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Edited Transcript of GTT earnings conference call or presentation 12-Nov-19 1:30pm GMT

Q3 2019 GTT Communications Inc Earnings Call

MCLEAN Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of GTT Communications Inc earnings conference call or presentation Tuesday, November 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. McKee

GTT Communications, Inc. - Executive VP of Corporate Development, General Counsel & Company Secretary

* Daniel M. Fraser

GTT Communications, Inc. - Interim CFO, Senior VP, Principal Accounting Officer & Global Corporate Controller

* H. Brian Thompson

GTT Communications, Inc. - Founder & Executive Chairman

* Richard D. Calder

GTT Communications, Inc. - President, CEO & Director

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Conference Call Participants

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* Brandon Lee Nispel

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* James Dennis Breen

William Blair & Company L.L.C., Research Division - Communication Services Analyst

* Jonathan David Charbonneau

Cowen and Company, LLC, Research Division - VP

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Presentation

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Operator [1]

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Good morning and welcome to the GTT Communications Third Quarter 2019 Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Chris McKee, General Counsel and Executive Vice President of Corporate Development. Please go ahead.

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Christopher T. McKee, GTT Communications, Inc. - Executive VP of Corporate Development, General Counsel & Company Secretary [2]

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Thank you, and good morning. I'm joined today by Rick Calder, GTT's President and CEO; Dan Fraser, GTT's Principal Accounting Officer and Interim Chief Financial Officer; and Brian Thompson, GTT's Executive Chairman of the Board.

Today's discussion is being made available via webcast through the company's website, www.gtt.net. A telephonic replay of this call will be available for 1 week. Dial-in information for the replay as well as access to a replay of the webcast is available on our website.

Before we begin, I want to remind you that during today's call, we'll be making forward-looking statements regarding future events and financial performance made under the safe harbor provision of the U.S. securities laws, including revenue and margin expectations, projections and references to trends in the industry and GTT's business. We caution you that such statements reflect our best judgment as of today, November 12, based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our SEC filings. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances.

During the call, we'll also discuss non-GAAP financial measures, including certain pro forma information, which were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today's press release and is posted in the Investor Relations section of our website. I will now turn the call over to Rick Calder. Rick?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [3]

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Thank you, Chris, and good morning, everyone. The third quarter remained challenging for us as we did not yet return to organic rep-driven growth. While we are disappointed in the sequential and year-over-year declines in revenue and EBITDA, we see promising trends underneath the headline numbers. As Dan will discuss in more detail, a much smaller portion of the declines came from negative net installs, with the majority of the declines from a decrease in noncash deferred revenue, nonrecurring revenue and continued currency headwinds. Our billing credits also remain elevated in 3Q, though we expect them to decline in 4Q '19 and return to normal levels in first quarter '20. We have made good progress in resolving and reducing our outstanding bill disputes, which led to a significant increase in collections and reduction in our accounts receivable balances.

Overall, we generated free cash flow of $20 million in third quarter, up from negative $16 million in first quarter and negative $4 million in second quarter. Note that due to calendar effects, third quarter '19 includes a semiannual bond coupon payment that was not present in the first half of 2019. Accordingly, the improvements in underlying cash flow generation we showed this quarter, is better conveyed by our non-GAAP metric of adjusted unlevered free cash flow, which was $83 million in 3Q '19, up from $34 million in 1Q and $43 million in 2Q. We remain focused on returning to and then accelerating organic rep-driven growth. As I noted, a smaller portion of our declines came from negative net installs as we have seen improving trends in net installs through the months of third quarter '19 and into October, where we had positive net installs in both Americas Division and Europe division for the first time this year. We have increased the size of our sales force with 382 reps at the end of 3Q '19, up from 320 at the end of 2Q. We expect to finish 2019 with over 400 reps on the way to 500 or more reps by the end of 2020. We have increased the number of full-time recruiters in the Americas and Europe to support these goals. With a significant increase in new reps, we saw the decrease in productivity per rep that we had forecasted last quarter as we increase the scope and scale of our sales force to cover our existing client base and drive new client acquisition.

