more once integration is complete, resulting in a purchase price of better than five times as a multiple of post-synergy adjusted EBITDA. As of March 31, our cash balance was approximately $10.2 million and our outstanding debt was $419.6 million excluding OID and unamortized debt issuance costs. Our outstanding debt consisted of $399 million Term Loan B, with an interest rate of LIBOR plus 525 basis points of 1% LIBOR floor and mandatory principal amortization of 1% a year until maturity in 2022, $19 million of revolver drawn against our $50 million revolving credit facility, which carries an interest rate of LIBOR plus 475 basis points with no floor, can be repaid at any time and otherwise as a maturity date of 2020. And $1.6 million of capital leases which will be repaid over the next two years. Our leverage ratio using first quarter 2016 annualized EBITDA was 3.6 times on a gross basis and 3.5 times on a net basis. This is within our target leverage range of 3 to 4 times and we continue to expect to de-lever organically going forward through combination of adjusted EBITDA growth and free cash flow generation. After quarter end, we drew an additional $10 million of revolver to fund the MegaPath holdback payment due in April. In addition, we entered into an agreement with our administrative agent on May 2 to issue a $30 million add-on term loan with the same terms and conditions as our existing $399 million term loan to pay down the current balance of our drawn revolver. This was an opportunistic transaction based on favorable market conditions and it has leverage neutral, as we are just charming out the drawn revolver. It does however enhance our liquidity as the full $50 million revolver commitment is now available. We continue to be comfortable with our current debt levels credit profile and liquidity. In closing, we had a very strong start to the year continue to execute well on our fronts and remain well positioned for growth and margin expansion in 2016. With that, I’ll turn the call back over to the operator, who will take your questions. Operator?

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have – come from Jon Charbonneau of Cowen and Company. Please go ahead.

[Jonathan Charbonneau:]

Great. Thanks for taking the questions. As it relates to additional M&A, given that the Telnes acquisition remains on track to be finished at the end of this quarter, would you say additional M&A could still happen as early, I guess, at the end of this quarter? And could you also provide may be a bit more color on the types of companies currently within the M&A funnel is mostly smaller companies like Telnes or still there – are there still bigger companies in there? Just trying to get a sense on what type of M&A could be the most likely going forward. Thanks.

[Richard Calder:]

Great, Jon. Thank you very much. To your first question about timing – this is Rick – yes, we remain on track with respect to completing the integration of Telnes, as we noted in the prepared remarks. We did complete the integration of OSN within the two quarters. And Telnes is on track to complete the integration this quarter, as we noted the organizational integration is complete, the systems in the network components will be complete by the end of this quarter. So yes, as we noted on our earnings call in March, we could do something as early as the end of this quarter, though we’re now in May, so the quarter is closing down. But clearly, we’re well prepared either at the end of this quarter or more likely, probably in the second half third quarter, fourth quarter to continue to do more selective acquisition that’s consistent with our strategy. To your second question about funnel, it remains very active really across all sizes. There clearly is a size of opportunity $25 million and below, similar to the Telnes acquisition we did before. There are midsize acquisitions $25 million to $125 million or so. And then there are some larger acquisitions that are greater than $125 million that remain in our funnel as well, that are consistent with our strategy cloud networking services to multinationals expanding that portfolio and adding marquee multinational clients to our base. So we feel good about the active nature of our funnel moving forward, and our ability to source and strategically integrate within one to two quarters of those acquisitions.

[Jonathan Charbonneau:]

Great. Thank you.

[Operator:]

Next, we have Barry McCarver of Stephens.

[Barry McCarver:]

Hey, good morning guys. Good quarter and thanks for taking my questions. I guess, first off, that’s good color around the organic growth of 9% year-over-year, 2% sequential. That seems like a pretty significant step-up from the past couple of quarters, if my memory serves. Can you give us more color on what specifically drove that improvement in organic growth?

