GTT Communications, Inc.
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Good morning and welcome to the GTT Communications’ Fourth Quarter 2017 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 note, the today’s event is being recorded. I’d now like to turn the conference over to Tony Hansel, Deputy General Counsel. Please go ahead, sir.

[Tony Hansel:]

Thank you, and good morning. I'm joined today by Rick Calder, GTT's President and CEO; Mike Sicoli, GTT's Chief Financial Officer; Chris McKee, GTT’s General Counsel and EVP of Corporate Development; 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 and financial performance made under the Safe Harbor provision of the U.S. securities laws, including revenue and margin expectations, projections and references to trends in the industry and GTT's business. We caution you that such statements reflect our best judgment as of today, March 1, 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'll also discuss non-GAAP financial measures, including certain pro forma information, which were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today's press release and is posted in the Investor Relations section of our website. I'll now turn the call over to Rick Calder. Rick?

[Richard Calder:]

Thank you, Tony, and good morning, everyone. In addition to our regular earnings announcement we were very excited to announce the acquisition of Interoute earlier this week. I will provide some initial commentary on our 2017 results, turn the call over to Mike to walk through the 2017 members and the financing plan for Interoute and I will provide more details regarding the Interoute acquisition before opening the call to your questions. 2017 was a terrific year for GTT as we grew revenue and adjusted EBITDA by 57% and 77% respectively. We closed our two largest ever acquisitions Hibernia Networks and Global Capacity and completed five smaller acquisitions Mammoth, Giglinx, Perseus, Transbeam and Custom Connect. To better serve our clients and increase rep driven growth we moved to three new divisions; Enterprise, Carrier and EMEA enabling us to increase our investment in both direct and indirect sales resources. To further our position as the disruptor brand in our industry, we launched our software-defined wide area networking service, which positions GTT to succeed disproportionately as enterprises rethink their bandwidth needs and look to migrate away from expensive and flexible legacy solutions. We also received several awards in recognition for our accomplishments in 2017, including the Fortune Future 50, World Communication Awards CEO of the year, and the Deloitte Technology Fast 500. On the integration front, global capacity is almost done with the organizational integration completed in 4Q 2017, systems integration now substantially complete, and network integration on track to be completed in 2Q 2018. Transbeam integration is right on the heels of global capacity with organizational integration completed in 4Q 2017, systems integration on track to be completed by the end of 1Q 2018, and network integration on track to be completed in 2Q 2018. Right at the end of the year, we acquired Custom Connect, an Amsterdam-based provider of high-speed network connectivity serving leading multinational enterprises and financial trading firms. This is a highly complimentary combination that extends that reach of GTT’s global Tier 1 IP backbone with additional points of presence in Europe and Middle East expands GTT’s sales presence in the Benelux region, augments our portfolio of ultra-low latency services with the industries lowest latency service from Frankfurt to London, New York and Chicago and add highly strategic multinational clients to GTT’s client base. Organizational integration for Custom Connect has already been completed with the systems and network integrations on track to be completed in 2Q 2018. On the rep-driven growth front, we have expanded our sales force to 165 quota-bearing reps and we are still targeting 200 reps by mid-year. We plan to continue to grow our sales team aggressively in 2018 targeting 250 reps by the end of the year excluding Interoute. We also plan to continue hiring the support resources needed to help our sales team succeed, including quoting, pre- and post-sales support, service delivery, and client account managers. In December, we also expanded our channel partner program to ensure the success of our agent partners from initial engagement with GTT to direct support of our partners and user clients. We appointed three regional Vice Presidents to lead these efforts each with extensive track records of success. GTT provides channel partners with a dedicated team supporting the end-to-end sales process for our entire services portfolio, including SD-WAN. I will highlight these capabilities further as the keynote speaker at the 2018 Channel Partner Conference & Expo in April in Las Vegas. We are off to a great start in 2018, well positioned to extend our leadership as the disruptor brand in our industry, attacking the market share position of large incumbents with our comprehensive portfolio of cloud networking services and an outstanding client experience driven by our core values of simplicity, speed, and agility. Let me turn the call over to Mike now to provide more details on the numbers and the Interoute acquisition. Mike?

