Market Overview

GTT Reports Second Quarter 2018 Financial Results

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Q2 Revenue Grew 71.9% Year-Over-Year to $326.8 Million; Up 25.4%
Sequentially

Q2 Net Loss of $136.3 Million (includes $107.7 million of non-recurring
costs)

Q2 Adjusted EBITDA Grew 39.2% Year-Over-Year to $74.9 Million; Up 19.5%
Sequentially

GTT
Communications, Inc.
(NYSE:GTT), the leading global cloud
networking provider to multinational clients, announced today its
financial results for the quarter ended June 30, 2018.

Second quarter highlights:

  • Revenue of $326.8 million grew 71.9% over 2Q17 and grew 25.4% over
    1Q18.
  • Net loss was $136.3 million, compared to net income of $0.7 million in
    2Q17 and net loss of $30.7 million in 1Q18. 2Q18 net loss was
    primarily the result of several non-recurring costs related to the
    Interoute acquisition, including $13.7 million in exit, transaction
    and integration costs, $13.8 million loss on extinguishment of debt
    and $88.6 million of expense related to a foreign currency hedge which
    was entered into at the time the Interoute acquisition was announced
    and subsequently settled at closing.
  • Adjusted Earnings Before Interest, Taxes, Depreciation and
    Amortization ("Adjusted EBITDA") of $74.9 million grew 39.2% over 2Q17
    and grew 19.5% over 1Q18. Adjusted EBITDA margin was 22.9% compared to
    28.3% in 2Q17 and 24.1% in 1Q18.
  • Capital expenditures were $19.3 million (5.9% of revenue) compared to
    $9.3 million in 2Q17 (4.9% of revenue) and $13.2 million in 1Q18 (5.1%
    of revenue).
  • Using constant currency, (i) 2Q18 revenue and Adjusted EBITDA would
    have been lower than reported by $7.9 million and $1.9 million,
    respectively, compared to 2Q17, and (ii) 2Q18 revenue and Adjusted
    EBITDA would have been higher than reported by $3.2 million and $0.7
    million, respectively, compared to 1Q18.

On a pro forma basis, assuming (i) Interoute and Global Capacity's
historical results had been included for all periods presented, and (ii)
constant currency:

  • 2Q18 revenue and Adjusted EBITDA grew 1.2% and 0.7%, respectively,
    over 2Q17.
  • 2Q18 revenue and Adjusted EBITDA declined 0.6% and 3.1%, respectively,
    compared to 1Q18.

See "Annex A: Non-GAAP Financial Information" for more information
regarding the computation of Adjusted EBITDA, constant currency and pro
forma calculations.

Conference Call Information

GTT will hold a conference call on Friday, August 3, 2018, at 8:30 a.m.
Eastern Time. To participate in the live conference call, interested
parties may dial +1.844.875.6916 or +1.412.317.6714 and ask for the GTT
call or view the webcast at GTT's
website
.

A telephonic replay of the conference call will be available for one
week and may be accessed by calling +1.877.344.7529 or +1.412.317.0088
and using the passcode 10121914. The webcast will be archived in the
investor relations section of GTT's
website
.

Forward-Looking Statements

This release contains forward-looking statements that are made pursuant
to the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which reflect the current view of GTT Communications,
Inc., with respect to its plans, objectives and strategies or future
events or future financial performance. From time to time, GTT also
provides forward-looking statements in other materials GTT releases to
the public or files with the U.S. Securities and Exchange Commission
("SEC"), as well as oral forward-looking statements. You should consult
any further disclosures on related subjects in our annual reports on
Form 10-K, our quarterly reports on Form 10-Q and our current reports on
Form 8-K filed with the SEC. Such forward-looking statements are and
will be subject to many risks, uncertainties and factors relating to our
operations and the business environment that may cause our actual
results to be materially different from any future results, express or
implied, by such forward-looking statements. Factors that could cause
GTT's actual results to differ materially from these forward-looking
statements include, but are not limited to, the following: our ability
to obtain capital; our ability to develop and market new products and
services that meet customer demands and generate acceptable margins; our
reliance on several large customers; our ability to negotiate and enter
into acceptable contract terms with our suppliers; our ability to
attract and retain qualified management and other personnel; competition
in the industry in which we do business; failure of the third-party
communications networks on which we depend; legislation or regulatory
environments, requirements or changes adversely affecting the businesses
in which we are engaged; our ability to maintain our databases,
management systems and other intellectual property; our ability to
maintain adequate liquidity and produce sufficient cash flow to fund our
capital expenditures and debt service; technological developments and
changes in the industry; our ability to complete acquisitions or
divestitures and to integrate any business or operation acquired; our
ability to overcome significant operating losses; and general economic
conditions. Additional information concerning these and other important
factors can be found under the heading "Risk Factors" in GTT's annual
and quarterly reports filed with the SEC including, but not limited to,
its Annual Report on Form 10-K. Statements in this release should be
evaluated in light of these important factors.

