TW Telecom Management Discusses Q2 2013 Results - Earnings Call Transcript

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Q2 2013 Earnings Call

August 08, 2013 11:00 am ET


Carole Curtin

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

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

John T. Blount - Chief Operating Officer


Lisa Lam - Morgan Stanley, Research Division

Kunal Madhukar - Jefferies LLC, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

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

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

Michael J. Funk - BofA Merrill Lynch, Research Division


Good morning, and welcome to TW Telecom's Second 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, Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over Carole Curtin, Vice President of Investor Relations. Please go ahead.

Carole Curtin

Good morning, and welcome and thank you for joining our call today. We're pleased to have you join us. To review our results for the quarter, please visit our website at, where you can find our press release, supplemental quarterly information and SEC filings.

Before we start, I would like to draw attention to our Safe Harbor statement included in our supplemental material, which you can find on our website. Information on our quarterly earnings materials and our discussion today 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. You can find reconciliations between the non-GAAP and GAAP financial measures in the materials on our website.

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

Larissa L. Herda

Thanks, Carole. Hi, everyone, and thank you for joining us today. This is another successful quarter as we continue to grow revenue, advance our growth initiatives, launch additional new products and features, deliver industry-leading innovation and execute our balance sheet initiative and return cash to shareholders. I'd like to touch on 3 key areas, including our quarterly results, our recent balance sheet initiative -- activities and the progress with our growth initiative.

Let me start with our quarterly results. For the second quarter, sales were steady, market demand remained strong and we continue to be excited about our new product opportunities as we introduce new features and services to our customers. Our revenue growth was strong, resulting in our 35th consecutive quarter of sequential growth as revenue grew 6.9% year-over-year and 2.2% sequentially and margins remained healthy while reflecting the progress of our -- of investing in our growth initiative and we continue to generate cash.

Turning to our balance sheet activities. As of August 6, we fully completed the retirement of our convertible debt, which we settled in cash, eliminating 20 million shares of potential dilution. We also completed $278 million of share repurchases to date, concluding our previously announced $300 million program and thereby returning significant value to our shareholders. And our board this week authorized a new $500 million share repurchase program after we successfully completed $400 million in about 3 years. We are committed to employing a balanced approach of investing in our business, maintaining a strong and flexible position for operating and strategic initiatives and delivering value to our shareholders.

The additional $500 million share repurchase authorization underscores the board's confidence in TW Telecom's long-term growth prospects and overall value proposition for shareholders.

Moving to our growth initiatives. We're making good progress, and we're on track with our expectations as we've delivered new products and capabilities, developed new systems and tools and substantially grown our sales talent. All of this sets us up well for 2014, and I will provide more color on our product initiatives in a moment. But first, I will hand the call over to Mark for more details on our results. Mark?

Mark A. Peters

Thanks, Larissa, and hello, everyone. Today, I'm going to review our quarterly financial results, provide a bit of color on our growth initiatives and walk you through our recent balance sheet activities and plans for the rest of the year.

Let me start with our financial results for the quarter. We delivered our 35th consecutive quarter of top line growth, once again demonstrating our ongoing consistent performance. Total revenue grew 6.9% year-over-year and 2.2% sequentially, reflecting our continued ability to grow our business and take share.

Data and Internet revenue now represents 54% of our total revenue and continues to be our growth engine, growing 3.7% sequentially and 14.9% year-over-year.

Modified EBITDA margin was 35.3% compared to 36.8% in the same period last year and 35.7% in the prior quarter. Our margin this quarter reflects the planned impact of our growth initiatives, much like it did last quarter. Looking forward, we expect near-term pressure on margins to continue until our growth initiatives start contributing and these costs are absorbed for increased top line growth.

We continue to generate cash this quarter, even with significant investments, including an increase in our success-based projects as well as our new growth initiatives.

Our cash flow as a percentage of total revenue was 4.1% for the quarter, reflecting leverage-free cash flow of about $16 million.

Net income for the quarter decreased year-over-year but grew sequentially, primarily reflecting the ongoing modified EBITDA growth impacted by increased depreciation, fluctuations in income tax expense and a sequential decrease in interest costs related to the convertible debt.

