GTT Communications, Inc.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good morning, and welcome to the GTT Communications First Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please 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 judgment as of today, May 4, 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. 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. GTT is off to a great start in 2017 extending our long track record of revenue growth and adjusted EBITDA margin expansion, we delivered revenue of $182 million up 47% from last year and 9% on a pro forma basis and adjusted EBITDA of $51 million, up 76% from last year and 15% on a pro forma basis. And in addition, first quarter adjusted EBITDA margin was 28% establishing a new baseline of profitability from which we can expand further. We closed the Hibernia acquisition in January and integration is well underway. Organizational integration and cut over to our client management database system are complete. And realization of network synergies is on track for completion in the next few months. We continue to expect to realize total annualized synergies of $30 million once integration is complete. From a growth standpoint, we will continue our dual strategy of rep driven growth and smaller acquisitions of client basis. As we drive GTT’s next phase of growth, we have established three new divisions at GTT with new division presidents. Layne Levine leads our West Division. west of Eric Warren a new addition to the GTT leadership team leads our East Division, and Martin Ford joined us from the Hibernia acquisition and leads our EMEA division. Our divisions, will own the primary client facing responsibilities within GTT including sales, quoting and ordering, service delivery and overall client account management. We will expand our division team to drive our growth and deliver an outstanding client experience by living our core values of simplicity, speed and agility. Demand is growing rapidly for our services as we help our clients connect people across organizations and around the world. Moreover GTT has emerged as the challenger brand in our industry, with our broad service portfolio, the reach and scope of our global network and the passion of our people to deliver a superior client experience. We are investing now in our divisions to seize this market opportunity and earn business away from the legacy incumbent telcos who hold most of the market share today and are focused on our other lines of business merging or both. Across our divisions, we have approximately 120 quota bearing reps today. And once again plan to significantly increase the size of our sales force throughout 2017 and into 2018. We also have a large funnel of smaller client base acquisitions, we expect to complete several of these transactions this year and it will immediately integrate these clients with our new divisions and drive our annual growth rate of 10% to 20%. One of the more interesting trends in our industry today, is software defined wide area networking or SD-WAN. We’ve recently launched our managed SD-WAN service further expanding the breadth and flexibility of our cloud networking service portfolio to support the rapid growth of enterprise network traffic around the world. With the top five tier-1 IP-network, extensive connectivity to leading call service providers across 300 plus global points of presence and a broad portfolio of diverse last mile connectivity options to any location in the world, GTT is uniquely positioned to deliver managed SD-WAN services. Leveraging our success to-date in delivering hybrid WAN services, our new managed SD-WAN service provides our clients with optimized application performance and cost effective network expansion as well as dynamic bandwidth management and the ability to integrate cost effective network technologies into the corporate WAN. We think SD-WAN is an important trend that is still in the very early stages and we are well positioned to gain share as client adoption grows. As always, we also maintain an active funnel of larger strategic acquisitions, and to the extent any of these opportunities becomes actionable, we will be in a position to act in the second half of this year. Following our proven template we are focused on opportunities that are consistent with our strategy of expanding our portfolio of cloud networking services extending our global network and adding multinational clients and new talent, able to be integrated quickly and available at a highly accretive price on a post synergy basis. GTT has great momentum in the marketplace right now, and we are as excited as ever about our opportunity to grow and gain market share. Now I'll turn the call over to our CFO Mike Sicoli for a review of the numbers Mike? Thanks