GTT Communications, Inc.
Q4 2016 Earnings Call Transcript

Published: 8 Mar 2017

[Operator:]

Good morning, and welcome to the GTT Communications Fourth Quarter 2016 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that 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.

[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 also available on our website. Before we begin, I'd like to remind you that during today's call, we'll be making forward-looking statements regarding future events and financial performance made under the Safe Harbor Provision of the U.S. Securities Laws, including revenue and margin expectations, projections or references to trends in the industry and GTT's business. We caution you that such statements reflect our best judgments as of today, March 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 filings with the SEC including the 8-K we filed earlier today, which contains our fourth quarter 2016 earnings release. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we will also discuss non-GAAP financial measures, including certain pro forma information; unless we specifically state otherwise the non-GAAP financial measures we will discuss today were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today's press release and is posted on the Investor Relations section of our website. I will now turn the call over to Rick Calder. Rick?

[Rick Calder:]

Thank you, Chris, and good morning everyone. Thank you for joining us. 2016 was another tremendous year of growth and overall performance for GTT. We successfully executed our growth strategy, while driving significant margin expansion in maintaining our CapEx light business model. During 2016, we completed the integration of One Source Networks, acquired an integrated Telnes Broadband, completed two strategic customer base purchases, RealLinx and Yipes and continued our organic quota bearing sales growth. Overall, we delivered 2016 revenue of $522 million, up 41% on a reported basis and up 13% on a pro forma basis, and delivered adjusted EBITDA of $125 million, up 62% on a reported basis and up 32% on a pro forma basis. In addition, we announced our largest strategic acquisition today, Hibernia Networks, which closed on January 9th and moving forward, Hibernia will be included in our results in 2017. Over the past year, we enhanced the reach of our global network, expanded our portfolio of cloud networking services, increased our blue-chip multinational client base, and added world-class talent to our team. In recognition of these accomplishments, we won seven awards acknowledging the excellence of our service offerings and the emergence of GTT as the challenger brand in our industry. Most recently our Cloud Connect private network solution, which provides secure, dedicated connectivity between our clients and leading cloud service providers won the 2017 INTERNET TELEPHONY Product of the Year Award, which celebrates the most innovative and highest-quality IP communication services. In addition, during the fourth quarter, we added four new points of presence to our network in San Diego, Detroit Chandler, Arizona and McAllen, Texas. These PoPs add value for our multinational clients by providing deeper reach into key growing markets, in the case of McAllen by serving as a key interconnection point into Central and South America. As we discussed last quarter, we are targeting 10% to 20% annual revenue growth from the combination of organic growth and smaller acquisitions. We have grown our sales force to approximately 115 quota bearing reps today, and we will continue to expand the scope and scale of our sales force throughout 2017 to address the tremendous market opportunity for our services. We also maintained an active funnel of small client base acquisition opportunities and we expect to add several customer bases in 2017. Once we add these customer bases, we grow the initial base of revenue with our larger service portfolio and our broader worldwide network reach. As I mentioned earlier, we were very pleased to close the Hibernia acquisition back in January. This strategic combination adds breadth, depth and scale to GTTs global network with significant fiber assets, key landing stations, an additional point of presence, expands GTTs cloud networking portfolio with optical transport and media services and grows GTTs client base with marquee multinational clients in the financial services, media and entertainment, web centric, and carrier segments. Hibernia integration is well underway and we were following our successful proven template. We completed the organizational integration in February. And we are now focused on completing the systems and network integrations by the end of third quarter 2017. We expect to generate $30 million in annualized synergies evenly split between SG&A and network cost, which we expect will yield a post-synergy multiple of seven times adjusted EBITDA or better on a pro forma basis. With our Hibernia integration on track, we are well-positioned to consider larger strategic acquisitions in the second half of the year. Our funnel is strong and we remain focused on opportunities that are consistent with our strategy of expanding our - extending our global network reach and adding multinational clients and great talent to our team. By focusing on the right strategic opportunities, we have a proven record of successfully integrating larger acquisitions quickly and at highly accretive purchase prices. By living our core values of simplicity, speed and agility, we have established GTT as the best alternative to the large incumbent telcos and we will continue to press this [ph] advantage. With Hibernia closed, we have accelerated our 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 our CFO Mike Sicoli for a review of the numbers. Mike?

[Mike Sicoli:]