[Richard Calder:]

Sure, I’ll start, and then I’ll ask Mike, to get some color on it as well. I think it’s very consistent. We post the integration of UNSi and OSN. Given the fact that UNSi was actually slightly declining, as we noted in our pro forma financials and – excuse me, and MegaPath was relatively flat. We had actually dipped down a little bit into the 5% and then the 6% range back into 8% in third quarter, 8% in fourth quarter, back into 8%-plus on an annualized basis in the first quarter. This at the same time by integrating slower growth businesses adding a higher growth business with OSN, and the scale of our business is significantly larger. So as we noted in our prepared remarks, we feel very good about our ability to integrate businesses. And at the same time, maintain a steady progress in our 8% to 10% organic growth rates on the top line, and we’re actually achieving significantly higher than our 15% to 20% adjusted EBITDA growth in the bottom line side. So, I think, we feel good about all of the elements of organic growth. We continue to grow the scope and scale of our sales-force. We were 85 in our last earnings call. We’re at 95 at this stage, with a stated objective we continue to grow to 110 to 120. We are putting significant emphasis on our channel program, as we historically have captured only about 10% of our gross-adds, gross additions and sales additions through the channel program. We see significant opportunity to grow that, and we’ve made a strategic investment at client account management with the stated objective of reducing our what is our lower churn rates at this stage of 1.5% or so and continuing to move that churn rate downward by having multiple touch points within all of our multinational client base to us. So we feel very good about that in our ability to sort of continue to invest in that moving forward. So maybe some commentary from Mike as well.

[Michael Sicoli:]

Yes. I would add a couple of points. One is that the organic growth that we’re delivering in late 2015 or late 2016 is really the result of the initiatives that we put in place last year that are bearing fruit with the cross-sell and upsell of the different products and services to the different types of customers that required selling more of the high-bandwidth multinational solutions to the MegaPath customer base which historically was just U.S. Selling voice and some of the other interesting products that we acquire from those megapath and OSN to the legacy GTT base. As well as some incremental investments in sales force and in tools and in sales support, that we made last year. So a lot of the initiatives that we’re talking about now are going to produce benefits back half of this year and beyond. Obviously, the bigger you get the more growth you have, the more you have to sell just to continue your growth rate. But we’re optimistic about what these various initiatives can do as we exit this year and beyond.

[Barry McCarver:]

And just in regards to the channel partner program, I know we’re still in the early stages of bringing that Telnes team over in ramping that up. Was that still about 10% of sales in the quarter and then what’s kind of the timeframe that you see for that to kind of ramp to what you would consider full productivity?

[Richard Calder:]

Yes. It is about 10%. We have, as I think we noted in the call last quarter, we have appointed Jason Ness, our senior vice president in charge of our channel initiative in the U.S. and he is building his team as we speak. So we expect sort of continued growth of that as with continued growth through the year in 2017. As we talked about in several call, previous calls, we think we can catch up to third of our net adds through the channel program over time. So we think and potentially even more than that. There are clearly competitors on industry who get exclusively all of their net adds through channel partner. So we think we have a growing and very well honed machine that has continued to grow on the direct side. And we see the ability to complement that with channel as an independent initiative, separate from the direct team to continue to grow our business and achieve even higher levels potentially over time of organic growth. So it will be a building initiative, though it’s clearly not going to happen overnight. But we see the ability to step up from the 10% as we continue to grow the business.

[Barry McCarver:]

Very good. Thanks a lot.

[Michael Sicoli:]

Yeah. I would just add to that too. It’s relatively early innings for us. We still have additional channel manager, heads that we’re looking to recruit on the sales team. There are other investments beside just reps that we’re maintaining in terms of the process around how we quote. How we install. How we bill and collect and really foster deep relationships with the channel. So that’s going to be ramping in throughout this year and even beyond, but we’re very excited about the market potential there, given our nation status today.

[Operator:]

The next question we have comes from Michael Bowen of Pacific Crest. Please go ahead.

[Michael Bowen:]

Okay. Thanks for taking the questions. Just first of all, and I’m sorry if I missed this. But can you go back and just give us a little bit more detail on what drove the outsized organic growth up to 11%. Secondly, I think about a quarter ago you guys, and I apologize. I think there was a signing of a DISA contract or something to that effect. And I just remember hearing you guys say, that you thought there will be increased contribution from these. And I was hoping, can you give us an update on that. And then finally, as you move more of your net adds to that channel. Can you help us think about the cost savings from that. Thanks.

[Michael Sicoli:]

Yes. I’ll take the first one. The organic growth of 11%. I think you’re looking at the year over year figure there and that’s above the 8% to 10% that we talked about historically, but that does also include a little bit of extra contribution from Telnes, which we did not pro forma officially, because it’s not required some material under GAAP. As we indicated in the script that added two to three points of the year over year pro forma growth. So year over year pro forma growth if you were to factor in Telnes based on the numbers we provided previously, it would be in the 9% range, which is in the 8% to 10% range same thing sequentially.

