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TW Telecom (NASDAQ:TWTC)

Q1 2013 Earnings Call

May 07, 2013 11:00 am ET

Executives

Carole Curtin

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

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

Analysts

Lily Chen - Morgan Stanley, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Michael Rollins - Citigroup Inc, Research Division

Barry McCarver - Stephens Inc., Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Operator

Good morning, and welcome to TW Telecom's First Quarter 2013 Conference Call. Today's call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over to Carole Curtin, Vice President and -- of Investor Relations. Please go ahead.

Carole Curtin

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

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

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

Larissa L. Herda

Thank you, Carole. Hi, everyone, and thank you for joining us today. This was another important and productive quarter as we continue to grow revenue, deliver new products and features, advance our industry-leading innovation, optimize our balance sheet and grow shareholder value. I'd like to touch on 3 key areas, including our quarterly results, strategic balance sheet initiative and products and innovation. Let me start with some financial highlights for the quarter.

We grew revenue 6.2% year-over-year to deliver our 34th consecutive quarter of sequential revenue growth, demonstrating our ongoing enterprise market leadership and our ability to compete and take share. We also delivered a 35.7% Modified EBITDA margin, reflecting our ongoing strong operation. And we generated a healthy levered free cash flow margin of 6.3% for the quarter, even after absorbing the impact of resetting payroll taxes and investing in growth initiatives.

This quarter marks our 23rd consecutive quarter of positive levered free cash flow, which speaks to our execution, return-based focus and strength in our business model. Our financial results reflect the trends we communicated in February, including our growth initiatives to drive greater sales momentum over the course of this year through ongoing investments in sales and support, product capabilities, automation and market reach, all designed to reaccelerate our revenue growth.

Turning to our strategic efforts. We've been actively executing our capital allocation strategy for 2013, which includes investing in the business, returning value to shareholders and maintaining flexibility for future strategic opportunities.

Because of our strong track record of revenue growth and cash flow, we did not have to choose between these priorities. Instead, we are able to do all of these in a balanced and thoughtful way while continuing to drive the business forward.

Let me touch on 3 of our key strategic balance sheet actions we've delivered this year. First, in April, we executed a benchmark financing, reflecting a very effectively priced Term Loan B as we completed a refinancing of our credit agreement that extends our maturities, substantially improves our interest rate and provides additional covenant flexibility. Second, through last week, we executed $105.5 million in share repurchases year-to-date. Third, we're retiring nearly 40% of the par value of our convertible debt subsequent to the first quarter through open-market purchases and voluntary conversions. Collectively, these 3 events all helped to optimize our balance sheet and grow shareholder value. And they were possible due to our ongoing strong financial performance, as well as our effective strategic sequencing of events, many of which we put into place -- we put into motion prior to this year.

Let me -- now let me turn to our products and innovations. We're advancing the development of our Constellation platform. With this unique platform, we're creating a powerful operating paradigm for enterprises to increase the velocity of how they buy our network services, driven by the ability to more quickly access and consume network and IT services. We're in the process of hiring the right talent, establishing and evolving key data center and vendor relationships and developing and deploying the required technology as we move forward with these new capabilities.

We've also continued to gain market awareness with our Intelligent Network services that are within the Constellation platform, with ongoing momentum showing up in our Ethernet revenue. And we've launched several new product capabilities that enhance and freshen our current portfolio, which reflects the bread and butter of our business, with more production for later this year -- more in production for later this year that I will talk about later.

As we head into the second quarter, we're executing on our growth initiatives, optimizing our capital allocation strategy and continuing to differentiate ourselves in the marketplace with capabilities that we believe will change the industry.

Mark will take you through our quarterly results and then I'll be back to talk further about our growth initiatives. Mark?

Mark A. Peters

Thanks, Larissa, and hello, everyone. Today I'm going to cover our quarterly financial results and our recent balance sheet activities and plans for the rest of the year. Let me start with our financial results for the quarter.

Our consistency was once again demonstrated as we delivered our 34th consecutive quarter of top line growth. Total revenue grew 6.2% year-over-year and 0.9% sequentially, which demonstrated our ability to take share, those dampened by certain discrete items that we highlighted last quarter, including a rate reduction in certain taxes and fees, the impact of slower third quarter sales and a large customer settlement last quarter that did not recur.

Data and Internet revenue continues to be strong, and now represents 53% of our total revenue and grew 14.3% year-over-year. Data and Internet revenue grew 2.2% sequentially, reflecting the impact of the customer settlement last quarter that did not recur.

