Q2 2019 Earnings Call
And welcome to the <unk> second quarter 2019 results conference call.
At this time, all participants are in listen only mode.
Later, well conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance. Please press Star then zero on your Touchstone telephone.
As a reminder, this call is being recorded I would now like to introduce your host for today's conference.
Richard right now.
Chief Communications Officer.
You may begin.
Good morning, and thank you for joining us today I'm joined by Peter Kiener, Chief Executive Officer, and Jim Kelly, Our Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. The presentation and earnings release, we referenced in the call are available on our Investor Relations page on <unk> website.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in today's earnings press release.
Management believes that our presentation of non-GAAP financial measures provide useful supplemental information to investors regarding our results of operations and our non-GAAP financial measures should only be considered in addition to and not as a substitute for or superior to any measure of financial performance prepared in accordance with GAAP.
Today's call contains forward looking statements as described on page two of the presentation. We urge you to read these statements are not guarantees of future performance actual results may differ materially from these forward looking statements due to assumptions risks and uncertainties that are described in more detail in our filings with the FCC.
We undertake no obligation to amend update or clarify these forward looking statements made as of today August six 2019.
Now, let me turn the call over the Peter Accredo Pete.
Thank you Richard and good morning, everyone.
I will discuss three main themes today.
This will catch everyone up since the first quarter call when we announced that we launched our strategic review.
First I'll cover the second quarter results, a leaping off of our new baseline.
After two years of rebuilding I nap into I end up too though.
We are very encouraged by that turned around and now focused everyday on optimizing our portfolio.
The data center closures that we previously announced there now all complete and the last of the revenue and EBITDA impact is now behind us.
In short we are on track with our free cash flow objectives at approximately approximately $70 million defined as EBITDA less capex.
And we're currently placing all planned tuck ins on hold given our strategic activity.
We expect continued consistency in the balance of the year and projected outlook for revenue and EBITDA that is on trend with June year to date.
We're also reducing capex significantly and our outlook to focus on success based deals and waiting to see what happens what our strategic review through to avoid.
Any market duplications any potential mergers.
All of this has kept free cash flow targets in line.
And finally I'll provide that information I can to update you all on the types of interest that we received either through outbound efforts by our advisors, most aligned tree or inbound interest given our attractive data center cloud and network portfolio.
I know that you you will appreciate that we cannot go too deep into these conversations today, but rest assured that we have explored a range of interest from certain existing operators exploring combination possibilities others, who are focused on specific data centers or business units.
And others, who are considering a strategic investment to take advantage of expected consolidation in our industry.
[noise], we have always believed in gaining scale. So we're pursuing the most actionable opportunities aggressively and not expecting to drag this initiative out too long.
As you can appreciate we we can provide no assurances regarding the outcome of this initiative.
Well, we are committed to considering transactions that are in the best interest of our shareholders.
So at this point, let's turn to slide four.
[noise], we had a solid second quarter, demonstrating stability and our new baseline reported revenue was 73 million was about flat with EBITDA up to 24 million.
There were lots of positives in the quarter, namely operations improvements good sales cadence and lower churn.
Our increase in installation backlog is also very encouraging and back up over 20 million.
Our current mode is to manage and sell into the portfolio that we have as aggressively as possible with our direct sales force and channel partners.
The sales team had a very good bounce back in Q2, as we recognized that the larger enterprise deals tend to have longer lead times.
Our goal is to get the backlog installed as soon as possible and continue to build our pipeline into 2020.
Both Phoenix and Atlanta sales funnels have been increasing significantly.
We're pushing really hard to get a few read over the line.
Other highlights for the quarter include.
Our sales team scored its first megawatt deal the year.
Which was a two cushion shot this latest when gives us a new anchor tenant for L.A. flagship expansion project.
I know that our sales team was missing good opportunities in that market lately since we maxed out in power.
So we're very excited about our expansion investment.
[noise], we're clearly pivoting in the right direction with a retail plus wholesale strategy going into next year.
We are engaging in enterprise deals of size like never before and see lot of new activity at the edge in the one to three megawatt territory.
This could provide meaningful organic growth in our case.
Relatively lower capex, when we sell into an existing site with capacity.
As you would expect many strategic discussions tend to us around how we can unlock the upside to this enterprise opportunity.
We believe that continued execution.
Front end marketing.
And promoting a greater awareness of our Colo plus connectivity advantage will help us help us gain our fair share.
We remain optimistic about our potential in high absorption markets, where our flagship data centers are located and working with our customers across multiple sites to help them grow their businesses.
Another great development is that we had one of the lowest churn quarters in years.
This is a great credit to our technical support customer service.
