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tw telecom inc. (NASDAQ:TWTC)

Q4 2009 Earnings Call

February 9, 2010 11:00 AM

Executives

Carole Curtain – VP of IR

Larissa Herda – Chairman, CEO and President

Mark Peters – EVP and CFO

Analysts

Robert Dezego – SunTrust Robinson Humphrey

Jonathan Schildkraut – Jefferies

Tim Horan – Oppenheimer

Dave Coleman – RBC Capital Markets

Simon Flannery – Morgan Stanley

Mike McCormack – JP Morgan

Donna Jaegers – D.A. Davidson

Barry McCarver – Stephens Incorporated

Colby Synesael – Kauffman Brothers

Brett Feldman – Deutsche Bank

David Dickson – FBR Capital Markets

Michael Rollins – Citi

Michael Funk – Banc of America-Merrill Lynch

Operator

Good morning and welcome to tw telecom's fourth quarter 2009 conference call. Today's call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters.

At this time, I would turn the call over to Carole Curtain, Vice President of Investor Relations. Please go ahead.

Carole Curtain

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

Before we start, I would also like to draw your attention to our Safe Harbor statement, which is included in our supplemental material. Information in our quarterly earnings materials and discussion contains statements about expected future events and financial results that are forward-looking and are subject to risk and uncertainty. A discussion of the factors that may affect future results is contained in our SEC filings which are post within the website.

I also want to point out that our earnings materials and discussion contains certain non-GAAP financial measures. You can also find reconciliations between the non-GAAP and GAAP measures in the materials on our website.

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

Larissa Herda

Thanks Carol. Hi everyone, and thank you for joining us today. 2009 was a great year for us, despite all the macro economic doom and gloom. We delivered strong comprehensive results both financially and operationally. We grew revenue, drove already strong margins higher, and generated increased cash flow, while maintaining healthy liquidity. Most importantly, we did not starve the business to deliver these results. Instead we improved our returns while continuing to make strategic investments in the business to position us for long-term growth.

Our relentless focus on the customer experience also generated strong loyalty and satisfaction results, as our surveys tell us, this is one of our best years ever in delivering service. This performance was driven by our operational accomplishments putting us at the top of our game in serving customers and further distancing us from the competition. And while the customer experience is like a race without a finish line, we know from our analytics that improved satisfaction does in fact drive revenue growth and customer retention. All the way around, our performance for 2009 was strong, demonstrating the strength of our model and outstanding execution.

I will talk more in a moment about our accomplishments in 2009 including how they bridge to our 2010 plans and ongoing strategy, and how we are leveraging our strong financial position and efficient operations to position the company to return to more robust growth. But first, Mark will share more details on our result. Mark.

Mark Peters

Thanks Larissa. To echo Larissa, we delivered very good overall performance that the results demonstrate. The bottom line is that we delivered strong financial results, continued to scale the business, accelerated our cash flow growth and increased our returns. To achieve that growth, we delivered on both the revenue and expense front. The revenue, we successfully outpaced churn and contract repricing pressure by delivering solid quarterly revenue growth of 5% year-over-year and 1% sequentially. We also posted 5% revenue growth for the full year.

In 2009, we continued our long history of solid cost controls, demonstrated by strong contribution of revenue growth to modified EBITDA of nearly 72% for the year. We finished 2009 with 36% modified EBITDA margin for the year which demonstrates our ongoing attention to margin. But it’s not just margins that are our focus, our results are due to our attention to balance performance in three key financial areas including revenue, modified EBITDA, and lever free cash flow. Overweighting of any of these three could result in short-term unsustainable result which is why we take a balanced long-term approach.

People and network expenses are our largest costs and we continued to manage both well, balancing cost while investing for growth. Unlike others, we did not slash our employee workforce to drive margins. In fact we grew our workforce a bit primarily in the area of sales.

Our strategy of valuing and retaining requisite skills and knowledge shows in our employee loyalty, customer satisfaction and operational results. But we did more than just to maintain our employee base in 2009, we also generated operational efficiencies that allowed us to redeploy talent to growth initiative, including product development, systems enhancements, and other assets of the faster aspects of our business.

Moving to cash flow and cash in the balance sheet, both grew significantly. We grew our levered free cash flow by 84% over the prior year. We also grew cash equivalents and short-term investments by $119 million or more than a third from the year ago, and we closed the year with $471 million.

Now let me touch on a few summary comments and business trends that we have experienced. We’ve had relative strength in this marketplace. Now not the kind we would expect in a robust economy, but we think delivering revenue growth while many others in the space are battling revenue declines is a pretty good benchmark.

As we look forward, we continue to expect a near-term headwind to continue to pressure the top line, which correlates with historical trends indicating that telecom services lag economic recovery. Our churn and repricing activity remains as it has been for the past few quarters generally no better than the worse.

We did experience some seasonality in bookings or signed contracts in the fourth quarter given the compressing selling cycle during the holidays, which has been the trend in most years. But having said that, we ended December strong and this strength carried into January. In fact, bookings in January were our best January in at least the last five years. Some of this activity was from large deals which will take a while to install, so we don’t expect to see revenue contribution from these deals until the second and third quarter.

So the good news is that we are seeing some green shoes and the strong sales activity that’s encouraging for the second half of the year. We are well positioned to accelerate our revenue growth when customers as a whole start feeling better about their businesses, plus allowing them to make investments in the network solutions that they buy from us.

Turning to customer decision-making cycles, they remain long, but we are relatively stable for the year. On a product basis, trends also remain pretty stable as we continue to see strength in our IPVN Ethernet and Internet services demonstrated by our 18% growth in our data and Internet revenue for 2009. These products represent a majority of our pipeline activities in our areas where we continue to innovate and invest.

Additionally, we continued to see steady demand for co-location opportunities in 10gig Ethernet which are relatively small but fast growing part of our business. Before I leave products, let me remind you that our usage based revenue is small about 4% of our total revenue excluding intercarrier compensation and that’s been very stable.

Looking at our revenue mix, we exited the fourth quarter with our revenue coming 75% from enterprises, 22% from carriers, and 3% from intercarrier compensation. The enterprise revenue mix in the fourth quarter remains similar to the past comprising over 90% of our voice as well as data and Internet revenue, and nearly 40% of our network services revenue. As for some additional color on fourth quarter carrier revenue, a bit over a quarter of this revenue was from wireless customers and this area has been growing nicely throughout the year.

Turning to the revenue churn, it was 1.2% for the quarter consistent with both the prior quarter and the fourth quarter last year. Recall, this churn is from both customers who would fully disconnect service as well as those who partially disconnect service, and it excludes the impact of changes in pricing and usage.

To further insight in our revenue churn, we have included a new metric which is a subset of our total revenue churn. This metric shows 0.3% revenue churn this quarter from customers who fully disconnect services. Let me repeat that, so this metric for customers fully disconnecting is just 0.3% of the revenue churn. This metric has remained very steady for the past two years demonstrating a strong and stable customer base. However, we still think it’s too early to call the bottom unchurn until the economy recovers, we expect total revenue churn to continue to be elevated.

Lastly, our building counts continue to grow as we ended the year with 10,407 buildings on that.

Let me switch gears to talk about seasonality and the quarterly impact. We expect the first quarter of 2010 will be impacted by historical pattern. As in the past, we are expecting employee cost will increase by a few million dollars due to resetting of payroll taxes and other begin of year changes. As it is last year and the year before, I mentioned this as a reminder of this historical trend as we model EBITDA margin for the first quarter. Also the timing of installing revenue, the impact of churn and other fluctuations will determine revenue growth in the first quarter, which historically has been a seasonally lower revenue growth quarter.

Shifting to our balance sheet, our receivables remain notably strong as days sales outstanding dated 26 days for all four quarters this year, which reflects our strong cash collections and management as well as a stable customer base.

Turning to CapEx, for the full year, we invested approximately $275 million, with the fourth quarter spending being higher than the third quarter due to the timing of infrastructure capacity in IT projects. Looking forward, we expect total CapEx for 2010 of approximately $275 million to $300 million with the majority tied to new sales opportunities as well as incremental spending for new product initiatives which Larissa will talk more about in a moment. As we move through the year, we could increase this guidance if we have greater than expected customer demand.