[Michael Sicoli:]

Thanks Rick. Fourth quarter revenue of $249.2 million grew 81% year-over-year and 23% sequentially. This includes $5 million of deferred revenue amortization from prior prepaid capacity sales. Fourth quarter adjusted EBITDA of $60.8 million grew 80% year-over-year and 8% sequentially. Full-year revenue of $827.9 million grew 57%, and full-year adjusted EBITDA of $221.7 million grew 77% compared to 2016. Revenue and cost of revenue include $5.6 million and $17.4 million in 2016 and 2017 respectively, related to Federal Universal Services Fund and similar taxes and surcharges which are now reported on a gross basis. Previously these taxes and surcharges had been reported on a net basis. Revenue and cost of revenue have been adjusted for all periods presented to reflect the change in methodology. Acquisitions drove most of our year-over-year growth particularly Hibernia and Global Capacity. On a pro forma basis, including Hibernia and Global Capacity in prior periods and in constant currency, revenue grew 5% year-over-year and 2% sequentially, while adjusted EBITDA grew 11% year-over-year and 4% sequentially. Hibernia and Global Capacity lowered our pro forma growth based on their pre-close trajectories. But as Rick mentioned earlier, we’re aggressively investing in the resources needed to produce consistent rep driven growth and keep up with our ever increasing revenue base. Adjusted EBITDA margin of 24.4% decreased by 340 basis points compared to last quarter and was flat compared to last year. The reduction in margin was expected due to the inclusion of Global Capacity for full quarter and to a lesser extent due to the change in USF methodology. On a pro forma basis adjusted EBITDA margin grew by 120 basis points from last year and by 60 basis points from last quarter. We continue to expect that we will grow margins back into the upper 20% area throughout 2018 as we fully realize the synergies associated with all of our recent acquisitions. We estimate there's approximately $30 million to $35 million of annualized adjusted EBITDA yet to be realized from our recent acquisitions, including Global Capacity, Transbeam and Custom Connect. We recognized $5 million of transaction and integration costs related acquisitions during the quarter, which are included in our reported SG&A, but executed from adjusted EBITDA. Fourth quarter net loss was $49.6 million, compared to net loss of $900,000 last year and $9.5 million last quarter. The fourth quarter net loss was primarily the result of several non-recurring costs, including $5.8 million in exit transaction and integration costs related acquisitions and several tax related items. The new tax law change resulted in $5.5 million of expense for the one-time deemed repatriation tax on earnings of foreign subsidiaries and $11.8 million of expense for the revaluation of U.S. net deferred tax assets from 35% to 21%. In addition, we recognized $29.1 million of expense related to the recording of a valuation allowance, against our U.S. net deferred tax assets. Some of you may recall that we released a valuation allowance a couple of years ago, but our significant acquisition activity since then has result in additional tax losses and per GAAP guidelines, we are now putting a valuation allowance back in place. Capital expenditures in the quarter were $15.2 million or 6.1% of revenue compared to $6.4 million last year and $9.1 million last quarter. Full-year CapEx was 5.1% of revenue in line with our target range of 5% to 6% of revenue. Adjusted EBITDA less CapEx was $45.5 million in the fourth quarter or 18% of revenue, a rate that we expect to raise throughout the year as adjusted EBITDA margins rise due the realization of synergies from prior acquisitions. The fourth quarter net cash provided by operating activities was $17 million and $11 million decrease from fourth quarter 2016. This figure is net of several key items, not included in adjusted EBITDA such as cash interest, exit, transaction and integration costs, prior prepaid capacity sales, and changes in working capital. During the quarter, we paid $54 million for the Transbeam and Custom Connect acquisitions and $6 million and holdback payments for prior customer based acquisitions. At quarter end, we had a balance of $20 million related to future holdback payments of which $14 million is in current liabilities. Our cash balance was $101 million at year-end and our outstanding debt balance was approximately $1.3 billion, including $693 million of Term Loan B and $575 million of senior unsecured notes. The senior unsecured notes balance includes $125 million add-on issuance that we completed in October. At year end, we had $95 million of availability under our revolver, net of $5 million in letters of credit issued. Our net leverage ratio using fourth quarter annualized adjusted EBITDA was 4.8 times on an as reported basis and 4.2 times on a pro forma basis, including the additional post-synergy, annualized adjusted EBITDA I highlighted earlier, from recent acquisitions that is not yet reflected in our reported results. Turning to the Interoute acquisition, we signed a definitive agreement to purchase the company at a price of approximately €1.9 billion or $2.3 billion to be paid in cash at closing. This price represents a multiple of approximately 11 times Interoute’s LQA adjusted EBITDA as of September 30, 2017. We expect to achieve approximately $100 million in run rate cost synergies within four quarters post-close resulting in a post synergy multiple of 7 to 8 times. I want to point out that Interoute’s financial results are prepared under International Financial Reporting Standards or IFRS which is different than U.S. GAAP. We are in the process of converting Interoute’s financial into U.S. which will be provided in an 8-Ka with our pro forma results likely at the end of March. At this time we're not aware of any significant adjustments. We received committed debt financing for the transaction from a group of financial institutions and committed equity financing of $250 million from the Spruce House partnership our largest institutional investor as well as Acacia partners. We expect the transaction to close in 3 to 6 months subject to certain European regulatory approvals. At closing, after funding the acquisition with a combination of debt and equity, we expect the ratio of total net debt to adjusted EBITDA to be approximately 5 to 5.5 times using pro forma combined adjusted EBITDA plus expected cost synergies. After closing over time we expect to reduce the ratio of total net debt to adjusted EBITDA to our long-term target range of 3 to 4 times. We expect to maintain our CapEx like model post-close. Historically, Interoute’s have been a significant amount on CapEx as they were building in upgrading their network. But they are now spending at a much lower rate of 11% to 12% of revenue. Combined with GTT we expect the spending level to decline further as we realized synergies from eliminating duplicate activities and fully leveraging our combined asset base. Post-close we're targeting CapEx of approximately 7% of revenue, which will continue to be largely success based driven by specific client contracts and overall demand growth. After integration is complete we expect combined adjusted EBITDA margins to be about 30% with some upside into the low-30's in the years ahead. This combined with the modest amount of CapEx I just noted should translate into significant recurring cash flow. Now I'll turn it back over to Rick to talk more about the Interoute acquisition. Rick.