Modified EBITDA margin was 35.7%, compared to 36.7% in the same period last year and 36.6% in the prior quarter. The strong margin naturally will be impacted by our growth initiatives, and we expect these initiatives will continue to pressure margins in the near term until they are absorbed by higher top line growth. Additionally, we had a $4.1 million sequential cost increase, due primarily to the annual resetting of payroll taxes.

Cash flow as a percentage of total revenue was 6.3% for the quarter, reflecting levered free cash flow of nearly $24 million. Our cash flow remained strong even after absorbing the impact of resetting payroll taxes and investing in the future of the business through both CapEx and OpEx growth initiatives. The change in cash flow margin from 4.6% last quarter and 10.4% the same period last year primarily reflects the impacts to modified EBITDA and fluctuations in CapEx between periods largely due to timing of projects.

Net income for the quarter decreased both sequentially and year-over-year, again reflecting the impacts from Modified EBITDA. Additionally, year-over-year, we had increased interest costs due to the funds raised last October to address our convertible debt, as well as increased depreciation expense.

Now I'll turn to our sales. Our bookings had remained steady as they increased slightly year-over-year and declined slightly from our strong fourth quarter sales. As we shared with you last quarter, our sales continue to grow as we take share and sell more to existing customers, although not at a high enough rate to sustain our 2012 top line growth rate. We had a good start on the growth initiatives we discussed with you last quarter. These initiatives include sales and support, product capabilities, automation and market reach. These initiatives are all designed to further grow our sales momentum, which we expect to see later in the year as we continue to introduce new products and features, hire and train our expanding sales force and continue to execute on our overall strategy.

Switching to demand. It remains steady and our sales funnel remained healthy. We believe that our expanded sales reach and the continued innovation of our offerings will allow us to convert more of this funnel into sales to drive a higher growth rate later this year and especially into next. We believe that these efforts will help us to capitalize in the favorable trends and serving complexed and multi-market solutions. In fact, today, about 80% of our enterprise revenue serves customers with services in multiple locations, with the vast majority of that revenue coming from customers with services in multiple markets, and we expect that number to accelerate with data center and cloud conductivity adding to those dynamics.

Now turning to our capital investing. We invested about $91 million for the quarter. This is in line with our guidance, and we continue to expect $360 million to $370 million of capital expenditures this year. As always, we expect to see quarter-to-quarter fluctuations as we move throughout the year due to the timing of installations and other initiatives.

Now let me recap our balance sheet activities, cash position and plans for the year. We ended the quarter with $913 million of cash equivalents and short-term investments, which is net our first quarter stock buybacks. As we told you last quarter, our intention was be to be more deliberate in our program this year, and the $60 million of repurchases that we executed in the first quarter was a good start. We continued with our program subsequent to quarter end with an additional $45.5 million through last week for a total of $105.5 million of share repurchases year-to-date through May 3.

In addition, subsequent to the end of the quarter, we also retired nearly 40% of the $374 million face value of our convertible debt via open market purchases and pending voluntary conversions that have been or will be settled in cash. We consider the retirement of our convertible debt to complement the share repurchase program.

Now let's turn to our plans for the rest of the year in this area. First, let's talk about the convert. We intend to retire the balance of the convertible debt in the near term, which could be in the form of additional open-market purchases, continued conversions by holders or via a full or partial call.

Turning to the stock buyback program. We intend to continue this program throughout the rest of the year. The total amount will depend on several factors, including our actual cash flow generation for the year and the amount of cash we ultimately used to retire the convertible debt. Broadly speaking, we're targeting a year-end cash balance of no less than $300 million. This target should allow to develop roughly $200 million to $250 million or so for the full year, inclusive of what we've already completed. As the year progresses, we will update this target.

Consistent with our overall approach to our business, we take a long-term view of our balance sheet. We've started setting up these recent activities by our actions back in 2011 when the board authorized our current stock purchase program and continued last year when we issued notes to fund the retirement of the convertible debt. We've also utilized the 10B5-1 program for a more regular execution of our buyback program.

I hope that helps you understand, in broad terms, our strategy and approach. We intend to maintain strong liquidity, which has been a cornerstone of our successful strategy. Our balance sheet is a strategic asset and allows us to execute on all of our objectives with a long-term view, which is in line with our overall business philosophy and has contributed to the strong consistent performance we've been delivering for years.

In closing, everything we are doing reflects a comprehensive balanced approach to maximize opportunities and deliver ongoing growth in the business as we work to continue to create a fully differentiated market position and grow shareholder value.

With that, I'll turn the call back to Larissa.

Larissa L. Herda

Thanks, Mark. Being successful in this business is about both long-term visions, as well as consistent execution. Last quarter, we spent time in our overall vision including our new Constellation platform to give you a sense of where we're taking the business and how we believe we're changing the game for the industry by building at our -- on our existing strategic capabilities, such as our Intelligent Network services and integrated operating platform. Today, I'd like to spend a little more time updating you on our consistent execution, including our 2013 growth initiatives.