Summing up the year, we delivered strong performance and execution, progressing on our strategy and positioning ourselves well for the future. In 2010, we expect to continue to strategically invest in the business to further differentiate our offerings, drive cost efficiencies and focus on returns. And I will turn the call back to Larissa for more on our 2010 environment.

Larissa Herda

Thanks Mark. As Mark has reviewed, we delivered great results in 2009. In fact, when considering our performance comprehensively top line, bottom line, cash flow, return expansion, and operational results, we think our combined results are among the top in our space. But our execution isn’t just the result of what we decided to do in 2009. It was the result of years of executing on our strategy which included deliberately making investments in areas we believe would both add value to our services and deliver a growing return on investment both now and over the long-term.

The soundness of a company strategy is frequently tested when the world is crumbling around them. Well, for the second time in less than 10 years, tw telecom is weathering storm ahead of the pack. This wasn’t an accident. Although sometimes we make it look easy, in fact, the fact is is that it took a lot of strategic thinking, steady execution, disciplined investing, and ongoing focus on the enterprise customers’ needs and a lot of really hard work.

As we sit here today, I think we have a couple of more quarters of slugging it out as the economy finds its legs again. But most importantly and more exciting, I believe we are well positioned to build the momentum back toward accelerating revenue growth when that happens. So what I briefly want to talk about today are operational accomplishments in 2009 and how they bridge to our 2010 plans and ongoing strategy, which are all components of our plan to drive to accelerated revenue growth. Given our limited amount of time, I will just touch on a few of our initiatives including first, our ongoing operational enhancements to drive sales productivity, second, delivering innovative products and services, and third, advancing our network technologically to empower our customers.

So first, let me start me with sales productivity. In 2009, we invested in programs to increase our productivity, this included initiatives to automate our prospecting, quoting, proposal creation, contract the preparation, capital deployment, and approvals. Okay, I will admit, that was a mouthful, but it was also a substantial amount of work. These initiatives benefited 2009 and we are one of the contributing factors allowing us to deliver 5% revenue growth for the year. As these projects occur throughout the year, we expect to see the full effects of these efforts in 2010. Also in 2009, we modified our support structure to offload much of the administrative work from the sales team to other support personnel, but this is still a work-in-progress.

All these efforts have and will continue to result in our account executives being able to spend more time prospecting for new customers and growing our relationship with existing customers. Think about it, cutting proposal time for multicity, multistate proposals from weeks to days or even hours. Now that kind of responsiveness is powerful on a competitive environment. Additionally, we began to add our sales force in 2009 and expect to continue to grow the team in 2010 to augment our customer retention, customer experience and new products strategy.

So next let me turn to our products plans. Our product strategy is to add greater capabilities and functionality to anticipate our customers’ needs and capture a greater share of their telecom spending. In 2009, we did several things to increase our products and capabilities, this included expanding our VPN product portfolio to include managed (inaudible) capabilities, services, and then adding capabilities to our – to serve our customers’ international needs. These capabilities which added about $15 billion in additional market opportunities to our business, helps to further set a foundation which we will build upon in the future.

For instance, with the growing trend of customers asking us to take more and more responsibility for their networks. As we now deliver the Edge Router and related security, we can free-up our customers’ IT teams to focus on their applications. We have become an extension of our customers’ teams by delivering our managed services and we partner with them to manage both their WANs, their wide area network, and their MAN, their metropolitan area networks. And we expect this outthirsting trend to continue to provide opportunities for us.

In 2010, we continue to plan to further invest in innovative products and services as part of our growth initiatives. Our plan includes a variety of new products as well as product enhancements, all focused on growing revenue. Our product enhancements are designed to provide differentiated capabilities for existing Ethernet, IPVPN and manage products that we can act upon quickly. To give you some sense of the continuum of our product roadmap, here are a few examples. We expect to leverage our VPN product suite by delivering a fully converged and managed solution in the near term. But contrast, we are looking down the road a bit toward providing 100gig Ethernet. We see future demand for 100gig services to support customers growing metro-based datacenter needs, which no one is currently doing. Today we regularly sell 10gig services and are already seeing customers with multiple 10gig connections particularly in the metro demonstrating the path to future growing Ethernet demand. Those are just a few of the things that we are working on and we expect to launch additional products during this summer.

Now let me touch upon network advancement initiatives and the resulting efficiencies, capabilities and customer empowerment that they can create. As we focus on maturing some more robust revenue growth, we are leveraging technology to drive our strategy of leadership in the enterprise services. This includes initiatives that help us become more capital efficient and cost effective, enable and support product development enhancements and provide customers with greater control and visibility into their networks. All three of these, products, technology and systems are linked together to enable a differentiated capability and set of tools that empower customers with the ability to monitor their networks, make dynamic bandwidth decisions, and enable their applications environment, some of which we do today and some of which we are preparing for in the future. However, owning the local fiber network is critical to achieving these network advancements and is a huge competitive advantage as customers want more strategic control of their high bandwidth locations which reside in the metro area.

Let me share a few hard initiatives to our network advancement and how they link and build upon one another. First, we are improving the efficiency within our central offices, including reducing the scale or a footprint of our equipment. This has two benefits. For instance, interoperations, we are now delivering in a card the capacity of a device that used to take half a rack, which significantly increases our capacity, capital efficiency and cost effectiveness to help drive a strong value proposition and improved competitive positioning.

For our customers, this advancement reduces the number of hardwired connections which provides higher levels of reliability and reduces maintenance cost. These central office efficiencies creates fewer systems operational interfaces and touch points to activate service, which lead us further down the path towards flow through provisioning, some elements of which we are already doing today. So why is that important? Well flow through provisioning has always been the Holy Grail for the telecom service provider.

Fully developing these capabilities means that we will be able to turn its capacity remotely end-to-end, minimizing the needs to roll a trust to our customer’s location and without having to touch the equipment in our central offices. It speeds the service offerings, reduces labor, and improves the quality of the installation. Folks in short, it’s all about scaling the business. This flow through provisioning positions us for the future to be more nimble and responsive to our enterprise customers. So where do we go from flow through provisioning? All these network advancements enable visibility and control for the customer. Customers are looking for things like capacity on demand and prioritization of applications on the network. Those key aspects of control and visibility to the lifeline of their business operations.

We are investing in our front and back-office systems to eventually allow our customers to expand their capacity as needed through our customer phasing portal. This customer self provisioning feature is a part of the evolution of our offering that is advancing from where we are today where we provide customers visibility to the performance and capacity usage of their network to our future when customers will be empowered to control the size of the network we are providing them when they need it.

As we look to future network demand, we are also developing tools that will empower our customers to manage and prioritize their applications as they move through the network. So think about that. In the future, our customers will be able to manage the size of the network and manage what they are putting through the network all through our customer portal. These significant feature enhancements are becoming more critical for sophisticated customers who are rapidly developing and changing their applications real-time with variable capacity requirements and dynamic usage patterns. They are demanding a more functional and smarter network and that’s what we are focused on delivering.

So what I have outlined for you today is the path to build our growing capabilities, to ultimately deliver the type of control and visibility that puts the customer in the driver seat on addressing critical real-time operational priorities in their business, while at the same time allowing them to offload certain network management to us. Our initiatives are a series of building blocks, and while they won’t happen all at once, we believe achieving this differentiated set of capabilities will help us continue to win in the enterprise space.

As part of that differentiation, we continue to play an integral role in the development and deployment of data and IP infrastructure for our industry at enterprise customers’ networks as we are widely recognized as the leading competitive provider in the Ethernet business as just last week Vertical Systems, a leading industry analyst has again recognized that with our overall third place market position for retail Ethernet ports and service. Also, we have proven our strength in IP technology.

Our facilities and network are the source of much of the traffic moving across the Internet today and we are rated as the eighth most connected network worldwide. Our IP technology and network also delivers IPVPN or virtual private lines solutions globally for enterprises for mission-critical application. In addition, when you combine our own co-location facilities, independent third-party datacenters, and private enterprise datacenters connected to our fiber network, we have hundreds and hundreds of locations critical to enterprises that we can connect and manage this environment.