Rick and good morning. First quarter revenue of one $182.4 million grew 46.6% year-over-year and 33.6% sequentially. On a pro forma, basis including Hibernia and in constant currency first quarter revenue grew 8.9% year-over-year and 2.3% sequentially. These growth rates are in line with our comments on the last call, and consistent with our expectations for the next couple of quarters. In addition, during the first quarter deferred revenue amortization from prior prepaid capacity sales was $6.3 million and there were no additional prepaid capacity sales. First quarter adjusted EBITDA of %50.7 million grew 75.8% year-over-year and 50.2% sequentially. On a pro forma basis first quarter adjusted EBITDA grew 15.3% year-over-year and 2.6% sequentially. Our reported results include the Hibernia acquisition as of January 1, 2017, which drove the majority of the increases in revenue and adjusted EBITDA. On a pro forma basis, the increases in revenue and adjusted EBITDA were driven mainly by organic growth and smaller customer base acquisitions. Adjusted EBITDA margin of 27.8% expanded by 460 basis points compared to first quarter 2016 and by 300 basis points compared to fourth quarter of 2016. Margin expansion was driven by higher gross margin, mainly due to Hibernia’s on net model and by lower SG&A as a percent of revenue due to scale and operating leverage. We expect to continue to expand adjusted EBITDA margins throughout the year, as we complete Hibernia integration and continue to grow. We’ve recognized $10.7 million of exit costs and $8.1 million of transaction and integration costs during the quarter related to the Hibernia acquisition, which are included in our reported SG&A but execluded from adjusted EBITDA. The majority of the exit costs are related to severance and the majority of transaction costs are related to Irish stamp tax. We expect to incur an additional $2 million of transaction and integration costs related to Hibernia over the next two quarters. First quarter net loss was $16.8 million compared to net income of their $0.9 million in first quarter of 2016 and net loss of $0.9 million in fourth quarter 2016. The first quarter loss was driven mainly by non-recurring costs, associated with the Hibernia transaction including the $18.8 million I just highlighted as well at $10.7 million from loss on debt extinguishment. Capital expenditures in the quarter were $8.5 million or 4.6% of revenue compared to $7.5 million last year and $6.4 million last quarter. CapEx was below our post Hibernia target due mainly to timing of expenditures but we still expect CapEx to be in the 6% to 7% of revenue range for the year. Adjusted EBITDA less CapEx was $42 million in the first quarter or 23% of revenue compared to $21 million last year and $27 million last quarter. First quarter, net cash provided by operating activities was $2 million, $4 million decrease from first quarter 2016. This figure is net of several key items not included in adjusted EBITDA specifically $8 million dollars paid for cash interest, $7 million dollars paid for restructuring and exit costs $8 million paid for transaction and integration costs $11 million change in deferred revenue driven primarily by amortization from prior prepaid capacity sales. $1 million use from changes in foreign currency rates and $17 million use from working capital primarily due to the 2016 bonus payouts and timing of vendor payments. At quarter-end our current liabilities were one $157 million, including $27 million related to acquisition holdbacks, $7 million related to deferred restructuring and exit costs and $20 million related to deferred revenue from prior period capacity sales. Excluding these holdbacks exit costs and deferred revenue, current liabilities were $103 million or $54 million less than current assets. Our cash balance was $33 million at quarter-end and our outstanding debt balance was $999 million excluding OID and unamortized debt issuance costs. Debt consists of $700 million Term Loan B LIBOR plus 400 basis points and a $300 million unsecured notes at 7.875%. At quarter-end our $75 million revolver was undrawn. Our leverage ratio using first quarter annualized, adjusted EBITDA was 4.9 times on a gross basis and 4.8 times on a net basis. These leverage ratios do not however include the full amount of expected Hibernia synergies. If we were to include the full $30 million of expected annualized Hibernia synergies our first quarter leverage ratio would have been approximately a half turn lower. We continue to expect leverage to be at or below 4.0 times within a year. In closing we're off to a good start in 2017, and now we'll open the call for your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And the first question comes from Scott Goldman with Jefferies.

