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Time Warner Telecom Inc. (NASDAQ:TWTC)

Q3 FY08 Earnings Call

November 6, 2008, 11:00 AM ET

Executives

Carole Curtain - VP of IR

Larissa L. Herda - Chairman, CEO and President

Mark A. Peters - CFO and EVP

Analysts

Frank Louthan - Raymond James

Jonathan Schildkraut - Jefferies & Company

Michael Rollins - Citigroup

David Dixon - FBR Capital Markets

Donna Jaegers - D.A. Davidson & Co.

Mike McCormack - JP Morgan

Rai Archibold - Kaufman Brothers L.P.

Michael Funk - Merrill Lynch

Simon Flannery - Morgan Stanley

Nick Netchvolodoff - Barclays Capital

Operator

Good morning and welcome to TW Telecom Third Quarter 2008 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 Curtain, Vice President of Investor Relations. Please go ahead.

Carole Curtain - Vice President of Investor Relations

Good morning everyone and apologies for keeping you waiting. Our third party conference company is having a bit of technical problems, but let me start by directing you to our website at twtelecom.com where you can find our press release and our supplemental information.

Before we begin, I want to read our safe harbor statement. Issues discussed on today's conference call include certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are naturally subject to uncertainty and changes in circumstances.

Actual results may vary materially from the expectations contained herein due to the risk in the company's annual and quarterly filings with the SEC, especially the section titled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2007 and our supplemental materials posted on our website.

TW Telecom is under no obligation to expressly disclaim any obligations to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. In conjunction with SEC regulation G, I want to point out that we report several financial measures that are non-GAAP including modified EBITDA.

Our non-GAAP measures are not intended to replace our GAAP disclosures, but rather are merely presented to provide additional insight into our performance. Please see our press release and other information posted on our website for more details on these and other matters.

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

Larissa L. Herda - Chairman, Chief Executive Officer and President

Thanks Carole. Hello everyone and thank you for joining us today. We delivered strong cash flow, expanded our margins and grew our earnings per share this quarter which we are very pleased with particularly in this economy. Additionally, we posted our 25th consecutive quarter for enterprise revenue growth and as a result we have a highly diversified revenue stream.

As we projected in September, this is a soft revenue quarter, however we continued to see steady demand across both our enterprise and carrier segments. We remain in a strong liquidity position, which provides us with a great deal of flexibility for navigating and capitalizing on market dynamics. We look at the marketplace balancing two priorities.

One priority includes managing costs and capital expenditures to generate cash flow through a slower economic cycle. And the other priority includes leveraging our market position and strong liquidity to go after customer sales that others may not be able to pursue, which is a great opportunity for us to take market share. Clearly, in this economy businesses are trying to reduce costs and become ever more efficient. So are we.

However efficiency cannot be a singular focus. Rather we believe that those companies who will emerge in a very strong position when the economy recovers will continue to innovate and invest in the future to position themselves for strength. We did this during the last economic slowdown and we emerged in a stronger position relative to our peers as we came out of that period leading to the past four years of consistent growth.

So, we are balancing our investments and executing on our strategy with both priorities in mind. Although, we would obviously prefer to operate with the tailwinds of a robust economy, this economic cycle is providing us with interesting opportunities as we enable our customers to improve their operating costs while upgrading their networks. I will spend more time on operating in this environment in a moment, but first Mark will take you through an overview of this quarter's results. Mark?

Mark A. Peters - Chief Financial Officer and Executive Vice President

Thanks Larissa, and hello everyone. Let me direct you to the press release for all the detailed results, as I turn to an overview on the quarter. First, we continue to grow enterprise revenue for the 25th consecutive quarter reaching all the way back to 2002. Our total revenue growth was impacted by the timing of revenue churn and customer installations, as well as an unfavorable impact from disputes together which had a significant impact on growth.

Second, we continue to eliminate costs and scale the business. Yielding us a strong 35.2% modified EBITDA margin for the quarter. Next on the CapEx front, we continue to invest in customer opportunities as well as infrastructure investments, which culminated in a higher investment quarter compared to the prior quarter. Finally, we delivered strong levered free cash flow, grew earnings per share, and very importantly in this environment we maintained strong liquidity.

Let me touch on each of those. Let's start with revenue, we had 6% year-over-year growth and 1.5% growth sequentially. This quarter highlights the impact we can experience in a given quarter due to the timing of installs and disconnects. For instance, revenue churn of 1.2% was identical this quarter to last quarter. However, due to the fact that we experienced higher churn earlier in the quarter, the impact to revenue was greater in this quarter.

Remember our revenue churn is a metric that measures lost monthly revenue or run rate over the entire quarter compared to total reported revenue. Similar to churn installation timing also impacted revenue growth this quarter. The trend for our revenue churn has grown from 1% in the last half of last year to 1.2% for the past two quarters, which reflects both the impact of the economy and acquired customers. We continue to see a concentration of churn in acquired customers with less complex products, as well as mortgage related businesses and carriers and we expect the higher churn may continue.

Also in this economic environment, we expect that we may see further fluctuations and disputes. Now, let me touch on sales installations and revenue for a moment. Our sales remain steady. Sales increased sequentially and year-over-year and also grew on a year to date basis over the same period last year. While we would expect higher sales in a better economy, the consistency and stability of sales and demand is encouraging in this environment.

Remember the timing of installing those sales is what drives the revenue recognition and it can take three to six months or even longer to fully install larger deals. In fact, we have some deals that won't install until next summer. Now, let me touch briefly on our enterprise revenue, which grew 11% year-over-year and 2% sequentially. This revenue segments continues to be primarily driven by our ongoing strength in data and Internet services, as well as contribution from our other lines of business.

For the current quarter, enterprise revenue represented 93% of our data and Internet services, 96% of our voice services and 38% of our network services with carriers contributing the balance of the revenues. Turning to the carrier segment, we experience we experienced a 3% revenue decline sequentially due to fluctuation and disputes disconnects and repricing of contracts.

Year-over-year, carrier revenue decreased 2% or $1.8 million, which approximates the loss revenue from the singular churn. Excluding that impact carrier revenue would have been flat year-over-year. If you recall our carrier revenue primarily represents local connectivity to our carrier's customers as well as services for their local infrastructure and does not include any inter carrier compensation which we break out separately.

Next let me touch on our margins and cost management. Modified EBITDA grew 4% sequentially and an impressive 19% year-over-year and modified EBITDA margin grew to 35.2% this quarter from 31.5% the same period last year. This growth in our margins started prior to the economic downturn and is a result of our deliberate operational planning, which was facilitated by our integration efforts.

Initiatives, like streamlining our customer service, centralizing our ordering functions, enabling customers to utilize our enhanced self service portal, trouble ticket automation and ongoing network grooming have all contributed to our scale and efficiencies. In addition, by keeping our eye on the possible impact of an economic downturn earlier this year we started tightening our head counts through normal attrition, reorganizing functions and asking our employees to take on additional responsibilities.