I hope this hopes paint the picture for you of our place and the landscape of data and IP infrastructure. With our vision and strategy of the advances for our network that I have just outlined for you, we will continue to build on our leadership position that focus on delivering an advance set of very sophisticated capabilities with our fiber networks to our customers will create an even stronger position for us in the future, one that can help distance us from the competition. As I have said many, many times before, there are no silver bullets in this business. Continued strategic thinking, steady execution, discipline investing, and ongoing focus on the enterprise customers’ needs and a whole lot of hard work will be the foundation of our success.

Thank you for your time. We will now take your questions.

Question-and-Answer Session

Operator

Thank you very much. We will conduct a question-and-answer session electronically today. (Operator Instructions). We will take as many questions as time permits. Our first question comes from Robert Dezego with SunTrust Robinson Humphrey.

Robert Dezego – SunTrust Robinson Humphrey

Hi guys, good morning. Thanks for taking the question. Just a quick question on the intercarrier comp in the quarter, it was clearly a boost. And I was wondering if you can maybe tell us a little bit more about what the balance was between the volumes, the disputes in the rate changes that you saw on a sequential basis, and maybe tell us whether you think that can flow into 2010?

Mark Peters

Yes, intercarrier compensation clearly is a small piece of our revenue, it only makes up to -- that's about fairly about 3% of our total revenue, but that’s an usual (inaudible) quarter-to-quarter settlements with other carriers as far as what we are charging them, we have that on the expense line frequently too. So probably in the order of priority without putting numbers down, it’s really it has to do with the dispute primarily as far as the fluctuations sequentially and then volume changes.

Robert Dezego – SunTrust Robinson Humphrey

Okay. And on – the second question I had is on the data and Internet revenue it was very strong in the quarter, it was kind of in line I think with what the expectations were. Can you talk about some of the trends here and what’s driving this growth and maybe what we are seeing – what we will be adding into 2010 and what kind of growth that we could expect in that segment going forward?

Larissa Herda

Sure. Well, clearly data and Internet has been the highlight of our business for quite a few years as it’s really the driver of a lot of our growth, our sales force lead with it. Some of our fastest growing products are products like managed IPVPN, IPVPN is not managed as well as Internet services. So we continue to believe that that’s going to be a driver in the business going forward.

Robert Dezego – SunTrust Robinson Humphrey

Okay. And the last question is about the magnitude of the January booking strength versus the prior years, you get a feel for – obviously without giving numbers, but just what kind of magnitude we saw there on that strength?

Mark Peters

We are not going – we don’t disclose the actual numbers on our bookings, but I mean that is suffice to say that that is a strong number in January, it’s the strongest. We said it’s the strongest in at least the last five years, but it’s -- it was – it’s really a good indicator to as we come into the year that we are seeing that strong activity that they will take a while to get installation for the revenue to come through. The strength coming out of the year and into this year, it really leads us to full of optimism as we progress the year.

Larissa Herda

To provide you with a little bit more color, in the fourth quarter, we saw some what I would call some more subdued buying at the beginning of the quarter. Anecdotally we were hearing from the sales force that customers were – some of them were running out of their budget – had run out of their budgets for the year and they were quickly planning or putting the plans in place to buy for the coming year. We started to see the results of that in December, and December sales popped back up again, and quite frankly we are fairly close and rivaled last December which was also one of the best quarters – one of the best Decembers that we have had in a very long time.

So to have both December and then January come in strong was obviously encouraging. But as Mark indicated, we did out a couple of large customer deals and there that are requiring a significant amount of construction over the next quarter or two, so it will take some time to see some of that revenue, but we think that – we are obviously all keeping our fingers crossed to see if we can keep the momentum going. We feel very good about all of things that we have put in place to do that. Obviously a little help from the economy would be helpful. But we are not waiting for that and that’s why we have put a lot of plans in place for new products and a lot of the sales productivity initiatives that I talked about on the call.

Robert Dezego – SunTrust Robinson Humphrey

All right, great. Thank you very much. Good luck.

Larissa Herda

Sure.

Operator

We will go next to Jonathan Schildkraut of Jefferies.

Jonathan Schildkraut – Jefferies

Great. Thank you for taking the questions. Actually Mark answered a few of them coming into this. So I was wondering if you could talk a little bit in more detail about what you were seeing from the wireless carriers, you noted that that has been a segment where you saw some strength. Is that related to backhaul office towers and is fiber-to-the-tower an opportunity for you? And the second question, just in terms of the CapEx outlook up a little bit on a year-over-year basis, from a percentage perspective you guys have spent 22%, 23% of revenue, pretty consistently, historically. Is that a fair way to think about CapEx on a go-forward basis and not specifically as it applies to 2010?

Larissa Herda

So I will talk about the wireless carriers and let Mark talk about the CapEx. For the first time in case you didn’t notice it, Mark mentioned what percentage of our carrier revenue is wireless, and it’s just above – about quarter of our carrier revenue, that’s new information. And over the course of the year that has been – it has been growing steadily. It’s the – it’s probably with carrier revenue and if overall a slight decline, I would say the wireless revenue has been the equalizer there in providing some stability to that revenue stream.

And we do have – so we have – that’s an ongoing customer base. We continue to get good sales from them. And it is a combination of wireless backhaul, some co-location, some voice services, some other transport or Ethernet connections to locations, connecting of datacenters, it’s overall network besides just the backhaul capacity. We kind of do it all for some of them, and it comes from the variety of wireless carriers. So, yes, that business we expect to continue to be growing nicely over the course of this coming year and continue to provide ongoing stability to the carrier revenue stream. And we are hoping that it will also continue to become a larger portion of the carrier revenue stream since it seems to be a lot more stable than some of the other carrier revenue.

Mark Peters

Regarding CapEx, there is nothing different from our expectation as far as CapEx percent of revenue holistically if looking at that percentage of revenue. Clearly you guys have to keep in mind timing, so you can’t – like last year and this year will be no different than the year after that. The timing of when we do installations could drive higher CapEx in a certain quarter, and then the revenue follows on in subsequent quarters. So we will see – it won’t be unusual for us to see shifts and the percentages from quarter-to-quarter and year-to-year depending on the timing of when some of those large projects come into play. And we are investing in some of those products and services and network capabilities that Larissa mentioned, so I would expect to see that – if you think about our Investor Relations slide, that middle category is a longer-term investment, we are putting a few more dollars there this year.

Jonathan Schildkraut – Jefferies

Great. Thanks for taking the questions, and we will look forward to tracking the wireless as a percent of the carrier. Thank you.

Larissa Herda

Okay Jonathan.

Operator

Our next question comes from Tim Horan at Oppenheimer. Tim your line is open.

Tim Horan – Oppenheimer

Sorry, guys can you hear me?

Mark Peters

Yes, we can.

Tim Horan – Oppenheimer

Two questions. Can you talk a little bit more about the sequential on revenue impact this quarter, I was just noticing and it’s only about 0.4% versus 1.5% in the third quarter. Was it – this is days outstanding were a little lighter, wholesale revenue came in a little bit lighter. If you can just maybe a little bit more color around, but I know it’s going to be lump quarter-to-quarter.

Mark Peters

Usage of a day is that it does have some impact on our usage based revenue and that only makes up about 4% of our total revenue as far as voice usage and then intercarrier compensations that can have some impact, but most of our revenue is fixed. So it really has to do with some of the timing that Larissa mentioned, when installations happen, when they come in the quarter. So that can happen – that can impact as far as the (inaudible) on the growth side, new installations as well as churn. So churn comes in earlier in the quarter, it can have a bigger on the quarter even though the overall percentage churn didn’t change in the quarter. When it comes in, it can impact what goes out on the quarter too. So those are the things that that really impacted. And then clearly we had fewer installations in the quarter as we talked about, so that impacted us as well.

Tim Horan – Oppenheimer

So did the first quarter CDO pickup as the installations improved towards the end of the quarter or you won’t really see that in the first quarter?

