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Executives

Carole Curtin - VP, IR

Larissa Herda - Chairman, CEO and President

John Blount - COO

Mark Peters - EVP & CFO

Analysts

David Coleman - RBC Capital Markets

Simon Flannery - Morgan Stanley

Barry McCarver - Stephens

Frank Louthan - Raymond James

Michael Rollins - Citi Investment Research

David Dixon - FBR Capital Markets

Colby Synesael - Cowen & Co.

Donna Jaegers - D.A. Davidson

Michael Funk - Bank of America Merrill Lynch

Tim Horan - Oppenheimer

tw telecom inc. (TWTC) Q3 2011 Earnings Call November 8, 2011 11:00 AM ET

Operator

Good morning, and welcome to tw telecom 's third quarter 2011 conference call. Today's call is being recorded. With us from the company are Chairman, Chief Executive Officer and President, Ms. Larissa Herda; Executive Vice President and Chief Financial Officer, Mr. Mark Peters and Chief Operating Officer Mr. John Blount. 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 statements included in our supplemental materials which you can find on our website. Information in our quarterly earnings materials and discussion today contain statements about future expected 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 want to point out that our earnings materials and discussion today contain certain non-GAAP financial measures. You can find reconciliations between the non-GAAP and GAAP financial measures in the materials on our website.

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

Larissa Herda

Thanks, Carole. Hi, everyone, and thank you for joining us. We delivered another quarter of strong comprehensive results including expansion of our revenue growth rate of solid EBITDA margin and healthy bottom line, ongoing free cash flow production and plenty of cash flow on the balance sheet, cash on the balance sheet available for the right strategic choices.

We are performing well both financially and operationally as we continue to invest in growth opportunities and rollout new services. Let me provide some visibility into the several indicators of ongoing momentum in the business.

Let start’s with revenue growth which continued its strong trend as we delivered just over 7% year-over-year revenue growth for the first nine months as compared to 5% growth for the same period last year which is an impressive expansion. Enterprise customers and our data and internet services continue to be our growth engine, while carrier customers provide ongoing opportunities but also contributed to some lumpiness in revenue this quarter.

Additionally, our sales funnel reflected strong ongoing market opportunities primarily driven by our data and internet growth engine including the new products we launched last year.

Moving to our booking. We had continued success with closing customer deals driven by our direct and indirect sales channels. Our bookings demonstrated ongoing strength as each quarter this year reflected growth in sales over the same quarter last year. Another positive sign is our growth in buildings connected to our fiber network as we continue to expand to more and more customer locations. In fact, we’ve already added as many buildings for the first nine months of this year as we did for all of 2010 reflecting customer wins to build into new locations as well as additional cell site locations.

Turning to customer buying sentiments, our sales leadership remains positive regarding ongoing opportunities as we continue to win sales based on our product innovation and customer service. We’re closing these deals because of our innovative and cost saving solutions as well as the fact that enterprises are under pressure to serve growing bandwidth needs. So despite the volatile marketplace, we’re finding good opportunities and customers continue to buy because the network is integral to their success.

So summing it all up, we delivered another strong quarter, driven by a consistent steady growth engine which is fueled by our new product solutions that continue to resonate with enterprises, ongoing new customer opportunities and further penetration and development of our markets. I'm now going to hand the call over to John Blount, our Chief Operating officer who can share a bit more on how we are raising the bar on our telecom services and enabling our future growth. John?

John Blount

Thanks Larissa. 2011 has been a great year for us. I would like to spend a moment on what our customers are telling us, why we are winning today and how we expect to win in the future. Let’s start with what customers are telling us. Enterprises are looking for telecom providers to raise the bar to deliver the critical services they need faster, better and easier. So why faster, better and easier?

Here’s some of the complex challenges customers are faced with today including escalating bandwidth needs, the velocity and growth in network applications, the adoption of cloud and collaboration coupled with challenge of addressing security for mission-critical applications and pressure to achieve greater productivity through automation.