[Scott Goldman:]

Hi good morning guys, two questions if I could. One Rick maybe for you, we’ve heard a couple of companies over the last week or so talk about a relatively soft demand environment in enterprise sort of late last year and that carried into say January and maybe parts of February this year. Certainly I don't think I picked up any comments in your prepared remarks just around the overall enterprise demand, but would love to hear your thoughts, just in terms of what you guys are seeing and maybe bifurcate that amongst North America versus rest of world. And then secondly maybe just if you could go a little bit deeper in terms of where you are and on the integration of Hibernia, specifically last quarter you talked a bit about some of the sales headwinds, it sounds like those you still expect those to continue but what your line of sight is, on getting that back up and what you've seen maybe around a customer churn within that basis. Well thanks.

[Rick Calder:]

I sure I think on the first point, we're still relatively small in a very large industry and so our ability to compete for large multinational and national clients, we think remains better than ever it's actually one of the reasons that we've made a strategic decision to invest significantly more resource in attacking this opportunity. We see a very nice market opportunity, we see the insatiable demand for bandwidth, remain a pace. And we are the attacker, and the challenger in this environment, so as clients need more demand or upgrading their bandwidth across all of their locations moving their IP applications into cloud service providers, the demand for cloud connectivity from new entrants such as GTT remains a pay. So we expect to grow significantly, our sales organization to take advantage of this and I think that speaks to our bullishness on the demand in the enterprise space, which will reach both direct to enterprise through channel partners as well as in a smaller wholesale part of our business that we have to sell to other carriers for a business that we don't have directly. So again and we think that's apace in both North America probably a little more bigger and a little stronger here but also in a EMEA. We've just announced the creation of the EMEA division under Martin Ford who joined us from Hibernia. And we see growth in EMEA region of the world both in direct enterprise as well as through carriers also. To your second question on the integration of Hibernia, we think we're substantially complete on two of the three phases, organizational integration was completed in the first quarter in late February. And the systems integration completed in April and we'll put our first bills out to clients now this month in May. And as part of our proven approach to integrate across three dimensions, organization, systems and network and as I noted in the prepared remarks, we believe the network integration is well apace as well and we will complete over the next several months. We are now one organization and we – as we announced in the first quarter, expect to grow our business back over the next several quarters into that 10% to 20% growth range or slightly below that this quarter. But we feel very comfortable with the integrated business and the ability to add optical wavelengths, our media product, Ethernet Direct and several other product capabilities we have from Hibernia. And we think that differentiated assets we have in the Atlantic will continue to stand us in good stead, as we grow our base of business.

[Scott Goldman:]

That's helpful and just anything on customer churn within Hibernia and then just one quick more housekeeping were there any customer acquisitions that we should be aware of that influenced this quarter. Thanks.

[Rick Calder:]

Sure on the on the churn rate, we have seen our churn rates on an aggregate basis to be right in our range of 1.5% and so across the entire book of business that we have and we feel very comfortable with where we are in churn. We've had a very consistent churn rate at that level for now many years, we still see opportunity to take that churn down a couple tens of point, so we are working. Continued to try to move churn down several tenths, but we feel very comfortable given the scope and scale of our business with where we are in churn. And we did to one small client base acquisition in the quarter was a portion of the customer base of Mammoth Networks. Roughly $10 million purchase price of which I think we paid $3 million during the quarter and the remainder would be paid out over the next year or two.

[Scott Goldman:]

How much revenue did that contribute to the quarter.

[Rick Calder:]

We haven't provided specifics around it, because it's not material similar to the others but it is consistent with what we've said previously around the direction of these smaller customer base acquisitions of roughly one times revenue and better than five times EBITDA.

[Scott Goldman:]

Right okay, thank you guys.

[Operator:]

Thank you and the next question comes from Walter Piecyk with BTIG

[Walter Piecyk:]

Thanks, and guys first of all appreciate you doing the call at 10

[Rick Calder:]

Well I don’t want to comment on Dave or Cogent per se we've actually seen I mean the IP transit market for us remains a nice business, it's roughly 10% of our overall business, we've been able to attract a series of new clients in the past quarter. Two are core backbone network, it is really the underpinning of many of our service offerings and from that perspective we've seen traffic grow. We continue to see traffic grow quarter-over-quarter, so it's highly competitive market of course. And we compete with the other tier ones, we remain one of the top five tier one internet backbones and continue to see some nice business within that segment.

[Mike Sicoli:]

I would say just from a customer perspective, we're very sort of broadly distributed in transit the revenue that we have. So unlike some others who have a little more concentration, we really wouldn't be detecting any of those broad trends probably anyway just because it's a small percent of the total. And it's a very broad base.

[Walter Piecyk:]

Got it and then my other question also related to one of the ten calls we had this morning was CommScope was talking about an acceleration from business that they were seeing from corporate data centers to cloud or shared data centers, however you want to characterize that. I'm just curious if you're seeing a similar obviously this is like a long trend that we are all aware of but they were claiming that there was some acceleration recently and I am curios if you are seeing, a pick-up in that type of business from your customers, I know you do a great job as far as the full solution, in dealing with however your customers want to connect their networks. Is that acceleration is happening and if so is this a benefit or risk to you guys.