Our success from those these efforts is showing as our head count is less than a year ago and that's against a back drop of growing revenue. Together these efforts contributed to us achieving a 370 basis point expansion and modified EBITDA margin year-over-year. Turning to CapEx, for the quarter we invested in customer sales and expanded network reaching capacity.

Of our $204 million of year-to-date capital spending, we have invested nearly $60 million to fund the expansion of our markets co-location facilities, national IP backbone, regional fiber networks and other infrastructure, all primarily driven by near and longer term sales opportunities. As we move into 2009, we will carefully manage the timing of similar investments against the overall environment, but we will not shy away from investing in direct customer opportunities that meet our strict return criteria.

For the full year 2008, we expect our CapEx to be approximately $275 million, which may be a bit higher or lower based on the timing of customer opportunities and other project and progress at year end. Finally, both our levered free cash flow and earnings per share were solid for the quarter with EPS moving up to $0.03 per share. Year-to-date levered free cash flow has increased $41 million from last year. Reflecting cash creation from a successful acquisitions, revenue contribution and our ability to scale the business.

With all the attention on the economy, I would like to pause here and level set our position in the marketplace by reviewing our strong fundamentals. First is the fact that we provide our customers mission critical network services to run their business by connecting to their branch locations, networking with their corporate headquarters and reaching their data center sites and the more complex and intertwined our services are with the customers, the less likely they are to churn.

Next we have the recurring revenue business and therefore we do not have to regenerate our entire revenue stream each quarter. Our customers sign long-term contracts providing revenue continuity. Currently 64% of our revenue is on three to five year contracts. Also important is our on net revenue, which contributes to our high margin and allows us control of our network operation.

This quarter nearly 64% of our revenue is fully on our own fiber network, end-to-end with the remaining revenue on our fiber network as well, but with some elements provided by another carrier. Looking at other metrics in our business, they remain strong including industry leading day's sales outstanding, continued low bad debt expense and most importantly today strong liquidity. Our debt structure and liquidity places us in a very favorable position. As of September 30th included the following.

First, we have $334 million in cash and equivalents. Second, we have strong leverage ratios including our net debt to annualized modified EBITDA, which is less than three to one. Third, we have no significant debt maturities before 2013. Next for the quarter, we had a relatively attractive 5.5% average effective rate on our debt. Also we have an underarm revolver which we do not need for daily operations, but rather view as dry powder. And finally, we have no debt financial maintenance covenants.

Having a strong liquidity position allows us to continue to pursue profitable growth opportunities. Additionally, we are in the enviable position of having no need to return to the capital market. Finally, let me share our thinking with regard to our available cash, we believe that in this environment cash is king. Especially as the economy continues to work through the current volatile environment.

Our priorities include maintaining maximum flexibility and security and to invest in growing our business subject to our consistent return criteria. Opportunistically, we could also consider debt or equity repurchases, but they are less of a priority. Let me leave you with one final thought and that is on our levered free cash flow. We feel comfortable that we will continue to produce levered free cash flow for 2009 even in a soft economy and here is why.

We have a predictable and stable recurring revenue business. We have demonstrated the ability to control costs and finally the majority of our capital spending is tied directly to new sales, which acts as a natural governor to spending given our ongoing return threshold.

Let me sum up the quarter by saying, we are pleased with the strength of our margins, cash flow and earnings per share as well as our strong liquidity. We will continue to focus on balancing all the important aspects of generating cash, investing in the business streamlining our operations, while pursuing strong customer opportunities which meets our return threshold.

With that I will turn it over to you Larissa.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Thanks Mark. I think Mark did a good job outlining the strength of our liquidity, our solid fundamentals and our effective cost control efforts. I would like to build on that by taking some time to talk about what we are doing to grow and manage our profitability. We have been in this business a long time and we know how to successfully navigate in a volatile market environment. To give you some historical perspective let's compare our market position performance and strength today to the last economic downturn, which was in the 2001 to 2003 time frame.

Let me paint a picture for those who are not familiar with us in 2001. First let's talk about the mix of our business, which was heavily weighted to the carrier business. At that time carriers were financially stressed. Many were going bankrupt and many engaging in irrational pricing. These carriers not only made up the majority of our revenue, but they had purchased a lot of network services in advance of their own customer demand and that led to a lot of unused capacity that was quickly disconnected when the economy changed.

Also in 2001, we had a very new enterprise business in its nascent stage. Our enterprise products were in their infancy and represented much more of a commoditized product set. As a result, we had many competitors. In addition, our back office systems and processes were not yet robust or streamlined or ready to handle complex solutions. Finally, we were in a position of having restricted debt covenants that caused us to be unable to invest in our business at the levels we would have like as quickly as we would have liked which resulted in a longer road to top line revenue growth once the economy turned.

So, there are things that we did since 2001 to address our market position. First and foremost, we decided to decrease our risk profile by heavily shifting our focus to enterprise customers and intentionally reducing our exposure to any single customer as well as to risky carrier customers. Next we deliberately expanded our product portfolio to increase our target market and to create stickier customer relationships.

Additionally, although our capital spending was restrained, we continued to grow our fiber footprint, to select network investments and we scaled our strongest markets by investing in infrastructure for customer opportunities. We also put in place programs to retain and up sell existing customers to reduce our growing churn. This included creating a new team of farmer type sales people who worked to up sell and renew existing customers.

Finally, we worked diligently over several years to optimize our capital structure to yield us the flexibility that we enjoy today. Together these efforts were very successful and we're all instrumental in building the foundation for a strong growth that we have enjoyed over the last four years.

Next let's look at today and see how things have changed from 2001. First, we have greatly diversified our business. We have shifted from a carrier centric business to one that serves a broad array of enterprise customers as well as carriers. Today our largest customer is only 5% of our revenue and represents a very strong and financially sound customer versus the last downturn when our largest customer was 12% of our revenue and by the way that customer went bankrupt. Our carrier business represents a quarter of our revenue today versus a majority of our revenue in 2001.

Our strategic focus for our carrier segment today includes targeted growth opportunities. This includes those opportunities, which we believe are the best fit for our business both from a risk profile and future business possibilities, and includes serving customers like wireless carriers and out of reach [inaudible] needs.

As for our enterprise segment, it has grown dramatically since 2001 and continues to grow as enterprise customers represent 73% of our revenue today versus 33% in the fourth quarter of 2001. Additionally we have grown from 29 markets at the beginning of 2001 to 75 markets today, likewise growing from serving less than 6500 customers in 2001 to over 30,000 customers today.

Also since 2001, the middle of our enterprise sweet spot has grown and evolved from serving primarily single site medium size customers with basic services that compares to today where we are serving complex mission critical fiber based solutions to a broad range of medium and large size customers including 30% of the Fortune 1000. Back in 2001, we wouldn't have dreamed of being able to serve a single customer in hundreds of locations as we can today.

