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GTT Communications, Inc. (GTT)
Q2Â 2019 Earnings Call
Aug 8, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the GTT Communications Second Quarter 2019 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Chris McKee, General Counsel and Executive Vice President of Corporate Development. Please go ahead.
Chris McKee -- General Counsel and Executive Vice President, Corporate Development
Thank you, and good morning. I'm joined today by Rick Calder, GTT's President and CEO; Mike Sicoli, GTT's Chief Financial Officer; Brian Thompson, GTT's Executive Chairman of the Board. Today's discussion is being made available via webcast through the company's website, www.gtt.net. A telephonic replay of this call will be available for 1 week. Dial-in information for the replay as well as access to a replay of the webcast is also available on our website.
Before we begin, I want to remind you that during today's call we will be making forward-looking statements regarding future events and financial performance made under the safe harbor provision of the U.S. securities laws, including revenue and margin expectations, projections and references to trends in the industry and GTT's business. We caution you that such statement reflects our best judgment as of today, August 8, based on factors that are currently known to us, and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control.
For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our SEC filings. GTT disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we'll also discuss non-GAAP financial measures, including certain proforma information, which were not prepared in accordance with GAAP. A reconciliation of our GAAP and non-GAAP results is provided in today's press release and is posted in the Investor Relations section of our website.
I will now turn the call over to Rick Calder. Rick?
Richard Calder -- President and Chief Executive Officer
Thank you, Chris, and good morning, everyone. This was a challenging quarter for us as we have not yet returned to organic rep-driven growth. Overall, net installations of monthly recurring revenue remains negative at this stage. We ended the second quarter with approximately 320 quarter bearing reps, the same level as last quarter, with a similar level of sales and sales productivity at approximately $7,000 per rep. As we discussed before, to return to positive net installs and organic rep-driven growth, we need a larger sales force to drive a larger volume of sales and installs to outpace our churn at the mid-1% level.
We are now targeting 400 quarter bearing reps by year-end 2019 and 500 by year-end 2020. Our installs in 2Q were similar to last quarter, though our installed productivity remains lower than our sales productivity at approximately $6,000 per rep in monthly recurring revenue with opportunity to improve the pace of installations of our backlog, which remains at approximately $10 million in monthly recurring revenue. Year-to-date, our churn remains at 1.5% and were slightly lower in first quarter and slightly higher in second quarter. Looking at a division level. Year-to-date, we have seen positive net installs in our Europe division, and since our last call, we consolidated leadership of our Europe division under Jesper Aagaard who will drive investments to accelerate growth throughout our 5 European regions, including the U.K., Nordics, Benelux, Germany, Austria, Switzerland or DAC, and south, which includes France, Italy and Spain. We have had weaker performance and negative net installs year-to-date in our Americas division.
Since our last call, we announced a leadership change with Ernie Ortega joining GTT in June as President of our consolidated Americas division. We are very excited to welcome Ernie to our team as he brings a tremendous track record of success in our industry running large sales organizations at XO, Cogent and Colt and will bring fresh leadership to the Americas division. As we grow our sales force to 400 by year-end 2019, we are converting existing trained resources at GTT into quarter-bearing account executives, directly assigned to clients, to focus a higher percentage of our workforce on direct selling activities. As of today, we have increased to 370 quarter bearing reps. We are also recruiting aggressively to add sales development reps, or SDRs, as our lead generation engine; inside sales account representatives to cover our smaller accounts; and selectively, for higher end account managers and account directors for larger accounts. While we expect these resources to increase our overall sales, average sales productivity per rep will be slightly lower as we move forward since our inside sales account representatives and our account executives will carry a lower quarter than our more experienced reps.
We expect to fund most if not all of the planned sales force expansion by reducing costs in other areas of the business, most notably non-headcount-related SG&A. For the balance of 2019 and through 2020, our focus is returning to and accelerating organic rep-driven growth. Very simply, we must grow our sales force to expand our overall sales and backlog. We must increase the pace of installations to keep sales productivity, installed productivity at similarly high levels. And we must maintain our churn levels in the mid-1% range. Within our Americas division and Europe division, Ernie and Jesper are focused on each of these 3 areas as follows: Increasing sales by adding sales development reps to generate leads and expand our farm system of new sales reps. Adding quarter bearing reps at both inside sales account representatives and higher end account managers and account directors to increase coverage of our existing clients and new prospects, and expanding our training and development program with focus on our core services of SD-WAN, Internet, transport and unified communications. Two, increasing installs and installed productivity by consolidating the talent pool across our previous 4 service delivery organizations into two stronger teams.