And network operations teams.
We have centralized sir and first responder functions and immediately seeing the benefit.
Customer support is becoming a core competency at I know.
[noise] into Q, we also launched a new cloud product called I not intelligent monitoring this tool gives our bare metal customers more control and information to optimize their own performance.
This product will ultimately incorporate other aspects of our footprint in the eye in that portfolio, including Colo in network elements, which can be very sticky.
Finally, we are committed to being balanced in our approach to spending and aware of leverage pressure felt by many in the industry. Several operators have had their debt downgraded and his are recalibrating of expectations of what a prudent debt coverage ratio is.
This is why we are totally focused on free cash flow and maintaining guidance on EBITDA less capex of approximately 70 million.
Our investments are success based and given the relative newness of our 14 I know datacenter flagships, we can be conservative and build towards a positive free cash flow profile.
We want to build an approach we want to build in appropriate runway for ironed out.
To operate its business plan and capture upside over the long term.
Let's turn to slide five to discuss the attributes that we've been hovering with the strategic review.
[noise], our NEP has evolved into a very attractive datacenter portfolio, primarily in North America, but with the emerging opportunities in Europe and APAC.
We claim 52 data centers across 21 Metro markets, primarily through tier three facilities.
However, our bread and butter clearly generated out of our 14 flagship data centers nearly 85% of our footprint capacity is driven by those 14 sites in major markets as you can see from the chart.
This is very attractive and relatively low cost platform given our tier three design data centers in key high absorption markets.
Hi, Nap is in a unique position with space and power in major markets to address enterprise in retail demand for Colo and private cloud.
Network performance data center connectivity and connections to the public cloud operators our differentiator.
And one of the main reasons why customers choose I know.
We expect customers to continue to pursue hybrid Colo and cloud environments is satisfied their business models.
And I NEP has the right enterprise products to help them grow their business.
We see infrastructure as a service.
As nascent and very fragmented in our country and around the world.
Europe , and APAC or even earlier stages of formation of consolidation and many see this as a great expansion opportunity.
There are single tenant datacenters that workload still resident on customer Prem that will ultimately find their way out and to protect in a secure datacenter environments.
Private or shared public infrastructure.
In addition, I nap is well positioned for additional revenue margin expansion by moving upstream to larger EMR. Our deals. We also believed that a good way to achieve broader scale is through strategic initiatives.
The discussions and product and process.
Have started in earnest earlier in the first quarter and generated by our desire to gain scale and protect the company's long term success in a growing industry.
The company along with it would its advisors reached out to the most likely interested parties, including strategic and financial players.
This exploration has led to some very interesting inbound interest in EPS capabilities as well.
Most of the conversations have been extremely educational learning, how others view the industry and the opportunity to get in early on consolidation.
Certainly you can imagine that many other Ceos are what I would call that $300 million to $600 million club, mostly private are open to meetings to learn about the benefits of the merger or other strategic transactions.
Most degree that smaller retail colo operators need to transform into a retail plus wholesale model to grow revenue.
Tapping into enterprise demand seems to be the best path, but not approaching hyperscale levels for the most part which is very competitive and mostly build to suit by rates or infrastructure funds.
Our go to market approach, which works very well is aimed at Fintech mobile App gaming healthcare software and other verticals that we've been very successful in.
We believe that we can be even more successful with scale in metro markets we serve.
The goal is to continue to evolve into a company that can keep pace with ever increasing infrastructure services demand.
And it's a balancing act.
As we continue to run the business well minimize distractions and working towards a transaction the appropriate amount of time is speed and I assure you that we are currently focused on executing on our plans Deli and we'll report back to you once we make some final decisions.
So at this point, let me turn it over to our CFO , Jim Kelly to go through the quarter Jim.
Thanks, Pete and good morning, everyone.
As previously disclosed the 2018 results include single Hopper operations, beginning March Onest 2018.
And are therefore, not comparable to the prior period.
Please turn to slide six quarterly financial summary.
Overall, our quarterly financial trends have stabilized with the completion of last year's portfolio rational rationalization, which is evidenced by the consistency in our quarter over quarter financials for the first half of 2019.
As we execute on our goals to drive organic growth manage our costs and deliver strong cash flows. We are confident that the recent positive trends will continue.
Total revenue as reported was $73.1 million in the second quarter of 2019, a slight decrease sequentially and a 10.8% decrease year over year.
The sequential decrease was essentially flat after adjusting for churn from the last remaining customers you exited data centers.
The decrease year over year was primarily due to the planned data center exits and churn from several large customers 2018.
Now, let's turn to the consolidated earnings summary, slide seven.
