GTT Communications, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good day, and welcome to the GTT Communications Second Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris McKee, General Counsel and EVP of Corporate Development. Please go ahead, sir.

[Chris McKee:]

Thank you, and good morning. I'm joined today by Rick Calder, GTT's President and CEO; Mike Sicoli, GTT's Chief Financial Officer; and Brian Thompson, GTT's Executive Chairman of the Board. Today's discussion is being made available via webcast through the company's website www.gtt.net. A replay of this call will be available for one month. Dial-in information for the replay, as well as access to a replay of the webcast is available on our website. Before we begin, ii would like to remind you that today's call we will be making forward-looking statements regarding future events and financial performance made under the Safe Harbor Provisions of the US Security Laws including revenue and margin expectations or projections in various references to trends and industry and GTT’s business. We caution you that such statements reflect our best judgment as of today, August 6 based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC including the 8K we filed earlier today, which contains our second quarter 2015 earnings release. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we will also non-GAAP financial measures; unless we specifically state otherwise the non-GAAP financial measures we will discuss today were not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the 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. Second quarter 2015 represented a strategic and financial leap forward for GTT with our acquisition of MegaPath managed services, which we completed on April 1. We've strengthened our competitive position as a leader in providing managed services to multinational clients with one of the largest PCI compliant network backbones. Combined with the UNSi acquisition that was completed in the fourth quarter of last year, second quarter revenue nearly doubled from last year, adjusted EBITDA grew by 128% and adjusted EBITDA margin rose by 270 basis points to 20.5%. Our greater market presence and stronger competitive positioning puts us in a terrific position heading into the second half of the year. We delivered organic growth in the quarter with revenues increasing by 6.2% o an annualized sequential basis second quarter 2015 over first quarter 2015 when adding the $31.275 million in pro forma, first quarter 2015 revenue reported in our 8K in MegaPath to our first quarter 2015 reported number. As the UNSi business was declining and the MegaPath business was flat , we feel very good about our organic growth progress with the combined GTT business moving forward and we expect to return to our 8% to 10% organic growth that on an overall company basis in the second half of 2015. Gross margin was nearly 46% in the quarter expanding significantly with the addition of MegaPath, a full quarter of UNSi synergies and continued core network efficiencies. We believe that gross margin can expand moderately overtime from current levels as we continue sell higher margin services and groom our network. SG&A increased to approximately 25% in the quarter as the managed services business does require slightly higher levels of SG&A but we expect SG&A to come down as a percentage of revenue through the second half of the year as we complete MegaPath integration and realize full synergy levels. The MegaPath integration is progressing very well the organizational plan was completed during the second quarter and the system and network integration efforts are well on their way towards completion in this third quarter. The acquisition is a terrific strategic win for GTT and we are very encouraged by the cross sell and up sell activity taking place across our combined customer base. As we have discussed previously, we expect to realize full financial benefits from this acquisition during the fourth quarter of 2015 and we expect to deliver a post synergy EBITDA multiple of five times or better. As we move into the second half of the year, we are in a great position to execute our growth strategy to expand cloud networking services to multinational clients to extend ubiquitous network connectivity to any location in the world and with any application in the cloud and to deliver outstanding client experience by living our core values of simplicity, speed and agility. We will continue to execute on our growth strategy organically and through selective strategic acquisitions. On the organic front our sales force is now at approximately 80 quarter bearing team members and our target remains to approach 100 by year-end. We are investing in partner channels adding resources and tools to capture the significant demand for our services in this space. As we build the GTT brand in the market we are earning business from new clients who see GTT as a better way to reach the cloud. Moreover, we are expanding our position with our existing clients with our broad cloud networking service portfolio our opportunity to expand our share of spend with our largest customers is very significant. On the selective acquisition front, we maintain a very active funnel of acquisition opportunities that are consistent with our growth strategy by expanding our global network, adding to our cloud networking service portfolio and adding multinational clients to our business. We will maintain our disciplined strategy with only acquiring companies with a strong strategic bet that can be successfully integrated quickly within two quarters and at highly accretive purchase prices. Historically, we have been in five to six tomes or better a s a multiple of post synergy EBITDA and we maintain a good funnel of opportunities at these price levels particularly for firms that have less inherent organic growth. We have also added some high growth opportunities to our funnel that maybe attractive opportunities for GTT as well where we will continue to maintain a conservative view of post synergy EBITDA multiples relative to our valuation. We are now materially closer to achieving our next financial objective of $400 million in revenue and $100 million in adjusted EBITDA and we look forward to accelerating our progress in the second half of 2015. No I’ll turn the call over to Mike Sicoli for a review of the financials.

