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TW Telecom (NASDAQ:TWTC)

Q2 2011 Earnings Call

August 09, 2011 11:00 am ET

Executives

Mark Peters - Chief Financial Officer and Executive Vice President

Larissa Herda - Chairman, Chief Executive Officer and President

Carole Curtin - Senior Director, Investor Relations

Analysts

Colby Synesael - Cowen and Company, LLC

Donna Jaegers - D.A. Davidson & Co.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

Barry McCarver - Stephens Inc.

Michael Rollins - Citigroup Inc

David Coleman - RBC Capital Markets, LLC

Frank Louthan - Raymond James & Associates, Inc.

Brett Feldman - Deutsche Bank AG

Operator

Good morning, and welcome to tw telecom's Second Quarter 2011 Conference Call. Today's call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over to Carole Curtin, Vice President of Investor Relations. Please go ahead.

Carole Curtin

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

Before we start, I'd like to draw your attention to our Safe Harbor statement included in our supplemental materials which you can find on our website. Information on our quarterly earnings materials and 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 the website. I also want to point out that our earnings materials and discussion contain certain non-GAAP financial measures. You can find reconciliations between non-GAAP and GAAP financial measures in our materials on our website.

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

Larissa Herda

Thanks, Carole. Hi, everyone, and thank you for joining us. With all the recent headline news and market volatility, I'm pleased to deliver some good news. This is another great quarter for tw telecom as we again delivered strong comprehensive growth across the business. Let me share with you some indicators of our ongoing momentum. As we look at the marketplace, enterprise bandwidth needs continue to grow, increasing the demand from customers' networks and creating an opportunity for high-performance private data solutions such as ours. And we've seen that demand show up in our business as our sales funnel remains strong, primarily driven by data and Internet solutions, including the new product capabilities that we've launched last year.

Turning to our bookings. They reflected a continued strong level of sales with ongoing incremental growth, including traction from our direct as well as our newer indirect sales channels, making our highest level -- marking our highest level of bookings to date.

Another sign of momentum is the fact that buildings connected to our fiber network grew impressively as we continue to add more and more new customer locations. In fact, the first half of 2011, we've added nearly 60% more than we added for the first half for 2010, making this the strongest start to the year ever for expanding our fiber reach to customer locations.

Moving to our products. Demand for our IP VPN and Ethernet services continued to drive new revenue for both enterprise and carrier customers, demonstrated by our 30% year-to-date growth in the strategic product revenue. As we look at our products launched in 2010, I wanted to provide one last glimpse at our traction as we mainstream these products into our overall portfolio. With these new products driving $180 million in new contract value since their launch last year, solutions like Converged Services and fractional 10 Gig Ethernet continue to resonate with customers and exceed our expectations. We expect a growing future benefit from continued new sales as we've just begun to leverage these products.

So you can see we continue to experience momentum in many aspects of our business, creating a steady and consistent growth engine that is clearly showing up in our results as our total revenue for both the quarter and the first half of the year grew nearly 7% year-over-year. In addition, we're also seeing strong sales momentum as we head into the second half of this year. We're pleased with the quarter as well as the opportunities ahead of us.

Mark will take you through our financial results, and later I'll come back and talk about how we expect to continue our growth and momentum into the future. Mark?

Mark Peters

Thanks, Larissa. This was another strong quarter building on the exceptional growth we posted last quarter. I'd like to touch on a few revenue highlights and then spend some time on where we're investing for the future, including how growth investments are being reflected in both our margins and capital investing.

First, let me add a bit more color on our revenue. We're pleased with our revenue growth this quarter, which grew 6.8% year-over-year and 1.8% sequentially. Additionally, revenue growth for the first 6 months of 2011 accelerated to 6.8% year-over-year compared to 4.9% for the same period last year. In fact, this is the strongest top line performance for the first half of the year that we've had in 3 years. We've also had terrific success in keeping our churn at historically low levels and in fact decreased this quarter to 0.9%, down from 1% for both last quarter and for the same period last year.

Looking into what is creating our growth, here are a few key metrics for the quarter. Our data and Internet revenue for the quarter grew 18% year-over-year and now represents 47% of our total revenue, up from 42% a year ago. So said another way, 47% of our revenue grew at 18%, which is a really powerful stable and consistent growth engine.

VPN and Ethernet products, which are a subset of data and Internet services, are the fastest-growing and most strategic solutions. These services for the quarter represented nearly half of our data and Internet revenue and grew at 29% compared to the same period last year. Looking forward, we expect demand for Ethernet services will remain strong for quite some time, supported by the overall market demand and our ability to continue to take share. The growth in demand is highlighted by industry analyst IDC, who predicts that Ethernet revenue for the industry will generate a CAGR of over 20% for the foreseeable future. Combining this growth with the fact that we're one of the top 3 Internet providers on the country, we believe we're well positioned to be a significant beneficiary of this growing market opportunity.

Now let's look at where the growth is occurring in our customer base. First, Ethernet customers represent our primary growth engine at 77% of revenue for the quarter and grew more than 8% year-over-year. Second, carrier customers represent 21% of our revenue for the quarter, which showed modest growth of 7 of the 8 last quarters, reflecting success with both wireline and wireless providers, primarily through our newer solutions. For instance, our revenue from wireless carriers grew about 13% for the quarter compared to the same period last year. These services represented 30% of carrier revenue. Additionally, our revenue from wireline carriers for Ethernet services to their end users grew by about 60% for the quarter compared to the same period last year. These services represented about 9% of our carrier revenue for the quarter, and we're just at the beginning of this trend as large carriers are just starting to purchase Ethernet services in order to meet their customers' demands. We are pleased to be demonstrating these growth areas within our carrier customer base as churn from carriers for legacy transport services remains lumpy and higher than overall churn.

Wrapping up my comments on revenue, you can see we have a number of strong consistent growth areas driven by our Ethernet and VPN growth engine, and we're continuing to leverage and differentiate our capabilities in this area.