Net loss in the second quarter was 18.6 million improving $1 million from $19.6 million in the first quarter of 2019.
As the cost of restructuring and exit activities largely related to the closed data centers decreased 1.3 million quarter over quarter.
On a normalized non-GAAP basis second quarter 2019, net loss remained relatively flat at 16.7 compared to the prior quarter and increased 6.2 million versus 10.5 main in the second quarter of 2018.
Sequentially, an increase in income from operations, resulting primarily from the cost savings initiated in the first half of the year.
Were offset by an increase in interest expense.
The year over year increase was primarily due to lower revenue and higher interest expense, partially offset by cost savings from the exit data centers and other initiatives.
Adjusted EBITDA in the second quarter was $24.4 million with adjusted EBITDA margin of 33.4% 130 basis point improvement over the prior quarter.
Adjusted EBITDA increased primarily due to cost savings initiated in the first half of this year.
Capital expenditures in the second quarter were $7.8 million compared to 8.6 last quarter and $11.1 million in the second quarter of 2018.
The second quarter spend was predominately for success based capital.
To fund growth customer installations.
Our capital expenditure plan for 2019, we'll continue to focus on customer growth and maintenance capital and turn shortening our returns on capital investments generating higher free cash flow.
As Pete mentioned earlier, we closed a megawatt deal in L.A., which serves an anchor to build out that facility in late 2019 to early 2020.
A portion of the Capex for this project is included in our current outlook for 2019 with the remainder to be incurred in 2020.
Adjusted EBITDA less Capex increased 1.6 million sequentially to 16.6 million in the second quarter of 2019.
A result of lower expenses and capital expenditures.
Now, let's turn to slide eight.
Our eye Nap UES business unit results.
U.S. revenue of $57.5 million in the second quarter of 2019 was flat sequentially and a decrease of 10.3% year over year. The second quarter revenue included churn from exited data centers offset by global transfer pricing adjustment between operating segment.
The decrease year over year was primarily due to the planned data center exits in churn from several large customers in 2018.
UES business unit contribution was $25.5 million in the second quarter.
A 3.5% increase compared to the first quarter of 2018, and a 14.6% decrease from the second quarter of 2018.
The sequential increase was primarily due to cost savings implemented in the second quarter of 2019, partially offset by seasonal power increases.
The year over year decrease was due to planned data center exit.
Churn from several large customers in 2018, partially offset by on ongoing cost savings initiated in the first half of 2019.
Now, let's go to slide nine to discuss I know international business unit results.
International revenue was 15.7 in the second quarter of 2019, a decrease of 2.3% sequentially and 12.4% year over year. The sequential decrease was primarily due to the global transfer pricing adjustment between segments.
The decrease year over year was primary due to churn from Iweb legacy products.
The international business unit comp contribution was $5.6 million in the second quarter of 2019, and 11.4% decrease compared with the first quarter of 2019, and a 6.6% decrease from the second quarter of 2018.
The sequential decrease was due to lower revenue from the global transfer pricing adjustment higher seasonal power demand and rent related to the new coal facility.
The year over year decrease was due to the churn from Iweb legacy products offset by ongoing cost savings initiatives.
Moving to slide 10, idle cash flow and balance sheet.
Free cash flow defined as net cash flows provided by operating activities less capital expenditures was $4 million in the second quarter of 2019, an increase of 10.3 million from the prior quarter and 300000 from the second quarter of 2018.
The increase sequentially was primarily due to working capital timing lower net loss and slightly lower capital expenditures.
Cash paid for interest was $15.6 million in the second quarter.
1.3 million higher than the prior quarter as several months of Fremont rent on some of our finance leases ended and higher interest from the term loan resulting from the rate change.
This brings unlevered free cash flow to $19.6 million in the second quarter of 2019 compared to just $8 million in the previous quarter and $20.1 million last year.
Total debt of $687.8 million includes $268.4 million and finance lease obligations previously capital lease obligations on our balance sheet.
$169.2 million of our capital lease obligations are excluded from debt for bank covenant purposes.
As they were operating leases at the time of refinancing.
Our covenant based leverage ratio was 5.9 in the second quarter of 2019 5.7 in the first quarter of 2019 5.2 in the second quarter of 2008.
Cash and cash equivalents were 10.5 million at the end of the second quarter of 2019 versus 8.3 million in the prior quarter.
The increase of 2.2 million was working capital timing.
With half of the year complete.
And as Pete mentioned any potential tuck ins on hold while we wait the strategic review we are revising our guidance for the second half of the year 2018, we expect revenue in the range of 290 to 300 million adjusted EBITDA in the range of $95 million to $105 million.
And Capex between 25, and 30 million for the year.