By standardizing our initial design and deployment of SD-WAN, which represents approximately 25% of our current installed backlog and allowing agile post install design changes from clients; and lastly, by automating many of our current manual processes using our internal CMD development resources as they have completed our integration activities. Three, reducing churn. Again, by adding quarter bearing reps to increase coverage on our existing accounts and by dedicating more resources across the critical post-sale client touch points, including service delivery, incident trouble management and billing and collections. Moreover, we are expanding client visibility and control into all of these touch points through our EtherVision client portal. I'm pleased to report that the Interoute integration is now substantially complete. We are still experiencing some post integration challenges with our billing and collections function in Europe, and converting billing systems is never easy. And while Interoute is not the most complex integration we've ever done, it was certainly the largest. Revenue and cash flow were negatively impacted during the quarter as we continue to work with many of our European clients to answer all of their questions about the new build format, fix any data errors and issue-related credits.
Michael will talk about this more in a few minutes, but we expect some of this work will continue into the third quarter and then return to normal levels by year-end. Our business remains capex-light, though asset-rich, and with the Interoute integration behind us, we expect to drive increasing levels of free cash flow, defined as operating cash flow, less capex, with a target of generating $175 million to $200 million of free cash flow in 2020. In addition, we have engaged an advisor to explore divesting nonstrategic assets that we have acquired over the past several years as we focus on our cloud networking services. The main use of proceeds from any asset sale will be to pay down debt. On the M&A front, we announced the acquisition of KPN International, which we expect to close sometime in 4Q '19. KPN International operates a global IP network serving strategic enterprise and carrier clients, increasing our Tier 1 scale and network reach, and adding key sales, operations and service delivery resources to our team. In addition this deal positions GTT as the preferred international network supplier for the domestic clients retained by KPN who have international connectivity needs.
The purchase price is EUR 50 million in cash, which we anticipate will represent a multiple of less than 5x post-synergy EBITDA, and we expect to complete integration within 2 to 3 quarters post-close. As I said earlier, while we have not yet returned to organic growth, we have completed our integration activity and remain confident in our ability to return to organic growth in the future. From the beginning of 2017 until now, we have closed and integrated 10 acquisitions and nearly quadrupled the size of the firm. As we've noted before, each of the companies we acquired had a flat or declining trajectory at close. And while we have not yet returned to growth, we have assembled all the right components to return to growth in the future. We have the same focus strategy of providing cloud networking services to larger multinational clients and taking share from the incumbent telcos in the multi-hundred billion dollar market for cloud networking services. We have a fantastic team of people located in 60 offices and 30 countries around the world, committed to deliver on our purpose of helping companies connect people to any location in the world and to every application in the cloud.
Now I will turn it over to Mike to review the financials in more detail. Mike?
Michael Sicoli -- Chief Financial Officer
Thanks, Rick. Second quarter revenue increased 33% year-over-year and decreased 4% sequentially to $434 million. Exchange rates had a negative impact on our reported results as approximately 51% of our revenue is denominated in non-U.S. dollar currencies. In constant currency, revenue increased 37% year-over-year and decreased 3% sequentially. On a proforma basis, including Interoute in prior period results and in constant currency, revenue decreased 3% both year-over-year and sequentially. The year-over-year decline was driven by 2 main factors: currency, which represented over $50 million of annualized revenue reduction compared to last year as well as negative net installs.
The sequential revenue decline was driven by several factors, including a $2 million reduction from currency headwinds, a $2 million reduction in nonrecurring revenue, and the remaining $12 million reduction was split fairly evenly between the impact of negative net installs and credits issued to clients to resolve disputed amounts associated with Interoute billing integration. Issuing dispute credits as a result of billing integration is not uncommon, but the magnitude is larger and the time frame is longer than we normally see. The typical reasons for these credits are missed disconnects, double billing or import errors, most of which relate to prior periods. We expect billing credits to remain elevated in the third quarter as well as we've resolved any remaining issues delaying payments, then return to a more normal level starting in the fourth quarter.