As a result customers have to do more, do it better and do it faster and at the same time manage costs and maintain reliability. Now that’s a sizeable requirement and it’s why these demands have added a great deal of complexity for enterprises and as a result continue to bring the importance of the network to center stage.

So let’s talk about why we are winning today and how we are positioned for the future. We are growing today because we’ve raised the bar on service and innovation as we continue to work toward faster, better and easier solutions for our customers. We are able to do this because of our network capabilities, our service model and our products. For instance unique products like our fractional 10 gig Ethernet let customers buy just the amount of Ethernet they need for each location rather than inefficiently buying more services than they require.

Additionally our finely tuned local sales strategy, in execution along with tools like our customer portal help us to deliver industry-leading service. We are in the enviable position of having an integrated network which is allowing us to help our customers leapfrog ahead to new capabilities. So let me give you some context to what that network platform means to our customers and what they say they are encountering with other national carriers.

Without an integrated platform like ours, customers’ applications are forced to function on the carrier’s disparate networks with complex architectures. As a result here are some of the impacts to the customer including varying service delivery and maintenance levels across the country, differing processes that are not standardized for all locations, complex bills that come from multiple systems, reactive network management and different people to deal with on service issues depending on the location, all of which result in inefficient use of the customers’ time and resources and that's just to name a few issues.

By contrast tw telecom’s integrated network allows the customers’ capabilities like consistent service delivery across the country for all customer locations, including low touch provisioning which is streamlined and fast, flexibility in choice and solutions to address customers’ complex challenges, highly efficient and user friendly customer self-service capabilities, proactive and predictive network management and next-gen Ethernet capabilities with an extensive network reach, all of which result in higher productivity for the customer’s IT staff.

In short that's what we call our network of ones. One network, one set of systems and one set of data and that's what enables our ability to serve customers’ needs for better, faster and easier. That's why we are winning today and it’s our ticket to ongoing revenue growth.

Well this platform has given us a clear competitive advantage today and we expect to provide future solutions that offer things like greater visibility into the network, dynamic network capacity and applications and managed services that make our customers more efficient.

So that’s where our intelligent network division comes into play which is a strategy designed to address customer’s rapidly growing demands and expectations. They get the intelligent network as the brains to leverage our strategic Ethernet and VPN services making them even more beneficial to the customer.

As we’ve mentioned last quarter, this vision has three phases. Let me recap what we’re currently doing. Phase I includes customer visibility into their networks or what we call enhanced management. We’re providing end-to-end visibility which means we are providing unique real time data with great granularity and it’s specific to our customer’s network and available in discreet network segments. By contrast to tw telecom’s doorstep-to-doorstep solution, other providers offer this visibility just between points of presence.

We can provide this robust type offering because of our strategy of focused and deliberate investment in our architecture resulted in our integrated network platform. This platform allows us to rollout services across our entire footprint to all markets nationwide, which is easily scaled to our customers who buy managed solutions. We launched Phase I enhanced management services this quarter in a controlled introduction and we expect to launch a boarder market-wide campaign next year.

The second phase of the intelligent network will include providing dynamic capacity of bandwidth when and where customers need it. When customers talk about faster, better and easier, dynamic capacity is the key solution to those needs. Think about our targeted customers for a moment; each one is likely running hundreds of business applications on their network. I know we are in our company.

Now not only are these customers’ bandwidth needs increasing, but each application is addressing the business purpose which is also growing and contracting based on their unique business dynamics. So it’s no surprise that customers want the network to be flexible enough to respond to those demands.

With dynamic capacity, you can increase your services real time to accommodate your changing needs. Other carriers may throw more fixed capacity at the problem which is costly and burdensome, not to mention they could take 30 days or longer to deliver and clearly does not fit the customer’s expectation of faster, better and easier. Our customers don’t want to wait. They want the network to just be there when they need it.

To address what our customers are telling us, we’re designing capabilities to allow customers to thoughtfully upside their network for longer term growing bandwidth needs, while making shorter term adjustments for changing application demands which can be done rapidly through our customer portal.

