Executives
Christopher Muller - Vice President Investor Relations
Arunas A. Chesonis – Chairman, President and CEO
Keith M. Wilson – CFO, Executive Vice President and Director
Analysts
Frank Louthan - Raymond James
Michael Funk - Bank of America Merrill Lynch
Simon Flannery - Morgan Stanley
Donna Jaegers - D.A. Davidson
David Dixon - FBR Capital Markets
Robert Dezego - SunTrust Robinson Humphrey
Tim Horan - Oppenheimer & Co.
Bob Kirchoff - Credit Suisse
Brett Feldman - Deutsche Bank
Todd Morgan - Oppenheimer & Co
Michael Rollins - Citi Investment Research
Colby Synesael – Coffin Brothers
PAETEC Holding Corp. (PAET) Q4 2009 Earnings Call February 16, 2010 10:00 AM ET
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2009 PAETEC Holdings Corp. earnings conference call. (Operator's Instructions) I'd now like to turn the presentation over to our host for today's call, Mr. Chris Muller. You may proceed, sir.
Christopher Muller
Thanks, Josh. Good morning everyone and welcome to PAETEC's fourth quarter and full year 2009 earnings call. With me on today's call are Chairman and CEO Arunas Chesonis and Chief Financial Officer Keith Wilson. Following our prepared remarks we will then conduct the Q & A session.
Before we get started I need to remind everyone that in the remarks today we will be making some forward looking statements about our expected operating results and financial position, our business strategy and other matters relating to our business. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward looking statements.
We've highlighted some of the more important risks and uncertainties in our earnings release. For a more detailed discussion, please refer to PAETEC's 10-K for it's 2008 fiscal year and our other filings with the SEC. We disclaim any obligation to update our forward looking statements. Please note that in today's call we will be referring to certain non-GAAP financial measures. These measures are reconciled to the most comparable GAAP measures in our press release and supplemental information which has been posted on the Investor Relations portion of our website at paetec.com.
Finally, now that we've got the Safe Harbor formalities out of the way, please note that we have posted on the Investor Relations portion of our website a supplemental presentation that will be discussed on this call regarding PAETEC's operating metrics. With that I'd like to now turn the call over to PAETEC's Chairman and CEO Arunas Chesonis.
Arunas A. Chesonis
Thank you Chris, good morning. 2009 was a most challenging time for everyone, but PAETEC had a very strong year. We exceeded the high end of our 2009 EBITDA guidance and hit the mid-point of our revenue guidance. But it is now 2010 and the start of a new decade for all of us. And before we move on let's take a brief moment to reflect on how we got here.
10 years ago, PAETEC had just made it through the Y2K scare and closed on our first large round of institutional equity financing, a $134 million round lead by Madison, Dearborn and Blackstone. We had decided not to pursue an IPO and not to borrow aggressively in the high-yield market. The market imploded 60 days later and so began the internet bust phase. Our management persevered, never restructured and grew the companies revenues organically in the double digits each year while reaching our goal of being free cash flow positive.
This quarters results mark the seven year anniversary of that achievement. Our streak of 28 consecutive quarters of free cash flow generation has provided PAETEC with financial stability and operation flexibility, especially during this latest economic downturn. Our senior executive team is different now than it was 10 years ago, as many of our founding officers have now retired, but 15 of our 20 current senior executives were with PAETEC early in the last decade in junior officer roles. They have all been battle tested in various sales and operations positions and another three of 20 have stayed with us after their companies were acquired by P. Only two of our 20 senior executives have been with us for less than five years, but we have been able to transition to an entirely new generation of PAETEC leadership while maintaining leadership continuity.
Our shareholder group has changed over the last 10 years as well. Even though MDP and Blackstone invested at the peak of the market in early 2000, they still averaged a double digit positive IRR when they finally cashed out seven years later. Our employees and insider (inaudible) still maintain approximately 20% ownership in PAETEC and we still grant stock options to every new employee who joins our team today to continue cultivating our ownership and service culture.
Our strong financial position in 2009 gave us a window of opportunity to set up our balance sheet for the long term, even when others in our industry struggle. Last summer and early last month we executed two bond deals that eliminated our senior secured bank debt and it's more restrictive terms and conditions. Our debt maturities are now pushed out until 2015 and 2017 with limited impact to our free cash flow generation abilities. We also took advantage of our historically low stock valuation and repurchased shares during 2009 with another million shares acquired just in the fourth quarter. In the future we will consider using some of our free cash flow to purchase our own notes and common stock if we conclude it is in the best interest of our company and our shareholders.
We were a net income positive company between 2003 and 2007 while we were a regional telecom carrier. Although we now have become one of the major nationwide alternative carriers with the acquisitions of US LEC and McLeod USA. Those transactions have also helped to temporarily place us in a net loss position. One of the less discussed benefits of those deals are the NOL's we were able to secure. We now have built up a sizable tax shield that should allow us to benefit substantially as we generate future profits and create additional value for our shareholders.
So today, we have the national footprint, the product portfolio, the balance sheet and the management team and experience to take us to the next level. Our Board of Directors last fall approved the third five-year plan in our company's history. Among other things, it calls for us to double our sales organization and return to our legacy PAETEC double digit growth rates of the past.
We made our first step toward that goal by adding 33 people to the sales organization during the fourth quarter. We currently plan to add 50 to 80 net new sales people to the company each year for the next five years. It is also important for us to return to profitability and we will seek to exit 2010 at a break even run rate and to be net income positive in 2011. Even with new market expansion, new product expansion and continued focus on sales organization expansion, we expect we will be able to maintain our positive free cash flow generation in 2010. We do believe that 2010 will remain a difficult year for the economy, but we are forecasting growth in our revenues and growth in our adjusted EBITDA.
Our 2011 growth initiatives will greatly benefit from one more year of teaching our East Coast offense to the sales organization in our Central and Western regions. They have quickly learned that marketing to our enterprise customers and fighting unfair with our IP data, software, hardware, security, data center and managed services solutions work better than trying to sell a commodity product bundle to a small business. We have seen continued improvement in our overall sales funnel and quantity size and quality of prospective clients.
As another component of our strategic plan we expect to be opportunistic relative to acquisitions. During 2010 we believe one or two small acquisitions to enhance our product portfolio will be likely. We will also look for attractive fiber assets in areas where we currently have many enterprise customers. Although there is much less competition today than 10 years ago, there are still many acquisition targets for us in the future. No need to hurry, patience will serve us well in M&A acquisitions in the future.
