tw telecom Inc. ( TWTC)

Q4 2011 Earnings Call

February 9, 2012 9:00 am ET


Larissa Herda - Chairman, CEO and President

Mark Peters - EVP and CFO

Carole Curtin - VP, IR


Simon Flannery - Morgan Stanley

Frank Louthan - Raymond James

Barry McCarver - Stephens

Colby Synesael - Cowen and Company

Dave Coleman - RBC

David Dixon - FBR Research

Tim Horan - Oppenheimer

Donna Jaegers - D. A. Davidson

Michael Funk - Bank of America Merrill Lynch



Good day, and welcome to tw telecom's fourth quarter 2011 conference call. Today's call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over to Carole Curtin, Vice President of Investor Relations.

Carole Curtin

Welcome to tw telecom's conference call. We're pleased to have you join us today. To review our results for the quarter, please visit our website where you can find our press release, supplemental quarterly information and SEC filings.

Before we start, I'd like to draw your attention to our Safe Harbor statements included in our supplemental materials which you can find on our website. Information in our quarterly earnings materials and our discussion today contain statements about future expected events and financial results that are forward-looking and are subject to risks and uncertainties. A discussion of factors that may cause our results to differ materially from the expectations is contained in our filings with the SEC under Risk Factors and elsewhere available on our website. I'd also like to point out that our earnings materials and discussions contain certain non-GAAP financial measures. You can find reconciliations between the non-GAAP and GAAP financial measures in the materials on our website.

Now I'm pleased to introduce tw telecom's Chairman, CEO and President, Larissa Herda.

Larissa Herda

Thanks, Carole. Hi, everyone, and thank you for joining us. 2011 was a great year for us, financially, operationally and strategically. Let me recap some of our key achievements.

Starting with our financial accomplishments for the year, we accelerated our revenue growth to 7.4% in 2011 from 5.1% in 2010 which is 45% expansion of our organic growth rate. We grew our data and internet revenue over 18% in 2011 and we ended the year with a strong growth engine representing nearly half of our total revenue.

We also grew total revenue for the 29th consecutive quarter which speaks to the strength of our model, the consistency of our performance and the validation of our strategy. And we achieved low revenue churn of 0.9% for the year as well as 0.8% in the fourth quarter which is the lowest since we started reporting its metric over 10 years ago.

We attributed this low churn to the attractiveness of our product portfolio, ongoing retention efforts and our continued success with the overall customer experience.

Turning to the bottom line for the year, we grew modified EBITDA margin 7.4% and we delivered a strong 36.4% modified EBITDA margin which is particularly impressive for an expanding growth company like ours. We increased our pre-tax net income by over 100% and delivered $58 million in net income reflecting ongoing financial strength in the business.

We also have expanded levered free cash flow by more than 10% as we increased cash flow margins to 6.7%. Additionally we continue to return value to our shareholders in the form of share repurchases which totaled $59 million as we completed one share repurchase plan and announced another multi-year plan for $300 million in November.

In addition to those financial accomplishments we advanced the business strategically positioning us for more growth in 2012 and beyond. Here are some highlights of those accomplishments. We grew our fiber-connected building additions by over 2,200 which is an increase of more than a third of those added in 2010. This was a company record reflecting our momentum in customer wins for connectivity to enterprise self-side and data center locations.

We also strategically advanced new products. This included great success in selling our converged services that we launched in the middle of 2010 which contributed to our strong 2011 revenue growth. Additionally, we added product enhancements to Ethernet portfolio that contributed to our ongoing leadership position in Ethernet solutions.

Additionally we designed, developed and introduced new network capabilities including the first phase of our intelligent network solutions. We believe our roadmap for these solutions will lead to greater differentiation and continued ability to take market share.

Last but not least, was the fact that we increased our Net Promoter Score to its highest level ever. This key metric not only measures our customer satisfaction and loyalty, we believe it played a key roll in propelling our revenue growth in 2011.

So let me summon 2011 as a terrific milestone in our continuing growth story. A year ago, we talked to you about breaking away from the pack and we believe that we clearly have done that with these accomplishments which demonstrate our ongoing growth and cash creation story, our differentiated market position and our ability to execute all of which were driven by our ongoing strategic choices. And of course, none of this would be possible with our most strategic asset which is our incredible team of employees. So let me say thanks to our team for breaking away from the pack and putting us on such a strong trajectory for 2012 to help our customers make their operation function better, faster and easier.

Now I'll turn the call over to Mark.

Mark Peters

Thanks Larissa. Today I'm going to provide a few comments on the fourth quarter including bookings, demand and overall customer sentiment, some insights on our 2012 capital allocation strategy, and some color on margins including a remainder regarding seasonality.

Let's start with the fourth quarter. We delivered another strong performance that contributed to our accelerated revenue growth for 2011.

Now, some revenue highlights for the fourth quarter. Total revenue grew 8.2% year-over-year and 2% sequentially, as data and internet continue to be our growth engine. Data and internet revenue represented 49% of our total revenue, up from 45% a year ago and grew more than 18% year-over-year. Within data and internet revenue, our strategic services which grew 27% year-over-year and represented about a quarter of total revenue. This subset includes our Ethernet and VPN data related products.

Our voice revenue grew 6% year-over-year due to growth from converge and dedicated voice services, boosted by the volume and rate growth and taxes and fees and partially offset by churn. And our services revenue declined 4.5% year-over-year primarily reflecting churn and reprising for contract renewals largely in transport services, which outpaced growth in high capacity and co-location services. Intercarrier compensation at 2% of revenue continues to represent a very small aspect of our business. And you can see our press release for further guidance related to this item.

Now, move to our fourth quarter highlights for margins and our bottom line. Modified EBITDA grew 7.3% year-over-year as we delivered a strong 36.4% modified EBITDA margin. Pre-tax income grew 40% year-over-year primarily driven by modified EBITDA growth as we delivered $16.4 million of net income, which declined about 6% year-over-year reflecting a higher effective tax rate.

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