Our sales or bookings for the first 6 months grew over the same period last year, and our second quarter sales grew both sequentially and year-over-year. While we're pleased to have sales growth, we still have a ways to go before sales are high enough to accelerate revenue growth on a consistent basis. The goal of our 2013 growth initiative is to improve the sales trajectory, and we expect it will be 2014 before these initiatives start showing up in revenue.

Switching to customer demand. It remained strong. We believe that our expanded sales force and the continued innovation of our offerings will allow us to convert more of this funnel into sales to drive a higher growth rate as we head into 2014, helping us to capitalize on the favorable trends in serving complex and multi-market solutions.

Moving to our capital investing. We invested about $101 million for the quarter as our CapEx grew by 20% for the first half of the year over the same period last year, partially due to increased investments as well as the timing of projects.

As a result, we're raising our annual CapEx guidance range by $10 million to $370 million to $380 million. This reflects 3 key areas of expected increased investments, including, first, for additional building entry in multiple site customer network deployments; second, for increasing infrastructure to support our current Ethernet capacity and new product initiatives; and third, to increase our on-net connections to additional strategic data centers that are foundational for enterprise customers and future Constellation Platform. 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.

Before I leave our results, I want to add that while we're pleased with our sequential growth rate, we'd like to temper your expectations going into the third quarter. The second quarter growth reflected the benefit of strong fourth quarter sales, two larger expected disconnects that were delayed, as well as higher settlement and intercarrier compensation revenue in the quarter. For the third quarter, so looking forward, we had a larger carrier disconnect that occurred in July, which we expect will also impact our third quarter sequential revenue growth rate.

So a nice second quarter revenue growth, although not yet reflected in the inflection point that we're still planning from our growth initiatives, which takes me to my next topic.

As Larissa mentioned, we've achieved good progress with our growth initiatives, and we're on track with our expectations. These initiatives include sales and support, product capabilities, automation and market reach. As we discussed in the past, these initiatives are all designed to increase sales growth to grow the business faster.

Turning to our sales force expansion, our goal for this year continues to be increasing our sales associates by about 10%. We ended the second quarter with 612 sales associates, and that's up nearly 7% year-to-date. As a reminder, it takes generally 12 to 18 months to get sales associates up to speed. So our expectation is that the sales people we're hiring this year will contribute to our sales growth in 2014.

The substantial progress in growing our sales talent this quarter fits well with the traction we're achieving with our product road map, which Larissa will talk more about in a moment.

Now let me recap our balance sheet activities, cash position and plans for the year. We continue to be very active and opportunistic with our balance sheet in 4 key areas. First, in April, we completed the refinancing of our term loan very successfully as we've lowered rates, extended maturities, achieved greater covenant flexibility and upsized both the term loan and undrawn revolver.

Second, we continued to execute the retirement of our convertible debt during the quarter. And subsequent to quarter end, we fully retired the remaining balance. In total for the year, we used $553 million in cash to retire the convert, which includes a $179 million premium or conversion value above the $374 million par value. Our ability to retire the converts this year effectively eliminated 20 million shares of potential dilution in a shareholder-friendly manner.

Third, we continued our deliberate share buyback program. Up through this past Tuesday, we executed $278 million of year-to-date purchases, thereby completing our previously authorized $300 million buyback plan. These buybacks resulted in the purchase of about 10.1 million shares year-to-date through August 6, or nearly 7% of our shares outstanding as of the end of 2012.

We executed the entire $300 million program at an average cost of $26.84 per share for a total of about 11.2 million shares.

Our effective total repurchases year-to-date through August 6 totals over $450 million when taking into consideration the premium paid of $179 million for the conversion value in excess of par value on the convertible debt, along with our open market share repurchases. And we believe that is a significant return to shareholder value in about 7 months.

Fourth, we announced a new $500 million share repurchase program. We expect to execute this authorization in a disciplined manner such that we can -- we continue to invest in our growth and other long-term priorities for the business while considering future cash flow generation and any future financing activities.

As a result of these activities, we ended the quarter with about $614 million of cash equivalents and short-term investments. However, as of June 30, pro forma for the buyback and convertible debt requirement subsequent to the quarter end, our cash equivalents and short-term investments totaled $245 million, and our net leverage was 2.2x, which compares to 1.4x as of December 31. We generally expect to maintain approximately $300 million in cash equivalents and short-term investments with periodic fluctuations for working capital needs and balance sheet-related activities.