Thanks, Rick. And good morning, everyone. Fourth quarter revenue of $132 million, grew 19% year-over-year and 4% sequentially on a pro forma basis, including OSN and in constant currency [Technical Difficulty], fourth quarter revenue grew 16% year-over-year and 4% sequentially. Fourth quarter adjusted EBITDA of $34 million grew 32% year-over-year and 5% sequentially on a pro forma basis, including OSN and in constant currency, fourth quarter adjusted EBITDA grew 31% year-over-year and 6% sequentially. The increases in revenue and adjusted EBITDA were driven by the acquisition of OSN, organic growth and our small customer base acquisitions. Telnes and RealLinx and Yipes. Adjusted EBITDA margin of 24.8% expanded by approximately 250 basis points compared to fourth quarter 2015 and by approximately 40 basis points compared to third quarter 2016. Year-over-year margin expansion was driven by an increase in gross margin, reflecting continued network grooming and scale, as well as a reduction in SG&A as a percent of revenue as the rate of increase in our organic growth investments has now reached a more normal level. Sequential margin expansion was driven mainly by the reduction in SG&A as a percent of revenue, slightly offset by a reduction in gross margin. We recognized $1.7 million of transaction and integration costs during the quarter related to prior deals, as well as the Hibernia acquisition, which are included in our reported SG&A, but excluded from adjusted EBITDA. There were no exit costs recorded in the fourth quarter. We expect to incur a total of approximately $20 million in exit costs and transaction and integration costs related to Hibernia, which includes $6 million in Irish stamp tax paid shortly after closing. Fourth quarter net loss was 900,000, compared to net income of $27.6 million in fourth quarter 2015 and net income of $5.1 million in third quarter 2016. As a reminder, fourth quarter 2015 included a $34 million income tax benefit, primarily related to the release of our valuation allowance against US deferred tax assets. Capital expenditures in the quarter were $6 million, compared to $4 million last year and $6 million last quarter. CapEx was 4.6% of revenue for the full year, in line with our target range of 4% to 5% of revenue. Going forward pro forma for Hibernia, we expect CapEx to be in the range of 6% to 7% of revenue, still CapEx light, but slightly higher than our previous range, as the Hibernia business is more capital-intensive, but also brings a higher adjusted EBITDA margin. Adjusted EBITDA less CapEx was $27 million in the fourth quarter or 20% of revenue compared to $21 million last year and $27 million last quarter. 2016 net cash provided by operating activities was $61 million, a $36 million increase from 2015. This figure is net of several key items not included in adjusted EBITDA, such as, $26 million paid for cash interest, $1 million paid for cash taxes, $4 million paid for restructuring and exit costs, $5 million paid for transaction and integration costs, $1 million from changes in foreign currency rates and $29 million of use from working capital, which improved by $5 million from the third quarter. At year-end, our current liabilities were $96 million, including $24 million related to acquisition holdbacks mainly from the Yipes and RealLinx and $3 million related to deferred, restructuring and exit costs. Excluding these holdbacks and exit costs, current liabilities were $68 million or $51 million less than current assets. Our cash balance was $30 million at year-end and our outstanding debt balance was $447 million, excluding OID and unamortized debt issuance costs. Our leverage ratio using fourth quarter annualized adjusted EBITDA was 3.3 times on a gross basis and 3.1 times on a net basis. These cash, debt and leverage figures exclude the $300 million in senior unsecured notes and the offsetting restricted cash held in escrow that were shown on our balance sheet at year-end. These notes were placed for the sole purpose of funding the Hibernia acquisition and the terms of the escrow agreement specify that the funds can only be released from escrow upon closing of the transaction which occurred on January 9. Now that we've closed the Hibernia acquisition, we have $1 billion in total debt, comprised of $700 million, 7 year Term Loan B, priced at LIBOR plus 400 basis points and $300 million in 8 year unsecured notes priced at 7.875%. In addition, we obtained a $75 million revolver, which is currently undrawn. This updated debt balance translates into a ratio of net debt to adjusted EBITDA of approximately 4.5 times, using annualized fourth quarter pro forma combined results, plus $30 million in expected cost synergies. As we've discussed previously, within a year we expect our ratio of net debt to adjusted EBITDA to be at or below four times, reflecting continued adjusted EBITDA growth and cash generation. Regarding Hibernia's fourth quarter results, Hibernia reported revenue of $43.4 million and adjusted EBITDA of $16.8 million, both of which includes $6.6 million in deferred revenue amortization from prior prepaid capacity sales. Hibernia's revenue declined by $1.1 million year-over-year and $2.1 million sequentially due to currency headwinds, as well as lower than expected sales performance in the second half 2016. As a result of this revenue trajectory, we will likely be at or perhaps even slightly below the low-end of our target revenue growth range of 10% to 20% until we fully complete the integration. Despite the revenue decline, Hibernia's adjusted EBITDA actually increased by $3 million year-over-year and 700,000 sequentially, due to lower than expected maintenance costs and higher profitability from clients on the Express system. In addition, Hibernia collected $8 million in cash from new prepaid capacity sales during the fourth quarter, which will begin amortizing in 2017. These figures are as reported by Hibernia and do not include any pro forma adjustments, which would have reduced Hibernia's fourth quarter reported revenue and adjusted EBITDA of $1.5 million and $1.1 million respectively. Please refer to the supplemental tables in today's earnings release and the amended 8-K we filed earlier today to see Hibernia's full 2016 financial results and updated pro forma information. In closing, 2016 was a great year for GTT and we look forward to another great year in 2017. Now, we'll open up the call for your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Jon Charbonneau of Cowen and Company. Please go ahead.

[Jon Charbonneau:]

Great. Thanks for taking the questions. As it relates to Hibernia, in terms of our models how do you recommend as we think about the realization of synergies that flow in through over the next couple quarters? And then in terms of the Yipes deal, I believe you did in late November, are there any synergies from that that we should be factoring in? Thank you.