Second quarter adjusted EBITDA increased 50% year-over-year and decreased 8% sequentially to $112 million. In constant currency, adjusted EBITDA grew 55% year-over-year and decreased 8% sequentially. And on a proforma basis, adjusted EBITDA grew 8% year-over-year and decreased 8% sequentially. Adjusted EBITDA margin of 25.8% increased by 290 basis points year-over-year and decreased by 130 basis points sequentially. The year-over-year proforma adjusted EBITDA increase was due mainly to the realization of cost synergies from the Interoute acquisition and a sequential decline was due to the revenue decline. Both cost of revenue and SG&A were lower sequentially but not enough to offset the revenue decline. We continue to expect to achieve our original target of $100 million of cost synergies from the Interoute acquisition and these savings are largely reflected in our results at this point, with only approximately $10 million of annualized savings remaining to be realized.
During the quarter, we incurred $6 million of transaction and integration expenses which are included in our reported SG&A but excluded from adjusted EBITDA. We also incurred $6 million of severance restructuring and other exit costs. From a cash standpoint, we paid out $14 million of combined exit and integration costs in the quarter, down from $18 million last quarter. These exit and integration costs are mainly related to Interoute but also include Access Point. At quarter end, we had approximately $18 million remaining to be paid out related to previously expense exit costs, most of which to be paid out in 2019. And we expect future exit and integration expenses related to these two deals to be minimum. Second quarter net loss was $33 million compared to net loss of $136 million last year and net loss of $27 million last quarter. The net losses in each periods were driven mainly by nonrecurring costs, including exit and integration costs as well as the noncash change in fair value related to our exchange rate and interest rate hedges.
Second quarter capital expenditures were $19 million or 4.4% of revenue compared to $19 million last year and $32 million last quarter. As we discussed on our last call, last quarter's capex was higher than normal due to the timing of payments, and this quarter was closer to normal. Going forward, we expect our capex to be between 5% and 6% of revenue, which is slightly lower than we discussed on the last call. Our revised expectation reflects the capex light nature of our strategy, and we are comfortable lowering the range now than we've seen a full year of Interoute activity. We continue to expect our capex to be driven mainly by success-based investments in support of specific revenue opportunities. Second quarter ending cash balance was $34 million and net cash provided by operating activities was $15 million. Adjusted free cash flow, which is net cash provided by the operating activities, less capex, excluding acquisition-related costs was $10 million in the second quarter compared to $2 million last quarter. Our cash flow was negatively impacted by working capital this quarter as we did not make significant progress yet on reducing our accounts receivable balances in Europe.
We have made organizational and process changes to accelerate the pace of reducing our accounts receivables balance in Europe, and we continue to expect to normalize our DSOs in the second half of the year. We also continue to expect cash flow to increase throughout the year, as we normalize working capital, fully realize expected cost synergies and finish paying out exit and integration costs, positioning GTT to deliver free cash flow in the range of $175 million to $200 million in 2020, as Rick mentioned earlier. Our debt balance was approximately $3.3 billion at the end of the second quarter, including $2.6 billion of senior secured term loans maturing in 2025, of which roughly 1/3 is zero denominated and $575 million of senior unsecured notes maturing in 2024. During the second quarter, we increased our revolver capacity by $50 million to $250 million, to increase liquidity and fund the KPN acquisition. We did not draw any additional revolver during the quarter.
