GTT Communications, Inc.
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Good day, and welcome to the GTT’s Third Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chris McKee, General Counsel and Executive Vice President 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 Bauer, 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 the website address as I just mentioned. Today’s comments will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that involve the use of words such as anticipates, expects, intends, plans, believes, may, will and similar expressions are intended to identify forward-looking statements. Forward-looking statements include by way of example, revenue and margin expectations or projections and various references to trends in the industry and GTT’s business. Such statements reflect current views with respect to future events and are subject to risks, uncertainties and other factors, some beyond our control, which could cause the company’s actual results to differ materially from those anticipated in these forward-looking statements. There are many risks, uncertainties and other factors that can prevent the company from achieving its goals or cause the company’s actual results to differ materially from those expressed in or implied by the forward-looking statements contained in our comments. These factors and others are more fully discussed under the Risks Factors in GTT’s Form 10-K and Form 10-Q as filed with the SEC. Statements in this call should be evaluated in light of these important factors. Also the discussion this morning will refer to adjusted EBITDA and unlevered free cash flow, both of which are non-GAAP measures. The presentation of GAAP financial measures and a reconciliation of non-GAAP information to GAAP financial measures is included in the press release we issued this morning, which is available on the GTT’s website. I will now turn the call over to Rick Calder. Rick?

[Rick Calder:]

Thank you, Chris and good morning everyone. And thank you for joining us today. The third quarter results we reported today show continued, consistent execution of our growth strategy as follows

[Mike Bauer:]

Thanks, Rick. Let me start with the income statement. Third quarter revenue of $49.2 million grew 9% year-over-year, compared to $45.1 million in Q3 2013. Sequentially, revenue increased 2.3% compared to the second quarter of this year. Third quarter gross margin of 39.2% expanded 470 basis points from 34.5% in Q3 last year and grew 50 basis points sequentially. Over the past six quarters, we have seen a steady improvement in our margins driven by strong sales and installations, utilizing our global network at an average of over 60% gross margin. And even as we have seen a steady increase in traffic, we have been able to reduce the overall cost to run our network through cost savings initiatives and network efficiencies. Third quarter adjusted EBITDA of $8.9 million, increased 18.2% from last year’s $7.6 million. Sequentially, adjusted EBITDA grew 4.4%. Our adjusted EBITDA margin was 18.2% in the third quarter. We generated unlevered free cash flow of $8.5 million in Q3 and $22.9 million year-to-date. Capital expenditures in the quarter were only $413,000, less than 1% of revenue. Year-to-date CapEx was $3.1 million or 2.1% of revenue. Fourth quarter CapEx will be higher than Q3, but we expect to be under 3% for the full year. Last week, we filed an update on litigation that began back in June of 2012 that resulted in a judgment against us for $3.3 million. We had a petition for appeal pending that was only partially granted. We are currently evaluating our options to further contest the judgment. However, to be conservative, we have established an accrual for the full amount of the judgment which you can see in the statement of operations in the restructuring and other items line. As discussed in our last call, we completed a debt refinancing in August that replaced our previously outstanding debt comprised of $50.5 million in senior and $31 million in mezz. This refinancing resulted in a $3.1 million debt extinguishment loss related to the write-off previously deferred financing cost and original-issued discount related to the mezz. Our new facility accomplished a few key objectives. First, we simplified our capital structure. We eliminated all the $2.3 million outstanding mezzanine lender warrants which eliminated the mark-to-market other expense item that we have been reporting over the past several quarters. Secondly, we significantly reduced the overall cost of debt. Our weighted average cost of debt was approximately 8% under our prior debt facilities. We are now paying approximately 4.5%, a reduction of 350 basis points. Interest expense in the third quarter of $1.8 million dropped dramatically from the $2.6 million in Q2. We expect our interest expense in Q4 to be $1.7 million to $1.8 million. Lastly, we increased our financial flexibility. We utilized the $15 million Delayed Draw Term Loan to help fund the UNSi acquisition on October 1st. The purchase price of $40 million included 232,000 shares or approximately $2.9 million in GTT stock and a $4 million one-year holdback for undisclosed liabilities. In Q4, we will record a one-time restructuring charge for the acquisition. Turning to the balance sheet. Our outstanding debt at quarter end and as of today is $125 million. Our $15 million revolving line of credit was undrawn as was our $30 million accordion. On a pro forma basis, our leverage is right around three times debt to adjusted EBITDA, well below our current covenant level of four times. Our cash balance today is approximately $10 million. Currently we have 29.1 million shares outstanding and 1.4 million employee stock options outstanding at an average stock price of just over $5. As we look ahead, we are very focused on integrating UNSi, realizing the synergies Rick discussed earlier and executing our growth strategy toward our next financial objective of $400 million in revenue and $100 million in adjusted EBITDA. With that, I’ll turn the call back to the operator who’ll open up the call to your questions. Operator?