[Richard Calder:]

Thank you, Mike. As we announced earlier this week we have signed a definitive agreement to acquire Interoute which operates one of Europe largest independent fiber networks and cloud networking platforms. This highly strategic combination significantly augments GTT scale expanding our Tier 1 Global IP backbone with a robust network that includes over 400 points of presence and interconnects 126 cities and 13 subsea late landing points across 29 countries. Strengthens GTT as a leadership position in software-defined wide area networking SD-WAN with expanded capabilities, enhances GTT’s cloud connectivity platform by adding 15 data centers, 17 virtual data centers and 51 co-location facilities. Contribute infrastructure edge and hosted services to GTT suite of cloud networking services expanding complements GTT's multinational client base adding over 1000 strategic enterprise and carrier clients primarily headquartered in Europe and enhances GTT's global team with a world-class sales, operations and customer service organization. This represents a major milestone for GTT and delivering on our purpose of connecting people across organizations and around the world. The combination creates a disruptive market leader with substantial scale, unique network assets and award winning product capabilities to fulfill our client's growing demand for distributed cloud networking services in Europe, the U.S. and across the globe. We look at this opportunity with the same disciplined approach we use for all acquisition opportunities focusing on three key criteria; one a strong strategic fit Interoute as a highly complimentary platform essentially the European version of GTT. We sell the same services to the same type of customers just in different geographies and this gives us the ability to significantly increase our total addressable market and wallet share on both sides of the Atlantic. Two, ability to integrate successfully and quickly given how similar our businesses are we are confident that we can integrate Interoute with GTT within three to four quarters which includes an extra quarter or two compared to our historical target integration time frame to account for Interoute’s relative size and geographic footprint. Three, accretive post synergy price. Once the integration is complete, we expect to achieve a post synergy purchase price multiple of seven to eight times adjusted EBITDA, which is highly accretive. We have tremendous respect for the business that Interoute has built and we think the value of that business will be enhanced significantly in combination with GTT. We are eager to build on the success and reputation for exceptional client service that Interoute team is created and look forward to closing this deal as soon as possible and welcoming Interoute’s employees and customers to GTT. This concludes our prepared remarks and we will now open up the call for questions. Operator?

[Operator:]

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Scott Goldman with Jefferies.