Our proforma net leverage ratio in the second quarter increased to approximately 6.5x on a trailing 12-month basis, including acquisitions and unrealized cost synergies in prior periods. As we've said before, we remain committed to reducing leverage over the next few years to our long-term target of 4x or less through growth in adjusted EBITDA, cash flow generation, potential asset sales and delevering acquisitions. We also announced that we've adapted a Section 382 Rights Agreement or NOL Rights Plan. The NOL Rights Plan is designed to protect our net operating loss carry forwards, or NOLs, available under Section 382 of the Internal Revenue Code. As of June 30, 2019, GTT had $217 million of NOLs available for use to offset future federal taxable income. And our ability to use those NOLs will be substantially limited if GTT experienced an ownership change defined under Section 382 of the Internal Revenue Code. To protect GTT's NOLs from being limited or permanently lost under Section 382, the NOL Rights Plan cedes to deter trading that would result in an ownership change and to protect GTT's ability to use its NOLs in the future in order to prevent the reduction and shareholder value that will result from any loss of the NOLs. More details are available in the 8-K.
This concludes our prepared remarks. And we will now open up the call for questions. Operator?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jon Charbonneau of Cowen and Company. Please go ahead.
Jon Charbonneau -- Cowen and Company -- Analyst
Great, thanks for taking the questions. How should we now be thinking about the timing of when you can get back to sales rep-driven growth especially given that you expect 400 sales reps by year-end? And then in terms of your free cash flow target of $175 million to $200 million in 2020, what assumptions have you made within that for sales rep-driven growth in additional M&A? Thank you.
Michael Sicoli -- Chief Financial Officer
Hey, Jon, it's Mike. I'll start and I'll let Rick answer as well. In terms of the timing, as you know, we don't provide specific quarterly guidance. So we're not providing a specific time frame today, although as Rick said in his prepared remarks, we are optimistic and think that sooner or rather than later. In terms of the assumptions of free cash flow next year, regarding rep-driven growth, there is not a significant assumption of rep-driven growth underneath that. And in terms of M&A, we've got the KPN deal that we've already announced and talked about which we have assumed will be in the numbers for 2020, but we have not assumed additional M&A in that number.
Richard Calder -- President and Chief Executive Officer
And then just to reiterate the point, Jon, I mean we are single-mindedly focused at this stage in returning our business to rep-driven growth. As we've noted in the prepared remarks, we are close. We're simply too small from the sales force perspective, and we need installed productivity to basically be equal to sales productivity. We have the backlog to achieve that. We have not achieved that yet. And we have to maintain churn at a constant level. So as we grow to 400, 450 by mid next year, 500 by the end of next year, we certainly see the opportunity to return relatively quickly to rep-driven growth, get to positive, and then accelerate that growth moving forward.
Jon Charbonneau -- Cowen and Company -- Analyst
Okay, thank you.
Operator
And our next question today comes from Frank Louthan of Raymond James. Please go ahead.
Frank Louthan -- Raymond James -- Analyst
Thank you. How close are you on -- to the 50% level? Can you give us some color on how much cushion you have before you trip the change of control? And then to be clear, you hired an advisor not to sell the whole company, just some particular assets. And can you give us an idea of kind of what those assets might be? And range of what they might be worth?
Michael Sicoli -- Chief Financial Officer
Sure. Regarding the 50% level around the 382 change of ownership guidelines, we haven't provided a specific number. I would say, it's not as if we are 1 or 2 percentage points away. But it's high enough that we felt like it was a prudent thing to do to take this step at this time. I would just say it was above 40%.
Richard Calder -- President and Chief Executive Officer
And then on the -- we're early in the process and we have engaged an advisor. The vast majority of our business is strategic, clearly, as we bought many different assets over the past 2.5 years or certain select portions that are less strategic to be focused on our cloud networking strategy. Our highly strategic products are clearly wide-area networking, LAN leading with our most strategic products offer defined wide-area networking, Internet services, transport and infrastructure, ethernet, wavelength and unified communications. So things that fall outside of that portfolio are less strategic to us. It generally represent relatively small portions and as it we're in early stages, I wouldn't comment specifically on how much we would expect to generate, but we do expect to take whatever proceeds we would generate and use it to pay down debt.
Frank Louthan -- Raymond James -- Analyst
Okay. I can appreciate you don't necessarily boxed in. But I mean is it, are we talking north of $100 million or something more like $5 million to $10 million kind of a sale? Is it -- are they meaningful assets that someone would want to buy?