About GTT

GTT is redefining global communications to serve a cloud-based future,
connecting people across organizations, around the world and to every
application in the cloud. Our clients benefit from an outstanding
service experience built on our core values of simplicity, speed and
agility. A Fortune Future 50 company, GTT owns and operates a global
Tier 1 internet network and provides a comprehensive suite of cloud
networking services to any location in the world. For more information
on GTT, please visit www.gtt.net.

 
GTT Communications, Inc.
Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in millions, except per share data)

 

 

 
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Revenue:
Telecommunications services $ 326.8 $ 190.1 $ 587.4 $ 376.1
 
Operating expenses:
Cost of telecommunications services 179.4 97.3 320.9 192.3

Selling, general and administrative
expenses

89.7 46.7 157.8 99.7

Severance, restructuring and other exit
costs

5.3 0.1 7.2 10.7
Depreciation and amortization 48.2   31.4   88.0   61.8  
 
Total operating expenses 322.6   175.5   573.9   364.5  
 
Operating income (loss) 4.2   14.6   13.5   11.6  
 
Other expense:
Interest expense, net (30.2 ) (16.6 ) (51.1 ) (32.5 )
Loss on debt extinguishment (13.8 ) (13.8 ) (5.7 )
Other expense, net (97.6 ) 0.1   (115.1 )  
 
Total other expense (141.6 ) (16.5 ) (180.0 ) (38.2 )
 
Loss before income taxes (137.4 ) (1.9 ) (166.5 ) (26.6 )
 
Provision for (benefit from) income taxes (1.1 ) (2.6 ) 0.5   (14.1 )
 
Net (loss) income $ (136.3 ) $ 0.7   $ (167.0 ) $ (12.5 )
 
(Loss) earnings per share:
Basic $ (2.83 ) $ 0.02 $ (3.60 ) $ (0.31 )
Diluted $ (2.83 ) $ 0.02 $ (3.60 ) $ (0.31 )
 
Weighted average shares:
Basic 48,221,341 41,244,595 46,435,245 40,849,853
Diluted 48,221,341 41,819,377 46,435,245 40,849,853
 
 
GTT Communications, Inc.
Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in millions, except per share data)

   
June 30, 2018 December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 73.7 $ 101.2
Accounts receivable, net of allowances of $3.2 and $5.1, respectively 255.6 102.8
Prepaid and other current assets 73.3   24.1
Total current assets 402.6 228.1
Property and equipment, net 2,036.6 499.3
Intangible assets, net 531.9 417.1
Goodwill 1,779.0 644.5
Other long-term assets 44.5   9.2
Total assets $ 4,794.6   $ 1,798.2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 335.6 $ 111.5
Acquisition earn-outs and holdbacks 10.8 14.0
Current portion of capital lease obligations 7.2 1.5
Current portion of long-term debt 42.9 7.0
Deferred revenue 183.4   53.7
Total current liabilities 579.9 187.7
Capital lease obligations, long-term portion 36.5 0.3
Long-term debt 3,122.0 1,236.5
Deferred revenue, long-term portion 286.3 108.0
Deferred tax liabilities 243.3 26.3
Other long-term liabilities 24.4   8.0
Total liabilities 4,292.4   1,566.8
Commitments and contingencies
Stockholders' equity:
Total stockholders' equity 502.2   231.4
Total liabilities and stockholders' equity $ 4,794.6   $ 1,798.2
 