As we turn to Modified EBITDA margin and the bottom line, we continue to deliver strong results. For the quarter, we achieved a 30% increase in operating income, a 53% increase in pretax income compared to the same period last year. Additionally, Modified EBITDA margins continue to be strong at 36.4% for the quarter, a 30 basis point expansion from last year, even while we invest for growth and absorb other cost increases.

Let me provide a bit more color on these growth investments. Our initiatives for future revenue growth require both capital as well as operating investments. Chief among the operating investments we've made this quarter is increasing our talent. In fact, the vast majority of employees we've added since the last year were hired to pursue new sales, provide additional customer support, address new product rollouts and investments, and support growing customer installations. Despite the near-term margin pressure that these growth initiatives are having, we believe we're making the right choices for long-term growth. In addition to the investments for current and future sales growth, we've also incurred special access rate increases while maintaining strong margins, which further demonstrates our ability to manage costs and deliver strong margins.

Which takes me to our capital investing. Similar to our operating investments, we continue to invest for growth. The increase in capital this year is primarily in 2 key areas: first, our success-based investments, primarily for building additions and increased connectivity to wireless providers; and second, long-term strategic investments for fiber expansions as well as IP initiatives. Let me elaborate a bit on each of these. We're making greater investments for success-based opportunities. This year, we increased our fiber-connected building additions by nearly 60% for the first half of this year compared to the first half of last year, all of which have that first anchor tenant delivering revenue. This growth has been driven by our sales success with VPN and Ethernet services, along with converged and wireless connectivity. The increase in building additions not only results in revenue growth from the anchor tenant but provides a longer opportunity -- a larger opportunity for future revenue growth from those connected buildings.

Additionally, we're investing further for longer-term strategic projects like key foundational IT initiatives which support our network platform and product roadmap, as well as investments to expand our fiber reach. In fact, we just recently completed a multimillion dollar acquisition from metro fiber and conduit, which expands our reach to further fuel our future momentum, and by the end of the year, we expect our network expansions, coupled with our additional network reach to wireless providers, will extend to about 1/3 of our markets, thereby enhancing our current footprint.

These strategic fiber investments are the type of deals we do very effectively all year long throughout our national footprint, and this year, we decided to do more of these expansions than we did last year. We like these mini-expansions as they are lower-risk investments to get us into high-growth areas. Here are a couple of examples of our track record of success with this strategy, one of which was a larger project and one was smaller.

In April of 2009, we invested in one of our larger projects. We made a multimillion dollar strategic purchase of fiber to expand our network in the Phoenix area. In just over 2 years, this project has added 28 buildings and 4 data centers to our network, and we're already generating an IRR of about 40%. Additionally, just last December, we made an investment for slightly less than $1 million for one of our smaller projects to extend our fiber in L.A. As a result, in about half a year, we've already added 14 buildings to the network along this route, and we're generating an IRR of just under 40% on this total investment.

Now all our projects won't achieve a 40% IRR, but based on our track record, we've been very successful with these types of expansions, and they create the fuel for accelerating growth because of the new opportunities we open up. These expansion efforts are an important part of our strategy to drive market density and scale as we target higher margins and cash flow.

Turning to our CapEx guidance, based on the strong momentum of the business to connect more customer locations, capitalize and co-location opportunities and further extend our strategic fiber reach, we've raised our annual guidance to $340 million to $350 million, with the expectation that the mix of our success-based capital and longer-term strategic investing will be similar to last year. Because of our proven returns and track record, we believe that reinvesting in our business is a great way to allocate our capital.

Now just a short comment on the current market climate and our view of the macro environment. As in prior economic cycles, we pay close attention to numerous indicators to assess their impact in our business, and we're pretty adept at adjusting our business to external factors. Recall our business and margins grew throughout and since the Great Recession, with our lowest annual top line growth year being 4.5% growth, and while we haven't seen any changes in overall trends, we obviously aren't immune to external factors. However, our business is very resilient for these upheavals as demonstrated by our consistently strong results. After all, our top line has grown each year for nearly 7 years.

Now before I hand the call back to Larissa, just a few words to recap our results. We've been demonstrating very strong results from the top line through the bottom line and to cash in the bank. Over the course of the last year, quarterly revenue growth has accelerated from 5% to 7% year-over-year. At the same time, we delivered a very strong modified EBITDA margin consistently over 36%. And over the past 4 quarters, we have generated $93 million in levered free cash flow, even as we've invested to generate more growth today and for tomorrow. We've completed $52 million of stock buybacks and our program continues. We've grown cash by $22 million to $509 million, recognizing that cash is king, particularly in this environment, and we have a low net leverage ratio of only 1.8x.

Clearly, we are in a strong financial position and are hitting on all cylinders. We're investing in the right places as our return on invested capital continues to grow, so as we look forward, we intend to use our balance sheet to do more of the same: investor growth in a balanced and thoughtful manner, all geared toward continuing to generate shareholder value.

Now I'll hand the call back to Larissa who will talk a bit further on some of the new services that we'll be offering later this year. Larissa?

Larissa Herda

Thanks, Mark. I'd like to talk about why we're gaining traction with customers on so many fronts. The simple answer is that our momentum is driven by our continued ability to differentiate ourselves, which has allowed us to take share and grow revenue. Today, there are many things that differentiate us from other carriers, including, for instance, more than 14,000 buildings connected to our dense fiber -- metro fiber networks, our high level of customer service including the ease of doing business with us, our track record of better-priced networking capabilities and execution, including our innovative products, capabilities and customer tools, and a model that leverages local relationships and produces strong growth margins and cash flow, and that's just to name a few.

However, at the end of the day, differentiation doesn't come from a single product or effort; instead, it comes from the total package we deliver including the comprehensive performance and value we can provide a customer. I've said it before, in this business, you innovate or die, and we know that innovation not only drives differentiation, but more importantly, it keeps us relevant to the customer.