Mark Peters

Well that – that has also to do with, then we talked about seasonality coming into the first quarter. So even though we had really strong sales in December and January, those where we expect to see really in the second and third quarter, it’s not much of that. So it really has to do with what we are doing earlier in the fourth quarter and as we indicated it started light.

Larissa Herda

And that’s not unusual, January generally comes in a bit late, because a lot of the January installs are a results of the October sales. There is like a – at least a four months lag there, sometimes longer, depending on whether there is a lot of construction involved. And as I said earlier, we had a flow – a flow bookings in the beginning of the fourth quarter, little hesitation there, it was a little more subdued, and then it pops back up again. So I would say the first quarter is solve a little lot of the trends that we have typically had in past years where it starts off a little bit slower and then the momentum builds as the year goes on, and it seems – it appears as though that seems to be what if what we are seeing as well.

Tim Horan – Oppenheimer

And then just lastly, you are not hearing the same optimism out of the larger competitors in the industry. Do you think it’s just that you are gaining with your products and services I mean Verizon was particularly kind of down beat? Are they seeing the same type of customer response you think or not?

Larissa Herda

I think we are all seeing a lot of the same things. We are certainly seeing the same types of – as I said, we – in the fourth quarter we did see the hesitation in the buying in the early of the part of the quarter, and then there seem to be a resumption of buying at the end of the quarter and into January. So I don’t think that we are seeing anything any differently than anybody else’s, we are – maybe we are approaching the market a little bit differently. We are also a lot smaller than they are. So when we get growth we don’t – it’s on a much smaller scale than what those carriers have to accomplish. We don’t have the big legacy revenue streams as well that we are fighting against to get to growth. So I think that’s probably helping us as well.

And so I think it’s a whole lot of different things. We are all seeing the same stuff out there. I think that it’s not any different, it’s all a matter of how you are executing against that, how you are focused. We have put a lot of – unlike some of the other companies in general in our sector who have laid off a lot of people over the past few years, we haven’t. And so, our people, we have repositioned people, we have repositioned resources, we have got – and we have spent a lot of time on a lot of these efficiencies and operational improvements that are just helping across the board.

And I think that we – I think we underestimate the impact of some of those that had on our business that have allowed to continue to get growth, while others have struggled with it. But we have continued to make investment, while others have produced a lot of their investment. And I think that – that was a lesson that we learned during the last downturn that when you stop investing in the business, when you stop investing in the buildings, in the networks, in the systems, in the products, in the people, I mean across the board people of other carriers have had to make cut through various reasons.

We are fortunate I guess and that we have been able to continue to invest in these things, while we have continued to grow our margins, grow our cash flows, and that’s led to top line revenue growth. So it’s a – we were contrarian at the beginning of this recession. I remember when some analyst said, why aren’t you cutting people, everybody else is? Why aren’t you cutting your CapEx, everybody else is? And our response was, but everybody else isn’t growing and we are, so we are going to continue to do this. And so far, it has worked for us. And I believe that it’s going to position us very well. In fact, we are very encouraged by what we are seeing as a result of those investments. Had we not made them would be starting at ground zero, and I think that perhaps that might be what some other companies are experiencing. And so they take them a little bit longer to get to growth than I think it will pick up. I shouldn’t say get to growth, we are already there, I guess accelerated growth.

Tim Horan – Oppenheimer

Thank you.

Operator

We will go next to Dave Coleman at RBC Capital Markets.

Dave Coleman – RBC Capital Markets

Thank you. Just a couple of questions, saw that in the quarter you wrote down bad debt expense by about $1.5 million, just wondering what the reason for that was? And then SG&A is about a $3.25 million quarter-to-quarter improvement, just wondering if there is any sort of one-time factors that are contributed to that? And then after adjustment for the seasonality in the first quarter what sort of the run rate should be beginning second quarter of this? And then final question, I saw you continue to add sale employees, just wondering if we can read anything into that as far as your outlook on bookings for the balance of this year? Thank you.

Mark Peters

That's a longer (inaudible).

Larissa Herda

You want me to start with the sales. So let me – I love talking about sales. On the sales employees, well the way you should look at that is that we see a lot of opportunity. We have under scaled in some of our markets on the sales side as we have been building momentum in some of our newer markets. We learned a long time ago that you can’t just throw, you can’t just – you have to build the management infrastructure, and I guess you could say the word is right in the management infrastructure in a new market before you start throwing a lot of people and sales people at it. And a lot of these markets are at that tipping point where they are ready for us to continue to – they have matured, these newer markets, they know where they are going, they have got their strategies, they are starting to – we are seeing the momentum and it’s time to start adding more sales people to those markets. And it’s something that over the years we have learned – we know when this is the – when it’s time and – but we see a timing in a number of places.

So you are going to see us continue to add sales people in those markets. The markets like the Washington Baltimore market, and a very, very big market. We have a huge network there totally underutilized and we have got the right people in there and we are starting to – we are going to start to ramp up more on the sales side there. Markets like Miami, Florida also a big network, great infrastructure, we are starting to get some more momentum in those markets as well.

So we are being very selective and careful about the type of people that we are hiring and where we are putting them, because the first thing that we have learned that you can do is hire sales people only to have them churn out a year later, because it’s very expensive proposition for the business in so many different ways, it’s just not that’s expensive to have people that never produce, it’s also customer relationships to get down and you have cheering the sales people. And one other things that we have been working very hard on and we are seeing very encouraging results on is the onboarding process of those new sales people.

One of the keys is to keep the sales people in their seats to pass that one-year timeframe when they have historically new people have a tendency to churn out, a lot of sales people churn are the same sales positions churning over and over and over again, and you never get any momentum and you spend a lot of money. So we have put a lot of time into outlining and focusing the daily lives and the daily tasks of those sales people for the first year here in the company. And we are about to get to – over the second and third quarter will be about a year that we started those programs and we started hiring people under that program and we are already seeing positive results from that initiative. So we are hoping that once we pass that threshold, we will start to see their continued stickiness of those sales people, because once they stick around, they really do start to perform, and that will ultimately help our overall sales productivity.

Mark Peters

Great. And let me hit a couple of the items you mentioned. Bad debt expense, I will start with that one. And I think the message you should take away from here and what I think as you have been us following us quarter-to-quarter is is that we are really good at managing our receivables. We have a terrific customer base, very stable and they pay their bills. That’s a good thing. Throughout the year and some of the fluctuations in bad debt – keep in mind it can fluctuate from quarter-to-quarter depending on if we have specific write-off in a particular quarter or if we recover something that we have previously written-off which we do a lot.

We might write something off, we keep adding and ultimately collect those dollars. Throughout the year, the aging of our receivables have steadily improved, which means the number of customers that are passed due on their bills have steadily declined and that’s through a lot of things, not the least and which is how we pre-qualify customers before we sign them up and then the processes as we do that we have to remind them to pay their bills. So we are good at it. We collect our receivables.

We also like I mentioned we collect previously written-off bad debt things, so it might – we thought it might have been bad, we collect that, so that can fluctuate in the quarter. All of this fits into what ultimately our allowances which goes to our bad debt expense. So we continue to have improvements through the end of the year and that contributed to a payroll of bad debt expense in the fourth quarter. Now is that sustainable at that level? Time will tell. We have been going through a recession, but we managed them really well, and I will expect us to continue to lead as far as our receivables and collections. But let’s see what the future brings us.

Now for overall SG&A, clearly bad debt expense goes through SG&A, so that had a favorable impact in the quarter. As we talked about, we had fewer installations in the quarter, so that impacts commissions, so you have fewer, you have lower commissions. And also as we talked about seasonality going into the fourth quarter with payroll taxes going up, while as the year progresses, those go down as employees max out on the payroll taxes and those costs go down.

So clearly when you get to the fourth quarter, you are at the low point and then you start over again at the first quarter and you have a higher cost going into the first quarter. But all of those plan to – what’s going on with our SG&A which by the way I think the percentage was – year-over-year our percentages were similar with SG&A for both last year and this year was 25% of revenue for both years and a little bit better in the fourth quarter of this year.

