GTT Communications, Inc.
Q4 2015 Earnings Call Transcript

Published: 3 Mar 2016

[Operator:]

Good day and welcome to the GTT Communications Fourth Quarter and Year-End 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note, today’s event is being recorded. I would now like to turn the conference over to Chris McKee, General Counsel and Executive Vice President for Corporate Development. Please go ahead.

[Chris McKee:]

Thank you and good morning. I’m joined today by Rick Calder, GTT’s President and CEO; Mike Sicoli, GTT’s Chief Financial Officer; and Brian Thompson, GTT’s Executive Chairman of the Board. Today’s discussion is being made available via webcast through the company’s website www.gtt.net. A replay of this call will be available for one month. Dial-in information for the replay, as well as an access to the replay of the webcast is available on our website. Before we begin, I would like 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 Provisions of the U.S. Securities Laws including revenue and margin expectations, projections of various references to trends in the industry and GTT’s business. We caution you that such statements reflect our best judgments as of today, March 3rd, based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC including the 8-K we filed earlier today, which contains our fourth 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 discuss non-GAAP financial measures, including certain pro forma information; unless we specifically state otherwise the non-GAAP financial measures we will discuss today were not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of our GAAP and our 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?

[Richard Calder:]

Thank you, Chris, and good morning, everyone. Thank you for joining us. In 2015, GTT delivered another terrific year of growth and performance. We demonstrated our ability to successfully execute our growth strategy through both increasing organic growth and selective strategic acquisitions, all while driving significant margin expansion. During 2015, we completed the integration of UNSi, which we acquired in the fourth quarter of 2014. We completed the acquisition and integration of MegaPath Managed Services and we completed the acquisition of One Source Networks. At the same time, we delivered solid organic growth and margin expansion. And we are well-positioned for continued strong performance in 2016. We ended 2015 with revenue of $369 million, up 78% compared to 2014; and adjusted EBITDA of $77 million, up 114% compared to 2014. On a pro forma basis, including UNSi, MegaPath and OSN for all of 2014 and 2015 and in constant currency, we grew revenue and adjusted EBITDA by 8% and 49% respectively, a great accomplishment for the GTT team. During 2015 we executed well on all elements of the GTT growth strategy. We expanded our portfolio of cloud networking services for multinational clients, by adding managed services, SIP Trunking and other enterprise Voice over IP services. We extended our global network reach by adding new points of presence in Hong Kong, Sydney and Bogota. And we delivered outstanding client experience to a growing roster of blue-chip clients across many different vertical markets by living our core values of simplicity, speed and agility. We closed the acquisition of OSN on October 22 and integration is well underway. We announced the organizational actions in November and we cut over to our client management database system in February. And we expect the remaining system integration and network integration to be substantially complete by the end of the first quarter. This is a highly strategic acquisition, which broaden our portfolio of services and network reach, and added a high-caliber sales team with deep multinational enterprise client relationships. In addition, their strong track record of growth enhances our ability to drive GTT’s organic growth going forward. Our synergy expectations remain on track as well and we continue to expect this deal to come in at a multiple of better than seven times post-synergy adjusted EBITDA. Turning to our organic growth initiatives, we now have approximately 85 quota bearing headcount, after completing the organization integration with OSN. Our number one organic growth initiative is to add quota bearing reps in 2016. And we are targeting 110 to 120 reps by year end. We plan to add talent across all our sales channels including direct to North America enterprise, direct to EMEA enterprise, direct to wholesale carrier clients worldwide, and importantly, indirect through our growing channel partner programs. While, any sales from these new reps will likely not produce much revenue in 2016, we see a tremendous opportunity to capture a higher share of industry spending going forward. Our value proposition has never been better. Our clients need more of what we sell every day and the competitive landscape is very favorable for us as large incumbent providers focus less on the multinational client market. Now is the perfect time for us to invest in a bigger sales team. In addition, we are adding new client account managers across the organization to assist our quota bearing sales reps in delivering outstanding client experience. Our client account managers will be focused on driving renewals and upsell opportunities in a client base, as we look to drive our churn rate to even lower levels. The new client account managers will enable our sales reps to focus more time on new sales opportunities, while ensuring an even higher level of service for our existing customers. Our overall churn rate has decreased to the mid-1% range, though we see more room for improvement as we invest in our new client account manager team. In December, we were chosen as one of a select group of eight service providers that will be delivering global network services to the U.S. Government Defense Information Systems Agency, the GNS contract is part of a $4.3 billion authorization from Congress for the Defense Department to support the global telecommunications and transport requirements of the Defense Information Systems Network and Department of Defense Information Network. We expect DISA to request bids for these services on a gradual basis over the next few years, starting in earnest later this year. We are honored to have been selected to participate in this opportunity. With our comprehensive portfolio of services and commitment to delivering a superior client experience, we are well-positioned to compete for these awards and to expand our existing significant relationship with the Department of Defense. On the M&A front, on February 4 we completed the acquisition of Telnes Broadband, a provider of high-availability managed network and cloud communication services to enterprise clients. In 2015, Telnes generated approximately $17 million in revenue and $1 million in adjusted EBITDA. This is a smaller, yet strategic acquisition as it adds a growing base of enterprise clients and enhances our emerging channel partner program. As we highlighted previously, growing our indirect channel partner program is one of our key organic growth initiatives. Telnes sold 100% through channel partners and developed a great reputation in the channel. We are very excited that Telnes founder Jason Ness has now joined the GTT team working for Layne Levine, GTT’s Chief Revenue Officer. Jason, will now rapidly expand our channel sales program building upon his strong existing team which joined GTT. Overall, we plan to integrate Telnes by the end of the second quarter, and we expect to achieve a post-synergy adjusted EBITDA multiple of better than five times once the integration is complete. We maintain a very active funnel of accretive acquisition opportunities, and we will maintain a disciplined focus on these opportunities with a strong strategic fit consistent with our growth strategy of expanding our global network adding to our cloud networking service portfolio and adding multinational clients, that can be successfully integrated quickly in two quarters and at a highly accretive purchase price as a multiple of post-synergy adjusted EBITDA. We remain focused on achieving our next financial objective of $1 billion in revenue and $250 million in adjusted EBITDA within the next five years, which we expect to deliver through a combination of continued 8% to 10% organic revenue growth, which should translate into 15% to 20% organic adjusted EBITDA growth and selective accretive acquisitions. In summary, we are very proud of GTT’s 2015 performance and we are excited for another great year in 2016. Now, I’ll turn the call over to Michael Sicoli for a review of the financials.