One of my goals in 2010 is to target investors who should be logical PAETEC shareholders. Many of these firms do not come to the usual investor conferences that we currently attend. Keith and I will travel to see them personally, to share the PAETEC story. Anyone who has been a patient, long term investor in PAETEC has been rewarded over the past 10 years. We have the nationwide platform and experienced team to generate significant shareholder returns over the long term at PAETEC. Let's now turn the call over to Keith to go through the details of the quarter. Keith?
Keith M. Wilson
Thanks Arunas, and good morning everyone. We're pleased to share our 2009 operating results and before we get started with the financial discussion I'd like to point out some of the fourth quarter highlights.
As Arunas mentioned earlier, being opportunistic in terms of network, PAETEC continues to invest in our network. At the end of the year, we acquired over 170 round miles of metro fiber in southeastern Florida. The Miami – Fort Lauderdale markets have been consistently solid markets for PAETEC and the expansion of our network in these markets should only make them stronger.
The customer profile continues to reflect the attractive relationships on which PAETEC has built the business. The average T1 per customer is now 3.7 which is 15% higher versus prior year period profile of 3.2 T1's per customer. The enterprise revenue which includes Core Network services revenue and Integrated Solutions revenue increased $2.1 million of seven-tenths of a percent in the fourth quarter of 2009 over the fourth quarter of 2008. Core Network services revenue is marginally down period over period due to usage based revenue pressure driven by economic forces. Strong Data revenue growth effectively offset that pressure.
Core Network services revenue per customer increased $107 or 5.3% to $2,139 in the fourth quarter of 2009 over the fourth quarter 2008. We continue to see a shift to larger customers that tend to be stickier relationships and allow PAETEC to generate better operating margins.
Core Network term remained relatively stable at 1% which was a 10 basis point increase from 2009 sequentially despite continued customer turn of low rent customers. This is a continued result of PAETEC's pricing discipline on smaller accounts enabling the organization to more effectively leverage a high tech service model. The 28 consecutive quarters of positive cash flow continues to be a hallmark of PAETEC's operating performance.
Now let's turn to the financial discussion. We'll first walk you through our income statement results on a full year over year basis, then the fourth quarter on a year over year basis, followed by a sequential quarter over quarter basis. Let's start with the full year over year analysis.
Full year 2009 revenues was $1.580 billion, a $9.8 million increase over full year 2008 revenue. Core Network services revenue for 2009 increased 3.1% or $34.3 million over 2008, primarily due to strong Data revenue growth and the inclusion of our five USA results for the full year.
Core Carrier services revenue for 2009 increased 2.5% or $4.6 million over 2008, and Integrated Solutions revenue of $61.7 million increased four-tenths of a percent or $200,000 over 2008 due to growth in equipment sales.
2009 adjusted EBITDA increased 8.1% to $256.9 million over 2008 adjusted EBITDA and exceeded the high end of our guidance. Adjusted EBITDA margin improved to 16.3% for 2009 compared to 15.1% for 2008. Adjusted EBITDA improvement was driven by higher quality revenue during 2009, resulting in higher gross margins as well as strong cost control. Gross margins for 2009 increased to 50.5% from 50.2% during 2008 due in part to attrition of customers purchasing lower margin products and the positive effects of network grooming efforts.
SG&A expenses for 2009 were $540.8 million, excluding stock-based compensation of $18.8 million and decreased 1.7% or $9.4 million in 2009 from 2008 due to initiatives instituted by management over the past several quarters to better align costs more closely with the revenue performance and expectations. As a percentage of total revenue, SG&A expenses excluding stock-based compensation were down 80 basis points to 34.2% for the full year 2009 compared to 35% for full year 2008.
2009 net loss was $28.7 million and exceeded expectations and compared favorably to 2008 net loss of $487.9 million. 2009 net loss had two significant items, which should be highlighted. A contributing charge of $17.9 million for debt extinguishment and related costs which included a swap termination charges associated with the June refinancing along with charges attributable to the discontinuance of hedge accounting as a result of the January debt refinancing. And an offsetting benefit of $7.2 million associated with the Iowa Department of Revenue settlement.
Interest expense for 2009 increased 70 basis points to $74.1 million from 473.7 million for 2008. The increase in interest expense is primarily due to higher weighted average interest rates following PAETEC's issuance in June 2009 of 350 million aggregate principal amount in it's eight and seven eighths senior secured notes due 2017.
Now let's turn to the fourth quarter year over year financial analysis. Fourth quarter revenue of $390.1 million decreased 5% or $10.1 million from the fourth quarter 2008 primarily due to decline in non-core basic telephone service or pods, lower carrier revenue and access revenue. Core Network services decreased just 10 basis points or $300,000 over 4Q08 as decreases in usage revenue were essentially offset by a 7.9% increase in PAETEC's Data revenue, generated principally by the sales of dynamic IP and MPLS VPN products. Core Carrier services revenue decreased 11.1% or $5.6 million for the fourth quarter 2009 from the fourth quarter 2008 due to lower usage based revenues.
During the quarter our Carrier group in conjunction with Network Services group made a concerted effort to accomplish two things. One, to free up network capacity in strategic markets by reducing the volume of lower quality traffic on our network and two, to increase the overall margin of our wholesale relationships by driving greater pricing integrity on all traffic streams.
Integrated Solutions revenue of $16.6 million increased 17.7% or $2.5 million over the fourth quarter of 2008 due to growth in hardware sales. PAETEC's bundled solutions including hardware and network services continues to offer a compelling holistic solution for customers. All three major product lines of Avias, Cisco and Allworx performed well.
Adjusted EBITDA for the fourth quarter in 2009 increase 8.2% to $65.2 million, over the adjusted EBITDA of $60.3 million for the fourth quarter of 2008. Adjusted EBITDA margin improved to 16.7% for the fourth quarter of 2009 compared to 15.1% for fourth quarter of 2008.
Cost of consult for 2009 decreased 3.9% or $7.9 million over the fourth quarter of 2008. Gross margin for the fourth quarter of 2009 increased at 50.8% from 50.1% over the fourth quarter 2008 due to a positive shift in revenue mix due to the attrition of customers purchasing lower margin products. SG&A expenses for the fourth quarter of 2009 were $132.9 million excluding stock based comp of $4.2 million and decreased 4.9% or $6.8 million for the fourth quarter of 2009 from the fourth quarter of 2008 primarily due to lower salaries and benefits. As a percentage of total revenue SG&A excluding stock based comp were 34.1% for the fourth quarter 2009 compared to 34.9% for the fourth quarter of 2008.