[Michael Bowen:]

Got it. Thank you.

[Richard Calder:]

And then Mike on the government services question. Yes. We were close to throughout the end beginning of this year. One of the eight contract award winners for a government contract from DISA, the Department of Defense for global network services called the GNS contract. It is a 10 year contract worth of $4.3 billion in total contract potential value over 10 years. And we do have to compete with the other eight players for specific awards. What we’re just starting now in terms of RFI type of proposals and then RFP proposals for specific awards under GNS. So we expected to ramp slowly, but it will ramp or start to see something probably this year in terms of ramp more significantly into 2017. Where we see the significant benefit to us is the fact that this contract award is exclusively for services outside of the continental U.S. or OCONUS in government parlance. And so we think we are particularly well positioned relative to the other U.S. incumbent Telco monopolies that have been awarded this to participate very actively for outside continental U.S. services. Given the depth and breadth of our global backbone network. Again top five is in the internet backbone in the world and we believe that we are significantly well positioned i.e. to be determined as we bid for specific contracts. To your point about net additions to channel, I would say probably in our commentary to Barry in his question. We see this I mean, clearly growing over time as even as Mike mentioned, we see some significant investment for making in two people, process systems. The continued relationship development with the various significant master agents and channel partners around particularly in North America. So we see a significant opportunity. It is early stage at this step in time, but it is one of the places that we’re looking most aggressively to add quota bearing sales force to actually build relationships with channel partners across North America.

[Michael Bowen:]

And thank you for that. One last quick one. On OSN I know, you said the post yield synergy multiple are seven times better than you are achieving that. I seem to recall though that with the growth eventually that could get to the 5 to 6 times post-synergy multiple. Is that still achievable.

[Richard Calder:]

It has that potential. Interestingly, we stated that now only really less than two quarters. And so we closed that transaction on October 22. And so this is through the close March 31. We’re really not even through sort of full two quarters of complete integration. Normally, its in the third quarter. We allude as you know visibility, because we integrate so tightly over the first two quarters that the visibility of where our EBITDA is exactly coming from after a period of time tends to get massed in our business. So we generally run it as one organization, one system and one network. So yes, to your point that can we, will we achieve potentially more post-synergy EBITDA, yes. I think, you see it from the outsize growth that we’re seeing in our EBITDA at this stage that we are continuing to recognize as the growth of our EBITDA line more and more tight integration synergy realization from even as I and the MegaPath integrations over time which is really driving. So I would say the over performance in our EBITDA. Do we expect that to potentially occur with OSN, yes, potential.

[Michael Bowen:]

Okay. Very helpful. Thank you.

[Operator:]

Next we have James Breen of William Blair.

[James Breen:]

Thanks for taking the question. Just wanted to ask couple of questions just on the cash flow side, I know the free cash flow was up around $21 million this quarter again similar to last quarter leverage in the 14 range or so you break out the interest expense. One of the things this quarter is CapEx is little bit higher than normal trend, it was only 6% of revenue. Can you explain, is that tied to the OSN purchase and how does that split out between sort of the normal maintenance level, and then what goes into the integration of that business? And then how you think that trend is going forward? And then just on the bigger picture on the cash flow side, I know that free cash flow is about the same fourth quarter and the first quarter. Will that improve now throughout the year as CapEx turns down and you’re seeing a better growth rate? Thanks.

[Michael Sicoli:]

Sure. As I mentioned in the prepared remarks, it was higher as a percent of revenue than what we’ve seen in the past year or so, but when you look at it over the course of the year its still 4% of revenue which is right in the range. CapEx timing does tend to be lumpy over the course of quarters or years. We do have a pattern of Q1 being the heaviest CapEx quarter, really related to the way we do some of our purchases around core network equipment. So if we look at last year first quarter, we were 5.5% of revenue for the same reason. So its just timing. No change at all in the target range of 4% to 5%. In terms of what’s in the CapEx. There is very little in our CapEx from the integration standpoint. It would be – the majority of our CapEx is still success based, meaning its either specific to customer orders for the CPE that we purchased and a managed secure access equipment that we purchase or its related to network upgrades, network capacity augments, some systems investment as well as we talked about several times. So its 90% plus success based capital. In terms of unlevered free cash flow, that margin took a dip because of the CapEx timing. So if you look at CapEx more normally over course of the year, 4% to 5% would be the typical number you would expect to be able to subtract from whatever the EBITDA margin to get the right free cash flow target.