Now let's turn to our plan for the rest of the year in this area. Our strategy continues to focus on delivering strong, comprehensive results while thoughtfully managing our capital allocation strategy, balance sheet activities and overall value creation for shareholders. As part of that focus, 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. This strategy has contributed to strong, consistent performance we've been delivering for years. Our plan is to continue to balance our leverage with our ability to invest for growth, further expand our footprint, finance any future acquisition of businesses or assets, weather any economic downturn and deliver a strong balance sheet as we compete in a highly competitive environment against much larger companies for medium and large enterprise customers. I hope that helps you understand in broad terms our strategy and approach.

In closing, our business is strong. We're generating cash and, as always, looking at ways to most efficiently and productively grow shareholder value, which we expect to continue to do as we move the business forward.

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

Larissa L. Herda

Thanks, Mark. As we look to the future, we're implementing a long-term vision to get in front of a wave of future networking cloud demand; to provide new, innovative choices for enterprises' network environments to help them work better, faster and easier; and to anticipate and deliver the innovation and customer service required to win substantial market share. We're driving dynamic data services through tremendous innovation, network intelligence and automation that we're bringing to the market through our product road map and our plans for the future such as the Constellation Platform. We're able to do this because we can leverage logical or software-driven capabilities enabled by the strong, integrated operating platform that we've steadily built over the past 7 years. This powerful operating platform allows us to quickly address the evolving network needs of enterprises to create more a differentiated market position and, in turn, to further drive our Ethernet and managed services revenue.

Today, I'd like to spend some time providing an update on 3 key areas that are part of our vision, including, first, how we're launching and gaining traction with new products and features; second, how we're delivering industry-leading innovation, including progress with our Constellation Platform; and third, how we're outpacing the competition with our customer service.

First, let me start with our new products and features. To recap our incredibly active product road map for this year, here are the product features and capabilities we've launched to date. In January, we enhanced our Intelligent Network services by adding Enhanced Management alerts, which is a -- which is proactive notification of network information based on customers' preset parameters, enabling unprecedented visibility and greater flexibility. This feature provides customers information needed to make discrete and specific network and applications changes based on their assessment of the network information.

In March, we launched our advanced SIP capabilities, which is an advanced voice solution over IP for large enterprise customers to help them innovate, optimize their networks and build personalized applications to fit their data infrastructure, saving them both OpEx and CapEx dollars.

In April, we launched our Distributed Denial-of-Service, or DDoS, security offering that mitigates attacks on our customers' Internet services as well as addresses unwanted traffic and data on their networks.

In June, we launched our 40- and 100-gigabit Metro Ethernet services, which provide a native hand-off of lit, fully managed, large-capacity metro capabilities for larger and more complex enterprise and public sector customer networks.

Also in June, we launched 2 new capabilities for our Dynamic Capacity offering. The first feature expanded our existing offering to now enable customers to flex up to 10 gigabits of bandwidth from our initial capability that flexed up to 1 gigabit of bandwidth. This new Ethernet-enabled feature was driven by demand from our large enterprise and data center customers.

The second feature is our alert-driven Dynamic Capacity, a very powerful Ethernet offering that builds on our January release. Our new alerts-driven feature combines our Enhanced Management and Dynamic Capacity capabilities to allow the system to automatically do the work for our customers to flex up bandwidth real time without manual intervention based on preset customer parameters. This feature is perfect for situations such as weekly scheduled replications of backups of data and unpredictable bandwidth needs for things like customer promotions, videoconferences or initial new large file transfers or backup, just to name a few.

As the network is imperative to mission-critical business applications, enterprises want to automate these decisions proactively without degrading the performance of their business environment or overcommitting their bandwidth. We believe this feature reflects the future for enterprises, which is greater and greater automation of the network. Our ability to offer this type of automation and rollout of this feature to our entire Ethernet network makes us the only national capability of its kind, further differentiating our market position.

So clearly, we have had a very busy first half of 2013 with an impressive delivery of services and capabilities by our team. And we're not done with our rollouts. Later this year, we also expect to enrich our managed services portfolio as well as further tee up our Constellation Platform capability. So in short, we've created a core competency of quickly rolling out new products and features to be agile and responsive to customer needs.