[Operator:]

Thank you. (Operator Instructions). And we’ll take our first from James Breen with William Blair.

[James Breen:]

Thanks. Just a couple questions. One with respect UNSi, could you talk about some of the products that you think you build now sell to your existing customer base. Is there a potential that we see sort of revenue per customer client as you add some of those new products. And then secondly Rick, just wondering lot of the papers saying about net neutrality and the shift toward type 2 for some of your information services. Could you just talk about any potential impact that would have on your business positive or negative? Thanks.

[Rick Calder:]

Okay. Thank you very much, Jim. In terms of the products, as I mentioned, we see the acquisition has been highly complementary, 90% of their existing revenue was in the EtherCloud transport services and internet services area. The two areas that I would focus on; one is they had a deeper portfolio of managed router services and managed security services and we can adopt and as you know continue to expand the managed service and managed CTE portfolio of services that our clients are demanding. And as importantly, they are one of the largest providers of broadband services in North America, low capacity options and we believe that has a tremendous opportunity for us to serve the small office, retail office, branch office, home office environment for many of our large multisite and multinational clients, so we see that as highly synergistic to and very complementary to as part of our EtherCloud portfolio services. So, we’re very excited about the addition. We think that the integration can be as we have done in the past integrated very rapidly within two quarters and that we can realize the synergy both from a revenue growth perspective in the existing legacy accounts that come to us, as well as in our own base of accounts. So, we’re very bullish on our ability to take advantage of the expanded strength of our EtherCloud and Global Cloud networking product portfolio. On the -- yes, it’s clearly lots of news yesterday with the President weighing in on the net neutrality. We have not taken into a public position and have not laid in we know with public commentary, we believe we’re -- we believe our position is very strong in the industry regardless of which way the network neutrality debate continues to play down. We are one of the top five internet backbones in the world. And as a function of that, we believe that our position will be pretty strong no matter which way the regulation does come out. We do believe probably as I think it was mentioned in some of the papers today, it might delay the process a little bit and potentially move into another round of commentary, but we believe that no matter which way the ultimate rules come that we will be well positioned competitively in the industry.

[James Breen:]

Great, thank you.

[Rick Calder:]

Thank you, Jim.

[Operator:]

We’ll go next to George Sutton with Craig-Hallum.

[George Sutton:]

Thank you. Rick, you’ve consistently said you would increase sales headcount as wanted by success and I think pipeline. I was very encouraged to see the number up to 70. Could you give us a sense of how much was that accelerated by the acquisition versus traditional organic hiring? And am I thinking that to mean or I should think it to mean, which is higher sales equates to bigger opportunities that you’re seeing?