[Mike Sicoli:]

Thanks Rick and good morning everyone. Let’s start with the income statement. Revenue of $95.1 million grew 97.9$ year-over-year compared to $48.2 million in second quarter of 2014 and increased 52.5% from $62.4 million in the first quarter of 2015. The year-over-year increase was driven primarily by MegaPath and UNSi acquisitions and the sequential increase was driven primarily by the MegaPath acquisition with organic growth also contributing to both comparisons. Foreign currency translations had an impact of $3.7 million on the year-over-year comparison, so in constant dollars second quarter 2015 revenue grew by 105.5% compared to last year. Currency impact on sequential results was minimal. Gross margin of 45.9% increased 720 basis points from second quarter of 2014 driven primarily by the addition of MegaPath’s higher margin revenue stream as well as the completion of UNSi network integration, core network grooming and the continued installation of higher margin services. SG&A as a percent of revenue excluding non-cash stock comp and transaction related expenses was 25.3% higher than the year ago figure of 20.9% and 21.7%last quarter. The increase as a percent of revenue results primarily from the MegaPath and to a lesser extent the UNSi acquisition. Each of these companies carries higher SG&A levels than GTT due to lack of scale and the incremental cost of operating the managed services product set. While we expect to eliminate the scale related costs via synergies, the incremental cost associated with the managed services business will keep overall SG&A slightly higher than GTT’s historical levels. We are very comfortable with these tradeoffs, as these incremental SG&A costs are more than offset by the higher gross margins on these services. In addition we are reinvesting some of the SG&A synergies from our recent acquisitions to add headcount to drive additional sales and to build a stronger back office platform that will enable us to scale more easily to the next level of growth. Adjusted EBITDA of $19.5 million grew 127.9% compared to $8.6 million in the second quarter of 2014, and increased 75.1% from a $11.1 million in the first quarter 2015. The year-over-year increase was driven primarily by the MegaPath and UNSi acquisitions and the sequential increase was driven primarily by the MegaPath acquisition with synergy realization also contributing to both comparisons. Foreign currency translation had an impact of $0.8 million on the year-over-year comparison though in constant dollars second quarter 2015 adjusted EBITDA grew by 137.8% compared to last year. The currency impact on sequential results was minimal. We’re pleased with high quickly we were able to realize some of the synergies associated with the MegaPath acquisition which drove adjusted EBITDA margin to a record 20.5% in the quarter. As we’ve discussed before we expect to drive continued margin expansion over time as we fully achieve synergy targets complete network grooming and realize the benefits of operating leverage to lower SG&A as a percent of revenue. We also recognize the restructuring charge of $7.7 million during the quarter related to severance and other exist costs associated with the MegaPath acquisition. In addition, we realized $2.6 million of transaction and integration related expenses and SG&A during the quarter, which have been excluded from adjusted EBITDA. Going forward, we expect to incur approximately $1.5 million in additional non-curing transition and integration expenses also to be recorded in SG&A which will bring the total MegaPath related non-recurring costs to approximately $11.8 million. Capital expenditures in the quarter were $2.9 million or 3% of revenue, compared to $0.9 million last year and $3.4 million last quarter, approximately 90% of our CapEx this quarter was success-based, related to specific customer opportunities or additional network capacity. We continue to expect CapEx over the course of any given year to be in the 4% to 5% of revenue range, higher than our historical 3% target due to equipment purchases necessary to support the managed services business. Unlevered free cash flow defined as adjusted EBITDA less CapEx was $16.6 million in 2Q, an impressive 17.5% of revenue, compared to $7.6 million last year and $7.7 million last quarter. We remain committed to our CapEx light business model which will enable us to continue to deliver compelling unlevered free cash flow margins comparing favorably to many CapEx heavy players in the industry. Let’s move to the balance sheet. As of June 30, our cash balance was $19.4 million and our outstanding debt balance was $230.6 million including capital leases. The primary driver of the movement in both cash and debt this quarter was the acquisition of MegaPath on April 1. With a cash portion of the consideration we used cash on hand of $28.2 million and raise the balance through an amendment to our credit agreement increasing the term loan to $230 million and extending the maturity date to March 31 2020. Our leverage ratio, using second quarter 2015 annualized EBITDA is now 2.95 times on a gross basis and 2.71 times on a net basis. We expect to continue to de-lever organically over time via combination of adjust EBITDA growth and free cash flow generation. And we'll use our strong balance sheet and credit profile to help drive our strategic growth efforts by funding accretive acquisitions as needed via the institutional debt markets. With that, I'll turn the call back to the operator who will take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from George Sutton with Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Rick, you mentioned that you were encouraged with the early cross sell and up sell activity coming from MegaPath. Could you give us a little more detail there and could you also wrap around global managed security opportunity as you push that internationally?