So I'd like to spend some time talking about how we're planning to extend our ongoing differentiated position in the marketplace through additional product development. Today, I'd like to focus our attention on the intelligent network services, which are aimed at solving customer problems and enhancing the customer experience. Here's why our intelligent network capabilities are important to our customers. Businesses operate in an ecosystem, which impacts the demands on their networks. There's a wave of change occurring for enterprises today as these businesses are rethinking their core operating functions, critical business applications and network design. These changing needs, as well as the growth in network applications and the adoption of cloud and collaboration, are all part of the growing demands which are putting more requirements and pressure on the network. For example, today, many companies are utilizing Software-as-a-Service, Infrastructure-as-a-Service or high-quality video applications which are driving growing network complexities. At the same time, businesses are managing more and more applications. To put this growing application trend into perspective, think about your smartphone and the explosion of applications that were created for the consumer over the last several years. Well, that same thing is gaining momentum in the business environment with a frenzy of business-centric applications being developed for enterprise customers. This dramatic increase in applications, as well as changes in how applications are leveraged by the enterprise, are in turn adding more complexity and pressure to enterprise's networks.

So ask yourself, why is it that U.S. businesses have been able to increase productivity over the past few years to a greater extent than ever before? Well, the answer is technology and automation. To a large degree, this is due to the fact that enterprises are leveraging their networks to create -- to remain competitive through the use of new applications that provide them greater efficiencies, which in turn drives lower labor costs and higher productivity. With enterprises relying more heavily on the network, we're in a great position to serve their needs and benefit from this trend.

What I just described is an environment where the network has taken on greater importance for all businesses, which takes me to our vision of the intelligent network. All of these demands are creating an environment where our advanced network capabilities are coming into play. CIOs today are faced with a growing tsunami of applications requirements and demands in supporting their businesses. These CIOs are increasingly looking to the cloud as a way to rapidly introduce new applications into the business in a cost-effective way. The applications model is appealing, with one significant challenge: the network. Most cloud providers are positioned to provide tremendous innovation for applications, but let's face it, most are not network providers. Therefore, they often want customers to use best-effort Internet connection because they can't provide a secure Ethernet connection. The problem with using the Internet to access the cloud is that it's not secure and it's not the predictable network experience that many customers require.

So here's the CIO's dilemma. They're not going to risk their mission-critical applications over a best-effort Internet connection. However, they may use the Internet for certain applications with lower priority and criticality. Their challenge is to look at each application and deliver it over a network solution that best supports the performance and security required, whether that is connecting to a private or public data center or private or hybrid cloud. This dynamic environment creates a growing demand for enterprises to manage their network traffic and at the same time consumes more and more of their resources. So if you ask a CIO what they need, they will likely describe this. They're looking for a secure, scalable and predictable network to access the cloud, or more broadly, a business ecosystem. However, they're also looking for a network that delivers a seamless integrated applications environment doorstep to doorstep, with the ability to control and prioritize their network demands.

Now you may think that these CIOs have pretty sizable wish lists. However, with the implementation of our intelligent network strategy, we will be able to pull together all the necessary capabilities to manage these fluid demands which make our solutions even more critical and valuable to customers. To capture this growing network market opportunity, we expect to launch a series of network capabilities over the next 6 to 18 months. Keeping true to our strategy of differentiation, we believe our offerings will be unique, so let me tell you a bit more about our product strategy and development vision.

While there are many complex aspects to these solutions, I would like to focus on 3 capabilities of our service which serve as building blocks for growing dimensions, including: first, visibility to network performance end-to-end and doorstep-to-doorstep; second, dynamic capacity for bandwidth when and where customers need it; and third, the ability to dynamically control and prioritize applications traffic.

So let me touch on each of these capabilities and the unique aspects of our service. First, let's start with visibility to network performance end-to-end and doorstep-to-doorstep. In today's environment, customers need network visibility to and from where their network is connecting. This is the first building block for the intelligent network services, an area where we are differentiating ourselves. For instance, some carriers are providing customers only performance data between points of presence or POPs on the network. The problem with that approach is that it leads off critical information from the POP to the customer's premise, so that would be like planning a trip on MapQuest and only getting part of the map for the interstate drive without giving you the final local destination. Likewise, while some carriers do provide end-to-end information, this data is provided as an average across the entire backbone, which could obscure specific trouble spots rather than by discrete network segments.

By contrast, our service will provide detailed performance data doorstep to doorstep at a Class of Service level by each key network segment, including actual, real-time network performance data, with great granularity and flexibility of use without averaging the data, and is specific to our customers' network. In fact, we've recently begun to use this capability internally to manage our own corporate systems and services, and soon, we will be ready to turn these capabilities over to our managed service customers for their own networks. This information will allow customers to plan ahead to avoid bottlenecks or pressure points, giving them actionable information to improve their service immediately.

Second, let's talk about dynamic capacity of bandwidth when and where customers need it, based on how the network is performing in relation to a customer's complex applications environment. So think of this as the next building block to these services, which provide real-time scalability of bandwidth. Here's the perfect application for this service. Imagine that you just implemented telepresence or some other key video application at your corporate headquarters for critical business needs, which can consume and compete for bandwidth at peak processing times. With dynamic capacity, you can dial up your services real-time to accommodate your changing bandwidth consumption and needs. Other carriers may throw more fixed capacity at the problem, which is costly and burdensome, not to mention it could take 30 days or longer to deliver. By contrast, we're talking real-time dynamic changes to your bandwidth without having to call anyone to make it happen.

So now let's build on that thought with the third key aspect of our capabilities, which is the ability to control and prioritize the applications traffic. This is a whole different ballgame than simply mapping traffic to a Class of Service designation. Our capability has even greater sophistication by enabling the CIO to view the traffic, understand how the applications and network are performing together, make a judgment on what is high- and low-priority traffic, and queue the data according to their immediate needs. What I just described all happened real-time due to the unique level of detailed information that our services provide, which allows customers to create the knowledge necessary to manage a dynamic environment. So by leveraging applications awareness along with network performance knowledge, these capabilities provide CIOs doorstep-to-doorstep real-time prioritization for every one of their locations.