Let me start first with our product initiatives, including how we're addressing our customers' current and future network requirements, as well as some specific progress on this year's product roadmap. We believe that the reason we keep growing is that we continue to invest, innovate and enhance our value to customers because in this business, you have to do so to remain relevant. We also believe that there is a direct correlation between our innovation and development and the fact that we posted 34 consecutive quarters of sequential revenue growth.

Customers are buying from us, both through our track record to serve their current needs and our integrated vision to solve their future business challenges. For instance, who else in the industry has delivered a Dynamic Capacity solution today? No one. And who else is talking about click and connect, reliable and secured network capabilities for dynamic connections between buildings, data centers and other cloud services, which we're developing through our Constellation platform? No one.

Our success is driven by constantly leveraging our core strength. For example, our Dynamic Capacity, Enhanced Management and E-Access, our one-to-many Ethernet service, are all very innovative solutions. But the real power is how they enhance our Ethernet portfolio, which is foundational to our growth engine. Collectively, these products make us more differentiated and competitive, helping us to open more doors and close more deals. For example, let me give you some color on how Dynamic Capacity is driving our Ethernet sales. As a reminder, our Dynamic Capacity solution, which is part of our Intelligent Network services, is delivered via E-Line, our most advanced Ethernet offering. Looking back over the 9 months from the initial Intelligent Network launch through the first quarter of 2013, E-Line revenue has grown by about 2.5x in that time frame. We believe our Intelligent Network capabilities, including our Dynamic Capacity solution, greatly complement our E-Line sales and has been a factor in this revenue acceleration. And we have seen the adoption rate between E-Line and Intelligent Network steadily increase in concert with our growth.

In addition, this summer, we plan to expand our Dynamic Capacity from our current offering that can flex up to 1 gig to be able to provide customers the ability to flex all the way up to 10 gigs. This has been driven by interest from our large enterprise customers. Again, because of our powerful operating platform, this service will be embedded into our infrastructure scalable and available across our footprint.

I also want to share that when I spoke with our sales leadership recently, they were excited about the buzz that Dynamic Capacity is creating in the marketplace for our overall product portfolio in our company. While we're still in the early stage of these new Intelligent Network services, we're pleased with our progress.

Let me turn now to some new products features with strong market demand that we're adding to our core products this year. First, in March, we added a next-generation advanced SIP capability for large enterprise customers. We launched this service to help customers innovate, optimize their data networks and build voice applications to fit their data infrastructure, saving both CapEx and OpEx dollars, which is very compelling. This offering is a next-generation, flexible and logical capability that enables customers to have less hardware, less software, fewer PRIs and fewer maintenance agreements while gaining greater disaster recovery options, again, part of our better, faster and easier approach to serving our customers.

Second, we introduced a new premium Internet service -- Internet security service in April, which is a Distributed Denial-of-Service, or DDoS, capability that mitigates attacks on our customers' Internet services, as well as addresses unwanted traffic and data on their networks. This advanced DDoS service is one we had utilized for ourselves on our own Internet network for some time. As customer requests continue to grow for this product, we began offering it on a limited basis. Then as demand further increased, we decided to turn it into a product offering for all of our customers. Let me give you an example of how we helped one of our early customers with this capability.

This enterprise was being swamped by traffic that was having a crippling impact on their Internet network and they though it was a malicious attack. With our advanced DDoS capabilities, we were able to determine it was not a malicious attack. Instead, we uncovered that the unwanted traffic was coming from their employees who were streaming World Cup soccer events. As a result, we were able to go in and turn off the specific traffic to restore the customer's Internet network its normal operating levels.

By having this solution now embedded across our network as a new product offering, we have capabilities to diagnose and shut down both malicious attacks, as well as unwanted traffic, which can have a profound effect on a customer's network, whether it's due to World Cup soccer, March Madness or presidential inauguration, all great events but with potential unwanted impact to enterprise networks.

We've estimated that about 20% of our entire customer base buys Internet from us. And, therefore, most of these customers will be prime candidates for this offering. And the powerful thing is that we don't have to install anything beyond our core network. We just have to upsell our customers, remotely turn up services and this product will add great incremental margin and make our customer relationship even stickier.

Third, we plan to add 40 and 100 gigabit Ethernet metro services next month. These are led, fully-managed, large capacity metro capabilities for the larger and more sophisticated enterprise customers and public sector organizations. We're an early mover in providing this native handoff to customers for use in their metro operations. Again, this is another example of enhancing our core capabilities.