[Richard Calder:]

Okay. And so – go ahead, Jim.

[James Breen:]

I was going to say, there is a follow-up to that. You saw very good year-over-year margin improvement. I think you talked about it being sort of part of it being because of the revenue mix in some of the managed services stuff. Does it changed anyway how you look at your longer term goals with $1 billion and $250 million as you’re already at 23% now for EBITDA margins this quarter?

[Richard Calder:]

Thanks for your questions. The follow-up question, Jim, yes, we think we’re very happy with the continued improvement of our margin growth over 46.8% on a gross margin basis. 23.2% on an EBITDA margin basis. So we continue to grow as we’ve noted in previous calls incremental gross margin of new sales and installs in our business is still trending north of 60%. So absolutely. We see leverage in our business across gross margin continuing to drive given the power of our global network backbone and we see leverage in our SG&A or SG&A as a percentage of revenue continues decline just a little bit quarter per quarter 23.8% to 23.6%, but we see significant leverage across the non selling components. And we are reinvesting some of that dividend in incremental sales force side to continue to drive organic growth in our business. And we see tremendous opportunity to do that. But that said we think we can comfortably as we continue to grow over the next four or five years achieve the $250 billion revenue plan, $250 million adjusted EBITDA and potentially over achieve on those on a margin basis associated with those goals. I think the most important point on CapEx is we continue to see our business being CapEx like we are in the managed network service, cloud networking services business to more sophisticated multinationals with a owned and controlled global backbone, but we do not see it being a capital intensive business for us 4% to 5% of success based capital. So we think our model is particularly unique in the industry and our ability to generate significant levels of unlevered free cash flow and free cash flow in our business that we can reinvest in organic growth initiatives and selective strategic acquisitions over time.

[James Breen:]

Great. Thank you very much.

[Operator:]

The next question we have will come from George Sutton of Craig-Hallum.

[George Sutton:]

Thank you. Rich, I wanted to look at your long-term plan objectives from a little bit different lens. So if we go back a quarter ago, there were obviously questions about debt capacity given the challenges in the debt markets. Your organic growth had been quite a bit slower than it is now. As we look at those objectives really from the revenue side there is three factors acquisition availability which I think you said is still quite good. Debt capacity which I think has improved, given the improvement in the debt markets and some of the things you’ve done just recently. And then the organic growth has picked up. So I want one answer and one question I want to sort of look at it from that lens. Those relative to your confidence in achieving those objectives, all seem to have improved by missing any component?

[Richard Calder:]

No, I don’t think so George. I mean, as we stated, as I remind everyone this is our third financial objective. We said in early 2011 the financial objective, we got 200 we achieved it with $30 million EBITDA. We said in late 2013, the objective of growing to $400 million with $100 million in adjusted EBITDA, $400 million in revenue and we achieved that. And now we said an objective to grow to $1 billion with $250 million in adjusted EBITDA and we certainly expect to achieve that within five years of the fourth quarter of 2015. So we still see it occurring exactly as we’ve done the first two which is through good solid strong organic growth 8% to 10% top line, 15% to 20% bottom line and selective strategic acquisitions that complement our strategy we see to your point the ability as we demonstrated to raise financing with our particularly our target that leverage of 3% to 4%. And the ability to go beyond that for acquisition and de-lever with our business continue at the acquisition funnel which as we noted before remained strong and continue to achieve it wisely, with a good portion of organic growth. So, we will achieve over the next four years within our growth range of 8% to 10%, we’d have to acquire $250 million to $350 million worth of businesses which we think we can vary comfortably do on an annual basis over the next three, four, five years. So we see the funnel opportunities there, the ability to debt finance them with selective equity particularly for a seller equity as we look to make sure, we intend the players to come and join our team, but prudently on the equity side and continue to achieve that next financial objective ourselves, not our ultimate goal but our next financial objective.

[George Sutton:]

Perfect. Thanks for the clarity.

[Operator:]

Barry McCarver, Stephens.

[Barry McCarver:]

Hey, thanks guys for letting me jump on a follow-up. Can you talk about any large customers in the quarter and I think specifically the opportunity, but I think it’s probably your first or second largest customer, Dell? Is there any bidding ramp there?