Before I leave our product discussion, I want to update you on the momentum of some of our recent product launches and color on some recent customer wins.

First, let's start with our DDoS security product. We've already seen some nice wins with our product -- new product offerings. For example, DDoS has hit the ground running with 80 product sales in the first 3 months after deployment, and I will tell you that is highly unusual for a new product, or roughly a sale per day with about 1/3 of those wins with new customers.

Also, these sales reflected good demand across our national footprint, and about half of those sales were in our financial vertical, which is really not surprising given the recent press around the cybersecurity risk in that area. So we're pretty pleased with the initial interest in this product.

One of these recent DDoS customer wins was an online business that has about 70% of U.S. colleges as customers and operates as a leader in online grading and originality checking. Or in other words, they help detect plagiarism. As our Internet customer, they came to us when their website began experiencing DDoS attacks on a regular basis each week that were impacting their ability to serve their end user customers. So my guess is that some students were unhappy with their capabilities.

To quickly help this customer, we were able to implement our DDoS scrubbing service that shielded them from these repeated attacks by filtering out the traffic upstream and away from their network, allowing them to stay connected during an attack to continue serving their customers. This is a great way to add some nice incremental revenue while increasing our stickiness with customers.

Next, I want to share a bit about our recently launched new advanced SIP capabilities, which is an advanced voice solution over IP. Although SIP deals generally take much longer to propose, sell and install than DDoS given its complexity, we've been seeing good traction on proposals for the service as well as some early sales.

A nice example of a win with SIP is a customer who specializes in custom and personalized luggage and bags. This customer employs over 2,000 people and has 80,000 consultants across America. Our Advanced SIP product provides individualized calling and routing that helps the company to route each caller appropriately to guarantee the best possible experience for everyone, allowing their network solution to be as personalized as they're made to order bags.

The customer also needed to scale for growth and to build a disaster recovery capability at their 3 primary locations. So they combined our advanced SIP capabilities with our wide area Ethernet with Class of Service.

This customer's investment in our advanced SIP and data solution makes their future strategic growth in their business easy, and they can quickly add bandwidth features and locations to meet their business needs, again all part of our better, faster and easier plan for our customers.

Let me move now to how we continue to lead the industry in innovation as we turn our vision of the Constellation Platform into a reality. As a reminder, our Intelligent Network is the infrastructure for our network services that leverages our common operating platform and automates many network functions such as Alerts Driven Dynamic Capacity for automatic bandwidth allocation. With our future Constellation Platform, we expect to extend our capabilities and automation to the data centers and cloud providers all the way through to the cloud applications.

In June, our team demonstrated our prototype of the Constellation Platform at the New York Cloud Expo. At the expo, through collaboration with the data center company and a cloud provider, our prototype for the first time enabled an enterprise to activate in real time our secure Ethernet private network service, including, and this is a very important point, to and through the data center, securely integrating their cloud environment.

This prototype delivered breakthrough innovation, taking our vision of real-time, secure and private networks to a new level to enable this entire environment for a powerful seamless enterprise experience. And here's the amazing part: that all occurred with one click and connect that took less than 1 minute to connect the enterprise environment through the data center and all the way to its cloud environment, giving the customer access to not just the network but also to their mission-critical applications on an elastic, dedicated, secure and reliable private network. So for those of you who are new to telco, this is a really, really big development.

Now contrast our prototype to today's telco 1.0 environment, where enterprises have to coordinate with not one provider but instead 3 different companies, including a network services company, a data center company and a cloud provider, to negotiate services, design and architect the circuit and complete the necessary paperwork. And on top of that, they have to wait 45 to 60 days or maybe longer to get the connection.

Also in today's telco 1.0 environment, customers have to commit to these services on a long-term contract. Now compare that to our connection created in under 1 minute where customers can buy in a new consumption model that is by the slice by the hour, and you will then understand why the introduction of our prototype generated so much excitement.

Leading data centers and cloud providers who attended this New York Cloud Expo told us they had not seen anything like this in the marketplace. And given this feedback we've received, it's clear that we've inspired potential new applications with these capabilities in order to further drive the value in their business.

When you think about these capabilities, remember one very important feature of our Constellation Platform, is that we use our private and secure Ethernet services and Intelligent Network versus the Internet. That's because enterprises are demanding secure, reliable and private networking options for their mission-critical application.