If you are all CIOs you would really appreciate how cool this really is, and since most of us are not, let me give you a real-time situation a customer is likely to encounter. Say our customer is seeing congestion during a peak processing time, which is inhibiting a key application. Now in this particular situation, the customer has elected to utilize their existing capacity instead of flexing their capacity up with their dynamic bandwidth capabilities, so that means that they need to make the decisions about which applications will be elevated and prioritized versus those that can be queued to a lower priority. A good example of this may be to prioritize and expand the capacity for processing of a customer's PeopleSoft financial data at the end of the month while mitigating traffic for YouTube, Facebook or other non-vital information to free up capacity. This is what CIOs tell us is the real wow factor of what we're doing, as it provides them greater control of their network demand as they either don't have that capability at all today or they're manually attempting these capabilities with a lot of human glue. By contrast, our solutions will make all of that effort easy and real-time.

And by the way, the services that I've just described will be made available and easily scaled to all of our customers and all of their locations for these managed services, which will expand our competitive advantage. Let me tell you why that's important. Some providers have legacy or acquired systems that require a bolt-on type of solution to deliver these services. The problem with that approach is the fact that they have to offer these services on a custom basis, not only making it hard for them to scale their offerings to additional customers, but this type of an approach is more complex and requires extra equipment, which adds cost and potential maintenance issues. By contrast, with our One Network and System division, we've created a scalable architecture that builds these capabilities into the network, allowing us to roll out services across our entire footprint to all markets nationwide without a custom build -- type build to all our customers who buy our managed services. Additionally, customers can essentially just open the customer portal and the real-time performance data appears without having to run a report, which I had to say if you live in this networking environment is also pretty cool. By providing these services not only for our managed VPN and Converged Services but also and importantly for Ethernet solutions, we're continuing to demonstrate our market leadership with Ethernet services.

So I hope this helps lend some perspective on how we envision our strategic plan for these intelligent network capabilities to take us one step further toward greater differentiation and value delivered to our customers. We believe that differentiation comes from our total package, including our network strategy, solutions, innovation and customer service, that will help us to continue to take market share, create more sticky relationships with our customers and drive incremental revenue, so stay tuned as there's a lot more ahead on our roadmap. We're always looking to the future to extend our long-term track record of differentiation and growth, which we know requires vision, investment and time for that to happen. We believe our ongoing network capabilities can create a powerful engine for further differentiating ourselves to drive ongoing revenue growth and shareholder value as customers continue to trust us with their networks. And with that, we will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG

Correct me if I'm wrong, but I think you indicated that the bookings in the quarter were another record. Is that correct?

Mark Peters

The bookings continue very strongly, kind of really good trends, so very consistent trends in our bookings and our overall sales activity. So we're very pleased with how we ended up the quarter.

Brett Feldman - Deutsche Bank AG

I don't think you quantified it, but last year, I think your bookings were up almost 18% which I realize is a fairly significant increase, and is it fair to say we're kind of run rating at those levels now? In other words, you're not up 18% from last year but you're sort of still hitting the same level of bookings that you kind of exited the year on? I'm just trying to think about the opportunity to continue to see strength in recent bookings flow-through and improved growth rates over the next several quarters and if that's still the right way of thinking about it?

Larissa Herda

Right, so our bookings or our sales were the highest level of bookings that we've had to date, which would include -- I mean to date. So...

Mark Peters

So as we came into the year, I mean we're at a higher level than we were last year and when we look at our bookings, so the trends continue to -- have continued to increase, which -- then it takes, well obviously for that to be reflected in the overall growth in our business. So as you recall last year, we saw an increase in our bookings, and now our top line growth rate has expanded, so it takes a while for that to come through and show up in the reported revenue growth.

Brett Feldman - Deutsche Bank AG

[indiscernible] It's just that [ph] you're still up this year despite the fact that you had a very strong year last year?

Larissa Herda

That's correct.

Brett Feldman - Deutsche Bank AG

Yes, okay, so thanks for clarifying that. And then I know you touched on this a little bit and everyone's trying to do their "well, what if we go into another recession again?" From your seat, what do you think is most different, in terms of either the way your business is set up right now, including product and revenue mix and maybe even things you're seeing with your customers that could potentially change the way your business might be impacted if we do double-dip?

Larissa Herda

I love that question. I wish we had thought of it at the time when we were putting our script together. Let me count the ways that we're different. Let me first start with just the main strategy that we took during the recession, and that was that we never stopped investing through the recession, and we retained our talent, we had no layoffs, but at the same time, we grew revenue every year of the recession as you know, and we also expanded our margin, so incredible performance during the recession. As a result of the investment that we made during that recession and we continue to make, we're in an even stronger position today heading into whatever the economy has to offer. Obviously, we hope it's not a recession, but if it is, we can deal with it. So I'll just point out a few things that are different today that we did not have going into the recession. We have about 10% more sales people producing, as well as a new and productive indirect sales channel that we did not have prior to the recession. We've put in place new customer retention programs that significantly reduce churn as has been demonstrated in our results. We have had enormous success with our new products that we released last year that we didn't have prior to the recession. We've signed $180 million worth of contract value on those, just those new products since they came out a year ago, so -- and we have more new products coming out over the course of this year and going into next year as well. We have nearly 2/3 more buildings on a -- connected to our fiber networks today than we had going into the recession. We've been really putting Buildings On Net at a very strong clip. Now remember, those buildings are our future revenue growth opportunities. It helped drive our very strong margins. So great opportunity for growth in all those new buildings that we didn't have prior to the recession. Market expansions. We've done 22 market expansions into -- and Mark described a couple of them on the call since the beginning of 2008, so we didn't have all of that market opportunity at our fingertips prior to the recession. Let's see. Back-office improvements. So we've had -- since the recession, we've implemented a robust customer portal, next-generation systems and infrastructure which support higher volume and service flow-through and have allowed us to scale our business much more effectively as demonstrated by our strong margins. We are supporting our integrated network initiatives that support the Converged Services in a ubiquitous way that we've put out there, and then, we -- with the indirect sales channel, we've created a new portal for them and tools to interact in a much more efficient way, allowing them to sell faster enough to implement faster, again, not -- we did not have that prior to the recession. And then lastly, all the investments that we made in the customer experience, we launched our first customer survey in 2007 and we have 4 years of very granular data where we've seen our net performance score increase 124%, which is a strong indicator of customer loyalty and engagement. And we've also -- as you look at our revenue from customers that leave us completely, it's 0.2%, which is de minimis, so a very, very strong indication of loyalty. So again, I think if you couple all these things, we were in good shape going into the recession, but we're in an even much stronger shape today, so we feel very comfortable with taking on and continuing to grow our business just as we did during the last recession.