And looking forward though in that category we talked about our sales – the strong sales in December and January, when we install them and start billing them, that’s when we pay the commission. So in those quarters, don’t expect SG&A to go up in support of that – of those new installations and that will be revenue. So we had a – speaking of overall EBITDA, as you know, we don’t give guidance. For the full year last year we had a 36% EBITDA margin. We ended the year in the fourth quarter with a 37% EBITDA margin. And with growth in the top line consistent with higher growth, I got to go back and we have that growth, but higher growth in the top line.

Over the longer term, I think we have opportunities for that to further expand be on that 36%, but with quarter-to-quarter fluctuations down for a lot other things that I just spoke about. So we are a leader with our margins. It continues to be one of the three metrics that we focus on along with revenue and cash flow, but I expect us to continue to lead metric and with that metric.

Dave Coleman – RBC Capital Markets

Thank you very much.

Mark Peters

You bet.

Operator

We will go next to Simon Flannery with Morgan Stanley.

Simon Flannery – Morgan Stanley

Thanks very much. Good morning. You continue to have that very good balance sheet metrics, the cash balance continues to build out, the maturities are a way out. Can you just update us on your thoughts or any thoughts about deploying that cash this year either returning to shareholders or M&A? And any update on the Washington outlook regulatory developments and particularly specific access? Thanks.

Mark Peters

I am sure, yes, we do have a – balance sheet capital structure it’s very strong and we continue to generate cash on all good things. Really, our point of view on our cash balances is to maintain maximum flexibility potentially due any and in all of those things as you mentioned. We have continued to invest in our products and services, having the flexibility as we see the demand that we have spoken about to – continue to do big deals, good big deals when they come our way, to evaluate network expansions like we did last year when we expanded network in Phoenix so fiber acquisitions to considering larger transactions if we were to find one that made sense to even returning to shareholders. That are all in the list we continue to evaluate. Having the cash in the balance sheet gives us that flexibility. And we will continue to evaluate where are the right place is to put that cash.

Larissa Herda

On the question to the regulatory side, nothing new on the special access run, obviously the SEC is quite busy now working on their national broadband policy. And they are exploring – with special access they are exploring an analytical structure for assessing rates. But at this point it’s all still a work-in-progress.

Simon Flannery – Morgan Stanley

Okay, thank you.

Mark Peters

You bet.

Operator

Mike McCormack at JPMorgan, your line is open.

Mike McCormack – JP Morgan

Hi guys, thanks. Mark, could you just clarify, I think when you started out the call, you were talking about holiday bookings being a little softer and/or holiday periods causing softer bookings, (inaudible) some of the comments that Larissa made about the – it was the first hard thing weaker in the second half of the quarter. And then secondly, just your thoughts on the sales, your things were ramping up as you exited the quarter and through January, is that stuff that’s been in the pipeline that’s now making decisions or is there is new business coming in? Thanks.

Mark Peters

I mean as far as seasonality, it really was leading out as we got into closer to the – I am sorry, let me back up. We did start October -- October light, but then as we got to Thanksgiving and the Christmas time, we did see a slower activity. But then we did have a several wheels that actually allowed us to close out December very strong, so they – so a couple of large deals did allow us to (inaudible) on one piece of our business to allow us to and exit.

Larissa Herda

But overall, there was still the seasonality in the overall trends on the sales side. And the second half of your question, could you repeat that again Mike?

Mike McCormack – JP Morgan

Yes, just whether or not you guys are seeing the strengths throughout January, that stuff has already been in the pipeline that’s now making a decision or is it totally new business coming in?

Larissa Herda

A combination of both. And one other things that the pipeline is still very large and sitting there and there is a lot of just delay decisions. So we are encouraged to see some of these – and some of them are just decisions that take a long time anyhow regardless of the economy, they are just large deals that take time. So it’s encouraging to see some of those pop out, because we would anticipate that at some point over the course of the year, we are going to start thinking more of those pop out that – the customers don’t generally go through the process without some intention of implementing. And generally what we see are deals where the customers have to make the transition, it’s just a matter of when for them. And so – but in January, we really saw both.

Mike McCormack – JP Morgan

Okay. And correct me on the seasonal issue. I thought historically what we had was sort of the fewer selling days during 4Q manifesting itself in a little tight – a little bit tougher revenue growth. In 1Q, is that the same thing we should expect?

Larissa Herda

Yes.

Mike McCormack – JP Morgan

Okay, thanks.

Mark Peters

You bet.

Operator

We will take our next question from Donna Jaegers at D.A. Davidson.

Donna Jaegers – D.A. Davidson

Hi, sort of a follow-up on Mike’s question and then another question on sales. I am hearing from some of your more IT brethren on the telecom front that they are starting to see last year they would be triplified their sales trends as pretty much just-in-time kind of sales that customers needed to get in for their ongoing business, and now they are starting to talk about seeing customers really look at growth initiatives. Can you – are you seeing any sort of trend like that?

Larissa Herda

Well, interesting, just-in-time. I guess we have always seen both types of activities. I am not sure that anymore of either or is occurring. So we – typically the stuffs that we are working on are fairly large networks, so they are not really just-in-time, and we have a combination obviously of a broad spectrum of customers that we sell to. And so I guess incremental add for a customer would be more maybe just-in-time. But when you are doing networks as large as we are doing, these are long planning processes for customers, because it just requires a lot of reworking at your business in general than their processes in general.

And so I would yes, we are seeing – we have been seeing the customers focusing on the growth of their networks and what they have to do, because I think it’s important to recognize that the customers and I tell this many times before and it still holds through probably more now than ever before, customers need the networks more than they have ever needed them before. They have to use the networks to get – to continue to stay competitive in this worldwide environment and the global – with global competition. And they have got to get more efficient and there are so many cool things that they can do that we are doing for instance that make your business so much more efficient that you rely on the network to accomplish for you, they are just compelled to do it.

We have been compelled to make investments in areas where it was just a no-brainer for us, because we said, my gosh, I mean this whether it’s just a software program or whatever it happens to be, it just – it becomes a business imperative, because it’s unnecessary for you to be spending these dollars in other ways when you can use the network to make yourselves so efficient. So you have a lot of companies out there who wanted to do these things for the past two years during this recession, who may have put it all who are recognizing. We just had a customer in not too long ago, said, we have been waiting but we now realize we have got to do this stuff. So I think that that’s just what’s – what we are going to see coming out of this recession or a lot of these businesses who held off are going to have to start to make those investments.

So yes, we are hearing it, we are starting to see it. Those are all part of the green shoes, but make no mistake about it, it is still very, very difficult environment out there. And I think that as the discussion we had earlier on the call on the Q&A, why are we seeing – are we seeing anything different than what others are seeing. The answer is no. We are all seeing the same thing. It’s a tough environment. The key is to make sure that you are focusing on what your strength is and that’s what we try to do. So we are focused in our approach with customers and how we are trying to solve their problems. And fortunately we are in that sweet spot of where customers need especially the metro network connectivity for their datacenter needs, for their disaster recovery needs, for a lot of their corporate needs and their branch location needs, and we have those capabilities to be able to address those solutions for the customers.

Donna Jaegers – D.A. Davidson

Great. And then on the carrier side of the business – thanks for the data point as far as 25% of your carrier sales go to wireless carriers. Can you talk a little about this? There is a lot of fiber-to-the-tower or a piece out there I understand and certainly the carriers would with the black eye that AT&T has gotten because of the poor service on the iPhone, they talk again of increased focus on really getting more fiber-to-the-tower. Can you talk a little about the opportunity set ahead of you versus what you saw last year?

Larissa Herda

Sure. I am not going to talk about any specific customer. We have very strict non-disclosure agreements with all of our carrier customers and we honor those. And so – but what I will say in general is that the wireless carriers feel the pressure of the demand that they are seeing for data services. And they have been taking a very strong look and they have been – it doesn’t – it is not something that you can transition to right away, it takes a lot of planning and they have been spending a lot of time in the planning processes, some of those wireless carriers have been moving more aggressively than others, but they are all moving to address the needs for more capacity at their cell site. They have to. They know that.