[Rick Calder:]

We definitely see it accelerating particularly in the larger clients, we believe that the movement to cloud applications through third parties was started in the SMB segment, and has moved now up to much larger clients, as they are recognizing the real benefit of using some of the scale players like AWS or Azure or Google or IBM. And what we, the benefit to us, as larger corporations move their IT applications from their own corporate data centers in their own buildings to cloud service providers it puts even increased demand for last mile connectivity. So that's really the cause of change that we see for clients to move from incumbent. So as they architect their network architectures and move to public and private cloud service providers, where we're interconnected already we manage a network of 300 points of presence. It's highly interconnected, through our cloud connect offering, with all of these major cloud service providers. We see the impetus to move to consider new corporate network providers that provide the cloud networking services with bigger basically pipes to their end enterprise locations as well as secure connectivity to the cloud services. So yes, we see it accelerating and we see it as a very positive trend for our business.

[Walter Piecyk:]

That makes a lot of sense as far as the positive benefit and that is great color. So I appreciate that, but is there any – do you have any thoughts just on why the acceleration might be happening now, as opposed to like last year, I mean what's different about early 2017 than prior years. Obviously AWS has been around for a while and why are companies doing this now.

[Mike Sicoli:]

Well I think, this is Mike, I think corporate inertia is a pretty powerful force, and the larger the company, the more legacy infrastructure there is, the more headcount and departments that are associated with these legacy solutions, the harder it is to move and the longer it takes. But once it starts happening, it does tend to pick up steam fairly quickly. And so I think that's what I would it attribute to. I want to make one other point going back to Rick’s answer to your first question, which is that – there is a really if there is a difference in the business model between cloud connectivity and cloud services. So we do get questions sometimes about whether the move to cloud service providers is potentially a threat to us. We think it is absolutely not a threat it is a benefit. Because just like we don't believe, we should be in the cloud services business, cloud service providers don't believe they should be in the network connectivity business. So we are two very complementary business models and I think therefore it's a net benefit to us.

[Walter Piecyk:]

Great thank you so much.

[Operator:]

Thank you and the next question comes from Jon Charbonneau with Cowen.

[Jon Charbonneau:]

Great thanks for taking the questions. Solid EBITDA margin expansion in the quarter, how much of this $3 million in synergies tied to Hibernia would you say you realized and how should we be thinking about the realization of the remaining synergies over the next couple of quarters? And then on net neutrality it seems like that could be getting repealed any thoughts on how you think that could impact your business? Thank you.

[Mike Sicoli:]

Sure Jon, its Mike I'll take the first one and Chris will take the second one. In terms of the synergies, it's very hard to come up with a precise number of what did you achieve within the quarter, particularly with so many moving parts in the quarter, first quarter after close. We think it's probably somewhere in the million dollar range for the quarter. $4 million annualized, which would imply we have $26 million annualized or something like that to go. And in terms of the realization to that, going to be pretty ratable in Q2 and Q3 and we would continue to expect that by the time we hit Q4 most, if not all of that should be in the Q4 run rate.

[Chris McKee:]

Again on, this is Chris and on net neutrality and sort of some of the de-regulatory activity you're seeing from newest FCC, I think I want to remind everybody that what Rick said at the beginning that we are one of the five largest Internet backbones in the world. And so because of that we have large scale commercial agreements with commercial parity that allows us to be a tier one settlement free pairing company. And so what that really means is that we're not relying on a regulated rate or a requirement of the FCC’s net neutrality or interconnection rules to do IP transit connections. And so for that roughly 10% of our business, we have a large enough scale business that we just – we just exist commercially frankly as we have for years. And so we don't view that as a threat to us. I think the general deregulatory trend of the FCC helps companies that have built up an upscale to rely exclusively on commercial arrangements.

[Jon Charbonneau:]

Great thank you.

[Operator:]

Thank you and the next question comes to George Sutton with Craig-Hallum.

[George Sutton:]

Thank you, I know you have a fairly aggressive plan to hire, I am curious how you plan to go about doing that potentially differently than you have in the past.