Mark Peters

And one of the thing I'd like to add is when we're going through the last recession, we were still in the midst of an integration of a large acquisition, and all the great strong success we've had over the last several years and through the last recession as well has all been organic growth and organic investing, and so we don't have again that kind of activity to distract us if we should go into another recession.

Operator

Our next question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James & Associates, Inc.

Can you comment a little bit on the M&A in the sector and how that may be affecting things from a competitive dynamic? Is it opening up any opportunities? And then with these new capabilities that you discussed there at the end of your comments, Larissa, can you give us an idea of maybe how much pricing power you might have with those products, or is this -- just represents a net new revenue opportunity that you can go after? How should we think about how that directly affects the revenue?

Larissa Herda

Well, I think the only people who have real pricing power in this business are the monopolies who continue to be able to raise their rates on things like special access without anything standing in their way, but, with that said, we think our new capabilities are going to put us at a very strong competitive advantage because we're not aware of anybody who's doing what we've described on today's call. With regard to pricing, more to come on that. We're still in the process of identifying the pricing model that we're going to be doing with this but it will -- there will be net incremental revenue as a result of these new capabilities. So I think stronger competitive position. I think when customers start to use, the nice thing is we'll be able to go to a lot of existing customers first and just turn it on for them and let them try it, see if they like it and then start charging them for it. So it's a kind of a nice position to be in, to be able to have a service that is ready and there and available for existing customers that you could turn up [ph], but the key is stickiness, because in this business, obviously, what you want to do is make sure that you're not reducing your business to a commodity. I'm not personally very big on commodity businesses, and one of the reasons why we've been so successful over the years is our strong differentiation. We've always had differentiated service, products, network and the way we engage with customers. So this is pretty exciting. Our sales force is really excited about it, and we're looking forward to the step-by-step process as we take our customers through and provide them with those new capabilities. With regard to the competitive dynamic as a result of the M&A, there's always a lot of kind of a fudge [ph] factor when companies buy other companies because they're clearly internally focused. There's a lot of companies out there that are going to be focusing on synergies, which is just a codeword for laying a lot of people off in many cases, which means that there is going to be a lot of disruption in the customer experience, which we have noted over the years has not gotten better in this industry, except for maybe us. And so from our perspective, we view a lot of the M&A as an opportunity to get closer to our customers. We actually have had a number of instances where customers have rethought their decisions or have kind of taken some M&A candidates out of the running because of what they've seen happen as the result of prior M&A at other companies, and they don't want to just be another number. So our whole strategy in our business is all around the customer. Everything in this company, our DNA is all about the customer experience and driving that customer experience. Everyone in our company had some element of their goals that are connected to the customer experience, even our lawyers, so they have a way of impacting the customer experience. So I think that, that's a very different dynamic than what we see in the telecom world today as most of the companies are trying -- as they get more efficient, they're trying to get more efficient by getting further away from the customer, by putting the relationships with the customers into call centers. And we talk to those customers every single day and they're not used to that and they don't like that, and they like our personal approach and I think that, that will serve us well as these companies consolidate.

Frank Louthan - Raymond James & Associates, Inc.

Okay, great thank you. And just one follow-up. Can you give us an idea of sort of the average number of customers you have per building that you have in your network, how that trended over the last 12 months, and where do you think ultimately the agent channel can go from a contribution perspective?

Larissa Herda

Sorry, Frank, I can't give you an average on the buildings, honestly. It's such a change in terms and it's a hard number to grasp. Each one of our markets has a very good handle on each one of the buildings and who the customers are, but on a monthly basis, customers are moving in and out of buildings, so it literally changes, right as we're speaking. But I can tell you we have many programs around increasing the penetration of revenue in our buildings, and every year, we continue to make progress and increase that penetration. The good news is as we keep on also adding a lot of new buildings, so we've got all this just wonderful opportunity that just continues to flow as we grow the business. What was your second question?

Frank Louthan - Raymond James & Associates, Inc.

Where can the agent contribution ultimately go from sort of the percentage of your sales?

Larissa Herda

I wouldn't want to put a number on it, but what I can say is I'm very excited about that group. We have hired a group with enormous amount of relationships that they came to the company hitting the ground running. I think the fact that we've put this great program, it's again a unique program from what other companies are doing and we think puts us again at a competitive advantage. Our idea is not to sign up a whole bunch of agents, our idea is to sign up with the best ones and who will represent us well and who we can partner with effectively. So we have a lot of energy around that program and it has been generating very good sales, and I would expect that trend to continue upward.

Operator

Our next question comes from Colby Synesael with Cowen & Company.

