|Back to main|
11/27/2012 9:52:46 PM
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