[Scott Goldman:]

Hey. Good morning, guys. Two questions. I guess one just on the Interoute that you are just talking about, Rick can you talk a little bit about – typically companies don't talk a lot about revenue synergies, but it seems to me you have a lot of scale in the U.S., you're adding a lot of scale in Europe now. How do you think about the cross selling ability to leverage your U.S. accounts and selling to Europe or vice versus to leverage the new European accounts and sell them connectivity in the U.S? And then secondly just larger picture on M&A, I guess you look back over the past year or two your larger deals have included fiber assets to some degree. Just wondering whether your view has changed a bit in terms of the mix of assets you look for or whether perhaps the M&A funnel has changed a little bit in terms of type of assets that are out there? Thanks.

[Richard Calder:]

Great. Thank you very much for the question, Scott. To your point on Interoute and synergies, I’d actually agree we never plan and in our assumptions associated with synergies, we never plan on any revenue synergies. That said, I agree with your statement, one of the reasons we believe, we will emerge as the real disruptor brand in the industry is that we will have deep operating presence in the two major economic powerhouses in the world North America and Europe, and as such our value proposition plays very well all the way up to scale to the largest multinationals in the world where historically we haven't focused as, as much given our relative lack of really deep presence in Europe. Likewise, we believe Interoute and through the process felt the same way that given their lack of real presence in North America that their ability to compete for some of the largest corporations and multinationals in the world was not as strong. And moreover even for the clients that they did compete for their ability to sell and it really had historically been one of their weaknesses is believed to deliver to locations anywhere in the world particularly in North America. So we absolutely think our value proposition is significantly strengthen. Our early feedback from clients both our own existing clients as well as Interoute’s clients has been very strong and we think there are significant opportunity for us to be much more aggressive as we continue to grow our business, which is why we said in our prepared remarks that we put another marker out there to grow our sales force to 250 pre Interoute by the end of this year. We think we are an outstanding place for the great talent in our industry to come to and we see great opportunity to continue to penetrate in the market. On your point about M&A, maybe I'll comment on it, maybe I'll turn it to Chris as well as who is here with us. We have always said that while it's not critical for us to own long haul fiber as we continue to scale our business, having ownership economics on long haul fiber given the scope and scale of our core network is beneficial to us, it also allows us to sell on a deeper footprint, and so we felt first and foremost the Atlantic made a lot of sense to us. And we think the long haul footprint in Europe that Interoute has is significantly beneficial to us both as an asset to sell and as our business at a scale of close to $2 billion in revenue gives us significant ownership economics over that asset. Specifically, we’ve also always said that we're not as keen on last mile fiber and so we don't see a significant amount of last mile or building specific fiber. We generally, historically have leased that and it's a very similar strategy to what we see with Interoute in terms of the very last mile access usually diversity across multiple players, across multiple access technology. So we still see that is very much part of our strategy. But owning in what we believe is now one of the most differentiated core network backbones in the world, owning fiber asset within that core network we think is very consistent as part of our strategy, and still yield a very CapEx light business in probably pro forma moving forward, probably more in the 6% to 7% of revenue range, but still relatively speaking to anyone else in our history very much a CapEx light, but a very differentiated core asset that we have.

[Brian Thompson:]

Yes, I mean I think just as echo sort of somewhat Rick said, I think pure infrastructure plays that are focusing just on fire in the ground or as Rick said, last mile connection that's really never been a focus of ours or what the M&A funnel sort of features for us, the focus is on connecting customers anywhere and everywhere in the world and sort of as part of that having owners of economics and some of the key infrastructure assets that are part of the overall sort of delivery of services that remains of interest. And as we've gotten larger in some of the companies that we've looked at have gotten larger. They'll have – those types of infrastructure assets in them. But as Rick said I don't think you'll see us pivoting to suddenly looking at very CapEx intensive businesses that would be at the top of our M&A funnel going forward.

[Richard Calder:]

Thank you, Scott.

[Scott Goldman:]

Thank you.

[Operator:]

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

[Jonathan Charbonneau:]

Great, thanks for taking the questions. In terms of Interoute, while their business isn't growing, I believe this is due to what I'll call some non-core stuff like churn from their SMB base? How do you recommend – do we think about how fast their business should be growing going forward? And then along the same lines how if at all does this change, how fast you can grow your rep-driven business longer-term? Thank you.