Colby Synesael - Cowen and Company, LLC

Just as it relates to the new products that you provided some color on the visibility, the capacity and I guess the prioritization, just trying to get a sense or a better sense of the magnitude in terms of potential revenue opportunity, and I was wondering if you could compare that to the products that you launched I guess earlier this year or late last year in terms of the converged and the fractional 10 gig? And then my second question has to do with the -- on that buildings. You've added about -- you've added greater than 500 the last 3 quarters, which is a significant uptick from what we've seen historically. Should we think of that as the new run rate based on the opportunities that you're seeing in front of you and the fact that you've been able to raise your guidance for CapEx based on I guess what's the expectations to add more on that buildings? And then I'll have just one quick follow-up after that.

Larissa Herda

I think on the buildings, we don't look at it as a run rate because the buildings are an output, they're not an input. We don't say to the cities, you guys do 500 buildings this half of the year or whatever. We say bring us the best opportunities with the greatest returns and we'll invest, and that's what comes out of it. So it'll always fluctuate. It's just through the natural sales process, but yes, I think it's a very good point that it is indicative, obviously, of the success we're having in closing deals and new locations and also future revenues. It takes a while for those buildings to -- for the revenue to show up. As you know, this is a slow, tedious process of businesses, but -- so I wouldn't want to say okay, this is our new number or our new target. We don't have those types of internal targets, we wouldn't want you to put those targets on us. With regard to the new products, so I think it's important that you all understand that this is a vision of where we're going with our products, and I think that it's -- and we -- I think it's premature to tie a revenue number to them. I can honestly tell you that we did not anticipate the success with our product enhancements that we did last year to be to the degree that they were. We just hit the sweet spot of what customers were really looking for, and it just really took off, which is a wonderful thing. You seldom have new products to take off quite like that. So this is a patient strategy. This is a strategy, by the way, that we've been investing in for years. This was a vision that we have had been working towards for years. This is the first time -- we've mentioned it a few times, but this is the first time that we started to talk about it because we're actually ready in the second half of this year to start to deploy some of the capabilities of these services. So we're just going to start. So I would say, at this point, it's a vision. It's where we're going. I think it's important for investors to know where we're going because it is different from what others are doing. It does put us in a very different category I believe than those that are just out there selling point-to-point capacity big fat dumb pipes, very, very different world that we're operating in with these types of capabilities, and I think that's the main message that I want you all to get out of that.

Colby Synesael - Cowen and Company, LLC

Okay, great. And then just the last one. Obviously, Verizon has gone on strike starting this past weekend. Do you anticipate any impact to your business that's material enough that you should be calling out as it relates to working with them and things like special access, et cetera?

Larissa Herda

So if we had thought that there would be something material, we would've called it out at this point. Just to give you some perspective on size, and not all of these markets, from what I understand, are involved in the strike, there -- of the 75 markets that we do business in, there are only 7 where Verizon is the dominant carrier, and not all of those are -- I believe not all of those are involved in the strike. So that should give you some perspective on the impact to us. Will a few of our markets be upset because they may have some delays, I suspect they probably will be. The nice thing about having so much of our revenue on our own network, 100% on our own network in many cases for a lot of customer applications, is that we don't worry about asking another carrier to complete services for us. So it's a pain, we can deal with it. We have processes in place, we've been down this road before, but as you can see, we're not very exposed to Verizon territory.

Operator

Our next question comes from Michael Rollins with Citi.

Michael Rollins - Citigroup Inc

Really 2 questions. First, I'm not sure if you actually mentioned it, but what's the percent of your revenue that's coming from the Ethernet? I think you mentioned the growth rate for Ethernet but not the mix of revenue. And then second question, just more broadly, can you give us an update with the customer renewal cycle, and as you're going into renewal negotiations with your customers, are you seeing them spend more with you to offset some of the typical pricing concessions that happen? If you can talk about that behavior, what you're seeing out of your existing customers, that would be great.

Larissa Herda

Sure, and yes, I want to clarify one of the script items that Mark said because I think he said that we were one of the top 3 Internet providers in the country. We're one of the top 3 Ethernet providers in the country, and I'm sure that everybody realized that's what he was saying. Let me attack the renewal question first. So renewals are something -- obviously, when you're a company that has been around for a while like we have, you have them every single month, and that's just the nature of the beast. I'll take you back a few years during the recession when customers were renewing, they were not -- most of them were not buying additional services. They were much more interested in what they were going to do to contract their business. So the renewal process was a bit more painful then. Since the recession, and this trend continues where -- when we renew, customers are buying additional services. So that's obviously a much healthier trend. That's not to say that we aren't impacted by re-rates, we are. I mean if you look at our churn, our churn is fairly low. It's below 1% for services that disconnect, which is a lovely place to be in. But we do have, we do continue to have and have continued to have, it's been a continual trend of having to deal with renewing services, then having to re-rate in some cases large revenue streams. And so I would anticipate that's going to continue. I think that's the nature of the business. It's one of the reasons why you want to continue to always have new product capabilities so that when you do go and renew with customers, you have other things to sell them. There are other things that they would be interested in which helps them to stabilize what happens on the renewal side. But that's a trend. It's always been there. It's part of our business, particularly on the more mature products, but we don't see any changes in that trend right now. It's the pretty stable but constant irritation for our business. So did you want to talk about...

Mark Peters

Yes, and the question on that, the percentage of revenue for Ethernet, and we haven't given that specific stat but let me give you what we have shared. So you'll have to kind of walk through it. I don't have the specific number in front of me, but data and Internet revenue represents 47% of our revenue, and then within data and Internet revenue is a subset with our VPN and Ethernet services of VPN and Ethernet together, and they represent nearly half of that data and Internet revenue. So you can do the math, nearly half of 47% and you can get to the math. And those clearly are growth engines with data and Ethernet growing at 18% year-over-year and the VPN and Ethernet growing at 29%, so clearly those are our growth engines.