[Rick Calder:]

Yes. So, just -- and George thank you for the question, to answer the specific numeric question we reported on the last earnings call that we were at 54 and we said today we’re at about 65%. And that’s a combination of both the incremental headcount we’re bringing on from the UNSi and organic adds. We had planned to finish the year at 60%, obviously with the large organization and the ability to add a nicely performing sales organization from the acquisition. We have up our target for the year-end to 70%. And I think as we’ve mentioned before that that is not an in state that is simply where we expect to finish the year. With a tremendous opportunity to sell to large multi-site, multinational booked enterprising care clients worldwide. We see tremendous opportunity to continue to grow the scope and scale of our sales force; we’re seeing productivity at higher ranges from numbers of our sales force, which is why we’re growing in. We continue to see opportunities to grow the business, the metric in our business is relatively straight forward, we’d look at net installs the difference between gross installs that come in churn and we see our churn rates as we noted in the prepared remarks, maintaining a nice range of the mid to high 1% range. We clearly have us at a large base at this stage adding the $55 million of revenue from the acquisitions. So, we continue to see an important part of our organic plan is to grow the scope and scale of our sales force.

[George Sutton:]

Great. Thank you. Relative to the MASS Com deal, can you just give us a sense is that a historical relationship for you is that a new relationship the customer that you will be serving or are there other opportunities in that portfolio that you plan to be talking to?

[Rick Calder:]

Certainly, as I say new relationship it comes to us from the acquisition. And it’s an opportunity to take the relationship that existed and expand it significantly given the much broader depths of our EtherCloud and Internet Service portfolio. So, there is really an opportunity with many of the large attractive logos that come to us from the acquisition to expand upon the attractive base they have and continue to grow the revenue stream with these large accounts. And as I have mentioned to many investors, both in public presentations and in non-deal road shows, investor one-on-ones et cetera is that our goals are to take 100 to 200 accounts and grow them by $100,000. And we see tremendous opportunity to do that with the types of clients we’re winning. It’s rare; we did win, as we noted in the prepared remarks, one we took from 0 to 100 rightaway. That’s a little more rare. Our bigger opportunity is to take ones where we have a deeper, we have an initial position in and grow accounts from 50 to 150 or from 200 to 300 et cetera. And we clearly see that with our expanded EtherCloud and cloud networking portfolio and the ability to sell into a broader portfolio of clients.

[George Sutton:]

Okay, great. And one other thing; I assume Chris is still focused on looking at the next great M&A opportunity. Can you just give us a sense of the timeline? Would you be ready to do something say in the next 6 months, 12 months, just curious what your thought process is there.

[Rick Calder:]

Chris is on the call. So, I’ll ask him to respond to that question, George.

[Chris McKee:]

Yes, sure. I mean I think we continue to maintain a very robust M&A funnel; I think there is a number of great opportunities. And to your question about timing, since we focus on completing all of the synergy, the synergy from a particular strategic acquisition we bring in within two quarters, I think by extension, we like to have ourselves in position to be able to do next one within that same timeframe as well. So it’s sort of to your question of would we be ready to do another large acquisition within the next six months, I think the answer is yes. And we’re continuing to look very hard at as well as opportunities in the funnel. And again, the financing flexibility that Mike talked about with the balance sheet initiatives also makes that possible. That’s no longer a limiting factor as it was maybe two years ago.

[George Sutton:]

Great, okay. Perfect. Thank you, guys.

[Chris McKee:]

Thanks George.

[Operator:]

We’ll go next to Michael Bowen with Pacific Crest.

[Michael Bowen:]

Hey guys. Good morning, how are you?

[Rick Calder:]

Good.

[Chris McKee:]

Hi Michael.

[Michael Bowen:]

Couple of questions. So with regard to how much or how much you can give out on this. But I am curious, so five to six times EBITDA, synergy multiple on the UNSi transaction. Could you give us any indication with regard to that business as far as what the acquisition was on a pre-synergy basis? And then secondly, related to that, you mentioned you’re going to reduce 74 people. Could you give us an idea as to the majority of where some of those folks will be coming out? And I guess related to that as well, how many of the UNSi sales folks will you be retaining and if you’ve decided that yet? And then just lastly with regard to future M&A opportunities, can you share with us your thoughts on debt equity and cash, particularly given what your stock price is, do you view the stock price as a good tool for that or basically there is much more upside and you’d rather use debt in cash? Thanks.