[Rick Calder:]

Certainly, George. Thank you for the question. We define cross sell as the ability for some of our Legacy clients to add the managed services products managed firewall, managed router, and the managed access product to the portfolio, as well as the continued adoption of the smaller lower capacity broadband sides which we’ve seen some really nice take up both from the UNSi and now the MegaPath acquisitions. So we've seen some good uptick in that cross sell so those times of products including that security services. We've put a whitepaper out just a couple of weeks about the real opportunity and improving the security profile for our multinational account. So we think the managed security offerings the multitier managed security offerings we have are of extreme interest to many of our overall clients, the up sell opportunity that we see is simply selling some of the legacy clients that we came or the clients that came from MegaPath and UNSi for a much larger capacity solutions one gig, 10 gig. As we announced even recently, we sold a hundred gig port to Saudi Telecom as we continue to see increasing bandwidth requirements around the globe. So we're very, very encouraged by both those trends the up sell and cross sell which is why we are very bullish about our ability to now that we've integrated both the declining business of UNSi and the flat business of MegaPath, seeing some good some good organic growth, this quarter will be back to the 8% to 10% growth targets we've been at historically.

[George Sutton:]

Perfect. And relative to your M&A strategy, you mentioned that you were beginning to look at what I would assume you mean to be earlier stage products or services that may not necessarily have the revenue profile yet but have pretty big market opportunity and you're going to remain conscious of what you're paying for those but am I correct in assuming you're looking at some of those types of opportunities?

[Rick Calder:]

We are. Our strategy has been pretty consistent to look at network expansion though we feel very good about where our global network backbone sits at this stage to be able to deliver service to any location in the world. Product portfolio expansion in the three major areas that we sell in, internet services, ether cloud transport services, and managed services. And so I'd say we’ve been very focused in the last couple and managed services. We see a couple additional opportunities in the managed service area but I'd say we feel very good about where our portfolio is now particularly coming off the acquisitions we did over the last six to nine months. And then the final area is adding clients. I mean, we feel that that is that we are very underrepresented in the multinational market space and that adding initial entree into clients that we can then grow significantly over time. And we, as we noted in remarks, see very significant opportunity even in the large clients we have for significant growth worldwide. So I'd say we're consistently focused across all those three and I would say if anything, it’s probably the third area that we’re most focused on is client addition.

[George Sutton:]

Okay. I appreciate the clarity. Great job, guys.

[Rick Calder:]

Thanks, George.

[Operator:]

We’ll take our next question from Michael Bowen with Pacific Crest. Please go ahead.

[Michael Bowen:]

All right. Good morning. Thanks for taking the question. A couple if I may. So, nice progress on the MegaPath integration. You had mentioned that it looks like post synergy EBITDA multiple of five times or better, do you have any more details on what road that improvement, I think the last time you had stated it was going to be probably five to six times. So, that would be helpful. And then also, can you also update us on UNSi? Do you have a post synergy EBITDA multiple you can update us with there. And then maybe a question for both of you, I know we'd have some discussions about capital structure going forward about how you're thinking about potentially issuing any debt or equity on a go forward basis, would love your thoughts to the extent if you can provide that. Thanks.

[Rick Calder:]