For instance, customers may want to adjust their bandwidth through an application for may be three weeks or perhaps three months. Three weeks would help address for instance, a situation where they want storage on-demand, while the replicate an additional server in a new location. And three months may be a sales campaign that tightens their network activity for interaction with their customers. It’s not only is value added to the customer, but it also achieved greater, billable velocity and market share which translates into greater return on capital for us.

The third phase of our intelligent network will be the ability to control and prioritize applications traffic. This will allow the customer to view their specific application performance, understand how the application and network are performing together on either Ethernet or VPN based solutions, make a judgment on what is high and low priority and then queue their applications according to their immediate needs.

By leveraging application awareness with network performance knowledge, these capabilities will provide customers doorstep-to-doorstep real time prioritization for every one of their locations, allowing them to dynamically manage their business. This takes customers beyond the fixed environment like that of MPLS to a dynamic environment. So that’s our intelligent network division which we believe will be a real differentiator for us in the marketplace.

Now I would like to shift over and talk about the engine that drives that vision and that’s our Ethernet strategy. Ethernet is right in the heart of what customers want and it’s an extremely efficient way to serve these enterprises and it addresses their need for better, faster and easier. We have achieved a leadership position in Ethernet and we’re constantly looking at ways to leverage our offerings.

Let me share some of our recent efforts to enhance our already impressive Ethernet position. Today, we’re the third largest Ethernet port provider in the US and we can take our customers to nearly 15,000 buildings, including about 400 locations with third party data centers in our own co-location facilities that are served directly by our fiber network.

To further capitalize on our Ethernet capabilities, we have been creating seamless connections to other Ethernet port providers to complement and extend our reach and footprint with enterprise customers. We’ve chosen these partners to fulfill our vision of better, faster and easier services to our customers. This not only avoids the more costly avenue of a public Ethernet exchange, it allows us to have handpicked partners where our capabilities are aligned through technical standards set for a long term relationship.

With these connections which are up and running today, we've extended our reach in over 40 of our local markets by connecting other top Ethernet providers giving us an even greater Ethernet footprint. By leveraging these relationships, along with our own impressive Ethernet connectivity, we’re working to further serve our customers multi-location needs through a powerful fully managed Ethernet solution. But our Ethernet plans don't stop there. Our plans for next year will differentiate us even further. So stay tuned as we continue to focus on raising the telecom bar.

With that, I’ll hand the call over to Mark for a review of our financial results.

Mark Peters

Thanks John. This quarter we delivered strong comprehensive results and we achieved an expanded revenue growth rate, a solid modified EBITDA margin and strong bottom line, and we delivered ongoing cash flow generation.

Now let me touch on a few highlights for the quarter, including revenue, margins, our balance sheet strength and ability to invest.

We are pleased with our revenue growth for the quarter which increased 1.8% sequentially and grew 7.5% year-over-year. The 7.5% year-over-year growth for the quarter compares to 5.1% growth for the same period last year, demonstrating the revenue acceleration that we've achieved over the course of this year.

And as Larissa mentioned, on a year-to-date basis, revenue grew similarly, expanded to just over 7% this year versus 5% last year; again leading to our consistent traction. This revenue growth was broad-based across business sectors. As we look across our vertical markets into which we categorize our customers, we experienced year over year revenue growth for the quarter from nearly every one of those sectors; speaking to the attractiveness of our offering and the diversity of our customer base. Additionally, our new products from last year continue to be strong contributors to our growth, including our converged products and several Ethernet solutions.

As part of our revenue growth, we continue to grow our opportunities in a traditional mid-to-large customer suite spot. This category of customers remains frustrated with the lack of responsiveness they receive from our biggest competitors which contrast greatly to our superior customer service approach.

We’ve also experienced success with very large customers. As we now serve nearly 40% of the Fortune 1000 companies. We generally only service small portion of their needs, so this category of customers provide a lot of future sales opportunities.

Also enhancing our revenue growth was the fact that revenue churn remained low which I believe reflects not only the quality of our customer base, but also the result of the differentiated services we offer coupled with our customer service approach.