[Rick Calder:]

Okay. I can get those all; probably try to do the first three Michael. One, synergy, I think as we talked about in our prepared remarks, it was basically pre-synergy roughly breakeven. I mean that’s slightly positive; we did as we’ve always done for our lenders, the detailed [quarterly] earnings analysis on the company to confirm their pre-synergy numbers. But we believe that we can make this, as we noted a five to six times post-synergy deal or better within the first two full quarters, post integration, which we fully reflected in the second quarter of 2014, mainly because we move very rapidly, as we have done in the past. To your question about the organizational integration, we actually within the first four weeks made the consolidated organizational decisions of what is the go forward organization as I noted we had which you’ll see in our 215 full time equivalents and they have added 144. And so we removed and made a go forward decision on 285 which was a reduction of 74. And I’ll tell you that became very equally across both legacy organizations; it came equally across all departments, it came equally across all office locations. So, we very much take a best of approach and we feel that it provides a tremendous, as we call a DNA infusion into the organization; it’s a real and it is always difficult to make those types of decisions but we do it better rapidly. And we announced on October 31st our go forward organization. So, we are operating now as one integrated organization moving forward and that is true for your third question about sales. So that we made decisions on the sales reps that we keep. I think as I answered the question to George, we did book -- with addition from 54 to 65 including some sales reps from the acquisition and some incrementally, we were added organically and we expect to continue to grow the combined organization and would have a new target over the next six to seven weeks to end the year at about 70 and that’s what we expect. And we continue, we believe that it’s just one mark as we continue to grow the scope and scale of the sales organization, given strong continued performance by the reps we have on hand and continued performance moving forward and the opportunity before us to sell to large multisite, multinational locations is limited by the scope and scale of our sales force. And so we are continuing to look to add outstanding talent in that organization. I’m going to let, as Chris mentioned, we are absolutely continuing to look at selective strategic acquisitions, we believe we’d be in a position after the integration of this one to days that we consummate and other selective strategic acquisition. Again making sure that strategic spending or worldwide geographic reach expanding our portfolio of cloud networking services focused on large multi-site, multinational clients. We do believe we have a lot more flexibility in our balance sheet as we’ve done a lot of work on that over the past 12 months to 18 months. And maybe I’ll turn it to Mike to talk a little bit about some of the options that we would have for financing future M&A.

[Mike Bauer:]

Thanks Rick. And Michael, I mean to grow over next years to our growth target of $400 million of revenue and $100 million of EBITDA, we will be doing acquisitions and we will continue to look to found those through a mix of debt and equity as we’ve done over the past few deals. It has been significantly more heavy on the debt side than equity side. But we will take a measured approach as we move forward using both available options. On the debt side, we’ve been very comfortable leveraging up to 4 times and I believe we’d be very comparable doing that going forward. We’ve got a very supportive lending syndicate right now and we believe we have very attractive options moving forward as we continue to gain scale.

[Michael Bowen:]

Okay. Thanks a lot guys.

[Rick Calder:]

Hey, thank you Michael.

[Operator:]

We’ll go next to Barry Sine with Drexel Hamilton.

[Barry Sine:]

Good morning, gentlemen. First question is on sales, I wanted to [drill down] and get whatever additional information I can. What is the -- as you add sales people, what is the ramp time to get a new sales person up to full productivity. What kind of a churn rate are you seeing and what kind of productivity changes are you seeing with your seasoned sales people?