And so we have been benefiting for – really benefiting from that for the past couple of years, because we have been – we are a big networks and where it makes sense for us to respond to wireless RSPs, we have been. And so – and we have been winning as well. So – and we will expect that we will continue to win, because we have the unique – a uniquely suited asset to able to do that. And it’s not just the fiber asset by the way, it’s our capability and our ability to be able to serve those customers and expand the capacity at those locations very quickly, and the network capability and our service capability which by the way is no small feat, because these networks are big, their requirements are significant, their demands for quality are very significant, and we happen to be very good at that. So we are winning a nice piece of that business and we would expect to continue to do.

Donna Jaegers – D.A. Davidson

Great, thanks.

Operator

And we will go now to Barry McCarver at Stephens Incorporated.

Barry McCarver – Stephens Incorporated

Hi, good morning, and thanks for taking my questions. You have got most of them. Just a couple of housekeeping questions, first off, you talked about first part of the year, but you didn’t mention anything on contract renewals, is there any reason or a thing that there is maybe a higher level or bigger contracts coming out for renewal here in the first half of the year?

Larissa Herda

We have contract renewals everyday. We are about a 15-year old company. So once you get to be a certain age, you do have set of me and myself. And they are all laughing at me here. Once I turned 50, I started complaining. But anyhow, once you get to a certain stage of maturity in your business, you have ongoing contracts renewals all the time. And so most of our business is on three-year and five-year contract, that’s actually been very consistent for the – forever, because keep in mind most of what we do for customers requires construction or it has fiber – there is fiber infrastructure involved, and so we – we require longer-term contracts to get the returns in our investment. That’s critical. And so customers they are used to signing those types of contracts for the services that we sell.

So I don’t know if there is anything more or else than we had at any other time, but we always have those types of things. And we continue – as Mark talked about earlier, clearly when you look at the new metrics that we have provided over the last two quarters, the 0.3% of customer churn, of those customers who are churning completely away and completely disconnect from our business, that’s a phenomenally low number. I challenge anyone to have a number like that. It just goes to show that we have tremendous stability in our customer base. Yes, every once in a while you lose a big one here or there and you lose some small ones, but we have a very loyal customer base, and there is a reason for that.

We have spent a lot of time focusing on the customer experience and everybody talks about the customer experience, but I got to tell you this company is actually executing on it extremely well. And we have all sorts of great analytics that demonstrates that. When you have a customer who is a net promoter for instance that how that impacts your revenue stream and the retention in your business and how they actually bring more business to you it’s really an important metric and you will hear more about that from us in the coming year. But – so overall, I feel very good about general customer renewals and the stability of the customer stream.

Barry McCarver – Stephens Incorporated

Okay, perfect. And then, historically you guys have provided some operating statistics in a table of last page of the press release. I noticed you didn’t do that in the 4Q release, instead just kind of talked general numbers in the commentary, is there a reason for that, should we not expect those operating metrics anymore?

Mark Peters

Well, a couple of metrics we have completely dropped off, while one has to do with how many class five switches we have. And that was something that was important years and years ago when we were first deploying voice services, but it’s kind of been an old metrics that we don’t use. So that one we are not disclosing at all anymore. Some of the other ones, we talk about route miles, the precision to go to for an network that’s a national network like ours to go to the amount of precision or providing seemed kind of overkill, plus I think we are the only ones who would have probably provided that kind of information. So we do provide information more rounded numbers on there just to give you the magnitude of the size of our network, which are huge.

So in buildings as I mentioned in the call, we had 10,407 buildings, so we are still providing metrics. Headcount we have – we have provided and then customers – 27,989 customers we have out there too. So anyway we are just more to condense, put things out there that that we thought were useful, and then you will also see that precision in our 10-K as well.

Barry McCarver – Stephens Incorporated

Okay. And then last question is just can you remind us what the tax rate is expected to do in 2010?

Mark Peters

2010, now keep in mind that we have a little over a 1.1 – right on $1.1 million net operating loss, so we will be continuing to utilize that.

Larissa Herda

Billion.

Mark Peters

I am sorry, billion.

Larissa Herda

It’s billion. It’s billion operating loss.

Mark Peters

Sorry, my mistake.

Barry McCarver – Stephens Incorporated

A million is not going to go very far in the quarter.

Mark Peters

I think I will pickup where it is actually generating net income which is a good thing. So that will service for quite some time.

Barry McCarver – Stephens Incorporated

Okay, that’s what I –

Mark Peters

We still keep using that. Obviously we have to keep our eye on what’s going on with same government locals, everybody is looking for money, so we will keep an eye on that. But overall, we have that nice loss to take it through.

Barry McCarver – Stephens Incorporated

Okay.

Larissa Herda

I see that we have gone a little past time, but we are going to continue going for a little while longer and plus we still have a long list of questions, we are going to try and get in as many as we possibly can. So for those of you who can hang on the line, we are going to continue on for a little longer to answer those questions.

Operator

We will take our next question from Colby Synesael at Kauffman Brothers

Colby Synesael – Kauffman Brothers

Hi, thanks for including me. It looks like – if I step back, I guess in what late 2006 you acquired about – I think it was around 18,000 customers from Xspedius and since that time, you have churned down about 14,000 customers. Can you just give us an idea where we are in terms of the customers that are below $500? Are we at the point where it’s safe to say that the majority that’s behind you now or maybe how much further of the 18,000 do we have left to churn out? Thanks.

Mark Peters

Yes, we do continue to, but we still have a quite of those smaller customers below that – below our target of threshold, which is $500 or below category. So we keep – we have been keeping them and tell frankly them their contracts renew and we will renew the contracts, but that’s the most competitive piece of our business. So I continue to expect to see customer churn from that category.

Colby Synesael – Kauffman Brothers

So we are not – we are not yet approaching the inflection or that’s behind you.

Mark Peters

No I think it will be – I think we need some more of that. Obviously we have seen a bit of a decline in that category just because of the absolute numbers are going down, but I would expect that number to – again further decline. But keep in mind that it’s – it is an output of our customer count, but when you look at our actual revenue churn that number has been pretty stable, that 1.2% of revenue, so that that has been a stable – very stable, higher, because of the recession, they are pretty stable. And then when you look at actual revenue churn as we mentioned before, some customers entirely disconnect and which these would be a subset out, it’s only 0.3% revenue churn. And so while the numbers on the customer count show – can show an absolute decline in our customers, the impact on revenue is diminishing.

Larissa Herda

I would just add a little bit more color to the whole subject of churn. We have been – and we have initiate a lot of very strong retention programs for the past few years that have been very effective. I believe that it has – we will have not just – it’s not only had an overall positive impact on the business during this recession, but it’s providing us with a unique discipline on a going forward basis that I think we will benefit from. It would be a wonderful thing if we could churn in a more normalized macro-economic environment come in below where we were before is obviously churn is expense and it’s a lot easier to keep customers and to get new ones.

So we have – we have been doing a lot of really great things in that area. And I would expect that we are going to continue to see the results from that. Even though we lose those smaller customers, quite frankly in some of the markets that we had acquired from Xspedius where we lost a bunch of those customers, our margins actually went up after losing them, because they were – some of them were no margin or negative margin. So we are focusing on the customers we want to keep, we have I think done a much better job than a couple of years ago when we started to lose a lot of those customers.

We identified the ones we wanted to keep. We have been upselling them. We have been holding on those customers very effectively. And so the ones that is churn away are usually those that we don’t have the product portfolio for anymore, because they are generally too small for our focus, and so we will continue to see those go away. The good news is is that the revenue is fairly small for those customers who doesn’t seem to be having a huge impact on the revenue.

Colby Synesael – Kauffman Brothers

And just one follow-up question, you guys I think you have historically targeted about a 40% IRR. Just curious, when you look at the deals that you have done over the last year or two versus maybe what you see ahead, can you still get that type of return within the timeframe that you have been using, maybe whether that’s a three-year customer or a four-year customer. Are you signing that to get that type of return you are needing to sign longer contracts? Thanks.