Great. Thank you very much for the question, Michael, I'll take them for the first one about integration of synergy and I'll let Mike take the capital imbalance sheet question. So, I'll answer your question on integration first. The UNSi integration is now complete and so we believe that this was the first full quarter, we closed that acquisition on October 1, so the fourth quarter we integrated, the first quarter we integrated. And all the EBITDA that we expect from that and even as we announced in the last call, well, that is a better than a five times acquisition to us based on the - on the $40 million, so better than $8 million an incremental EBITDA that we saw from that. And it was helped in the lift that we saw in quarter-over-quarter EBITDA, and probably in advance where we originally probably expect it to be, so that certainly contributed but that integration is now complete. We are in the first quarter of the MegaPath Integration, we closed it on April 1, so the second quarter was the first quarter, we will see incremental EBITDA performance from MegaPath in both the third quarter and it will complete in the fourth quarter as we noted in our prepared remarks. And I would say that we are overachieving relative to and you have a good memory, we did say in the last call five to six times are better and this time we feel very comfortable that we’ll be at five times or better meaning we - on a standalone base, it had $20 million in EBITDA. It was roughly a little over $150 million in purchase price that we see better than $30 million and more than $10 million synergy coming out of it at this stage and I think it has also contributed to the nice performance we saw in this quarter on EBITDA but it is the first quarter end. So we’ve seen more performing coming and as Mike mentioned in his prepared remarks, we do see SG&A as a percentage of revenue continuing to come down as we achieve those incremental synergies with MegaPath. To be - to put a specific point on it, we take synergies in the first two quarters from three areas, headcounts, other SG&A and network expenses and I think we’ve seen probably overachievement from our original plans in all three areas, we have completed the headcount integration, I think we announced on the last call, we announced our integrated organization on May 4, so most of that is - a lot of that is baked in. Some of those headcount reductions came through the quarter but that is complete and we have one integrated organization going forward, we did see some very nice reductions, initial reductions and other SG&A given the fact that our business was much larger and we had significant overlapping other SG&A expenses and we saw some good integration of the network and so there is some network expenses that we’re able to take out, those will complete as we noted in the third quarter. So all in all, we’re very, very encouraged about the progress we’ve made on MegaPath and completing the progress on UNSi which is why we would feel comfortable potentially doing another selective strategic acquisition in the second half if it presents itself. So let me turn it over to Mike for the capital question.

[Mike Sicoli:]

Sure. So, I think the next logical progression for us from the capital structure standpoint is institutional debt - whether that would be term loan B or high yield, I think we have significant incremental capacity today and I think those markets would be very open and receptive to us, we’re slightly sub three times right now leverage and we’ve historically talked about a three to four times range is kind of our comfort level and I think normal course that is correct. I think we do have the ability to go above four times maybe in the four to five times range for the right deal. We do produce good organic free cash flow and I think that we would de-lever quickly from there, but for the right deal we could potentially go above four. But four is kind of that sort of comfort level range where three to four is still the right range for us.

[Michael Bowen:]

Okay. Thanks for that. And one quick follow-up. When you talked about the organic growth at 6.2% but then moving back to more of a 8% to 10% range in the second half, is there any particular segment of the enterprise market right now that you're seeing growth in that will help drive that or any other details you can - you can give us on that?

[Mike Sicoli:]

Sure, I mean we - thank you Michael. We’re I mean we’re focused on both multinational enterprise market and the carrier market we see good progress in the carrier market, we’re one of the large Internet backbones in the world and we see some continued good progress, we’ve got press announcement about our as the FCC promulgated their rules on the open internet. We've seen some good receptivity from some of the more problematic peers in the industry of open-air capacity, so we do see some nice growth on the carrier side of our business. We continue given our ubiquitous nature of our business to win business with other carriers to extend their networks to any location in the world as well. So that represents about 20% of our business or so that carrier business. But we’re very focused on the multinational enterprise business. So from the U.S. federal government which is our largest client on down, we see some tremendous need for bandwidth. So the same trends that we’ve talked about in the conferences continue to run very strong, one being access to the public Internet, two being the increasing need to transfer within a corporate wide area network, increasing file sizes around corporations and a very fast moving of the late stage trend for multinationals to move applications to the Cloud where we think we’re uniquely positioned to be able to provide connectivity with any application in the Cloud on a private secure ether Cloud backbone. So those three trends we think are causing multinational CIOs to take notice and say, I’ll move away from my incumbent or even as interestingly add more capacity around my incumbent and build a share with a player like GTT.

[Michael Bowen:]

Okay. Great, thanks, Rick, thanks, Mike.

[Mike Sicoli:]

Okay. Thank you.

[Operator:]

We will take our next question from Barry Sine with Drexel Hamilton.

[Barry Sine:]

Good morning. Wanted to continue to kind of question on the cross selling opportunities and get a status update in terms of where you are on managed services versus transport, so a couple of ways to ask about that. First of all, cross training of the sales force, I'm assuming, knowing you guys, that's pretty much all done. Secondly, on your Legacy clients, to what extent had you been able to set up appointments, get in there and educate them on your new - newly acquired managed services products and then thirdly, the opportunity to get in and pitch the new managed services client you brought in on the transport capability.