 
GTT Communications, Inc.
Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

   

Three Months Ended
June 30,

Six Months Ended
June 30,

2018   2017 2018   2017
Cash flows from operating activities:
Net (loss) income $ (136.3 ) $ 0.7 $ (167.0 ) $ (12.5 )

Adjustments to reconcile net loss to net cash provided by
operating
activities:

Depreciation and amortization 48.2 31.4 88.0 61.8
Share-based compensation 8.7 5.3 14.6 9.9
Debt (premium) discount amortization 0.4 0.3 0.2 0.5
Loss on debt extinguishment 13.8 13.8 5.7
Amortization of debt issuance costs 1.1 1.0 2.3 1.7
Change in fair value of derivative financial liability 98.1 115.3
Excess tax benefit and deferred income taxes (0.9 ) (0.6 ) (0.5 ) (13.5 )
Non-cash deferred revenue (17.1 ) (9.6 ) (19.8 ) (21.3 )
Non-cash deferred costs 0.4 2.9 0.8 3.8

Changes in operating assets and liabilities, net of
acquisitions:

3.5  

(7.5

) (15.7 ) (9.9 )
Net cash provided by operating activities 19.9   23.9   32.0   26.2  
 
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (2,173.1 ) (39.4 ) (2,206.7 ) (552.5 )
Purchase of customer contracts (11.0 ) (14.9 )
Settlement of deal-contingent foreign currency hedge (105.8 ) (105.8 )
Purchases of property and equipment (19.3 ) (9.3 ) (32.5 ) (17.8 )
Net cash used in investing activities (2,298.2 ) (59.7 ) (2,345.0 ) (585.2 )
 
Cash flows from financing activities:
Proceeds from senior note 159.0 159.0
Proceeds from revolving line of credit

 

Repayment of revolving line of credit (20.0 )
Proceeds from term loan 2,634.5 2,634.5 696.5
Repayment of term loan (691.2 ) (1.8 ) (693.0 ) (429.3 )
Repayment of other secured borrowings (1.3 ) (1.3 )
Payment of earn-out and holdbacks (3.8 ) (18.5 ) (9.4 ) (20.3 )
Debt issuance costs (62.7 ) (2.9 ) (62.7 ) (27.7 )
Proceeds from equity issuance, net of issuance costs 424.5 424.5
Repayment of capital leases (1.0 ) (0.3 ) (1.7 ) (0.6 )
Proceeds from issuance of common stock under ESPP 0.3 0.2 0.4 0.3

Tax withholding related to the vesting of restricted stock
units

(5.0 ) (0.9 ) (10.2 ) (2.3 )
Exercise of stock options 0.6   (0.2 ) 1.2   0.6  
Net cash provided by financing activities 2,294.9 134.6 2,282.3 356.2
Effect of exchange rate changes on cash 2.7   (1.1 ) 3.2   (0.5 )

Net increase (decrease) in cash, cash equivalents,

and restricted cash

19.3 97.7 (27.5 ) (203.3 )

Cash, cash equivalents, and restricted cash at

beginning of period

54.4   33.0   101.2   334.0  

Cash, cash equivalents, and restricted cash at end of

period

$ 73.7   $ 130.7   $ 73.7   $ 130.7  
 

ANNEX A: Non-GAAP Financial Information

In addition to financial measures prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"), from time
to time we may use or publicly disclose certain "non-GAAP financial
measures" in the course of our financial presentations, earnings
releases, earnings conference calls and otherwise. For these purposes,
the U.S. Securities and Exchange Commission ("SEC") defines a "non-GAAP
financial measure" as a numerical measure of historical or future
financial performance, financial positions or cash flows that (i)
excludes amounts, or is subject to adjustments that effectively exclude
amounts, included in the most directly comparable measure calculated and
presented in accordance with GAAP in financial statements, and (ii)
includes amounts, or is subject to adjustments that effectively include
amounts, that are excluded from the most directly comparable measure so
calculated and presented.

