Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

tw telecom inc. (NASDAQ:TWTC)

February 26, 2013 3:45 pm ET

Executives

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

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

Michael A. Rouleau - Former Senior Vice President of Business Development & Strategy

Analysts

Edward Katz - Morgan Stanley, Research Division

Edward Katz - Morgan Stanley, Research Division

Okay. Good afternoon, everybody. So it's my great pleasure to introduce the TW Telecom management team. Larissa Herda, on my left here, CEO; Mark Peters, the CFO; and Mike Rouleau, who is Head of the Business Development and Strategy.

Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear at the Morgan Stanley public website at www.morganstanley.com/researchdisclosures, or at the registration desk.

So great to have you all in here today. And Mark, you want to read the disclosures?

Mark A. Peters

I have to do our legal stuff, too. So information on this webcast contain statements about expected future plans and expectations that are forward-looking and are subject to risks and uncertainties. A discussion of factors that may cause the results to differ materially from our expectations is included in our 2012 Form 10-K especially the section entitled Risk Factors.

Question-and-Answer Session

Edward Katz - Morgan Stanley, Research Division

Thank you. So Larissa, last year was the year of the Intelligent Network, now, we have Constellation. Maybe you can start by sort of just giving us a big picture overview of what we should be looking for out of the company in 2013, what are your main priorities to drive growth?

Larissa L. Herda

Sure. Hi, everybody. So as we look at 2013, we obviously reflect on our past track record of very consistent performance year after year after year. We've had 8 years of every quarter consistent revenue growth, great margins, strong margins in our business, good cash flows. And -- but last year, we also saw a declining revenue growth rate in our business and as we looked at the year and the things that we wanted to do to get back to accelerating growth rate, it became really clear to us that along with our innovation that we've been doing a very good job of over the years, we needed to simply increase the size of our sales force as well. And we haven't really increased our sales force since 2009. And over the course of last year, we had -- we spent a lot of time evaluating how we wanted to increase our sales force. We see -- we saw good sales over the course of the year, strong sales, better sales than the previous year, but just not good enough to continue the trend of accelerating our revenue growth rate. So for us, a lot of it is a numbers game, increasing the number of salespeople. But we don't like just increasing the numbers. We like to -- we've always been very methodical and strategic about how we do this. And so last year, as we were attriting some of our lower end sales force, we started to add a higher end sales force. And there were certain parts of our organization where we felt that would most benefit because of the business opportunity that we saw from an increase. So for instance, our national enterprise sales organization has -- because of the -- primarily, a lot of it's because of the new product offerings that we had and are going to have, have entered much more strategic dialogue with enterprises who are very interested in doing business with us. That sales organization needs to grow. We just simply don't have enough of them, given the market opportunity out there. Our federal sales organization has really gotten a lot of traction in the past couple of years. And it needs to grow. That's a longer selling cycle, but they're mature and we've made some really great inroads in some various different agencies that we know that we can expand on very effectively now. That's going to grow. Our indirect sales force, which has really been doing a great job for us over the past couple of years is providing us with access to customers that we never would have had an opportunity to sell to before because of their relationship. And so therefore, that's an area for a quicker growth because they generally come to us with relationships, and there's a lot of demand out to there for relationships with us that we've had somewhat limited because of the size of the organization. And we always like to try it and see if we like it before we expand it. And we like it, so we're going to expand it. And then, just our market -- our local market, we have a number of markets where we're underpenetrated and -- but the management teams in those markets have gotten -- have shown track records now. They're maturing, they're ready for new sales teams. So when you combine the new product innovation that we've been coming out with in the future, along with these incremental increases in our sales organization across the country, now, these are a couple of the dials that we're tweaking, so to speak, to get back to accelerated growth. You mentioned the Constellation network. That's a future, right? We wanted to talk to investors about the vision of the Constellation network, which kind of is an overarching theme and vision for the business. But the idea behind that is to make it easier for customers to acquire dedicated services. And to make it instantaneous. And to make it flexible. And we're starting with the data center ecosystem because we've hundreds, over 400 third-party data centers on our fiber network. Plus, we've got thousands of enterprise data centers on our network. And so we connect them all virtually by our fiber. So we decided, and this was after a lot of conversations with customers, why do we need to do business with all of these companies the same way a telecom company has done business for all of these years? Why do we need to stick to the 100-year-old provisioning cycles and telco ordering cycle? Why don't we do something different? And as an inspiration, look at what -- look at the iPads and the iPhones and the instantaneous communication. And to some degree, the Internet is an inspiration. But how do you provide that type of connectivity, but on a dedicated secure circuit but as fast as you could do that? And so we've been working with a number of the data center companies who have been also very inspired by this theme because the telco world is slow, it's cumbersome and it's slower to revenue for them. Whereas if we can provide them a more instantaneous connection to their customers, they get revenues faster, we get revenues faster. And if we can do it in an automated fashion, and that's really one of the keywords for us, is automation, then we obviously can really scale this opportunity quite aggressively.