[Rick Calder:]

Yep so great question, thank you very much Barry. Yes we have done several rounds of training across as we mentioned we have just under 80 quota-bearing sales reps across the organization. So in the enterprise focused area, we’ve done but as you know it takes many rounds of training to bring folks up to speed but we feel very good where we stand initially, we see and as I mentioned in the question to George that our opportunity to basically take our larger bandwidth clients and traditionally serve the smaller locations with Managed Router, Managed Firewall it’s something that we historically had downplayed and now we see nice opportunity. So with our legacy base, we are taking a more traditional retail and branch office locations that we historically have not served and we’re seeing that as a nice opportunity and on the flip side on some of the legacy MegaPath clients where they historically and even UNSi, this is true is well where a domestic U.S. only company, we see tremendous opportunity to serve their worldwide locations for many of the retail, foodservice clients that we have tremendous international presence and again that was opportunity that was downplayed and not sold and we see big opportunity to sell that moving forward. All of our clients to your point have needs for our Managed Secure and Managed Router service and network based intrusion detection services. So if anything we’re seeing security as we like to say is a thin edge of the wedge to basically bring all of our clients to a more secure Cloud networking solution. So we’re seeing that as really one of the lead products for us moving forward. The last question you asked is about percentage and I’d say we’ll always in our most recent or updated - when we update our August investor presentation, you will see Managed Services represent about 10% of our business but remember it’s attached on to the main Internet and transport ether Cloud services. So the wide area networking business is will now represent more than half of our business, the ether Cloud business a very important portion though our revenue stream is that high margin Managed Services that is really the glue and high value services that really make these wide area networks hum for our large clients. So we see all those that component growing over time but it is now a much larger part of our business.

[Barry Sine:]

Okay. And then, that's very helpful. Thank you, Rick, on that. Next is you've mentioned a bit more of a focus on channel partner sales and, you know, one channel partner that you've announced and talked about in the past has been IBM and, obviously, pretty significant opportunity there. So could you talk generally given a bit more specifics about what you're doing with channels and then, in particular, is that IBM transaction relationship going as well as, you know, perhaps you would expect it?

[Rick Calder:]

Well a couple of things, yes. We see tremendous opportunity in channels simply because historically we’ve gotten less than 15% of our business through channel has broadly defined and almost none of our business through the system integrator, channel opportunity that we would see from an IBM and I’d say, the potential of the IBM relationship we think is better than the it’s ever been. We’re seeing we have initial orders from them and we see that as a key part of their growth strategy to continue to focus on providing cloud services out of their data centers to their multinational clients worldwide and their clients are asking how do I access it and so they see us a very key partner and providing the cloud networking solutions that allow their multinational clients to access their cloud services. We see that type of opportunity in other system integrators and other major cloud services players in the industry and we think that it through the second half of the year. This would be a very interesting development for us to shift some of our growth and achieve, sort of our growth rates with higher percentage of business through the system integrator partnered channels likewise we’re making more of an investment in the traditional agent channel partners, again this has been a relatively small part of our business overtime but we see that we are uniquely positioned to assist the broader agent channel community with their sales to multinational clients. We think we’re one of the uniquely positioned businesses in the industry that can provide a very competitive offering relative to the seven or eight major incumbents that are out there and we think that is a great opportunity for us to take more business through the traditional agent channel partner as well and we’re investing in that area also.

[Drexel Hamilton:]

Okay. Again, thank you for that. The last question, you had a press release on June 30 where you announced that you had new interconnection agreement with AT&T and you've talked on this call about kind of a more favorable environment with the FCC's water on interconnection? Can you give us any color on that announcement? And then, how many, more of these large interconnection agreements are you still looking to do, to get to where you need to be?

[Rick Calder:]

Yes. And where we think, as I mentioned probably earlier, we believe that the FCCs opening internet order which, the now the land has clearly made the major incumbent ISPs more receptive to interconnect discussion so the bilateral, the commission did not make a specific ruling on it but did a client jurisdiction is part of the - internet to interconnect and I think it has made the majority of the main recalcitrant players more receptive so well we only announced one deal we feel very good about our progress with the major players in the U.S. in terms of providing a more capacity to deliver what is traffic destined for their clients. So if we believe that, this will also help increase the levels of growth in that portion of our business that is the internet backbone business, again that doesn’t represent of enormous portion of our business but we think is a strategically important and growing part of the GTT service portfolio.