We are investing in sales enablement, training, churn analytics and ongoing rep education to ensure newly hired reps achieve targeted levels of productivity within their first 6 to 12 months on the job. In particular, on rep productivity, we are seeing great traction and performance with our software-defined wide-area networking, or SD-WAN, product as our industry moves through the early growth phase of a generational shift from legacy wide-area networking technologies to next-generation SD-WAN services.

GTT is uniquely positioned to benefit and win from this shift to Internet-based SD-WAN services in the following ways. First, with our top-ranked Tier 1 global Internet network, we provide superior performance and throughput for client traffic between client locations to any public Internet site and to any private cloud service provider. Second, we provide multilevel security and threat management services with SD-WAN, either premise based, network based or both to secure all client traffic.

Third, we provide the deepest selection of redundant last-mile access options, using all available technologies, including copper, coaxial cable, fiber and wireless for a unique, fit-for-purpose and cost-effective SD-WAN option for each client location.

Fourth, we have decades of experience in the life cycle of managed services with hundreds of thousands of actively managed services delivered to any location in the world. We are particularly excited about the productivity improvement potential from this growing shift to SD-WAN, as even today, almost 40% of our total new sales backlog comes from SD-WAN and related Internet services supporting SD-WAN deployments. We expect this percentage to increase and drive rep productivity improvements over time. Moreover, we have made good progress on our pace of installation, which has supported our improving net install trend over the past 3 months. We are continuing to refine our install processes to make them more efficient and effective for our clients. As SD-WAN is a newer service offering for clients, we have seen delays in deployment of our early SD-WAN wins. We have made significant progress in simplifying the initial design and employment approach for new SD-WAN sales to speed initial site installation for clients. Post installation, we provide clients through our EtherVision portal the ability to view their network performance at an application-by-application level and the agility to change their SD-WAN application routing preferences, and the security policies, both for the overall network and any specific client site. As our SD-WAN and related Internet sales continue to grow, we expect to see increases in sales productivity and continued increases in our pace of installations.

I would like to take this opportunity to provide some additional detail to help understand the underlying trends we are seeing in the business, which make us optimistic that we're closer today than at any point in the past 6 quarters to realizing sustained rep-driven growth. Much of the decline in recurring cash revenues seen in third quarter was attributable to discrete churn events, including from service losses that were noticed last year that were finally completed at the same time in early 3Q '19. Our churn rate year-to-date is approximately 1.6%, though we increased to 1.8% overall in 3Q '19 with these churn events.

Through September and October, our churn rate has normalized back to approximately 1.5%, and more importantly, our remaining churn backlog is at the lowest level all year. The disappointing churn performance in 3Q, drove our negative net installs in total in 3Q '19, though the positive momentum we saw in August and September has continued through to October when we achieved our first net install positive month in both Americas division and Europe division for the first time this year. While one month is not indicative of a trend, we are also very encouraged by the many operational improvements and leadership hires that Ernie Ortega has made since joining GTT in June as Division President, Americas. Ernie joined GTT with a tremendous track record of success serving in similar roles at XO, Cogent and Colt. We are already seeing tangible improvements in the underlying metrics for the Americas division. Ernie, together with Jesper Aagaard, our Division President, Europe, have assembled the talent and resources to return GTT to organic growth and then accelerate our growth as we continue to expand our sales force.

Strategically, we are focused on delivering on our purpose of helping large and multinational clients connect their people everywhere in the world and to any application in the cloud. We are focused on a set of products and managed services that are in demand by these clients, leading with SD-WAN and including Internet, Ethernet transport and IP voice, particularly SIP Trunking. All these services are delivered over our top-ranked Tier 1 global Internet network.

On our last earnings call, we announced that we engaged an adviser to explore divesting nonstrategic and noncore assets that we have acquired over the past several years. Subsequently, we received significant inbound expressions of interest with respect to our network infrastructure assets, including our highly differentiated terrestrial Pan-European fiber assets, subsea transatlantic fiber and data centers, which we acquired as part of the Interoute and Hibernia acquisitions.