Non-GAAP financial measures are provided as supplemental information to
investors to provide an alternative method for assessing our financial
condition and operating results. We believe that these non-GAAP
measures, when taken together with our GAAP financial measures, allow us
and our investors to better evaluate our performance and profitability.
These measures are not in accordance with or a substitute for GAAP, and
they may be different from or inconsistent with non-GAAP financial
measures used by other companies. These measures should be used in
addition to and in conjunction with results presented in accordance with
GAAP and should not be relied upon to the exclusion of GAAP financial
measures.

Pursuant to the requirements of Regulation G, whenever we refer to a
non-GAAP financial measure, we will also generally present the most
directly comparable financial measure calculated and presented in
accordance with GAAP, along with a reconciliation of the differences
between the non-GAAP financial measure we reference and such comparable
GAAP financial measure.

Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization ("Adjusted EBITDA")

Adjusted EBITDA is defined as net income/(loss) before interest, income
taxes, depreciation and amortization ("EBITDA") adjusted to exclude
severance, restructuring and other exit costs, acquisition-related
transaction and integration costs, losses on extinguishment of debt,
stock-based compensation and, from time to time, other non-cash or
nonrecurring items.

We use Adjusted EBITDA to evaluate operating performance, and this
financial measure is among the primary measures we use for planning and
forecasting future periods. We further believe that the presentation of
Adjusted EBITDA is relevant and useful for investors because it allows
investors to view results in a manner similar to the method used by
management and makes it easier to compare our results with the results
of other companies that have different financing and capital structures.
In addition, we have debt covenants that are based on a leverage ratio
that utilizes a modified EBITDA calculation, as defined in our Credit
Agreement. The modified EBITDA calculation is similar to our definition
of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA
of and expected cost synergies from the companies acquired by us during
the applicable reporting period. Finally, Adjusted EBITDA results, along
with other quantitative and qualitative information, are utilized by
management and our compensation committee for purposes of determining
bonus payouts to our employees.

Adjusted EBITDA Less Capital Expenditures

Adjusted EBITDA less purchases of property and equipment, which we also
refer to as capital expenditures, is a performance measure that is used
to evaluate the appropriate level of capital expenditures needed to
support our expected revenue and to provide a comparable view of our
performance relative to other telecommunications companies that may
utilize different strategies for providing access to fiber-based
services and related infrastructure. We use a "capex light" strategy,
which means we purchase last-mile services and select core IP network
services from other providers on an as-needed basis, pursuant to our
customers' requirements. Many other telecommunications companies spend
significant amounts of capital expenditures to construct their own fiber
networks and data centers, and attempt to purchase as little as possible
from other providers. As a result of our strategy, we typically have
lower Adjusted EBITDA margins compared to other providers but also spend
much less on capital expenditures relative to our revenue. We believe it
is important to take both of these factors into account when evaluating
our performance.

The following is a reconciliation of Adjusted EBITDA and Adjusted EBITDA
less capital expenditures from Net (Loss) Income (amounts in millions):

   

Three Months Ended
June 30,

Six Months Ended
June 30,

2018   2017 2018   2017
Adjusted EBITDA
Net (loss) income $ (136.3 ) $ 0.7 $ (167.0 ) $ (12.5 )
(Benefit from) provision for income taxes (1.1 ) (2.6 ) 0.5 (14.1 )
Interest and other expense, net 127.8 16.5 166.2 32.5
Loss on debt extinguishment 13.8 13.8 5.7
Depreciation and amortization 48.2 31.4 88.0 61.8
Severance, restructuring and other exit costs 5.3 0.1 7.2 10.7
Transaction and integration costs 8.4 2.4 14.3 10.4
Share-based compensation 8.8   5.3   14.6   9.9  
Adjusted EBITDA 74.9 53.8 137.6 104.4
Purchases of property and equipment (19.3 ) (9.3 ) (32.5 ) (17.8 )
Adjusted EBITDA less capital expenditures $ 55.6   $ 44.5   $ 105.1   $ 86.6  
 

Constant Currency

We evaluate our results of operations both as reported and on a constant
currency basis. The constant currency presentation, which is a non-GAAP
measure, excludes the impact of fluctuations in foreign currency
exchange rates. We believe providing constant currency data offers
valuable supplemental information regarding our results of operations,
consistent with how we evaluate our performance. We calculate constant
currency results by converting our current-period local currency
financial results using prior-period exchange rates and comparing these
adjusted amounts to our prior-period reported results.