[Michael Sicoli:]

Sure, Jon. It's Mike. I’ll take the first one. Yes, if you look at their publicly reported results over the past couple years, they had a slight decline in revenue. There's really three key reasons. One is currency translation. They have a lot of revenue in British pounds, but the functional currency is euro and the pound to the euro change rate has not been great post Brexit. The second is they've had some declines in non-cash revenue as a legacy use have rolled off and haven't been replaced at the same rate. And then the third one as you mentioned is an SMB churn specific to the easing at acquisition they did back in 2015, which is abating, but is expected to continue at least at some level. But when you net those three things out, they are actually growing today. And our expectation around growth rate is somewhere between low single-digits to maybe mid single digits on what they would do going forward. And in terms of when they would turn the corner and into positive territory, netting out those other three items are – busy including all those other three items could be as early as this year.

[Jonathan Charbonneau:]

Yes.

[Richard Calder:]

And to your question about how do we think moving forward about our business, we're very bullish about our ability to drive rep-driven growth in our business is one of the reasons that as I mentioned in the last question, we put another marker out there just standalone to grow to by the end of the year from the $165 million we’re at right now to $200 million midyear to $250 million at the end of the year. And we see the same type of opportunity in Europe to be much more aggressive in terms of adding to the number of reps that we have and just the initial three or four day feedback from in the competitive market in terms of attracting talent has been very positive. We think we are that disruptive brand to go after the heart of the incumbent Telco monopolies and take share from them at the very top of the market, all the way down starting from the largest and multinationals on down. And so we're very excited about that opportunity. We think we have a significant opportunity to grow. As Mike said, it will take a little time. It's not going to happen right away as we integrate their business and but all of the trends that we see in terms of number of reps productivity per rep is actually trending very strongly in a standalone basis for us and churn rates across both organizations we think will be right in the range that we need to be able to drive ever increasing levels of rep-driven organic growth in our business.

[Jonathan Charbonneau:]

Great, thank you.

[Richard Calder:]

Thank you.

[Operator:]

Thank you. And the next question comes from George Sutton with Craig-Hallum.

[George Sutton:]

Thank you, Chris. You mentioned your funnel earlier pipeline of a potential M&A opportunities. I'm curious if you could help us understand how do you treat that funnel currently given this large acquisition?

[Michael Sicoli:]

Yes, I mean I think in GTT wants to be involved and looking at every relevant process and every - so we're continuing to take a look at anything that opportunistically comes available as a possible sale. I think realistically given the size of this one what you'll see us focus on in terms of material acquisitions is focusing on closing and integrating this one over sort of the balance of the next few quarters focused on getting, getting to closing within the next quarter or so. And then obviously the hard work becomes an integration after that. As we said in the prepared remarks and I think we would continue to be optimistically looking at small deals and the funnel is Rich of those we talked to about the number of deals that we did both material and the non-material in 2017. So execution wise is that we would continue to look at that non-material deals you know even during the process that I'm talking about.

[George Sutton:]

Okay perfect. And you mentioned with Interoute you’re adding some edge capabilities obviously with some of the new technology drivers out there edge is going to become increasingly important? Can you help us understand how you address that holistically as an opportunity?

[Richard Calder:]

I sure and one of the things that we are most excited about with the Interoute acquisition is their product capability and software defined wide area networking ironically or actually I think very fortunately they actually branded it edge right and they've made some very significant investment in it and we will be building on that investment and committed to supporting the investment in edge and software defined wide area networking that they have made today and we see a tremendous opportunity to move clients who traditionally have built close MPLS networks in an era where the Internet didn't exist as the true capability it has. Pairing that technology that they've invested in edge together with a Tier 1 Internet backbone with some of the deepest access options around the globe, we think will set us up to be an even more rapid share shift player as we move share from the incumbents to GTT. So we're very excited about these capabilities and we think it's one of the sort of hidden gems within Interoute.

[George Sutton:]

Super. Thanks guys.

[Richard Calder:]

Thank you.

[Operator:]

Thank you. And the next question comes from James Breen with William Blair.

[James Breen:]

Just on the sales force side can you talk about the sales headcount that Interoute has now and how that complement the 250 you're trying to get to and then with respect your current business you saw pro forma sort of 5% year-over-year growth and then just under 2% sequentially, so clearly some productivity improved there. Can you just talk about the sales force productivity seen in the last six months as you've been hiring more sale people in the back half of 2017? Thanks.

