GTT's Calder: It's not critical to own long-haul fiber, but it does provide ownership economics

GTT says that while it sees value in owning its own fiber networksa trend that certainly was illustrated by its acquisitions of Interoute and Hibernia—the service provider isn’t going to start snapping up every fiber network either.

Rick Calder

Rick Calder, CEO of GTT, told investors during its fourth-quarter earnings call that while buying or owning last mile fiber assets it not core to its strategy, the service provider sees that it does add value to enhance how it offers business services.

“We have always said that while it's not critical for us to own long haul fiber as we continue to scale our business, having ownership economics on long haul fiber given the scope and scale of our core network is beneficial to us, it also allows us to sell on a deeper footprint,” Calder said during the earnings call, according a Seeking Alpha earnings transcript. “We felt first and foremost the Atlantic deal made a lot of sense to us.”

By acquiring Interoute, GTT will get access to a sizeable long-haul fiber network in Europe. GTT will expand its Tier 1 global IP network with a 72,000-km fiber network in Europe as well as over 400 points of presence, spanning 24 metro areas and interconnecting 126 cities across 29 countries.

“We think the long-haul footprint in Europe that Interoute has is significantly beneficial to us both as an asset to sell and as our business at a scale of close to $2 billion in revenue gives us significant ownership economics over that asset,” Calder said. “Specifically, we’ve also always said that we're not as keen on last mile fiber and so we don't see a significant amount of last mile or building specific fiber.”

RELATED: GTT acquires Interoute for $2.3B, deepens European fiber, cloud platform reach

Calder added that while Interoute gives it more last mile fiber, it will continue to lease fiber from other providers.

“We historically have leased that and it's a very similar strategy to what we see with Interoute in terms of the very last mile access usually diversity across multiple players, across multiple access technology,” Calder said. “We still see that is very much part of our strategy.”

Opportunistic M&A

From an overall M&A perspective, GTT plans to consider various asset deals that could add value to its portfolio.

Having just announced its purchase of Interoute, which is a sizeable deal, GTT’s near-term focus will be on making sure it can close it and begin the integration process.

Calder said that “we will not be in the market for a large material transaction prior to successfully closing and integrating the Interoute transaction.”

However, Calder added that GTT will consider smaller tuck-in acquisitions.

“The funnel of smaller deal opportunity is quite large,” Calder said. “We will be cautious about making sure that we do those in an appropriate pace, but we see an increasing funnel for small transactions that at customer base add select network assets that are complementary to our business that can be integrated very rapidly and that deliver on a price post energy multiple that's very attractive to our investors. Those opportunities are bigger now and I think as we continue to scale, we see a growing funnel of opportunities on the M&A front that complements our very bullish outlook on rep-driven growth.”

One market where GTT will likely look for M&A opportunities will be in Europe.

With a desire to grow its presence in the region, GTT’s CFO Michael Sicoli said that additional purchases of assets in Europe could complement its pending acquisition of Interoute.  

From an M&A perspective, there's a lot more opportunity available to us now in Europe that really wasn't as actionable or wouldn't have produced the same level of synergy that we can produce now,” Sicoli said. “I think that there's more now in the Europe funnel which should also potentially increase the amount of that activity.”

Acquisitions drive growth

For GTT, acquisitions were a key element of driving revenue growth during the fourth quarter.

The service provider began to see additional revenue from buying Hibernia and Global Capacity, two providers that have diverse domestic and international business services reach.   

Here’s a breakdown of GTT’s key metrics:

Capex: GTT’s capital expenditures in the quarter were $15.2 million or 6.1% of revenue compared to $6.4 million last year and $9.1 million last quarter. Full-year capex was 5.1% of revenue in line with our target range of 5% to 6% of revenue.

Net losses: Net losses were $49.5 million, compared to net loss of $0.9 million in the fourth quarter of 2016 and net loss of $9.5 million in the third quarter of 2017. GTT said the fourth quarter net loss was primarily the result of several nonrecurring costs, including: $5.8 million in exit, transaction and integration costs related to the Global Capacity and Transbeam acquisitions; $17.3 million of tax expense related to the change in U.S. tax law; and $29.0 million of tax expense related to the recording of a valuation allowance against U.S. deferred tax assets.

Financials: GTT reported $249.2 million in revenue, up 80.7% year-over-year and 23% sequentially.