Actually, I guess we did dream about it, and then we turned that dream into a reality. The solutions we have today not only increased the stickiness of our customer relationships, but also help us to gain an increase share of wallet from them. And a significant part of the solution, we offer is directly tied to our consistent investment in our IT backbone, which continues to grow at impressive rates with our IP traffic growing by 12% in the third quarter alone.

With regards to competition there are only a fraction of the players that remain from 2001. Today given our targeted customers and their complex fiber solutions there are only a few competitors within most of our markets who can do what we do. Similar to our earlier acquisition in 2001, our most recent acquisition has provided us tremendous fiber networks increasing our national reach. During the last telecom downturn, we were constrained from investing in those markets as quickly as we would have liked.

However, after we did they became some of our strongest and fastest growing markets that we have today. Likewise, we look to our most recently acquired markets as our growth engine of the future and we are starting to see nice traction in those markets. Since, we are benefiting today from our strong cash flow and liquidity, this enables us to continue to invest in such market opportunities, which will provide us with a great launching pad as the economy turns.

So over the course of 2001 to 2003, we managed through dramatically higher churn, restricted bank covenants and restrained capital spending, yet from that we positioned ourselves for 25 consecutive quarters of enterprise growth, which began in 2002 and continued today. That is a pretty nice track record. So, as we sit here today, we are much stronger in all aspects of our business and in a better position than we have ever been before.

Therefore, when we think about how we will grow and manage profitability in the future we will continue to do what we have already done including investing in the right market opportunities, controlling our costs, and focusing on the customer experience. But that is not enough. We also believe to be positioned for the future we need to continue to innovate. Therefore, we expect to further expand our product portfolio, as well as continually improve our customer experience.

In this market just as it was in the last downturn, one of the most critical success factors is efficient and innovative solutions for the customers. With customers shopping for the best value, which includes product innovation, lower cost of ownership and often greater capacity, this is causing greater opportunities for our business. And here are a few customer wins that demonstrate our ability to deliver just that including Travis County Texas in Austin.

We won this business for all county locations including an upgrade from the customers current frame relay to our VPN service at 17 locations plus transport and bundled waste products. The bottom line on this multisite win is that we won it from an incumbent, we constructed fiber to where the customer wanted us to be which not all competitors were willing to do. We provided a solution that could scale as the customer grows and the customers expecting a cost saving exceeding $500,000 over the life of the contract.

Liebert Corporation was another recent customer win. Liebert a subsidiary of Emerson Corporation is a multisite customer who is currently expanding in Columbus Ohio. As a current provider already for a portion of their services, we proposed and won a comprehensive multisite Ethernet offer, transport and voice network solution, which displaced the incumbent solution.

The bottom line of this multi site win was the fact that we were able to address scalability and resiliency which were key issues for our customers with our premium reliability through our SONET-based service. We leveraged an existing relationship with the customer and we won this business from the incumbent. Trustco is another recent win of ours. They are based in Albany, New York and operate over 110 bank offices in five states. Our solution, which encompass their needs at 13 sites was a VPN network with class of service capability, which enabled the bank to deploy emerging banking applications, voice over IP and video services.

The bottom line on this multisite win was providing an innovative solution to improve their infrastructure in order to enhance their own customer's experience, as well as their competitive position. Finally in Birmingham one of our new investment markets, we won Ethernet, Internet and transport services with the University of Alabama Medical Center which has been a nationally ranked facility for the past 17 consecutive years and one of Alabama's largest employers. Bottom line on this customer win was that we won this business away from the incumbent due to our local leadership sales team and service support.

This is one area that continues to differentiate us from the competition. Now those are just a few of our recent wins, but they speak of our ability to innovate lower a customers operating cost and good old fashioned customer service.

In closing, let me say that we believe no Company is immune to this economy and neither are we. As we said previously, we have been seeing longer sale cycle times for larger customers and while our stats aren't telling us the cycles are lengthening across our base, we believe that they are lengthening in some areas.

As Mark discussed, churn has also gradually increased over the past year, which we believe a portion is related to the economy. However, let me point out some of the things that position us not only move through these issues and this economic cycle successfully, but to build market share and position ourselves for another long-term of cycle growth, including our relentless attention to customer care and product innovation, our customer diversification by types of customers, vertical markets, geographic regions and services, our ongoing investments in systems, process and people and our track record to execute perform and generate consistent long-term results.

We believe these differentiating factors will allow us to continue to win new business and grow. We will now take your questions.

Question and Answer

Operator

Thank you very much. [Operator Instructions]. We will take as many questions as time permits. Your first question comes from the line of Frank Louthan with Raymond James.

Frank Louthan - Raymond James

Great, thank you. Can you give us an idea looking at the carrier business, what is sort of the outlook there. You're seeing... I mentioned in the release you have are seeing some repricing can you give us an idea of what you think that environment is going to be for the next few months and the wireless carrier that you saw the disconnect is most of that traffic off or what is the exposure there? Is there more traffic that you think could potentially come down?

Larissa L. Herda - Chairman, Chief Executive Officer and President

Yeah. Hi Frank…... on the carrier side, carrier business has been fairly stable for several years and like you said if you took out the Cingular traffic it would have been completely flat. We are seeing lots of good sales in that area. We have been responding to some of the wireless RFP's that are out there. We actually have been awarded a few of them and are in the process of constructing. Some of them have been delayed. I think that you will probably see some of the wireless carriers delay some of those initiatives in this environment and that may make the process a little bit longer on those.

We sell to out of region carriers and that business is going well. And we have good strong regional relationships with a lot of regional carriers as well. So, we like our position in the carrier segment. It's pretty steady. Do I expect growth? I think that the wireless carrier... I think Cingular is going to continue to see disconnects there. They have been optimizing their network. It's taken some time but it's going to continue, and it's just an ongoing monthly thing for them now.

And, I think we will see that throughout the year. So, I have yet to commit to the market. For years we have had investors who wanted me to tell them that I would expect carrier revenue to actually grow. I'm still not willing to go there especially in this economic environment. I'm sure that we will probably see more disputes. You typically see and we have been seeing more disputes coming from carriers as they've sent in their cost analysis vendors in.

That's fairly typical in this environment. We are seeing it again now. They are going to keep on optimizing their networks. The good news is that most of them were in pretty good shape from network optimization I think. They have been much more cost conscious than they were in 2001. There isn't a lot of spare capacity out there. Carriers have been growing their business on a much more incremental business, being much more careful about their capital spending.

So, I don't think there is as much to disconnect. But, I think we will probably see some headwinds from them in the coming year from various different carriers. But, we think the basis is very strong. The good news is that the majority of the revenue that we serve… when we serve the carriers we are really taking them to end user customers.