[Richard Calder:]

Sure, I'll start with the first one, and I let Mike talk about and all in on the productivity one as well, but Mike start with productively. On the sales force side, I maybe very clear that 250 that we announce today is exclusive of Interoute right. So we would expect to get to 250 standalone prior to adding in on the Interoute side we have been specific in terms of the sales force size and structure of Interoute yet given that we haven't closed but we see the ability to take from their base and continue to grow and invest in the quarter bearing side that they have as well. So given the market opportunity we have in front of us and the fact that we still represent even on a combined basis at close to $2 billion of revenue under 1% market share of the addressable market opportunity with the great technology to be able to reinvent and re-architect for CIO's the ability to help them connect their people across their organizations and around the globe. A tremendous opportunity to grow the size and scope of our sales force moving forward across again these two major economic powerhouses North America and throughout Europe. And so we're very bullish about that and our ability to continue to grow in every geography sort of in the world. And then maybe Mike talk about productivity.

[Michael Sicoli:]

Yes, I’ll just you know while we can provide specific numbers for their workforce I can tell you that if the similar size to GTT. And the similar strategy in terms of having a mix of hunters and farmers are you know as we call more cams. So I don't think there's a tremendous amount of difference in the way we're going to market I'm sure there's some in there are some, but it is a similarity sized and structured sales force. In terms of ours as Rick mentioned we've been pleased that the productivity levels have remained strong despite the rapid growth in reps over the past few quarters. So it's still in the same area as we've talked about previously in high single-digit thousands of MRR sold each month. We just still as Rick said don't have enough, right we need to get to that 200 level and beyond in order to drive the consistent growth on the rep-driven side relative to the size of the base that exists today on the back of lots of M&A last year.

[Richard Calder:]

I mean I even then just to clear that, I mean I have where our rep productivity is actually increasing as we grow the size of our sales force. And we think as probably mentioned in earlier question, the opportunity here with the combination of Interoute is to take it up even further, right because of the cross sell, up sell, the deeper world-wide platform that we will have just the early returns we're getting from our sales force from our clients as we'll consider you for things we would not have considered you for earlier given the deep and very disruptive and very unique network you now have.

[James Breen:]

Great. Thanks.

[Richard Calder:]

Thanks.

[Operator:]

Thank you. And the next question comes from Walter Piecyk with BTIG.

[Walter Piecyk:]

Thanks. Michael on the cash flow statement, this line that talks about the hold out – hold back earn out that started, is that all for the small deals or is that at all related to the large transaction that you do?

[Michael Sicoli:]

That is related to the smaller transactions. And just to reiterate sort of the way those work is we typically do not pay all of the cash for those smaller transactions upfront. There's usually 10%, 20% held back for one-year – usually one-year post close sometimes a little longer, so that we can have a better view of any undisclosed liabilities or issues yet to find in the purchase agreement that we can net it against those final payments. Our experience has been typically that there isn't much if anything that does get held back, but it's a structure that we prefer just to make sure.

[Walter Piecyk:]

Then if I look at that line item as well as the purchase of customer lists in investing section, does the Interoute transaction should that change the pace of those types or the pace/size of those types of deals going forward and shouldn't those numbers if anything go up just because the scale of the company is obviously much larger now?

[Michael Sicoli:]

Yes. I would say two things. One is obviously as almost double sized business on the back side of that transaction. The definition of immaterial does go up, so it is possible that there are more things that could fit into that category. I would also say that just like Rick just described on the commercial side from an M&A perspective, there's a lot more opportunity available to us now in Europe that really wasn't as actionable or wouldn't have produced the same level of synergy that we can produce now. So I think that there's more now in the Europe funnel which should also potentially increase the amount of that activity.

[Walter Piecyk:]

I think in terms of the smaller deals as opposed to the bigger deals right?

[Michael Sicoli:]

Correct.

[Richard Calder:]

As Chris said earlier, I think we will be very focused in the large material on completing and consummating Interoute. We will not be in the market for a large material transaction prior to successfully closing and integrating the Interoute transaction. That said, the funnel of smaller deal opportunity is quite large. We will be cautious about making sure that we do those in an appropriate pace, but we see an actually increasing funnel for small transactions that at customer base add select network assets that are complementary to our business that can be integrated very rapidly and that deliver on a price post energy multiple that's very attractive to our investors. So those opportunities are bigger now and I think as we continue to scale, we see a growing funnel of opportunities on the M&A front that compliments our very bullish outlook on rep-driven growth.