We have amassed some of the broadest and most unique infrastructure assets in the industry. We are evaluating a divestiture of these non-strategic infrastructure assets, and we believe a potential sale will allow us to dramatically deleverage GTT's balance sheet and reduce GTT's capital expenditures as a percent of revenue from 5% to 6% to approximately 3%, which is consistent with our historic CapEx-light business model.

Moreover, divesting these nonstrategic assets in no way alters the execution of what has always been our core strategy of providing cloud networking services to large and multinational clients and extending secure network connectivity to any location in the world and to every application in the cloud. We would retain our global operating platform and Tier 1 global Internet network to drive significant future organic growth combined with tuck-in acquisitions within our stated long-term leverage parameters. While we cannot offer more specifics at this time on the progress of these initiatives, we are working aggressively on this effort. As noted on our last call, we expect to close the KPN International acquisition by year-end, and we have completed almost all of our preclose integration planning. With respect to our search for a permanent Chief Financial Officer, we have retained Russell Reynolds, a leading national executive recruiting firm. Dan Fraser has served ably as GTT's Principal Accounting Officer and Controller for the past 5.5 years and currently serves as our Interim CFO.

Now we'll return the call over to Dan to review the financials in more detail. Dan?

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Daniel M. Fraser, GTT Communications, Inc. - Interim CFO, Senior VP, Principal Accounting Officer & Global Corporate Controller [4]

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Thank you, Rick, and good morning, everyone. Third quarter revenue decreased 6% year-over-year and decreased 3% sequentially to $420 million. Exchange rates had a negative impact on our reported results as approximately 50% of our revenues denominated in non-U. S. dollar currencies. In constant currency, revenue decreased 4% year-over-year and 2% sequentially. There is no pro forma comparison this quarter as both year-over-year and sequential comparisons fully include all acquisitions. The year-over-year revenue decline was driven by several factors including currency, which represented over $40 million of annualized revenue reduction compared to last year, the increase in revenue credits issued or accrued for, which represents approximately $37 million of annualized revenue compared to last year, negative net installs, which represents approximately $32 million of annualized revenue reduction compared to last year, approximately $4 million of annualized revenue reduction from the run-off of noncash deferred revenue and approximately $5 million of annualized revenue reduction from nonrecurring and other revenue.

The sequential revenue decline was driven by several factors, including a $4 million reduction from currency headwinds, a $4 million reduction in nonrecurring revenue, a $3 million reduction in the run-off of noncash deferred revenue and the remaining $3 million from negative net installs. The $3 million decline in revenue attributable to negative net installs compares to $4 million in 2Q '19.

The decline of noncash deferred revenue has been significant over the past 12 months. We expect this decline to be much more gradual over the next several years. The deferred revenue footnote in our Form 10-Q provides the outlook of this component of revenue. In addition, billing credits remained elevated in 3Q '19 at similar levels to 2Q '19, and these effectively flow through to EBITDA at 100% margin. We have now resolved the majority of disputed amounts, which include missed disconnects, double billing or integration import errors and expect to start to return to a more normal level of billing credits in 4Q '19, with further improvements through 1Q '20. Over the course of 3Q, we reduced the number of outstanding billing disputes by 47%. And we have invested to drive this outcome by adding 40 dedicated FTEs to our billings and collections teams. Third quarter adjusted EBITDA decreased 6% year-over-year and decreased 9% sequentially to $102 million. In constant currency, adjusted EBITDA decreased 3% year-over-year and 8% sequentially. Excluding the impact of the runoff in noncash deferred revenue, the adjusted EBITDA decline would have been 6% sequentially.

Again, there is no pro forma comparison this quarter as both year-over-year and sequential comparisons fully include all acquisitions. Adjusted EBITDA margin of 24.4% increased 20 basis points year-over-year and decreased by 140 basis points sequentially as declines in cost of revenue and SG&A did not keep pace with the declines in revenue. Part of this reflects the investments we are making to drive organic growth in future periods.

In 4Q and beyond, we also expect to see margins benefit from a reduction in revenue credits and the realization of cost savings actions taken over the course of the third quarter. Based on measures already taken, we expect to see approximately $5 million of annualized other SG&A savings to show up in 4Q. We may choose to invest some of these cost efficiencies back into the business to fund the hiring of additional sales reps or other rep-driven-growth-related initiatives.