Edward Katz - Morgan Stanley, Research Division

Great. So let's go back to the sales force. Can you just take us through where you are today and how you expect to build the sales force? What your ultimate goal is and so, how that sort of flows through the SG&A line? And then the goal from there to bookings, to revenues? How should we be kind of looking to check your progress over the next few quarters on that?

Mark A. Peters

You bet. Like Larissa mentioned, over the last few years, we've been pretty stable with our number of direct sales folks. In fact last year, we're actually down a little bit when you look at the average sales people we had last year, even though we had a growth in sales. So good strong productivity from our sales folks, but that growing base needs to do more. Really, towards the end of last year, we increased the count by about 6% or so. Really toward the end of the year. And then, coming off of that base, we expect to add another -- roughly by the end of this year, another 10%. But when you think of in totality when they came in so over, say a, 13-, 14-month period, we expect to increase our direct sales headcount by about that 15%, 16%. And so we'll see it growing into the first quarter, you'll see the full impact of the cost related to those -- just those headcounts for the full quarter coming in. But along the way, salespeople need support resources as well to make them productive. And so we'll be adding them, we have started adding them towards the end of the last year and into this year, with the increase in the AE, account executive, headcount as well. Because they -- we're selling a complex product and we need the salespeople to be doing the relationship, the hunting, but they need somebody to take care of it. And once they do the selling and help them sell and help them bring that deal and then get it, convert it to revenue.

Edward Katz - Morgan Stanley, Research Division

So can you talk about have you -- how -- you've obviously found some talented people, but what's your -- are there enough qualified people to meet your criteria out there to kind of...

Larissa L. Herda

Oh, there's a lot people out there and...

Edward Katz - Morgan Stanley, Research Division

[indiscernible] experience the kind of...

Larissa L. Herda

We're sourcing people from different places than maybe we historically have. Over the past couple of years, we've started to source people from data-oriented types of businesses like hosting business, software companies, et cetera. They generally speak IT speak and they understand that environment and so aside from the normal sourcing that generally happens from other carriers, that's always there. We're also changing a little bit of the dynamic of the type of salespeople that we've been hiring.

Edward Katz - Morgan Stanley, Research Division

So when should we start to see these sort of reacceleration in the top line as a result of these?

Larissa L. Herda

Well, time will tell. As you know, nothing happens really quickly in this business. If you hire a salesperson...

Edward Katz - Morgan Stanley, Research Division

I have sort of 9 months in my mind of when a lot of this...

Larissa L. Herda

Well, if you hire a salesperson in January, right in the very first part of the year, and you figure it takes a while to train them and get their feet on the ground and get them -- unless they're coming with relationships that they can sell to right away, which does happen but, unfortunately, not often enough. You have to train them. Your first 3 to 6 months is more of a training and building a network of customers. Let's say they start selling in the second quarter, which would be awesome, but they're not selling at quota, right, but they'll be selling something, it's still another 90 days to 6 months before you're going to see the revenue. So it's a long selling -- it's a long cycle. It's a second half of the year, you're going to have some that will sell sooner. But the indirect sales force, for instance, arguably could sell sooner because very often they're bringing -- they're always bringing relationships with them and so there's opportunities there to sell sooner. The national enterprise, it's probably not going to sell much of anything this year just because -- not only the -- unless, of course, they bring relationships. But even then, it takes time. It's just a longer selling cycle with bigger, bigger companies. So it's going to just be different depending on the...

Edward Katz - Morgan Stanley, Research Division

So they're really exiting this year. At 2014 is when we can really kind of say independently how...

Larissa L. Herda

That's a good view.

Edward Katz - Morgan Stanley, Research Division

Right. You've had 3 months with some of these. So far so good?

Larissa L. Herda

Three months with?

Edward Katz - Morgan Stanley, Research Division

The people you hired in December, so?

Larissa L. Herda

Time will tell. Too soon to tell.

Edward Katz - Morgan Stanley, Research Division

Okay, okay.

Larissa L. Herda

So some -- if you hire 100 salespeople, some not insignificant portion of them will never sell a thing. And that's just the reality of it. You spend all this money training them, you've got them for 6 to 9 months, and it's a big goose egg. That happens. I wish we were really always perfect at when we hire people. Sometimes, it's just not a good match. And we don't realize that until too late.