[Michael Sicoli:]

Thanks, Rick, and good morning, everyone. Fourth quarter 2015 revenue of $114.8 million grew 83% year over year and 18% sequentially. The year-over-year increase was driven primarily by the acquisition of MegaPath and the sequential increase was driven primarily by the acquisition of One Source Networks as well as organic growth. In constant currency, fourth quarter 2015 revenue grew at an even higher rate, 86% compared to last year and 19% compared to last quarter. On a pro forma basis, as if we had owned MegaPath and OSN in all periods presented and in constant currency, fourth quarter 2015 revenue grew 8.8% year over year and 2.2% sequentially, well within our target organic growth range for revenue of 8% to 10% a year. Gross margin of 46.1%, increased by approximately 810 basis points from fourth quarter 2014 and by approximately 110 basis points from third quarter 2015; the year-over-year increase was driven primarily by the acquisition of MegaPath, which brought higher gross margins due to its managed services products mix and the sequential increase was driven primarily by the realization of savings from MegaPath network integration efforts. SG&A as a percent of revenue, excluding non-cash stock comp and transaction-related expenses was 23.8%, 100 basis points higher than last year and 30 basis points higher than last quarter. The year-over-year increase as a percent of revenue results primarily from the MegaPath acquisition as MegaPath carried higher SG&A levels, due mainly to the incremental costs of operating the managed services product-set. On a pro forma basis however, we’ve been able to reduce SG&A cost significantly as a percent of revenue over the past year due to synergy realization from the UNSi and MegaPath acquisitions primarily from headcount reductions. The sequential increase was due primarily to the acquisition of OSN, which had a slightly higher level of SG&A as well as some year-end adjustments, including annual bonus expense. Going forward, we expect to continue to reduce SG&A as a percent of revenue as we realized synergies from the OSN acquisition and realized the benefits of scale as we grow. Fourth quarter 2015 adjusted EBITDA of $25.5 million grew 152% year over year and 22% sequentially. The year-over-year increase was driven primarily by the acquisitions of MegaPath and OSN, as well as synergy realization from the MegaPath and UNSi acquisitions and organic growth. The sequential increase was driven primarily by the acquisition of OSN, as well as full realization of MegaPath synergies and organic growth. In constant currency, fourth quarter 2015 adjusted EBITDA grew at an even higher rate, 162% compared to last year and 23% compared to last quarter. On a pro forma basis, as if we had owned MegaPath and OSN in all periods presented and in constant currency, fourth quarter 2015 adjusted EBITDA grew 53.7% year over year and 5.8% sequentially, well above our target organic growth range for adjusted EBITDA of 15% to 20% a year. Adjusted EBITDA margin of 22.2% expanded by approximately 610 basis points compared to fourth quarter 2014 and by approximately 70 basis points compared to third quarter 2015. The year-over-year increase was driven primarily by the realization of synergies from the MegaPath and UNSi acquisitions as well as organic growth. The sequential margin increase was due primarily to the expansion of gross margin related to the MegaPath network integration efforts. We expect to drive continued margin expansion in 2016 and beyond as we achieve synergies from OSN, continue to groom our network and realize the benefits of scale, partially offset by the investments in headcount to drive additional revenue growth that Rick highlighted earlier. We recognized the restructuring charge of $4.9 million during the quarter related to severance and other exit costs associated with the OSN acquisition. In addition, we recognized $2.5 million of nonrecurring transaction and integration-related expenses and SG&A during the quarter, which have been excluded from adjusted EBITDA. Going forward, primarily in first quarter 2016, we expect to incur approximately $1 million in additional nonrecurring transition and integration expenses also to be recorded in SG&A, which will bring the total OSN related nonrecurring cost to approximately $8.5 million. In addition, at year-end, we released the valuation allowance against our U.S. deferred tax assets, which drove a $34 million income tax benefit on the income statement. We released the valuation allowance, because we determined that it was more likely than not that we would be able to utilize our net operating loss carry-forwards, due to the net deferred tax liability created by the acquisition of OSN as well as our forecast of future taxable income. Going forward, we now expect to recognize U.S. federal and state income tax expense on our income statement at a typical corporate rate of approximately 40%. There is no cash impact from the release of the valuation allowance, and we continue to expect that we’ll be able to utilize NOLs to offset cash taxes for at least the next several years. All of these assumptions are subject to change based on future activities including any future acquisitions. Capital expenditures in the quarter were $4.2 million compared to $2.8 million last year and $3.5 million last quarter. Fourth quarter CapEx was 3.7% of revenue just below our target range of 4% to 5% of revenue. Unlevered free cash flow defined as adjusted EBITDA less CapEx was $21.3 million in Q4 or 18.6% of revenue compared to $7.4 million last year and $17.3 million last quarter. Our CapEx-light strategy continues to support our competitiveness by giving us flexibility to provide custom global solutions to complex client needs while delivering compelling cash flow margins. Net cash provided by operating activities was $22.7 million for the full year of 2015, which includes $13 million paid for cash interest; $8 million paid for restructuring and exit costs relating to UNSi, MegaPath and OSN; $6 million paid for transition and integration costs relating to MegaPath and OSN; $3 million used from changes in foreign currency rates; and an overall working capital use of approximately $23 million, most of which is related to working capital deficits from acquisitions. Prior to OSN, most of our acquisitions had working capital deficits at closing and it can take several quarters or more for customer and vendor payments to settle down to a more normal state. At year-end, our current liabilities were approximately $100 million including $13 million related to acquisition earn-outs and holdbacks, and $6 million related to deferred exit costs from acquisitions. Excluding these earn-outs, holdbacks and deferred exit costs related to prior acquisitions, current liabilities were approximately $81 million, $12 million less than current assets. As of December 31, our cash balance was $14.6 million and our outstanding debt was $407.4 million excluding OID and unamortized debt issuance costs. Our outstanding debt consists of a $400 million Term Loan B which we entered into in October 2015 to fund the OSN acquisition and refinance our previous term loan with an interest rate of LIBOR plus 525 basis points of 1% LIBOR floor and mandatory principal amortization of only 1% per year until maturity in 2022; $5 million of drawn revolver, part of the $50 million revolving credit facility we entered into in October 2015, which carries an interest rate of LIBOR plus 475 basis points with no LIBOR floor, can be repaid at any time, and otherwise has a maturity date of 2020; and $2.4 million of capital leases which will be repaid over the next three years. Our leverage ratio using fourth quarter 2015 annualized EBITDA was 4.0 times on a gross basis and 3.8 times on a net basis. And on a pro forma basis if we had owned OSN for the entire fourth quarter, our leverage ratio was 3.8 times on a gross basis and 3.7 times on a net basis. We’re pleased that we were able to complete a highly strategic and accretive acquisition within our target leverage range of 3 to 4 times. And we expect to de-lever organically going forward, through a combination of adjusted EBITDA growth and free cash flow generation. We’re very comfortable with our current debt levels, credit profile and liquidity. Last month, we announced the acquisition of Telnes Broadband which was signed and closed on February 4. The total consideration for the acquisition was $18.2 million comprised of $13.7 million in cash and 178,000 shares of GTT common stock valued at $2.7 million delivered at closing, plus a one-year cash holdback of $1.8 million to cover any undisclosed liabilities or indemnification claims. We funded the cash portion at closing by drawing an additional $14 million from our $50 million revolving credit facility. Telnes 2015 revenue and adjusted EBITDA were $17 million and $1 million, respectively. Going forward, we expect the Telnes revenue stream to grow at a similar rate to GTT overall, and we expect to generate annualized synergies of $2.5 million or more, as we complete integration within the next two quarters, resulting in a post-synergy purchase price better than five times as a multiple of adjusted EBITDA. In addition, we expect transaction integration and restructuring charges related to Telnes to be approximately $2 million, spread across the first and second quarters. In closing, we are really pleased with what we accomplished in a very busy 2015, and we remain focused on delivering another successful year of growth and margin expansion in 2016. With that, I’ll turn the call back over to the operator to take your questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Goldman of Jefferies. Please go ahead.