Michael Sicoli -- Chief Financial Officer
Yes. Without being specific, just reacting to your range, yes, we are talking about north of $100 million, not $10 million. If it was $10 million, we wouldn't bring it up, right? It's meaningful.
Frank Louthan -- Raymond James -- Analyst
Okay. All right. Good enough. And then can you quantify the billing credits that you have left for the remainder of the year that will be elevated so we could have a better idea how to put that into and how to model for that?
Michael Sicoli -- Chief Financial Officer
Yes. If you go back to what I talked about in the prepared remarks, there was sort of a $12 million number sequentially that was a combination of the negative net installs and the billing credits. Billing credits, it was roughly half-and-half between those two items, so call it $6 million approximately in this quarter from billing credits. Our expectation is that, Q3 will probably be a similar level to Q2, meaning it shouldn't generate additional declines sequentially. But it will remain elevated during the third quarter, while we resolve all of the outstanding issues that are preventing payment. And then as we head out of the third quarter, that level of credits should go down, such that, that alone would produce some incremental revenue quarter-over-quarter and then it should be sort of normal from there.
Frank Louthan -- Raymond James -- Analyst
Okay, great. Thank you.
Operator
Our next question today comes from James Breen of William Blair. Please go ahead.
James Breen -- William Blair -- Analyst
Thanks for taking the question. Just a couple. The EBITDA margin came down sequentially. Can you just talk about what's driving that? And how you feel about that progressing throughout the year? And then secondly, you gave the free cash flow guidance for 2020. Given the 5.5% ratio for capex, it sort of implies a revenue number of somewhere between $1.06 billion to $1.08 billion, which is a pretty broad range. Do some of the asset sales factored into that guidance? And then how do you think about that going forward?
Michael Sicoli -- Chief Financial Officer
Sure. From a margin perspective, obviously disappointing this quarter. The revenue credits that we talked about a minute ago, are essentially 100% margin reductions to revenue in period. And so that clearly had a big impact on margin this quarter and will probably weigh a little bit on margins again in the third quarter. Longer term, there's really no change in what we've said before and what we expect, getting into the high-20s and ultimately up to 30. I think it's still achievable and still our goal. In terms of the -- trying to infer the revenue guidance from the capex guidance that was in the non-GAAP reconciliation, we're clearly not trying to provide revenue guidance. The range on capex is really based on the way we think about forecasting capex, it's not based on a revenue expectation.
James Breen -- William Blair -- Analyst
And sorry, if I missed it. Did you quantify the credits?
Michael Sicoli -- Chief Financial Officer
Yes. We said it was roughly $6 million in the quarter of sequential decline. There's always some level of credit activity in our P&L. No one is completely perfect at billing. But the incremental above the normal or above the first quarter level was about $6 million.
James Breen -- William Blair -- Analyst
And how do you feel about that going forward?
Michael Sicoli -- Chief Financial Officer
Sure. Literally just answered that question. The -- we expect a similar level in Q3 versus Q2. So shouldn't produce additional declines from Q2 to Q3. And we expect it to return to normal by the time we get to Q4.
James Breen -- William Blair -- Analyst
Thanks.
Operator
And our next question today comes from George Sutton from Craig-Hallum. Please go ahead.
Jason Kreyer -- Craig-Hallum -- Analyst
Hey, good morning guys. Jason on for George. Just a couple from me. So just wondering if you can comment on the hiring and retention trends that you're seeing? Are you seeing the employees that you want to hire out there for the economics that you're looking at? And then if there's anything unique that you're seeing in the internal attrition trends? And then kind of along those same lines, you talked about the productivity levels that you're seeing today. Maybe that dips down a little bit as you accelerate hiring. Over the long term, can you get that back to where we are, can you get that back higher to levels that we've seen in the past?
Richard Calder -- President and Chief Executive Officer
Yes. two comments there. I think at the high end, as we said in our prepared remarks, we are very selective in hiring at this stage. We think we have the right number of hire and account managers and account directors to cover our -- what we tag internally as our premier and gold accounts. We have some selective hiring there. And I think we see enough -- in generally those are people that are well known to us or known to the teams in terms of recruiting them. We're generally not trying to hire people that we do not know. Most of our recruiting will be focused at the SDR levels, sales development rep, which are usually either graduates or first jobs, and then into the account representative, which is the inside sales. We're absolutely as we grow from -- to 400, 450 and 500, it will be much more of an internally generated development program. And we are investing significantly more in training as we bring up SDR to account representative then into outside sales account executive and beyond.