[Mike Sicoli:]

Hey, Jon. It’s Mike. In terms of the synergies, should be fairly even throughout the year. I mean, as we've articulated before we expect to sort of be fully synergized or realize the full level of $30 million by the time we exit the year, so in fourth quarter. But between now and the end of the third quarter it should ramp in to pretty consistently. We did the headcount actions back in February as Rick mentioned. So that won't be as much in Q1, you know, because there is sort of an only a half quarter of benefit there. But the rest of it should come in pretty rapidly throughout the year and then as it relates to Yipes, it’s on the small side. So while yes, there will be some synergies realized, most of them are already in the run rate at this point.

[Jon Charbonneau:]

Great. Thank you.

[Operator:]

Our next question comes from Scott Goldman of Jefferies. Please go ahead.

[Scott Goldman:]

Hey, guys. Thanks. I guess, just a follow-up on Hibernia, I think Mike you mentioned aside from FX, that maybe there were some sales headwind that hit resulting in the revenue that you guys saw in 4Q. Maybe you can just to talk to us a little bit about whether those are temporary in nature and more importantly about the progress that you guys see being able to cross-sell Hibernia with your existing base and leverage the assets that you guys acquired up there? And then secondly, maybe just talk a little bit, maybe for Rick on the M&A environment. Obviously been a lot of deals over the last, call it 5, 6 months predominately you know, in evolving fiber and including you guys as well. Can you just talk a little bit about you know, the competitive environment and maybe what opportunity that has created for you, with perhaps some of these deals taking place and whether or not that’s created some opportunity even for you guys, maybe on the hiring of sales force or things like that going forward? Thanks.

[Mike Sicoli:]

Sure. So I'll start. You know, as it relates to the revenue on the Hibernia side, its not unheard of that you'd see a little bit of slowdown heading into a deal and you know, that period between signing and closing. So I view it as you know, somewhat normal and I think we have every expectation that it will be a grower going forward. But it may take a little bit of time for us to sort of get it back to growing, but we're still very excited about it and still view it as you know, highly strategic and most importantly you know, despite of the revenue softness they did continue to grow EBITDA and cash flow, which is ultimately the strongest measure of performance.

[Rick Calder:]

Yeah. And I think – Scott, this is Rick. I think we saw the same thing similar behavior when we bought MegaPath in April of 2015. They had been through a fairly elongated sale process. And I think that creates a little bit of uncertainty within sales and support organization and it took us a few quarters to fully integrated and get that back in growing. And I think we feel the same thing about Hibernia, which is been in a relatively long sale process, and we now with the integration we're created as one company. I think the ability we've launched the optical wavelength product now to the entire sales force, we put a renewed focus on the media product as well. We see some really interesting opportunities across our much larger base. To your second question on the M&A environment, we actually think what's going on is, a very well position for GTT, particularly in the US market at this stage, given the consolidation of six players to 3, with the XO's purchase with Verizon, with just recently completed EarthLink into what Windstream and then the pending consolidation of Level 3 in and CenturyLink. We simply believe that there are fewer choices and we really have emerged as the best alternative to the incumbents. And we see that our position strengthening over time, as we - as I mentioned in prepared remarks, we're at about a 115 reps today. We've actually not said sort of publicly yet where we want to get to because we see an opportunity to grow pretty aggressively this year, based on you comment that there's a lot of talent out there that I think will be very interested in being part of a fast growing player who can be very disruptive in our industry. So we see that as our opportunity over in 2017, moving into 2018 and we want to take advantage of it this year.

[Scott Goldman:]

And just a quick follow-up on the quarter you guys talked about, Hibernia you know, after you sort of get through the growth that they got from the Express product is sort of being you know, mid single digit or in line with your prior organic growth expectations, is that still the case going forward?

[Mike Sicoli:]

Yes, that is our expectations, you know, mid to high single digits, potentially even a little bit higher, but, yes.

[Scott Goldman:]

Okay. Great. Thanks a lot guys.

[Rick Calder:]

Thanks, Scott.

[Operator:]

Our next question comes from Walter Piecyk of BTIG. Please go ahead.

[Walter Piecyk:]

Thanks. Some of the acquisitions that are out there, can you just talk more about the types of sales people if any, that would be applicable to your business. I would think that with CenturyLink buying Level 3 there might be people there or maybe I don’t fully understand you know, the types of people they have versus what you would want? Also are there any other deals that there that we haven't thought about traditionally, like you know what Comcast [ph] bought they had some small enterprise businesses that are there any valuable sales people there that can help to layer on to your existing business?

[Rick Calder:]

Sure, Walter. This is Rick Calder. Couple quick comments, first the best sales people in any organization frequently are difficult to get, where because there they are doing very well at their current organization. The moment in time that becomes opportunistic for us is when they go through an integration, when they are changing, the value proposition, change in compensation plans, or all types of things that happen in integrations, which is when we see great sales talent become available. So with the combinations that I mentioned a second ago, we see some real opportunity for us to go in and take them. We've been successful with that this year as well. We also see…

[Walter Piecyk:]

I am sorry to interrupt, is that across the board though, is it – because I know that Level 3 was having some issue at the low end, which is kind of not you're saying, right, I mean, you're more in the highly integrated approach?