[Scott Goldman:]

Hey, good morning, guys. Thanks for taking the questions. I guess, two questions if I could. The last couple of acquisition, the OSN and the Telnes had been growing a bit faster than the 8% to 10% range that you had targeted prior to those deals. Just wondering if maybe you can talk a bit about how, if at all, those two deals change your view on the organic growth capabilities of the company once they’re integrated as well as maybe the incremental margin opportunity of the company with those two assets embedded. And then, maybe second one for Rick. Just wondering, obviously you’re a lot bigger now than you were just two to three years ago, just wondering if you could comment a little bit about what the added scale has done for you, whether it’s opened more doors, invited more companies to come take a look at GTT to be their service provider. It’d be really helpful. Thanks.

[Richard Calder:]

Great. Now, thank you for the questions, Scott. In terms of the first one, I’ll comment on it, maybe let Mike comment on it, and then I’ll address the second one. We’ve had our organic growth goal of 8% to 10% now for about four years. And we’ve had very consistent execution on that goal. We bought as we showed in the pro formas to a couple of companies that have been growing at less than that rate, clearly the UNSi business were shrinking and the MegaPath Managed Services business was growing. We’ve now bought two companies that have been growing at faster than that 8% to 10% growth rate both OSN and Telnes, which leaves us comfortable to keep on a steady-state basis as we’ve integrated very rapidly all of these businesses into our business, to leave us comfortable to be in at 8% to 10% growth range moving forward. That said we clearly would like to demonstrate over time faster organic growth rate. As we mentioned in the prepared remarks, we think our value proposition is better than it has ever been at this stage. We think our clients need more of what we have, multinational CIOs, clearly need more bandwidth. And we think we have emerged as the true challenger brand for multinational enterprises around the world in addition to carriers and the U.S. government as we noted in terms of our win of a capability there. So we are comfortable with that range. And we’re clearly working our organic growth initiatives to work to maintain ourselves in that range, if not, of course exceed that range over time. So I don’t know if you have anything to add.

[Michael Sicoli:]

Yes. I will just add a couple things. We are selling into a very large and growing market for communication services, purchased by multinationals, many hundreds of billions of dollars spent worldwide. And it’s growing as well, particularly when you look at the specific services we sell which are IP-centric, whether it would be data or voice or managed services. So clearly the industry is growing. And given the competitive landscape, I think our ability to take share is as strong now as it’s ever been. So I think that clearly the potential exists for it to be higher than the current targets. But as Rick said, until we are delivering in that a higher rate consistently we don’t want to get in front of ourselves on it.

[Richard Calder:]

And then to your second question, Scott, absolutely were bigger, we’re approaching a $500 million run-rate business at this stage revenue-wise. We’ve achieved our previous two financial objectives growing the business, first the $200 million of revenue, and then sufficing and growing to $400 million of revenue. As we’ve noted, we announced in November our growth goal to grow $1 billion in revenue within the next five years, and $250 million in EBITDA. And we think we have the capability to grow rapidly both organically and through selective acquisition because of the strength of our scale. We believe we are a unique company in the industry that has the size to compete, the credibility to win competitive bids in the multinational marketplace against the incumbent telco monopolies, be a credible alternative to them, given the scope and scale of our business, the reach of our global network the broad portfolio of cloud networking services that we have put together, and most importantly our ability to be different from the incumbents and our values in the way we are easy to do business with fast and responsive and have a culture of saying yes to clients, simplicity, speed and agility. And we’ve seen that play out clearly with our clients and their willingness to trust us with an ever larger portion of their spend. Moreover, we found a significant traction with suppliers. We are continuing to grow in scale and scope with them and continue to drive ever more attractive buying relationships with the 2,000 plus suppliers that we have in our network to be able to reach any location in the world, and as importantly, connect with any application in the cloud on behalf of our multinational suppliers. So we believe that our network is starting to generate some network effects of itself by continuing to drive scale with all of our various myriad supplier relationship. So we absolutely see that, which is why we believe that our value proposition is better at this stage than it’s ever been.