Edward Katz - Morgan Stanley, Research Division

Well, we've had the conference at 1.5 days at this point, and one of the themes we continue to hear is traffic growth. It continues to be very healthy out there. I wonder if you could just talk about what you're seeing in the market in general, in terms of the overall market expansion? And anything on competition, pricing that you can share with us as well.

Larissa L. Herda

I'll let Mike talk.

Michael A. Rouleau

So just in terms of enterprise demand and traffic, we're still seeing customers looking for additional capacity. They're looking for, frankly, a new architecture that can grow out their IT infrastructure and looking at how they adopt and integrate capabilities like cloud and some of those sorts of applications. And so that's one of the things that we're finding a great interest from the enterprise guys around is how we can deliver that Ethernet connection to a customer that goes into the data centers, into the cloud applications providers, and help them with their more transient IT needs. So what I think, if nothing else, the CIOs are struggling with how do they adapt quickly to what's going on in their business environment and how do they bring in these new applications quickly. Because they tend not to be 3 or 5 years sorts of commitment in terms of application deployment. They're looking for how do they set up infrastructure this week, this month, this quarter and make sure that it's highly available and secure and predictable. So the traffic demand is continuing to grow into these sorts of environments, and one of the things we're trying to do with our Constellation platform is give that on-demand instantaneous new network connection to the CIO so that they can go in and select what kinds of applications they want to use in a real-time basis. So having that level of capability is unprecedented in our business. And giving them the ability to go to 1 location today, a different location tomorrow, to meet the needs of their business, and to do that in real time, giving them as much capacity as they need for as long as they need it and only paying incrementally for what they use is an incredibly appealing concept to them.

Larissa L. Herda

So not -- so getting to kind of traffic and I mean, one of the reasons why we're increasing our sales force is not only just because of the innovation and then, obviously, we need more salespeople to sell more in order to increase our revenue trajectory even though we've sold more last year than we ever have sold in the history of the company, it's just wasn't enough to do that, because you have to accommodate for churn and rebates and things like that. We're increasing our sales force because there's a lot of demand. And there's a lot of demand for our products, regardless of what's going on in the macroeconomic environment, traffic continues to increase and customers are looking for that innovation. And we are very good at providing Ethernet services and customers continue to migrate to Ethernet. And so there's just a lot of demand for us out there to go after.

Edward Katz - Morgan Stanley, Research Division

There's been quite a lot of consolidation in the industry. Has that helped pricing? Are you -- how would you describe the level of competitive intensity right now?

Larissa L. Herda

Our competition is really the large incumbent carrier systems, primarily. So consolidation really hasn't done anything against those competitors. So I would argue our -- it's just a very competitive business, it always has been a competitive business. We obviously managed to get our share, we want more than our fair share. We want to take more share-taker primarily. So I don't think really anything has changed for us as a result of consolidation. You've had some long-haul consolidation. You've had some dark fiber-based consolidation. You've had some small business type of [indiscernible] consolidation. But we don't really compete that much in any of those areas. We really compete against the big carriers.

Edward Katz - Morgan Stanley, Research Division

And you've basically, since Xspedius, you sort of stayed out of the M&A arena. But you do consider to look at things, your cash balance is obviously extremely healthy, you haven't been doing a lot of buybacks. How do you think about that?

Larissa L. Herda

Arguably, our cash balance is too healthy. But we'll let Mark talk a little bit about what we're going to do about that. But that's a temporary situation. But we've always had a good cash balance, and healthy cash flow business. And obviously, we've got some debt, but we could add leverage if we wanted to, certainly. But as far as M&A is concerned, we're always looking. We probably have the best research on the industry of anybody because we look at everything and so we understand what all the assets are out there. But for us, there's the trade-off. So if do you -- do M&A, it's hard to do both M&A and extreme innovation like we're doing at the same time. Because we're a fairly lean organization so a lot of the same people who are doing innovation would have to integrate. And integration does cause you to step back a little bit. Our last integration with Xspedius, we decided that we were going to integrate much differently than anybody else in the industry. We were going to create a single database of information from inventory to customer data. We were going to create a single platform so that -- and make it so that we could do things like Dynamic Capacity and have customers pick a circuit from Denver to Columbus and increase capacity in seconds on their own from -- up to 3x. That can only be done if you really integrate well. So when you're thinking about M&A, you have think about what the trade-offs are. And you have to think about what investments you have to put in these businesses, and whether or not you're going to get a return on your investments. And so obviously, we haven't done a lot of it because a lot of the companies that may have been opportunities we would've considered, we thought were not worth the money that they ended up getting sold for. And it hasn't hurt our business in any -- we, very fortunately, have had strong organic growth for 8 years. And our growth is organic. And sure, M&A is an opportunity, but it's also -- it can be a distraction. And as we have seen, it can also destroy value. So we're very careful about not doing that. But that's not to say we don't continue to look. It's just that the bar for M&A is very high.