The Internet is a best efforts capability versus our guaranteed Ethernet-driven network experience that also provides elasticity, like the Internet, but in a secure, dedicated and reliable manner. In fact, we've even seen some of our large competitors acknowledging that the Internet is not good enough to serve enterprise mission-critical applications, and they, too, are looking for various solutions such as dedicated or routed Internet or, in some cases, VPN. However, by contrast, we've instead decided to leapfrog those solutions to the most powerful, secure and flexible solution in the industry, which is Ethernet.

Now here is why all this matters. We believe there's a wave of opportunity coming as enterprises continue to trend away from the Internet to dedicated private and secure connectivity as a part of their overall network strategy and cloud adoption plan. Today, some analysts put that cloud opportunity for 2014 over $84 billion, which corresponds with the projection that about 7% of the IT market's 2014 annual spend is moving to the cloud next year. The good news is that this growing market opportunity will require new, dedicated private network connectivity. However, to catch that wave, we knew we needed to do something very innovative, which is why we're pursuing the Intelligent Network and Constellation Platform and why we're so excited by these new capabilities. So stay tuned as we provide further updates yet this year on our progress in this groundbreaking area.

The last area I want to spend time on is how we're outpacing the competition through our customer service differentiation. As with all customer interactions, it really comes down to people buying from people. It's about making our customers' networks run better, faster and easier while being able to deliver exceptional service.

Now I could spend a lot of time talking to you about our Net Promoter Score and various survey efforts and results, which, by the way, I would love to as we have some great results. But nothing says it better than an independent source. And that's what happened in June when industry analyst, ATLANTIC-ACM awarded best in class awards to us in 5 categories for enterprise service, including for sales reps, billing, customer service, voice value and data value. What makes that so compelling is the fact that from April to June, ATLANTIC-ACM reached out nationally to buyers of enterprise communications services, asking them to rate their providers. This survey resulted in nearly 5,000 ratings generated from over 1,500 buyers. These awards validate what we already know, which is that our customers buy from us because we give them an excellent overall experience. When we asked customers to describe where they're headed and what they're looking for from a network provider, ease of doing business by far tops that list, which is why our mantra remains better, faster and easier. It's also why we're focused on combining our strong people skills with network automation to make our portal experience world class by leveraging technology to enable further interaction and a great online experience for the customer.

In closing, making it easy for enterprises to do business, both with us as well as through us in terms of reaching other data center and cloud providers, will be a huge part of our future. As we further unfold our very aggressive product road map, we believe we're going to continue to be very disruptive to the industry with our new capabilities like the Constellation Platform and other plan capabilities, all focused on further distinguishing us in the market and growing shareholder value.

Thank you for joining us today and for your support of tw telecom. Before we turn to Q&A, I would 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 will now turn the call over to the operator for questions.

Question-and-Answer Session


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

Lisa Lam - Morgan Stanley, Research Division

This is actually Lisa for Simon. I was wondering if you could talk a little bit more about what you've been seeing from the macro environment and how that plays into revenue growth for the remainder of the year.

Larissa L. Herda

The macro environment has been actually very steady. Our demand has remained really constant and steady and strong, and we're not getting really any indications from -- anecdotally from our sales organization that the macro environment is slowing up decisions on sales at this point. So it's really a pretty neutral environment from our perspective.


And we'll take our next question from Kunal Madhukar with Jefferies.

Kunal Madhukar - Jefferies LLC, Research Division

I had a question on the advanced, the new services, the Intelligent Network and everything else that you're doing. Within your existing customer base, what do you estimate as the addressable opportunity, revenue opportunity for you? Just ballpark?

Larissa L. Herda

We're not going to give you a ballpark on that. What I will say is that we sell to a lot of enterprise customers who don't have these kind of capabilities today. And so -- and a big part of what we do is sell to existing customers. Obviously, we're always adding new ones, but a good part of our revenue, more than 50% of our revenue, every quarter comes from existing customers. So we have a great platform to be able to go back and sell them those new services.

Kunal Madhukar - Jefferies LLC, Research Division

And following up on that, in terms of the services that you launched, say, 6 months ago or maybe 1 year ago within those advanced services, what has been the sales booking? And then I...