[Scott Goldman:]

Great. Thanks a lot, guys.

[Operator:]

And our next question comes from Jonathan Charbonneau of Cowen and Company. Please go ahead.

[Jonathan Charbonneau:]

Great. Thanks for taking the questions. In terms of additional M&A, you noted in your prepared remarks that you still have an active funnel. But given the recent Telnes acquisition, is it more likely that you will wait until after the integration is complete in the second quarter, before making another acquisition or since it is relatively small could we see you do something sooner? Thank you.

[Richard Calder:]

Thank you very much for the question, Jonathan. I’ll comment at least initially on timing. I’ll throw it to Chris McKee who is here as well with us to talk about the other sort of the health of the funnel itself. We have traditionally said we would take two quarters to integrate. We see the ability to integrate some of these smaller acquisitions within a quarter. So I would say, we clearly wouldn’t do anything until later in the second quarter, though I would say, we could be prepared to do something as early as of the end of the second quarter or early third quarter on a smaller basis. So we feel very comfortable. And I think - I’d reiterate the fact that we did Telnes because we felt very comfortable with where we were with OSN. We closed OSN on October 22. We closed Telnes on February 4. I think that just gives a strong sign of confidence relative to the team’s effort to GTT to be able to integrate very successfully and start another integration process with Telnes, albeit a little bit smaller. So we do maintain an active funnel of opportunities. So we would be expecting, we have the - we believe the financial strength and the organizational strength to be able to continue to do selective acquisitions that fit in the strategic sweet spot that we talked about earlier. And maybe, Chris, maybe a few comments on the funnel itself.

[Chris McKee:]

Yes. I mean, I think you’re just - both timing and funnel, I mean, you’ve seen - if you’ve been following us for a long time, we used to do one strategic acquisition per year. You’ve seen in recent times we moved to one per six months. And then, the difference between October 22 when we bought OSN and February 4 when we bought Telnes is even shorter. And then, as Rick said, I think that’s a statement about how we think the team is doing on integration activities, when we can turn towards the next one. And we’re continuing to see I think the timeframe that Rick talked about where I think as early as towards the end of second quarter we’ll be ready for another one. In terms of the funnel itself, it’s larger than it’s ever been. I mean, I think, with the demonstrated history we have of getting deals done and closing transactions, there are lots of sellers who look at us as a viable exit option. And so the funnel itself is larger than it’s ever been. It’s certainly, from our perspective, a buyer’s market on the M&A side and we’re a buyer. And so it allows us to be even more selective and look through a larger group of possible targets for what’s next.

[Richard Calder:]

And just one final comment, most important thing, Jonathan, is we don’t have to do anything. So we feel very comfortable with the strength of our business and our organic growth potential and demonstrating the organic growth that we are. So we see no need to do any acquisitions. We’re very comfortable with the scope of our network. We feel very comfortable with the scope of our product portfolio. We see, most importantly, acquisitions adding great clients and great distribution strength moving forward. So it’s one of the things we’re actively looking at as a way to accelerate what is already very strong growth for the business. That said, as Chris noted, we see opportunities and we will be very disciplined about making sure that anything we do in terms of deploying capital for acquisitions will be highly accretive for our shareholders.

[Jonathan Charbonneau:]

Great, thank you.

[Operator:]

And our next question comes from Barry McCarver of Stephens Inc. Please go ahead.

[Barry McCarver:]

Hey, good morning, guys. Great quarter and thanks for taking my questions. I guess, first off, you mentioned that adding to the headcount for the sales team you specifically called out the strategic importance of the channel partner program. I was wondering if you could provide a little more detail on that and what you think the long-term opportunity is there.

[Richard Calder:]

Great. Thank you very much, Barry, for the question. We probably noted in the last couple of calls that we are underrepresented in the channel. We’ve historically achieved less than 10% of our sales on a quarterly basis through channel partner programs and effectively a non-strategic unmanaged way. And so, we are very excited to have Jason Ness from Telnes join us and take the leadership role with our channel program and we’ve given him the charter to expand significantly with strategic channel partners and bring on a much larger team to actually expand that program. I think, we’ve commented previously, we see the ability to grow pretty rapidly to have the channel be upwards of a third of our sales on a quarterly basis. So we see tremendous growth potential for us as a way to continue to maintain, if not, exceed that 8% to 10% organic growth profile that we’ve been achieving.

[Michael Sicoli:]

And this is Mike. I’ll just add one additional point, which is that, the reason this is so important is that there’s a meaningful percentage of enterprise clients, particularly who buy through these channels. They don’t buy direct from providers, they use integrators, they use resellers, they use agents. And for us to be underrepresented in that world, just underwhelms our own organic growth opportunities. So we see it as - we just need to beef up to get our fair share of the business in that channel.

[Barry McCarver:]

Great. That’s very helpful. If I can, just one follow-up question, on the Department of Defense global network service contract, I think the last time we spoke you didn’t see any overlap in the new contract opportunities relative to the business you already do with DoD, is that about correct?

[Richard Calder:]

That is correct. This contract is predominately for outside the continental U.S. services. So as a function of that we - well, the Department of Defense is a very large client of ours. The overwhelming majority, if not, exclusive services we provide to them are for continental U.S. services. So we see this as non-overlapping and we see with the other eight award winners, the opportunity to be disruptive and take disproportionate share in that contract over time. Let me reiterate, we see that as a next several year opportunity. We don’t see it as a meaningful contributor to revenue this year, but given its size, we see it as a very nice tailwind for us in subsequent years as we continue to grow, given the power and strength of our global network.