That's where we differentiates for the carriers. We don't play so well in the commodotized carrier business. Because we are not the cheapest game in town. We believe that the value that they get from us our ability to respond quickly. Our service levels are worth something. And so, where we really I think shine for the carriers is taking them to their end user customers.

So, that's inherently a much stickier customer base than just a lot of capacity between carrier locations.

Frank Louthan - Raymond James

Okay, great. One follow-up, and maybe if you... may be you covered this earlier, I apologize if I missed it, but can you comment on the SG&A expense in the quarter? Was there anything one-time there and what should we expect for that trend going forward? Would that be going back up to levels we have seen in the last three quarters.

Mark A. Peters - Chief Financial Officer and Executive Vice President

And SG&A... ours is... . I only want to first define for you, everybody know it because as we look at others define operating costs and SG&A a little bit differently. But, remember in our operating costs, we have a lot of people up there. Network operation centers, field technicians everything to run the business, as well as our network cost and our SG&A cost is our sales cost and normal G&A cost.

So, where we see fluctuations from quarter-to-quarter are fluctuations in timing of commissions earned and paid. We have seen fluctuations this quarter and this quarter we had favorable tax settlement. We have those things every quarter plus and minus. We took up our bad debt expense, a bit this quarter. So, that increased… contributed to the increased... .contributed to SG&A this quarter.

So, just really though quarter to quarter fluctuations are back and forth. Does it go up or down next quarter. It will be a matter of those fluctuations and really those kind of things and that just happens from quarter-to-quarter.

Frank Louthan - Raymond James

How material was the tax settlement?

Mark A. Peters - Chief Financial Officer and Executive Vice President

It was... gosh I forgot the number... it was... let me get you that number... how about let me get to that number and if I can share it later in the call... I don't remember the exact number.

Frank Louthan - Raymond James

Okay. Great, thank you.

Operator

Your next question comes from the line of Jonathan Schildkraut with Jeffrey.

Jonathan Schildkraut - Jefferies & Company

Thank you for taking the questions. Mark during your prepared comments you talked about churn occurring earlier in the quarter and kind of highlighted the churn levels remained same. Does that mean the churn levels improved through the course of the quarter? Following up on the churn question last quarter the company indicated that the SME kind of base... call it sub $400 or sub $500 represented 0.2% of the churn in the quarter. And I was wondering if we can get an updated number along those lines and then I have a follow-up on CapEx. Thanks.

Mark A. Peters - Chief Financial Officer and Executive Vice President

First on the timing of the churn and the churn trend as I pointed out in the call, we have seen and Larissa mentioned as well, we have seen a gradual increase in churn from a year ago. The revenue churn a year ago... ending the year was around 1% and now it's around 1.2%. And it's been concentrated in the acquired customer base less complex products the smaller customer base and we have not updated that number… but I can update that number... track that separately. So I am not going to give a good comparison for the last quarter on that.

But that really where we are seeing that churn is really around the less complex products particularly in the acquired customer base. Now from a timing standpoint, let me kind of give you a little bit of an example. You really have to look at churn. We saw churn in the first couple months of the quarters to come in higher. But nearly trailed off a bit in September. From an overall full quarter standpoint, the actual revenue churn rate appeared to be the... was the same from percentage standpoint from the prior quarter.

However, when you think about the timing, because it's an annuity type of stream. So by having it heavier in the first quarter the impact in the quarter was higher. So, if we had… now lets say we have the churn all in the first month versus all in the second month. The impact on the dollars could be three times greater just because when it comes in. The impact on the actual total reported revenue even though exiting the quarter, the run rate would be the same regardless of when the churn happened the impact in the quarter was higher.

Now having said that, what I don't want you to think is now churn is going down. That was just an impact in the quarter, because like I said, we have seen churns grow over the year, and frankly I don't expect that to go the other direction actually in this environment.

Jonathan Schildkraut - Jefferies & Company

All right, so you are not calling a reversal on churn?

Mark A. Peters - Chief Financial Officer and Executive Vice President

No I'm

Larissa L. Herda - Chairman, Chief Executive Officer and President

No…but I will tell you... but you know Jonathan the... most of the churn... the elevated... obviously you always have churn in the business. Customers move. Customers change location. There is also as customers go out of business. That's a normal part of business.

The elevated churn though that we are seeing is primarily coming from the acquired markets. It is smaller customers. It is generally the less complex products. But, you know in general it's the expeditious customer base. And so, interestingly enough though... in some of those markets where we've seen higher churn, the sales continue to be strong. When I say strong... strong I guess relative to the economy we are in but very steady and margins are actually better, and we think that some of that... . because some of the…a lot of these customers that are leaving the network are actually very low margin customers. And so, therefore it's actually helping the margins in those markets.

Jonathan Schildkraut - Jefferies & Company

Great. Along those lines you had previously indicated that that group of customers are about 3% of your revenue. Will you update that number or just going to leave that one as of last quarter?

Mark A. Peters - Chief Financial Officer and Executive Vice President

Yes. Because that number we haven't updated it. Let me just see if I can get that number while we are on the call.

Jonathan Schildkraut - Jefferies & Company

Okay. I did have a question on CapEx.

Mark A. Peters - Chief Financial Officer and Executive Vice President

That has been churning down. So, it really... it's come down a bit from last quarter.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Yeah. It's going to come down but keep in mind something... we are also selling to smaller... not small, small customers, but... so I would say that... we will see if we can get a number for you by the end of the call here, but they are slowly but surely churning away, but again we are also adding customers. So it is kind of a moving target at this point.

Jonathan Schildkraut - Jefferies & Company

Okay. Just a quick question on CapEx. You are at $275 now. Is that CapEx total number including the re-branding initiatives or is that a CapEx just outside of the $10 million to $14 million that you planning on spending on integration and re-branding? And then, have you brought up the CapEx number simply because I have heard you taking about Larissa taking advantage of some market opportunities? Thanks.

Mark A. Peters - Chief Financial Officer and Executive Vice President

The 275…that's all in. So that's all of our capital spending from our success base to, infrastructure to branding. It's all of that. If I just quote on a prior comment to…really because of the small percentage of... that the small customer's makeup of our total revenue even though that churn went up in the quarter from the small customers. I mean, it went up probably about from net basis, our churn from those expeditious smaller customers went up by about a $0.5 million this quarter.

From a percentage standpoint doesn't move yield enough [ph] that much for that total revenue. So it's pretty similar from a rounding standpoint from the last quarter.

Jonathan Schildkraut - Jefferies & Company

Thank you.

Larissa L. Herda - Chairman, Chief Executive Officer and President

And with regards to CapEx spending, as you know over 80% of our CapEx spending is related to success based opportunities. So in our model higher CapEx spending is actually good news. Where we are making some... we've some large customer opportunities. In fact, one of the things to keep in mind is we are spending some CapEx now for customer opportunities they're going to take us probably six months to install.