With the reset of our baseline revenues and adjusted EBITDA in Q1.
We will continue to tightly manage our capital expenditures and drive cost efficiencies in order to maintain consistent cash flows for the year.
Now, let me turn the call back to Pete.
Thanks, Jim, Let's turn to slide 11 for our closing remarks.
So the industry is evolving into a colo Ed sprawl hybrid cloud and renewed demand for low latency and high performance network connectivity.
I know can deliver all three.
Customers are selecting multiple vendors, depending on site location and application specific requirements. Our NEP is well positioned to gain its fair share of the system in the future.
And we're looking for ways to improve scale in our full potential.
We scored a few high profile deals in the second quarter gives us confidence across our entire product set.
Colo expansion la and increased activity in Phoenix, private cloud expansions in Seattle and Ashburn.
And advanced discussions on network transport deals.
The momentum is expected to carry throughout the year and into 2020 as we lay the ground work with enterprise customers and lead generators either through our direct sales force for our channel partners.
As we look ahead to the back half of the year will remain conservative on our spending and continue to optimize our cost structure aligning with ineptitude auto.
And for my final comment of our prepared remarks, we all agree that there is no time to be wasted in exploring our strategic alternatives we are on it.
And look to conclude our work as soon as possible report back.
We may not be able to comment on hypotheticals today. So while I. Appreciate the interest we'll just have to play a few of these scenarios out in real time.
I also want to thank Jim Kelly.
For his service I Nap and really appreciate his leadership.
And this is his last call a nap and we thank him very much for service.
Operator at this point, we'd like to take you take the questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key again that is star then one if you would like to ask a question.
Our first question comes from the line of Dan Kurnos with benchmark. Your line is now open.
Great. Thanks, good morning.
Pete just on the guide just so I understand this based on your commentary if and what you put in the press release, if churn is actually at its lowest levels and you're not you didnt there wasn't a big customer delta unless you're expecting one in the back half of the year. It means that you must have probably contemplated some inorganic tuck ins or something prior. So can you just talk about the size of that and is that also part of this whole thing you know, we don't want to get into duplicate markets as part of the strategic review.
Yeah, that's right Dan I mean in the review that we've been the.
Working with most aligned tree, we've talked to a lot of players and some of the matches basically cover the same.
Covered a same territory.
The the property that we were looking at in the first quarter that was basically slated for the second quarter and it's a modest tuck in bolt on but it was a market we needed.
Seem to be.
A duplicate.
So we basically put on hold and revised guidance it'd be pure organic based on the first two quarters.
The second quarter lowest churn.
Experience was was just really good for us for the first time and I think it has a lot to do with the infrastructure put in place in the back office, clearly where we're working on.
On the customer experience a lot more than ever before and it's probably take in almost two years to get to this point.
To make it as good as it is and it could always be better but it's.
It's it's a night and day from where it was.
So thats manifesting itself into a positive.
The positive impact.
So if you take into account what I would call a slower first quarter, we definitely got out of the gate little slow in Q1 with some things dragging into Q2 Q2 was a very good bookings quarter and.
No basically a rebound.
So once you net out the.
The planned inorganic.
Deals that we basically had on the table.
And you incorporate Q1.
It's not rocket science to basically annualize June year to date.
And basically reset the baseline.
And get through the process.
So thats the.
That's the goal.
And then just in terms of you talked about Atlanta, and Phoenix, Obviously, you know I think that might help in the strategic review to the extent you can get.
A big deal over I don't know if there's any consideration paid to also saving cash in case, you happen to get a two megawatt deal, but just how close are you to something particularly and in Phoenix and what kind of size should we be looking at.
Well.
And less last year, we did.
We did too.
Or three megawatt deal.
The first one we did for L.A. was little bit later than we expected, but it happened in twoq.
Frankly, I thought we'd have to buy now this one right on the edge. So we're trying to push that one but I think we're currently on the die of.
Two to three to four megawatt deals at our current.
Our current pace, so frankly, it's a little bit of luck and a lot of hard work to make these things aligned but we're now at the table at one to three megawatt opportunities that we never were before so we're entering the RFP process.
We're working with channel partners, we've had meetings around the country with them to have Ida eye contact with our channel partners said listen we want to the bigger deals now.
Hi, Naps converting from just pure no racking cage two calls we want to sell one to three megawatts of here's our portfolio.
So we rolled out to the channel partners.
No our.
Our footprint with the expansion opportunities across the NFL cities that we have.
And frankly the meetings were.
Pretty lightening because they.
I would say 80% of them said, we Didnt know you had that and so that.
There is still lot of work to do there, but from the senior levels down to the sales team down to the marketing team that.