[Barry McCarver:]

Very good. Thanks, guys.

[Richard Calder:]

Thank you.

[Operator:]

And our next question comes from Inder Singh of SunTrust. Please go ahead.

[Inder Singh:]

Good morning, gentlemen. Thanks for taking the question and congratulations on a strong quarter here. I wanted to ask you about kind of the playbook that you run with your prior acquisitions, where you’ve made the acquisition, sort of tucked it in and then managed to drive cross-sell opportunities and growth through those acquisitions. And we saw this quarter as well, you’ve lifted margins, profit margins. What’s the prospect now that you got ONS and Telnes going forward, you expect to leverage the same kind of a playbook with those acquisitions? And then I have a follow on.

[Richard Calder:]

Sure. Yes, now we’ve had a very well-scripted and executed and proven approach for integration really across three dimensions, Inder, and they are organization, systems and network. And I think the thing that sets us apart is we do all of this within two quarters. And so we generally do the organizational integration to have one GTT organization within one quarter and the systems and network pieces within two quarters, so that we are represented to the market as one company. And we have seen significant cross-sell, upsell opportunities across our channel both by selling managed services to clients who traditionally have not been managed services. And we now see a huge opportunity to sell voice and voice over IP services, SIP Trunking, hosted PBX across the complete client base of product line that really completes in many respects the cloud networking service portfolio that we have been putting together over the last two or three years. And just a quick little story, I’m sitting here with my Chairman right before the call, just leaned over and showed we do an electronic alert to our entire company every time a sale comes through and that it was very nice that we just got today from one of our new sales reps just a nice cross-sell opportunity for the products and services that we have an opportunity to sell across the bay. So we are very encouraged by the organic growth potential of our business, particularly as we put the various piece parts in place over the last several years.

[Inder Singh:]

Great. And then just a follow-on was around the demand environment right now with the macro overhang that everybody sort of talks about, and given that you have a global exposure, what’s that like, what’s the competitor environment like? And then, what does that mean for pricing when a contract comes up either for renewal or a new cross-sell opportunity.

[Richard Calder:]

Right. Its - we’ve always said we love our industry mainly because it does grow in the segment that we play and cloud networking grows. And we don’t have the share, the share is generally owned by the incumbent telco monopolies and so we don’t have it. Yes, the point you make about price decline is there. That’s actually an opportunity for us, because bid growth is tremendous. So as our multinational clients are looking for alternatives to the incumbent telcos, we represent a tremendous value with an opportunity to improve the service levels they get. We see time and again that the incumbents are less focused on this multinational cloud networking marketplace and more focused on the consumer and mobile and the cable businesses than they are in our segment. So as a function of that, we think as we said in the prepared remarks that our opportunity to take share has never been greater, and that our CIO target client needs more, needs more access to the internet, needs bigger wide area cloud networks to interconnect their offices together. And as they move IT applications into the cloud needs a trusted secure cloud networking partner to seamlessly interconnect themselves with applications if they’re moving to cloud service providers. And we represent a perfect option for all three of those items driving revenue demand in our industry.

[Michael Sicoli:]

And this is Mike. I would add to that by just saying we’ve been in this business for a long time. We’ve seen a bunch of different market cycles and the one thing that remains constant is exponential growth in demand for data and IP services. In an up-market investments in these services help companies grow. In a down-market investments in these services help companies improve productivity and cut costs. So we’re not seeing any impact right now in the end-user demand environment from the market chop that you see out there today.

[Inder Singh:]

Thank you. I appreciate that.

[Operator:]

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

[James Breen:]

Thanks. Just a couple questions, one from a modeling perspective, is it fair to assume you used that sort of 119.5 fourth quarter pro forma to think about sequential growth going forward throughout this year? And, if you can, remind us when Telnes closed so we can think about how to layer that on top of that. And then, with respect to margins, it seems like the last couple quarters you’ve seen EBITDA margins expanding sort of 100 basis points a quarter, maybe a little bit more, maybe a little bit less. How should we think about that going forward? And then lastly, you talked about the pipeline being there. I think, given the capital markets there’s always sort of concern about what potential capital cost and so forth can - so, Mike, can you just sort of talk about your access to capital at this point either from bank debt perspective or how you feel about the high-yield markets? Thanks.

[Michael Sicoli:]

Sure. So Telnes closed on February 4. It was a sign and close. You are correct that the appropriate pro forma fourth quarter revenue jump-off is 119.5 as presented in the tables in the press release. That’s the 114.8 that we reported, plus an adjustment to include the 21 days of OSN that we didn’t own them since the deal closed mid-quarter on October 22. From a margin expansion standpoint, yes, we have been able to steadily grow margins, you can really see that in the pro forma view that we’ve presented today. You can see there has been some healthy top line growth on a pro forma basis, but really outsize EBITDA growth as a function of us realizing the synergies that we’ve talked about frequently. So that’s the biggest driver behind the margin expansion. Assuming no additional acquisitions the path forward still has margin expansion, maybe not as rapid, because you don’t get the chunks of synergies that come in. But from the 22 or so that we are at today, we’ve talked about 25% goal. The majority of the past from 22 to 25, which can be achieved purely through an organic growth mode, is from SG&A leverage. We have opportunity to increase gross margin as well, that tends to be a little more steadier, since it’s a much bigger base, it’s harder to move quicker. But we expect some gross margin improvement and some improvement in SG&A leverage, but it’s probably two to one from SG&A as opposed to gross margin expansion. From an M&A standpoint, we put the $50 million revolver in place, when we did the new credit facility in October for exactly the opportunity that came up with Telnes, not specific to Telnes. But because of the funnel and the robustness of the funnel, there are dozens of additional targets that look like Telnes. And we wanted to set up a debt structure that would enable us to be able to capture those opportunities that become available without a massive hundreds of millions of dollars’ worth of financing. So there is incremental capacity available under our current credit facility both in terms of the revolver, but also incremental term loan. Our deal was oversubscribed by fair amount, when we did the term loan back in October; it’s traded between 99 and 100 the whole time, despite the overall market backdrop. So we know the demand for that paper is good, and to the extent the right opportunity came along that would probably be our first option. And to the extent something very big came along, then we’ll be looking at alternative sources as well, perhaps the high-yield market or other sources of debt financing. But at this point based on what I see in the funnel, I think we could accomplish the types of deals that we see with additional term loan.