We are selling customer opportunities now that are scheduled for the May, June, July time frame. They are just big and they take time and there is construction involved. You are also running into the wintertime and there is usually delays in the November December time frame due to moratoriums in a lot of markets.

So... but there is consistent good sales opportunities are being funded by that CapEx.

Jonathan Schildkraut - Jefferies & Company

Thank you.

Operator

Your next question comes from the line of Michael Rollins with Citigroup.

Michael Rollins - Citigroup

Hi, good morning. I guess I had Just a couple of questions. First, I was just trying to think about… as you look at what you described in August and then in September and today. If you could sort of just recap for us again, where you think incrementally you saw the toughest impact on revenue? If you maybe could prioritize some of these issues because it seems like some of the things that you mentioned like the churn issue that was earlier in the quarter, it would seem like you would have known about that back in August.

So that was something that probably was within your thinking for August. And so I am just trying to understand incrementally where you saw the worse impact. And then I guess, the second question is how do you look at the sales cycle today versus a year ago? So, is there a meaningful difference in just the size and install rates of orders today versus a year ago or is it that you are seeing some lower demand from some of the smaller segment and sort of fill in the gaps while you are waiting to install revenue? Thanks.

Mark A. Peters - Chief Financial Officer and Executive Vice President

Let me start with some of the trends, and Larissa and I am sure you will comment here to it. Really what we were seeing as we went into from August to September was the higher churn coming into the beginning of... during the beginning half of the quarter. And like I mentioned, it has been trending up since last year and it has been staying at those higher levels.

We will see churn that bounces up and down month to month and quarter to quarter. What we were seeing it was consistently staying up at that higher level and it was in the beginning of the quarter. That was one thing that I want to…that led us to, I want to share that with the market.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Which you are right. And it's exactly your comment that we saw the churn in August. It continued at that higher level and therefore as soon as we had the numbers put together and saw that is when we decided to put out the 8-K.

Mark A. Peters - Chief Financial Officer and Executive Vice President

Right. So around that we also had mentioned... . in the Southeast and Midwest we are seeing some softness there. The good thing is that hasn't... now that stabilized but they are still seeing pressure... .continue to see pressure in those markets. So, coupling all those things together led into the quarter and it really led into the softness in the quarter and then obviously coupling that all together with the overall environment.

Larissa L. Herda - Chairman, Chief Executive Officer and President

You can't under estimate the rule of sixes in the quarter on the churn. If you have higher... July is typically slower on the install anyhow just because it's a seasonal month. It's coming into the summer. It's what we have seen…we always see it, but August generally pops back up and churn ended up continuing.

So the impact of just those two months... . September actually got back to at least normal levels on the installation side and although churn was still on the higher overall, we were a lot more comfortable with September. But the quarter was already impacted by the first two months. On the sales cycle, so from a year ago we have been slowly but surely evolving as a business and selling much more complex products.

Although last year, we were selling complex products, we are selling bigger more complex ones today. The selling cycles on those are generally longer anyhow so that's why to some degree it's hard for us to determine whether or not the sales cycles are actually elongating, because these are such complex deals. Interestingly, we are actually having customers who are telling us that sales that we have made, but they want us to get things installed quickly because they are trying to show cost savings themselves.

We save customers a lot of money, so this is important for customers for their own business objective. We like hearing that. We are not hearing it across the board. We hope to hear it across the Board, and I think that could be a nice trend for us as we continue through this economic cycle, because we just save the money and even customers are willing to spend CapEx, if they're going to save on the operating expense and that's a long-term savings.

So, we wait to see if that is something that positively impacts our business going forward. But, on the sales cycle in general we have been seeing... the larger customers some of it I will also say on the installation cycles we see longer installation cycles, but we can nail that right down to the fact that these are bigger deals and they are taking us longer to install. And it's not just us longer. It's also the customers.

Customers have a lot of coordination. We are taking their whole networks, which is I think is a new thing more so than maybe a year or two or three ago. We are doing the whole thing. And so, there is a huge coordination associated with that effort on the customers' part. We are just one piece of the pie.

When you combine that with the fact that we are almost always with these larger deals constructing fiber. You have got right-of-way issues. You have got franchise issues. You have got weather issues. These take a long time. But, the sales cycle themselves anecdotally the sales force doesn't seem to really feel like there is any big changes, but we think they probably aren't noticing them because they sell such a wide variety of customers.

An individual sales person can sell to a wide variety of customers, some that naturally would take a longer period of time than others. So I think, hopefully that answers your question.

Michael Rollins - Citigroup

Yes thank you very much.

Operator

Your next question comes from the line of David Dixon with FBR Capital Markets.

David Dixon - FBR Capital Markets

Thanks very much and good morning. I wondered if you could just provide us with some updates on the changes in sales momentum by major product category Larissa. I'm trying to get a sense of whether we miss remarkably seeing an acceleration from Legacy to IP? And thinking forward through the cycle... I think it is perhaps a little early yet. But, I imagine with the deep fiber investment strategy here that with the downturn we have seen an increase in the stranded asset ratios. But, as we think through and coming out of the cycle, I wonder to what extent we should expect us to factor in some improvement in incremental margins as business picks up again with that fiber moving to a higher capacity levels.

So, just some color on that would be terrific. And then thirdly, just on capital spending disaggregating the CapEx little more in terms of the mix between Long-haul and Metro? I wonder if there has been any initiatives to move away from SONET into Optical Mesh? I think you have talked about that before but just some color on that, thinking specifically there about the move to real time provisioning. That would be terrific. Thanks very much.

Larissa L. Herda - Chairman, Chief Executive Officer and President

All right. Well I am going to start off answering your questions and then I am going to probably have to have you ask them again as we go down the list. So, let's talk about sales by product. Data and Internet… I would say our data and IP based services are the majority of our sales funnel.

I would say probably 60% of the sales that we have today are data and have a data and IP related element to them. And the fastest growing product for us right now... but again keep in mind this is on a small base is our IP VPN service. Lots of locations. We build the core fiber into the buildings for the customers. And we VPN their branch location. Internet as I said on the... in the script our Internet... our IP traffic is actually growing.

It grew 12% in the quarter. So it is all inter related. Because, we those are the products that we are offering and then on top of that honestly our voice services have been doing quite well too because they are all part of the network. So we are kind of getting that... when you get that data everything pulls through. So, I don't know if that gives you enough clarity, but I would say the product that is probably the weakest would be our network services which is basically the old Transport.

As the world is moving away and moving more to IP and Ethernet. So, I didn't understand your fiber question and asset ratios.