Net loss for the fourth quarter of 2009 was $2.4 million compared with a net loss of $114.4 million for the fourth quarter of 2008. Net loss for the fourth quarter 2009 reflected $7.5 million in debt extinguishment and related cost attributable to the discontinuance of hedge accounting as a result of the January debt refinancing. In the quarter PAETEC also benefited from a $6 million sales and use tax settlement related to it's existing Iowa Department of Revenue tax dispute. The net loss for the fourth quarter of 2008 primarily reflected a $15 million goodwill impairment charge and the establishment of an income tax reserve of approximately $104 million against PAETEC's deferred assets.
Interest expense for the fourth quarter of 2009 increased to $19.8 million from $18.9 million for the fourth quarter of 2008. The increase in interest expense was primarily due to PAETEC's June 2009 issuance of $350 million aggregate principal amount of it's eight and seven-eights senior notes due in 2017.
Now let's follow up with the sequential quarter over quarter discussion. Total revenue for fourth quarter 2009 decreased 1.4% or $5.5 million from the third quarter of 2009 revenue. This decrease was largely due to the fourth quarter 2009 having three fewer business days that resulted in lower usage based revenues on both the Core Network services and Core Carrier service revenue streams. Core Network service revenue decreased 1.1% or $3.2 million from the third quarter of 2009. Core Carrier services revenue for 2009 decreased 1.5% or $700,000 from the third quarter of 2009. Integrated Solutions revenue for the fourth quarter of 2009 increased 1.9% or $300,000 over the third quarter of 2009.
Adjusted EBITDA of $65.2 million for the fourth quarter 2009 represented an increase of 1.6% over adjusted EBITDA of $64.2 million from the third quarter of 2009. An adjusted EBITDA margin was 16.7 for the fourth quarter of 2009 compared to 16.3 for the third quarter of 2009.
Fourth quarter 2009 cost of goods sold decreased 3% or $2.5 million from the third quarter yielding a 50.8% gross margin that remained unchanged from the third quarter.
SG&A expenses from the fourth quarter of 2009 were $132.9 million excluding stock based comp of $4.2 million and decreased $2.9 million or $4 million from the third quarter. As a percentage of total revenue SG&A expenses excluding stock based comp decreased 4.1% from 4.6% from the third quarter of 2009. The decrease in SG&A was primarily attributable to lower salary and benefit expenses.
Net loss for the fourth quarter of 2009 was $2.4 million compared to a net loss of $6.5 for the third quarter. The fourth quarter net loss included the impact of a $7.5 million charge attributable to the discontinuance of hedge accounting as a result of the refinance in January and a $6 million benefit from the settlement with the Iowa Department of Revenue tax dispute settlement. Interest expense of $19.8 million for the fourth quarter was unchanged from the prior quarter.
For the full year 2009 capital expenditures were $121.5 million, an increase of $2 million from the full year 2008. As a percentage of total revenues capital expenditures were 7.7% for the full year of 2009 compared with 7.6% for the full year 2008. Just a 10 basis point increase.
Capital expenditures for the fourth quarter were $36.6 million or 9.4% of total revenue compared to $32.1 million or 8% of total revenue for the fourth quarter of 2008. Capital expenditures for the fourth quarter of 2009 reflected project timing related to IP network enhancements, fleet upgrades and PAETEC's previously announced Data Center build out.
Now on to cash flow and liquidity. PAETEC had a year end cash balance of $152.9 million compared to a third quarter cash balance of $141.5 million, primarily the result of higher operating cash flows that were partially offset by the early voluntary repayment of $10 million of loans outstanding under PAETEC's revolving credit facility and $3.9 million in continued purchases of PAETEC's common stock under the companies stock repurchase plan approved by the board in September 2009.
Cash flow provided by operations increased to $62 million in the fourth quarter of 2009 from $40.8 million in the third quarter, and free cash flow for the fourth quarter of 2009 was $28.7 million which represented the 28th quarter of free cash flow generation. Due to the timing of capital expenditures free cash flow for the fourth quarter decreased 21.5% from the third quarter.
Full year net cash provided by operations of $152.2 million remained stable in 2009 compared to full year 2008. Full year free cash flow was $134.5 million, a 14.5% increase from $118.2 million for the full year of 2008. As of December 31, 2009 PAETEC had $920.2 million in outstanding debt which was comprised of $270.2 million principal amount of term and revolving loans outstanding under it's senior secured credit facility, $350 million principal amount of eight and seven-eighths senior notes due in 2017 and $300 million principal amount of nine and a half senior notes due in 2015.
Subsequent to year end 2009 PAETEC opportunistically issued additional $300 million principal amount of eight and seven-eights senior secured notes due in 2017 and applied most of the net operating proceeds to the full repayment of the company's term loan and revolver borrowings under it's senior credit facilities. We very much appreciate the support of the debt capital market investors who provided us a long term debt instruments which affords us the appropriate tactical flexibility to enable continued growth for the company.
The common stock repurchase program under PAETEC's September 2009 stock repurchase program we repurchased a total of 1,028,200 shares of common stock for an aggregating cost of $3.9 million or $3.80 average cost per share in the fourth quarter of 2009. Under our current repurchase plan and debt agreements we have the ability to repurchase another 16.2 million of common stock through December 31, 2010.
Under PAETEC's August 2008 stock repurchase program which expired in August 2009, PAETEC repurchased approximately 6.8 million shares of common stock for an aggregate cost of $14.5 million.
Now onto the full year 2010 outlook. As we discussed during our last earnings call, we are pleased to provide full year 2010 guidance as part of our ongoing efforts to provide useful information to our investors. We expect revenue of $1.59 billion to $1.63 billion or a 1% to 3% growth rate and adjusted EBITDA of $260 million to $275 million which is over 7% on the upside.
These expectations for 2010 assume among other matters that there is no further significant decline in economic conditions and that there are no significant changes in the competitive or regulatory environments.
That concludes our prepared remarks and I'd now like to ask the Operator to open up the call for questions.
Question and Answer Session
Operator
Thank you sir. (Operator's Instructions) Our first question comes from the line of Frank Louthan with Raymond James. Frank, you may proceed.
Frank Louthan - Raymond James
Great. Can you give us an idea of when you are expecting to return to top-line growth in 2010? I mean, you're clearly guiding to it as more of a second half issue or is it going to be a little earlier? And what are some of the main areas of your revenue that you see that are changing that are driving that success back on the top-line? Thanks.
Keith M. Wilson
Frank, with all due respect we don't give quarterly guidance. I think we're giving probably as robust a guidance as any of our kind of peer group here in giving you the full year both on revenues and EBITDA so I'm a little bit hesitant to offer you quarterly guidance which you're sort of asking for. I think what we've said publicly in the past and we'll say again, we think the second half of the year is going to be stronger than the first half, but I think we feel good about the numbers that we're putting out there and we expect it to be somewhat incremental as we go through the year.