[James Breen:]

Great, thanks. And then, just one quick follow-up on the Telnes acquisition, you said you ended the year at 85 quota bearing headcount, wondering how much that will add post-synergy to that?

[Richard Calder:]

The 85, we expect and this is primarily through the growth with Jason, that we’ve actually ask him to really double, if not triple the size of the channel partner program as we discussed in earlier question. We see sort of tremendous opportunity there. If anything, where our sales force is too small as we’ve discussed before, that as we’ve grown if you recall on our last quarterly call, we actually - were at 90, suppose the integration of OSN and in particular we’ve actually declined slightly have a base of reps. So I think we have the highest productivity that we’ve ever had in our tenure, and we see tremendous opportunity to add great talent, some of the great talent in our industry is sort of approaching us at this stage, and as accessible was not accessible before. I think to add to a comment about that Scott Goldman made about, how to scale help you. I think that make us much more attractive is the destination for great talent in our industry and we’re actually starting to see that. So we see tremendous opportunity to be selective until we add, but we do need to add. We are really very focused at our number one organic growth initiative is to add quota bearing sales force both in the channel program as you noted, as well as direct enterprise and direct wholesale.

[James Breen:]

Great. Thank you very much.

[Operator:]

And our next question comes from Tim Horan of Oppenheimer. Please go ahead.

[Timothy Horan:]

Thanks, guys. Just followed upon Jim’s questions on the margins there. It seems like longer-term the 25% EBITDA margin seems conservative, not to put words in your mouth. But just a few things I think could drive that maybe a little higher. I’m just curious on your opinion, but do you see the cable companies entering enterprise cannot benefit your business actually as you get more suppliers out there or they may be kind of be more competitors to you. And I guess, Rick, on the voice side, it seem like that should have substantially higher margins overtime. Could you maybe just give us some color on what your voice product looks like out there versus the competitors. And I guess also it seems like the churn to come down also overtime, so just curious on long-term?

[Richard Calder:]

Sure. Four questions there. So let me start with the first one on margin, Mike, spoke at length about margin. When we set the next financial objective, we set the goal at 100, the financial objective at 100 - well, excuse me, $1 billion in revenue and $250 million in EBITDA. We describe that as 25% EBITDA margin, as our gross margin will continue to grow as Mike noted, and our SG&A as a percentage of revenue will continue to decline. We see opportunity in both areas, clearly and if anything, we clearly would like to overachieve on that percentage. So we feel - felt comfortable setting a goal that we have clearly an opportunity to achieve, it’s not overtime and opportunity to grow beyond that 25% margin. It’s important to note, just as we set the first two objectives. These were next financial objectives, that are not our end state we continue to see growth overtime in both gross margin and EBITDA margin. Our new sales come into our business at 60% gross margins and higher, as Mike noted, we have a very large base now. So it’s a little harder to move it very quickly as - but we see tremendous opportunity to grow. To answer your third question about voices margin, voice absolutely is one of higher margin products that we sell at this stage, though, that said, I’d say all of our products are relatively high margin, given the fact that our average margin for new sales is at 60, the voice as at the higher end of that. So we clearly see great opportunity in margin expansion as we grow our business and we think we’ve set a financial objective for ourselves that is eminently achievable as a next financial objective. To your point about cable companies, it’s very interesting, because while the cable companies have historically been focused on very small business, SOHO business, they started to try to move up the stack. We are a significant supplier to most of the cable companies in the U.S. They use us for off-net extension services. As we note in our investor presentation about 20% of our businesses to carrier clients the two value propositions result of them. Of course, we have a large internet backbones we generally sell transit services to carrier clients around the globe. And we sell off-net extension services given the power of our global network to basically interconnect with a large carrier client like a cable company and then extend on behalf of their enterprise clients to any location in the world, in the U.S. or in the world. So we see tremendous opportunity to grow the relationships we have with cable companies as they move, where we don’t see cable companies participating now within the multinational target market that we have. So we believe it is very complementary to sell to carriers that are serving the smaller, more regional and local clients for their needs that are either within the U.S. or worldwide. And I think your last question was on churn. And as we noted in the prepared remarks our churn is now at the mid-1% level 1.5% or so as a percent of revenue, it’s come down very nicely overtime to that level. We see big opportunity there in terms of continuing to take churn rates down mainly driven by the fact that our value proposition is higher that we’ve seen clients actually buy more service from us, and have less tendency to churn away. We still have churn - our number one churn reason quote is closed location. Our clients close their locations and we close our service when that happens. And we generally have a high degree of service churn, not client churn, were because of that close location activity. One of the initiatives we mentioned in the prepared remarks is a significant SG&A initiative in investing in client account managers to assist our direct quota bearing sales reps with renewals and uncovering potential upsell opportunities and accounts as our sales rep focus on real new opportunities with existing and new client. So we think that is another initiative that can help us continue to take that churn rate down from the mid-ones even lower over time.

[Michael Sicoli:]

And Tim, this is Mike. I’ll just add one point on the margin discussion which is - this is a long-term play right. We are not optimizing for near-term margin expansion. We’ve got a balanced approach to, we’re definitely committed to driving margin expansion, but not at the expense of investments in long-term growth. And so the investments in the headcount that Rick talked about both on quota bearing people and sales cams is a perfect example of the fact that we are reinvesting some of the synergy that we’re driving from the deals into more organic growth.