And we have -- and that will two-fold things. One, the piece of our base that is not as well covered today is the silver or smaller accounts, and we think that will not only allow us to sell more, but actually maintain, it's not even potentially lower churn. And we see lots of opportunity to recruit that level of folk throughout the 16 countries that we sell-in. So we are very aggressive there. We do expect that because those quotas on account representatives and the lowest end of account executives and outside sales are lower, that our sales productivity will come down somewhat, though as our more tenured folks actually continue to improve sales. We think that will offset it slightly. But as we noted in the prepared remarks, we would expect some small decline in sales productivity moving forward.
Jason Kreyer -- Craig-Hallum -- Analyst
Thank you.
Operator
And our next question today comes from Brandon Nispel of KeyBanc. Please go ahead.
Brandon Nispel -- KeyBanc -- Analyst
Hey guys, thanks for taking the question. I'm curious, Mike, as EBITDA declined sequentially and potentially, I guess could going forward given the growth trajectory here, where are you at with your debt covenants? And where does -- where the equity is trading now impact any impairment asset impairments tests that you might have? And then secondly, can you size maybe the revenue impact from KPN so we can square away our models?
Michael Sicoli -- Chief Financial Officer
Sure. I can go in sort of reverse order. In terms of KPN revenue, it's a similar expectation to other small acquisitions at approximately 1x revenue, the purchase price being approximately 1x revenue. In terms of impairment, we did -- if we haven't already, we will be filing the Q shortly. And in the Q, you can see the commentary regarding impairment. We did look at the stock price decline as a triggering event to review the fair value of the goodwill and determined there was no impairment as of today. Obviously, there could be impairment in the future depending on what happens to the stock price.
But as of today, no impairment. In terms of the debt covenants, we still have plenty of room today. As you know, there's only really one covenant -- one maintenance covenant that is in the revolver to the extent that the revolver is greater than 30% drawn. It is today greater than 30% drawn, however, our expectation is, we'll be paying it below 30% and all the way down to 0 at some point as the free cash flow returns. That being said, we did also which you'll see in the 10-Q, we did push out the covenant step downs a bit as well just to sort of take that issue completely off the table. So we have plenty of room today and we will have plenty of room under that covenant for quite some time.
Brandon Nispel -- KeyBanc -- Analyst
Thank you.
Operator
And our next question today comes from Timothy Horan of Oppenheimer & Co. Please go ahead.
Timothy Horan -- Oppenheimer -- Analyst
Thanks guys. The free cash flow on guidance or range for 2020, does that include any impact from working capital either positively or negatively?
Michael Sicoli -- Chief Financial Officer
As we said, we do expect to improve working capital significantly over the next several quarters. I expect a lot of that to be done this year. There probably is a little bit more upside in 2020 as well, but we did not forecast any significant improvement in working capital as part of that number.
Timothy Horan -- Oppenheimer -- Analyst
Because if you normalize for the $6 million this quarter, you're close to $120 million of EBITDA. And with your interest expense and capex, you're close to $50 million of free cash flow in the quarter. There is no working capital improvement. So I mean, it's kind of implying around a $500 million range of EBITDA next year. I know you're not kind of guiding to that. But you're really not I guess guiding to any real improvement of the trends that we've seen in the first half of the year for either revenue or EBITDA onto next year with this type of free cash flow guidance?
Michael Sicoli -- Chief Financial Officer
Sure. The one thing to point out is, the bond interest payment was made in July because the last date of the quarter was in June. So the cash interest year-to-date doesn't have the bond interest in it. But that's a relatively small component of the overall free cash flow. I think your point is that we have a conservative expectation, and I think that's a valid point. And I think that's prudent for us to do really at any time, but especially now. So hopefully, we'll outperform.
