By
Monte Sol
Capital
:
Global Telecom & Technology (GTLT.OB) is a small, well-run
company that generates a lot of cash and is building a track record
of putting that cash to good use. EBITDA per share has grown for 20
straight quarters, and has compounded at a 40% annual rate over the
past five years. Insiders own nearly half the company and regularly
buy additional shares in the open market -- in recent years they
have purchased 12% of the company in the open market. Yet despite
this abundance of attractive characteristics, GTLT sells for a
pittance. Currently trading on the Pink Sheets for $2.50 a share,
the company is being valued by the market at just 5x its cash
earnings.
Soon, though, GTLT is likely to join NASDAQ. Once the shares
trade above $3.00, they will be eligible for such an up-listing. A
move from the Pink Sheets to NASDAQ would almost certainly increase
trading volume, making GTLT more interesting to large institutional
investors who can help close the large valuation gap that currently
exists.
GTLT is a global network integrator. It is distinct from most
other telecom carriers in that it owns almost no hard assets, just
contracts and relationships. It does not own telecommunications
infrastructure, rather it buys capacity from a multitude of other
carriers and then forms its own global network using that purchased
capacity. GTLT sells this network to business and government
customers, as well as to other carriers.
The company began life in January of 2005 as a SPAC. In Q4 of
2006 the SPAC made its big deal, spending $45 million to acquire
two companies: Global Internetworking, and European Telecom and
Technology. These two companies were merged into one, forming an
intercontinental foundation that GTLT has subsequently used to
create a leading network integrator [also known as a multi-network
operator ("MNO") or virtual network operator ("VNO")] through a
combination of organic growth and acquisitions.
GTLT constructs a global, largely redundant telecom network
using purchased capacity from more than 800 different suppliers.
The network is capable of basic data communication as well as more
specialized services such as private lines, colocation, and
wide-area networks. In many cases, GTLT does not compete directly
with traditional telecom carriers because the specialized nature of
some of GTLT's services makes its product a complementary rather
than core offering. GTLT can provide international organizations
with enterprise-wide networks that are secure, scale-able, fast,
and act like the LANs most of us have in our homes and offices. If
a customer transfers a lot of data between two locations on
opposite sides of the world and needs a fast, redundant, secure and
dedicated connection between those two locations, GTLT can probably
provide it.
GTLT also sells it network to asset-based telecommunications
carriers themselves. These carriers may not have physical assets in
some geographic regions where they want to offer a service, so they
may buy access to GTLT's network and then use that access to plug
holes in their own networks.
Without an entity like GTLT acting as the middleman, customers
who want access to the sort of network GTLT provides would need to
build it themselves by finding and contracting with each
sub-provider directly. In most cases this would be impractical, and
in some cases it would be impossible.
GTLT's customer base is fairly diversified, with its five
largest customers representing 18% of revenue, and the largest
customer being less than 7% of revenue. In total the company has
more than 1,000 customers, with 70% of revenue coming from
customers based in the U.S., and the remainder coming from Europe.
Contracts are typically fixed-price and last one-three years. The
historical customer churn rate is 2.0-2.5%. 70% of growth has
historically come from existing customers.
Since GTLT's business is more or less a utility, its revenue is
quite reliable. In 2009 sales declined only 4%, and EBITDA actually
increased due to reduced overhead. Overall, GTLT should be able to
grow 2-3x GDP, or roughly 5-10% a year, for the foreseeable future.
The enterprise communications sector itself is growing less quickly
than that, but GTLT has been able to generate industry-beating
growth by taking market share from less able competitors. The
company is also starting to benefit from increased bandwidth demand
that is being driven by the adoption of "cloud" computing
applications. Cloud platforms require exponentially more bandwidth
than traditional tower-based applications. For enterprises that
want to access these applications anywhere in the world, the
network used doesn't only need to be fast and secure, it needs to
be global. GTLT's freedom from physical assets tying it to a
specific geographic region leaves it well-positioned to offer the
sort of global network that multinational, cloud-embracing
companies are going to want.
The financial side of GTLT's business is fairly simple. GTLT's
cost of goods sold consists almost entirely of capacity payments to
its telecom suppliers, so gross margins, which are 30%, don't budge
much regardless of how revenue changes. In contrast, the company
has operated at $18 million of overhead for most of its history, so
the expense for SG&A is mostly fixed. This means that each
gross profit dollar falls straight to EBITDA. This is another way
of saying that GTLT's incremental EBITDA margin approximates its
consolidated gross margin of 30%.
And since GTLT's consolidated EBITDA margin is about 13% today,
a 25-30% incremental EBITDA margin translates to operating leverage
of approximately 2:1. When GTLT's sales grow by
X
, profit grows by 2
X
. Two-to-one leverage is fairly steep and suggests the company
should pursue revenue growth aggressively. GTLT's management
understands this, and has diligently pursued acquisitions as a way
to grow sales over and above the revenue increases that are
internally generated.
