GTT Communications, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good day and welcome to the GTT Communications Second Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Chris McKee, General Counsel and EVP 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 telephonic replay of this call will be available for one week. Dial-in information for the replay as well as access to a replay of the webcast is also available on our website. Before we begin, I want to remind you that during today's call, we will be making forward-looking statements regarding future events, financial performance made under the Safe Harbor provision of the U.S. securities laws, including revenue and margin expectations, projections and references to trends in the industry and GTT's business. We caution you that such statements reflect our best judgment as of today, August 3rd, based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our SEC filings. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we will also discuss non-GAAP financial measures, including certain pro forma information, which were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today's press release and is posted under 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. Second quarter 2018 marked an important strategic milestone for GTT. We delivered revenue and adjusted EBITDA growth of 72% and 40% from last year respectively and we closed our largest strategic acquisition Interoute at the end of May on the early end of our expected timeframe. Through the addition of Interoute, GTT has nearly doubled in size with the most comprehensive and competitive global cloud networking platform in the industry serving a significantly large base of marquee multinational clients with a tremendous global team. We immediately began executing across the three dimensions of integration including organization, systems, and network, which we expect to complete within three to four quarters, if not sooner. We will complete the organization integration phase by the end of August 90 days post close and we further expect substantially all of the corresponding reductions to be completed by year-end. We expect to complete the majority of systems and network integration by year-end as well. During the quarter we also completed our integration of Accelerated Communication extending GTTs market presence and unique network footprint in Canada. In terms of future M&A, we may consider a smaller deal in the second half of 2018, but we will hold on any larger strategic acquisitions until next year after we have completed the Interoute integration. Our pipeline of potential large and small deals remains robust, particularly given our enhanced presence in Europe. Going forward, our target selection criteria remains the same to find opportunities that fit our strategy of providing cloud networking services to large and multinational clients that can be integrated quickly and that can be acquired at highly accretive post synergy crisis. Moving to rep-driven growth on the legacy GDP side, we have approximately 190 quota-bearing reps and the combined sales force now stands at well over 300 reps. We will continue hiring additional reps in the second half of this year and beyond consistent with our prior plan as we target double-digit growth from a combination of rep-driven sales and small acquisitions. We have revised our division structure in connection with Interoute, now consisting of five divisions

[Mike Sicoli:]