We have a great channel partner manager in our in our company, we are getting in front of them to try to reintroduce them to the on that portfolio and its.
It's really.
It's really work, we got to do bottoms up.
I know weve been poking at it for two years, but we still could do more and those meetings are really critical.
And having the eye contact from the CEO .
Down it's really helpful.
So that's what we've been working on I think frankly those deals on the edge are out there.
So we just need to get into the into the mix.
And then play to win in and because we have conductivity, it's kind of the tie breaker.
The NFL city portfolio, the kind of activity.
And the ability to put on.
No multiple megawatts now is enough is an advantage. So phoenix is like that Atlanta is like that Dallas is is like that law was capped we're trying to expand that now Montreal's cap, we're already expanding working on plans expand Montreal.
So we can show that if you need one to three megawatts now.
You can come to us so we can put it up probably as fast as anybody.
So that is part of the.
That's part of the future for us and Thats, where we are.
In our evolution.
Got it thanks Pete.
Thank you. Our next question comes from the line of Frank Louthan with Raymond James Your line is now open.
Great. Thank you very much. So can you can you quantify exactly how much more revenue and EBITDA is left in your current run rate that will be exiting the data centers from the identified space working you definitively state that there is no more force churn or exits of the third party space from from the company.
There are no more.
Planned force.
Migrations in our body right now now that being said.
It could be a building down the road that we want to look at it again, but right now.
For 2019, it's all done.
Dragged a little bit into the first quarter as you know Frank but for the most part second quarter was clean.
Pretty much done so.
That's a big accomplishment for us.
I know it was a little bit of a.
There's some hangar hangers on if you will in some of the data centers that is difficult enough to move a customer out of a data center, but we were pretty.
Understanding of some.
In select markets that really needed more time.
So the second.
The second quarter's clean first quarter still has some drag along but.
We're done.
So you say there might be some in the future if I look at slide five you have these 30 additional buildings.
With less than five megawatt, what's the revenue and EBITDA associated with those because I would assume those are kind of that would be potential.
Revit targets, you might revisit next year right.
So okay, what's the revenue and EBITDA potential for that well have we can have an understanding.
As I mentioned, Mike as I mentioned in my script, we're probably 85 15 in terms of relationship between our 14 flagships.
And everything else, so, let's say 15% of.
The balance of our smaller data centers that are in partners sites like the rights that you know.
We've been grooming some of those it won't be.
It won't be such a huge impact because the revenues are.
Our.
Much smaller in terms of impact, but we've been grooming.
Every collection.
Of partner sites.
Since I've been here.
And without naming names the biggest collection has been adjusted already this year.
We have term sheets in front of another as we speak.
And there's two more on the edge at the end that we still need to address mostly in Europe .
But that's that's mostly cost savings initiatives and.
And clean up if we lose some revenue in a.
In a squeeze down of a small colo plus pop datacenter Ob.
You know be de Minimis.
But.
For the most part.
The hardest the hardest part of the work that we did was in the flagship category.
Slash you know.
Bigger partner sites that were that are now out of our body.
The turn key facilities, we have and we have now are primarily in the DRTV.
So we have six out of eight that are in.
Great tier three facilities with digital.
The rest are are.
With significant partners, but they are much smaller sites, probably started as pop somewhere around the world.
Okay.
What is what is the what's the interest and the hosting business as something to to to jettison and can you give us an idea of what.
Strategic investment might look like in some of those conversations you've had.
Yes, so we can't talk about it too much today, there's a lot of different flavors of that but as you can imagine there are strategic that are interested in.
Pure play specifics, whether its colo or managed services there are a lot of players out there that.
Our.
One.
Well more pure play nature.
We're looking at every but everything that.
Basically makes sense.
I can't really comment on the financial sponsors or the or the strategic interest but.
You know that we know a lot of these players, especially through moelis align tree, we touched everybody that that probably would.
I would have some interest.
And we're trying to run down the best ones for now to see what makes sense. The noncore asset sales are still interesting for us because.
No one or two assets definitely could help us de lever.
We have.
We have always had interest in a in a datacenter here or there or a smaller business unit in our body here or there and I think with putting everything on the table as part of the complete review.
We're going to start making some decisions on what are the best things to act on.
In the coming.
Weeks last month.
The sooner the better so.
We're working on it every day, it's clearly.
An initiative that is taking a lot of time, but worth every every minute getting to where we want to get too.
For 2020.
Okay have you had any.
Any loss of salespeople recently.
I'm sure the answer is yes, but.
But we backfill right away, we have a very strong leadership team, we have a strong international leader.
Added Canada, we have a new us a strong leader.