[Rick Calder:]

Well, I'll mention Walter exactly where…

[Walter Piecyk:]

Okay…

[Rick Calder:]

We see and the types of sales force that we see taking. But the other thing I'd say is when we talk about adding great talent, the one of the best things we get from everyone our acquisitions is talent, right. So its different, we actually were absolutely hiring organically from many of our competitors and we're hiring great talent through the acquisitions that comes - that bring us fantastic talent. They generally tend to be some of our top performers, the folks that come through requisition. In terms of the type of talent to your question, we have a broad approach at this stage, and I think many of the competitors that each one of these. So if you think about our approach 20%, 25% of our business is sold to carriers and we continue to grow our direct to carrier wholesale organization across the world. We actually have grow that significant this year and we see opportunity across our product set, whether it is selling wavelength, selling high-capacity IP transit services or selling off-net extension to our carriers to extend the reach of their network around the world. That is a very nice and growing value proposition for us and we think we have the product set that is well positioned and we think there are players in carrier wholesale across the competitive landscape that we can actually attract to the GTT banner. High-end, multinational enterprise sales are another key focus for us, continuing to grow that part of our business and I would say that’s probably the biggest area that we see with growth and the ability to take the multinational and large US national profile and continue to grow that throughout the US and in Western Europe. And then lastly, an area that we've traditionally been underrepresented, to getting that majority of our sales have come from those direct efforts to carriers or direct enterprise is channel and we see a big opportunity to continue to grow. We made a relative from a relatively small base a big growth increment this year, last year and 2016 and we see the ability to continue to partner with channel partners to actually attack the enterprise market indirectly through channel partners. So all those three we see as opportunity, both to continue to get great talent through acquisitions, future acquisitions we do, as well as to continue to take talent from our competitors who are in the process of merging at the stage. In terms of…

[Walter Piecyk:]

That was a massive data to come towards [ph] large different opportunities, other ones that you think are – I mean, is it always going to be better for you to just – when we think about the growth of your sales force, to think about in terms of acquisitions as opposed to, I mean, you kind of laid out like every single different angle that you get to and I appreciate that, but like is there – is there one area that’s really going to account for the predominant amount of the growth of these sales people that’s really driving your business?

[Rick Calder:]

Well, I mean, I think it speaks to our strategy. We take unique approach to execute our strategy organically and through selective acquisition. So I think you'd see a balanced approach as we grow our business. We continue to grow our business organically by continue to hire people and great talent that we can actually attract to us, as well as find great talent for our teams through selective acquisition.

[Walter Piecyk:]

And just that one last one, sorry but its corollary to this, have you seen any dislocation in Zayo [ph] I mean, I think there was some – they had some revenue issues in recent quarters, and I think there were some comments about, I wouldn’t call it a restructuring of their sales organization or maybe a change in how they were approaching some of their product sales. Have you been able to pick up any sales people from Zayo are those people even of interest to you?

[Rick Calder:]

Well, I'd say I mean, Zayo is been a fantastic partner of for us. We've had very complementary strategies. They've been very focused on infrastructure services, co-location and fiber services, and we've been a great partner with them. So I would say that we want to continue that great partnership we've had Zayo. We see our approaches to the market being complementary in nature and as far as that's concerned me, we think that that partnership will continue to be very strongly moving forward.

[Walter Piecyk:]

Okay. Thank you, Rick.

[Rick Calder:]

Thank you.

[Operator:]

Our next question comes from James Breen of William Blair. Please go ahead.

[James Breen:]

Thanks. Just a couple questions. One for Rick, could you just talk about on the sales side, you know, are you seeing existing customers adding more services, is it new logos that you are getting, sort of what the balance is between those two? And then for Mike, you know, you talked about the revenue growth range of 10% to 20% and being slightly below that possibly depending on how Hibernia re-ramps from where it came out of the fourth quarter. I'm assuming that that means on the organic side, absence any other further M&A this year. Can you just sort of give us some color on that? Thanks.

[Rick Calder:]

Sure. I mean, in terms of the – just to give a sense of the portfolio, we actually showed it in our updated investor presentation, which is on our website at this stage. We added both the media product set, as well as the wavelength product set and we've actually launched that to the entire broad sales force, the wavelength footprint that we have to sell. So we clearly and have begun to see even in early days a good cross-selling opportunities of selling Layer 1 optical transport. We have actually – sine here we think about the broad portfolio, we have wide area networking services, Ethernet, MPLS, VPLS. We have a whole suite of Internet services from high-capacity IP transit, DIA, down to broadband Internet and broadband wireless services for a lower capacity locations and branch offices for clients. A whole suite of managed services and managed security services and then a suite of voice services, SIP Trunking and Hosted Communications, Unified Communications for Hosted PBX services and then the two new ones that I mentioned. I'd say we absolutely are seeing good cross sell across the two and traditionally we've seen it between the wide area networking suite, the Internet suite and the managed service suite. The area that we had still have tremendous opportunity and you probably see it in our percentage of portfolio is voice. We actually have anything where we have been underrepresented relative to the spend of our clients is cross-selling and up selling voice services, SIP Trunking and hosted seats and we see that as a nice opportunity and have actually refocused some of our efforts around cross-selling voice, because every one of our client has the need and we are not as well represented as we are in the data services suite.