Thanks, Rick. Second quarter revenue grew 72% year-over-year and 25% sequentially to $327 million. Second quarter adjusted EBITDA grew 40% year-over-year and 20% sequentially to $75 million. Our growth was driven by acquisitions with Interoute and Global Capacity having the largest impact. On a pro forma basis, including both Interoute and Global Capacity and prior period results and in constant currency, revenue grew 1.2% year-over-year and decreased 0.6% sequentially, while adjusted EBITDA grew 0.7% year-over-year and decreased 3.1% sequentially. The sequential pro forma revenue decline was due to a combination of factors including Interoute's pre-closed trajectory as well as a one-time increase in churn from two large clients and lower non-recurring revenue on the GTT side. The sequential pro forma EBITDA decline was driven by the revenue decline I just noted as well as higher cost of revenue due to some integration-related delays in disconnecting certain vendor services and higher SG&A due to continued investments in rep-driven growth. As we noted in prior calls, we were not expecting to see growth in the first half of the year given the trajectory of our recent acquisition, though as Rick mentioned, we're still targeting revenue growth in the second half of the year as well as significant margin expansion as we realize synergies from our various acquisitions. We estimate that there is approximately $15 million of annualized adjusted EBITDA not yet realized in our reported results from cost synergies related to acquisitions prior to Interoute plus the additional $100 million to be realized from Interoute for our previous comments. During the quarter, we incurred $8 million of transaction and integration costs related to the Interoute acquisition which are included in our reported SG&A but excluded from adjusted EBITDA. We also incurred $5 million of exit costs primarily related to Interoute. Over the next few quarters, we expect to incur an additional $45 million to $55 million in exit transaction and integration costs related to Interoute which would bring the total to $70 million, $10 million lower than our prior estimate. In addition, we recognized a $14 million loss on the extinguishment of debt and an $89 million loss on a foreign currency hedge both related to Interoute. We entered into the currency hedge at the time we announced the Interoute deal which we felt was a prudent move to ensure certainty of fund flow and rates happen to move lower between signing and closing. From an accounting standpoint, this shows as a loss, from a cash standpoint there is minimal impact compared to our expectation of the cost of the deal at announcement. Collectively, these non-recurring costs drove our second quarter net loss to $136 million compared to net income of $1 million last year and a net loss of $31 million last quarter. Capital expenditures in the quarter were $19 million or 6% of revenue compared to $9 million last quarter. We continued to expect our CapEx to be approximately 7% of revenue going forward including Interoute. During the quarter, we paid $2.3 billion in cash for Interoute. As previously discussed, the debt portion of the consideration was financed through a new $2.9 billion credit facility comprised of a $1.8 billion U.S. term loan facility, a €750 million EMEA term loan facility, and a $200 million revolving credit facility which together replace both the prior GTT and Interoute facilities. The equity portion of the consideration was comprised of $425 million in GTT stock committed by Spruce House, Acacia, and Aleph Tiger investors. At quarter end, our cash balance was $74 million and our outstanding debt balance was approximately $3.3 billion comprised of the senior secured facilities I just mentioned and $575 million of senior unsecured notes already outstanding. We had $186 million of availability under our revolver, net of $14 million in letters of credit issued. Our net leverage ratio in the second quarter was 5.6 times using pro forma combined trailing 12-months adjusted EBITDA including all acquisitions and expected cost synergies in prior periods. Over time, we continue to expect to reduce leverage to our long-term target range of three to four times through growth and adjusted EBITDA and cash flow generation. In summary, we continue to execute against our growth plan including rep-driven in M&A and while there is still a lot of work to do on both fronts, we look forward to a strong finish for the rest of the year. This concludes our prepared remarks and now we'll open up the call for questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Walter Piecyk of BTIG. Please go ahead.

[Walter Piecyk:]

Hey thanks, Mike if I look at the sequential declines on the pro forma basis, I think you said it's like 0.6% but then you look at Interoute and it’s down I think it was about 2% in a constant currency basis. So I know Global Capacity has had some issues but I mean I guess the math on I would say that the rest of the business grew sequentially is there something in the math that I'm doing there that’s wrong that would suggest that the overall businesses declined sequentially?

[Mike Sicoli:]

Sure. So we don't break out the results of the different acquisitions after the deals have closed obviously as you know but --

[Walter Piecyk:]

The Interoute stuff is effectively provided though right in terms of what was its two month it’s $134 million that business I think was down 2%, if that's down 2% and the overall business was only down 0.6% and the rest of the business should that implies growth for the rest of the business sequentially know?

[Mike Sicoli:]

Yes, I understand the question. The -- I'm not sure where you're getting that 2% on the Interoute piece.

[Walter Piecyk:]

Okay.

[Mike Sicoli:]

I think that the Interoute piece was a portion of that sequential decline and there were also some impacts from the legacy GTT part of the business as well as I noted between the two specific churn events that won't be repeating in the future and also non-recurring revenue is lumpy by definition and in any given quarter to be plus or minus a couple of million and it just so happened in the first quarter, it was on the little bit higher side, in the second quarter it was little bit on the lower side. So those all came together to create the 0.6%.

[Walter Piecyk:]

And can you give us a little bit more color on the two churn events, so this -- was this maybe I missed down in the prepared remarks, was that bankruptcy, was it a non-renewal, did the sales person originally responsible for that leave the company like any typical color and do you have any possible events like that that's coming up in the quarters to come?