Turning to our revenue by product line, the real growth engine of our business data and internet revenue grew 18.6% for the quarter on a year-over-year basis and now represents 48% of our total revenue up from 43% a year ago. Based on our trends, we expect it won’t be long before this growth engine exceeds 50% of our total revenue as a result of our continued success with this product category.

A particular note, within data and internet services, our Ethernet and VPN based strategic service business, which grew about 28% for the quarter compared to the same period last year. These products comprised half of our data and internet revenue and represent our fastest growing solutions.

Our voice services for the quarter grew 2.7% year-over-year and represents 25% of our revenue. On a year-to-date basis, voice services grew 0.4%. The contrast in our quarterly and year-to-date growth reflects the fluctuation we’ve experienced from a combination of growth, churning rerate settlements and quarterly changes in certain taxes and fees.

We’re pleased with the modest growth in this category, especially when compared to the industry, which is showing near double-digit declines. Our network services for the quarter declined 3.6% year-over-year and represents 25% of our total revenue. The decline primarily reflected an increase in some larger carrier disconnects and re-pricing impacts that coalesced in the quarter. As carrier buy new services, they’re more frequently moving to Ethernet-based services which are reflected in our data and internet revenue.

Now let me turn to modify EBITDA margin which was 36.3% for the quarter. We’re pleased that we’ve driven increased revenue growth, greater modified EBITDA and higher unlevered free cash flow during this year, while sustaining a strong modified EBITDA margin. Delivering on anyone of those metrics was difficult. We’re growing all three as we invest for the future demonstrating the strength of our model and our execution.

As customers ask us to do more and more for their networks. We’ve invested in both OpEx and CapEx initiatives. These initiatives were targeted to further our differentiation in the marketplace including new product and capabilities and enhanced network platform and growth-related headcounts.

Over the past year and a half, we’ve deployed numerous products and features to meet our customers’ rapidly changing requirements including the first phase of our intelligent network offering this quarter. As part of those efforts, we’ve fast tracked some of our products in order to get them to the marketplace quickly. These growth initiatives primarily impacted operating costs which had naturally pressure our growth margin a bit. However our modified EBITDA margin was stable.

We continue to refine processes and invest on automation initiatives to allow us to further scale over the long term. Innovating and investing in future growth while strong financial metrics is a challenging balancing act. And we believe we’ve executed well on that front.

Moving to our balance sheet, it remained strong with about $459 million in cash and equivalents, a favorable metric of 26 days sales outstanding, bad debt expense of less than 1% of revenue and a net leverage ratio of 1.8 times. Next I would like to touch on capital allocation. Our ongoing comprehensive performance and results put us in a strong financial position and provides flexibility to invest in the business, repurchase shares and consider strategic initiatives.

Throughout this year, we’ve continued to invest for organic growth, made some opportunistic purchases of fiber and conduit and also completed our $50 million share buyback program this quarter. Because of our proven returns and track record, we believe that reinvesting in our business is a great way to allocate our capital and that is where we placed the majority of our resources this year.

Our annual CapEx guidance is $340 million to $350 million reflecting our strong, success-based opportunities as well as other longer-term strategic and IT initiatives. In closing, we remain focused on initiatives to accelerate our revenue growth while maintaining strong margins, invest in opportunities to further differentiate us in the market place, leverage our underdeveloped markets and generate cash flow resulting in strong liquidity and flexibility allowing us to invest, return value to our shareholders and have dry powder for other strategic initiatives. With that, I will turn the call back to Larissa.

Larissa Herda

Thanks Mark, John and Mark had done a great job in laying out how we are preparing for future growth through ongoing differentiation in the market place, as we continue to keep our eye on the ball of growing our return on investment.

So let me pause there and emphasize that it’s no small fee in this economy to grow revenue and deliver solid margins and cash flow while we invest throughout the business in both CapEx and OpEx for future growth initiatives which demonstrates that we are clearly finding ways to win with both new and existing customers.