David Dixon - FBR Capital Markets

Larissa, just perhaps asking it in a different way. Just wondering if you could help us spend with the loop back analysis, what that's highlighting in terms of the changes in stranded assets where you see some of these customers turn down? You have highlight some great customer wins here. I imagining that there is also been some customer losses with the economic environment that we are in. But, also just as we look through that I imagine there is opportunities as the market recovers that we should see from an incremental spending basis that CapEx, although it's being spent ,and maybe sitting there someone idle that going forward we should be able to see that optimized, as we come out of that downturn.

Perhaps just a characterization of to what extent you have seen stranded assets with the deep pocket strategy you have been employed working with.

Mark A. Peters - Chief Financial Officer and Executive Vice President

Let me take that one. It's actually... you are right. Let me talk about what happens when we do see a customer that goes away and also that highlight some of the... kind of the overall efficiencies as we've gained as we move through our integration activities. What we did as part of the integration is we came to such a size and scale that we could centralize our inventory before it decentralize and one of our initiatives was to centralize and control all of our electronics at one location.

So that we can manage that for the entire country. So, we have gotten actually pretty good at redeploying electronics from one customer location if they say disconnect, we will pull those electronics out of that location and pull it back in the inventory and redeploy it elsewhere.

So while it's not perfect, where we can always able to take the capacity out of this location and moving into another one. We don't need great deal of stranded assets when we see the churn. While there is some of it we do redeploy those electronics. Obviously the fiber stays in place and that becomes an opportunity for us in the future.

And we've frankly today we have hundreds of buildings that have fiber connected to them but no electronics and that gives the opportunity of efficiency when we go and sell into those locations from both the speed standpoint, because we don't have to dig up the ground or boar under the pavement to pull up a new fiber.

We can go in there and deploy the electronics and rapidly turn up service. So, you're right through a period of churn we would see some fiber out there that we are not using. But frankly a lot of the churn we are seeing is also from the acquired customer base that was using a type two component that wasn't even on our fiber.

So, we pulled the electronics and deployed, but we don't leave the fiber assets in place.

David Dixon - FBR Capital Markets

That's helpful and then just lastly could you help me a little bit just with the… we are seeing the larger carriers moving to a real time provisioning model with Optical Mesh investment in ROADM as well. Could you help us with the investments that you are making into the network generally whether that is as much a focus on you... obviously the larger carriers have a high degree of focus on the financial sector which is driving some of this but interested in just some update there.

Larissa L. Herda - Chairman, Chief Executive Officer and President

With regard to where we focus, we have a very different business than the Longhaul players do. We have some regional networks and we have upgraded over this past year several of our regions with higher capacity, optical services and obviously it eliminates stacking of gear in the central offices and stuff. It's very efficient. But vast majority of our investments is really in the Metro. It's punching into buildings for customers and that has been traditionally where we have been spending most of our time.

David Dixon - FBR Capital Markets

That's very helpful. Thanks very much Larissa.

Operator

Your next question comes from the line of Donna Jaegers with DA Davidson.

Donna Jaegers - D.A. Davidson & Co.

Hi, thanks for taking the question. Larissa you have talked before about 64% of your customers being on three to five year contracts. Can you give us some idea of what... is that sort of a rolling number or what sort of number of years are left on those contracts?

Is it two years left or... could you give us some idea?

Larissa L. Herda - Chairman, Chief Executive Officer and President

We have contracts that come up every months and you follow those for a long time, and I think that has been kind of the same for 10 years it seems. We give our sales people a significant incentive to sell long-term contracts plus a lot of what we sell involves construction, and so therefore in order for customers to keep their operating expenses lower they need to sign longer term contracts. So their monthly recurring costs are more manageable.

So, the two play go hand in hand. So, I would say very similar percentage of contracts that we have signed over the past 12 months are in the same... are 3 and 5 year contracts as well. So it is a very consistent metric that we have had obviously... . and it's because of the way I think we have motivated the sales force combined with our requirement to get our internal rate of return over the life of a contract, and so therefore that lends itself to longer term contracts.

Donna Jaegers - D.A. Davidson & Co.

Okay. And then, just two other quick questions. The sales force numbers you guys dropped about 32 sales people in the quarter. Is that...

Larissa L. Herda - Chairman, Chief Executive Officer and President

No big deal. It's a timing issue. We have strong performance requirements on sales people and that some sales people churn. We also have a lot of sales people in the funnel to be hired too. So, it's always a moving number because sales people at the low end of our sales force churn. So I think it's probably primarily timing really.

So I wouldn't draw any conclusions from it. We will replenish some of them and some of them will reallocate. That's just a natural part of our business.

Operator

Your next question comes from the line of Mike McCormack with JP Morgan.

Mike McCormack - JP Morgan

Hey guys thanks. Just trying to get a sense for you guys... you obviously have your ear to the ground and listen to customers and getting a sense for what's going on out there. Larissa or Mark, I guess when you are talking to them, what's your sense on sort of where you are, what inning perhaps on this sort of declining economy and when you think it might get better and maybe just a sense from your customer standpoint? Are we at the sort of point of capitulation where they are spending as little as they can and it could get better from here or is it still early on?

Larissa L. Herda - Chairman, Chief Executive Officer and President

Yes. Mike, if I could answer that question, I would be a very wealthy woman. Customers interestingly as we talk to our customers, our customers are really focused on getting more efficient. They are trying to find ways to save money. That's nothing new. They are... the issue that they have is that their bandwidth is continuing to grow, but they are trying to keep their costs from coming up. Because they are using their networks more and people aren't traveling as much.

They continue to put more on the networks, because it's a lot less expensive. I know how much money we have saved over the past few years just putting more applications on our networks and making ourselves more efficient. We continue to do it. I mean, we've got all sorts of initiatives that we implemented this year that are just, have been really helping our business and customers are continuing to do that.

The network is the life blood of the organization now. That's very different than it was back during the last Telecom implosion. Companies can't live without the network and even when they lay people off unless they are shutting down offices and you are serving every single one of those. They're probably not going to change the capacity of those offices because there is certain minimum requirements for capacity that they have to have for the base network.

So customers are really interested in cost savings ideas and ways to make them more efficient and they like... the reason why I think we resonate with them and the reason why we are seeing sales remain steady... . I know sales are steady, but revenue didn't grow and hopefully we've explained what happened in the quarter there. But churn is also higher and I think that's going to be a big headwind for us going forward.

So... but from a customer standpoint, we are going to save the money and that's… and allow them to continue to expand their bandwidth and we are real flexible and I think that's really... . from the way we look at it that's what they talk to us about.

Mike McCormack - JP Morgan

When you talk about the... you mentioned sales remaining steady a few times, but I guess historically the way that you are getting growth is not just steady sales but sort of constant increasing rate of sales growth, so are we seeing... there is more of a churn issue or is the growth rate in incremental sales going down… or both?

Larissa L. Herda - Chairman, Chief Executive Officer and President

I would say sales… when we say steady they have been steady. They are not increasing. They are fairly steady. That's I think a very good news story in this environment, since we are hearing from other companies that sales are actually going down. We have not been seeing that. So we are happy with steady right now.