[Walter Piecyk:]

Right. So from 10,000 feet the growth stories that's still a component, a key component of the growth story even though the size of what you're going to have to do is going to have to be much larger than what we’ve done in the past in order to deliver whatever 100 basis points we were expecting from that element of growth. Is that fair?

[Richard Calder:]

That is correct. We'll execute our growth strategy both through selective strategic acquisition both material and non-material deals as well as through rep-driven growth. And we would expect that we will be growing at a north of 10% with a combination of reps and selective strategic sort of non-material deals.

[Walter Piecyk:]

Got it. Is there any update also on the change in the tax code and how that impacts NOLs or when you’re expected to pay – how that impacts your cash taxes?

[Michael Sicoli:]

Yes, there is a lot of moving pieces, some good, some not as good. There is a limitation on deductibility of interest. That does limit have an impact on us meaning there is an interest expense that is not deductible. However, the offsetting items kind of netted those out and we're basically in the same place we were before in terms of when we would expect to be a cash tax payer, which is still a few years out at least. If and – when we become a cash tax payer? It will obviously be now at a much lower rate. On a pro forma basis for Interoute, clearly they don't have much of any U.S. income and so European tax loss become more important. We do have Ireland in the UK today as meaningful taxable jurisdictions for us and we have a large NOL in the UK, not as much in Ireland. So there'll be some cash tax on both sides in jurisdictions where we don't have as much NOL. But we would expect that cash tax to be pretty limited on both sides. They have a pretty significant NOL position as well in most countries. So I think it's a pretty similar set up on their side as well as ours, you're looking at least a few years before, there's any significant amount of cash tax.

[Walter Piecyk:]

And if you don't mind just speaking one last one and yesterday Donovan at AT&T was pretty bullish about Enterprise. He wasn't willing to be specific on macro versus success there, because I think the last quarter they were marginally less worst than they have been recently. You have any comments on that macro? Are you seeing anything different from them in their competitiveness or is there just a better macro feel in terms of enterprise business in general?

[Richard Calder:]

We're very bullish on it and we're very bullish on our ability to take share from the largest incumbency. Their businesses have continued to shrink. They’re generally anchored by legacy technologies and we think our ability to compete given the values we live, simplicity, speed, agility and delivering outstanding client experience positions us very well. We think we have a network the second to none on a service and value proposition with software defined wide area networking that is highly disruptive to their business models and value proposition in terms of culture that allows us to compete very effectively against any of the incumbent Telco monopolies.

[Walter Piecyk:]

Great, thanks.

[Operator:]

Thank you. And the next question comes from Brandon Nispel with KeyBanc.

[Brandon Nispel:]

Okay, thanks for taking the question. I'm only going to ask two. One is for Rick. Rick, I was hoping you could talk a little bit about churn at the Interoute. One of the things that maybe stood out to me is that the churn profile that they have even with the SMB exposure seems to be lower than what I've seen from some of the U.S. peers that you guys have. So I guess why do you think the churn profile is so low 1% or so? And is there something that you can do it implement their practices into your U.S. business to move your churn rate lower? And then for Mike, are you guys hedging the transaction costs at all and do you have any plan to hedge the FX translation risk with the euro going forward? Thanks.

[Richard Calder:]

Yes. Thank you, Brandon. You're absolutely right, the churn profile and measured on an apples-to-apples basis with ours is lower, very excited about that. We think that creates an opportunity to on the entire base of business, lower our churn profile. As we said in our prepared remarks and the release, we think the team Interoute is fantastic. We think it's very complementary to the strategy that we've employed to from a from a mirror business. I think as we said we more focus in the U.S., they in Europe. I think one of the things that we've said publicly about the differences were much more acquisitive, and I think as we buy a lots of different businesses. We've seen our churn rate be getting slightly bit higher. We would expect that in organization that's as acquisitive as we are. That said your point about best practices, we always do that. We look at every company as we integrate to take a best of approach and look to take practices that we believe are superior whether they're Interoute or whatever from we buy and adopt them across the entire organization. So back to the point of that rep-driven growth, if we were bullish about the number of reps we continue to recruit to our banner. We're bullish about productivity. We're also bullish about churn rate, which why we think over time. We have an opportunity to continue to grow the rep-driven side of our strategic growth strategy. And I’ll turn to Mike for the hedging.