Larissa L. Herda

Again, we don't provide that kind of information.

Mark A. Peters

But when you think about all the enhanced product that we're offering, from the Intelligent Network, the Enhanced Management, the Dynamic Capacity, it's really intended to add to the growth rate of our underlying Ethernet services or data and Ethernet products. And as you see, consistent growth. And again, a lot of these aren't kicking in yet like we've talked about. Our growth initiatives are really intended to really get us set up well for next year. But we are seeing contribution opportunities, in particular for the earlier products that we've launched, to again to grow, bring in opportunities and help us to close deals on the Ethernet side.

Larissa L. Herda

And our data and Internet revenue is growing at about 15% year-over-year. So it's a pretty nice growth rate.


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

Colby Synesael - Cowen and Company, LLC, Research Division

I have 2, please. So the first one, I just wanted to tie up. Your cash, you mentioned, is pro forma $245 million. You talked about, including the year, around $300 million. I'm just trying to get a sense of what that implies for the potential buyback in the back half of the year. Would you consider actually drawing on your term loan -- or not drawing [ph] on your term loan, on your credit facility to support the buyback? Or is it really just going to come out of cash that you're generating? And then my other question is just more high level, I guess. One of the comments, I think, that's come out of earnings this quarter has to do with how enterprises aren't yet really adopting cloud services perhaps to the degree some were expecting. I'm just curious, as it relates to these services that you're now building out with anticipation of enterprises adopting cloud, have you gotten any color in terms of if that's happening now? Or is it just starting to build? Or is it just still an expectation that you'll see that at some point?

Larissa L. Herda

Yes, I'll answer the enterprise question first. That's exactly -- one of the big issues for enterprises is that it -- they don't want to use the Internet. It has been a bit of a science experiment. I think those are, Mike likes to call it a science experiment for the enterprises. But they recognize that there's a lot of benefits to moving to the cloud, but they want that secure connection. And it's hard to get that secure connection in a timely fashion, so that inhibits their ability to move towards the cloud. So we think that with those types of capabilities, that will certainly move them forward. They're going to -- there's plenty of opportunities that we're working on today of customers that want these services today that, from our perspective, are very encouraging in terms of what the future market demand is going to be in this area. But I'm not surprised that -- we know that customers are having a -- are taking their time in doing it, and a big part of it is security.

Mark A. Peters

Okay. And then as you look at the stock buyback program and what we expect to do for the rest of the year, I guess I'll broadly say that as you look at the $500 million program and the $245 million pro forma cash, now clearly it's dependent on our future cash flow generation and other priorities and sources looking forward in the business. So I don't want to get locked in to say how we might fund it other than out of flow for the rest of this year. We'll be opportunistic as we look at that program and kind of how we ultimately fund it. But it's going to be very thoughtful. We want to maintain that balance sheet because it's -- that strong balance sheet, because it really is a strategic competitive asset for us. So we want to maintain the liquidity for us to grow and compete against the big guys with products and never have that be a detraction when we're out competing. And that's exactly what we've been doing, what we have done and will do going forward.

Colby Synesael - Cowen and Company, LLC, Research Division

Is there an expiration on the new buyback?

Mark A. Peters



And we'll take our next question from Frank Louthan with Raymond James.

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

Can you give a -- can you comment a little bit on Constellation and how you expect it to impact margins, both sort of the at the outset or the launch of the project and then over time? And will it have any impact on capital intensity with these kind of services? Will it help lower capital intensity? Will it -- would it increase? How should we think about that as this product gets more fully baked into the market?

Mark A. Peters

Yes. So as I think about the Constellation Platform from a margin standpoint, I mean, initially, and it has, and it is and it's going to continue for a while here, to impact margins and also our capital intensity in the near term as we go through. And we're deploying -- doing the hard work, the back office, the programming work to make it all flow through in the automated fashion that we've already prototyped. So there's a lot of work there. There's product managers. There's actually senior sales leadership that we're bringing on in advance to build the relationships to -- in advance of us actually launching it as a full product. So that our EBITDA impacts particularly people initially. And on the CapEx side, what we're doing, we mentioned in our remarks today is that we're in over 400 third-party data centers today that connected up with our network. But we also are deploying the advanced infrastructure at the key data centers to be the -- at the foundation of the Constellation Platform. It's actually sort of a double duty. It also increases our capacity at those data centers for the "non-Constellation services" that we're selling today, but it's also foundational for what we're doing for Constellation Platform. So once that's all deployed, that can be highly scalable as and when we start selling the services. So that's what's going on before we launch the Constellation. But the Constellation itself I expect to be a very high-margin service offering because the infrastructure is in place, the connections into the data center are going to be the high-capacity connections. And then it's going to be incremental sales, then we go -- the -- to and through the data centers. So as we go through the data centers to the application, we expect that to be high contribution margins.