Timothy Horan -- Oppenheimer -- Analyst
I guess, just on that point, can you tell us, I mean, I know you don't guide. But if you normalize for the $6 million, should EBITDA trend up from here? Or should we expect a few more quarters of EBITDA declining at a high level? And adjust offer that run rate for the first half of the year to next year we expect an increase on EBITDA broadly speaking?
Michael Sicoli -- Chief Financial Officer
Yes, tricky to answer because we don't provide guidance. I think if you go back to what I said before, clearly the $6 million from the second quarter that was related to the billing credit is effectively a 100% margin and we don't expect that to be there forever. It should -- it will likely be there in Q3. But beyond that, no. So I think that's a fair adjustment to make. I also mentioned that there's still some additional synergy realization to hit the P&L, which should also drive some upside. And then ultimately, we expect to get back to organic growth as well, which should drive additional growth and margin expansion on top.
Timothy Horan -- Oppenheimer -- Analyst
Thanks.
Operator
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to GTT's CEO Rick Calder for any closing remarks.
Richard Calder -- President and Chief Executive Officer
All right. Thank you, operator. And I'd like to turn it over to Brian Thompson, our Chairman, for some closing remarks.
Brian Thompson -- Executive Chairman of the Board
Thanks, Rick. I just wanted to be brief, but make a comment that's historical in nature most of all. That over the 14 years since we started the first acquisition, we have been a public company and we have fairly assiduously avoided guidance to the investment community. Going forward, because of the obvious difficulty in determining how and when so many onetime charges, both income and balance sheet related would fall and beyond that, the learning experience that we have with each acquisition and how that will turn itself into, things like organic growth and technology.
We are a company that is built itself on acquisitions to the size we are because we solve that. We have to be a size like we are now before we can really do the kinds of things technologically that the customers requiring worldwide, which is a very important factor as well, so that we could have a value proposition that would be very comfortable for our sales force to be out there, bringing to the customer demand. We believe we are at that point. I think it's fair to say that because of our lack of providing guidance, the most important thing that has come about in this time frame is that we feel comfortable about where we are in terms of generating the positive cash flow that we have set for years that we were focused on because it's that cash flow that allows us to have a lot of flexibility as we meet the marketplace, both technologically as well as in things like adding sales force, etc. Because we are no longer a major acquisition-mode company and we are committing ourselves to what I would call the performance test of the model that we started with 14 years ago.
I feel that the strength of the company is as it has never been before, it is terrific. The people that we've got now going forward, not just at the leadership level, but at the secondary level and down are really quite confident, comfortable and able to bring forward the value proposition and the basic tenants that make this company successful going forward. We are quite bullish frankly about our ability to move this company forward from where we are now, having taken advantage of all of the issues that have come through our acquisitions and importantly, the headwinds and the difficulty in doing an acquisition of the size of Interoute and getting that behind us, I think has created a very valuable lesson for everybody and the company going forward about what is critically important, both as we do acquisitions but more importantly, as we operate the company.
Therefore, I think it's fair to say number one, the projection that we have made finally of what we think cash flow would look like in the next year is a one-time thing that we have not done before and is very important. We feel comfortable that we can make that projection. We hope to be able to put ourselves into a position where we can give even better guidance going forward in future years because we will be a very dominant factor in the marketplace that we serve, which is basically the cloud network services activities. So with that, I wanted to say thank you for the call, thank you for the questions, and we are looking very much forward to the third quarter and the fourth quarter. Thanks.
Richard Calder -- President and Chief Executive Officer
Thank you, everyone. This concludes our call for this quarter. We look forward to reporting in the third quarter. Thank you.
Operator
[Operator Closing Remarks]
Duration: 40 minutes
Call participants:
Chris McKee -- General Counsel and Executive Vice President, Corporate Development
Richard Calder -- President and Chief Executive Officer
Michael Sicoli -- Chief Financial Officer
Brian Thompson -- Executive Chairman of the Board
Jon Charbonneau -- Cowen and Company -- Analyst
Frank Louthan -- Raymond James -- Analyst
James Breen -- William Blair -- Analyst
Jason Kreyer -- Craig-Hallum -- Analyst
Brandon Nispel -- KeyBanc -- Analyst
Timothy Horan -- Oppenheimer -- Analyst