[Rick Calder:]

Great questions. Thanks Barry. On the ramp I think as we’ve sort of said in the past, it depends that we’d generally hire into a number of different type of job titles. We have folks at our entry level that come in that take care of our lower-end base and they can generally ramp to their [quotas], which are lower in a three to six month timeframe. We have a group of folks that focus on some of the larger carrier accounts and they ramp a little bit quicker somewhere in the six to nine month range. And then are highly enterprise focused reps can take a longest nine months to a year to ramp to full quota. And so, we see a variation on the ramp of our reps. The reason that we are continuing to hire aggressively is we’re seeing some of the best quota performance that we have seen in the 7.5 years that I have been here. So, we continue to increase the scope and scale of the sales force as we’ve seen folks continuing to improve on performance to quota, as measured in monthly recurring revenue that they sell and the revenue growth of the base that they’re responsible for. On the issue of churn, we’re seeing some lower churn rates. I mean we have had higher churn rates in the past, but we don’t really have -- because we’ve talked about before, we’ve seen annualized churn rates now probably under 40% of our overall sales force, which quickly on a monthly basis probably under 3% or so. And so, we’re actually pretty comfortable with that. And generally most of that comes from the newer hires as they’re in the initial ramp at three, six or nine ramp most of that occurs in that. And we’ve seen the best performance from our 10 year reps. And so, that [bundles] us in the ability to continue to bring on reps that can get to full 10 year.

[Barry Sine:]

Okay. That’s all very helpful, thank you. I want to ask a question also if I may on M&A, a little bit different than the prior question. Your last acquisition, you disclosed you entered some new product areas and kind of expanded the breadth of the product line there offering whereas prior acquisitions were just more about I guess adding more customers. What’s on your shopping list now, do you still see new product or services that you want to add to the portfolio, would they be more or like some of the older acquisitions, what are you looking at acquiring as you go shopping again?

[Rick Calder:]

Yes. I mean I think probably the best way to answer that, Barry, is things that absolutely are strategic. So, we think we have been very adept at making sure that the acquisitions we do are strategic and complement to our strategy. So, I’ll answer it in the framework of that. So, in the three elements of our strategy; so the first one is, extending ubiquitous network connectivity worldwide. So that is really key to us and that this particular acquisition, if you think about the last acquisition we did in April of 2013, it expanded our network reach deeper in EMEA and in APAC. And so that helped the extension we had network presence in those not as deeply and that expanded here. This acquisition, the most recent one, the UNSi did not expand any of our international network reach or global network reach. But it did do an important thing for us an extended ubiquity within the North American markets of allowing us to provide broadband services effectively to any building, any location in North America. And so that is a particularly important thing for us as many of our large multi-site multinational clients had smaller branch office locations which are perfect complements for a broadband EtherCloud solution. And so we think that was a very nice addition for us. So, we continue to look. So if I think about the shopping list, we continue to look for potentially areas of the world. We mentioned on previous calls that we have no direct points of presence in Latin America. That continues to be an area we look at and some of the other areas in the Southern Hemisphere, whether it’d be in Australasia or in Africa, some areas that we would think about either organically or through acquisitions. Second area is product portfolio. We feel very comfortable with the two major pillars of our business which are really in the EtherCloud managed transport area and the internet services area; and then if I think about a third is managed services being able to provide managed CPE, managed securities solutions, managed router services et cetera. And so we’re looking for things that are complementary. We have not historically looked at being aggressive about expanding beyond that. We see tremendous worldwide demand for those offerings. And the last two acquisitions, both [TINA] and UNSi fit very squarely 90%, 95% with [TINA] probably 100% squarely in our existing product portfolio. So we’re looking for areas that expand it but are very focused again on serving multinational clients which is really the third part of our strategy, very large multinational multi-site. We like to see acquisitions where 80% to 90% of the revenue is in clients that have addressable opportunity of $50,000 to $500,000 in monthly referring spend. And we’ve seen that very much in the last three or four acquisitions that we’ve done. And that’s really the focus for us is bringing on businesses where we can take a foothold and continue to expand with the deeper product portfolio we have.

[Barry Sine:]

Okay. That’s great. Thank you very much Rick.

[Rick Calder:]

Thank you Barry.

[Operator:]

We’ll go next to Keith LaRose with Bradley, Foster & Sargent, Inc.

[Keith LaRose:]

Hi, good morning. Can you describe for me, how your acquisitions expand the leverage of your sales force from a go-to-market perspective, over time? Can you provide me with some color on that?