During the quarter, we incurred $2 million of transaction and integration expenses, which are included in our reported SG&A but excluded from our adjusted EBITDA. These are related to our preclose work on KPN acquisition and small amounts related to our previous acquisitions.

We also incurred $2 million of severance, restructuring and other exit costs, primarily related to the divisional alignment completed in the third quarter to move from 4 divisions to 2 divisions. From a cash standpoint, we paid out approximately $8 million of combined exit and integration costs in the quarter, down from approximately $14 million last quarter.

At quarter end, we had approximately $16 million in cash remaining to be paid out related to previously expensed exit costs, almost all of which will be paid through the end of 2020, and we expect future exit and integration-related expenses to be minimal. Third quarter net loss was $26 million compared to a net loss of $23 million last year and a net loss of $33 million last quarter. The net losses in each period were driven mainly by nonrecurring costs, including exit and integration costs. Third quarter capital expenditures were $26 million or 6.2% of revenue compared to $29 million last year and $19 million last quarter. The third quarter rate was slightly higher than the previous quarter due to the timing of cash payments. Year-to-date, our CapEx is 5.9% of revenue, and we expect our CapEx to be between 5% and 6% of revenue, driven mainly by success-based investments. Third quarter ending cash balance was $40 million, up from $34 million last quarter. And net cash provided by operating activities was $46 million, up from $15 million last quarter. Free cash flow, which is defined as net cash provided by operating activities less CapEx, was a source of cash of $20 million in the third quarter, compared to a use of cash of $4 million last quarter.

During the quarter, we made organizational changes to address our accounts receivable and made considerable progress in making collections and reducing our accounts receivable balances in Europe. During the 3 months ended September 30, we collected over $40 million in cash from past due accounts receivable. At quarter end, approximately half of the arrears were collected, up from only 30% at the end of the second quarter. We expect to further normalize our collections in the fourth quarter. We continue to expect cash flow to increase sequentially in the remainder of the year as we normalize working capital and finish paying out exit and integration costs, positioning GTT to deliver free cash flow in 2020 of $175 million to $200 million, as discussed on our last call. Our debt balance was approximately $3.2 billion at the end of the third quarter, including $2.6 billion of senior secured term loans maturing in May 2025, of which roughly 1/3 is euro denominated; and $575 million of senior unsecured notes maturing in December 2024. Our revolver remains drawn at $85 million, consistent with the second quarter.

Our total senior net leverage ratio in the third quarter increased to approximately 5.4x on a trailing 12-month basis, including acquisitions and unrealized cost synergies in prior periods. We remain committed to reducing leverage over the next few years to our long-term leverage target of 4x or less through growth in adjusted EBITDA, cash flow generation, potential nonstrategic asset sales and delevering acquisitions.

This concludes our prepared remarks. We will now open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from Jon Charbonneau of Cowen and Company.

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Jonathan David Charbonneau, Cowen and Company, LLC, Research Division - VP [2]

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Is it reasonable to expect the positive net installs seen in October continue through November and December and then into 2020? And then I may have missed it, but what was the level of bookings MRR backlog currently?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [3]

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John. Absolutely -- I mean, our focus is, of course, on driving organic growth, which is in its end is based on net installs. So we were very encouraged about the progress we're making, that the overall company was positive for the first time in October. And while we don't forecast or give guidance to future quarters, we're encouraged by that trend, and it is a fundamental focus of everyone in the firm to return ourselves to organic growth. And as we continue to drive an increasing scope and scale of the sales force that we see that trend continuing into fourth quarter and then into 2020. So that is our objective, and we're encouraged by the progress we've made. We did have a onetime uptick in churn. We've seen that moderate back down through the months of August, September, October as well. So we think all the specific metrics are there to continue to move us in the right direction on the net install component of growth.

To your question, we made some really nice progress on the install, picking up steam on installs. So actually, our backlog decreased from about 10 million to around 9 million in new install backlog. We see that as a positive trend. We see the ability to continue to grow that backlog with new sales, though. As we've noted in previous quarters, one of the challenges we had over the past 6 months was getting our installed backlog moving at a faster pace. So we saw some nice progress in that into the third quarter.