[Mike Sicoli:]

Yes, so in one case it was two clients merged and they reduced their spend as happened sometimes and in the other case there was a CIO change and the business came out of term and the CIO had an existing relationship but it was not GTT and moved the business over. We’re not aware of anything on that magnitude going forward at least not at this time.

[Rick Calder:]

Yes, and this is Rick, Walt, a couple sort of comments in general we’ve been saying over the past couple of quarters, we did not expect growth, we probably grew a little bit into the first quarter but we did not expect growth in the first half of the year given the trajectory that we saw from both Global Capacity and Interoute. Where we are today given at the end of this quarter into July and August, we see that actually changing and so moving forward we have actually our largest backlog defined as sold but not installed at this stage across both the Legacy GTT and the Legacy Interoute base. Our productivity as we noted in the prepared remarks is the highest we've seen and so we've also seen sort of the decline most of the businesses that we have purchased have declined and one of the things we've been able to do is stop the rate of decline and then start the growth and so in the second half of the year, we see our business growing. We see the net trend of monthly recurring revenue installations growing into the second half of the year as we complete the integration of both Interoute and sort of the final legacy integrations of the previous deals.

[Walter Piecyk:]

Got it. And just last one which is obviously Interoute took a lot of time and money this quarter. Is this trough EBITDA margins, should we expect sequential growth in EBITDA margins here given us any sense on where you think you'll exit this year or next in terms of EBITDA margins?

[Rick Calder:]

Yes, definitely. I mean we see probably a short-term issue we talked about with cost of revenue and integration and just taking it out. We generally, as we actually integrate businesses in fight with our vendors about taking cost of revenue out that's not real and so there's overlapping cost of revenue, we’ve identified it, we are now in the process of distributing and taking out of our business disconnecting it and disputing actually the tails of some of those spends that we have with vendors and we absolutely expect our gross margin and our EBITDA margin to continue to uptick. In terms of exact pace, we will report that in future quarters but we see no reason why this business cannot grow to a 50% gross margin business in the near-term or the mid-term and that as SG&A continues to come down as a percentage of revenue to the 20% range, the EBITDA margins in our business can grow as we've mentioned in the past to 30%.

[Operator:]

The next question comes from Jon Charbonneau of Cowen. Please go ahead.

[Jon Charbonneau:]

Great, thanks for taking the questions. In terms of Interoute, would you call out anything surprising particularly as you work through the integration the past few months and any change in how we should be thinking about the longer-term sales rep-driven growth pro forma for Interoute going forward? Thank you.

[Rick Calder:]

Yes, thank you, Jon. Last call, we had about a month before close. I've spend a lot of time with that in another three months we close as we mentioned on the early end and I have gotten that question from a lot of folks actually privately and the answer is -- the short answer is no. I mean we think the combination of these two businesses, it creates a fantastic opportunity, we saw an interesting trend where pretty close, a lot of clients have held purchase orders in terms of the not signing prior to the close immediately after the close, we got a significant number of really big sales wins on the Interoute side. I think there was some trepidation about what would happen to the business if were not to close and that we heard directly from the large CIOs and we think the combination of the two businesses is even a more compelling player for us and two of those were very large SD-WAN transactions that we didn't disclose in the prepared remarks but were both in Europe big multi-site locations for big food processing companies. We also had three major renewals three, four and five year renewals from clients, who just really are very excited about the potential across the two companies. We're also starting to see the early opportunities on the cross-sell across to the U.S. one of the obviously Interoute's biggest weaknesses was the inability to serve sites effectively in North America. And we've started to see that dialogue with clients to say well we hadn't given you our locations in North America did, we'd like to do that moving forward. So in terms of performance and productivity as we put the businesses together, we saw record productivity, so we want to continue to grow the scope and scale of the sales force, we didn't give you a specific number on the total sales reps for the entire company, we're well over 300, we're actually sorting between quota-bearing client reps and support plan account managers and determining that we will have a very precise number on the next call and then we will grow from there. We do expect to be able to grow throughout Europe; we have never had a real sort of presence in Europe. We mentioned, we appointed a new leader Jesper Aagaard, who came to us from Interoute to run Continental Europe and we think it's an area that we should be investing in moving forward.

