Fusion Reports Second Quarter 2017 Financial Results

Tailwinds’ Take: great across all metrics. Most impressed by 11% internal growth in business services and the ASP climbing again. Gross margins were strong and getting the OSS launched is also a positive. Market cap of $30M equals their medium term stated EBITDA target!?!

NEW YORK, NY–(Marketwired – August 14, 2017) – Fusion (FSNN), a leading cloud services provider, today announced financial results for the three and six months ended June 30, 2017.

Second Quarter Financial and Operational Highlights

  • Business Services segment revenue grew 40% year over year to $30.0 million, of which over 86% was contracted and recurring. Consolidated revenue grew 23% to $38.1 million, compared to $31.0 million in Q2 2016
  • Consolidated gross margin increased approximately 270 basis points to 45.1%, compared to 42.4% in Q2 2016
  • Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) grew 66% to $3.7 million, compared to $2.2 million in Q2 2016 and grew 13% compared to $3.3 million in Q1 2017 (see definition and further discussion about the presentation of Adjusted EBITDA, a non-GAAP measurement, below)
  • Ended the quarter with approximately 13,100 Business Services customers and approximately $13.4 million in total contract value in backlog
  • Ended the quarter with an average monthly revenue per customer (“ARPU”) of $751, compared to $539 at June 30, 2016 and $732 at March 31, 2017
  • Ended the quarter with monthly churn of 0.9%, compared to 1.0% in Q2 2016 and 1.0% in Q1 2017
  • Reduced the Company’s senior debt balance by $4.6 million year to date, as the Company made scheduled principal payments and paid down its revolving credit facility during the quarter
  • Announced the formation of Fusion Global Services, which will combine Fusion’s Carrier Services division with XComIP, LLC, enhancing Fusion’s focus on its Business Services segment and reducing operating expense, thereby improving the Company’s consolidated margin profile
  • Completed the implementations of a new operations support system (OSS) and unified billing platform
  • Launched a new and enhanced customer portal for Fusion’s leading-edge SD-WAN (Software Defined Wide Area Network) cloud network solution
  • Added to the Russell Microcap Index, one of the most widely followed equity investment benchmarks for emerging growth companies

“Fusion continued to improve its financial performance as demonstrated by our strong results in the second quarter,” said Matthew Rosen, Fusion’s CEO. “By executing on our strategy, we delivered solid year-over-year growth in revenue and Adjusted EBITDA by leveraging our market position as the single source for the cloud, our unified service delivery platform, and our robust nationwide network. The investments we have made in our highly scalable platform and our sales and marketing organization have enabled us to expand our margins efficiently as we grow both organically and through acquisition. Furthermore, the implementation of our new OSS system, which we completed during the second quarter, will improve Fusion’s operational efficiency, reduce the time between sales and revenue recognition, and allow us to integrate acquisitions faster and more easily.

“I am also pleased to note that Fusion produced nearly 11% year-over-year revenue growth in Business Services, excluding the contribution from our Apptix acquisition which closed last November. We achieved this through a combination of solid sales bookings, installations and customer novations. In addition, our M&A pipeline remains solid, and we continue to anticipate closing one to two acquisitions per year to drive significant growth in our customer base, revenue and cash flow.”

Michael Bauer, Fusion’s CFO, said, “In the first half of this year, we reduced our outstanding debt by $4.6 million through principal payments and repayments against our revolver. At quarter end, our full $5.0 million revolver was undrawn and available. Also, we remained focused on taking meaningful steps to simplify our capital structure and improve our financial flexibility in the coming quarters.

“The Apptix acquisition has been fully integrated and we have achieved the full run-rate of our expected cost synergies. And, with our expanded Business Services platform and our robust sales and M&A pipelines, Fusion is well positioned to achieve its intermediate financial goals of $200 million in annual revenue and $30 million in annual Adjusted EBITDA.”

Second Quarter 2017 Financial Results

Fusion’s consolidated revenue grew 23% in Q2 2017 to $38.1 million, compared to $31.0 million in Q2 2016, due to an increase in the Company’s Business Services segment revenue. Business Services revenue grew 40% to $30.0 million, compared to $21.4 million in Q2 2016, primarily due to the acquisition of Apptix which closed in November 2016. Carrier Services segment revenue in Q2 2017 was $8.1 million, compared to $9.6 million in Q2 2016, primarily due to a decline in the total minutes of traffic carried on Fusion’s network.

Consolidated gross margin in Q2 2017 was 45.1%, an increase of approximately 270 basis points compared to 42.4% in Q2 2016, primarily due to a greater proportion of Business Services revenue in consolidated revenue. Business Services segment gross margin of 56.7% decreased slightly from 59.3% in Q2 2016, primarily due to the addition of lower margin revenue from new customers the Company began servicing during the second quarter. Carrier Services segment gross margin was 2.4% compared to 4.8% in Q2 2016.