Mike McCormack - JP Morgan

Right.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Obviously, we would like to see growth. But, I'm real happy with steady. With regard to churn... keep in mind, again you have seen us for a long time on any given quarter you're going to have fluctuations. And there are things that fluctuate for the positive and there are things that fluctuate for the negative, which is why we have always been a very big believer in looking at the long-term trends for the business.

And keeping in mind that we have a recurring revenue business. We don't have to replicate our revenue stream every quarter. That's a huge element of consistency and stability that we have in our business as well. We don't have a lot of that exposure to really any sector. So the key for us obviously is to out sell the churn. And that's what it was back in 2002.

In 2001 and 2003 we didn't out sell the churn, because we had the vast majority of our revenue coming from carriers and most of them were going bankrupt. We don't have that issue today. So, we feel pretty good about out selling the churn. The question will be to what degree will we be able to do that. So far the sales funnels still remain steady. The demand coming in and the sales that are closing are steady. We are starting to enter into the holiday season and we generally see slower sales from late November into December, which always impacts the first quarter and that is nothing new.

So the question will be will it pick back up again like it normally does in the January, February time frame and I think we just have to wait to see. We don't have any indication today that tells us that it's not going to happen, but this is kind of a strange economic environment and it's hard to tell, but the sales force isn't feeling that right now and we talk to the sales force weekly and they are feeling pretty good about the position that we are in.

I think we are also fortunate in that we still have such a small portion of the market of the share of what's out there in the market and products are well suited to be able to take share away from the incumbents and we are quick. We are flexible, we have got great people, great sales force, really innovative in providing solutions to customers. We are really focused on the customer and that may also sound cliché, but it actually really works and it's working for us. So we feel like… do I think that we're going to have a robust year.

I don't know if there is a company out there who is going to tell you that they're going to have a robust year. So, do I think that we will manage through this in a thoughtful way and we will get through this cycle, absolutely. We are extremely well positioned for it and we are in this great position. We are actually generating cash. So, we can make the right investments in our business and you have known us for a long time. We are very conservative and cautious.

But at the same time we are also very opportunistic and smart about how we deploy our resources and we're going to continue to do that.

Mike McCormack - JP Morgan

Great. I think those of us in the financial services industry are well aware of how non robust of a year this is. Thanks for answering the question. Thanks guys.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Yeah. All right.

Mark A. Peters - Chief Financial Officer and Executive Vice President

Yeah. Before we go to the next question I want to come back to the SG&A question on the change sequentially. And like I mentioned before, we got fluctuations from quarter-to-quarter. This quarter our taxes... local tax category went down by about $2 million but kind of the counter point to that we also have pluses and minuses of our bad debt expense went up by about $2 million. So, we also have things that put and take up from quarter-to-quarter. Next question?

Operator

Your next question comes from the line of Rai Archibold with Kaufman.

Rai Archibold - Kaufman Brothers L.P.

Thank you. Couple of questions I want to ask. One is related to... one was related to the new markets that you have turned on. I know that they have been ramping. I was just curious though… actually let me back up first. You had put out the 8-K early in September and you talked about the Midwest and Southeast regions showing incremental weakness.

I was wondering if you could just bring us up to date and if you have seen weakness spread to other markets within your footprint.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Okay. And then you want me to answer a question on the new markets as well?

Rai Archibold - Kaufman Brothers L.P.

Yes yes.

Larissa L. Herda - Chairman, Chief Executive Officer and President

Okay. Right as we previously said the Midwest and Southeast regions were seeing more pressure than elsewhere. But, actually they have stabilized. They are not getting any worse. So, that's good news. Really some of this… most of this was due to the acquired markets that were experiencing the heavier churn coupled with a less experienced sales leadership in those developing markets.

We were getting some more hands on leadership help to help them become more productive. That combined with I think the pressure from the acquired customer churn was causing us to see more churn and more pressure in those areas. The good news is that we have done... I think we put some really good attention and these people are starting to mature. Sales force is starting to mature. We are starting to sell... .see some great traction.

The reality is, is that most of the people were new there and it takes a year or sometimes two years to start to see traction and I think that their traction has been masked a bit by the heavy churn in those markets, but there is some really good sales momentum. They have been adding a lot buildings. We had increased their capability in terms of product capability and that's really helping them.

They have become instrumental in the multi site deals that we are doing in other markets too. So, that's really starting to show promise and the good... again getting back to... I hate constantly going back to the past, but many of you will remember during the downturn in the Telecom industry we had acquired GST and we put almost all of those markets in hibernation for almost two years. Maybe some of them even a little bit longer. And when I say hibernation, I mean we got rid of most of the people and we didn't spend any capital in those markets for several years, because we were in a capital strained environment.

The one market that we did continue to invest in actually wasn't part of the acquisition but it was a market that we had built organically at the same time and that was Minneapolis. And many of you have seen our Minneapolis slides over the years and you have seen the tremendous EBITDA margins that we have in those markets and they are significantly more mature than our other markets.

Although our other GST markets are now some of our fastest growing markets today. They are doing great, because we did get back to investing in them. The position that we are in today is a bit different. Because, we are not capital constrained from continuing to invest in those newer markets. And those are going to be the jet fuel for our growth on a going forward basis. It just going to take a bit more time because of the downturn but it is going to be there.

This is a tried and true strategy that we have utilized through good and bad times and it works, and it is all about making the right investments, having the right discipline around and demanding the same kind of returns on those investments, and I will tell you that has not changed. We continue to be extremely disciplined in that regard and when you do that overtime, the results come through and they will.

Rai Archibold - Kaufman Brothers L.P.

All right. And if I could just ask one more follow-up please. I guess, now that you have hit the mid 30% bogey for your modified EBITDA, I was wondering if you could share if there is a new target or where do you think the EBITDA margins can go from here?

Mark A. Peters - Chief Financial Officer and Executive Vice President

We have some obviously some nice growth over the last year, 370 basis point expansion of our margins and clearly at 35% we are really up there with the industry leaders on EBITDA margin. Now future growth area that is something which I don't want you to get used to that every year I am going to have a 370 basis point expansion. That's a little difficult and in this environment to be in the mid 30s, I think is a really good place to be and I wouldn't… especially in the near-term I think it's a good place to focus right where we are at give or take.

It is going to fluctuate from quarter-to-quarter and future growth obviously is predicated on top line growth, frankly. So, we'll have to monitor the goals were good work and we feel good that we are in the right range now, and it's an important metric to us, but it is also an important metric to us but it's also important metrics… also flow that all the way down to positive cash flow, which we have proven that we generate cash flow and we expect to continue to do so.

Rai Archibold - Kaufman Brothers L.P.

Great, thank you.

Operator

Your next question comes from the line of Michael Funk with Merrill Lynch.