Pro Forma Financial Information

In addition to financial measures prepared in accordance with GAAP, from
time to time we may use or publicly disclose certain "pro forma"
financial measures in the course of our financial presentations,
earnings releases, earnings conference calls and otherwise. We believe
these certain pro forma financial measures provide a more comparable
view of our results relative to prior periods, particularly given the
number of acquisitions we have completed in the past.

The following unaudited pro forma financial information and related
notes present the historical information of GTT as if the acquisitions
of Interoute and Global Capacity had occurred on the first day of the
period presented. The pro forma adjustments included herein reflect
final accounting policy convergence adjustments that may differ from the
pro forma financial information presented in any Form 8-K/A's previously
filed with the SEC.

For the three months ended June 30, 2018, compared with the three months
ended June 30, 2017, the following unaudited financial information
presents historical GTT information as if the acquisition of Interoute
and Global Capacity had occurred on the first day of the period
presented, as reported and in constant currency:

 
($ in millions) Three Months Ended June 30,
2018   2017
Revenue
GTT as reported $ 326.8 $ 190.1
Interoute, net of pro forma adjustments (1) 134.5 195.0
Global Capacity, net of pro forma adjustments (1)   52.6  
Pro Forma Revenue $ 461.3   $ 437.7  
Pro Forma % Growth 5.4 %
Pro Forma % Growth (Constant Currency) 1.2 %
 
Adjusted EBITDA
GTT as reported $ 74.9 $ 53.8
Interoute, net of pro forma adjustments (1) 33.4 46.9
Global Capacity, net of pro forma adjustments (2)   2.4  
Pro Forma Adjusted EBITDA $ 108.3   $ 103.1  
Pro Forma Adjusted EBITDA Margin % 23.5 % 23.6 %
Pro Forma % Growth 5.0 %
Pro Forma % Growth (Constant Currency) 0.7 %
 
(1) Pro forma adjustments include (i) revenue
recognized by acquired companies from GTT, net of revenue recognized
by GTT from acquired companies prior to their respective close
dates; (ii) adjustments in deferred revenue from acquired companies
and (iii) adjustments related to converting operating results from
International Financial Reporting Standard ("IFRS") to U.S. GAAP.
(2) Pro forma adjustments include (i) net
adjustments in deferred revenue and deferred costs from acquired
company and (ii) adjustments related to the converting of operating
results from IFRS to U.S. GAAP.

For the three months ended June 30, 2018, compared with the three months
ended March 31, 2018, the following unaudited financial information
presents historical GTT information as if the acquisition of Interoute
had occurred on the first day of the period presented, as reported and
in constant currency:

 
($ in millions) Three Months Ended
June 30, 2018   March 31, 2018
Revenue
GTT as reported $ 326.8 $ 260.7
Interoute, net of pro forma adjustments(1) 134.5   210.7  
Pro Forma Revenue $ 461.3   $ 471.4  
Pro Forma % Growth

(2.1)%

 

Pro Forma % Growth (Constant Currency)

(0.6)%

 

 
Adjusted EBITDA
GTT as reported $ 74.9 $ 62.7
Interoute, net of pro forma adjustments (2) 33.4   50.9  
Pro Forma Adjusted EBITDA $ 108.3   $ 113.6  
Pro Forma Adjusted EBITDA Margin %

23.5%

 

24.1%

 

Pro Forma % Growth

(4.7)%

 

Pro Forma % Growth (Constant Currency)

(3.1)%

 

 
(1) Pro forma adjustments include (i) revenue
recognized by acquired companies from GTT, net of revenue recognized
by GTT from acquired companies prior to their respective close
dates; (ii) adjustments in deferred revenue from acquired companies
and (iii) adjustments related to converting operating results from
International Financial Reporting Standard ("IFRS") to U.S. GAAP.
(2) Pro forma adjustments include (i) net
adjustments in deferred revenue and deferred costs from acquired
company and (ii) adjustments related to the converting of operating
results from IFRS to U.S. GAAP.

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