Arunas A. Chesonis
Frank, the second part of your question, on the type of revenues or what's sort of the trigger that's going to create this revenue growth it's the evolution of the types of sales we're getting right now. If you took a snapshot of our fourth quarter sales in 2009 versus 2007, you would see many more large enterprise customers with multi-site locations. So instead of doing three or four MPLS nodes with the northeastern based company we're seeing 20, 30, 50, 70 location nationwide enterprise customers that are still sort of underneath the radar of the large encumbance but still have a lot of telecom and IT needs that they need serviced, so it's that multi-site MPLS dynamic IP SIP trunking customer that's really driving the growth for us.
Frank Louthan - Raymond James
Okay, great. That's very helpful. Just a follow-up. What is it you think you're seeing at the smaller end of the business that's giving you a little bit more success in the market – and I mean by the market the RBAC's clearly are dragging on the enterprise side. What is changing, are you seeing anything in the economic dynamics of your customers, are they starting to grow a little bit more or is it just expanded sales? Because we generally see a little bit earlier signs of recovery with the smaller carriers – is there anything in particular you can point to to tell us why you're being more successful there?
Arunas A. Chesonis
I think there's two things for me, and then Keith you can jump in, as he always does. On a distribution side, having that national footprint we're getting much more attention from the channel and agents and our partners. So where we were only getting maybe 5% or 10% of their wallet share and their mind share going after all of their prospective customers and their clients, we're getting a higher percentage of that. So they do a pretty good job, and again a third of our new logo sales come from the channel as opposed to our own direct sales people, so they're being pretty successful doing some things for the smaller customers and they're attaching themselves more to PAETEC, especially with some of the changes in channel relationships and commission programs that other carriers have imposed on them over the last 12 months.
And I think on the direct side we're seeing at the smaller customer segment the IP simple bundle that we've been offering has really gotten some strong legs. And again, that;s our Allworx IP PBX system bundled together with the network services on a converged basis whether it's voice or data or combined, and we do that on an ownership basis or a rental basis and people have really gotten excited about that opportunity because of the tough economic times. I mean, they can't afford some of the newer higher end equipment out there – you know we have a very cost effective solution so I think it's a combination of those two issues.
Keith M. Wilson
Yeah, I mean Frank – you know one of the other things that we've heard and I know you guys have heard as you've kind of gone on some of the other competitors calls the reality is that there are a lot of folks who are scaling back their employer resources by the tens and twenty thousands, that tends to take away from the service models that I think our customers really value, and I think you know that from their confirmation – that this is a very tough segment to serve, and you really have to be committed to serving that medium size enterprise customer in terms of the service model, the product offering, the bundle and the discipline to really kind of work with them over the long term to be successful there and that's largely why we've had historically some of the strongest term metrics in the industry and we've got a very attractive customer profile. So I think it's hard work, it's part of the reason why we've encouraged folks to really look at this as kind of long term model, because it takes a lot of discipline and I think generally we feel really good about our position in that market.
Frank Louthan - Raymond James
Great, thank you.
Operator
And our next question comes from the line of Michael Funk with Bank of America Merrill Lynch. Michael, you may proceed.
Michael Funk - Bank of America Merrill Lynch
Great, thanks so much for taking the question. I guess I'll ask a question about the sequential changes during 2010 in a different way. What was baked into the high end of the guidance for 2009 that didn't occur and how would that variability affect 2010 results and then second, as some of your competitors talk about unique shape of the spending pattern during 4Q relative to historic results – maybe you can just comment on that? And then finally one last question, as you're talking to your customers, and addition color on their spending plans for 2010 would be helpful.
Arunas A. Chesonis
Thanks Michael. For me the biggest change to the upper end of the guidance for the revenues for 2009 was the discipline that we took with regard to our wholesale carrier business – there was a lot of long distance usage sensitive traffic, especially the short duration calls. And I think that's something that everyone may not be aware of – you know it's pretty costly to deal with a lot of toll free customers that have five, 10, 15 second duration calls, and we actively did not choose to pursue those clients and their pricing demands over the last six to nine months, and some of that business left the network. We didn't want to clog up the network with that kind of low margin business. So where other parts of the carrier business did well, the private label and the IP traffic, it was the LD Auerbach (ph) business that could have given us some upside to those revenues.
Michael Funk - Bank of America Merrill Lynch
Okay. Maybe, on the shape of the spinning pattern during the 4Q, did you see any kind of pull back and spending related to customers reaching their budget and then delaying spending til 2010, did anything happen like that?
Arunas A. Chesonis
No, not really, Michael. I mean, it’s been sort of a continuation of the last 9-12 months. It was nothing different. I think on the – we were able to take advantage from our perspective on the capital side where we got some deals year end from software providers, equipment providers. And that’s where we saw the Cap Ex pick up a little bit as well. We were opportunistic for their year end. But we haven’t really seen much difference in our enterprise customers.
As far as 2010, I think it’s going to be more of the same. I mean, they are more optimistic. We’re out in the field all the time with people. They are talking about actively pursuing a limit number of projects. But no one’s going into it, a significant huge expansion with employs that we’re seeing right now.
Keith M. Wilson
The ISG line really reflects kind of more specific purchases in the quarter, per say. And that line item held up reasonably well. We actually saw really good demand there across all of our various segments, software included, which is really a high priced ticket, that continued to be pretty strong in the fourth quarter.
Michael Funk - Bank of America Merrill Lynch
Great. Thank you, guys.
Operator
And our next question comes from the line of Simon Flannery of Morgan Stanley. Simon, you may proceed.
Simon Flannery - Morgan Stanley
Thanks very much. Arunas, you talk a little bit about the sales additions, about 33 new sales people. What’s the sort of typical ramp in terms of productivity to get those up to, sort of, your average levels? And then, maybe Keith a couple of things, any big change to interest expense in ’10 given the refinancing. And some of the puts and takes around 2010 Cap Ex versus ’09 give the data center spend. And I think you’d also referenced some capacity, needing to get some new capacity back from some of your grooming efforts. Thanks.
Arunas A. Chesonis
Thanks, Simon. The sales ramp is pretty similar to what we’ve seen in the past. It’s usually 9-12 ramp. As we go up market, we’re hiring more major account executives, national account managers that tend to be that 6-12 month ramp versus a 3-6 month ramp for the account executives.