Operator

Our next question comes from Robert Dezego with SunTrust Robinson Humphrey.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

I'm just wondering, on the building growth we've seen in the last couple of quarters, can you talk about the ramp from the full revenues in those buildings from like that first anchor customer, say? Is all the revenue there in the first quarter that we see the building added, or is there generally been a ramp, i.e. should we expect to see some better growth the next couple of quarters from the fact that you've added over 500 buildings a quarter over the last 3 quarters? And if I could follow up to that one is, if you look at the buildings you added in the last 2 years, how many of them are getting that second and third and fourth and so on customer versus you're still keeping with that one anchor tenant?

Mark Peters

Sure. When we look to try to tie the building growth to the revenue growth, I mean it's fairly close. Clearly, you have to put the building -- light [ph] the building first, and then you may or may not get that revenue in that same month that you light [ph] The building because we have to turn over. You have to test, if it's a big network, we have to test the whole network with the customer and then start charging them. So there can be a bit of a lag with when the building actually turns up. Now when you look at it from a standpoint of the revenue from those customers and how much more revenue we get, I think Larissa mentioned earlier that we get that -- first our model is that before we go into a building, we have a signed customer contract, and that contract and our bogey for that, for the revenue and the returns, the internal rate of return for that building is a 30% IRR over the life of that customer contract, and that's assuming they don't renew at the end and that's an after-tax calculation, I mean even though we're just really -- we have big [indiscernible] wealth -- we're really not a cash taxpayer today. So that's our model, but then we have programs in place like Larissa mentioned and incentives in place for our account executives, our sales folks to go out and further penetrate that building. I mean the simplest way to think about it is their -- besides the tools and the other normal sales tools we give them, their commission is higher to sell into -- to sell on that services, so clearly they follow the money too. So there's all kinds of incentives to do that. We track them internally and we get very nice growth in those existing buildings. And that's why when you look at our overall blend of returns from our buildings, I mean it exceeds that 30% internal rate of return because of that follow-on revenue that we do generate from that incremental investment.

Larissa Herda

And another note, a number of the buildings that we've put on, a good number of the buildings that we've put on are actually single-tenant buildings, and so we get our foot in the door with a customer and then we grow from there. We build a relationship and it continues to grow. So it's kind of a combination of both those things. We have a bunch of multi-tenant buildings and a bunch of single-tenant buildings that are generally -- the gifts that keep giving because once you get into a single-tenant customer, they're usually yours for just about for life as long as you're providing them with a good service.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

Okay, great, thanks. And if I could just follow up, could you talk about the margins with the new agent sale channel versus direct sales channel?

Mark Peters

Yes, I mean they're selling them under the similar model that we follow for our internal sales folks.

Larissa Herda

Yes, it's the same.

Mark Peters

No different.

Larissa Herda

Yes.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

So even with the commission, it's a basic [indiscernible] Commission is [indiscernible] you have to spend so you're kind of running at the same margin for both channels?

Larissa Herda

Right. You don't pay the commission for the direct sales person so it's a different -- but it's pretty much the same. Sometimes direct -- sometimes the indirect sales force actually charges a higher rate too, so it just depends. So it's a nice margin business.

Operator

Our next question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.

Just a few quick questions, and great quarter, guys. On special access, you mentioned the increase that you guys absorbed during the quarter. Can you give us a little more color on that? Is that -- was that fully in the quarter? And any dollars that you can help us sort of see the -- how much a good offset with your own productivity, that would be helpful.

Mark Peters

Yes. Well, there's 2 of them, in particular, the one that -- with...

Larissa Herda

First of all, we were talking -- mainly talking about the AT&T increase last year.

Mark Peters

Right. So really year-over-year, when we compare our margin -- the cost when we compare it to where we were last year and the rates this year went up, so we had to absorb those cost increases. And so that had an impact on the margins, and frankly, we see some other ones coming up, I think in -- I think within Verizon territory.

Larissa Herda

Right. Verizon announced a rate increase that will -- of course, it's a smaller portion of our exposure because we're only in a few of their markets, but it's still irritating.

Donna Jaegers - D.A. Davidson & Co.

[indiscernible] doing?

Mark Peters

Well, it definitely does peel off [ph] -- a fraction of a percentage point off the margin, so it's -- when we look to expand our margin, we have to -- we absorb those kind of costs too.

Donna Jaegers - D.A. Davidson & Co.

Great. And 2 other quick questions. On the fiber to -- on your sales to the wireless carriers, are you -- have you installed all the fiber to the tower contracts that you have won now?

Larissa Herda

No, we still have plenty of more to go.

Donna Jaegers - D.A. Davidson & Co.

So through -- will those be installed by the end of the year to capture bonus depreciation or any timing on those?

Larissa Herda

Through the end of the year and into next year.

Donna Jaegers - D.A. Davidson & Co.

Okay. And then the CapEx increase, is that purely driven by the order interest that you guys are seeing, or are you also trying to sort of build it front to capture bonus depreciation?

Mark Peters

When you look at bonus depreciation for us, because we do have the NOL, we tend to manage that bonus depreciation against our AMT, our alternative minimum tax, which is what we are subject to, so we can -- we don't necessarily have to take all of that. We look at the bonus depreciation to -- and time that with when our actual cash taxes might hit us so we can actually manage it. So we actually get more flexibility with how we do that. So that's not -- come back to your question, that's not what driving our investments because of our NOLs. It's the investments for the growth and the opportunities.

Operator

Our next question comes from Barry McCarver with Stephens.

Barry McCarver - Stephens Inc.

I don't want to put too much emphasis on the buildings but just going back to that conversation for a couple of minutes, have you ever taken a look at kind of what the -- in terms of the potential buildings out there, the number still is and particularly may be the lowest-hanging fruit in terms of where the best customers might be and what that number is just given the ramp in the total number we're seeing.