[Drexel Hamilton:]

Yes, that's great. Thank you very much.

[Rick Calder:]

Thanks, Drexel.

[Operator:]

We’ll take our next question from Scott Goldman with Jefferies.

[Scott Goldman:]

Hi, good morning and thanks for taking the question. I guess I have a few hopefully will be somewhat quick. Rick, just wondering maybe you can put a little more specificity around the organic growth, you know, side, specifically, just around the timing, obviously, good progress in Q2 given, where UNSi and MegaPath were, just wondering how quickly you think you can get back to that, run rate targeted 8% to 10%. And then, a question on the margin side, perhaps from Mike, as you look out, you know, as we get into perhaps 1Q '16 or something like that and we're past these, the current transactions. Maybe you just give us a sense for where you see now the incremental margin of this business after you layer in MegaPath and UNSi, where the incremental margins of this business are and what you kind of think as a medium or long term margin target might be. And then, just quickly, last one for Mike as well, I think when you came on board a few months ago, part of - part of your thought process was, to implement initiatives to improve the platform for scale and you talked briefly about that in the prepared remarks. Just wondering if you can just give us an update on, how far along you think you are with some of those and how that helps position you for the next wave of M&A or growth in the Company. Thanks.

[Rick Calder:]

Great. Thanks, guys, I'll take that first one organic growth and let Mike address the other two so let me probably reiterate first the point that I made in the prepared remarks that we bought a business in the fourth quarter UNSi that was declining, so it was shrinking and then we bought a business that have been flat for several years MegaPath. So feel very good about we got that 6.2% in aggregate across 1Q to 2Q we are in this annualized sequential growth and we made the point in the prepared remarks that we will be back in 8% to 10% range in the second half. So we probably reserve the right whether means third quarter, fourth quarter but I would tell you that we have probably the best backlog we’ve ever had in our company’s history and net backlog, net installs less the churn backlog that we have so we’re feeling very, very positive about continuing to basically return to that 8% debt, that 8% to 10% goal that we’ve had and we’ve achieved historically.

[Michael Sicoli:]

And I’ll take the other two so from a marketing standpoint, we talked 20% this quarter which I think was a real nice milestone for the company but I view this as a 25% margin business in the intermediate term I would say and the we have additional operating leverage to get primarily on the SG&A side as we realized MegaPath synergies but also grow the top line. I think there is a little bit of gross margin expansion to for the, items that Rick and I both talked about earlier but the primary margin expansion will come from bringing SG&A down as a percent of revenue. In terms of the status of creating a back office platform that will scale. I would say we’re still relatively early innings on that. There is - that the people side of that I think is in pretty good shape now both Chris and I have added some really nice talent to our teams over the past couple of months. Now sort of the hard work begins on the system and the process side so I would imagine that will happen over the next few quarters, as we stand up different types of investments but I feel very good about where we are today in terms of how long these transformation typically take but more to come and that obviously will have a lot to do with driving the SG&A scale that I talked about a minute ago in terms how we get the 25% margins on the current business, let alone the ability to fold in additional businesses successfully over time.

[Scott Goldman:]

Great. Thanks a lot, guys.

[Rick Calder:]

Thanks Scott.

[Operator:]

We’ll take our next question from Tim Horan with Oppenheimer. Please go ahead sir.

[Tim Horan:]

Thanks, guys. Just clarity on the MegaPath synergies, are we halfway through those synergies, do you think, a third, two-thirds, just some rough numbers would be great. Then just two other questions, on the channel partner side, do you think this can get the kind of 30% of incremental revenues from the 15% we're at now or just maybe some gauge at some point in the next year or two. And then, which products are you real excited about now that are maybe a little percentage of revenue and where can they go as a percentage of revenue in the next couple of years. Thanks a lot.

[Rick Calder:]

Got it. So, in terms of synergy, again it takes generally we are very disciplined about, completing the integration within two quarters and so we see the full synergy realization in the third. So, for MegaPath we've reported one full quarter, 2Q we’ll see more in the third quarter and more in the fourth quarter so we feel very confident we said before that we’ll yield more than $10 million in incremental synergy use five times better as we said. We are probably further along that we might have been, I think we realize some of those synergies little bit quickly but we clearly have more to achieve, as Mike just noted we see also this is very much being a 25% EBITDA business so and most of that will come from some of the incremental synergies that overtime that we expect to see coming out of MegaPath and future acquisition so I would say probably little ahead were we sometimes have been historically and we think that the well sort of honed integration playbook that we have is playing out very nicely in this one such that, we would feel comfortable potentially during out of the one this year. To your questions…

[Tim Horan:]

So, there were maybe $3 million to $4 million of synergies in the quarter from that deal?