[Rick Calder:]

It is great, thanks George for the question. I think the main initiative is to decentralize that across three division Presidents Layne Levine in the West, Eric Warren in the East and Martin Ford in EMEA. We think that we were across three leaders have the opportunity to grow more rapidly and as importantly ensure that we maintain the differentiation of client experience. And make sure that we decentralize within each of these division leaders, the power to satisfy our clients on an ongoing basis as we ramp. We expect – I think I already mentioned it in my prepared remarks but we would think that we're going to grow from about 120 over the next year to about 200 across these. So we think that is an achievable goal across these three leaders, as we look to attract great talent in the industry to the GTT banner and we also see as we mentioned on the last call that the consolidation, in combination within the industry is creating great opportunity for GTT to attract some of the best talent that we've ever seen in our corporate history.

[George Sutton:]

Perfect and relative to your funnel of opportunities on the smaller-end of the M&A spectrum, can you just give us a hypothetical perspective what would you like to see over the next year. What would be viewed as a ideal year in terms of completing those kinds of deals.

[Rick Calder:]

Well I would say we're generally opportunistic on them, if anything I think as we said in our prepared remarks, we've seen an accelerating pace of them. Simply because I think it's harder to be a smaller player. We've seen lots of players who we have actually tracked for many years. I mean we've – be even the one we just mentioned the Mammoth Networks who sold a piece of their business to us, we've been talking to for probably five or six years. So we talk to them for a very long period of time and we generally like to do the deals of that ilk, where we've kept in touch with them for periods of time, we generally do have done commercial business in a buy sell arrangement. And we're – it is very easy to take the contracts. We generally are not taking the entire business, we're taking revenue and cost to revenue contracts. And we're able to put them into our division, our new divisional structure to actually nurture and grow that series of clients. We view it as part of our organic division, activity as we actually integrate these clients into the business. So if anything I'd see to accelerate I mean we have the pace to continue to do these types of transactions. They're generally non-material and could be integrated much more rapidly than say a Hibernia business which we do over a couple quarters. These are generally done over a couple of months.

[George Sutton:]

Perfect thanks.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from James Breen with William Blair.

[James Breen:]

Thanks for taking the question. Just a couple. One could you just talk about where you're seeing growth from, whether it's existing customers or new customers that you're adding. And then from a sales perspective as you move toward these different regions, how are you motivating the sales force in those regions? Is it top line, is it based on EBITDA just sort of an idea of what's the frameworks in place there. Thanks.

[Rick Calder:]

Sure I think we've generally Jim we've seen a balance in our business, business from new a majority of business from existing clients and then the balance from new logos. I mean our business is highly concentrated in the number of accounts we have. Generally very large, we see an interesting opportunity, it actually goes slightly down market. We've been very focused in some of the largest customers and they're the largest spenders and while we still have a very small I think – we publicly commented in the past. We have well under 10% share probably in the top 300, 400 clients that we have. So we see a tremendous opportunity to continue to grow from the small base of business we have with those clients. That said as we continue to grow the scope and scale of our sales force, we think the new logo opportunities create that growth engine for us in the future. And it's one of the rationales to grow and expand the sales force size. With respect to compensation, we compensate very similarly, our proxy went out, I think last week. And really it is three main dimensions at the leadership level, which is revenue growth, EBITDA growth, and the net installation of monthly recurring revenue. Which is new monthly occurring revenue that’s installed last month the re-occurring revenue that’s churned out. So those are the three principal metrics that the leadership of the firm is compensated on.

[Mike Sicoli:]

And as it relates to the reps themselves the compensation plan is consistent across the divisions and it's much more heavily focused on new sales activity as you might imagine but the ultimate payout is also then dependent on the gross margin of the sales as well as the term of those contrasts. But again that hasn't changed much here over the past few years. The division move is more about decentralizing to be able to execute more efficiently and get more of the action closer to the customer.

[James Breen:]

Great and just one follow up on Hibernia. I think you stated in the last call you saw a little bit of a slowdown there through December, and any change now that you've got sort of four months under your belt. What some of that was attributed to in terms of maybe just a merger or just a transition itself. Thanks.

[Rick Calder:]

Yeah, I think as we noted in the last call, just a little bit of pre-merger activity, which you sort of see as standard in a merger and now that we're one combined business, we actually feel very good about the momentum we have across the combined organization. And the ability to take clients who previously only bought wavelengths and to sell them lots of other interesting products in our broader products and service portfolio and our legacy GTT sales force to be able to add layer one optical wavelengths in addition to some of the media products that we have now. And just a and a more interesting Ethernet Direct product, latency sensitive. We just, we feel very very comfortable with where we are with this highly differentiated asset in the Atlantic. So yes we think we feel comfortable on a go forward basis.