Michael Funk - Merrill Lynch

Great. Thank you for taking the question. Following up on the margin, can you give any color on the trend that you have seen and that you are seeing today on the incremental enterprise margin given the more complex products that you are selling?

Mark A. Peters - Chief Financial Officer and Executive Vice President

Really the difference…there is not really a difference because of the combination of selling on-net... when we sell on-net obviously it's a high incremental margin for that customer, but then we augment it with our VPN and off-net component to connect up those data centers that are on-net to those satellite offices that are going to be…we get close to them with our network then we use a component that's off-net. So that can offset the higher margin from the on-net.

So, we haven't seen real any change in that incremental margin. It's obviously... it's a mix of whether or not it's... what the mix is between on and off-net. But it's been pretty consistent.

Michael Funk - Merrill Lynch

Okay. And just One follow-up, if I could. The growth that you are seeing from the existing customers versus new customers coming on, any sense of beak down there?

Larissa L. Herda - Chairman, Chief Executive Officer and President

It always comes from both. One of the customers I actually talked about in the script was an existing customer. They had bought some services from us and we expanded that relationship. Very often the larger customers start off that way where you do a little bit for them. They get a feel for who you are. They are not willing to give you the network right away until they get comfortable with you and then you get a bigger piece of the pie.

That's a significant portion of what we do. But, obviously you have to keep on feeding that funnel with new customers that you can do that with as well. So, it's very much... It comes from… revenue comes from both new and existing customers.

Michael Funk - Merrill Lynch

Thank you very much.

Operator

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Okay. Thank you. Good morning. Mark you talked about the cash balance from the strong liquidity and the free cash generation that you are seeing. Can you help us think through under what circumstances you would consider debt buy backs with equity buy backs, obviously with no near term maturities and the cash flow generation, it doesn't seem like you have really a use for the cash balance in any material way and there is some pretty attractive valuations out there but in the securities markets on both debt and equity sides. Thanks.

Mark A. Peters - Chief Financial Officer and Executive Vice President

It's a good problem to have to be thinking about those things. But again, I think in this environment, like I mentioned having what you might be intimating is having cash in the balance is really good place to be as the environment is pretty volatile and we talked about where we see the consistency of our revenue stream and how our sales year-to-date and year-over-year has been greater than last year and all those kind of things. But, it has been uncertainty out there.

So it think it's prudent for us to maintain a higher level of cash even as we generate positive cash. As we work down the road here down the path here, and if we see the environment at least settle out a little bit in more the external environment that might lead us to more seriously evaluate a better equity buy back. We do have certain limitations and equity in particular because of our credit agreements, we are limited to use $50 million of our cash for instance to actually repurchase shares.

But again, I'm not saying they are not on the table, but we are conservative not only in our investments but in our balance sheet and capital structure. So time will tell on those topics as we really evaluate the external factors.

Simon Flannery - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Nick Netchvolodoff [ph] with Barclays Capital.

Nick Netchvolodoff - Barclays Capital

Yeah that's Nick Netchvolodoff. Hi guys. You guys after having 99% of the precincts report in hopefully you guys have something new to add here. One thing I wanted to talk about the voice trends a little bit, and whether or not... you probably talked about the migration from Legacy data to IP. Do you think that migration is going to have a affect on... do they have affect on voice growth and how should we think about voice growth over the next… 2008 and 2009?

Larissa L. Herda - Chairman, Chief Executive Officer and President

Yeah. We would have thought that it would have had a affect on voice growth already, but instead… I think because we have been fairly creative and how we have sold out voices and bundled out voice. I don't know about you, but I still use the phone every day. And so, we believe that we are going to continue to see voice grow for us. It's again... It's not a standalone product. Generally it's part of a bigger network. Customers need to use their telephones. So I don't see yeah, that's going to change.

Mark A. Peters - Chief Financial Officer and Executive Vice President

And voice sometimes becomes reporting challenge to you because voice becomes an application. So, we are still using voice that comes over the IT backbone. At some point it becomes an application so still the revenue is coming through, but at some point how do you record it.

Nick Netchvolodoff - Barclays Capital

Thanks guys.

Operator Your next question comes from the line of Jonathan Schildkraut with Jefferies.

Jonathan Schildkraut - Jefferies & Company

Hi, sorry to circle back on you. I was wondering if we could talk just briefly on seasonality. If you can kind of remind us... there is some of the seasonal impact so we might look forward in that coming quarter. I believe historically it has been a slower sales quarter, the fourth quarter because of the days, but the revenue growth hasn't been necessarily slower.

And on the margin side you have some cost that stop accruing in the fourth quarter and potentially lower power cost at your data centers.

Mark A. Peters - Chief Financial Officer and Executive Vice President let me hit the revenue. I might come back and ask you question on the last part of it. But historically our seasonal from a less historical sequential growth have been the first and third quarters. The first quarter tends to be coming off of when you are selling starting on Thanksgiving through New Year's. Obviously that the sales call... company is going through budgeting. It can make a call the holidays are going on there. So, those sales sale historically have led into a lower first quarter sequential growth and also there is some usage patterns in there that tend to drive that as well.

Similarly in the third quarter... .less pronounced but historically we have seen less sequential growth in the third quarter. Again coming off the summer vacation holidays... I mean in the middle of summer and also some less usage going into the third quarter . So, on the revenue that's what we have seen historically.

On the cost side what also happens going into the first quarter is on January 1st from a pay roll tax standpoint everybody gets reset up to the full reset and we max out our pay roll taxes increase and that can have a meaningful impact on sequential cost going into the first quarter. And then, we have also historically we do merit increases in the first quarter that also have an impact on the cost in the first quarter.

Some of those... that the pay roll tax in particular throughout the year they tend to trend down a bit and then come back up on January 1st. You also asked another question on power that I...

Jonathan Schildkraut - Jefferies & Company

I was talking about, maybe what we can expect from an incremental margin perspective. So, I knew there were a handful of some of those accruing costs that you noted. But, also there are some other costs that tend not to be as high during the winter months like power at the data center, because it requires less cooling during the winter than the summer?

Mark A. Peters - Chief Financial Officer and Executive Vice President

I'm not sure that moves the needle much. I mean, we have seen an increase overall in our power and fuel costs. Because of you know we have about 500 or so technician trucks out there that are driving around every day. So, we have seen higher gas costs.

We have seen higher costs in our data centers over the last year. Obviously, we might get a little benefit going forward if gas prices stay low for the time being. But, as far as the temperature and stuff, I'm not sure if it's enough to make a big difference.

Jonathan Schildkraut - Jefferies & Company

Thank you.

Operator

And there are no questions in the queue.

Larissa L. Herda - Chairman, Chief Executive Officer and President

All right. Well thank you all for joining us on the call today. Have a good day.

Operator

That concludes our program. Thank you for joining us. .

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