Net loss attributable to common shareholders in Q2 2017 was $3.1 million, or $(0.14) per share on a basic and diluted basis, compared to net loss in Q2 2016 of $3.0 million, or $(0.20) per share on a basic and diluted basis.

Adjusted EBITDA grew 66% in Q2 2017 to $3.7 million, compared to $2.2 million in Q2 2016, and grew 13% compared to $3.3 million in Q1 2017, due primarily to revenue growth and the achievement of additional synergies associated with the acquisition of Apptix.

Capital expenditures in Q2 2017 totaled $1.4 million, or 3.6% of revenue. Capital expenditures in the first half of 2017 totaled $2.3 million, or 3.2% of revenue.

Cash at June 30, 2017 totaled $2.4 million, compared to $7.2 million at December 31, 2016. During 2017, the Company made $4.6 million in debt pay downs, reducing its outstanding term loan balance by $1.6 million and completely repaying the $3.0 million outstanding on its revolving credit facility. As of June 30, 2017, the Company’s full $5.0 million revolving credit facility was undrawn and available.

Further details about the Company’s financial results are available in its quarterly report on Form 10-Q, which is available in the investor relations section of the Company’s website at ir.fusionconnect.com.

Conference Call Information

Fusion CEO Matthew Rosen and CFO Michael Bauer will host a conference call today to discuss its Q2 2017 financial results, followed by a question and answer period. To access the call, please use the following information:

Date: Monday, August 14, 2017
Time: 4:30 p.m. ET / 1:30 p.m. PT
Dial-in: (888) 427-9411 (domestic) / (913) 981-5526 (international); Conference ID 4384178
Webcast: ir.fusionconnect.com under “Events”

Participants should dial in 10 minutes prior to the start time and ask to be placed into the Fusion call. An operator will register your name and organization. If you have any difficulty connecting with the conference call, please contact MZ Group at (949) 491-8235.

Use of Non-GAAP Financial Measurements

The Company believes that EBITDA (earnings before interest, taxes, depreciation and amortization) is useful to investors because it is commonly used in the cloud communications industry to evaluate companies on the basis of operating performance and leverage. Adjusted EBITDA provides an adjusted view of EBITDA that takes into account certain significant non-recurring transactions, if any, such as impairment losses and expenses associated with pending acquisitions, which vary significantly between periods and are not recurring in nature, as well as certain recurring non-cash charges such as changes in fair value of the Company’s derivative liabilities and stock-based compensation. The Company also believes that Adjusted EBITDA provides investors with a measure of the Company’s operational and financial progress that corresponds with the measurements used by management as a basis for allocating resources and making other operating decisions. Although the Company uses Adjusted EBITDA as one of several financial measures to assess its operating performance, its use is limited as it excludes certain significant operating expenses. EBITDA and Adjusted EBITDA are not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In accordance with SEC Regulation G, the non-GAAP measurements in this press release have been reconciled to the nearest GAAP measurement, which can be viewed under the heading “Reconciliation of Net Loss to Adjusted EBITDA”, immediately following the Consolidated Balance Sheets included in this press release.