[Operator:]

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

[Jason Kreyer:]

Hey good morning guys, it's Jason on for George. Rick, you touched on this a little bit but just wondering if you can give us some details on how you move forward with the cross-sell opportunities, what are the steps that you take with the sales force and then is it all focused on geographic expansion or are you also focused on adding additional services?

[Rick Calder:]

Sure, great question, thank you, Jason. One of the things that we find in this interregnum period we call it before we integrate the systems is that every rep in the company is interested in cross-selling and getting access to not only the services, the service portfolio but really the reach and the depth of the suppliers and the depth of the network we have everywhere else and which is why we focus so rigorously on cutting over to one systems infrastructure which we have planned now for the first of October. We believe we're on track towards that to allow the company to operate in one global system with access to the full reach of the network everywhere in the world, all the points of presence, all the network interconnects to our local loop providers everywhere in the world and have one consolidated service platform across the world. So there's only a couple of months before that, right. So we think we're there, we do and as every good rep want to do, how do I do it today? So we do have a group that handles those and they're very busy right, because we are seeing as I mentioned just a second ago, we're seeing that interest from both sets of clients, the legacy clients in the U.S. who have deeper reach and opportunity in Europe and clearly the Interoute clients who are very interested in getting quotations and delivery for services into the Americas. So but the key -- the key focus on the cross-sell is to get the systems integrated and then we think that we'll see real upside opportunity in terms of productivity in sales even above the record levels that we've been at today. In terms of depth of services, to your other question, generally we sell the same things and we think 95% of what Interoute did was exactly what we did, there's a little bit of overlap in cloud services or additional services in cloud services, we're setting up an Advanced Solutions Group to continue to support the cloud service business, it sold some really great marquee clients and we want to continue to grow that part of the Advanced Solutions business, so we see some opportunities across cross-sell and up-sell there. However we think the core business that we're in cloud networking services is very similar across the two platform which was why we thought it was a fantastic deal for us.

[Jason Kreyer:]

Okay. One quick follow-up, you talked about the DITCO contract that you recently won, I believe that's part of the GNS contract that we had talked about a year or so ago and it seems like that contract has moved a little bit slower than we would have expected, just wondering if you have any sense or if you're hearing anything on some developments out of the GNS deal?

[Rick Calder:]

Correct, it did. That service came out of the Global Network Services which are serving the U.S. Military need outside of the Continental United States and we do and it was slower, you’re correct, it’s slower than we originally anticipated. However we have an nice bundle of opportunities there. We were actually seeing some of our best performances actually coming from the government sector right now and we're very competitive for a whole series of bids that are coming out of the GNS contract and clearly the business that we just acquired with Interoute and the deep access in network that is outside the U.S. positions us perfectly, we think to the winner in many of these upcoming bids.

[Operator:]

The next question comes from Mike McCormack of Guggenheim Partners. Please go ahead.

[Mike McCormack:]

Hey guys, thanks. Mike, I think you mentioned earlier in the prepared remarks in addition to the churn you had installation issues, can you just sort of give us a sense of what that was and then secondly with Century Level 3 coming together, just from a maybe competitive standpoint but also from a sales talent standpoint any pressures you’re seeing because of that transaction and any activities thereafter? Thanks.

[Mike Sicoli:]

Sure Mike. The -- I didn’t say anything about install, I mentioned something about integration related delay which was impacting cost of revenue and that’s what Rick was talking about earlier and he said there is a little bit of overlapping cost right now that we haven’t yet taken out of the business but we expect to in the next couple of quarters. So no it was not installs and I’ll let Rick answer the other one.