Mark Peters

Yes, I will just remind everybody it’s actually what our operating model is is for a new customer (inaudible) capital for new customers. We have a 30% internal rate of return threshold over the life of that customer’s contract and that doesn’t assume any residual and no renewal on that contract there is no residual on that equipment. That remains our bogie today. So we go – like we mentioned earlier, if we renegotiate with the customer find out what it takes to provide those services, our sales folks have on their laptops, an IRR model, they know what an IRR is, and they know the bogie they have to hit. And then that – we don’t have all of them at 30%, we will make some strategic investments if we have a large customer that we know there is – we are getting a small piece of their business and we have large opportunities to grow with them, but now – the 30% IRR threshold remains our model today.

Larissa Herda

Has been since I joined the company in 1997, we haven’t changed it.

Mark Peters

Yes.

Colby Synesael – Kauffman Brothers

Thanks.

Operator

We will go next to Brett Feldman at Deutsche Bank.

Brett Feldman – Deutsche Bank

Yes, thanks taking the question. And I was assuming if you can just clarify a little bit the color you provided on your outlook for the first quarter. When you talk about the typical seasonal slowdown in the rate of your revenue growth, does that apply to total revenue including intercarrier comp or should we really be thinking about that as this typical seasonality in your services business?

Mark Peters

Really we talk about them – when we talk about that again we are not once we have guidance, but we speak about that broadly. And so overall revenue – I mean it’s generally driven by installations coming in our sales – sales in the fourth quarter leaving and the installations in the first quarter. But that’s what – but when we speak about it, we speak of it holistically at total revenue sequentially.

Larissa Herda

And what we are really trying to do is make sure that for those investors who have not been following us for a really long time that they are aware that typically there is no acceleration of revenue in the first quarter, and so that’s fairly typical for us.

Mark Peters

And as I mentioned, certain cost increase is coming into the quarter.

Brett Feldman – Deutsche Bank

And then just one more question on revenue churn, that really is a great slide that you guys provided about the reasons why and how much it is associated with a total disconnect. The churn portion from customers who are staying with you, so the revenue churn from customers who are not leaving seems have been pretty stable. I am just wondering if you can give a little more color around what’s driving that, why you have revenue churn from existing customers, is it mostly repricing, is it mostly the customer maybe is shutting down portions of their network or grooming their network, and has that changed much over say the last year or so.

Larissa Herda

So, that’s a real good question. And obviously where a lot of the accelerated churn that we have had during the recession is really from existing customers that have been pruning their networks. It’s obviously no secret there has been a lots of layoff over the past couple of years. And when we have a customer that lays off hundreds or thousands of people their network requirements generally go down. Lot of companies, business enterprises and carriers have become more vigilant about their cost and looking for ways to reduce their network expenses. And so that’s where we have seen a lot of – a lot of that reduction. And it has – there appears to be some stabilization in those numbers. There was a point in the recession where they were going – it was going out every quarter.

Lately, it seems to be somewhat stable, but the problem with disconnects is that you can’t forecast them, and that you cannot forecast them, they just happen. And when they happen, they impact your revenue. So we do believe that for the long-term we have put some – as I talked about a little bit earlier, we have put some great revenue retention programs in place to help. And I think those retention programs had a very big impact on keeping our revenue churn from going even higher during this recession honestly.

I think they were very, very important to that, and I think they will be important going forward in keeping it stabilized. But make no mistake about it, it could come back up again. All that it takes is one big customer and it can impact your churn for a quarter. So we continue to believe that it is going to stay at an elevated number, but we have obviously seen some stability in the past couple of quarters, we hope to see that in quarters to come. In fact, we hope it goes down. But hope is not a strategy and we have been focusing very much on making sure that that happens in the future. So, in general, repricing is not in that number. Repricing is a separate item.

Over the course of the recession, we did see gradual increase in the repricing. Again not extraordinarily huge impact, but it did have an impact on our – and it is a headwind for the business. The good news is on some of our products like Ethernet services or our Internet – some of our Internet services. We have been going through this repricing with some of the Internet services for the past three years. And so most of those services are back to – they are at the market, so the declines are not as great. And so I think that bodes well for the future of those types of products where we were seeing some significant headwinds over the past couple of years.

Brett Feldman – Deutsche Bank

That’s great color. Thanks a lot.

Larissa Herda

Sure.

Operator

Our next question comes from David Dickson at FBR Capital Markets.

David Dickson – FBR Capital Markets

Thanks very much, and good morning. Larissa, thanks very much for giving us the time here. Question for you on the impact of the major carriers adding fiber-to-the-buildings for wireless backhaul, we have seen one competitive CLEC gain or potentially gained access to rent 3000 buildings in a major market recently. I was just wondering to what extent you could see that as a potential threat versus the obviously opportunities in that area? And then secondly, question for Mark on CapEx, if you could explain Mark perhaps on the underlying assumptions behind the lower end of the guidance range and the higher end of the guidance range for 2010 that would be terrific.

Larissa Herda

So, obviously there is a lot of competition out there. We don’t take competition lightly and I think that’s probably why we continue to grow while most of our competitors are not. But the reality is is that there is a lot of business opportunity out there for wireless connectivity. And our focus is where our networks are strong and where they are big and where we provide a competitive – and we have a competitive advantage, we are not out there just building new network – a huge big new networks, we are capitalizing and leveraging our existing infrastructure. It’s hard for other competitive CLECs compete against us in those markets. Now there is other markets that we have that are not nearly as developed and we may not be as competitive in which case there will be other competitors, it’s not just CLECs, it’s also cable companies, and it’s also incumbent LECs that are going after this business. So there is obviously a lot of opportunity out there and we are – we think we are getting our piece of the pie and that we are going to continue to get our piece of pie and that’s we are focused on where we are strong.

David Dickson – FBR Capital Markets

And Larissa in those buildings that you do provide access, do you – are you seeing any evidence of carriers, the magic carriers overbuilding into those buildings that you already provide access to?

Larissa Herda

You mean the business customer buildings.

David Dickson – FBR Capital Markets

Correct.

Larissa Herda

No. There is not as much of that kind of construction. I mean the reality is is that the incumbent carriers obviously have over many years have been building out their fiber networks. Take a look at the CapEx budgets and the CapEx spending for most of the competitive carriers out there and you will find as a percentage of their revenue, it’s fairly small and ours is not. I think that tells you who is actually building the networks and who’s not. And so we don’t generally see a lot of – every once in a while that you will see it, but not prolifically, that that’s something that we are really focused on, we are adding – we are still adding about a 1000 buildings or so a year.

We would add 2000 if the opportunity was there, maybe someday it will be. Those are all good things, because clearly when you look at our business model, it’s the adding the density in the markets that drives the cash flow and margins for our business, and that’s what really what lifts all both in our business. So it’s a focus of our business, I am not sure that it’s really a focus of some other businesses out there.

David Dickson – FBR Capital Markets

So they’re typically leasing from you for the wireless backhaul purposes versus the –taking advantage perhaps of some of the longer-term scalable benefits they get from deploying their own fiber-to-your-buildings.

Larissa Herda

So – you are mixing my last (inaudible) of what I just said was actually more global than in scope than just the wireless buildings. The wireless carriers have been buying various different types of services over the years, but a lot of them are very focused today on higher capacity services to the cell sites. They are looking at cyber Ethernet is a big push as well. So however we can get them that network capacity they are interested in getting it.

Mark Peters

And then on the CapEx range mark, $275 million to $300 million, really it's largely the variability has to do of demand. Clearly at the lower end we would – it would be closer to what we did in 2009 – for the full year 2009 we had $275 million and that’s the lower end of our range for 2010. So the movements among those range is generally related to growth installation opportunities, sales opportunities that we sign up, as well as we are doing some investments as we talked about in our products and services that’s going to into expense.

David Dickson – FBR Capital Markets

So Mark just to clarify, your – the low end of your guidance range implies a similar revenue growth trajectory as what we saw in ’09.

Mark Peters

Well a lot of things come into the revenue trajectory include churn rates, timing of installations, et cetera when you look for full-year revenue growth rates. So I don’t want to get – I am not going to break out history of not giving revenue guidance, but the actual dollars and dollar amounts fluctuation is highly related to actual deployment of services to our customers.