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Operator [4]

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Our next question comes from James Breen of William Blair.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [5]

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Just a couple. I think Dan, you talked about the impact of the credits on the EBITDA. Can you sort of quantify in absolute dollars the impact this quarter on EBITDA, sort of, above the outlook, you view as normalized levels?

And then just from a balance sheet perspective, is there any need to pay down the revolver at all at this point in time? Or you're going to wait until you generate a little more cash flow next year? And just what gives you the confidence in terms of the moving parts to get to the $175 million to $200 million in cash flow?

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Daniel M. Fraser, GTT Communications, Inc. - Interim CFO, Senior VP, Principal Accounting Officer & Global Corporate Controller [6]

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Sure. Thanks, Jim, it's Dan. With respect to the revenue credits. So the absolute dollars, it was up roughly $800,000 compared to prior quarters. So very consistent with what we had said last call that we expected that elevated credits. Again, slightly higher, but we expect that to start coming back down in the fourth quarter and into the first quarter of 2020. With respect to the revolver and paying that down. We are committed to paying it down to a level where the covenant no longer applies by the end of the year. And my teams in the accounts receivable area are very focused on cash collections to allow us to do that as well as, I would say, responsible spending in the fourth quarter with some SG&A savings initiatives.

And then finally, in terms of the bullishness on the $175 million to $200 million cash flow target, I think we still feel very confident in those -- in that guidance. The -- we do expect the net working capital to continue to normalize on the backs of accounts -- the accounts receivable improvement. And then also, just finishing off paying the exit and transition costs. And then finally, as I mentioned, and we had mentioned in a prior call, the SG&A savings initiative will certainly help generate more positive net working capital and should lead us into that guidance.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [7]

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And then I might have missed it, but can you just talk about what the total number of salespeople was at the end of the quarter? And then sort of what's your goal there to get to over the next 8 to 12 months?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [8]

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Sure. We finished the quarter, Jim, at 382 for third quarter. We expect to be over 400 by the end of 2019 with the objective of growing to over 500 by the end of 2020. And as we noted on the last call if I reiterate here, this is across all different levels within the organization, inside sales representatives, teams of account managers and account representatives, a select group of higher-end accounting directors as well. And so we have had really good pace and progress on growing the quota-bearing sales force across both Europe division and Americas division. And we see that as one of the key drivers of accelerating our growth into 2020.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [9]

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And any color on sales force productivity. Obviously, you've added some, so that probably impacts productivity, but how has that been progressing with the more seasoned salespeople?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [10]

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Yes, it did -- the overall productivity, as we expected, did decline quarter-over-quarter. We did see the magnitude of our sales grow, but the overall productivity per rep did decline as expected. And we have made some big investments in sales training, onboarding, all of the efforts, and we've seen good results from the cohort analysis of the folks that have come on early. We've also seen some really nice progress from our sales development rep initiative, which is a marketing initiative to bring on nonquota bearing. We expect to be over 100 of those by the end of this year as well as our farm system to develop new inside sales reps, and we've seen some very nice progress in the promotion ranks of those into inside sales reps and into account representatives and over time into account managers. So we see the -- both of those initiatives playing out, and we're encouraged by the ability to both grow and then continue to grow productivity over time.

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Operator [11]

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Our next question comes from Frank Louthan of Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [12]

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Great. Can you give us some metrics around your fiber assets that you're potentially for sales, sort of, on the terrestrial side, maybe a number of conduits and average fiber count? And what the mix is in, sort of, intercity and long haul? And then sort of the routes and fiber count and distance on the undersea routes as well so we can get a better idea of what's actually in that asset?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [13]