Larissa Herda

It's a number that's large enough that I will probably not get into all of those certainly in my lifetime. I think the reality is, is we're in 14,000 buildings where we have, from our statistics anyhow, more buildings connected with fiber than any other non-incumbent carrier in the United States, which is an impressive number and it's taken us, what, 15 years to get here. They're hard to put on. That's another reason why we have such a strong differentiated market position, but -- and they're very valuable, because we can provide services like the fiber-based Ethernet services that we do and just do a lot of things that others can't do without those types of assets. So when it comes to opportunities to go into additional buildings, there's a whole heck of a lot more that we can go into. In each of our markets, we've targeted them. We know the buildings that we really want to get into, and those are the ones that our sales organization focuses on, getting that first customer contract to get into where obviously it makes financial sense. For some buildings, there are many buildings that we will never go into and nobody will ever go into other than the incumbent carriers because it will never be economic to do so. That's just the world. That's just a financial -- it becomes -- it's always a financial decision, and so we -- as far as opportunity, we pass by about a million buildings that have a couple of circuits in it in terms of enterprise customers -- I'm sorry, passed by 1 million enterprise customers, not 1 million -- well, we have -- there's probably 1 million buildings in a -- we're in a lot of markets, so there's a lot of density in those markets that we still have yet to penetrate and get to. So we have such a small market share. Just generally speaking, when you think about the incumbent carriers who still have -- in this market, they still have something like 90% of the market, and we're one of numerous competitive carriers out there taking a piece of the pie. I think overall speaking, this is a target-rich opportunity for us. When we look at how we're allocating our capital, obviously we're doing a good job in returning some of the cash back to shareholders, but when we think about the best way, the best place to allocate our capital, it is where we get the best returns and those are the buildings. And that's where we're putting it, and nothing pleases us more than to continue to see that accelerate. Everything that we're doing is targeted in making those decisions, and we've told our sales force they don't have a budget in terms of what they can spend to go into buildings, they just have to bring us great returns. That's what we're focused on is just give us what we -- where we can make the most money, and it really drives great behavior when you go through the parameters that you're setting. When you set a parameter and say you need to be in these many buildings, you get all sorts of bad stuff that come out of it, but when you tell them you want to make money and you want to have buildings that give you good returns, then you get great results like we have. And obviously, the -- one of the key things about having the buildings is its less reliance on the local exchange carriers and other carriers to provide the solutions that we provide to our customers.

Barry McCarver - Stephens Inc.

And just along the lines of your comment about returning value to shareholders, we've seen you pick up a little bit, buyback in stock here a little bit this quarter, a little bit less actually you did in 1Q. Is there any thought to stepping that up kind of given where the stock is now versus where it was just back, I guess in July because $6.5 million worth of stock is just kind of a drop in the bucket. What do you think about how much cash you guys have?

Mark Peters

Yes. Well, we are pretty patient in our program but your...

Larissa Herda

Which, as it turns out, has served us well.

Mark Peters

It served us pretty well. But since the end of the quarter, and I do have an update, so we've now sort of taken that number up to, for the full year, to about $37.5 million in buybacks, so clearly, patience has paid off in this program. So there's about $12.5 million left in the program that we'll be executing -- expect to execute in the future.

Barry McCarver - Stephens Inc.

So you've taken up to $37.5 million at the end of the second quarter?

Mark Peters

Actually no, through yesterday on a year-to-date basis.

Barry McCarver - Stephens Inc.

Okay. So you bought back quite a bit in 3Q already then?

Mark Peters

Yes.

Operator

[Operator Instructions] And our next question comes from Dave Coleman with RBC Capital Markets.

David Coleman - RBC Capital Markets, LLC

I was wondering if you could talk about the wireless backhaul contracts as a percentage of 2Q bookings and how that's compared to past quarters? And then secondly, just on the new products rolled out over the past year or so, the Converged Services and fractional Ethernet, so I'm thinking about those properly, they seem to expand customer opportunity or accelerate the customer decision into purchasing services from tw telecom. Would the same hold true for the intelligent networking services? Are these more designed to gain a larger share of existing customers' IT spend?

Larissa Herda

So I'll answer your -- I don't think we can answer your first question, but on your second question, I think the answer is both. So it will definitely expand our relationship with our customers, but we do have customers that -- and we've seen some that if you don't have some kind of capability in this area, they're not interested in buying the services from you. So this is eventually going to become a ticket to play. Some version of these types of services will be a ticket to play. We believe we're going to be able to maintain our differentiation at how we do this compared to others, but the key is to attract, retain and increase wallet share, so that's the -- you're going to get -- you're going to see I think all aspects of that in the future.

David Coleman - RBC Capital Markets, LLC

Great. And then just going back to the wireless backhaul, it sounds like you can't put a number around it, but can you talk about directionally whether wireless backhaul contracts are larger share of the bookings or about the same?

Larissa Herda

Wireless, we've never really talked -- we really haven't even really talked about it. What I can say is wireless backhaul bookings have a tendency to be lumpy, so they're just lumpy. They come and then -- and we've got -- we still have more proposals out there for more opportunities, so they'll still be lumpy. So I'd rather not talk about -- and honestly, I don't have that number in front of us anyhow, and we haven't disclosed it publicly, but they come in lumps. And the nice thing is, is that we've been progressively, every month, we add more cell sites and they just -- it's just a nice constant flow of cell sites that we keep on adding to the network and seems to be no letup in that for the foreseeable future. One other point I should make is that for some of the sites that we've already turned up, the customers are asking us to increase the bandwidth to those sites, and -- which is really neat because our strategy has been, for those customers anyhow, some of the cell carriers did some other things, but for the customers where we've put Ethernet to the cell sites, it's great because we can go from 100 to 200 really fast, and so for them -- and we don't have to spend any capital to do it, which we love. So those obviously are the gifts that keep giving. Those are on long-term contracts so we would expect that to continue, but we didn't even have those cell sites installed for a year before we started to see requests for increases in capacity.

All right, and with that, I think we're out of questions. You let us off easy. We were prepared to stay for the duration here. So thanks a lot for your attention to our company for the past hour and 10 minutes, and we appreciate all of your support. Have a good day.

Operator

Your conference has concluded. You may disconnect at anytime. Thank you for joining us, and enjoy the rest of your day.

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