[Timothy Horan:]

Of course. Thanks a lot guys.

[Operator:]

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

[George Sutton:]

Thank you. Just one question, Rick, several times you’ve talked about the goal being to grow your share of customer spend. I wondered, if you could give some relatively tangible examples where some of your successes lie in terms of percentage of spend and where your overall numbers might look like today?

[Richard Calder:]

Sure. We actually did a - we had a strategy meeting with our Board of Directors in the fourth quarter with the result of our third in advance of setting this or right after setting this next financial objective. We did do analysis for the board of the top 50 clients and we believe our fair is very small under 5% in the top 50 clients. And I probably highlight one of our largest clients, the federal government as I noted earlier, that the contract that we won we have zero share for right now. The Oconee [ph] is outside the continental U.S. services for the Department of Defense is not an area that we traditionally have served. So we are now one of the eight award winners that has tremendous opportunity to take share from the incumbents, and what is to grow in market. So we see our share as one of the main opportunities for us to continue to grow our business. We are underrepresented, we believe as the challenger brand in our space has the ability to continue to grow with all clients who all need more. I can’t reiterate that enough, and that we don’t see a decline in the need for incremental bandwidth across for the public Internet for private secure cloud networks and for access to the many public cloud service utilities out there that multinationals are moving towards. So we see tremendous opportunity for growth within our existing client base and to be clear, we only have probably about 800 or 900 good multinational clients at this stage in an environment where there is probably 15,000 to 20,000. So we see tremendous opportunity not only to grow with our existing base, but to attack and win small wedges of business with new accounts that we can actually grow once we demonstrate our value proposition of being able to reach any location in the world having this broad portfolio services. And truly delivering a differentiate experience relative to the incumbents.

[George Sutton:]

Super answer. One other thing you mentioned the Department of Defense contract, and you’ve mentioned the potential for getting an inordinate share of that or a larger than normal share. Can you discuss your assets outside the U.S. and how they might fit with this opportunity specifically?

[Richard Calder:]

Sure. We’ve built a global network backbone that can extend to any location in the world. We now have added Points-of-Presence in Australia and Latin America, but with our existing Points-of-Presence in Asia-Pac, a very deep network throughout Europe, a plan to make additional organic expansions of the network in 2016, is part of the earmark of our 4% to 5% capital spend it’s continue to enhance our Points-of-Presence network. And we believe that - and we maintain a top five internet backbone that can truly reach sort of any location now augmented by the deep trading relationships we have with regional players to extend our network to any location. So we believe that is highly differentiated relative to some of the other players in that contract which is why we believe we have an opportunity to take more than one-eighth of that contract. We’re certainly happy with our fair share, but we think we have an opportunity to take more than our fair share of that contract given the strength of our existing relationship with the Department of Defense in U.S., as well as the strength of our global backbone to sell for outside continental U.S. services.

[George Sutton:]

Perfect. Thank you.

[Richard Calder:]

Thank you.

[Operator:]

And our next question comes from Michael Bowen with Pacific Crest. Please go ahead.

[Michael Bowen:]

Okay. Good morning and thank you. So couple if I may or few if I may. First of all, Rick, as far as the sales headcount, I’m assuming that you’re seeing quite a few people of quality caliber coming out of Level 3. I was wondering if you could either firm that or deny it. And then tell us where else you are seeing good qualified salespeople coming from. And also with regard to the ramp up to 110 to 120, should we consider that to be more linear or is there any type of seasonality to that. The second question, I have probably for Mike. Mike, can you just help me out with the OSN revenue that you provided in the back. If I’m doing my math correctly, can you either - can you help explain, I think the OSN revenue might have declined sequentially and I want to make sure I’m doing my math, right. And then finally, this one probably is more for Rick. With regard to cloud connectivity demands by enterprises increasing not only here in the U.S. but on a global basis, couldn’t you make the argument pretty easily that organic growth should accelerate pretty markedly upward from the 8% to 10% range, obviously I am not asking you to give guidance here. But if my premise is correct there, and you are going to see more and more multipoint to multipoint connectivity requirements, because of the cloud. I would think, we’d see higher growth rates there. And are you seeing any particular regions and vertical within the industries where you might see that strength from particularly as Europe starts to improve? Thanks.

[Richard Calder:]

Okay. So four questions there, I’ll take three of them, and then Mike take the OSN revenue one. First one, sales headcount, yes, as we noted earlier, we see tremendous opportunity to attract great talent in our industry from - generally from the competitive players Level 3, if you noted is one, we’ve seen that some talent join us from Level 3, we’ve made a press announcement of our new head of in the Enterprise Sales, Luca, who joined us from Level 3, it’s just an example of that that we have made public. So we see clearly other opportunities to continue to attract and Level 3 is a good comparable company to us, just significantly larger in scale at this stage, but absolutely from what we’re really seeing is the opportunity to attract some of the best talent people that reside at the top of the stack rankings of some of our traditional both incumbent as well as competitive competitors. So at your question about ramp, I certainly would like to get there faster, but I think linear is a good assumption of having that ramp go linearly from now through the end of the year to get into that 110 to 120 range, and we are very focused on reinvesting some of our savings into our EBITDA synergies, into a larger both direct quota bearing sales force as well as a client account management team. And then, I’ll answer the last question, now the cloud connectivity option, absolutely we see bid growth being tremendous, you have to be cautious just a little bit that, clearly we see revenue declines as well - as I’ve said publically more as well it has not been suspended, that we still see tremendous cost of benefit that we pass on this price, we’ve actually continued to be able to pass on last price savings than we see in cost reductions in our businesses, the scale of our network continues to grow. And so we feel comfortable in that 8% to 10% range, are we trying to grow faster than that? Absolutely. Do we see a potential to do that? Potentially. Are we saying publicly that we are going to grow faster than that at this stage? No. But we clearly would like to overachieve from the objective that we’ve said and continue to demonstrate to the market in terms of strong organic growth. We do believe, I 100% agree with you Michael that the secular trends are behind us that the need for more bandwidth is greater than ever for multinational clients across ECG [ph], just the public Internet alone drives tremendous bandwidth demand within any multinational not to speak of the massive growth in file size, most people think files, data files, the clients need to move across the organization will grow at 15 times over the next several years, and the movement of IT apps into the cloud is driving tremendous demand for higher bandwidth speed to every one of our clients. So yes, we agree with you on the concept, which is why we’re trying to hire sales-force as fast as we possibly can.