[James Breen:]

Terrific thanks.

[Operator:]

Thank you and that's question comes from Brandon Nispel with KeyBanc Capital Markets.

[Brandon Nispel:]

Thanks for taking the question, So on SD-WAN, is there a potential to cannibalize part of your base of the MPLS connections when you install an SD-WAN type of product for your customer, or how quickly are they shutting down their MPLS connections. And then secondly on the special access market reform and maybe new pricing coming, going into that market, can you talk about the potential impacts you could see on some if the links that that you buy off net. Thanks.

[Mike Sicoli:]

Sure I'll take the SD-WAN comment and let Chris take the regulatory comment question. Interestingly, for us we actually have a very small percentage of what’s left in the trans we're about 8% and MPLS. We historically have been a much bigger Internet backbone company, broadband Internet, wireless broadband Internet, wavelength, Ethernet and so and you'll see it in our latest IR presentation in terms of the service type mix. So we actually see ourselves as being very well positioned for the admin of SD-WAN and if it's positioned as a way to reduce costs. We have some – we have as a Company some of the best assets to participate in the SD-WAN marketplace as a top five Internet backbone with deep connectivity to all of the cloud service providers as we mentioned before with a very diverse set of last mile access options across cable, wireless, copper, fiber and as a very proficient provider of managed CP at the end. Procuring, sourcing installing and maintaining and monitoring well over 50,000 devices at this stage for clients. And with our announcement of adding the orchestration layer with VeloCloud we think we again will be the attacker in this market. In the ability to look to move clients who are on higher cost network architectures to lower cost network architectures.

[Chris McKee:]

Yeah and on FCC reform, the special access preceding, I mean as I'm sure that proceeding has been going on for well over a decade and really I think it's lessened an importance generally but very specifically, it's just simply not important to GTT. We actually do no current purchasing off of either remaining tariffs or commitment discounts plans. And so while probably long overdue for some of the legacy services that are out there in the competitive industry. It's really addressing a market that we no longer buy and when I talked earlier about IP transit, the same is true. When we buy our off net extensions, we're buying these as just a commercial arms link purchaser from the various people that we buy network inputs from.

[Brandon Nispel:]

Thank you very much.

[Operator:]

Thank you. And the next question comes from the line of Timothy Horan with Oppenheimer.

[Timothy Horan:]

Thanks guys. Rick could you talk about may be just two questions, may be what products or customer segments are you're seeing the strength in right now. And then I just want to follow-up with SD-WAN.

[Rick Calder:]

Okay, we have always had broad scale demand across multiple product or multiple market segments. Financial services is a particular strength of ours at this stage particularly with our low latency offerings. And we continue to see our ability to provide broad scale wide area networks and to the question before the acceleration of the movement to cloud services is actually it's now starting in financial services, which had been the biggest laggards given the comments that Mike made in terms of corporate inertia, regulatory concerns et cetera. So financial services has been big, the web centric and media centric we’ve served some of the largest web centric content firms in the world. And we see them as voracious consumers of bandwidth and continue to be well positioned in that. But whether and we've had a very big service base in retail and consumer and continue to be and we see that as a big beneficiary of the movement to SD-WAN as well. But that said pharmaceuticals, manufacturing and other industry segments continue to have broad demand for the types of services that we offer. And we can – then you see real strength in the – in sort of the carrier telecommunication carrier world in our business as well to be able to sell wavelengths, IP transit services and off net extension given the large global reach of our network at this stage.

[Timothy Horan:]

That's great. And maybe SD-WAN is kind of one of lot of the bait, what it means to the industry, is it deflationary or inflationary and I think you can combine together a couple of different broadband access types and make them almost seamless to look at it as one and you can do more real time prioritization of the networking. I mean some carriers are telling me they're seeing up sales of network capacity as a result of deploying SD-WAN and others are saying it does hurt the sales a little bit. Just curious what it can mean for you in a little bit more detail and what customers really like about it.