Fourth, we're adding several features to enhance our managed services, which has been a very successful part of our portfolio. We're developing a few new capabilities this year, including Virtual Route Forwarding, or VRF, a feature to provide customers more control of their operations by enabling them to share a virtual piece of their network with vendors and others. And multi-cap capabilities will be another addition this year to our managed services portfolio, which allows customers to carve out and prioritize available network capacity for video broadcast to all their satellite locations.

I've just described 5 features we are bringing to the market this year, as well as the expansion of our Dynamic Capacity capability, not to mention all of the development work for our Constellation platform. This reflects a very comprehensive set of innovative efforts and part of a very robust product agenda for 2013.

In short, we are very busy. Our strategy has always been to attack the market on multiple fronts without relying on any one offering to be a home run. If we just hit a lot of singles, we're going to move this business ahead, which has always been that secret of our stability and consistency of execution and performance.

Let me now turn to our sales and support initiatives to help further drive the momentum in our sales for our bookings. As we shared last quarter, our average number of sales associates in 2012 contracted from the prior year. However, late in the fourth quarter, we increased our sales associates by about 6%, with the goal of growing another 10% by the end of this year, as well as growing our support personnel.

Let me provide some insights into our sales reach and the diversity of our resources. We have numerous customer segments that we go after, with a very diversified sales force that is focused on local enterprise, national enterprises, federal and government customers, both domestic and international communication service providers, data centers and opportunities through our indirect channel. And we're expanding every one of these sales channels. Much like our products, we're not banking solely on any one of these areas. Instead, we are investing in many diverse opportunities to increase our sales momentum.

Also, as we look at the indirect channel, we're not only expanding our resources to manage this channel. We're also increasing the number of channel partners, thereby further expanding our sales reach. We're strategically putting the right people in the right places. The progress we've made on changing the mix of our talent is putting us on the right path for increased sales momentum as we expect these new people on average will carry a meaningful increased sales quota. We made good progress on this for the quarter and look to gain further traction through the rest of the year. What we're doing is very strategic. We're finding new markets and opportunities and mapping our product portfolio and talent to those opportunities.

As it relates to our other 2 growth areas, including automation and expansion of our market reach, we continue to make good progress on both of these initiatives this quarter and we will provide more color in the future.

In closing, let me recap our outlook for 2013. The proliferation of business applications, changing network architectures and the ongoing adoption of cloud capabilities are all driving increased demand on enterprise networks. As a result, businesses must rethink their approach to core functions, critical application and network design to succeed. We're addressing these needs as we continue to position ourselves with the distinct competitive advantage as we adapt with the market. We have incredible assets, advanced enterprise expertise, industry-leading products and a strategy to enable businesses to meet their network demands in a way no other carrier is doing today. Our industry is changing, our customers are changing and we are changing and anticipating the needs of our customers to continue to be market leaders and share takers as we grow shareholder value.

Thank you for joining us today and for your support of TW Telecom. Before we turn to Q&A, I'd like to introduce John Blount, our Chief Operating Officer; and Mike Rouleau, our SVP of Business Development and Strategy, who will be joining us for the Q&A session. I'll now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Simon Flannery with Morgan Stanley.

Lily Chen - Morgan Stanley, Research Division

This is actually Lily for Simon. I wanted to focus a little bit more on your current growth initiatives. I know you gave pretty good details on the progress and timing of when you're seeing new products come aboard. Can you provide a little bit more details on how we should expect to see this kind of being reflected in the sequential revenues in margins going forward and during 2013?

Mark A. Peters

Sure. I think on the revenue side, it takes -- we're seeing good demand, as we talked about, and good steady funnels, good steady sales. And we brought on about 6% more sales people in the fourth quarter and in the process of getting trained and getting acclimated to how we do things and our products. It will take them a while to get productive. So we really -- and then the new ones we'll be bringing on, obviously, that will take them a while, too. So we're really looking for, second half of the year, an increase in the bookings or sales and then driving that into late in the year from revenue and into next year, primarily. And then when you look at the margin standpoint, so we -- in the first quarter from a sales and support, we added a few folks and that will continue to build throughout the year. So we'll expect to see obviously more progress to build up that additional 10% of sales plus the support that goes with that throughout the year. So that will continue to pressure margins until we start seeing that flow-through of the increased growth rate of the revenue. So it will take a while. And we feel we're in a good spot today. It will take a while to see that in acceleration.