That's a that we consolidated under.
We have a great inside sales team leader.
That is working well and we have a really good.
Channel partner leader that make up the four horsemen, if you will.
So we like the leadership team we have.
There's been some optimizing of the team that's probably more normal than not but the four horsemen are really.
Coming into their own and it sort of manifested itself in the second quarter.
I think at some point now I can say, we're hitting on all cylinders and.
And we have really good opportunity to keep going.
But we have the people we need at the leadership position all working for our Chief operating Officer, Andy Day, and I think.
Everyone would agree here that he is.
Engage daily with the sales team.
The marketing team is also very strong in the company that we picked up mostly from single up under our CMO.
That's.
That's with us today here and.
You know I think we built the infrastructure for the back office and front frankly, the front office that we need for the future and it's taken some time, but we have the leaders in place.
So what's the what's the current sales head count and what do you expect it to be by the end of the year.
We typically run somewhere between 40, and 50 quota bearing reps that flexes here and there that's supplemented by the outsource channel team and having met with them.
And many of the cities in our tour.
There is another 20 people per city that are working for us so.
We and we put that back together the channel.
Partners basically disappeared in 16 and 17.
But they're they're getting re.
In a re energize and.
And we're trying to work with them the best way, we can to get them back in the game.
So.
The 40 to 50 is probably table Stakes, we flex up sometimes 60.
But we are supplementing some a new sales because we go in larger for enterprise the channel partners really are.
The secret sauce.
So probably the answer is somewhere between 40 and 50 plus channel is it's who we are right now.
Plus inside sales.
Got it okay. Thank you very much.
Thank you. Our next question comes from the line of George Sutton.
With Craig Hallum Your line.
It is now.
Good morning, this is Adam on for George.
Pete in the press release you characterized.
Initiatives as actionable axle seems to suggest timely how important as speed in this process.
Speeds as speeds important from a from an operations perspective.
Speed is important because when you're trying to run to run a business and you're doing these extra curricular activities.
It's a it takes a lot of management time.
So we want to be.
Careful to run through this review in a very smart and diligent way have the appropriate combination of speed.
And.
And so called doing it right.
So we're trying to be patient as well as a aggressive in trying to get through.
This work as you can imagine we started in the first quarter in earnest.
We're into Q.
That's a you could learn a lot in two quarters to figure out where you go and so.
We're trying to do as fast as possible, but we also want to do it right. So.
Where we're putting in the time.
I think my team and those working with us are doing double and triple.
Duty.
There is a lot of sweating going on so we're trying to get through it.
But were.
You can appreciate Adam we're trying to run the company at the same time so.
We'd like to get through it as soon as possible.
Great. Thank you and.
On that point, obviously, great to see backlog back up again above 20 million.
Has the strategic initiative hampered you in terms of client conversations.
Never know, but we definitely have to do two things at the same time.
As you can imagine it does take.
It takes a lot of finance time for sure in our advisors are put in a lot of time as well.
So we were able to do two things at the same time.
We're not we're not and we're not going to slight.
Our initiative to sell.
So we're trying to do two things at the same time.
All right. Thank you.
One final question in terms of the.
The pipeline as well as the backlog how does that.
Compare if you will get it from.
Legacy business versus single Huh.
Well I would say.
I would be guessing, but I would say three or four times better.
Easily at least for old Internet I would say when I came in it was almost nonexistent.
This pipeline is manageable I always think we could do more too, but given what we started with it was.
It didnt exist.
At all.
And in case, a single high up I would say the business. It was run very well and it had a pipeline in a lot of the infrastructure both inside sales and channel partnership infrastructure in marketing I mean, we we benefited from that acquisition.
Probably gave us.
No not really a platform, but the team to help in that area that really gave us a jumpstart.
So.
I'd say they had their act together before.
Old interconnected and then they got they made us better.
So thats the.
That's the combination.
Great. Thank you.
Thank you. Our next question comes from the line of Jennifer Fritzsche with Wells Fargo. Your line is now open.
Great. Thank you for taking the question I'm, sorry, if I missed this but.
Can you talk about the capacity that they're without additional capex.
And then a separate question are there customers that really want to ride on your fiber network only.
Yes, Hi, Jennifer.
Hi.
In the case of Phoenix Phoenixs are our largest flagship.
It probably can do 15 megawatts with with.
Capex.
For success based Capex, we probably could do three megawatts to five now.
That would be building out a hall for example, but for critical infrastructure to get the 15 that would be a little heavier on the capex side, but we can do it we basically have a power station right on campus there in Chandler.
So we're very excited about that flagship we've probably run 50 tours through there in the last last three months or more.