There is a little bit of a nuance there where we’re hiring additional junior sales people to attack certain segments of our existing base to really farm that base on an accelerated basis from what we’ve been doing in the past with our account development team. So, they will have a faster ramp on existing customer sales. But the ramp for the new logos will be sort of averaging that nine month phase for new high end sales people.
So that spends for the second half, I know.
Keith M. Wilson
On the interest expense, if you look back in our tables on the release we do a reconciliation for the EBITDA guidance. And what we put in there for interest expenses, expected interest of about $90 million. So that’s going to be a little bit higher than what you’ve got for run rate today. Some of that is inclusive of debt amortization costs for the issuance. But I think that’s a pretty good working number, that again, will be a little bit higher than the last couple of quarters run rate just due to that issuance.
And then the second piece, on the Cap Ex side. We didn’t give Cap Ex guidance here. But historically we’ve offered to you guys to think about it, 7%-9% of revenues. We think we can stay within that bandwidth comfortably with all the various initiatives that we’ve got in place. My guess is you’ll probably see a number a tad higher than the percentage you saw this year. But I think it’s going to be pretty close to the midpoint.
Arunas A. Chesonis
And Simon, on the data center piece. We’ve decided where the other markets are going to be outside of the Boston data center. That’s really the only new space that we’re leasing. It’s a long term lease. It was old Bell company backup data center. Fantastic facility and the perfect location for us, for New England. The other three data centers will be Milwaukee, Huston and Phoenix. They’ll all be within existing space that we acquired through the McLeodUSA transaction. And they had a ton of space in the central office. So it will be very cost effective, inexpensive to build out the data center capabilities in those three markets for those three additional regions.
I think we’re – for us, we’re going to be opportunistic. We’re going to be careful, but it’s going to be on the middle mile, on the last mile fiber assets. Something that Keith mentioned earlier in his remarks that we’re looking to improve the margins and drive more enterprise connections into our physical networks. So that’s where the Cap Ex may creep up a little bit if we’re successful this year.
Simon Flannery - Morgan Stanley
Great. That’s helpful, thanks.
Operator
And our next question comes from the line of Donna Jaegers of D.A. Davidson. Donna, you may proceed.
Donna Jaegers - D.A. Davidson
Thanks for taking the question. I guess one big question, you can talk a little more about how the sales trends are going in the McLeod regions? Are you starting to pick up traction in those regions now that you have the sales force in place?
Arunas A. Chesonis
Yeah, Donna, I would tell you that when you look at the two regions, the central region, which was historically the core McLeod territories where they had spent most of their investments and been there the longest, in the fourth quarter those markets tended to do fairly well. We’re approaching, sort of, 90% of our quota in those territories. So that we’ve seen the progress we were hoping to see.
In the western region where those were either relatively ignored or newer markets for McLeod, it’s been very much dependant on the management in each of those areas. So where Houston has done well and overall Texas is up for the year, there are some other markets that are still newer and are going through their normal transition. So I would say central, good progress and selected western progress.
Donna Jaegers - D.A. Davidson
Okay. Great. And then on the POTS and carrier churn, both of those popped up a little bit in the fourth quarter. Is that sort of the trend that we should forecast going forward or is there any sort of one time event there?
Keith M. Wilson
No, Donna, there’s no real one time event there. I mean, I think we had mentioned last quarter that we were pretty pleased with where those levels were trending and that we thought there was risk that there might be some lumpiness there. I don’t think we viewed the – especially on the POTS, any of those numbers being tremendously out of line. I thought last quarter was exceptionally low. So I wouldn’t necessarily saw you should take the 2.8% on the POTS as we go forward. I don’t think it’s totally out of the bandwidth either. So, we think kind of that mid twos range is a very reasonable range for the POTS, plus or minus either way.
And I think on the wholesale side, especially in light of customer, there are so relatively so few customers in there that that spike in churn that you saw last quarter really attributed to less than five extra customers churning off for the quarter.
Donna Jaegers - D.A. Davidson
Okay. Thanks, Keith.
Operator
And our next question comes from the line of Dutch Fox from FBR Capital Markets. Dutch, you may proceed.
David Dixon - FBR Capital Markets
Actually, it’s David Dixon here. And thanks very much. Keith and Arunas, I was wondering if you could just circle back to the Enterprise South activity that you’re seeing today. One thing you mentioned was that you’ve seen some evidence, I thought, of the Auerbach, kind of, pulling back and focusing on the higher end of the Enterprise space. What we’ve been hearing based on our exit interviews with Verizon, in particular, is that that’s been a relatively new phenomenon. So I was just hoping you can maybe touch on that a little bit more. Because from my perspective what we see is it’s been (inaudible) positioning in national scale. It’s been driving this momentum and I would have thought that this would have been an incremental opportunity, just relative pull back by the Auerbach more recently.
Keith M. Wilson
Yeah. David, I think that as Arunas talked about, the big focus (inaudible) right now is really hitting folks across the country, kind of hitting the deliverables in terms of just selling the right (inaudible) product set. And being able to hit their quota across the board for the full complement of sales folks. And while we see different shifts in Auerbach patterns from time to time, and now we think is pretty advantageous, we have typically focused on our own productivity and our ability to be effective and what we know how to do, as really being the key metric there. As we’ve talked about our penetration in the market still, is in the kind of low 2% range, so regardless of what the Auerbach strategy is – I know some times this is difficult to kind of synthesize, but regardless of what their strategy is, if we’re doing our job well we should see a fair amount of success. We do think that some of the pull back that we’re seeing right now should provide incremental benefit for the company. But I think it’s incumbent upon us to continue to do our job well for the long term success of the company.
Arunas A. Chesonis
David, I still think that where a lot of the confusion comes about when you’re talking and trying to compare alternative carriers and Auerbach focus on the Enterprise, is how they define the size of enterprise. If someone spending $400,000 a month, that’s an enterprise customer. For us, that’s a large enterprise customer. For them it’s sort of medium. Going after the $15, $20, $30,000 a month, 25 site firm, scattered around the United States, that’s not something that they focus on with their direct sales force. They may outsource that and allow the agent channel to go after that business. But we are going at that kind of customer with both channels, very hard. And I think it’s a definitional issue. But, if anyone at the Auerbach is telling you that they’re very focused on the $25,000 a month multi site enterprise customer, that scale, and that would be – I don’t think that would be something that you should put a lot of stock into.
David Dixon - FBR Capital Markets
Now that’s very helpful. Thanks very much.
Operator
And our next question comes from the line of Robert Dezego of SunTrust Robinson Humphrey. Robert, you may proceed.