When GTLT buys a competitor, it essentially buys the customers
and capacity contracts, and leaves the rest. Historically it has
been able to eliminate virtually all of the corporate overhead at
the firms it acquires, leaving a pre-tax cash profit that is
roughly equal to the acquired company's gross profit minus the
interest expense on the debt used to finance the acquisition. GTLT
also has legacy tax assets that dramatically reduce its tax rate,
and because of a recent acquisition (nLayer, discussed below) that
has greatly increased the size of GTLT's intangibles amortization
tax shield, the company is unlikely to pay significant cash taxes
for at least the next few years.
The following table shows GTLT's historical financials, as well
as unofficial pro forma estimate for 2012.
On April 30, 2012, GTLT bought competitor nLayer for $18
million; $12 million of the consideration was paid in cash, and the
remaining $6 million was in the form of an earn-out. GTLT financed
the deal almost entirely with debt. nLayer published 2011 revenue
and EBITDA results of $15 million and $2.6 million respectively,
but by the time GTLT bought nLayer, nLayer's EBITDA had risen to a
~$3.5 million annual run-rate. Assuming the earn-out is paid in
full, GTLT bought nLayer for approximately 5x EV/EBITDA.
nLayer was a private provider of IP transit and Ethernet
transport, and the deal brought valuable physical and intangible
assets to GTLT. nLayer had invested more than $4 million over the
previous two years to outfit its important data center locations
with new Juniper equipment, and its CTO Richard Steenbergen is
extremely well-regarded within the industry. He has become GTLT's
CTO.
GTLT produced $3.5 million of EBITDA in the most recent quarter
(9/30/12), and
today
the combined entity is operating at an EBITDA run-rate of $14
million. The company is still in the process of eliminating
redundant costs between the two organizations, and those cost
reductions, combined with even modest revenue growth, position GTLT
to generate approximately $15 to $17 million of EBITDA in 2013.
It is important to stress that a large portion of GTLT's EBITDA
will be available to the company in the form of free cash flow. As
a result of the acquisitions GTLT has made, depreciation expense is
quite high, at roughly 8% of sales, but actual capital expenditures
are
de minimis
, averaging less than 1% of sales. Capital expenditures spiked up
the September quarter because GTLT spent money to outfit its
non-nLayer network locations with nLayer-matching Juniper routers,
but this large expenditure is not recurring.
Combine the discrepancy between D&A and CapEx with GTLT's
tax shield, and you have a recipe for very high free cash flow. At
$14 million of EBITDA, $4 million of interest expense, negligible
CapEx, and 19 million shares, GTLT's run-rate FCF is about $0.50
per share.
Net debt is currently at 2.3x pro forma EBITDA. The steady
nature of GTLT's business has allowed the company to use debt to
fund acquisitions. The company is already generating strong EBITDA
as a result of the nLayer acquisition, and I would not be surprised
by another acquisition soon. There are numerous small private
competitors fit for acquisition. Some of them have trouble
competing with GTLT's scale and may look to sell out.
Finally, no write-up of GTLT would be complete without a mention
of the management team. GTLT's CEO, Rick Calder, owns 6% of the
company and has recently bought additional shares in the open
market. He has an MBA from Harvard and a B.S. from Yale. He is a
skilled operator and is very focused on growing GTLT. The company's
20 straight quarters of growth in EBITDA per share are a testament
to his ability and focus. Further, every acquisition the company
has made under his watch has resulted in significant growth in the
per-share intrinsic value of GTLT.
GTLT's Executive Chairman, Brian Thompson, is intimately
involved in the operations of GTLT as well. Mr. Thompson also runs
a telecom private equity fund that is GTLT's largest investor,
owning 27% of the shares outstanding. The fund has recently bought
shares in the open market. Mr. Thompson has an MBA from
Harvard.
As this title's article suggests, GTLT insiders are active
buyers of the company's stock--despite already owning more than 40%
of the company. For most of the GTLT's short public history,
insiders have been consistent buyers. Since October of 2006, they
have purchased a total of 2,215,858 shares - 12% of the shares
outstanding - at an aggregate purchase price of $2.56M. In total,
14 different insiders have made purchases, including directors,
executives and VPs. Insiders have continued purchasing shares even
after the stock's recent move. Since the end of March, Brian
Thompson has bought stock six times, with his purchases totaling
66,700 shares for $153,933. In early June, Rick Calder bought
10,000 shares for $20,900.
Disclosure:
I am long [[GTLT.OB]]. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it.
I have no business relationship with any company whose stock is
mentioned in this article.
See also
Buy Nuance Communications For These Reasons
on seekingalpha.com