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Well, we clearly acquired all of these assets to give you a sense of it from the -- both the Interoute and the Hibernia acquisition, they came along with those acquisitions, which were predominantly about buying clients and revenue streams, which are -- where the strategic part of our business, whether it's wide area networking, Ethernet transport services, Internet services and the like. We have integrated those into our business. They are some of the, I think, most unique assets in the world in terms of the Pan-European nature of the terrestrial fiber assets and related data center and co-location centers as well as the very unique transatlantic fiber assets that we do own. They -- as we noted in our remarks, they are not core to our business or core to our strategy of providing cloud networking services to large and multinational clients. If you'll recall, historically, we had never owned any underlying fiber or data center infrastructure, historically, with the exception of the last 2 or 3 years. And so as a function of it being able to separate it. And we've got significant unsolicited inbound indications of interest about those specific assets. We've been pretty public about what they are in terms of our public disclosures so rather than doing an advertisement today about what they are specifically. They also were the majority of our increase in PP&E. So you can see that as we have increased our net fixed assets in our business, they're sizable. So we believe that they are sizable in scope and size. And as we said in our prepared remarks that they -- we think, are actually more valuable at this stage than when we originally acquired them. So we think it's a relatively straightforward transaction to separate those underlying layer-one assets from our business. And we think we're working very diligently on that process at this stage.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [14]

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But you can't give us average fiber count or those kind of things? Or I'll just have to dig through some filings, I guess. But do you have that handy?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [15]

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I don't have it handy right now. But all that information is public in terms of what we have actually -- what we have as an asset within GTT.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [16]

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Okay. And then on -- I think you mentioned the -- you said the target for the 500 people in sales, that's for the entire sales organization. What's your current count of quota-bearing heads right now? And as you get to your next couple of -- the 400 and 500 people, what will be the mix of quota-bearing heads within those numbers going forward? So how many actual quota-bearing heads are you going to take on?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [17]

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Well, the -- just as Jim had asked a second ago, the quota-bearing headcount as of the end of the third quarter was 382, and that's across the 4 major classes of quota-bearing, inside sales representatives, account representatives, account managers and account directors so -- of our roughly 3,000 headcount. So our goal is to grow that number to at least 400 by the end of the year. We're well on pace to do that; and to 500 by the end of 2020, while retaining overall headcount roughly the same. I think we'll see some overall increase in the overall headcount of the organization. But we see the opportunity to continue to grow quota-bearing as a percentage of the overall business within GTT. And we -- as we said in previous calls, we simply believe for the scope and scale of our business today that our sales force is too small that we -- both to cover adequately our existing account base and to drive, as importantly, new client acquisition, particularly with the advent of software-defined wide-area networking, we think it's probably the most important initiative in front of us. While we maintain productivity and churn rates at our historic levels.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [18]

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Okay. So the 500 will the actual quota-bearing heads?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [19]

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Yes. Within the 3,000.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [20]

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Right. Can you give us some color on what are some of the things that Ernie is doing differently on the hiring and productivity side that are improving that, helping you have better attention and productivity from the sales force? And what are some of the tactics he's using that he's doing differently?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [21]

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Right. Well, one of the things we're really excited about Ernie joining us is the fact that he has done this before at 3 different firms. So he joined us with deep experience from firms that had similar scope and scale, similar sales force sizes, whether it was at XO, Cogent or Colt. And effectively, as he said, as he looked at our business and as we were recruiting him to GTT, he says you have one of the best networks and assets and sales propositions that I've ever seen in the industry to be able to sell. I have a proven playbook and formula that I can bring to GTT and implement it. And one of the things he's done is bring a set of key lieutenants in with him who understand this playbook, everything from ensuring that we have deep funnel management and understanding of sales funnel prospecting, account reviews, account management, client experience initiatives. He has really re-architected, in a very short period of time, over the past 3 or 4 months, the whole go-to-market approach for the Americas division with a set of lieutenants that he's recruited in, who have done this before with him. And he has shown remarkable results in the first several months to drive America division, which we disclosed last quarter, which was the one that was most negative to positive in a very short period of time. So we're encouraged. It's early, as I said in the prepared remarks, we're only in the -- and we have done -- one month is not indicative of a trend, but we feel really good about where we stand moving forward.

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Operator [22]

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Our next question comes from Brandon Nispel of KeyBanc Capital Markets.