Robert Dezego - SunTrust Robinson Humphrey
Thank you. Just a quick question on the declining SG&A we saw in the quarter, from third to fourth quarter. You mentioned a lot of the lower salaries and benefits in the fourth quarter versus the third quarter. I was wondering if that’s more of a one time change that you have in the quarter? Will that continue to decline heading out into 2010? And if the fourth quarter run rate SG&A is a fairly good number to think about heading into 2010?
Keith M. Wilson
It’s a good question, Robert. I think that as Arunas talked about, we did bring on by the end of the quarter another 33 sales folks. Any incremental headcount for this year is going to be primarily focused on the sales side. But I do think that the run rate is probably a little bit on the lower end. I wouldn’t say it’s off the mark, obviously it’s going to be target for us. But I think you should probably expect that number, especially in the first quarter, will be a little bit higher.
I think as many of you know, you do have incremental tax expense in the first quarter associated with employees for FICA and things like that which tend to spike that up a little bit. But I would say that the run rate on an SG&A stand point probably be a little bit higher just as we bring some additional heads onto the business.
Arunas A. Chesonis
And, Robert, as you go through the normal final integration of the McLeod asset and systems into the overall (inaudible) systems. We are recovering positions that will not need to be duplicated any more when you have one consolidated network, one consolidated OSS. But we are redeploying those dollars into additional sales heads or other back office parts of the organization, such as project management, advanced data engineering and areas where we see the fastest growth. So you won’t see a lot of payroll increase during the course of 2010, but you also won’t see any kind of significant work force reduction.
Robert Dezego - SunTrust Robinson Humphrey
Right. So when you talk about the lower salaries and benefits sequentially, was that something that you – you went out there and lowered the benefits and salaries of specific employees or is this just less – I’m trying to figure out what happened in third to fourth quarter on the salaries and benefits and what happens going into 2010 in that area?
Keith M. Wilson
It’s a couple of things, Robert. Getting pretty granular, but I mean, at the end of the day you have less business days, so less payroll cycles. We have been incurring for bonus during the year. We accrued a little bit less for bonus in the fourth quarter. And we had more heads at the end of the quarter than we started the quarter with. So, I mean, nothing nefarious, it’s just kind of typical machinations of the business. You just have a number of them together that produced a good number there.
Robert Dezego - SunTrust Robinson Humphrey
Okay, great. Thank you very much.
Operator
And our next question comes from the line of Tim Horan from Oppenheimer. Tim, you may proceed.
Tim Horan - Oppenheimer & Co.
Well, thanks guys. I think your revenue term is up a little bit on the core network services. Can you give us just a little bit more color on that? Where do you think we are in the process here? Maybe Arunas you can touch on sales force supported (inaudible). I assume it’s kind of bottomed and it is improving being that you’re adding headcount here? Could you maybe give us some color on that also? Thanks.
Keith M. Wilson
On the revenue churn, again, it spiked up a little bit. I think what we had talked about this last quarter, I’m not sure if it was you or one of the other folks who asked, is this kind of the trend line that’s going to head south. And I think we said, we hope so but we wouldn’t be surprised to see a little bit of bouncing around here. I think we still feel good about the 1% churn rate. We continue to try and drive that down. But I think one of the big things that we continue to look at is the integrity of the pricing. So as customers come to us and seek for – to push the margins a little bit too low on a renewal, it’s something we’re going to have discipline on. And I think you’ve seen the improvement both in the gross margin and the EBITDA margin by doing that. So while none of us love to have higher churn levels, I think 1% is a pretty respectable number. And so long as the margin’s heading in the right direction we think it’s the right thing to do for the business despite losing the revenue.
Tim Horan - Oppenheimer & Co.
And then just on the customer churn there, I know you said it’s a small business customers mostly. But who are they using? Where are they going to and what are the average (inaudible) on these type of customers?
Keith M. Wilson
It ranges across the board. I think the statistical average of the customers that we lost during the quarter was in the $700 range. So they were theoretically seeking to go lower than that on a renewal. And that’s kind of the average. So I mean, you’re talking about most likely a 1-1.5 T1 type of customer. And for all intense and purposes they’re heading back to the Bell. Occasionally they might be going to another competitor. But similar to, kind of, our 90 10 breakout that we talked to you guys from the competition standpoint as you do exit interviews, the majority of the folks would be going back to the Bell, or the Bell competitors like Verizon business or AT&T Solutions.
Tim Horan - Oppenheimer & Co.
Thanks. And really, just on the sales productivity?
Arunas A. Chesonis
For us, because we added so many sales people in the fourth quarter in some of the other newer markets, and we churned some of the lower performing folks in the third quarter, that offset the increased productivity in some of the central areas. And in the fourth quarter the east region did very very well. They actually were above their 100% of the quota. And their productivity has been very solid. So they both kind of cancelled each other out. So I think overall we’re kind of around the same productivity fourth quarter versus third quarter. But we watch that every single day, every single week. It’s one of the areas we’re most aggressive on. But it’s really tough to give you more detail than that right now.
Tim Horan - Oppenheimer & Co.
But it’s not like you feel fairly confident that it’s set to improve this year based on you guidance and underlying trends?
Arunas A. Chesonis
Yes we do.
Tim Horan - Oppenheimer & Co.
Thanks.
Operator
And our next question comes from the line of Bob Kirchoff of Credit Suisse. Bob, you may proceed.
Bob Kirchoff - Credit Suisse
Quick question, in your press release and on your comments you talked about successes in your data offerings with the IP and D10. Can you give us any detail on kind of the type of customer that you’re having, that you’re seeing these successes with and if there is any specific types of day to day they’re using? And also if there’s any kind of difference in what you’re seeing, sort of the churn from kind of high data users versus non-high data users? And last, I know we talked about it before, on the revenue for T1, which has been declining, any trends that you think will either accelerate or decelerate that during the year?