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

So where are you in that process? Do you have all those people on board? And how much of that upfront CapEx has been spent? Or is that -- or is it paced more with the deployment?

Mark A. Peters

It's really still in flight. So we've done the -- a lot of initial work to get it up to a prototype level. But that's still in play for us, and we haven't put a time frame on when our actual product introduction or launch of that capability will be.

Larissa L. Herda

And we're focusing on kind of some big data centers that have -- had been very aggressive on their side in terms of moving forward with this capability because they see the competitive advantage that it gives them as they're selling their services. So that's been the priority.


[Operator Instructions] We'll take our next question from Donna Jaegers with D.A. Davidson.

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

Mark, just to try to pin you down a little further, on the very high margins that you guys are expecting from Constellation, is 80% incremental gross margin, is that out of line since it's going to be on-net?

Mark A. Peters

I'm going to defer -- well, it's -- you have to remember it's where our customers are. So it's all going to be part of the package of where our customers are. So it's part of that bundle. So if our -- it just depends on where our customers are accessing it from. Initially, I would expect it to be on-net. But the way it -- they would work, is the customer that's connected to us at any point would be able to then access the services under the Constellation. So it's going to be a complementary to everything else we're doing. So I'm going to hold off in giving you a specific number other than because it's so automated, when you think about what Larissa described earlier on, how in that prototype we demonstrated that again, all through the portal and APIs and all that kind of stuff in the background, the customer can go in, identify the app at the location they want to go through and dynamically connect it without any human intervention. So very -- so those connections are going to be high, incremental margins.

Larissa L. Herda

But Donna, one way to visualize this is kind of the way I visualized this since I'm not an IT person. I'm a network person. I kind of think of our network almost like becoming a great, big router that comes -- any customer who can connect into our network almost really anywhere, whether it's an on-net or an off-net service with an Ethernet connection will be able to connect to eventually, the goal is anywhere else on the network. That's been -- that's gone through -- that's in the Constellation Platform. So we're starting with the data centers clearly because those are high-value locations, identity locations and that's where a lot of people want to go. And right now, for instance, one of the dynamics that we're seeing is that we'll sell to a data center company, and the first use of the product is for their companies that they're hosting in their data center to be able to communicate with all their other data centers. So it's kind of a between data center thing where they can turn up circuits, they can move them around, they can have them for a couple of hours to try something out that's over in another data center. And they're kind of moving between their own data centers. It seems to be one of the -- some of the first things that they're doing. But enterprise customers eventually will be able to plug into our network and access any one of the data centers that are on our network that have been certified for the Constellation Platform. And they'll be able to move their services around at will. And so when you think about that, you think about the automation involved in all of that and the ability of customers to access their apps that way instantaneously. There's not human intervention in that process from our perspective, so it's a very scalable type of a solution. And because we -- the customer will already have -- or has to, obviously, already have a relationship with us on an Ethernet connection, the ones that are completely on the network are obviously very high margin. And as you know, even our off-net services are high margin as well. So -- but we think that the first opportunities are going to be for all on-net. That's really where the beginning of this all starts and then eventually move out from that point, but that's a longer term story.

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

Okay. And then just one specific question on some of the caution around Q3. On the carrier disconnect, usually I think of those in the terms of maybe $1 million or so a quarter. Is that sort of the ballpark?

Mark A. Peters

It's a -- just really, it's just one large disconnect. We're not going to give a number, but it's enough to -- when we think about sequential growth rate, last -- it's going to come into the quarter and it's coming in early in the quarter. So we're going to get the full impact to the quarter.