[Rick Calder:]

Yes, I mean, we've always thought Level 3 in Century Link is one of the sort of closer comparables to our business in terms of selling cloud networking services to large multinationals and we are seeing opportunity there, we've always felt that we are a great brand, a great talent to join and that our purpose is powerful in helping large corporations help connect their people across their organizations around the world and we are seeing that flow. And we continue to recruit and attract some of the best sales talent and support talent in the industry and some of it is coming from the firm you mentioned and we get it from other places as well. So we clearly see opportunity not only for talent, we see opportunities for business, we’re seeing opportunity from large corporations, you’re saying, yes we are not as happy with the incumbents whether it’s Century Link or any of the other incumbents BT, ATT et cetera particularly the others ones as they focus their business much more on other things specifically mobile and content services, yes and so we’re seeing an opportunity to attack what is a multi-hundred billion dollar business and being the small player and having a great combination of a better value proposition with Internet-based SD-WAN solution with a fantastic team of people that can deliver and live our values of simplicity, speed, agility, and give them better values in terms of ultimately price which is really the third criteria that people really think about. So I think that really is showing in our results in terms of the increasing performance of our sales force and the ability as we grow the number of reps to keep productivity per rep growing and which is unusual, usually productivity per rep declines versus grows if you grow reps and we’re seeing it grow. So again probably the biggest limiter for us and it actually continue to attract, so we’re very aggressive in trying to attract the best talent in the industry.

[Operator:]

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

[Scott Goldman:]

Hey, good morning guys. Just following up first on the integration-related delay, it just sounds like that timing is there anything you need to do specifically to address that or is that just a function of timing and related to that, it doesn’t look like from what I can see in the side that there is any real change in terms of the long-term synergy outlook for all the deals included but just want to confirm that. Secondly Mike maybe just talk little bit about the timing in terms of when you think you can get to your leverage target? Thanks.

[Rick Calder:]

Okay. I'll take on the cost of revenue, no that’s just a timing issue, absolutely. So we have identified the specific segments that we need to take out of our business and as I mentioned we’re tussling with the vendors who claim that they weren’t disconnected and we’re disconnecting them. So we’re taking them out and we expect that to show as I mentioned earlier increasing gross margin going down through to EBITDA margin and we expect to complete most of that over the next couple several quarters as we actually complete those integrations and then layer on top and we think we could do a lot of it this quarter because in fourth, once we integrate CMD fourth quarter, first quarter really is the work of making sure that we totally integrated the Interoute businesses well but no absolutely just timing.

[Mike Sicoli:]

Yes, in terms of the long-term margin expectations I think Rick covered it earlier as well but you are correct in the side also when you just layer in the expectation of future synergies that we talked about earlier, we're still looking at a 30% business and 7% capital intensity, so no change there. I think it is pure timing; we did put more resource on it in the past 30 days in order to speed it up versus the pace it was running at. But no fundamental change in the way we approach it or where we will ultimately end up. In terms of the leverage target, we want to get there as quickly as we can. I don't think that's going to happen overnight obviously but we've talked in the past about a one to two year timeframe in order to get there and getting there will be a combination of execution against the things, we've already talked about, getting the synergies realized and obviously growing the business as well as Rick talked about before. So there will be growth in EBITDA and cash flow that will create it and then we have an expectation of additional M&A in the future in the next year or two and the additional M&A presents an opportunity to further de-lever particularly with the small deals that we do that are typically five times or less post synergy by definition relative to our current levels, those would be de-levering but even in the future, we would expect them to continue to be de-levering.

[Rick Calder:]

And just a bit, I think, may I directly addressesed your question, we absolutely see the synergy targets remaining the same, so that we can sum up $50 million I think -- left, I think as Mike said in the prepared remarks we expected previous integrations in the 100 for any is right in front of us and so we noted in the prepared remarks that the organizational integration will complete at the end of this month by September 1st and that almost all of the headcount associated and all, the majority of that 100 isn't headcount, so $60 million of that is headcount-related and we see that coming out of the business by the end of the year. And likewise the other SG&A of $20 million and the cost of revenue in the network synergy of $20 million we also see proceeding over the three to four quarters or sooner post close, all very much on track very, very clearly identified by individual line item and we're prosecuting on it as we speak.