– Tables Follow –

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Revenues $ 38,089,006 $ 31,041,047 $ 73,900,882 $ 64,835,296
Cost of revenues (exclusive of depreciation and amortization, shown separately below) 20,901,548 17,865,570 40,172,461 38,397,081
Gross profit 17,187,458 13,175,477 33,728,421 26,438,215
Depreciation and amortization 3,600,609 3,031,890 7,437,757 5,948,153
Selling, general and administrative expenses 14,330,934 11,270,013 28,465,809 22,694,799
Total operating expenses 17,931,543 14,301,903 35,903,566 28,642,952
Operating loss (744,085 ) (1,126,426 ) (2,175,145 ) (2,204,737 )
Other (expenses) income:
Interest expense (2,172,084 ) (1,624,669 ) (4,264,396 ) (3,252,633 )
Gain on change in fair value of derivative liability 113,779 45,642 73,334 228,042
Loss on disposal of property and equipment (65,250 ) (11,996 ) (92,050 ) (72,818 )
Other income, net 13,365 37,111 129,845 88,263
Total other expenses (2,110,190 ) (1,553,912 ) (4,153,267 ) (3,009,146 )
Loss before income taxes (2,854,275 ) (2,680,338 ) (6,328,412 ) (5,213,883 )
Provision for income taxes (23,100 ) (30,911 )
Net loss (2,877,375 ) (2,680,338 ) (6,359,323 ) (5,213,883 )
Preferred stock dividends in arrears (240,498 ) (284,839 ) (1,494,607 ) (1,816,821 )
Net loss attributable to common stockholders $ (3,117,873 ) $ (2,965,177 ) $ (7,853,930 ) $ (7,030,704 )
Basic and diluted loss per common share $ (0.14 ) $ (0.20 ) $ (0.36 ) $ (0.49 )
Weighted average common shares outstanding:
Basic and diluted 22,408,335 14,864,768 21,562,714 14,306,170
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2017 2016
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,407,317 $ 7,221,910
Accounts receivable, net of allowance for doubtful accounts 9,486,904 9,359,876
Prepaid expenses and other current assets 1,707,268 1,084,209
Total current assets 13,601,489 17,665,995
Property and equipment, net 13,850,574 14,248,915
Security deposits 612,299 630,373
Restricted cash 27,153 27,153
Goodwill 35,286,629 35,689,215
Intangible assets, net 60,975,789 63,617,471
Other assets 60,527 77,117
TOTAL ASSETS $ 124,414,460 $ 131,956,239
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Term loan – current portion $ 4,875,000 $ 2,979,167
Obligations under asset purchase agreements – current portion 911,370 546,488
Equipment financing obligations 1,238,986 1,002,578
Accounts payable and accrued expenses 20,692,741 19,722,838
Total current liabilities 27,718,097 24,251,071
Long-term liabilities:
Notes payable – non-related parties, net of discount 31,692,383 31,431,602
Notes payable – related parties 903,583 875,750
Term loan 57,341,519 60,731,204
Indebtedness under revolving credit facility 3,000,000
Obligations under asset purchase agreements 1,290,811 890,811
Equipment financing obligations 983,364 1,237,083
Derivative liabilities 262,542 348,650
Total liabilities 120,192,299 122,766,171
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 14,341 and 17,299 shares issued and outstanding 143 174
Common stock, $0.01 par value, 90,000,000 shares authorized, 22,505,365 and 20,642,028 shares issued and outstanding 225,054 206,422
Capital in excess of par value 193,605,847 192,233,032
Accumulated deficit (189,608,883 ) (183,249,560 )
Total stockholders’ equity 4,222,161 9,190,068
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 124,414,460 $ 131,956,239
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Reconciliation of Net Loss to EBITDA and Adjusted EBITDA
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Net (loss) $ (2,877,375 ) $ (2,680,338 ) $ (6,359,323 ) $ (5,213,883 )
Interest expense and other financing costs 2,167,124 1,624,923 4,275,759 3,252,915
Income tax benefit 23,100 30,911
Depreciation and amortization 3,600,609 3,031,890 7,437,757 5,948,153
EBITDA 2,913,457 1,976,475 5,385,104 3,987,185
Acquisition transaction expenses 602,603 71,439 925,242 163,809
Change in fair value of derivative liability (113,779 ) (45,642 ) (73,334 ) (228,042 )
(Gain) loss on disposal of property and equipment 65,250 11,996 92,050 72,818
Non-recurring employee related expenses 535,500
Stock based compensation expense 225,500 207,712 622,892 458,496
Adjusted EBITDA $ 3,693,031 $ 2,221,980 $ 6,951,954 $ 4,989,766

About Fusion

Fusion (FSNN), a leading provider of integrated cloud solutions to small, medium and large businesses, is the industry’s single source for the cloud. Fusion’s advanced, proprietary cloud services platform enables the integration of leading edge solutions in the cloud, including cloud communications, contact center, cloud connectivity, and cloud computing. Fusion’s innovative, yet proven cloud solutions lower our customers’ cost of ownership, and deliver new levels of security, flexibility, scalability, and speed of deployment. For more information, please visit www.fusionconnect.com.

Forward Looking Statements

Statements in this press release that are not purely historical facts, including statements regarding Fusion’s beliefs, expectations, intentions or strategies for the future, may be “forward-looking statements” under the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and may sometimes be identified by the use of forward-looking terminology such as “may”, “expect”, “anticipate”, “intend”, “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. Important risks regarding the Company’s business include the Company’s ability to raise additional capital to execute its comprehensive business strategy; the integration of businesses and assets following an acquisition; the Company’s ability to comply with covenants included in its senior debt agreements; competitors with broader product lines and greater resources; emergence into new markets; natural disasters, acts of war, terrorism or other events beyond the Company’s control; and other factors identified by Fusion from time to time in its filings with the Securities and Exchange Commission, which are available through http://www.sec.gov. However, the reader is cautioned that Fusion’s future performance could also be affected by risks and uncertainties not enumerated above.

In the event that there is any inconsistency between the information contained in this press release and the information set forth in Fusion’s Form 10-K or 10-Q filed with the Securities and Exchange Commission, the information contained in the Form 10-K or 10-Q governs.

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