David Dickson – FBR Capital Markets

Okay. All right, thanks very much.

Mark Peters

Sure.

Operator

Michael Rollins at Citi, your line is open.

Michael Rollins – Citi

Hi, good morning, and thanks for taking the question. I guess a two parter, the first part is – is it fair to believe that bookings for the prior couple of quarters has more of an impact on revenue for the current quarter than bookings in the current quarter?

Larissa Herda

Yes.

Michael Rollins – Citi

And the second part of that is I am just trying to take everything that you said in the call and just really come up with maybe the two key reasons why sequential customer revenue growth in the fourth quarter was $1.1 million versus the average of the last four quarters of about $3.7 million, if you can just help prioritize maybe the two biggest issues. And I think about that in the context of the booking comments for the six months prior to the fourth quarter is being somewhat solid to the year before and you guys have talked about lengthening of book-to-bill now for probably the better part of the last year. So I am just trying to figure out what that incremental change was from the last four quarters to 4Q09 as we just sort of slipped through all the data points on the call. Thanks so much.

Larissa Herda

So let me – and Mark will talk a little bit about that. Let me provide you a little bit more color on your – on the first part of your questions. The answer is, our installations have a broad – it’s kind of a broad spectrum of time from booking to install. Obviously, if it’s a building that’s in our network we can turn it up the same day if we have to. Generally customers aren’t quite ready that fast.

So I would say when you think about our bookings, there is generally a lag and it’s not a 100% because there is probably there every month something installed from the previous months not a lot, and then the following months just a little bit more and then the following month a little bit more. But it would – it’s generally it will pass 90 days when you get the majority of what you have booked is generally about four months out. But we are selling some big stuff that’s requiring more network construction, and that’s six months out. I mean that’s four to six months out.

It’s generally kind of the timeframe for that. So every quarter you have stuff from the previous months and/or every month you have some sales from the previous month, but you are depending more on stuff that you have been planning for quite some time. So the first part of the year generally is lighter, because we see slower sales – in this case, we saw slower sales in the fourth quarter, so we are starting to see the impact of that.

Mark Peters

And I think it’s really important, because of all those puts and takes that Larissa mentioned is that you really take and look at the trends over a longer period of time, because it’s hard to important to understand when an installation happens or when a disconnect might happen in a quarter. So if we have a large, say let’s pick on disconnects.

So let’s say we have a large disconnect in a particular quarter and it hit us right at the beginning of the quarter. But while the amount of monthly run rates that we have lost in the quarter and the impact on our churn rate, the revenue churn rates that we report out is the same if we the revenue comes out at the beginning of the quarter or at the end of the quarter, the impact on the revenue in that quarter is much greater if it comes out earlier, because you get a three times impact if it comes out earlier than later.

Actually we did have one large customer this quarter that hit our network services revenues, enterprise customer that has that same bad effect. So impacted the quarter a bit for the sequential growth rate.

Larissa Herda

And that was one customer. So one customer can make that kind of difference in the quarter which is why you really need to look at trends as opposed to any individual quarter.

Mark Peters

Because in that one, it was just one customer, it’s not like any kind of a fundamental change in the churn, but it was one and it hit and it impacted the full quarter similarly on the timing of revenue. And so when the revenue comes in, even though you can have the strong bookings that we had here in the year and coming end of the year, there was some several large deals and that were going to take up months to install.

And it’s not just frankly us being able to install, it’s our customers being ready to accept the services. So it’s both sides of the equation. So the more complex the projects are, the longer the installations them can take. And so that’s why when we talk about the strong bookings, and that might not open revenue for three months or six months or sometimes longer. So those are – that’s kind of the puts and takes are and that’s why you really have to look at the longer-term trend in the business.

Michael Rollins – Citi

That’s a very helpful detail, thank you very much.

Larissa Herda

You bet.

Operator

Our next question comes from Michael Funk – Banc of America-Merrill Lynch

Michael Funk – Banc of America-Merrill Lynch

Great, thank you guys for hanging on so long and taking the questions. Two really quick ones if I could. First is about the revenue churn, and the foot side of that being gross revenue, right the difference between revenue disconnection and net revenue. Can you give any color around that gross revenue and the percentage coming from existing versus new customers? And then second, you guys are doing some great commentary on the call around the color about the lagged effect of telecom spinning from the economy, your view on the potential economic recovery at midyear and expectation for acceleration in the revenue growth if and when this happens. Taken that qualitative commentary and dropped into my model, it seems like 4.5% to 5% of revenue growth is probably the right range. Can you guys give any commentary maybe what I might be missing or what other factors are unknown there might be that could take it off this trajectory?

Larissa Herda

All right, I will answer the question on the revenues from existing versus new and then Mark can tell you how we don’t provide any guidance on revenue.

Michael Funk – Banc of America-Merrill Lynch

I have a chart at the end here.

Larissa Herda

Yes, that’s always worth a try. So where we get – we get a lot of our revenue from existing customers as well as from new. Clearly in this recession, all of the competitors and I would say this is probably across the board, everyone is trying to hold on to their customers. We obviously are with our customer retention strategies and every other carrier is trying to do that too. So getting new customers has been a – has been more difficult for the past couple of years that it has been in prior years. But with that said, we continue to add customers and we continue to sell new networks to new customers every day.

But the – I guess one of the beauties of our business is that we have so many customers now and we have so many products, and a lot of our customers buy multiple products, but there is more products to buy. And one of the very important aspects of our business is to continue to add new products to the portfolio, so that we can go back to our existing customers and say, we have got a new product. You liked us before, but you are going to love us with this.

And it gives you – you have a relationship and it is much easier to sell those new products, so we are constantly doing that. And so I would say there is a very almost not quite an even split, but a very good chunk in it and it varies from quarter-to-quarter. But a good chunk of our revenue comes from existing customers as well as now.

Michael Funk – Banc of America-Merrill Lynch

And in short I guess more (inaudible) some other carriers are talked about customers running hot, I guess over burning their networks. And I am wondering if you are seeing any customers come back to you and increase spending because they want to increase capacity based on their view of the economy improving more business trends improving.

Larissa Herda

Absolutely. I mean for the past couple of years clearly customers have been running their networks hotter than before, trying to get everything that they can out of them. But there comes a point of diminishing returns and they have to make investments to be able to – it’s not just the economy getting better, it’s some of the things I talked about earlier where they are continuing to put more on the networks and require more of the networks for their own business operations and efficiencies.

So both things have been happening and we are starting to see some of those deals where the customers – well, actually we are being seeing it all long and where customers were running hot and they needed to add capacity. So there is definitely a demand for bandwidth, there is just like a huge burden on the network. Saw this video that’s going around, I mean this is just our IP network continues to grow quite nicely and there is just a lot of demand out there, you have got the Cloud computing phenomenon that’s happening more and more capacity being driven as a result of that, you have got a lot of video.

I mean every time some of these look at YouTube we just love it, because it just – it’s more demands on business network. So all of those drivers are inherently there and are continuing to require customers to add more capacity. And Mark’s going to end, because we have gone almost a half hour over, so he will end with not giving you any guidance.

Mark Peters

Hopefully you have heard from us – yes, we are not going to give guidance. But hopefully you have heard from us how bullish we are about our business and how we are positioned. And short-term revenue, growth rates, they will be what they are, but ultimately we do feel that everything we have doing not just the past couple of years just foundationally in our business, and where we are targeting our business, and the customers are going after and the products and services and customer experience is going to service well, and we will lead it back to accelerated revenue growth.

And as you can see from our financial metrics, we invest in the right places, we have the right discipline, we are focused on return, and that’s going to serve – serve the business and the shareholder as well. So we are bullish about the business and really we are looking forward to continue to talk to you guys throughout the 2010.

Larissa Herda

All right. And with that we will end our call. And we want to thank you all for hanging in there for so long and for your support of tw telecom. Have a good day everyone.

Operator

This concludes our program. Thank you for joining us.

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

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Source: tw telecom inc. Q4 2009 Earnings Call Transcript
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