[Michael Sicoli:]

And then on…

[Michael Bowen:]

And, Rick, before Mike jumps in, real quick, on that point, are you seeing any visibility that you can help us with regard to potential regional strength in the future. And then also we’ve heard some other companies talking about being able to renegotiate contracts like Akamai is talking about with regard to transporting traffic overseas versus here in the U.S. and it cost more overseas than it does here in the U.S. therefore, they’re adjusting their contract. Are you able to do that as well, are you seeing any pricing strength in a particular markets or foresee that in a particular market?

[Richard Calder:]

Well, I mean, clearly the price for bandwidth in running a global backbone with access in delivering service to over 100 countries in the world. I mean, clearly the price of bandwidth varies dramatically from market-to-market. Given the development of underlying networks around the world, so clearly what we sell a 10-meg solution for here is very different from what we sell in Nigeria or South Africa or other less-developed parts of the world, so, yes, that is - and in many parts of Asia-Pac as well. So that is definitely true. To your point about verticals, one of the nice things that we see in our business, it is - as we sell a very horizontally attractive solution that applies to multinationals in many different industry segments, technology at Akamai, whether it is in the financial services, the professional services segment, the retail food service, oil and gas, we have a sort of tremendous opportunity to take share in many different vertical markets. I wouldn’t necessarily say that there - that one is better than another. I probably wouldn’t say that we see tremendous opportunity one versus another, but clearly opportunity in many different verticals and an opportunity to win wedges. We generally frequently will win our initial piece of business in an underserved market, because of the strength and global scale and reach of our network and our ability to take a piece of demand from someone in an area that a traditional incumbent doesn’t want to serve. And that frequently is in an area where we can provide, whether it is in Africa or Australia or Asia-Pac or South Asia, places where we can get to that many of our incumbents are less interested in. So that’s frequently where we do start and then we can grow our business over time.

[Michael Sicoli:]

And then on the OSN revenue, it did not decline sequentially. The growth rate declined a bit but the absolute revenue did not. And the only thing I can think of that you might be looking at is not netting the pro forma adjustments against the as-reported revenue to get the right starting point. So you got to add - in the tables you would need to add those two lines together to get the - what it looks like going forward.

[Michael Bowen:]

Understood. Okay. Thanks for the clarification.

[Operator:]

That’s all the time we have - or all the questions we have time for so I’d like to turn the conference back over to management for any final remarks.

[Richard Calder:]

Great. Excellent. I’d like to turn the call over to our Executive Chairman Brian Thompson for some concluding remarks.

[Brian Thompson:]

Thanks, Rick, and thank you all for joining the call. My remarks that most of the things I was going to say had been covered. But the one thing I wanted to start with is, this has been for the past six months or so, for all of you a difficult time for making investment decisions. And it was even more difficult for people who are out there doing trading. And the biggest problem, I guess, that you all have faced is that there are so many of the high-velocity trading or hedge fund liquidations or short rumor-mongering that has caused strange perturbations in the market. The reason I bring that up is that has - those have nothing to do with the underlying value of the companies that you are investing in. And therefore, I think what you’re seeing here is, as we said in our last call, we’re not in this for this month or next month, we’re not in it for the quarter. We have developed an engine here to provide real value on a long-term basis to our investors. We all around the table, we stay with something we could have done over the past six months to convince people that your investments were solid. I only have to point to the results of the regular activity of the company and our report today to show you that we consistently continually try to drive and bring value from the proposition that we put in place. And our proposition is pretty straightforward. We are an asset-light company, because we understand that as technologies change and as the market evolves our customers really want to get the benefit of what Rick was speaking to, which I call the glide path of costs and prices. And therefore, as long as we understand that and we do, and as long as we have a team of people that can really be intensive managers of our business, which is what we have, and with the breadth and the depth of our management as we’ve improved it over the past couple years with acquisitions, and with bringing people on, as Rick say, that now want to join, because this is an exciting place to be, we think the future is incredibly bright. It is not a quarter by quarter. It’s not a month by month. Our contracts are a minimum year and they go out to three years with our customers. We have a very steady performance when you take a look at the revenue stream. So I think it’s something I like to say and I’d like to make sure that you all understand that our key still is how are we satisfying our customer, how are we managing our affairs, how are we building the platform that will allow us to both grow organically and to integrate very important strategic type of mergers that will allow us to expand our coverage and add talent and add capabilities that we may not otherwise have. I’m quite comfortable with where we are right now and I think we continue to grow and develop, and a good example is in our behind the scenes programs we have created. As I’ve said before, a great platform for management, one that provides information throughout the company on a very transparent basis, our CMD. But on top of having that and on top of the way we’re doing it, we’re continuing to improve in the systems that we add to that and integrate with that to support these activities to ensure the kind of growth that we think we can perform here with your investments and with our company. So with that, I’m pretty proud of what this team has been able to do, what the team will continue to do, and with the opportunity that we have to attract even more - and real interested people in the excitement of being with a company that can do those things, at the same time as being one of the most efficient companies in our industry, generating around $900,000 per person which I would put up against virtually anybody. And the reason you can do that is because of the way we operate and the fundamental premise of our programs. So with I’m going to turn it back to Rick. And thank you very much for listening.

[Richard Calder:]

Great. Thank you very much, Brian. And thank you to everyone for listening to us. And we’re very excited about our performance last year and the team’s performance at GTT. And we very much look forward to sharing our results in 2016, which we expect to be a great year for GTT. So thank you very much.

[Operator:]

And thank you, sir. Today’s conference has now concluded. And we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.