Edward Katz - Morgan Stanley, Research Division

Mark, on the balance sheet?

Mark A. Peters

Yes, you're right. We ended the year with just beneath $1 billion in cash on the balance sheet and a net leverage of around 1.4x. So, a very strong balance sheet, we generate cash for 22 competitive quarters on a levered basis. So we're in a strong positions -- so, we're in a great -- we have a great opportunity to invest in all of our growth initiatives we talked about. We've announced a little over a year ago a $300-million stock buyback program. We've gotten about $22 million of that more optimistically in the past. And I expect we'll be a little more deliberate with that this year. And then we did take advantage of the high-yield market last year, so we put some of that -- part of that cash from the balance sheet was to lift for that. But then we can also address our converts that's how much callable later this year. So at some time, you might expect us to address that as well. So, a year from now, I wouldn't expect that we're going to have that $1 billion of cash in the balance sheet because we'll be able to deploy it across all of those options, and I expect we will.

Edward Katz - Morgan Stanley, Research Division

And you think that leverage closer to maybe 2x or something is more appropriate, or...

Mark A. Peters

We're comfortable clearly using that cash flow as opportunities will take our net leverage up, as a result, so it will drift out to those results. And we're in a very comfortable position on leverage. So, and to take it up clearly we're comfortable taking our cash balances down as a result of those initiatives. And because of our leverage ratio and we're up even after that it will be pretty -- it will be in a comfortable position for us to -- if there is something else that we want to do, we have the flexibility to do that as well. So looks like we don't have to choose between a lot of good alternatives when we think we can do them all.

Edward Katz - Morgan Stanley, Research Division

Your capital spending, $360 million, $370 million this year, up slightly year-over-year. Just talk about some of the main buckets of that, what you're trying to achieve with that?

Mark A. Peters

Last year, as you know, we -- our CapEx revenue of about 23%, 23.5% or so of our revenue. The vast majority of that is what we call medium- to short-term success-based investing, which is primarily going into new customer locations with our network after signing the customer contract, as well as adding other capacity into our IT platform to serve near-term demand. So that's where our CapEx has gone and I expect it to continue to go. We expect our CapEx to present a level of intensity to be roughly similar this year. So even though the absolute dollars are going up, our revenue is growing, too. So, and then again the vast majority is going to new success-based opportunities, as well as some going into all the product initiatives that -- and capabilities that we've been talking about. But again, for a company our size, as you point out, it's not a big increase in the CapEx.

Edward Katz - Morgan Stanley, Research Division

Okay. And how do you sort of work with the sales force to ensure that you're getting a good payback, you're hitting your hurdle right, they're selling into the existing network as much as possible? Or is that where all your thought process?

Mark A. Peters

It's actually on many levels. I mean, our sales folks, and broadly, our organization, know what the internal rate of return is. Because everything they sell that has a dollar CapEx associated with it. They have to demonstrate what that central rate of return is on that dollar of investment. So when they go and then sell their customer and we connect up 1 or 20 locations with our fiber, they -- through the tool that we give them, they know it's the revenue they're going to generate, they know what it's going to cost to deploy it. And if it hits a 30% internal rate of return, I would like that contract with no residual and it's an after-tax calculation, so even though we have an $800 million, $900 million federal NOL, that's an after-tax calculation so then we're planning for the day that we use that up. If it's 30%, they can commit to that customer. And what that does -- and that's been there ever since Larissa instituted this concept 15 years ago. And it's been consistent. And that's -- by doing it consistently, our sales folks know what they can sell. And they can maintain that momentum versus stopping and starting that we've seen any of our competitors do. So very disciplined deploying that CapEx, when we're doing network expansion and like of course, I mentioned since 2006, all of our growth has been organic. And it's been -- our expansions have been with the emerging/adjacent/existing markets. Those all have return thresholds to them as well. So, and we do product initiatives. We do business plans and say, okay, let's look in the generate and this is the return. Everything we do is return-focused and then we track it. And so it's very disciplined. And that's why while we spend in the mid-20s percent of our CapEx revenue, our ROI continues to expand. And consistently expand. Because of that discipline that we demonstrate at every level of our organization. And we also don't do dumb M&A either, so.

