GTT: A Broken Roll Up

We are short GTT Communications, Inc. (GTT US) because we believe it is an over-levered, fundamentally broken business that uses non-GAAP metrics to conceal its lack of organic growth and cash flow from investors. GTT lost -$71 million and -$243 million in 2017 and 2018, and by our calculations, generated negative organic growth of -8.7% and -7.7% in 2017 and 2018. Despite these awful metrics, senior management has received $37 million in bonuses because GTT’s compensation plan effectively incentivizes value destruction through indiscriminate acquisitions.

GTT’s management keeps this self-enriching process going by deliberately creating financial opacity in the following ways:

- GTT does not disclose its organic growth rate to investors. We calculated GTT’s organic growth rate to be -8.7% and -7.7% in 2017 and 2018, respectively. With negative organic growth, no more accounting levers to pull and nowhere near enough free cash flow to service its debt, we believe GTT is a fundamentally broken roll up.

- GTT inflated its operating profit by almost $80 million in 2018 by significantly stretching its depreciation and amortization periods and revaluing acquired assets. Had they not made these adjustments, GTT would have reported an** operating _loss _**of almost $40 million last year.

- GTT’s net debt has grown from $700 million at the end of 2016 to approximately $3.2 billion as of March 31, 2019, bringing GTT’s debt-to-equity ratio up to 996%. GTT’s trailing 12-month cash conversion rate (OCF/Sales) is 5.1%. With management’s guidance of capex at 7% of revenue, it is mathematically impossible for GTT to generate positive free cash flow.

- GTT’s executive compensation structure has, in our opinion, incentivized value destruction. In the last two years, GTT has posted record losses of $71.2 million and $243.4 million while GTT’s top three executives were awarded record compensation of $18.3 million and $19.3 million in 2017 and 2018, respectively.

- GTT’s executive compensation plans have caused management to deviate significantly from its stated strategy of growth through small, strategic acquisitions. Instead, GTT has made massive acquisitions of declining, unprofitable businesses in 2017 and 2018, regardless of their impact on the company’s leverage and profitability.

GTT’s net debt-to-EBITDA is 10.9x – more than double the adjusted EBITDA-based leverage metric that GTT highlights to its investors. We believe GTT’s unsustainable cash burn rate and debt burden leaves GTT needing a large, dilutive equity raise – which would only buy more time, without addressing the underlying problems.

The main problem is that GTT does not generate organic growth or enough free cash flow to service its debt. We see chapter 11 bankruptcy in GTT's future.