Larissa L. Herda

So we have a lot of products that have been and are coming out this year. And obviously, that means a lot of people getting trained on new products, not just on the sales side but on the operations side when it comes to installation of some of these products. And then the sales people need to get out there and start talking to customers about it. I can say that the new product lineup has been causing a lot of really good energy in the marketplace. There's a lot of activity when we talk to our sales leadership, which we always do a few days before our earnings call here so we have the latest, greatest, anecdotal feeling from the market. There's a lot of positive energy coming from that team, but it's going to take time. Everything -- nothing happens overnight in this business. It takes time to hire people. The beginning of the year, this first quarter, we spent a lot of time hiring the right leaders for the expansion of the sales force. And now those leaders are out there hiring the sales people, so we should see some increase in the momentum of the size of the sales force or the growth of the sales force happen over the course of the next few quarters. We feel pretty good about that. And sales people don't get productive in this industry right away. It takes them no less than, generally, 9 months to start getting productive, so we think we're setting ourselves up really well for 2014. We think we'll start to see some good sales momentum in the second half of the year. And there's been a lot of talk out there in the marketplace about the macro environment. And when we talk to our sales organization, they're not seeing slowing demand coming from customers. There's no concerns on purchasing decisions or the slowing of purchasing decisions. There is something that appears to be -- that we think, and who's to say what is actually going on out there, because a lot of it is anecdotal but customers are -- have almost too many options when it comes to what they can do with their networks. And there are so many different things that they can do with the introduction of cloud options. They're trying to figure out, "Should I implement SIP? I don't know if I should move to the cloud. Do I have all the resources to figure out what to do." They're lacking IT resources. They're asking us these questions and we're trying to help them with that. And so if anything slows up a customer right now, we think it has more to do with that than anything going on in the macro environment. But it seems like every other carrier out there is talking about the macro environment, so it must be true. It's just that we don't seem to be seeing it from that perspective. Maybe it's because we have just a really good lineup of products and customers are pretty excited about it. So we feel pretty good about how that will help us drive sales as the year progresses. And, obviously, once we sell, it takes a little while for it to show up in revenue because, generally, we're constructing network for customers and that takes time. So hopefully, that gives you a little bit more color.

Operator

We'll take our next question from Frank Louthan form Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Great. And to follow up on that, if the macro is not as bad as some other carriers are seeing, at least not what you're seeing, when do you expect to return to higher growth levels like you did a couple of years ago when the macro environment was better? And can you give us an idea of what percentage of your revenue growth, not necessarily the sales but the revenue growth, is coming from existing customers who are expanding their businesses with you? And how does that compare historically?

Larissa L. Herda

If I had a crystal ball, Frank, I would love to tell you exactly when we would expect to see it. All I know is that we are doing all the right things and we're turning all the dials that will each in themselves create growth opportunity. And I think that we'll start to see it show up -- we should start to see it show up in the second half of this year on the sales side, and so I feel pretty good about that. The sales organization feels very good about that but, of course, there are always glass half-full people, so you have to moderate their enthusiasm a little bit. But I think the fact that we've come out with some really cool products, some very -- some of them are pretty unique, there's a whole new story that they're learning how to talk about to our customers right now. And that takes a little bit in helping them to even acclimate to the newness of some of the product offerings. So we need to get -- have a little bit of patience there as the sales organization matures with some of those new products as well and then, obviously, the maturing sales force that you're bringing on board. And it takes a long time for you to see sales productivity come from those people, which is why we've typically said that, that momentum won't happen probably until 2014. But we think some of the new products that we're deploying right now will -- are going to help us with our sales momentum in the second half of this year. As far as revenue from customers, new revenue. New revenue -- the new revenue that we're bringing in or the new bookings that we're bringing in really come from over 50% -- well over 50% is coming from our existing customers. So these new products are great for that because we can go back into -- we're good at going back at selling into a customer, opening up the account and then going back and selling them more. That's something that we're really good at. So whenever we deploy new product offerings, those are the first people we generally go to, so that obviously will be helpful in generating some sales momentum in the second half of the year.

Mark A. Peters

I would also point out. As you've seen in our customer numbers as well, you've see that we're adding customers at a faster rate as well. And churns then remain low and had been down a little bit. So you've seen a growing customer base as well. So I think that bodes well as we can then sell into that growing customer base. That complements what Larissa has just said.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

And so how does that 50% compare with -- historically going back [indiscernible] years?

Larissa L. Herda

No. It's well over 50%.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay. How does that compare historically?

Larissa L. Herda

I think we've -- I think it's pretty stable.

Mark A. Peters

Pretty stable, yes.

Larissa L. Herda

I mean, we've always been really good at selling to our existing customers. It's a big part of our overall strategy.