[Operator:]

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

[Frank Louthan:]

Great, thank you. Can you give us sorry what are the assumptions you're making for FX for the rest of the year here and then can you give us a little more detail on sort of some of specific tactics you're taking with the sales force at Interoute and how you're getting them integrated with the products and so forth, any specific changes you're making there? Thanks.

[Mike Sicoli:]

Sure. On the FX side not dissimilar from other businesses, from an operational standpoint we really focus on constant currency, so we're not as focused on FX swings in terms of our day-to-day activity. From a cash management standpoint and treasury planning absolutely working out but the thing to remember about our business, while we have a fair amount of revenue that is denominated in other currencies, we also have a lot of cost in those same currencies. So the net impact of FX from a real cash or economic standpoint is relatively small, even today pro forma for Interoute, so it’s not a major driver of the business.

[Rick Calder:]

And then on sales force, I mean the major sort of tactic that we take is to divide the business into divisions, so that the client experience in all elements of the client experience from quoting, selling, ordering, service delivery, installation, overall planning, and management billing, collection all of that is owned by the Division President and the resources in the division. And we thought it was very important in Europe to pick Europeans to run our divisions, so Martin Ford is the Division President for the UK which includes Middle East Africa and Asia-Pac and he came to us originally from Hibernia previously from three and we think he is outstanding leader to run the UK division and he is inheriting a significant team from Interoute and is in the process of integrating them into the GTT way. Interesting though, we told the whole Interoute team prior to the CMD cutover on October 1st, business as usual and interestingly June and July were probably across like as Interoute two of the best sales months they've had in any of the quarters that we've looked at in the diligent spot. So as I mentioned before we're seeing some nice uptick, so we're sort of telling them in short-term business is usual until we cutover and I’ll come back to what we're doing it cutover in a second. And then we've elevated a guy by the name of Yus Bragard, who came to us from Interoute five years ago and we think is an outstanding leader for us to run Continental Europe and we'll divide that into five regions with five regional leaders in Europe to work for [indiscernible] and help drive the success there and they're having great traction in the short run. The key there is to basically make sure that and we started in the month of September to train right. So pre -- we don't -- our belief is you don't want to train too early otherwise, you'll lose it so we'll start in the month of September to train the entire organization. The legacy Interoute organization, now GTT on CMD products and services ordering and process procedure et cetera and then that's ongoing but there's a really big push in September and October as we cut over to CMD. So but you know I think, I would leave any point is that we are seeing great productivity on both sides of the legacy GTT, legacy Interoute and so our goal is to continue to drive that productivity up, as we continue to hire. I mean we are absolutely continue to hire quarter bearing reps across all geographies at this stage as we look to drive ever increasing levels of rep-driven growth.

[Mike Sicoli:]

I'll just make one other point there. I think Rick mentioned just a little bit before but just to clarify that in the interim before we've done all that deep training and systems cutover there is a group of people who is responsible for helping to do the cross-sell and up-sell opportunities that do arise during this interim period, so we have had a few of those already driven by entrepreneurial reps and/or inquiring clients but in the near-term that get sort of handled on the individual case basis from a corporate standpoint and so everybody is in the single system.

[Frank Louthan:]

Great, that's very helpful. One follow-up on the FX just as it more as it relates I guess to Interoute on the CapEx side is the CapEx also in local currency or is any of that in U.S. dollars.

[Mike Sicoli:]

It's primarily in local, well it's wherever it gets spent and obviously the majority of our CapEx going forward would be outside the U.S. given the relative capital intensity of Interoute versus Legacy GTT. So yes that’s local currency denominated.