Keith M. Wilson
The data customers that are coming on are extremely attractive. They’ll range anywhere from a nationwide retailer that might be seeking 300-500 sites to a regional firm that’s looking for 5-20 type sites. I think statistical average is coming in between 15-20 nods per. We have a really robust MPLS TDM products. So folks are using that as a real private line replacement, ATM frame and point of sale replacement. And using those sorts of things holistically. Typically we’re seeing equipment sales coming with that as folks are looking for network upgrades. And it’s either coming from our vendor partners who are brining us in on the agent side whether they’re getting the equipment sale. Or it’s coming from us, if we’re delivering the equipment solution and then we’re taking on the network services behind that. So it’s a very attractive customer. These average contracts tend to be closer to five years than three years. But they’re also a large reason why the average revenue for T is coming down, because those units tend to come in more on a flat rate basis. Not exclusively but more typically on a flat rate basis and they tend to be statically lower in terms of average revenue per T, because of the nature of the product set. But the customers continue to be very attractive, very sticky. Behavior wise they are much stronger in terms of the churn dynamics than the classic integrated TDM customer. And really it’s the kind of folks that we want to have as part of our portfolio. Arunas did you want to -
Arunas A. Chesonis
Yeah. I think, Bob, when you’re doing multi site data deals for people and installations that take several months with multiple sites, nothing goes perfect and it is messy. And once people go through that process than they’re happy with how they’ve tuned the network, it’s not something that people want to go and do again right away. It’s like going to go get root canal another time. And it’s just something that you want to stay where you are. So they do tend to be much stickier. I think the typical client right now, the types of data services that they’re most interested in are in areas where they can use for the conversion networks and they can save money. When you’re talking about the capital efficiency and the network savings on (inaudible) versus separating out your traditional TDM network trunks, various savings there if you’re willing to go with the new technology. So again, it’s being driven a lot by people’s needs to save money at the end of the day.
The types of customers that you’re seeing, they do range. But we are seeing the multi site financial institutions, regional banks, credit unions, multiple site health care providers. Trying to connect their hospital networks to all their clinics, doctors’ offices, other practitioners. We’re doing a lot more with people who have enhanced toll-free services. Surprisingly enough you think that the voice is dead in this country as a revenue stream, but people do a lot of toll-free services for their customers. And they’ve been shifting into virtual telephone number arrangements with us so they can give you that local telephone number presence even though they’re in 84 cities around the country. So it’s a combination of things, Bob. There’s not just one thing that we’re doing for people right now. But at the end of the day it’s flexibility in the network, capital savings efficiency and overall network savings is what’s driving them.
Bob Kirchoff - Credit Suisse
Okay. That’s great color. Thank you guys.
Operator
And our next question comes from the line of Brett Feldman of Deutsche Bank. Brett, you may proceed.
Brett Feldman - Deutsche Bank
Thanks for taking the question. Just a sort of follow up on some of the earlier discussion about the sales force. Obviously you’ve outlined some plans to increase the size of the sales force. But I think you’ve also talked in the past about sort of enhancing the skill set of your rep so that they are a bit more tech savvy. I know that’s sort of a generalization. But if I look your sales force a year ago and I look at it now, it’s about the same size, a little bit bigger. How would you characterize where you are in this process? What percentage of your team has the skill set your looking for but maybe is just in a process of getting ramped? And where were you a year ago? Where are you now? Where do you think you’re going to be by the end of this year?
Keith M. Wilson
That’s seven questions there, Brett. Let’s see, I would tell you that it’s not just us but other carriers in the industry have a lot of work to do because our sales forces aren’t as comfortable as they should be with the newer IP technologies and what they enable. So we’re embarking on sort of a three, four year training program to accelerate there. We are hiring a different type of person. The skill set of the people that are coming on board are much more IT comfortable. They’re much more comfortable talking to the CIOs then just the director’s of facilities or managers of telecom. I would tell you, about half our sales force is where they should be at this point in time right now. But it’s a moving target. I mean, it’s going to take us a couple of years for everyone to get comfortable, especially in the newer product lines. There aren’t that many experts in any carrier on IP security systems right now. And that’s an area all of us are going to work on.
On virtualization and (inaudible) computing opportunities, and all the managed services, they enable. They’re just a handful of people in any given company that are really comfortable with that. But that’s just sort of normal training evolution.
I would give us about three or four years before 90% of our sales team really feels comfortable talking to CIOs with all the products we’re going to have in the future.
Brett Feldman - Deutsche Bank
Okay. That’s great. And then just slightly different question. You talked about the potential to do one to two deals this year. Have you thought about how you would prefer to fund them? Do you have the desire to primarily do this in cash? Are you thinking about issuing shares or does it depend on the size of the deal?
Keith M. Wilson
The focus, Brett, especially on the smaller product side is really going to be cash. We’ll typically look at an upfront payment with a multi year earn out if we think that there’s real growth dynamics to the business and the entrepreneurs that we’d be acquiring believe that. And we want to make sure that we retain them. So we’d look at a number of different ways. But we try and be fairly creative with those kinds of transactions. And again, I think we feel like our stock is undervalued and that’s why we’ve been buying it. And we are very disciplined in terms of issues stock, especially for the smaller transaction.
Brett Feldman - Deutsche Bank
Is it a priority to generally reduce the share count over time? Is that part of the reason why you have a buy-back program in place?
Keith M. Wilson
I think there’s really a number of different goals on the buy-back program. One, we fundamentally believe that the stock’s undervalued. So we think it’s appropriate for us to execute that plan and show support for the stock because of our perspective of where it’s set. I think long term we would like maybe stronger technicals within our stock. We do still have some large groups that hold blocks. I don’t want to say in and of itself, we want to have a smaller share count. We’d like a higher quality float is, I think is probably the better way of saying it, as opposed to a lower share count.
Brett Feldman - Deutsche Bank
Okay, great. Thanks for taking the questions.
Operator
And our next question comes from the line of Todd Morgan of Oppenheimer & Co. Todd, you may proceed.
Todd Morgan - Oppenheimer & Co
Thank you, good morning. With McLeod under your belt you now have a pretty large market presence in many different markets. Can you talk about the number of multi region – the volume of multi region business that you’re doing? And is this the kind of proposal – who are the real competitors you see when you’re looking at that kind of proposal?
Keith M. Wilson
Todd, you’re absolutely right. I mean, that’s exactly who we’re targeting right now. It still tends to be 80%-90% of the time the people that we’re really going up against are AT&T rise and Quest. It’s a large encumbrance. And it’s more AT&T and Verizon. Quest, local offerings outside of their US West territory are fairly weak. And it’s really AT&T and Verizon our top two competitors.
On the Cable side you really don’t see the multi region national deals being competed against by Time Warner Cable and Comcast and others. They’re not in that stage of their product life cycle lead at this point. And once in awhile you come across one of the other three national providers. Maybe Level 3, maybe TW Telecom, maybe XO. But again, the majority of the time it’s AT&T and Verzion.
Todd Morgan - Oppenheimer & Co
That’s helpful. And do you have a sense of how big a part of the volume that is at this point?
Keith M. Wilson
We do. I don’t have that right in front of me.
Arunas A. Chesonis
Todd, we can circle back up with you on that offline.
Todd Morgan - Oppenheimer & Co
Okay. No problem. Thanks.
Operator
And our next question comes from the line of Michael Rollins of Citi Investment Research. Michael, you may proceed.
Michael Rollins - Citi Investment Research
Good morning, just a couple of questions. First, do you guys do any capacity sales for cash in advance? And the second question is, if you look at your revenue by geography, I’m not sure if you described it in this way, but is it instructed to think about what the total change in revenue, year on year wise? So if you look at the – I guess, total of 390 down 2.5 year on year. Is there a significant different in the northeast region versus some of the other regions? Thanks.
Keith M. Wilson
Yeah. Michael, so capacity sales in advanced, do you mean us purchasing capacity in advance or us selling capacity in advance?
Michael Rollins - Citi Investment Research
You selling capacity in advance?
Keith M. Wilson
Only in the context of IRU sales?
Michael Rollins - Citi Investment Research
Yes.
Keith M. Wilson
Yes. I mean, we do some IRU sales. We have some proposals out there. It’s not a huge part of the business. But we do, especially in the places where we have significant fiber capacity. For places like Texas and the Midwest, so you see a little bit of that.
Michael Rollins - Citigroup
Can you give us a sense in dollars of what it might have been in the fourth quarter and what it might have been for the full year 2009?
Keith M. Wilson
You know what? We have it, I am hesitant to put it out because it is just not one of the breakouts that we have here. Suffice to say that it is not a significant number, which is why we don’t break it out.
Michael Rollins - Citigroup
Ok, thanks.
Keith M. Wilson
Alright, and then the second question was total change year-over-year or period-over-period in revenue streams. Absolutely very significant behavioral differences between regions depending on the specific revenue make up of the given regions.
The North-East and South are clearly the stronger markets compared to the Central and West, there’s no question, but within those markets, within a Central or a West there are very different behaviors within those markets as well. So it’s much more independent, each of those 84 market behaving in their own way.
I’ll give you a positive example, up in New England, our Boston suburban markets averaging over 17% growth year-over-year, whereas other markets in New England are not growing at double digits. So it has less to do with the specific regions as it does the individual market dynamics
Michael Rollins - Citigroup
And I guess I wanted to follow, if I look at the unit volumes that you disclose, for example in network services where the average account declined about $1250 third quarter to fourth quarter of ‘09. Is there a way to think about what the change of higher value or what you might call strategic customers were in the quarter versus this change in maybe smaller and less strategic customers?
Arunas A. Chesonis
I understand what you’re trying to get at Michael, I mean at last year’s investor conference in May we went through that breakout by type of customer whether they’re strategic and key versus the smaller enterprise single or two-T customer and we plan to do that breakout again in May at this year’s investment conference, but we’re not ready to share that with you today.
Michael Rollins - Citigroup
Thanks very much.
Operator
And our next question comes from the line of Colby Synesael of Coffin Brothers. Colby, you may proceed.
Colby Synesael – Coffin Brothers
Thanks for fitting me in. How much of EBIDTA improvement in the function of reduced benefits and salary, maybe more specifically bonuses verses more permanent cost cutting or synergy that you’re getting from McLeod and I’m talking specifically about 2010 EBIDTA guidance? Thanks.
Arunas A. Chesonis
Colby, just so I understand the question. How much of 2010 EBIDTA performance is going to be due to cost cutting on the McLeod side versus bonuses, is that what you’re asking?
Colby Synesael – Coffin Brothers
Essentially if you look at your guidance at least on the high of $275 million, versus what’s happening with revenue. I’m just trying to get a better sense of the improvements that your making.
Are they primarily a function of the reduced salary and benefits that you called out, as well bonuses would be included in that, versus more permanent cost cutting initiatives that are continuing at the company, more specifically you mentioned some synergies are still there to be had within McLeod.
Arunas A. Chesonis
I think, Colby, I understand your question. I think it’s a combination of many additional factors than just those few. It’s where we see the turn dynamics to the rest of 2010, where we see the up-sell of existing customers, the sales productivity improvements, the additional network grooming efforts.
There are additional network savings that are going to be gained by finalizing, just as an example, our least cost routing through the IP networks and doing that combination this year. There are some efficiencies on the SG&A side, it’s a combination of things, it really is difficult to place in any two or three areas.
Keith M. Wilson
I’ll give you an example, Colby, if you took your runway gross margin versus your statistical average for the whole year and were able to maintain that gross margin level, it’s $5 million in stronger performance next year, year-over-year, assuming no further improvement in the growth margins and that has nothing to do with belt tightening on the SG&A side.
So, there are a lot of different places where we’ll look, not the least of which continues to be the focus on the right kind of customer. As we churn off a $600 or $700 a month customer on the TBM side and bring in $700 or $10,000 note MPLS customer that’s coming throughout the country, the margins on that are very good and there’s real SG&A leverage on that because it is not necessarily going to require additional support infrastructure in handling that customer.
So that’s part of the dynamic of trying to make sure that we’re being very focused on the balance of pricing, the customer quality and the right king of traffic that we’re bringing on. So, I think it’s a combination of a lot of different things like Arunas said, but–
Arunas A. Chesonis
Colby, we’ve had this discussion with you in the past as well as a lot of your colleagues on the call where sometimes we hesitate to give you more micro information on customers, variable costs, on contributions by customers, of different types of products. And I think we’re going to end up focusing a lot of our time at the investor day in May.
It is really driving through those details with you on a very granular levels so that you can see what happens when a TDM customer upgrades to IP or you bring on a new IP customer, which replaces a TDM customer that turned off, because that’s something that we just haven’t dug deep enough with all of you to give you that sort of comfort level for our business model.
Colby Synesael – Coffin Brothers
I think you guys provide the most amount of (inaudible) compared to your peers so I give you credit for that definitely, but I guess what I’m trying to do is to try and understand better where the upside to EBIDTA could come in 2010. And it sounds like if you were to hit that higher end it would come from improvement in both the gross margin and then also in the SG&A, even though you’re still adding you said that 30 or 40 salespeople.
Arunas A. Chesonis
And again, it’s also the price compression on the existing base and we’re all trying to figure out exactly when that’s going to happen for Enterprise customers. Some of our colleagues in the industry are calling the steady state of re-pricing sometime in the summer of this year, but again if we just get a little bit of benefit with the economic conditions that could have a significant turn for the upside.
Colby Synesael – Coffin Brothers
Great, thank you.
Operator
And at this time we’re showing no further questions available, the chairman and CEO Arunas Chesonis, you may proceed.
Arunas A. Chesonis
Well again, thank you everyone for taking the time to be with us for our year-end earnings we look forward to seeing you again in three months. Goodbye.
Operator
Thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect. Have a great day. (01:11:57)
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