Operator

We'll take our next question from Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company, LLC, Research Division

First, I just want to talk about revenue. So a lot of talk about why you think revenue growth will start to reaccelerate more so in 2014. But I'd like understand a little bit more in terms of why that's decelerating. So if we look at churn that you just mentioned, churn has been roughly stable for the last year or so. So I don't think that's the issue. So it's really on the bookings side of things. And I'm just -- it seems like there's just been this inflection to the downside where all of a sudden, now in 2013 just the bookings have slowed dramatically. Well, they slowed, I guess, in the back half of last year. Now we're seeing the impact of that. But I know you've been hinting at the point that it has a lot to do with the sales force and how you've lost some people. But if I look at the sales account executive number, which you give us every quarter, you only lost 12 people out of a base of over 500 in the first 3 quarters if we're adding the 31 net people that we get to see in the fourth quarter. So I'm just not understanding exactly why all of a sudden we're seeing this huge deceleration in the bookings that you're referencing. And then my second question just has to do with margins. Is it your expectation just based on what you're saying in your prepared remarks that margins continue to go down each quarter through the course of this year and then they could potentially start to go up in 2014? Or do we potentially start to see margins going up before that?

Mark A. Peters

Okay. Well, let me maybe start here going back to the revenues and the sales force. I'm just going to take it back to kind of last quarter, Mark, discussion last quarter and talk about our -- the fact that before we added toward the end of last year the sales headcount that you pointed out, we did see the average coming down as far as our total sales headcount goes. And when -- in that environment, when our base keeps growing, so the base, when you look at percentage growth rate, the base of our revenue has been growing as we've told you a few times, 34th consecutive quarter. And the sales reach isn't expanding and the churn remains stable against the growing base, all those numbers work against you from -- just from math. So that's why it's important for us to increase that sales reach to sell more over this growing base of revenue. And that's kind of the simple math of what's been going on. So that's when we talk just about sales folks. And then, obviously, we're investing in all the products and other features and services that we're delivering to help complement that expansion of the overall sales reach.

Colby Synesael - Cowen and Company, LLC, Research Division

So Colby, just to expand on that a little bit. So the first quarter bookings were better year-over-year than they were the prior year, right? So sales are good. Sales are not good enough to grow revenue at a faster rate because in order to do that, you have to sell a lot more to make up for churn and rebates. And yes, those has been very stable and they, obviously, contribute to growth. But if your sales -- if you're not constantly increasing the sales organization or increasing the product portfolio or a combination of those types of things, it's hard to sell more. And even though we continue to sell more, we're not selling enough. But I'd say that we're selling, in some cases, record quarters but they're not record enough. So the issue is not around demand. The issue is around continuing to expand, number one, the size of the sales force, the product portfolio. To some degree, you have a lot of large numbers, you do have to continue to increase the sales force. Now last year, we -- as we went into the year, we didn't necessarily think that we were going to have to do that as the sales force was selling well and they were breaking -- continuing to break records. But it does comes a point, and maybe it is an inflection point in the growth when you've got to make up for churn and rebates that you just have to have a larger sales organization to be able to continue to accelerate the growth. We're continuing to grow. We have got the best growth, by the way, I will remind you, in the industry right now of companies of our size or larger. So our growth is still pretty impressive with pretty impressive margins. But we know that with these initiatives, we can make it accelerate. When you ask the question why do we think it will accelerate in 2013 -- in 2014, we've done this before. If you look at our track record, we did this back -- coming out of the recession, we announced a bunch of growth initiatives, the increase -- almost exactly -- different products but almost the exact same strategy and we rode that strategy for a few years really nicely. And now we're kind of reinvigorating again. So we've done this before. This is not -- and it's actually not even the second time. I think it's the third time that we did this. We did this in 2005, I think it was -- or no, it's 2003, I think it was. But anyhow, same thing happens, you move a bunch of dials in the business, you add a bunch of products, you add a few more sales people, and now we even have new channels that we didn't have back then and we've got a lot of products that we didn't have back then. So we think that given what we're doing and given the sentiments that we're hearing from the sales organization, we feel pretty good about the lineup for 2014.

Mark A. Peters

And then talking about margins, I'm not going to get specific on what's going to happen, what we expect to happen in the second or third or fourth quarter from a margin standpoint. But we are going to be increasing the sales and sales support like we talked about. And so when those come in, depending if they come in smooth or lumpier like -- it'll have impact on the margins in different quarters. So we will have pressure throughout the year until we reaccelerate the overall bookings and revenue.

Larissa L. Herda

So that's a really clear message, Colby, on how to -- how for you guys -- as you forecast your margins, don't get too excited about them for a while.

Colby Synesael - Cowen and Company, LLC, Research Division

Well, I guess, that's the point, right, which is I'm trying to understand the upside of not being more explicit with us if you actually think margin is going down in each of the next 1, 2 or 3 quarters, particularly when your stock is up today with the buyback, I think, helping out. It just seems like that level of visibility would actually help you in terms of investor sentiment. But, I guess, that's just my two cents.