[Rick Calder:]

Sure. I think one of the -- if I think about -- and I’ll use the last acquisition and I’ll just probably reiterate the point about broadband. And that we historically have not been an adapt provider of the broadband services, traditionally thought it as either cable modem or DSL services. So this latest acquisition brings us relationships with over 1,000 broadband providers in the United States and North America. And so historically, as our clients and we have extreme culture of retaining sure, we can get anywhere that you want us to get to and you ask. Providing high capacity, high end Ethernet or Ether-Cloud solutions to select locations can be quite expensive where a braodband service actually fits to build the best so to speak for a multi-site client that has significant number of large branch in headquarter locations, but has a small -- a larger number of smaller branch locations. So, what we have seen and what we’re in the process of doing right now is adding broadband into our EtherCloud product portfolio and making a seamless part of a multi-site, multinational clients, enterprise wide area network. And so, we see tremendous leverage opportunities in being able to expand share of wallet with clients; continue to provide them a seamless EtherCloud solution with a deeper product portfolio. And for many of these locations, having a managed router service on the end is critical at some point; it’s wanted and managed it themselves and some clients want us as the cloud network provider to do it for them directly. So we see that it’s adding tremendous leverage to what historically have done with our accounts and being able to provide ubiquitous connectivity for clients from any location to any cloud service in the world.

[Keith LaRose:]

And can you provide if possible, what does this mean through the eyes of your sales people, your top sales people deals like this from the standpoint of compensation? How excited do they get about these deals that you’re doing?

[Rick Calder:]

I mean it’s clearly more -- I mean our high end sales representatives are responsible and own the revenue for a series of accounts anywhere as small as 5 to as big as maybe 20 or so. And clearly, having more opportunity to walk into an account to solve their need provide EtherCloud and connectivity solutions around the world is a great move. It’s an opportunity to cement the relationship; the clear sign of loyalty to any client who is buying a service from you. So having a deeper portfolio of services that are consistent with our existing EtherCloud portfolio allow us to reach deeper into an account is clearly something that brings the smile to people’s faces and allows us to solve the problems with the simplicity, speed and agility. So we think it’s very consistent; it’s one of the reasons we continue to look to expand the scope in the sales force because at our highest and most tenured end, we’re doing the best we’ve done. So we clearly think there is an opportunity to hire more and bring our services to more accounts in the world.

[Keith LaRose:]

Thank you. On UNSi, can you give a just very brief color on its operating history of relative to kind of its historic growth rate? And then also, pre-synergies, were they cash flow positive, I didn’t catch, if they were breakeven on a cash flow basis or on a bottom-line basis?

[Rick Calder:]

Right. We’ll report an 8-K filing within 75 days, which will provide some of that color. So, that’s due by rule to the SEC and we’ll publish it, expect to be the middle of December or if not before. And so that will provide some of the color. The business has been in business since 2002 I believe it was founded. And started growing from that point and we’ll provide sort of the require disclosure on the business in the 8-K filling, which we’re actually producing right now.

[Keith LaRose:]

And last question, how many -- what’s the opportunity set in the marketplace relative to companies like UNSi. How big is the opportunity set in the market from your view?

[Rick Calder:]

Sure. I’ll let Chris in terms of M&A opportunities; I’ll let Chris talk about sort of the depth and nature of our funnel.

[Chris McKee:]

Yes. I think I mean the M&A funnel is still pretty huge and while it may not be measured in hundreds of companies, it’s certainly in the dozens. So I mean there is a lot of companies that are in a similar revenue size and a similar product portfolio mix that are excellent targets for us. And it’s, I think we’re still at a point in the industry where a lot of these companies and consolidation continues and it’s still early innings of that. So, I think we see a pretty I would say the M&A funnel is as large as it has ever been and we’ve been in the practice of doing M&A deals now for several years. But it’s fairly large right now.

[Rick Calder:]

And that’s why we’re very -- we believe this is a great next step as we’ve completed one selective strategic acquisition a year. As we look to build our business to our next financial objective of $400 million revenue or $100 million EBITDA, we think these selective strategic acquisitions clearly accelerate our gross strategy and make the business significantly stronger moving forward.