[Mike Sicoli:]

And in terms of the revenue growth target, as Rick outlined the 10% to 20% target is a combination of organic and a small customer base acquisition and we've been well above the 10%, low end of that range for all of 2016. When you look at it - so specific to your question, when you look at that metric, it does not assume additional acquisition, if there is another large acquisition later this year you know, that would be on top of that 10% to 20% growth target. In terms of the context around, my comments around will probably be around the low end to that, early in the year, at least until Hibernia is fully integrated. If you just look at their fourth - the pro forma, inclusive of Hibernia, fourth quarter '16 over fourth quarter '15, sorry over third quarter '16 the growth rate was 2.3%, you know that annualizes to something between 9% and 10% which is slightly below the low end of the 10%. And that's really the nature of the comment is to just address the fact that you know, if you just look at the sequential from Q3 to Q4 it was slightly below and you know that probably will continue to be the case, you know, for the next quarter or two until the integration is complete. And as Rick mentioned we get the cross sell and up-sell into the market to drive the growth rate, back up hire, it could be 9, it could be 10, it could be 11, you know, its just going to be somewhere probably in that lower end of the range, you know, for the first couple quarters of the year and then probably up from there.

[James Breen:]

Okay. That makes sense. And then just from a margin perspective, you were at 247 this quarter, which is obviously the long-term outlook or long-term guidance for $1 billion to 250, is it 25% EBITDA margin you would expect, and if you can provide some color, as I expect that margin come down a little bit in the first quarter, just as you see some of the costs come back in that you know, generally are in the fourth quarter, but at the same time you got Hibernia, which had decent margin from their business. Can you just talk about how you sort of think about margins going forward? It seems like you'll hit that 250 number before you hit the $1 billion; just any color would be great? Thanks.

[Rick Calder:]

Sure. I'll let Mike address the math. Just in terms of nomenclature, I mean, we've said three financial objectives, so I just wanted to be clear, it’s not our long-term objective or goal, is just our next financial objective. We set a goal of achieving - our next financial objective of achieving to $200 million, we achieved it. We've set an objective of setting - of achieving $400 million in revenue. We achieved it. Then we said the current next financial objective which was a $1 billion and 250 and as we noted in the press release in the prepared remarks, we've accelerated our progress towards that goal and we would expect to achieve it sooner than the five year timeframe that we laid out when we announced it the next financial objective in November of 2015. And I think - even as we talked about last quarter, yes, we would, our margins are increasing faster than the 25% EBITDA margin that would be implied by 250 or $1 billion. So at our current trajectory we would probably expect to eclipse the 250 before the billion, but we're not saying that’s what we will happen, right, depending on what happens without any other significant strategic acquisition moving forward. But relative to our current trajectory and maybe Mike can make a few comments.

[Mike Sicoli:]

Yes. So two things, one is you know, Hibernia is enhancing the margins on a pro forma basis, even before the synergies. So we would expect margin to improve in '17 over '16 right away. There are always pressures in Q1 from an SG&A standpoint as you mentioned, with payroll tax and audit and things like that and those will course be there. But you know, net of all that, we would still expect the margin to be going up.

[James Breen:]

Perfect. Thank you.

[Operator:]

Our next question comes from Arun Seshadri of Credit Suisse. Please go ahead.

[Arun Seshadri:]

Hi. Thanks for taking my questions. Hi, Rick, Mike. Just had a few, first I just wanted ask in terms of working capital outlook for this year, I just wanted to understand, I think about a $30 million negative in operating side for '16, and I don’t know if you could give a rough range for where do you think you end up this coming year without Hibernia?

[Mike Sicoli:]

Yes, I think if you look at '16 working capital there is a couple of things to note. First is that we did make a conscious effort to get current from an AP [ph] standpoint, those $5 million, $10 million or $15 million of the move that doesn't repeat you know, presuming we stay current going forward and we did that on purpose because we thought it was going to get us better relationships with vendors and more discounts and more disputes approved and things like that and it has resulted in that. So we're very pleased with the upside of that. And then on the AR side, the DSO's did widen out a little bit. Some of our larger customers took longer to pay and it’s on us to figure out how to make sure that we get those DSO's back down into a more normal range in '17. I think you know, it be reasonable to think about us as you know, somewhere in the 30 to 40 range in terms of DSO going forward. We're at about 50 at year-end. We do have a number of large customers who do have longer payment terms than the typical 30. So it would be very difficult for us to get below 30, but somewhere between 30 and 40 is a reasonable place for us to be in. That's what we're chasing in '17.