Larissa L. Herda

Yes, the dilemma with disconnects, as you know, is that they sometimes can come and happen the next month. And sometimes, as this past quarter, they're scheduled, and we thought they were sure things, which is why we communicated to our investors that we were going to have a low quarter in terms of growth. And then they move because in this particular case or a couple of cases that were some some large disconnects, the customers weren't ready to make some of the moves that they were planning to make. So they moved those out. In the case of this quarter's disconnect, we know because it's happening. And so it started happening in July. So the other added elements of that is that we will see the full quarter's -- pretty much the full quarter's effect of that disconnect in the quarter. And so even if it wasn't in the realm that you're talking about when you're talking about 3 months of the quarter having that negative impact, it will have a dampening effect on our sequential growth going into next quarter. But as you know, we have these things all the time. In this particular case, this was a large carrier disconnect who is disconnecting a wireless platform, which everybody knows who that is. And so that is -- it's a lot that they're disconnecting, but it isn't because the revenue is going to a competitor, it's that they're shutting down their network. So we've known that, that was probably going to happen for quite a while, but it finally happened. So that's the variability. That's why it's hard to -- I know it's hard for all of you. It can be hard for us, obviously, we had a better quarter in terms of revenue because we didn't have the disconnects that were initially planned when we talked to you last formally on our earnings call. So it's hard to sometimes predict the impact of those things. But that goes to the variability of our revenue on a quarter-to-quarter basis. The good news is, is that still, when you look at the long term, it's the study growth of the business. It's a really very steady business with that quarterly variability.


[Operator Instructions] We'll take our next question from Michael Funk from Bank of America.

Michael J. Funk - BofA Merrill Lynch, Research Division

I have a couple of quick ones. First, on the salespeople you're adding, I don't believe you're just adding brute force here. Maybe I'm wrong, but I believe the sales still, maybe, are targeting different industry verticals or customer sizes that you hadn't targeted before. So maybe some thoughts on that, how you're thinking about maybe expanding your horizons here as far as a potential customer set. And then second on the CapEx, I know you mentioned a little bit higher during the quarter, more buildings connections. Maybe some comments on the drivers of that capital spending during this quarter? If you're trying to create more opportunity, more potential customers? Or if that was more of a pool type of CapEx during the quarter? That was it.

Larissa L. Herda

All right, Michael. I want to give John Blount an opportunity to answer the sales call since we have him on the call with us today. So I'll swing the call over to him.

John T. Blount

Okay, thanks, Larissa. I think your assumption is correct that there's no one particular area that we're adding salespeople or one particular vertical. As you look at the new products that we are rolling out, they open up doors of new opportunity for us in a lot of different customers. But if you go across-the-board, we're adding salespeople in our indirect program, we're adding salespeople in our national enterprise program, we're adding them in our federal program, we're also adding them into our local sales. As we expand our markets, we're adding new teams into markets to capture opportunity that find as we expand our networks. And so it's really across the board. And what we do is we're very specific about where we add them. We add salespeople into specific modules to go after specific customer types. And it's really important for us to match the skill set of the salesperson with the market opportunity. It's never been our philosophy to just add salespeople and just throw them out there and see what sticks. And I think that's a differentiator for us as we kind of roll out these people. It takes a little more time. It's harder to get them, it's harder to find the exact skill set to match that opportunity. But we think that effort's worth it in the long run. So it's really across-the-board that we're adding.

Mark A. Peters

Okay. And on the CapEx question and as far as the increase in CapEx in both the quarter and for the year, when you're looking at things about the quarter, and we're obviously going into a lot of buildings, connecting up new opportunities and multi-location ones. But we also pulled in some projects, some that completed a little quicker. So we had some projects that we had expected just late on the year that just pulled in sooner, and some of those were around the data center deployments, of the technology at their site to do the stuff that we talked about previously. And then we talk about the full year. And again, not a big increase, but $10 million, as we saw we're bumping up against the higher end of our guidance. And again, that's -- there are success-based opportunities there as well as the continued deployment of the infrastructure around the data centers and the overall initiatives we're working on. So again, not a big shift. It's all tied to those 2 items, most directly the new sales as well as the initiatives.


And it appears we have no further questions at this time.

Larissa L. Herda

Okay. Well, that's a quick call. Thank you all for your time. We appreciate your support of TW Telecom. Have a good day. Thanks.


And that concludes our program. Thank you for joining us.

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