So we'll catch we're going to catch a fish soon.
I'm pretty sure and the good news about Phoenix is that they can come in right away and they see speed.
Two.
Installation big advantage.
So we're very excited about that.
On the network side, we if you may recall that we lit a metro markets with dark fiber from Zayo, and we put our own Sienna gear on it.
In our network leadership team is discussing pure transport.
Deals with major enterprise customers in the seven seven figure range.
Which means they want to connect multiple cities in a resilient.
Protected.
Fiber constructs with wave back up.
In major markets for their own.
Enterprise.
We've never had that before so well everything that we thought we would do first had a first intention which is to harden our own backbone because.
The company was kind of a.
In short of.
Bandwidth here and there we had bottlenecks we had outages related to.
Surges of capacity, we've been working like Crazy.
To harden, our backbone and to put more facilities in place to make it more resilient that's paying dividends now so the deals we're actually talking about on the network transport side.
Relate to the work that we did in the fiber rings in the in the case of North America.
The.
The increase in bandwidth and the backbone with the carriers to make our facilities more resilient.
It wasn't much of a an investment per se because a dark fiber rings were already in place.
And the negotiation with carriers, which was done very well by our team not only saving costs maximizing the bandwidth across the back won't backbone because we focused on reengineering.
The way it was set up.
And that and Thats being present in now to customers, who just need connectivity to be intercity cross country.
To the extent they have colo with us already and then see what we can do on the network side and be a one stop shop and see all the way through network management.
Is it is a big attraction, we thought we would get here and and now we're pitching those deals. So I'm very encouraged by it. We we are looking forward to reporting on that.
Well, we'll see how it goes but the network at I know is a differentiator.
And we've invested in it.
Reengineered for for the last 18 months.
Great. Thank you. Thanks.
You're welcome.
Thank you. Our next question comes from the line of John Peterson with Jefferies. Your line is now open.
Great just.
Maybe just one more question on guidance just to make sure that we're all clear so.
Is there.
Im sorry talking about moving from the second quarter to the third quarter are there any adjustments that need to be made.
To get to a better run rate as you think about your guidance for the rest of the year or is the second quarter kind of a clean run rate quarter.
I think twoq use a clean clean run rate.
As I mentioned.
And the next on the previous call or previous.
Report I think theres some things in there that are in our favor they just got to come down.
If even if we sell a bigger deals, let's say one megawatt deal it's going it's not going to book.
It may bump, but it won't bill in Q Q3, because it take time to install it.
So I would say that third quarter would be more the same with some growth opportunities.
They are coming through particularly on the cloud side.
That are more.
Simultaneous since you sell cloud deal in Seattle It books.
So.
So we're looking to keep that momentum up that will help the cadence in the quarter.
But but nothing unusual unless it's.
You know like I said, if it's one of those bigger network deals are co lo deals.
More than likely build book, but not bill.
Completely in Threeq, so more of the same.
Okay. So if we think about your 20 million dollar backlog versus the low end in the high end of your guidance, maybe kind of help us understand how much of that backlog needs to come online.
What you guys are kind of assuming in terms of how much of that comes online.
Yes, because.
And because a lot of that backlog is that megawatt deals probably.
It's probably a lot in the back half of the year.
So I would say 70, 520 525 will get in year.
And 75 will push only because the bigger they are the longer they take.
So.
That's that's the nature of the these enterprise deals are that are booking.
Pretty big numbers.
Okay. So it's more of a end of year 2020 momentum.
Pleasure.
All right. Thank you and then.
I guess in terms of the strategic review of it sounds like you guys are having a lot of discussions with other players in a merger.
I have two portfolios to create kind of a bigger and better more competitive.
Portfolio I'm curious if you could maybe frame as you're having these discussions how people think about the idea that portfolio in where they see the most about most strategic value whether it's the network.
Well your colocation footprint or your international exposure.
That's a great question I think.
There's some consistency around.
Tier three Colo sites those 14 flagships.
Are really attractive.
In the in the added benefit of having a network connected to it.
Is.
Attrax or in people.
Those who who see Colo and kind of activity is one idea, especially when you think about latency.
And.
Lease cost routing and.
And just keeping the network up 24 seven.
Those two go together and I think it's back in Vogue in many ways you hear a lot of the larger datacenter companies talking about investments and conductivity now I think Europe and Latin America's figured out.
First in some ways.
They are a lot of the portfolios in Europe already have.
Network connectivity and Colo together Latin America's similar.
And then there's other pure play providers, there really are focusing on IP infrastructure and getting getting really good at it.
Professional services on top of that which is.
You know, it's really driven by by talent and head count.