[Arun Seshadri:]

Great. Thanks for that Mike. And then as far as broader commentary on a leverage, I think you've said clearly that you expect to be inside of four you know, by the end of the year. And then Rick, I mean, you made a comment in the second half of the year you know, you potentially start looking at bigger things. So is it fair to say that you're relatively comfortable with leverage kind of you know around four times as the scale of the business improves and then you're willing to sort of keep it there around four times, and then sort of on the back of that - back of the next acquisitions just sort of try to take leverage down at three?

[Rick Calder:]

All right. I'll start and then let Mike comment. We've always said that we feel comfortable in a steady-state basis living with leverage in the 3 to 4 range and you know as we disclosed we're at the lower end of that range on a net basis right now, through 3.1, at the end of last year we did our next deal, right, so it took us outside of that. We said we're happy to go outside of that for a period of time for strategic acquisitions, like Hibernia. So we - but we expect to delever pretty rapidly. We've also said that to the degree we live outside of that 3 to 4 range, if we do another acquisition, we like it to be leverage neutral, right, so that we would like - not like to extend our debt while we're sitting outside of our comfort zone as a public firm. So that’s - I think we feel very good about the tunnel of opportunities that are out there that could be executed in a reasonably leverage neutral way, while we sit outside 3 to 4.

[Arun Seshadri:]

Great. Helpful…

[Mike Sicoli:]

Yes, no much more to add there, just to say, you know, in the context of whatever we do from an M&A standpoint, I thin as Rick mentioned, its important to highlight that, we are committed to a business model that delevers fairly quickly. So you know, absent another deal, we expect to be - take a half turn or so out by the end of this year, to be back down within our normal target range. If for some reason we do another deal you know, before we get to that level it would be leverage neutral, even delivering as a way of making sure we continue to sort of progress against that target of getting back down into the range. But it will be you know, Rick mentioned steady state, I am not sure there is such a thing as steady state, for GTT, right. Its – there is just so much opportunity in the marketplace for us. The market is so big. The share opportunity for us is so big, relative to the large incumbents and the opportunity is now for us to get bigger. So you know, we are very focused on appropriate leverage and prudent leverage in making sure that we always have good free cash flow and sort of keeping things in balance. But you know, there is a lot of strategic opportunity out there.

[Arun Seshadri:]

Great. Thank you, both. One last thing for me or couple of last things from me on cash side, IRU and prepaid sort of look at the balance of that, how should we see it trend for this year, and then Mike if could also sort of make comments on cash taxes, where do you end up for the year?

[Mike Sicoli:]

Yes. So IRU and prepaid, if you look in the 8-K/A, the amended 8-K that was filed, apologies we are having some trouble with the SEC website this morning, but it is now filed. You can see the updated table as of year-end of what the amortization schedule will look like. It's a little higher than the one that we did in the third quarter, as I mentioned in the prepared remarks, Hibernia did collect an $8 million prepaid n the fourth quarter. So the numbers will be a little bit higher than what you saw previously. But otherwise you know, no real change in what we talked about previously. There will be a runoff of legacy Hibernia prepaid. We do expect to continue selling some amount of prepaid capacity, just not at the same levels that Hibernia did historically, particularly those deals that related to the Express project. So there's probably $10 million or so a year of prepaid that you would expect to see from us going forward. But that could be 5, one year and 20 one year, I mean, the standard of deviation is probably pretty high, because the deals can be chunky. But over a 5 year period, I would expect this average probably $10 million a year, in terms of the new that we bring in. And on cash tax, we do – we did utilize NOLs in 2016 from a US standpoint. As you can see the NOL balanced, we haven't seen yet [indiscernible] but the NOL balance is lower at the end of '16 compared to '15. And you know, we think that for the next couple of years we still have plenty of NOLs to keep us from paying cash tax, but 3 to 5 years out I think we would expect to become a cash tax payer, absent any changes from you know, that come from M&A activity which of course - there very well could be, but at least, as we sit here today, we think we have few years of runway.

[Arun Seshadri:]

Thank you for taking my questions. Nice quarter.

[Mike Sicoli:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Rick, you mentioned the channel partner opportunity, I wondered if we got a little more detail, given the consolidation going on around, it would seem that the inbound interest from channel was very good. I'm curious if you could talk to that, but also do you have any outbound programs that are specifically getting accelerated by this audit [ph]

[Rick Calder:]

Well, certainly I mean, as I mentioned before, just thinking about the six companies that now have consolidated to three. There are just simply fewer networks to represent for channel partners, particularly in the US market. So it is precisely the reason we've almost double the number of resources we have in '16, against the channel partner opportunity and we clearly see the opportunity to double that number of resources again, both to outbound - I mean, I would say its still - we still are buying that and where people are calling us to place orders with us, we're still at selling environment for us to hire folks to go approach new masters and subagents to the masters to basically take advantage of the relationships that channel partners have with their clients. So we think we're a very, very credible service provider to address the enterprise demand that comes through the channel environment. So you know, back to the point that still about 10%, about 10% maybe 12% of our sales are coming from channel and we've seen particularly as we've acquired businesses over time, companies that are in the 80% to 100% smaller. So we think that is a sort of an untapped opportunity for us and we want to continue to grow our presence within the channel.