[Michael Sicoli:]

Yes. We have hedged the euro exposure between now and closing. That was a big number and that was not something that we were comfortable just letting flow based on where rates might go. In terms of what we will do post close both from an interest rate and then cross-border currency standpoint, we haven't made final plans yet that isn't something we would do until closer to close or even after close, but we would clearly be looking. If there's any material amount of cross-border exposure, for example if there's cash flows from the U.S. and you go to Europe or from Europe and even come to the U.S., we would look to put some hedging in place as well. We're not really that interested in being currency traders, right. So today we don't have that problem because the amount of cash flow that would have to go cross-border is pretty limited, but that may change our post transaction and if it does, we will be prepared.

[Richard Calder:]

Thank you, Brandon.

[Brandon Nispel:]

Thank you. End of Q&A

[Operator:]

Thank you. And it does conclude the question-and-answer session. I would like to turn the conference back over to Mr. Calder for any closing remarks.

[Richard Calder:]

Well, I really appreciate that. And as we've always done, I'd like to turn the call over to our Chairman, Brian Thompson for some closing remarks.

[Brian Thompson:]

Okay. I hope people can hear me. I wanted to make a couple of comments because I think we've spent a good deal of time talking about mergers and acquisitions and rightly so especially in light of the Interoute transaction. But I want to go back because I want to add some color to what we really do when we acquire even the smallest of companies because I think it's important for people to get some color on what goes on in the company. In this case, I don't like the word roll up which a lot of people have used for multiple acquisitions. In our case, I call it a roll in. We roll all of these acquisitions into the single organization that we've got. And in doing that, we really do spend, as Rick pointed out, and I'd like to underscore it. We really do spend time looking for the best and brightest both in terms of the people as well as the way in which they're doing business. And that's one of the great successes of GTT. We are wide open in terms of adopting and adapting to both the markets and for the acquisitions. As a result of that you got a lot of new people they come in with new ideas and we don't just say, hey we bought to what we do as we say, you're part of us. And that's a very important thing. When you look around the organization now and you look people in the eye and you see their excitement about whether it's an acquisition or something new that we’re doing. I think I'd put this company up against any company I've ever worked with for looking at that excitement and just feeling it within any office you go to. The second thing I wanted to talk about is this acquisition of Interoute because there's no question. This will be transformational for this company. The Interoute acquisition I think the team once again did a spectacular job of putting together both an approach to the acquisition, but also having as we do in every case of well thought through strategy, what do you do? What can you do before you even enter into it? We had a very good sense of what they were doing. We've known the Company a long time. We sold to them. They sold to us and we had a great deal of respect for what they were doing when you can put together two organizations like, the excitement is beyond what I can describe to you on this phone. What we have now is a great future for what we've been doing right along and that's merging, acquiring and creating a whole new enterprise that is going to attack the marketplace in a fairly substantial way. The last thing I wanted to talk about is a student of leads and lags and then in every case when you establish a new approach to things or you do things that you're such as trying to bring in more salespeople or in and trying to restructure the company as we have into three divisions. It takes a while for those things to really take root. The good news right now and you can see it because the numbers you're just looking at are numbers from last year and they really reflect an awful lot of the business we were doing in the early fall, not in a late fall. What you find out is that the trends and the sense of perspective of our sales force in these new organizations as well as the way in which they're beginning to produce sales is really remarkable. So we're quite bullish about our future. We think that adding sales people we can really grow the organic as you like to call it mostly analysts call it organic from the sales force itself or we had these smaller acquisitions and buying books of business which I call organic as well because it's a lot less expensive sometimes to buy those books than to take six months or nine months to build a sales organization to achieve that. In any event it does take time but when you've got the direction that this company has got you can't help but be excited. With that, I am going to turn it back to you Rick.

[Richard Calder:]

Great. Thank you very much Brian and thank you to everyone for joining us today. We're very excited about the future opportunity for our firm and we look forward to reporting in future quarters. Thank you.

[Operator:]

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