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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [23]

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Okay, great. Rick, a question for you. You mentioned the financial profile of the company changing with some of these asset sales, specifically on the CapEx side. So if you can talk more about maybe the gross margin side as we become more CapEx light?

Then maybe for Dan. Do you guys expect the asset sales that you're targeting to get to your targeted leverage profile? And then maybe just an update on the timeline to get there.

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [24]

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Sure. On the financial profile, I mean, our historic business has always been a CapEx-light business. We own site analysis in term -- particularly in terms of our Tier 1 network backbone, some of the nicest assets in the industry. We had never owned historically the hard infrastructure assets of fiber and data centers, which are the most capital intensive. And so we had seen our capital intensity grow from roughly 3%, which was our historic average to -- all the way up to 7%. I think as we say today, it's probably about 5% to 6% moving forward, principally driven by the investment in optronics and fiber and data center investment. And so as we sell those assets, we would -- potentially sell those assets, we would see our capital intensity go down back to our historic average of around 3%. So we would see gross margins decline somewhat, although we have seen, simply because we would be a leaser, of the underlying layer-one capacity, which means part of that is now run on our owned infrastructure. That said, a significant portion of the cost is still leased, both in carrier-neutral data centers as well as other alternative fiber networks that we lease our long-haul capacity on. We have always leased our last miles and using all available access technologies, as we describe, whether they be copper, coax, fiber or wireless, and we would continue to do that. So we would see -- we would expect to see some small reduction in overall gross margin as we think about that part of our business being higher margin. That said, we would expect the cash flow characteristics of the business to increase substantially given lower CapEx. And of course, so I'll let Dan comment on the debt. But we see this as being a significantly deleveraging transaction so that we would see significantly lower interest expense as delever our balance sheet at a much faster way back to our long-term target of 4x or less.

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Daniel M. Fraser, GTT Communications, Inc. - Interim CFO, Senior VP, Principal Accounting Officer & Global Corporate Controller [25]

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Sure. And Brandon, from the perspective of the leverage goal, as stated in the prepared remarks, our goal is to get to 4x or less. And certainly, the illustrative examples that we're seeing as we pull this together would get us into that range. And in terms of timing, I think a lot of that is being worked on and aggressively being planned for now, but I think it'd be fair to say that it's our intent to have this done in 2020.

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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [26]

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And if I could just follow up. I don't think I heard anything about KPN. When do you -- is that acquisition closed? And maybe can you help us understand what you expect it to contribute to revenue and EBITDA in the fourth quarter?

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

Sure. We did say in our prepared remarks as we said last quarter, we expect to close it this quarter, and we're very much on that schedule. We're excited about that acquisition. We feel it is exactly in the sweet spot of GTT of providing networking services. We actually add a series of clients. We add scope and scale to our Tier 1 Internet backbone by consolidating another Tier 1. And we had a very large client in KPN who retains their clients in the Netherlands but will use us as their international scope partner to extend diverse secure connectivity on behalf of their clients everywhere.

I think as we said last quarter, we expect it to deliver as we have for our smaller tuck-in acquisitions, better than 5x adjusted EBITDA on roughly a EUR 50 million purchase price for the asset. So we see that coming together and being part of our financials in the fourth quarter.

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Operator [28]

--------------------------------------------------------------------------------

This concludes our question-and-answer session.

I would like to turn the conference back over to Mr. Calder for any closing remarks.

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Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [29]

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All right. I'm going to turn the call over to our Executive Chairman, Brian Thompson.

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H. Brian Thompson, GTT Communications, Inc. - Founder & Executive Chairman [30]

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Thanks, Rick. I just had some brief thoughts and comments I wanted to share with you all. Unfortunately, having had 50 years of history in the industry, I've seen lots of things come and go, and I hope I won't dwell on them too long, but it became clear to me over the past 10 years that the old mantra of requiring to -- your own infrastructure to be competitive in this industry is changing radically, and it started with the advent of Microwave allowing Bill McGowan and MCI to attack AT&T by using new technologies in the infrastructure. And it was also felt that you had to have that infrastructural capability that differentiated you from the incumbents, so you could be disruptive in the marketplace. That went on through Microwave. It then went on through the digital transformation of -- and fiber optics that brought us both new technology to go into the backbones and economics that were uniquely different. And I do recall major changes in the investment community going from the old utility of AT&T into the need to put a lot of money into the ground in fiber optics during the '90s and on into the early parts of 2000.