[George Sutton:]

Okay. Thanks for that. One other thing relative to the first half of the year where it sounds like you're refocused on any smaller potential acquisitions and sort of customer type acquisition. Can you just give us a sense of what that pipeline of opportunities looks like?

[Rick Calder:]

Sure. As I said in prepared remark, it's a very robust and we see this opportunity as the ability to get wedges with client’s right, so upon to the hardest things we have to do is simply take our great value proposition and present it to clients and get the first sale. So having an initial wedge with a set of clients, as we've done with the Telnes and RealLinx and the I-Flash [ph] here and we'll continue to do is a fantastic way to grow our business, right, and we've seen a significant number of sub $30 million of businesses out there that have difficulty scaling once they get to you know, some reasonable size. And so on the opportunity for us to add those great clients, maybe a few sales reps, but to be able to have it be highly accretive immediately to our business and create a platform to grow by selling a broader portfolio services and a broader reach, given our global network backbone, you know, is a fantastic way to grow our business. So we see that we have a great funnel of opportunities in the 20, 30, 40, range and its all about finding the right one, because – and making sure that the client base is consistent with ours, the service base is consistent with ours and we can integrate it very, very rapidly. So we would expect absolutely to do several of these this year.

[George Sutton:]

Perfect. Thank you.

[Operator:]

Our next question comes from Barry Sine of Drexel Hamilton. Please go ahead.

[Barry Sine:]

Good morning, gentlemen. Very strong organic growth in the quarter, I know you get a lot of questions on acquisitions, again, organic story looks very good. And Rick you’ve already talked about a couple of the drivers, I wanted to ask about a couple more of those. On your new investor slide deck, the pie chart, you're about 13% international or non-US revenue. Could you talk about the geographic, where the growth is coming from geographically, as you're seeing more international? And then also from an industry standpoint, what industries are driving it, we just saw very, very good jobs numbers come out a few minutes ago - a few minutes ago. And then also, what is your churn experience, is that improving, is that helping drive organic revenue growth?

[Rick Calder:]

Sure. Let me kick through these. First, we have continued – I mean, interesting Hibernia it probably breaks the string of having a business it’s more balanced between its sales efforts in EMEA, as well as in North America. So we're excited about that. We've actually grown now through acquisition, resources that we have in Western Europe, Ireland, and the United Kingdom, and we see opportunity continue to grow there. We've had most success outside of the US in the carrier channel, right. Our ability to grow on the carrier side it’s been great. We put a lot more resources there. The area that I would say creates opportunity where we have not grown as rapidly as direct enterprise outside of the US. So we think that is an opportunity area for us to continue to invest in, particularly in the United Kingdom, Ireland. It’s real sort of untapped. We think the competitive dynamic while not as extreme as is happening in the US, it’s still the same in Europe where there are fewer and fewer competitors, that have the scale and scope to be able to address the needs of multinational enterprises. And so we will continue to make those investments and grow that business. We now have actually more resource than we had pre-Hibernia. On the – the other question that was churn, we've seen our churn continue to maintain even as we've added these customer bases. We've actually seen 2Q to 4Q a slight tick down, we're still in the mid 1% range, but we seen sort of slight declining trend in churn as percentage you know, MR as a percentage of revenue. So we feel good about that. There's always opportunity to continue to improve on the churn, right, given that we're still in the mid 1% range. We still think we can take you know a good 2, 3, 10s out of that churn rate to continue to help make our organic growth even stronger. I'm not sure that I get all three?

[Barry Sine:]

You got all three, but I am going to layer another question on top of that. On future M&A, could you give us your shopping list in terms of what you're looking for in future M&A, in the past you've added product capabilities, you've added geography with Hibernia, you added some network assets. What is on your wish list for larger acquisitions down the road?

[Rick Calder:]

Sure. I mean, it’s been a very consistent story for us. I mean, we want to buy things that are strategic and when we say that, that they expand our cloud networking portfolio. We feel pretty good about that right now. That if I would think about the last major piece part that we weren't selling for cloud networking was Layer 1, optical wavelength, so we've added to that. There is clearly things we could do opportunistically to expand the portfolio of our owned long-haul fiber network. So things we would look at you know, on our shopping as per se, but we feel good about our cloud networking portfolio. The next piece of our strategies to extend secure connectivity to any location in the world and we feel good about our value proposition there. We don't there any particular holes in our global network. We continue to be ranked as a top five world Internet backbone and feel good about it. We've opportunistically, as we noted in the prepared remarks continue to add points of presence and we'll continue to do that. But there are areas in particular that we worry about saying hey, we're uncovered here. We cannot deliver on our value proposition of extending connectivity to any location in the world, depth and breath and clearly areas we continue to look at. And the last piece is adding great accounts and adding great talent. So we see that those that can live our values is simplicity, speed, agility be integrated into our culture very rapidly and we felt that Hibernia was a perfect fit and having now met all the employees gone through the integration, we think that there are great talent for us to add to our business and are now integrated into one GTT moving forward. So if anything that we probably look for a little bit more on the M&A front is great logos and great talent and great people. So to add to our businesses as we continue to move forward. So not to say we wouldn't continue to look for opportunities exceeding [ph] in our product or network reach, but logos and talent are probably top of our list and you know, just add one more comment, we're clearly continue to execute on our proven approach to integrate very rapidly. We take a very different approach for most firms in the industry and that we integrate over 2 to 3 quarters, not to three years. And so we've completed as we noted the organizational integration within a month of close, and we are well along on completing the other two dimensions, which are systems and network, which was why we were confident to say that we could look at another material larger acquisition in the second half of this year.