[Rick Calder:]

Yes, if you look at EBITDA from the first quarter, with some organic growth on that EBITDA, there was probably an incremental there and some of that came from UNSi the final bid of UNSi and lot of that came from MegaPath, yes. Quarterly in terms of channel 15% we think is quite low we still believe the majority of our sales would come direct but I think your number 30% is a good one I think somewhere overtime in that 25% to 50% range is a good target for us to look to increase our scope in channels. Recognizing we have a relatively small sales force. So we are still at 80 with a target to get to 100 up to 100 by the end of the year and so we see tremendous opportunity to leverage and force multiply our product portfolio across a series of system integrator partners, as well as traditional agent channel partners. So we would like to grow that quite rapidly, I think majority of sales over 50% will so come direct but we do clearly see opportunity here in the channel realm. And your last question about products, we like all of them, I means I would say if you think about our business internet services we see tremendous growth in the use of the internet so it’s a very nice fast growing market, the ether cloud, wide area transport business is very attractive, but I would probably come back to the point I mentioned before the ThinEdge application for us managed services, managed security, managed secure access, the ability to provide through sophisticated client portals, detailed information to clients about the health and wellbeing of their business managed at the end point. I think that is becoming a real resident point for us and it continuing to earn us the right to grow revenue within all of our multinational accounts. So I think those are the areas that we are very excited about right now.

[Tim Horan:]

And, again, that edge business, what percentage of revenue is that now?

[Rick Calder:]

If we think about it strictly defined, as the edge has not attached to about 10% but recognize that it is part of a holistic solutions that we provide out to customer. So to them they think about it as one solution for the wide area network, but when we break it out in our revenue mix which you will see in our August investor presentation it will appear at 10%.

[Tim Horan:]

Perfect. Thank you.

[Rick Calder:]

Thank you Tim.

[Operator:]

We will take our next question from Howard Rosencrans with Value Advisory.

[Howard Rosencrans:]

Hi. Thanks very much, guys.

[Rick Calder:]

Thank you Howard.

[Howard Rosencrans:]

I'm not sure that you covered this previously. Your longer term target, it seems to me, you've already achieved in the context of your sort of 400, 100 top line on EBITDA numbers in terms of the gross margin. And it sounds like there's plenty more to come. In terms of the SG&A, do you still believe that, I guess it was, I forgot exactly how you got to the, I guess it was 45 and 20 which left the 25 points over for the EBITDA margin. Do you still believe that number is a good number for the SG&A in the context of let's say $400 million or $500 million in revenue, or do you need to now get to a bigger number to hit that SG&A, that implied SG&A target number? Thank you.

[Rick Calder:]

Thanks, Howard. I’ll let Mike answer that one.

[Mike Sicoli:]

Yes. So on the question about the target; we’re approaching the target very close of the target but not quite there yet. So I don’t know that we’ll be talking further about new targets, and so, we've actually hit the ones that we’ve laid out. But you’re right, we’re very close. In terms of how to get to 25% margins I think going from 25% on SG&A as percent of revenue today approaching 20% over time is a good way to think about it. It might not be 20%, it might be 21% and there might be a little bit of extra pickup in gross margin, let’s say. But, that is the order of magnitude of how it would occur. Q - Howard Rosencrans But that's still in the context of the - you guys had the $400 million-ish number in terms of revenue target associated with that. I mean, clearly you're going to have a bigger number already. So, do you need to get to $600 million or $700 million in top-line to get down to 21-21 or can you do it in the context of let's say approaching $500 million?

[Mike Sicoli:]

No. I think that within the context of our current business including the expectations around organic growth, we shouldn’t be able to get not talking about a specific time frame and as I mentioned before, something intermediate term, which to means, one to two years Q - Howard Rosencrans Okay. I just know what sort of budget, I mean, you're going to be making, a couple of acquisitions a year. So I guess that sorts of clouds the picture as to what sort of revenues we need to get to, to achieve that sort of SG&A number.