[Operator:]

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

[Brandon Nispel:]

Hey, guys thanks for taking the question. On the churn from the two large customers is there any way that you can quantify the impact in terms of revenue and EBITDA maybe on an annualized basis and then two it is nice to hear some deal momentum in SD-WAN, can you give us a sense of what percentage of your total bookings that was this quarter. Thanks.

[Mike Sicoli:]

Sure, I’ll take the first one. In terms of the churn we highlighted sort of three things Interoute trajectory, the churn from the customers, and then the non-recurring lumpiness. I would say each of those was in the same sort of zipcode in terms of the impact. We haven't provided the specifics of each one of those but they're each in the sort of couple million zipcode.

[Rick Calder:]

In terms of SD-WAN total bookings choosing it had historically been relatively small as its going. It's actually increasing now, in terms of new sales and the installs are coming, so across the three deals that we talked about in the prepared remarks and the two or three others that I mentioned in a previous question we're seeing a nice uptick, we think the movement is accelerating from legacy MPLS to SD-WAN and from a relatively de-minimis part of our total sales it's now meaningful double-digit and growing part of our total sales numbers and we see that accelerating. Moreover we believe GTT is one of the best positioned software-defined wider network players because the entire technology is based on using the Internet as a mechanism where historically less than 20% of the enterprise traffic was destined for the Internet and shoot down with CIOs today and I say 70% of my traffic doesn't for the Internet and I need to be able to have that traffic flow from each location, diversely and securely and that's our forte we can deliver diverse local loops across multiple axis technologies. We have a deep; we are in the Internet backbone with the ability to deliver at lowest latency, highest performance traffic to the hyperscale cloud service providers as well as to the public internet in general. Very securely across our global backbone and we have very deep experience procuring, installing, maintaining managed SD-WAN edge devices for clients on their premise and so we think we’re very well-positioned to be the big recipient of this, we have relatively small exposure to sort of why we’d consider legacy WAN technology at this stage given the Internet is comprises the bulk -- vast bulk of our business at this stage and we see it accelerate absolutely.

[Brandon Nispel:]

And if I could just follow-up on that our customers buying with this SD-WAN product dedicated IP connection as well as the private connection. So they’re essentially purchasing two connections, thanks.

[Rick Calder:]

Sure. Generally the I mean there is lots of different local loop access options that we can provide, we think the most compelling is a dedicated Internet access option that comes over a Ethernet Fiber Loop directly to our network to our provider edge devices and SD-WAN gateways. And then a broadband Internet connection either through DSL or cable that is a load balancing load share opportunity, it could even be delivered over a 3G, 4G wireless connection for small location. So we see that as being the actually most compelling bundle for clients and our ability to deliver dedicated Internet access options over fiber everywhere in the world, we think it’s second to none at this stage and we have one of the deepest array of broadband Internet buying from last mile providers and local loop providers around the globe. And so it’s one of the reasons that we think we really stand out as clients look at being able to A, confidently purchase and our ability to install, maintain, trouble manage services around the globe to any location in the globe and get that traffic securely back to our global Tier 1 Internet backbone.

[Operator:]

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

[James Breen:]

Thanks for taking the question. Just a couple on the sales rep side if you talk about getting to sort of mid-single-digit organic growth of 46%, if you have just over 300 reps today, given what you’re seeing in churn and your rep productivity, what’s the right number is it 400, is it 450 in order to sort of be in that range and then just on the pro forma side, I was looking at the slides it looked like sort of jumping half point to revenue this quarter is around $461 million and $108 million in EBITDA, that's how we should think about what the full quarter impact would have been and then moved from there in terms of modeling and then just one last one on Interoute EBITDA looks like it went down year-over-year from $47 million to $33 million. Just -- what's -- what are the adjustments there as we think about that growth trajectory? Thanks.