[Barry Sine:]

That's really thorough. Thank you very much, Rick.

[Rick Calder:]

Thank you.

[Operator:]

Our next question comes from Brandon Nispel of Pacific Crest Securities. Please go ahead.

[Brandon Nispel:]

Hey. Thanks for taking the question. I want to talk a little bit about your EtherCloud services, we're hearing a lot about SD-WAN as potential replacement to an MPLS connection or maybe using concert with an MPLS connection in hybrid networking approach. Can you talk about sort of your exposures to specific products they segments that might be replaced by newer technologies over maybe the next 3 to 5 years and maybe any plan to put SD-WAN product in the market?

[Rick Calder:]

Sure. Absolutely. Its interesting because we actually have the building blocks of providing and I would say do provide software defined wide area networks today. We're one of the oldest the payment card industry compliant networks. We've been doing secure access to services from broadband locations around the globe. We have well over 50,000 locations on broadband access, whether broad Internet or broadband wireless services that we integrate into our global network backbone on behalf of clients. We provide premise-based firewall and network-based fire walling, premise-based router services. So we think we have all the building blocks and will be in the first half of this year announcing our formal SD-WAN offering as well. So we - but we think we come from a position of strength, having been sort of a deep provider of all types of capacity and locations for clients around the globe, and so we think this will be a very nice addition to our service portfolio that will meet the evolving needs as clients move from a higher cost to lower cost options. We have been at the forefront of that providing very cost-effective low-cost options for smaller branch office in remote branch locations for employees. In addition to providing some of the highest capacity links on the planet, right, to very high capacity client. So we think we're well-positioned across portfolio and to your direct question about MPLS, it's actually been a relatively smaller part of our portfolio, not been the largest part. So we think our exposure if SD-WAN is the so-called killer of high-cost MPLS, we have less exposure to that and much more to gain by attacking the incumbents.

[Brandon Nispel:]

Thank you.

[Operator:]

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

[Rick Calder:]

Great. Thank you, operator. I'd like to turn the call to our Chairman, Brian Thompson for some concluding remarks.

[Brian Thompson:]

Thanks, Rick. I think you've done a thorough job of questioning the executive team here on the past, what I wanted to do is reflect a little on the future and I think the team has done a great job of positioning and for sure this latest acquisition of Hibernia, it just adds greatly to that future. Rick and I were able last week to spend time with the our Hibernia headquarters organization, as well as the rest of our organization in Ireland and during that period had the great opportunity to talk with the Prime Minister, the Minister of Communications and the Secretary-General of that agency about where we are and what we are doing and what the future is for Ireland, in particular with the European Community in general. And I come away as I have been involved there for quite a while, but I come away with a renewed sense of strength of our strategy and the reason I do is number one, because of the quality and the people within the organization that we've acquired in Ireland, as well as added to our organization in Ireland over the past couple of years. But the reason I pick out Ireland is because it's a country with 4 million people, 5.5 on the full Ireland island, but it's a country that has made a commitment irrespective of politics over the past several years to build and create a network that will provide broadband to every citizen in the country and they have agreed to underwrite or subsidize up to €500 million in the build out of a broadband network, so that the people in the rural parts of the country, as well as in the urban parts of the country can participate in this huge changes taking place in our industry, in terms of the use of the of Internet, the use of the technology to enhance life. And really what that is, is a country that says it is our policy and we will do it and irrespective of the politics and to be sure the politics in Europe, in Ireland and in England at this time are going through the same unique spell that we are here in the US. But the worldwide efforts that I have seen over the past five years to move public policy toward making certain that all of the citizens and especially the OECD countries have access to broadband gives me great strength in terms of our strategy. It says that we are spot on where we want to be. The opportunities are going to be huge over the next few years in terms of the growth and will continue to grow for us to bring to these markets the capability that we've got to being very efficient and very effective in delivering on a fairly low cost way the kind of connectivity that they really need. So you know, worldwide connectivity is really what we're about. The connectivity to people in Ireland is something the Irish government is dead set to provide and I'm really pleased and proud that we've got an organization there that has huge upside opportunity, where they’ve been focusing as Hibernia on the optical part of the network, they have huge opportunities with a customer base that they are serving to provide enterprise services, not just in Ireland, but worldwide. So I'm quite pleased about the future. I'm very convinced that this team has put in place a strategy that is going to yield great results for a long period of time. With that, I'll turn it back to Rick.

[Rick Calder:]

Great. Thank you very much Brian and thank you everyone to joining us for our 2016 earnings call and we very much look forward to reporting in a couple months our first quarter of 2017. Thank you.

[Operator:]

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