[Richard Calder:]

Well, we continue interestingly. I’ll answer the question first, Barry, by saying we look at churn very conservatively on a service basis, on a client basis. So, generally, the trend in our top clients, top 30 to 40, we actually went through probably most of them with our senior leadership team yesterday, is even though we do churn individual services. Number one reason quote [ph] for our churn is the client closes a particular office, but generally has a series of other services they add with us. As Mike noted, we’re seeing particular traction in cross-selling. Particularly, we’ve added managed services and voice services SIP trunking and hosted PBX, and enterprise PBX hosted seats for our clients. So we see some nice additions from those clients. And we’ve seen some very good traction with our – with some new large logos that have started with being initial wedges of business with us. So, yes, we see growth in some of our top clients like Dell, but we continue to see growth in some of our smaller clients, smaller so to speak that are continuing to grow their share of market presence with us. I think as we noted in our prepared remarks, we are the challenger brand in a very large market opportunity taking on the incumbent telcos. And we see tremendous opportunity with the power of our service portfolio and our value proposition, the values that we live with simplicity, speed and agility to take increasing share in this market and we’re seeing that play out. We are subject to NDA. So we generally can’t specifically disclose and thus we do press releases. And we try to do press releases on some of the more material clients that we announced. So you’ll see those from us time to time, but we feel very good about the progress that our sales and service team are making and we’ve had some of the, I would say, record setting months over the past few months and quarters for our sales performance both on an absolute magnitude basis and on the productivity per rep, which is why we’re continuing to add as aggressively as we can sales-force staffs.

[Barry McCarver:]

Okay. Thanks, guys.

[Operator:]

Well, at this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

[Richard Calder:]

Great. Thank you very much, operator. I like to turn the call over as we do every call to our Chairman, Brian Thompson, for some concluding remarks.

[Brian Thompson:]

Thanks, Rick. I appreciate everybody being on the call. Just a couple of items I would like to address. The first is, if you get an opportunity to look at our proxy statement, you will find out that one of our terrific directors, Morgan O’Brien, has decided not to run for reelection after having been on the board for 10 years. He is developing a new company, PDVW, which is a very interesting wireless company and unfortunately that’s taking too much of his time. So he had to step down. So we have also in that proxy you’ll see that we are bringing on board, now hopefully with the board for the first time, Elizabeth Satin, a terrific M&A person who comes to us right now as a Senior Executive of Wolters Kluwer but had spend about 20 years in the investment banking business before that. So her specialty seems to be clearly M&A and therefore she is going to help us very well. Morgan was a great M&A person too. So we believe our board is continuing to evolve in very positive ways. The second thing I wanted to address was really our whole approach to value creation, because I would hope that you as analyst and investors take the same view that I do in looking to the future rather than worrying about past. But what we’ve been able to do here in the company and now that we’re at about $0.5 billion revenue run rate, I believe it’s fair to say that we have created a proven solid platform that is now at a point where we feel very confident in its scalability both in terms of our structure, our approach and the people that we now have in key places to go to that next level. I like to draw the analogy having been a navy diver that the hardest part of diving is very simply the same as starting up companies. The first 33 feet is doubling of the pressure on you and is the place where most of the changes take place. When you’re building a company it’s very similar. As you’re starting, you really need to hit the hard parts. And as you can build the scalable platform like we have, the next 33 feet or the next major acquisition becomes much easier and much more predictable. Our people have done that and it’s terrific to watch where we are now. It gives us though the unique flexibility, because as Rick said, being asset-light, being able to generate the kind of future cash flow that we have, we have the option to de-lever the company should we choose to do that or to do other acquisitions or to invest in growth. We are in a position to be able to make those decisions very positively and very consciously. And therefore, we don’t see the overwriting pressure to do one of those or the other. But we have the option of doing it. And I take my hat off to this team for putting us into the position to do that. Going forward, I think the future is even brighter than the past has been. And I’m very bullish about where we’re going. I’m bullish about the performance. And I think we got a great future especially in this ever-changing industry of ours. Thank you very much.

[Richard Calder:]

Excellent. Thank you very much, Brian, and thank you to everyone for listening today. We’re very excited about our future and reporting our results to you in the future. Thank you.

[Operator:]

And we thank you sir and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. We thank you again, everyone. Take care and have a great day.