[Keith LaRose:]

Thank you, gentlemen. Congratulations on the quarter.

[Rick Calder:]

Thank you, Keith.

[Operator:]

(Operator Instructions). And we’ll take our next from Jay Lee with [Trafalgar Broker].

[Unidentified Analyst:]

Good morning. You’ve shown excellent gross margin expansion over the last couple of years in the business, I just want to understand for modeling perspective, how do you expect the [UNSi] acquisition to affect gross margin as you’re working through the cost saving process?

[Rick Calder:]

Okay. I would say at the outset the business is consistent with our margins, the recent acquisition maybe slightly less. We clearly believe though that overtime as we continue to achieve cost of revenue synergies and SG&A synergies moving forward, it will move us very nicely along the path that we’re on. If we think about our target model as we reach our next financial objective is to grow to a business to 25% EBITDA margins that I think we have told people would be in the range of 45% gross margins or maybe slightly below that as we maintain 20%, 21% SG&A margin. So, we believe that is very consistent with that. And as we fully integrate the business within the first two quarters and then beyond, because we usually see incremental cost of revenue synergies that we see beyond the first two quarters, we simply don’t model them. That is very consistent with our business and our value proposition of growing our business to a 25% EBITDA margin business and roughly 45% gross margins.

[Unidentified Analyst:]

Okay. So, as you still expect to see continued gross margin expansion sort of consistently as you’re seeing it in the fourth quarter as well?

[Rick Calder:]

We don’t make any predictions on the next quarter. We clearly believe this will be consistent as we continue to move forward. So, but we believe that it will continue to help us march towards our path of $400 million and $100 million, yes.

[Unidentified Analyst:]

Okay. Thank you.

[Rick Calder:]

Thanks Jay.

[Operator:]

There are no further questions at this time. I’d like to turn it back to our speakers for any additional or closing remarks.

[Rick Calder:]

Great, thank you very much, operator. I’d like to turn the call now over to our Chairman Brian Thompson for some concluding remarks.

[Brian Thompson:]

Thanks Rick. I just wanted to touch along, I know we as the team has done what we’ve always said we were going to do, but there is a very interesting thing that I have found in the last weeks attending Directors in round tables where it rang some bells about what we’re doing and seems to be very misunderstood. And that’s probably one of the three to four major issues to Directors now in virtually every company in this country is the issue of cyber security. And what happens when you get into the details of the discussion with the experts, it’s all around the use of the internet and how we can have secure access to the cloud network. And I just stated, it rings true to me, because that’s the position that Rick has put our company in right now is to provide a worldwide, the ability for large corporations to have access to all of their points, but to do it in a very secure way, so the EtherCloud and Virtual Private Networking that we can bring to the client are pretty heavy concern for cyber security and one that we have a solution to which makes it even more attractive as we go forward especially with our redundancy in the network. And to me that’s next quarter’s and the following quarter’s issues that people are going to ring at the Board level and they are going to start to look to who can provide that and I think GTT is probably in one of the best positions worldwide to do it. So, I wanted to comment on that. The other comment I wanted to make is that once again the team has shown how a single company with a single objective with a whole -- of new and capable sales people, as well as operations people can create a real dynamo, a machine that can add very selectively, but very importantly new customers, new opportunities for the people that we’ve got and grow the company for all of its shareholders and its interested parties, both its employees and the share base. So, I’m really pleased about the quarter. I’m excited about what the next quarter will look like and the following quarter. But I think we’ve got a team that can deliver. Thank you.

[Rick Calder:]

Great. Thank you very much Brian and thank you to everyone for your participation on the call. We’re very excited about the finish of 2014, as I mentioned at the beginning and very excited about where we’re going in 2015. So, we look forward to reporting our results on the next quarter. Thank you again for attending. Good bye.

[Operator:]

This concludes today’s conference. Thank you for your participation.