Tw Telecom's CEO Discusses Q1 2012 Results - Earnings Call Transcript

tw telecom inc. (TWTC)

Q1 2012 Earnings Conference Call

May 2, 2012 11:00 am ET

Executives

Carole Curtin – Vice President-Investor Relations

Larissa L. Herda – Chairman, President & Chief Executive Officer

Mark A. Peters – Chief Financial Officer & Executive Vice President

Analysts

David Coleman – RBC Capital Markets Equity Research

Colby Synesael – Cowen and Company

Michael Rollins – Citigroup

Brett Feldman – Deutsche Bank Securities

Barry McCarver – Stephens Inc.

Frank Louthan – Raymond James & Associates

Timothy Horan – Oppenheimer & Co.

Donna Jaegers – D.A. Davidson & Co.

Michael Funk – Bank of America Merrill Lynch

Tom Sites – Jefferies & Co.

Presentation

Operator

Good morning, and welcome to tw telecom’s First Quarter 2012 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 would like to turn the call over to Carole Curtin, Vice President of Investor Relations. Please go ahead.

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 at www.twtelecom.com where you will find our press release, supplemental quarterly information, and SEC filings.

Before we start, I’d like to draw your attention to our Safe Harbor statement included in our supplemental material, which you can find on our website. Information on our quarterly earnings materials and our discussion today contains statements about expected future events and financial results that are forward-looking and are subject to risk and uncertainties. A discussion of factors that may cause our results to differ materially from our expectations is contained in our filings with the SEC under Risk Factors and elsewhere on our website.

I’d also like to point out that our earnings materials and discussion today contains certain non-GAAP financial measures. And you can find reconciliations to the U.S. GAAP financial measures on our website.

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

Larissa L. Herda

Thanks, Carole. Hi, everyone, and thank you for joining us today. We posted our 30th consecutive quarter of sequential revenue growth, delivered strong margins and grew both our bottom line and free cash flow this quarter. These results along with our strong operational execution reflect another good quarter and demonstrate the remarkable ongoing consistency of our business.

A key driver of our consistency, the ability to anticipate, adapt and position for future opportunities customer’s needs are quickly changing and the strategic architecture and products that we’ve been innovating position us well for what we believe is a pivotal time for the future of network capabilities.

We are very excited about our intelligent network roadmap and it’s resonating really well with our customers, and here is why? Our intelligent network is designed to provide customers network capabilities, including bandwidth when they needed, where they needed, and how they needed. And most importantly, real-time and with the capabilities or intelligence to automatically see critical performance data, add bandwidth, prioritize traffic, as well as enable customers to dynamically access best-of-breed cloud solutions.

We’ve led the way through much strategic change, yet two of these changes standout as truly transformational, not just for us, but for the entire industry. One of these changes was when we’ve moved to Ethernet and the world followed, and the other we believe is unfolding now with the power of the intelligent network capabilities. When we reflect on the evolution of Ethernet, we see a parallel with our intelligent network today.

We were one of the first to promote Ethernet and at the time 10 years ago, we were way out in front of the pack. I clearly remember that we had to educate the market on Ethernet’s value and as a result, it took time for customers to adopt it and implement it. Now fast-forward to today for Ethernet with its scalability and flexibility is a leading industry platform, is the leading industry platform for serving enterprises, data centers and carrier demand, and we remain a leader in the space. Clearly, the adoption of the Ethernet was a very pivotal time in the history of network evolution and we were at the head of the pack.

Today, we believe we’re at the forefront of another pivotal time, and again we are leading the way. Few in the industry are providing the advanced in soldered network division that we have and some are even contemplating these capabilities yet, again much like what we experienced with Ethernet. However, there is one key contract to be adoption of the Ethernet and that customers not only need these new capabilities, the CIOs we are talking to, they are clamoring for this suite of products.

As we talk to customers, industry analysts, and leading technology companies, we can see that we are clearly on the right track to dramatically change the fabric of our customers businesses, our business and the industry with these new powerful solutions. We design divisions, the platform, the capabilities, the service, and the scale to rollout our Intelligent Network roadmap, and we expect to further deploy some of these services in the very near future. We see the development of these network capabilities at transformational and much like the Ethernet transformation, we are leading the way.

So now I will turn the call over to Mark to take you through the quarterly results and then I will be back with more progress on our Intelligent Network and a new powerful Ethernet solution we’re coming out with this summer.

Mark A. Peters

Thanks, Larissa. As Larissa shared, we delivered another solid quarter as we continually evolve our business with the rapidly changing needs of our customers. I like to provide more specifics on our financial results in several areas, including an update on demand, bookings, and overall customer sentiment. A few more details on our revenue growth, and some additional color on our modified EBITDA margin. Let me turn to what we are seeing for demand and customer sentiment. Our sales funnel remains strong and reflected ongoing market opportunities across our national footprint.

These opportunities are driven primarily by our data and Internet growth engine. Our first quarter bookings or sales grew over our seasonally lower fourth quarter sales and gained momentum throughout the quarter. In fact, March was one of our best sales months in the past three years. Another positive sign was our continued growth in buildings connected to our fiber network as we continue to expand to more and more customer locations. Over the past year, we’ve added over 2,000 buildings to our account. Remember, the building connections are an output of our sales success, which means we have signed sales contract in-hand before we invest to connect them.

These on-net buildings are a great place to acquire new customers and revenue with very attractive returns. With nearly 16,000 buildings connected with our fiber-to-the-home, we have a lot of opportunities to grow at existing locations. Now, turn to customer buying sentiment. In addition to our strong funnel and bookings, our local and national sales leadership remains bullish regarding ongoing opportunities as we continue to win sales based on our differentiation and products, capabilities, and customer service. We continue to find good opportunities and customers continue to buy as the network remains integral to enterprises, customers success.

Now, let me turn to revenue growth. Total revenue grew 7.9% year-over-year and 2.1% sequentially as data and Internet continued to be our growth engine. A sequential revenue growth this quarter reflected strong ongoing enterprise demand and an increase in taxes and fees, partially offset by seasonally lower sales in the prior quarter, as well as an increase in the revenue churn. Together, all these factors contributed to a nice overall revenue growth with underlying seasonal trends.

Last quarter, we achieved an exceptional 0.8% revenue churn, our lowest in over 10 years. This quarter revenue churn increased to 1.1% largely due to increased carrier churn including two large capacity circuits disconnected by single carrier later in the quarter.

Now let me run through a few other revenue metrics for the quarter. Data and Internet revenue represented 49% of our total revenue, up from 46% a year ago and grew 16% year-over-year and 3% sequentially. Our growth engine within data and Internet revenue with Ethernet and VPN data-related products, which grew 24% year-over-year and 4% sequentially.

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