In fact, I remember at one time, when new analysts, were analyzing companies on the basis of capital invested in the ground rather than revenue streams that were coming in. As we got into the business, I felt that we started this company with a notion, as Rick has underscored today, of being asset light. And the reason for that was that the newer technologies, whether it was wireless and the use of spectrum and smart devices, but more importantly, in the infrastructure itself of the service requirements had gotten to the point where technology was driving unique capabilities to not own underlying assets but to direct those by leasing and putting together networks. That started to show its face back in the early 2000s. And then we went through the dot-com bust and a whole bunch of other things from the standpoint of investment, where people were trying to sort out where they should be going. It was during that, that we put together this company. And the fundamental premise was, if you can use technology in a platform that existed in this company when we started it to really interface with your customers and give them a client experience that you could take off their shoulders the burden of providing that network that no matter who owned the network, whether it was an incumbent or a new fiber company or a new wireless company, it puts you into a position where the client really didn't care as long as they were getting their service. This company was founded on that premise.

And when we started talking about asset light, we got beat about the head and shoulders in the marketplace by people saying, well, you can't get a reasonable return if you are asset light. The fact of the matter is that we proved over the first 35 to 40 acquisitions that we did, that we could be asset light, and we could give a client experience that was second to none. And we felt that we had to expand our scope and scale worldwide if we were going to compete not just in the U.S. but in the rest of the world with that same construct. We did that and got to the point where, opportunistically, we were able to acquire Hibernia and more recently Interoute not for their basic asset, which was very expensive, but it was part of the equation, but to get that customer base that they were moving toward, and both of those companies were moving in the direction that we were already in.

Now what's happened is I am seeing more and more public policy going full circle in the world, not just here in the U.S. but in the rest of the world to where the fiber itself and the need to provide broadband access in rural and complete parts of the country have become public policies. Those public policies have generated a great deal of interest in both subsidy as well as building in countries all over the world.

And what we're getting to, once again, is what I'm calling a fiber utility mentality. Fiber utilities are going to be the backbone, whether it's to carry 5G because it requires more fiber or whether it's to carry the general use that companies and countries need to communicate. With that when we put these assets on our plate, we paid a lot of money for them, we created an awful lot of leverage in the company that you all have let us be fully aware of and things have happened in that leverage to bring to our mind that we have strayed a bit from our basic premise. Not only that, but I think it's important to point out that more recently, the ability to manage assets like infrastructure is very different from managing the customer interface and the services that we provide. It takes a different person. It takes a different mentality, takes a different asset utilization and asset employment.

Therefore, as we went through these acquisitions in the back of our heads was, as long as we can maintain these infrastructure assets and make sure that they did not diminish in any way, they would become increasingly beneficial for others to mold and merge with what they are trying to do.

In the last 3 to 4 years, we have seen major increases in infrastructure funds starting to look at telecommunications as a very important asset base. And indeed, where we are right now, I think it's fair to say, when people talk about infrastructure, whether it's the funds or the governments, they are including telecommunications, and really, it's information technology infrastructure, and they're talking about fiber. They're talking about subsidizing wireless assets. They're talking about subsidizing local drops even to the extent that they're needed to bring broadband to everybody in the country.

With that in the background and where we are right now, we believe this is time for us to see if it's possible that we can divest those things that are not fundamental to our premise. And we can create a delevering, which we've been talking about over the past couple of quarters.

To that end, I think we're in the right place at the right time. I continue to look to the future as really bright because we have put in place the ability to manage that customer experience with all of the new technologies that are out there and to master those technologies. It is networking that's important, it's not infrastructure to us.

With that, I'm going to turn it back to you, Rick, and thank you.

--------------------------------------------------------------------------------

Richard D. Calder, GTT Communications, Inc. - President, CEO & Director [31]

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Great. Thank you, everyone, and we look forward to reporting on our next quarter.

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Operator [32]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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