[Rick Calder:]

Right well, I mean I think it's very early stages to in I mean, I think the peer number of locations that are on – that have purchased the orchestration layer it is very small at this stage. So I think it's, it probably be difficult to really talk about exactly what we would expect to see but that said the ability to add orchestration on top of less expensive access options. We talked about those four before whether it's Ethernet over copper, or whether it is cable, whether it's LTE 3G, 4G wireless options which we have deep experience with and obviously the fiber of Ethernet on PLS fiber based options. We have some, one of the deepest portfolios of access options in the industry and our ability to mix and match that client demand and add the orchestration layer. We think we are incredibly well positioned for it, as clients want to add this particular orchestration layer and again without much exposure to hike higher cost MPLS backbones again back to say 8% of our business. So we expect it to be sort of the corporate attacker in this regard and be an evangelist for clients who want to migrate to less expensive access options for branch networks. And it's just another way for us to get a corporate decision maker to say yes, I'm willing to make a change from an incumbent and move to the challenger brand GTT.

[Mike Sicoli:]

And I would add to that that in the short term it probably will represent a little bit of an up sell opportunity as client deploy the technology and get to know it first. But long term once they're using it they will be much more, they will be smarter consumers of bandwidth going forward and to Rick's point they will be able to use cheaper last mile options that may have less independent reliability but you might be able to pair two of them together. So we see a lot of cable modem, that’s the primary, LTE is the backup for example. Those two together are much cheaper than the legacy incumbent telco WAN solutions. So legacy incumbent telcos are the ones who stand to lose here and initially it might be up sell as clients who have been in the dark and their customers don't even know what they're using and how much they're paying for it. They get this software in place now they know and now they're looking to make a change. And that trend really I think bodes well for us.

[Timothy Horan:]

Thank you.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the call back over to Rick Calder CEO for any closing remarks.

[Rick Calder:]

Thank you, operator and as always I'd like to turn the call over to our Chairman Brian Thompson, for some final remarks.

[Brian Thompson:]

Actually I just have a few comments and a lot of them have been a part of the discussion so far today. As we all know timing is so important in our industry that you've got to be at the right place at the right time if you're growing like we are to take advantage of it. And I think about six months ago I started to see the trends that were really going to impact us both this and next year and starting to take place and that started with some of the mergers that were being created with companies that noticed that their total revenues were dropping. And they were trying to figure out how they could continue to be successful. That merger activity created a couple of things. That, it created an effort on the part of even smaller companies to begin to think about what their future looks like. But it also created unease in the people who were working with those larger organizations in a way that gave us a great opportunity. And the opportunity came forward and I began to see it with the acquisition that we did of Hibernia, which I think a lot of people were – that we would have expected to be competitors to us in trying to do that, we’re tied up in other things that were going on which gave us a great chance to acquire the Company at a reasonable price. But more importantly with that company, and it's proven to be the case to get some not only new capabilities but new people with great upside potential. The second thing that's happened is that with that technology change, and some of which we were talking about the sense of we're moving toward SD-WAN and some of the other movements have created the difficulty for the smaller companies in our business to expand their capabilities with the customers that they've generated over the past ten years. And they look at it as a real issue for them and created this opportunity for them to say gee maybe this is a time to talk to somebody like GTT. So we have both the large scale things going on as well as the smaller companies looking at us and what that does for us is it puts us in a place where we now have a virtual flood of opportunities to create what I call alternative organic growth, which is putting in place these smaller acquisitions because we're buying books of business that have been created. We are allowing the people that are with those books in many cases to join us and to have the opportunity to grow those because of the technologies we understand. The second thing is it has created some real interest in the larger companies, in saying maybe this is the time to take a hard look at merging with or talking to GTT. And I think the net result is we're in just the right place at just the right time. Our team has once again done a great job of merging in even the large Hibernia organization as well as the smaller ones that we do. And there's no stopping that and so as we will look forward to the rest of this year you will all as I – as a major shareholder will begin to see the real benefits not just in cash flow but in other things coming from the integration of those companies. Coming from the new opportunities we've got out there and I'm extremely bullish about the future. So I'm real pleased about the team's work, so far. I'm especially interested in how these waves have put us in the right place at the right time. And I think it's going to be an interesting rest of this year and next year. So thank you all very much. Rick.

[Rick Calder:]

Great thank you Brian and thank you to everyone for listening today and we very much look forward to reporting in the next several quarters. Thank you.

[Operator:]

Thank the conference has now concluded, thank you for attending today's presentation may now disconnect.