There is a there is a vein of folks that are really focused on that too.
In our case, we find that.
The having bare metal servers as part of our portfolio has not hurt us in any way, it's actually helped us very complementary.
Many customers have both Colo.
And bare metal.
We even have a program, which is very attractive where customers can port spend between colo.
And bare metal.
Which means that sometimes they don't know they get into a project and they start one way and we don't lock them in we just basically say keep the same revenue just ported to this other product and keep going with us as really helpful.
To somewhere best customers.
So we find as uniquely attractive in the in the customer base that we have.
And.
And so you have a long way of saying that you have pure play players and then others who see.
The environment as a a full solution set to enterprise customers and that's how we're playing it today.
Okay. That's helpful color. Thank you.
Okay.
Thank you. Our next question comes from the line of Erik Rasmussen with Stifel. Your line is now open.
Yes, thanks for taking the questions.
I'm going to circle back again on the guidance and I know you talked a little bit about it I think it was even the first questioner.
But when you when you prior range assumes some strategic or tuck in type deal.
But how much of that 30 million difference.
Was assumed from this versus sort of a.
Any change or a deterioration in the baseline of the core business assumptions.
Well, it's a little bit of a mix, but once we had a.
First quarter result that was a little bit off and hot Hot haven't been in effect in the beginning of the year that has a multiplier effect on on the whole.
On the whole calendar year for sure.
But.
We we thought.
Pretty pretty clearly that that we can make it up.
And.
And once we decided to pull back on the tuck ins we.
We just focused on pure organic but the path to get there on the original trend.
Was really a.
To cushion shot we had to recover in the second quarter, which we did.
And then we had to add to tuck in that we had under Ela why which we did it.
So.
The math suggested.
Let's just do it for the sake of revenue.
And.
Let's be let's be smart about it because.
The worst thing we can do is do a bad deal or deals simply.
To hit a number what we're in the middle of a strategic review and the things that we're seeing would would render it.
Duplicate.
So.
We basically said, let's be smart about it let's do a timeout focus on organic.
Focus on the base, the new baseline and.
And offer that today as a way to rebalance what we're doing.
And then frankly, we'll see we'll see what happens the next coming months some of those deals are still there. So.
We may be back to them, but we thought would be best today.
To just express.
Realization first quarter's a little slow and take the inorganic added the trend.
And sit tight and manage the portfolio, we have and let's get through the next couple.
You know weeks.
Or so to see where we end up.
Okay got it and then maybe just as it relates to your target model with sort of the latest.
Reset what sort of targets.
Should we be modeling for revenue EBITDA margins Capex I know you talked about a sort of revenue 40% growth and.
There was sort of a margin.
Implied there.
Some point, 40% where are we at with that target model.
Well the revenue and EBITDA.
Trends from one Q into Q U can depend on we still have some upside in EBITDA back half of the year, we have some cost initiatives in place.
That's still our plan to try to get EBITDA up by the time, we exit at the end of the year.
Some of the things that we want to play forward is the investment in marketing against that but where.
No. We're we're still moving in that same direction. The other thing is you know Eric is that we.
We lowered the capital program in the outlook as well so the thing that's near and Dear to our heart.
From a.
From a baseline perspective as free cash flow.
So EBITDA less capex is still on the original.
Guidance target.
So we're trying to balance all three components not just revenue in EBITDA, but the capital program related to.
The inorganic was removed as well.
So if you if you study first quarter and probably second quarter net it's pretty clean.
At the baseline we're working on what we called out today is the caution that cost initiatives.
Realigning some of the infrastructure fixed costs of the company.
Two.
To a scenario where were six data centers lighter.
And we're more focused on.
Selling into the flagships on net.
So were really honing in on.
Being lean, but very deliberate and selling what we have and that's that's going to save.
Some costs.
Okay, and then maybe just finally the strategic alternatives.
I realize the process is ongoing but.
Where do you see that the major concerns or hurdles for sort of getting a deal done and what sort of scenario would make sense.
To do a deal considering some of the limitations in the model.
I really can't comment on that Eric but.
We're trying to do the best deal we can that's in the best interest of shareholders. That's that's our goal.
The different flavors were looking at.
There's so many varieties actually but as we narrow them down we want to make the best decision to put us in position in 2020.
The gain scale.
So at this point I really cant comment more than that.
But.
We will continue our work and report back as soon as we have something.
Okay. Thanks.
Thank you. This concludes today's question and answer session I would now like to turn the call back.
Mr. Peter Carlino for any further remarks.
Thank you operator, thank you all for your time today, we look forward to.
The upcoming what a ones and any questions you might have thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program you may all disconnect.
Everyone have a great day.