[Rick Calder:]

I'll take the reps one first and in terms of reps, I think the short answer to that is as many as we possibly can recruit and bring on effectively to our business to drive as high levels of rep-driven growth is possible. Our objective I think as we just stated is to have double-digit growth with the combination of rep-driven and small M&A which we view as sort of organic part of our business as we buy books of business. So at double-digit, 10% of half and half are coming from grade but I think as we said in our earlier calls, there is no reason why we can’t get double-digit from each component over time as we continue to grow and it is limited more than anything else by the number of reps. So I say Jim we’re not as focused on saying what it is the right number to get to right now, I think what we’ve been reporting to you is we want to keep it growing and we see an opportunity to attract right talent as I’ve mentioned earlier and so we don’t really see any end we think for the size of our business, our sales force is still relatively small and that opportunity to with a great leadership team in place, hire in some of the best geographies in the world and North America, the U.S., Canada and throughout the United Kingdom and all throughout Continental Europe is just right in front of us and as we traveled around we think our sales force is too small in all those organizations and likewise all the sort of the attendant business. We also see churn while we had sort of a slight uptick this past quarter based on the two things that Mike said as we look forward in our business we don't see any real discontinuity and we think our churn rate will maintain in that 1.5% range as we mid ones as we move forward in our business, so that if we keep productivity high, it's really just about adding reps.

[Mike Sicoli:]

And in terms of the other two questions I'll address the second question first which is that the pro forma number that you see for Interoute in the second quarter is just the two months pre-close. So their second quarter EBITDA if you were just looking into Interoute versus Q1 would have been pretty similar. In terms of the jump off point question, yes I think subject to currency fluctuations, yes, I think that's a reasonable jump off point to consider as you look at the future quarters.

[James Breen:]

Okay on the Interoute side I was looking at second quarter 2017 versus second quarter 2018 in terms of EBITDA its $47 million and $33 million is that so the second quarter 2018 only includes two months.

[Mike Sicoli:]

Correct.

[Operator:]

Okay, this concludes our question and answer session. I would like to turn the conference back over to Richard Calder, President and CEO for any closing remarks.

[Rick Calder:]

Great. Operator I’m going to turn the call over to Brian Thompson for some concluding remarks. Thank you.

[Brian Thompson:]

Thanks Rick. I'm pleased to be on the call again this quarter. I know it's going to be a difficult quarter for most people to understand from the standpoint of all of the moves and changes that have taken place both in the. Operator am I connected?

[Operator:]

Yes you are, yes sir.

[Rick Calder:]

Okay, he is back. Very good.

[Brian Thompson:]

Okay, thanks. Let me start over right, which I was saying I'm glad to be able to be on this call again with you and I'm especially understand that you folks have got a difficult time trying to work through the quarterly results only because of the moves and changes that have taken place especially as a part of the Interoute transaction. There are only two things that I'd point out in that that I think are going to confuse the general public one obviously is a huge loss in the quarter as reported recognizing that virtually most of that is coming from the way in which accounting treatment has to be taken on the transaction itself and especially the FX impact on the values that are associated with that transaction. The second thing obviously that is difficult to go through and something like that is that one month and one month treatment of the acquired company especially in the size being the largest that we've done. On the positive side, though that I think is most important and Rick and I think and Mike have very well laid it in place and that's the positioning of the company and the way we are going forward. We are continuing to integrate in a way that I think is second to none in any companies I've been involved with in the past 50 years. And these guys have the ability to do the right thing and they continue to adjust as they go forward in creating the kind of values that we have laid in place for the company. The team is really involved in this integration and very, very bullish about the possible future that comes from it, not just from the standpoint of the income statement, balance sheet of the company but the people that we're taking into the company in the way the people are approaching the customer base and the challenge in the future of our industry. I think we've got we've got a company well worth everything that you all are interested in and very much for the investors going forward that the future looks just as good as the past has been. With that I'm going to turn it back to Rick and thank you very much for being on the call.

[Rick Calder:]

Great, thank you, Brian and thank you for everyone for joining us as we continue to focus on our two key priorities of the integrating Interoute and the driving the rep-driven growth. We are very excited about reporting to you next quarter, so thank you for joining us. Cheers.

[Operator:]

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