Edward Katz - Morgan Stanley, Research Division

Good, good. I've got time for some questions from the audience. Okay. What are you seeing in some terms of churn right now? How that's been fairly...

Larissa L. Herda

That's been fairly consistent. Yes.

Edward Katz - Morgan Stanley, Research Division

Is that just reflecting a sort of a stable economy? I mean they...

Larissa L. Herda

It might be. We also have very -- we have revenue churn and then we also have revenue that churns out from customers who leave us completely, which is like 0.2%. It's barely a nonexistent. I'd argue it's almost like the bankruptcy rate probably where people moving out of the cities. And then the other churn that we -- the revenue churn that we have which vastly it's right around 1% or so. And that is a function of just -- it could be a function of customers moving circuits. They disconnect here, they reconnect over here. Or moving offices or it could be going out of business, too, in there as well. But in most cases, it's just all sustained customers changing what they're doing with us. Or sometimes we lose to competition, too.

Edward Katz - Morgan Stanley, Research Division

Mic? There's a mic there.

Unknown Analyst

About what you're saying from the cable companies. Comcast, they talked about sort of how the small market businesses really did well for them, growing, I think, 30%, and now they're kind of starting to scale at medium-sized businesses. So can you talk about what's your competition seeing from the cable operators?

Larissa L. Herda

Well, we've had competition from cable operators for many, many years. Companies like Cox have been selling enterprise services for, I don't know, 15 years. Time Warner Cable has been selling business services for probably 10 years. And so we're used to -- Comcast is really the newer entrant into it, and they've been very focused. In fact, I think they have a staff that counts how many orders they install per minute. That is a really different business from the one we have. We don't look at that type of a metric. They're selling to a lot of smaller business customers and I'm sure they'll move up market, the cable companies occasionally. We see the other ones moving up market, too, in the past. We sell primarily multi-city big networks around the country. So if we sell a 10-site IP VPN or -- in a multiple market, we're not going to be competing against the cable companies for those types of services. So yes, there is some low hanging fruit that's local, that we -- sometimes we win, sometimes we lose against them, it depends on what the customer is looking for. But the vast majority of what we're selling is multi-city type of applications. Our main competitors are AT&T and Verizon. And then as you know, occasionally, CenturyLink.

Edward Katz - Morgan Stanley, Research Division

So as we come back to the Constellation, I look at where -- how should we think about that impacting revenue? What's the timing on sort of productizing some of these concepts and bringing it really to the customers so they can actually -- we can get the bookings, get the revenues coming through?

Larissa L. Herda

Much like the Intelligent Network -- when we first started talking about the Intelligent Network, we wanted to communicate to the market what we were doing. We weren't quite ready to tell them when we were going to be doing it and last year, you saw -- over the course of last year, first we released Enhanced Management, then in the August time frame, we released Dynamic Capacity, which allows customers to triple their capacity on an Ethernet circuit within seconds on their own and then, part of the install chip network is also the one-to-many products, to some degree. It's Ethernet innovation, essentially allowing customers like carriers that don't have network in the United States to connect with us in 1 location and be able to serve -- that they can buy services from us with that one point of presence anywhere in the United States, which saves them a lot of money and operating expense. So the Constellation network is an expansion, it's really an overarching vision that we have that is, first, focused on the data center ecosystem. So when you take the 400 plus third-party data centers we have and then the thousands of enterprise customer data centers that we have and their desire to get to one another in a more dynamic way and in a secure way on dedicated services, it's a very compelling proposition. From a time frame, we're not ready to tell people exactly when. We're going to have the instantaneous connections, or we call it click-and-connect type services. But the fact that we're talking about it at all means that we're getting ready to start to actually implement some things.

Edward Katz - Morgan Stanley, Research Division

And then the early client feedback or...

Larissa L. Herda

We're still -- we're working primarily right now with data center companies. And we're working the operational, technical aspects of it and that's going to take us some time. It's hard work. It's -- none of this stuff is easy that we're doing, and nobody's ever done it before. So it's truly cutting edge, it's very innovative.

Edward Katz - Morgan Stanley, Research Division

That creates differentiation?

Larissa L. Herda

It absolutely creates differentiate (sic) [differentiation] just like Dynamic Capacity changed the entire conversation with our customers, we think Dynamic Connection is really going to see a very interesting revenue opportunity for us. But more to come on that.

Edward Katz - Morgan Stanley, Research Division

And well, that's a great place to wrap it up. Larissa, Mark, Mike, thank you for your time. We appreciate it.

Larissa L. Herda

Okay, thanks.

Mark A. Peters

Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TW Telecom's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)
This Transcript
All Transcripts