Operator

We'll take our next question from Michael Rollins with Citi.

Michael Rollins - Citigroup Inc, Research Division

I was wondering if you could talk a little bit more about the work that you've done to try to improve penetration in buildings where you've already built the fiber, too. Can you share maybe some of your observations? And what's been holding back some of that uptake and where you see those opportunities over the next 1 to 2 years?

Larissa L. Herda

Michael, it's an ongoing process for us. The key to this model is put as much revenue on your network as you possibly can and -- because that's what drives our margins, our cash flows, our competitive positioning, everything. So we have ongoing programs. All of our general managers have personal objectives that are related to increasing the penetration of revenue in our buildings. And we continue to do so. You don't see it -- actually, you do see it. You see it because we've got great margins. When you look at our margins and you think about what's negatively impacted our margins just this past quarter and the fact that we still have over 35% EBITDA margins, it's because we are selling so much on our fiber network and because we're successful with those programs. It's the reason why we can add heads, we can make big investments, we can have increases in our payroll taxes and we still have really beautiful margins. So you're seeing it, it's just that you don't have any -- those are where the metrics -- that's where really it shows up. So we're very pleased with the ongoing increased penetration of our buildings. Could it be better? It can always be better. There's a lot of market opportunity in our buildings. We're in a lot of nice big, juicy multi-tenant buildings. But when you go into buildings and customers have existing contracts, then sometimes you got to wait. So the buildings have cycles and so -- and then maybe you don't have all the products the customer needs. So there's always a number of reasons why you may not get the customers in those buildings, but our products are very oriented towards on-net services and we are more competitive. Our sales force wins more deals when the vast majority of the solution is on our network and still over 70% or around 2/3, 70% or so of our revenue is 100% on our fiber network. So all of those things, those types of stats, tell you that what we're doing is working.

Operator

We'll take our next question from Barry McCarver with Stephens.

Barry McCarver - Stephens Inc., Research Division

So a couple of things. Back on the question about growth and I promise you I'm not trying to beat this to death. But could you talk a little bit about what you saw from the competition during the quarter versus maybe what you saw last year? Are you seeing any change in the way some of your peers are pricing the network products?

Larissa L. Herda

So no problem. You'll never beat a growth question to death. I think that's a -- those are great questions to ask. So one of the things that we do on this call that we have just before earnings with all of our sales leadership across the country, is one of the questions I always ask them is, "What's changed." I ask them a lot of other questions, but I always want to ask them what's changed with competition. And what they had indicated is that it really hasn't -- over the past year, competition has been about the same, really, really tough. It's always been tough. This is a very competitive industry that's why you have to innovate, that's why you have to do things differently, that's why you have to -- we have initiatives around -- strong initiatives and good track record around customer experience. It's not business as -- it's never business as usual in this marketplace. So from our perspective, it's pretty -- it's a pretty -- I guess, you can say it's a stable, competitive environment and that is a very competitive -- incredibly competitive environment. I don't know that anybody's behavior is changed all that much. Pricing has always been very competitive. The key for us is offering products that others don't have that helps us be able to set ourselves apart and pricing becomes less of a question. But you always have to be competitively priced, that's just the bottom line.

Barry McCarver - Stephens Inc., Research Division

Okay, that's helpful. And then secondly, when you think about your revenue segments in lieu of the idea of putting additional sales force heads out there and the rollout of the new products you had mentioned, data and Internet services has kind of been the growth engine for a while. Network services has declined a bit and Voice is kind of holding its own. Would you expect that trend to continue? Or do you think these new initiatives will benefit all 3 of the reporting segments?

Larissa L. Herda

I think that data and Internet, you are absolutely right. It's our core growth engine. All of the products offerings we have, I mean, even SIP is probably going to go into that line because it's really an application over the data networks. So I think that that's the -- that's really where you need to look for the growth where the business is going. All the products that I talked about today go into that category. Network services is really the traditional TDM SONET-based products. And by the way, people still buy them. They're just buying less of them and even like the carriers used to sustain that product line. Now the carriers are buying a lot of Ethernet from us. We've had great success. Now that the carriers can get Ethernet from the incumbent carriers, and by the way, I think almost -- I think all the incumbent carriers now can do it. They have their own more ubiquitous offerings and so they are buying more from us, so -- which is great. Before, it was hard for them to buy Ethernet from us because, well, they could only sell it where we could provide it. So it's better for the whole Ethernet trajectory that the big carriers can provide it as well. So I would really be focusing on the data and Internet line for continued growth, and that's where we're focusing on accelerating our growth.