[Mike Sicoli:]

Yes. The numbers that I’m talking about now are all else equal, the current business that we have today. Obviously to the extent that we do additional acquisitions in the future, the numbers could shift around a little bit. But my expectation is, if and when those were to occur those would all be accretive and good news stories on top of where we sit today. Q - Howard Rosencrans Okay, fabulous. Everything sounds great. Thanks so much.

[Mike Sicoli:]

Thanks, Howard.

[Operator:]

[Operator Instructions] We’ll take our next question from Jay Li with Trafelet Brokaw. Please go ahead.

[Jay Li:]

Hi, I just wanted to clarify that when you talk about bringing down SG&A over time you're talking about it excluding the stock comp, that 25% at this level that you saw in this quarter, is that correct?

[Rick Calder:]

That’s right, excluding stock comp, excluding non-recurring transaction type of charges there might be an SG&A as well as we’ve disclosed in the EBITDA reconciliation.

[Jay Li:]

Okay. And then, you know, I saw that stock comp a little bit, you know, a little bit elevated I think in this quarter relative to previous - can you give us thoughts on, you know, what you expect that run rate stock comp to be moving forward?

[Rick Calder:]

There is a little bit of increase in the run rate this quarter because the achievement of some of the historical performance grants, the achievement is some of the criteria underneath that and then obviously there is ongoing grant activity as well. So there are some additional performance targets out there that have not yet been met. So to the extent that we continue to execute on the goals, you might see that expense come up a little bit over time as well from current levels. But again remember that’s a non-cash number and as long as you're staying focused on the cash flow side, as well as the shares that we disclosed in terms of the options and the restricted stock outstanding, I think you will be able to capture everything you need.

[Jay Li:]

Okay, but I guess there - is the number - as far as you said like something around $1 million to $1.5 million a quarter, does that seem like a reasonable estimate?

[Rick Calder:]

Yes I think that’s not something that we’ve provided guidance around historically and I wouldn’t be comfortable providing guidance on that item on the call.

[Jay Li:]

Okay, no problem. Thank you.

[Rick Calder:]

Thanks Jay. End of Q&A

[Operator:]

[Operator Instructions] It appears there are no further question at this time. I would like to turn the conference back to speakers for any additional or closing remarks.

[Rick Calder:]

Great, well thank you operator and I would like to turn the call over to our Chairman, Brian Thompson for some concluding remarks. Brian?

[Brian Thompson:]

Thanks Rick. I just very briefly did historical look at what we tried to do when we started this company back in the 2006-2007 period and at that time we were pointing to a company that could generate as much as $400 million to $500 million of revenue and the EBITDA numbers that you’re talking about in a original presentation to shareholders back at that time. We didn’t see that we’re going to hit 2008 in a type of marketplace in which it was a very difficult time to be putting together acquisitions but the point I guess I'd like to make is this team has now achieved everything that we set out back in the, in the original intention of putting this company together. It was an asset light company, it was one that was based on the understanding that the technology and the investments that have been made in our industry and would continued to be made as well as the demand for broadband types of solutions in the data business. So we are going to provide a new model for company growth and unique ability to provide services to large enterprises and other carrier so my point I guess that I really want to make is, this is a group that is taking the long view has taken the long view. They have continued to execute against those basics and enhanced those with acquisitions as we going forward and I couldn’t be proud of where we are but more proud of the base that we built and the ability of this team now to create fairly extensive and very productive new enterprise solution and business model that I think will be the will be the envy of lot of people going forward over the next three to five years. Somebody asked the question about objectives and the $400 million something that we set about three years ago, about two and half years ago. We gave it a five-year horizon. And this team has put it together in a quicker period of time. There is no question that the Board of this company has very proud of what we have done and we’re looking forward to the next set of objectives because we said this is an interim plateau and we're not going to stay there long so those of you who have invested in the company that are on this call or those of you who are analyzing the company I think there is a lot remaining, you’re going to say great things going forward and I encourage you to stay with this. Thank you.

[Rick Calder:]

Great. Thank you very much, Brian. As this is my 33rd earnings call with investor so, as Brian noted we’ve come a long way over those 33 quarter and as I told many investors privately as Brian just mentioned. I think our growth prospectus from this point forward are some of the brightest that we’ve ever seen so we feel very bullish about where we’re going as a business and we think we’re emerging as a very disruptive power in the communications industry so we appreciate you being on the call. We very much look forward to presenting to you in the future. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation.