Call Start: 11:00
Call End: 12:00
tw telecom Inc. (NASDAQ:TWTC)
Q1 2014 Earnings Conference Call
May 08, 2014 11:00 AM ET
Carole Jorgensen - VP of IR
Larissa Herda - Chairman and CEO
Mark Peters - CFO and EVP
John Blount - President and COO
Simon Flannery - Morgan Stanley
Donna Jaegers - D.A. Davidson
Barry McCarver - Stephens Inc.
Colby Synesael - Cowen and Company
Barry Sine - Drexel Hamilton
Good morning, and welcome to tw telecom’s First Quarter 2014 Conference Call. Today's call is being recorded. With us from the company are; Chairman and Chief Executive Officer, Ms. Larissa Herda; President and Chief Operating Officer, Mr. John Blount; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters.
At this time, I will turn the call over to Carole Curtin Jorgensen, Vice President of Investor Relations. Please go ahead ma'am.
Welcome to tw telecom’s conference call. We're pleased to have you join us today. To review our results for the quarter, please visit our website at www.twtelecom.com, where you can find our press release, supplemental quarterly information and SEC filings.
Before we start, I would also like to draw your attention to our Safe Harbor statement included in our supplemental materials, which you can find on our website. Information on quarterly earnings materials and our discussion today contain statements about expected future events and financial results that are forward-looking and are subject to risks and uncertainties. A discussion of factors that may cause our results to differ materially from our expectations is contained in our filings with the SEC under Risk Factors and elsewhere available on our website.
I'd also like to point out that our earnings materials and discussion contain certain non-GAAP financial measures. You can find reconciliations between these non-GAAP and our GAAP financial measures in the materials on our website.
With that, I'm pleased to introduce tw telecom's Chairman and CEO, Larissa.
Thanks, Carole. Hi, everyone. And thank you for joining us today. I am pleased to share our strong results for the quarter as we grew revenue at an increased growth rate both year-over-year and sequentially and at the same time we also have continued our industry leading innovation, advanced the integration of our strategic market expansion and returned value to shareholders through share repurchases. I’d like to touch on three key areas including our quarterly results, products and innovation, and ongoing momentum we see in the business.
First, let’s start with a few financial highlights for the quarter. We achieved strong revenue growth as we delivered our 38th consecutive quarters of sequential revenue growth. Our results demonstrated the traction from our growth investments including 7.1% year-over-year growth and 2.1% sequentially. We continue to build our investment in the future of the Company while still delivering 33.5% modified EBITDA margin. Our margin includes the impact of resetting payroll taxes in line with the expectations we communicated in February as well as ongoing growth investments and an increase in commissions related to positive revenue momentum in the business.
We also continue to thoughtfully execute our capital allocation strategy for the quarter including investing in our operations, maintaining our flexibility for future strategic opportunities, and returning value to shareholders. This included executing $113 million of share repurchases for the quarter.
Second let me turn to our ongoing product development and innovation. We continued this year to announce new products and capabilities, create new alliances with industry leading players and gain traction with both our innovative intelligent network as well as core product features and services like our DDoS security and our advanced enterprise capabilities to name a few.
Third, I want to provide some color on the momentum we’re experiencing. Our business is growing. We have strong demand and our first quarter revenue growth rate reflects that our investment plan and our revenue acceleration strategy are gaining traction. What’s exciting for us is that the momentum that we’re starting to see is not in just one part of our business instead we’re seeing it start to happen across the Board. It’s not just one thing that we’re doing it’s everything that we’re doing and here is a bit of color on the momentum. Our bookings or sales for the quarter were strong. As we continue to deliver ongoing strength similar to what we saw on the fourth quarter. In addition we remained very enthusiastic about the marketing opportunities that we are creating with our new products and expanded market reach including our new datacenter sales channel.
We continue to season and train our new sales hires most of which are still in their productivity ramp. They’re on track and we look forward to their sales contribution as we progress throughout the year. We are also right on track with our expectations for a strategic market expansion of which John will talk about more in a moment. All this momentum continues to give us confidence through reiterate our guidance but we expect to grow our revenue at a higher growth rate this year than last.
As we head into the second quarter, we’re doing what we said we were going to do, including differentiating ourselves in the marketplace, selling our new products and executing on our growth initiatives which is a great way to start the year.
I will turn the call over now to Mark to take you through our quarterly results and then John will update you on our strategic market expansion. And then I’ll be back later to talk further about how we’re continuing to fuel our data and internet growth engine. Mark?
Thanks Larissa. Today, I am going to review our quarterly financial results, provide some new financial information and our strategic market expansion, update you on our capital allocation and balance sheet activities and discuss our margin and cash flow expectations for the rest of the year. Let me begin with our financial results. Our revenue acceleration strategy is gaining traction. And our growth rate this quarter is a reflection of our success and we’re pleased with our progress.
Let me turn to a few details. We grew total revenue at higher rates this quarter than last. On a year-over-year basis weaker revenue 7.1% this quarter or 90 basis points higher from the same period last year. Similarly legal revenues sequentially 2.1% this quarter or 40 basis points higher than the fourth quarter. With these strong revenue results we expanded our track record of 38 quarters of sequential total revenue growth or more than nine years.
Turning to our growth engine, basic internet revenue for the quarter represented 60% of our total revenue and grew 15.1% year-over-year and 3.6% sequentially as we continue to benefit from our Ethernet leadership as well as other new product offerings. These were strong revenue results and we're results with our progress. Also any time we can increase our recurring revenue base by 90 basis points that bodes well for the future for the strong quarter and the work is sustained that great progress.
Next, moving to the rest of our results we delivered a 33.5% modified EBITDA margin, reported net income of $9.8 million or earnings of $0.07 per share and generated $10.8 million and levered free cash flow. All strong results when considering our increased cost for the annual resetting of payroll taxes as well as our intentional investing to increase our revenue growth rate including higher sales commissions related to the increased momentum in our business.
John will provide a little further detail on our margins. We delivered an M-EBITDA margin this quarter that was in line with expectations that we communicated in February and the vast majority of this change was for the resetting of payroll taxes which accounted for 110 basis points impact with the remaining impact primarily from higher commissions and growth related initiatives.
Let me also touch on our increased sales commissions. As we’ve shared bookings of sales have accelerated in the last seven months and that has translated into our increased revenue growth rate and naturally with the step up in revenue, commission costs are also increasing. Our commissions are largely front end loaded and as a result, they’ll put some pressure on margin initially until we get to a steady higher revenue growth rate, this increase in commissions is a good news story and reflects the inflection point in our growth rate.
Summing up the quarter the success of our growth initiative is showing up in our ongoing momentum in bookings and our accelerating revenue growth with the expected near term pressure on margin and cash flow.
Next, let me turn to our strategic market expansion. John will update you in a moment on our successful integration progress, however I’d like to recap our financial expectations, our market expansion and provide a few more details.
First we expect this project to generate an overall five year internal rate of return of greater than 40% after tax while achieving a greater than 50% incremental Modified EBITDA margin by year five.
Second, as we’ve said previously, we expect to spend $50 million this year to integrate the new fiber and this integration cost will not recur.
Third, given the traction we’re already seeing we continue to expect to generate bookings in the second half of this year with incremental revenue growth and positive incremental Modified EBITDA in 2015.
[Indiscernible] how to better understand the high financial expectations we have from this important growth initiative as we view this project as a great acquisition of fiber assets to expand our national reach.
Next, let me move to our capital allocation and balance sheet activities. We continue to positively execute our capital allocation strategy for the quarter including investing in our operations and growth initiatives while still maintaining our flexibility for future strategic opportunities. We also returned significant capital to shareholders. This included executing $113 million of share repurchases for the quarter which brings the total repurchases for the last 12 months to nearly $0.5 billion representing a significant return of cash to shareholders even while we were investing in our growth initiatives.
We continue to target a cash balance of about $300 million and to maintain our leverage ratio similar to where they are today. Our expectation for our stock repurchase program is to continue to be opportunistic for the rest of the year as we manage within these parameters. We’re also reiterating our total CapEx guidance of 440-$460 million for the year which includes a $50 million of investments to integrate and activate our market expansion. Excluding the market expansion capital, our CapEx to revenue percentage was 23.1% this quarter at the low end of our CapEx to revenue for the past four years.
Now let’s turn to our margin and cash flow expectations for the year, let’s start with our margin expectations. With our expected higher revenue growth this year, we also expect additional cost to fuel our growth including hiring for our strategic market expansion as well as increased commissions. As we look forward, we expect Modified EBITDA margin to remain near our first quarter levels and then begin to expand towards the end of the year as a result of expected higher revenue growth.
Now let me turn to our cash flow and share a bit about our philosophy. We have built a tremendous growth engine which is a significant cash creator. You’ve seen us generate cash and we’ve taken that cash and used it for reinvestment opportunities in the business to expand our growth rate with a goal of building an even larger long term cash generator and we’ve also returned quite a bit of cash to our shareholders. So we see good opportunities to invest in growth, that’s what we’re going to do.
The fact is we’re finding a lot of great opportunities to invest, opportunities that are fuel for our growth engine. We’re investing now because we have a differentiated product line up, new alliances with leading cloud and data center providers, a powerful integrated platform that we can quickly leverage with new capabilities and growing fiber assets and network reach. We have a competitive advantage that we want to capitalize on with capabilities such as our Intelligent Network, a new dynamic prioritization and our feature consolation platform and if the market moves fast we’re investing now to leverage our unique position.
In closing we are on track with our investment plans. We said we will invest for higher revenue growth and we’re delivering that growth, because the margins and cash flow growth will follow and we’re on track for that expectation as well. We believe these investments will help us, continue to drive profitability, profitable growth and thereby long term shareholder value. With that I'll turn the call over to John.
Thanks Mark. Today I’m going to update you on the strategic market expansion that we announced last November including progress on our integration efforts and some color on our new market opportunities. Turning to our integration progress here to date we fully integrated and activated 10 expansion markets. We launched one new market and we have a lot of positive activity in the remaining markets, so nice progress to date and in line with our expectations.
Our focus in these newly integrated markets is on our sales and marketing activities, including expanding solutions for current customers and winning new ones. So business as usual as we start to sell into these new routes with our standard success based model. Also, you may have noticed we've increased our expansion markets from 27 to 28 with the inclusion of Kansas City. We’ve identified some great expanded routes in that market which we will be able to fit into our existing innovation budget.
Next, I want to provide some color on our marketing mix opportunities including selling to our existing customers and expanding our addressable market. Let me start with a great example of an early customer win. Several weeks ago we announced that our Houston market expansion had been fully connected into the network and ready for sales and already we’ve achieved a significant customer win. Houston has been a strong market of ours for years, in fact one of our largest markets in terms of fiber route miles, that were parts of Houston that we still did not serve with our fiber, which is why we strategically selected new routes in this market.
As a result of this expansion we were able to sell additional services to a large existing customer that required an on net fiber solution. Those customers are large healthcare organization consistently ranked in the US News and World Reports’ best hospitals list and has been named one of the country’s top hospital systems. Today this customer buys multiple gigs of Ethernet services from us to serve their needs. As a result of this expansion we recently extended service to a critical trauma center with one gig of connectivity increasing the total locations served for this customer to 19, including data center and hospital facilities.
This customer’s data network supports their business operations and also plays a vital role in the clinical management of patients, transmitting everything from imaging to the control of patient treatment devices, therefore our recent win required a diverse and highly available on net fiber based solution. So this is a great example of how our expansion can effectively leverage existing customer relationships. As with this hospital system example by serving more key customer sites with strong network performance and innovative capabilities our customers will be incented to add more applications to the network, therefore driving more long term revenue and royalty as we continue to serve the networking needs.
Next I would like to provide you some perspective on how we’re expanding our market opportunities. Defining our addressable market is something we do market by market, and the underlying data to define this is something that is as dynamic as the marketplace itself. So given that backdrop I thought it might be helpful to look at a few of our market expansions and share some color.
First, let’s look at Minneapolis, the expansion market for the integration is just about completed. This has been one of our top performing markets for a long time, is a home of many corporate headquarters which is a great environment for leveraging the innovative capabilities of our data and internet portfolio and our national network reach. Like our Houston market, Minneapolis has a robust fiber footprint and we still had areas that we did not serve with our fiber.
With this expansion we expect to serve new areas in key business parks in about 10 new communities. More importantly we estimate that this fiber expansion in Minneapolis will expand our addressable market by approximately 10-15% with our direct fiber connections.
Let me quickly touch on a smaller market of ours which is Louisville, Kentucky. We’ve completed a high density fiber route expansion in this market; as a result we increased our fiber route miles by approximately 20% to access several additional communities in Kentucky as well as businesses in southern Indiana. We estimate that this fiber expansion in Louisville will expand our addressable market by nearly 10% with our direct fiber connections.
Now while every market is different clearly all of the markets in this project will bring more opportunities to the table that we will leverage with our local, national and indirect sales teams as well as our ongoing product innovation. We have achieved some significant progress on our integration and as we move through the rest of the year, we expect to integrate all of our remaining new and expansion markets by yearend. However, like any project of this magnitude completing our integration and ramping the revenue contribution from these markets will take time. To-date we’ve hired some key leadership and our next steps include further expanding our sales and operational teams to provide resources aligned to these new market opportunities. We anticipate that we will increase our total sales associated for this year including those for our strategic market expansion by about 7% as well as higher additional sales support and operational personnel.
In closing, we’re on track with our integration plan and very pleased with our progress to-date
With that, I’ll turn the call back to Larissa.
Thanks, John. Our data and internet portfolio continues to be the growth engine of our business with just over 15% year-over-year growth this quarter and we’re focused on driving even greater revenue growth through our ongoing innovation, alliances with industry leading cloud and applications providers and our powerful and differentiated product portfolio which continues to open more doors and close more deals.
Let’s start by talking about our innovation. Everything that we’re doing is doing to different ourselves in the market is to address enterprises' needs through our ongoing innovative solutions for better, faster and easier ways for customers to manage their networks. We’ve spent a lot of time talking to you about our foundational Ethernet and intelligent network capabilities, which are powerful part of our product portfolio as we continue to win business because of these market leading capabilities.
Today however, I want to talk about how we're expanding our intelligent network innovation beyond our Ethernet solutions. On Monday, we announced that we’re extending our dynamic capacity capabilities to both our internet and IP VPN services that will complement our existing unique Ethernet dynamic capacity offering. These new capabilities work similarly for the both IP VPN and internet services, however, given that our intelligent network is still new to many of you I’m going to highlight how our new Ethernet or our new internet capabilities to compare and contrast the added value that dynamic capacity can offer versus versatile internet, which is a product that you probably more familiar with in terms of flexible bandwidth.
For instance with our internet dynamic capacity, our customers can establish network thresholds, receive alerts and automate bandwidth changes through our alerts driven feature to dynamically manage their internet traffic. They can also schedule increased bandwidth for a specific event and they can correlate cost and bandwidth usage with specific business activities. Those are capabilities of our new internet dynamic capacity none of which can be done on traditional versatile internet. With these new product offerings, we’re now providing dynamic capacity across our entire data and internet portfolio including Ethernet, IP VPN, and Internet services which clearly no one else is doing today as we deliver the greatest choice and flexibility in the market.
Let’s move now to another innovation we’ve just launched for our IP VPN services. On Tuesday, we’ve announced a powerful new platform and capability called dynamic prioritization which is a unique, new automated way to create and manage class of service capabilities. So let me explain what that means. In our customers’ world, applications are constantly changing at a frenetic space therefore because of the demands on their networks enterprises have to prioritize the applications that process through their network to allow their most valuable applications the highest priority with the capability called class of service.
Well, applications are constantly changing so are business priorities. The problem for enterprises is that in today’s teleco world they have been locked they’re locked into a static process that requires them to predetermine this important prioritization even before they really know what they’re going to need. What's challenging is that, is the fact that they can’t easily change these prioritizations, in fact they have to send an order to their network provider to make any change so think about it. That means that the telecommunications industry is addressing a rapidly changing applications environment with an old slow teleco 1.0 static process. As you can imagine, that is a big challenge for the enterprise. We’re solving this challenge with our unique new dynamic prioritization.
We’ve developed a capability where the customer can now change their own class of service, but here is the most powerful part, our customers can do it anytime they want real-time allowing them to proactively respond to their changing environment without any involvement from their network provider. This is radical by the way.
So let me provide a glimpse, a slice of the week in the life of an enterprise CIO and how dynamic prioritization will be so important for their network. First on Tuesday a new alert is issued regarding a nationwide network security vulnerability that could threaten their network which probably sounds familiar as it is a very timely topic. The CIO now needs to prioritize an emergency security patch application to its top class of service as a high priority to immediately and fully protect your network. With our dynamic prioritization, our customer can adjust this application real time to its highest class of service in order to be responsive to their business needs and they can do that on their own without having to interact with us at all.
Next on Thursday the NCAA March Madness tournament is on and our customer has a lot of employees trying to stream video. Sounds familiar? Straining their Internet bandwidth at the same time, their company has a major financial transaction that has to take top priority which they reprioritize immediately with our new capability, however our Dynamic Prioritization has another feature that can reallocate bandwidth capacity to one class of service from another to manage within their existing bandwidth capabilities, this is also radical by the way.
So the CIO expands the bandwidth of a top class of service capability while effectively decreasing its Internet bandwidth, while this network prioritization may disappoint some of their hardened basketball fans, the company’s financial software application will be a top priority with plenty of capacity to execute as it needs to and the CIO can execute these changes real time on their own.
Okay, so now the week is not over yet, it’s Friday. The company is scheduled to launch a marketing campaign and is expected to significantly increase their network traffic. With a combination of our Dynamic Prioritization and our dynamic capacity, the CO can not only increase the priority of this marketing application real time, but they can concurrently schedule an increase in their bandwidth, so two powerful integrative capabilities working together to address the CIO’s real time needs.
What I just described is what we believe is a very real live example of a week in the life of the CIO. I know it is for our CIO and what’s really amazing is that with our Dynamic Prioritization, they will not have to call us or wait on us as we put them in the driver’s seat. We believe Dynamic Prioritization is a game changer and we’re selling it today as we continue to innovate to make enterprise’s worlds run better faster and easier. And here is the exciting part, no one else is offering this service which puts us in a great competitive position and is changing the conversations we are having with customers.
So now let’s move to the alliances we’re building to some more network services and further drive our data and Internet engine. Our alliances today include a focus on applications providers of infrastructure as a service, VMware and software recovery solutions and now Big Data which are some of the hottest IT solutions today. We’ve also created key partnerships with datacenters who are important players in cloud adoption.
First, let’s start with the new partnership we just unveiled yesterday. Last week Equinix announced their Equinix Cloud Exchange service that connects enterprises to cloud providers, what’s exciting for us is that we are a key party in delivering this total enterprise solution that combines network, datacenter and cloud services as our advanced Ethernet network is integrated with the Equinix Cloud Exchange. And as a result of this, new alliance is better faster and easier solutions for our customers.
At our last meeting with the Equinix team I could see their excitement unfolding as we provided an overview of our product roadmap. I could also tell how well they understand how we can make their services more differentiated to drive more revenue opportunities to them with our innovative new capabilities. So the more revenue opportunities for them and the more they sell, then the more opportunities we have to sell more services.
Now let’s discuss the new alliance we announced yesterday with GoGrid. GoGrid supports leading Big Data technology and is recognized by industry analysts as a leader in cloud computing. The important of Big Data services to enterprises is that providers like GoGrid can take huge volume of data, mash it together, analyze it and then turn it into meaningful information. However this data must be transported to and from the enterprise and GoGrid and that’s where we fit in our elastic network connectivity.
With our Ethernet eLynk platform integrated into the GoGrid environment, we’re enabling enterprise connections to their cloud capabilities. Together with GoGrid we’re partnering to provide enterprises a complete network and application solution, so it’s a win win for both of us as GoGrid drives new revenue from their application services and we drive new revenue for network services.
We also announced a relationship in April with Digital Realty Trust, a global datacenter and collocation company to exclusively connect their customers in 12 key markets directly to Amazon Web services or AWS. Through us, Digital Realty can provide the AWS applications to their customers better faster and easier.
As we discussed with you before, we’ve partnered with AWS by combining their direct connect program with our innovative eLynk Express network solution that takes enterprises to and through the datacenter directly to the application which no other carrier is doing with them today. The powerful apart of this example is that we’re taking enterprises to and through two different data centers and cloud provider environments with a data center to data center connection to get enterprises quickly to their applications, which is the beginning of a new ecosystem that we are creating.
So in closing, we’re very pleased with our progress on our growth initiatives and the early signs of top-line momentum. We have a huge and growing target market and the leading products, exceptional operational capability and effective sales machine that has proven, we can win a greater portion of that opportunity and we are going for it.
Accelerating growth will obviously come at a cost in the short term, but we’re experienced at this, we know how to turn the dials in this business, you’ve seen us do it before, and our goal in the long term is to achieve a consistently higher level of top-line growth which in turn will create a bigger cash engine driving long term shareholder value for years to come. Thank you and let’s go to questions.
Thank you very much, (Operator Instructions). And we’ll take the first question from Simon Flannery with Morgan Stanley, please go ahead.
Simon Flannery - Morgan Stanley
Great, thank you very much. Good morning. Nice to see the strength in customer bookings. I wonder if you could give us a little bit more color around that, how much of it came from new logos versus existing customers? And what's related to the share gains, what's related to a better business environment, and then some of your expansion? Probably a little bit early for that, but any color around that would be great.
And then just as a follow-up, on the expense side, the commission structure that you referenced, Mark, perhaps you could just give us a little bit more color about if you sign a new contract, how much is for that first period, and then what's the residual impact? Thank you.
So, hi Simon, so yes, we have strengths really across the board in really all of our markets which has been -- which is really fun to see and so, and it’s been very consistent, like Mark said we’ve had seven months of very consistently strong results which obviously showed up in the first quarter revenue.
We get a lot of our revenue from existing customers. We estimated in the range of about 70%, and that’s because we sell to big customers so you get your foot in the door like International Enterprise Group once you open up the door, all of your revenue is coming from the customers, so they’re kind of the gift that keeps giving, so the bigger -- the more you sell to bigger customers and you start to generate a lot more, but it’s been pretty consistent over the years now that recently that we've had a large percentage of our revenue coming from existing and obviously you can see that we're also growing a number of new customers as well.
So really good, all of our channels are showing really good overall momentum, there’s some seasonality in certain channels like National Enterprise, generally it starts off, you know the booking is slow in the beginning of the year and that builds up as the year goes on as they’re starting to expand their budgets and -- but, we’re very pleased with the funnels that we’re seeing, they’ve been very consistent, in fact I’ll give you some color, we always have a call with our sales leadership from around the country prior to this call and the purpose for the call is just to make sure we’re calibrating our comments correctly and the color of what we’re seeing out there in the marketplace.
And last quarter everybody was feeling pretty good but there was cautious optimism because it was the beginning of the year and it’s still too early to tell how the first quarter was going to go. When we talked to them a few days ago, their response was they were feeling bullish about the year. So of course it’s anecdotal, salespeople have a tendency to be bullish, but our leadership is pretty realistic about what they’re actually seeing out there.
We’re very happy about the products that we have, I think that the products have been a huge boost in the conversations that we’ve been having, especially the product roadmap and what we’re doing with our current products as well as what we're laying out for them for the future.
A lot of our customers that's opening the doors to customers that we never really had doors open before and even if we don’ t sell that particular product that opened the door, we’re opening up the new relationship with a new sale and that’s happening all over the place.
We’re also seeing interestingly, we’re starting to see signs that customers aren’t going out for RFP when they would normally go out for RFP on an existing customer because they like our product roadmap and the product roadmap is keeping them in RC without a competitive process and that’s kind of an interesting thing that’s happened with a number of our customers lately too, so we don’t know if that’s a trend that would be nice if it was a trend, because it is a very competitive marketplace, let’s face that. So when we can keep our customers and keep selling them new products and we bring new products to the table, that’s a wonderful thing because it’s a lot easier to keep a customer and sell them new stuff than it is to build new relationships. So fortunately we're doing a lot of both and generally we feel very good about the sales trends that they we're seeing.
I’ll touch on your commissions’ question. Now just to level set that we take commissions once a customer solution is installed and ready to bill, so it’s not on the sale, so we have seven months of that consistently hiring and building sales momentum but until its installed [indiscernible] we don’t pay the commission so that’s end of the level that -- so we start to see that in the first quarter.
Now from a timing that when those commissions get paid, the vast, vast majority of our sales come from our direct sales channel and we also have an indirect channel we call it our alternative channel that’s becoming more meaningful estimates growing nicely, so those are the two kind of buckets, the real bulk of it comes from our direct sales force. And our direct sales force that will take commission if it's on installation, that they don’t have new residuals, so it’s paid when it’s installed and ready to bill.
So that’s when its paid, so depending on -- I'm not going to provide the details to how do we structure it but it can be months the MRR is paid on installation. So that’s why it gets kind of chunky. So we took the step function in the installations in the first quarter, the commissions are chunky. And so people will pay those back and then our goal is to maintain that consistently higher level of installations, so until we have that consistently higher levels of recurring revenue to absorb it, it’s going to pipe some pressure as we take that step function in our revenue. But the alternate channel is different in that there is a residual there, but that’s not paid up front, that’s paid with a residual. So again, that’s a smaller percentage of our commissions and that’s paid overtime.
And we’ll take our next question from Donna Jaegers with D.A. Davidson. Please go ahead.
Donna Jaegers - D.A. Davidson
Thanks for taking my questions so early. I had all my obscure questions lined up because I thought everyone would ask the good ones. On your cycle time which is these new products, can you talk a little about how that compares to sort of an IP VPN where you have a long cycle time because you’re hooking up a lot of offices? On these data center products, it seems like that should be pretty quick.
Well yes, when you’re selling data center to data center circuits and you’ve already hooked up into the data center, it’s especially for the some of the steps that I’ve talked about on the call where you have them all linked up into our intelligent network service and we’re creating eLynk connections, or eLynk Express connections through the data centers, that’s literally instantaneous new capacity that can turned up. So that’s a wonderful thing and it’s obviously extremely high margin since it’s all on the fiber network and we don’t have people from an operational standpoint having to turn up those services.
So that’s where we’re taking our business that’s where we’re taking big piece of that business that’s the whole vision behind the intelligent network and consolation platform, it’s for our customers and our customers' customers within the data centers to be able to transact without us in the process. That is nirvana.
But when you go the enterprise obviously you have to first connect it up to cyber and then connect them into the data centers, so the vast majority, in fact all of our revenue today is not instantaneous, it takes time. It will take time before that grows, that’s the future, but we’re setting ourselves up well with all of the alliances that we’re creating.
And there is a lot of excitement in the data center and cloud community because they don’t want to just do that over a layer three network, which is what other carriers are doing. They want to be able to have the quality of the Ethernet connection and the flexibility that we’re providing on that Ethernet connection for the dynamic capacity and the ability to turn it up and turn down and do all those kinds of things. So, yes, you’re right, that is the future that’s more to come on when we get more of that instantaneous revenue that’s going to take up from time for us to continue to develop.
Donna Jaegers - D.A. Davidson
Okay. And then one other question, I always look at your jobs, just in case I get suddenly thrown out of work, and I've noticed a lot of support staff jobs recently. Is that -- you've always insisted that these new products are scalable. There’s no human touch involved. Is that still what you're seeing and these are just backfill or is something changing about how touch-free these new services are?
Right now we are adding some support people across the business. As you have sales people and they become productive you have to have support people as well, technical support people as well as people to support the coordination of a complex project.
The other thing that we’re doing is and we’ve talked about this that we’re expanding some of the people around the new fiber expansion market, so we've starting posting jobs out there to fulfill that as well. So in general, forget about what we said we’re going to do, we’re going to lead the sales and then we’re going to be following in with the support to match for our models.
And we’re bringing the support people on sooner in the process than we had in past years because we’ve determined that that will make the sales people productive faster and that is actually turning out to be the case. With regard to a lot of the automation that we’re doing and we’re actually doing some amazing things that are resulting in additional sale, it’s allowing us to install services faster and we’re just seeing more of that over the course of this year, so those things are actually, we’re very, very pleased with the progress on that, we’re automating as much of the process we possibly can taking out as much of the human touch and potentially human on the stakes which has really helped us a lot. And so yes, that’s part of this working but we’re growing our revenue base and we’re setting ourselves up well I think and correctly in the expansion market so that you got to put some support people in there for that.
And we’ll take the next question from Barry McCarver with Stephens Incorporated. Please go ahead.
Barry McCarver - Stephens Inc.
So you mentioned that seven months of strong bookings and now it's starting to show up in revenue. Is that to imply that the book to bill here recently has been about seven months?
It’s pretty broad, it depends on how big the deal is but bigger deals do take -- you think, even if we install the revenue in March, you’re not going to see it in first quarter probably much because it doesn’t show up in the bill until April so then you aren’t going to see it show up in the full you get the full quarters so there is quiet a lag from the time you see the sales bookings which is why we’ve been talking about it so that investors can understand that it’s there, it’s coming, just be patience and we were right which I love being right, but it was just a matter of when you start to actually see it show up in the revenue stream.
So it’s not going to be a straight line, we feel good about it though because we’ve had very -- one of the nice things that we’ve seen is a very consistent trend months after months on these very strong bookings and in the past, we see a good month and you see a low months and it kind of be all over the place. It’s pretty consistent, we’re very pleased with every month we’re doing a little bit more, a little bit more, a little bit more and so things are starting to click and obviously where we see when that shows up in the top line.
Barry McCarver - Stephens Inc.
We love for you to be right as well.
Yes, I really love it.
Barry McCarver - Stephens Inc.
On the sales force, you mentioned in the prepared remarks, still a lot of younger sales people fairly new to the company. How far -- is it a quarter or two away before you think they kind of fully ramp up or is it quicker than that?
It always takes time, we’re tracking every single new sales person that we brought into the company since fourth the quarter of 2012 and they’re -- as a group, they’re tracking on track, you really don’t get much from them the first year, the bulk of those people we hired really towards the end of last three quarters of last year, so they’re not even the bulk of them haven’t even be with the company for a year.
So yes, they’re doing -- they're selling and they’re going to start selling more as the year slowly as the year progresses and you’re not going to see as much of the revenue because again from the time they book to the time it actually shows up in revenue it’s going to take some time but you’re going to see it and we’re setting the stage for multiple years of top line revenue growth acceleration, that’s what this is about, you can’t -- this is not just about getting a short term thing and so this is a layer, we’re getting -- this year we’re getting a lot of the growth so far is really about our products, because that was part of our growth initiative of our products.
And as this year progresses, it’s going to be the combination of products, plus some of the productivity that we’re going to start to see more from the new sales people that we hired and then next year you’re going to layer on top of that the new markets, so it’s a layered approach. There is no silver bullet but what we like is we’re seeing progress in all these fronts, so we’re getting some of the traction from the new sales people as we expected, it’s always a slow process, it’s the reason why a lot of people don’t like to add a lot of sales people because it takes so darn long to get them productive and a lot of them so there is a cost that we have been incurring in the business in the short term with not a whole lot of productivity in the short term but it’s coming and it’s going to be there and we feel very good about that. And the fact that we’ve broadened a lot of the products that we have will make those sales people we think more successful as new sales people too.
So by seeing all the little elements that we’re doing, they’re all starting to take shape, that’s what we’re looking for not -- there is no hockey stick in this business as you know, it’s a slow gradual, it’s a pretty predictable business and the nice thing is that we’re starting to see those results come in and that’s very gratifying actually.
Barry McCarver - Stephens Inc.
And if I could follow up, you're painting a picture of pretty good revenue this year. Relative to your guidance of just an improvement over last year's growth, you started off the one quarter, first quarter obviously very strong. It seems like hitting that guidance, it ought to be already kind of done in a bag, am I missing something in the next three quarters?
Don’t think you’re missing anything, we are seeing the consistency in the sales department, and we’re talking about that seven months. When we kept talking about the record sales we were having, they just weren’t record enough to move the needle and now we're seeing those record months and that’s why you see in the first quarter the growth rate that we delivered. So, we feel good about it and every quarter is not going to be the same but we feel good about the year.
So again we don’t look at this business on a quarter by quarter basis. I know that there are people who do and they suffer greatly over the lumpiness of different things that happened. If you look at the long term trends of our business, it’s a very stable business and our goal is just to make it a stable, accelerating growth engine, it’s great, I’d love to have hockey sticks but that generally doesn’t happen, and so we’re building the momentum and I think that’s what we are seeing. I mean we’re seeing it, it's showing up in the results, we’re seeing it in the -- in what’s going on in the marketplace, again it’s a very competitive market, we don’t win everything we go after but we’re obviously winning a nice share for us to have one of the highest growth top-line growth rates in the sector.
And we’ll take the next question from Colby with Synesael with Cowen & Company, please go ahead.
Colby Synesael - Cowen and Company
Great, thank you. Just a few quick ones. First off, I was hoping you can give some color on the timing of the sales heads. It looks like the numbers stayed flat with 4Q, so just trying to get a sense of if you're planning on frontend loading them into the second quarter, more in the back half or more just kind of linear through the year?
Also curious if you have any interest in potentially raising debt in this year. Last year, I know you wanted to maintain $300 million cash balance, and I think you're doing the same thing this year. But one of the ways that you were obviously able to be more aggressive on the buyback was to raise additional debt; just curious if that's something that's on the table?
And then just lastly, you mentioned in the press release, I think you mentioned this before, but you're spending about $50 million for the market expansion costs, and I think that that's one-time in nature. How much of that is in OpEx versus CapEx? Thank you.
So I’ll address the first question on the timing of the sales heads and then Mark can address the question of debt and then the 50 million. The sales heads are going to come as they come. We’re hiring a -- we hired the leadership; most of the sales heads that we’re talking about adding are in the new markets. We haven’t hired really very many if any salespeople but we have started to hire the leadership in those markets, we’re just turning up the markets now, I mean you’ve seen some of the announcements and John talked about it.
You know you can’t hire people too soon in the process either because they sit around with not a whole lot to do, but we’re hiring the leadership, we want the leadership to hire the sales people, so that’s really the way the process works, you want to hold them accountable so you want them to hire the teams that they think are going to make them successful.
So that’s really the next stage, so our hope is to get as many of them in as soon we can, but that doesn’t mean that we’re not already -- we have sales processes going on, obviously in the expansion market that’s a no brainer because our existing sales force is right there and as John talked about, we’ve already made our first sale and the market just turned up which we were not -- I mean that’s early. That’s really early.
We’re not expecting to see actual bookings in those markets just given that the time it takes to talk to customers and close deals with our existing customers, so it happened pretty quickly. And we’re seeing a lot of proposals to existing customers right now, so the first sales that are going to happen in those markets are probably mostly going to come from existing customers which is what we do anyhow so it’s all very expected.
And the new sales people will layer in, most of the new sales people in those markets are not going to sell a thing this year, it’s just not going to happen, they need to be trained, there’s all sorts of things, so most of those sales are going to come from what we’ve got going on now, we feel good about the conversations and the proposals and the funnels and things like that that are building certainly in the market expansions and then obviously a little bit more slowly in new markets because it takes more to start up a new market.
So it’s hard to say exactly Colby how that will come in, but the reason why we indicated that margins will stay at near the levels that they’re at right now is because we’re hoping to hire a bunch of them over this quarter and next quarter and obviously hopefully as the sales increases things will start to expand after that but we do have costs that are going into the business for the expansions as we expected.
Anybody want to add to that?
Actually I had a couple of things; first quarter is traditionally a quarter where sales people reevaluate their lives and on the good news front as we concede first quarter turn and our sales [indiscernible]. Mark talked about commissions earlier and one of the things we do is we have accelerators for our reps as they rise up above 100%, our good reps are really happy in there, they’re making some good money right now, so the [indiscernible] I’d make is, we’re just not interested in bodies, we’re interested in the right bodies in the right places and that takes a little bit more time to make sure we're getting the correct rep that’s out there. And so we’d rather take more time to find the right person and then just get out filled with many bodies as we can at these new markets to see which ones are going to stick. So I would expect that this is going to be gradual throughout the year, and we’re going to continue to add reps and we gave you the target thereof -- we expect a 7% increase in our overall sales force this year.
And that’s a smaller -- just to remind everyone, we increased our sales force last year by 16% so we’re expecting -- and we were flat in the first quarter and again I guess to what John just said, that was a good point. Every year, and it happened last year too if you remember, we have higher churns beginning of the year because like John said, sales people are reevaluating their lives and at the beginning of the year they seem still churn which is fine because the good ones generally don’t churn and so -- but from here on -- it’s a much a much smaller growth of our sales force and that’s even including the new markets and the expansion. So we don’t intend to hyper-invest in growing the sales force every single year. We don’t think we’re going to need to that and that’s just an example of its less than half of the growth that we did last year and I would expect next year potentially we’ll see what happens but if we’re getting the productivity that we need to get out of the sales force we wouldn’t expect to have big increases next year either. So hopefully that’s helpful to you Colby
Colby Synesael - Cowen and Company
Okay. The $50 million we referenced for the integrating the fiber acquisition that’s just CapEx that will not recur when we get to next year, so again $50 million that won’t recur next year. Now on the question as far as issuing more debt to do that buyback, I think we’ve given some pretty guidance from the standpoint of we want to be around $300 million give or take as far as that maintenance cash balance. We had for over that -- we ended the quarter higher than that, so it’s based on that metric we have capacity and then maintaining our leverage metrics kind of where we’re at today. So we do have capacity as a regard to what cash we have. The timing will be opportunistic; we’ll look at how the cash generation goes. We’re a [indiscernible] $300 million up or down, so we’re not going just have that completely fixed.
But as far as issuing new debt, we’ll see how the year goes as far as cash generation and our metrics go before we consider issuing more debt do the most stock buyback. The great thing is obviously we did quite a lot in the first quarter I think we more than doubled what you are expecting in you expectation. So we really did a lot there. We have done a lot over the last year plus and the beauty of our model, the strength of our model is we could do alongside of our growth initiatives which really does speak to the strength of our business, our ability to generate operating cash, to reinvest in the business and to allocate for -- returning capital to those shareholders, and we have capacity to do so.
Hey, very good. And we’ll go to Barry Sine with Drexel Hamilton. Please go ahead.
Barry Sine - Drexel Hamilton
Good morning, folks. Very helpful information you gave on the new markets with the IR expectation and the margin expectation. Was wondering if you'd help size that market opportunity, 28 new markets, do you have data on the number of businesses, potential revenue opportunity and then how does that relate to the existing markets you're already in? How much are you increasing your addressable market by entering these new markets?
We said we’re going into five brand-new markets that we weren't in before. And some of those are pretty big markets and I think Boston and Philly in particular. And then we're expanding in 28 existing markets and those 28 markets have existing management and infrastructure that we are going to tap in to and expand physically. So we have a really good sense of how many new opportunities, new businesses we can serve directly with our fiber. It’s quite an expansion. We’re not publishing that number because it’s…
We don’t want people to get ahead of themselves and it’s going to take time and it’s a very large number. So we want to just keep the expectations in check because we’re not going to get it all at once. But it’s a very big market opportunity.
It is, I mean if you look at Manhattan, Northern New Jersey, higher the expansion and this is going to help up grow up into Westchester in the Long Island. It's going to expand us into a lot of New Jersey, so just that one market with a ton of opportunity.
Boston high density, Philly high density, the expansion in Chicago, we were in very tiny little network in downtown Chicago. Now, we’re going all throughout all the suburbs. I mean you can think about what those markets, just those markets not including all the other market expansions are going to mean, it’s a great opportunity and we’re building an infrastructure as laying the foundation for growth for many year to come with this expansion.
Barry Sine - Drexel Hamilton
Okay, I appreciate that additional color. Thank you.
All right. Well, thank you everyone for your time today and your support at tw telecom. Have a good day.
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