Barry McCarver - Stephens Inc., Research Division

And, I guess, my point is that, if we should expect network services to continue to become a smaller piece of the pie, and that's been a little bit of a drag on overall company growth, as data and Internet becomes a bigger piece, it becomes easier to show better top line growth. Is that the way to think about it?

Larissa L. Herda

That's right. Well, once we've got over 50%, it starts to -- you can start to imagine a future acceleration. But network services will continue to be a drag on growth, but it will become a lower proportion of our overall revenue pie.

Operator

We'll take our next question from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

One of the things that sort of sends a mixed message is the recent increase in management insider sales. Can you address that? I understand the sales, obviously, of options that expire within 1 year, but the sales go beyond that.

Larissa L. Herda

So insider sales are always done as a function of a 10b5-1 plan. That was -- those plans are put in place. I can say that all those plans were put in place long before this year, so they sell when they sell. There's not much -- once you put those plans in place, you're kind of stuck with them. The way the that we -- the way lawyers have explained it to us that if you start and stop those plans, it's very troublesome. So whether you really want to sell or not after you've put something in place, when you thought that maybe it was a good thing to do with the time, you're kind of stuck with them. So they are what they are. At the end of the day, Donna, just from my perspective, I've run this company for 15 years. The sales that I have made this year were my first sales in 5 years. I think that every management team member has a -- should have an opportunity to diversify, especially when they have a good piece of their life in 1 stock. I doubt anyone on this call has the proportion of ownership in 1 stock that I do. So you will see sales happen, and they will always happen as part of the 10b5-1 plan. I can't speak for everyone else, but I think that that's probably the philosophy from a diversification standpoint that you'll see from management. I sold sales 5 years ago and it didn't mean I had any less confidence in the company then. I'm still here. But I think -- I get a little older, I like a little bit of personal diversification. So hopefully, that answers your question, Donna.

Operator

We'll take our next question from Tim Horan with Oppenheimer.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

It's been 6 quarters of stability in wholesale, Larissa. Kind of any thoughts on the outlook there? And then secondly, just on the -- on your cost of goods sold side, you haven't talked too much on that on the operating costs side. Are you doing...

Larissa L. Herda

You just broke up. Could you -- start all over again. You were breaking up the whole time.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Sorry about that. 2 questions. 1 on the wholesale side. It's been really stable for 6 quarters. Any thoughts on what you're seeing out there or going forward? And then secondly, on the operating costs side, that's also been kind of stable as a percentage of revenue here in the 42% range. Are you taking any steps that would either drive the operating costs up or substantial revenue or down? I know you've talked a lot about the SG&A going up.

Mark A. Peters

Okay. I'm going to take the OpEx one first. When you look at that, it has been pretty stable and there's a couple initiatives -- a couple of things that are driving that. One, we're pretty efficient in our front and back office. We've talked about how we have a common set of systems and platforms that allow us to be very efficient both in what we centralize and what we -- our operations in the field. And we've talked about some -- part of our growth initiatives are automation. And automation complements both our interaction with our customer to make it faster, better and easier for them to deal with us. But it also makes it easier and more efficient for us to provision services, surveil a network and interact with our customers. So that's part of our strategic initiative to drive those efficiencies and more scalability in our business. Now there's a little bit on the other side of that. We're also -- our customers want us to go everywhere, whether it's in our market or outside of our markets. So there's also network costs when we buy service from somebody else to complete those services. There's a bit of a counterweight there as well from the efficiencies that we're driving with all the automation efforts that we've done and expect to continue to do. So there's going to be puts and takes in that category. But as we continue to scale and grow the top line, we do expect to see some efficiencies over the longer term, primarily as we just build more density in our existing locations. Now on the wholesale side, the wholesale, we break it out, it's just kind of one of those trend lines that keeps becoming less of a percentage of our total revenue. We're finding the wholesale carriers are buying more of the Ethernet. So when you see in the other question we had, they're buying more Ethernet-based services and less network services. But it's -- the biggest emphasis for us is really on the enterprise customers, and that's where really the growth engine is with the Ethernet services.

Larissa L. Herda

Yes, wholesale has been stable for so many years now. It's nice that we now have Ethernet that we can sell them because that, hopefully, will continue to provide some ongoing stability there. We have -- we are having some very nice success with the international carriers in particular because of our one-to-many product. So we've really expanded the number of international carriers that we have been selling to. And we've also expanded that side of the sales force as well, so that we have more people who can actually speak other languages, which is important in that area, so it's a bit new for us so that's been really helpful as well.

And I think that's it, there are no other questions. We're actually going to end early today. Thank you, all, for taking the time with us today and thank you for supporting TW Telecom. Have a good day.

Operator

That concludes our program. Thank you for joining us.

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