I can just imagine what we will be able to do when we get some help from the economy. We are very excited about the unique opportunities, we are creating for ourselves this year and believe that 2011 is shaping up to be a very good year for us as we continue to focus on growing shareholder value. And with that we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from the side of Dave Coleman with RBC Capital Markets.

David Coleman - RBC Capital Markets

Just wondering if you could give us an update on the new products that you've rolled out over the past year, year and a half like fractional Ethernet Converged Services and now the intelligent network. I think last quarter you said it was about $180 million of revenues booked from those products, I was just wondering if you can give us an update as to where those stand now and then just a second question, just another strong quarter of Ethernet VPN growth, just how much of that is coming from existing TDM SONET networks and how do the value of those contracts compare?

Larissa Herda

So on your first question sorry, we said last quarter that that was the last, it had been one year since we had deployed those products and they are no longer new products to us. They are part of our existing product portfolio and so we are not providing any additional information on it, but you can see how they are performing by looking at just the incredible growth that we’ve got in our data and internet product line. That is what is a huge element of our growth is coming from the new product portfolio that we put out there last year.

On Ethernet, when we sell an Ethernet network, we’re generally filling into an existing customer that has some other type of technology and it’s typically not Ethernet. So it is coming from a conversion of whatever that customer had most likely with the incumbent carrier. So and from a pricing standpoint I think that was your question, it’s a much more economic offering for customers and much more flexible, it allows them to ratchet up their bandwidth quickly if they need to.

We’ve had situations where if we had a situation a few years ago that just off the top of my head where a police department in San Diego was dealing with fires and they had so much demand going in their website. They kept on crashing and they asked us to turn up the capacity and we were able to do it within the hour, in minutes actually. So it was, I mean that was an Ethernet connection. Ethernet is where all customers are going. Whenever we sell most what we are selling is Ethernet based. Sure there are some services that are still sold on TDM type of products, but that’s not the way of the future.

David Coleman - RBC Capital Markets

When you say more there are economic, does that mean lower price points, but they are taking more services, so the net spend is essentially changed or possibly be greater?

Larissa Herda

It’s a little less, lower total cost of ownership, basically. So the customer doesn’t have to spend CapEx to convert. When you think about what Ethernet is within the building that a customer is doing business in, they have an Ethernet LAN, right, a local area network. When they have to go, they have to convert to TDM to leave the building, only to convert back to Ethernet. In the next building you have to use electronics to make that conversion. When you can provide them Ethernet straight through building to building they don’t to have spend that money on CapEx anymore for the equipment to make that conversion. So that’s one area, where it’s very efficient.

John Blount

And we do find it when they transition to the technology, the VPN to convert services, a lot of times there, while the price per bit might go down to them, they’re actually buying a lot more capacity from us as well. So it’s not unusual for us to, again while the price per bit might go down, the total spend with us might go up.

David Coleman - RBC Capital Markets

And then could you just talk about the overall demand environment and second quarter you said, it was the strongest, I think you said the strongest bookings for the company and it’s history. 3Q or this quarter you said that bookings, up every quarter versus the comparable period last year. I was just wondering how 3Q bookings look versus 2Q levels and if you’re seeing any kind of softness in the overall demand environment?

Larissa Herda

No, we’re not seeing any softness in the overall demand environment. We have consistently you know you’re always going to have fluctuations, some quarters have seasonality in them, but as far as the funnel, it’s very strong as far as the demand continues to be strong as far as bookings, they continue to be strong. And as far as you know our backlog of things that we have to install, we’re very pleased with the backlog of what we have to install coming up for the next few quarters.

So I think from our perspective, it just continues – again, you see it in our results, you see it in the continued growth of our revenue; it’s just a nice consistent strong momentum moving forward. The monthly recurring business is not one where you see huge gyration, hopefully you don’t, but, you know even during the recession when revenue got a little slower we were still growing and we just had a bit of a dip in our growth. Saying when you are accelerating your revenue, we went from approximately 5% to 7% this year, that’s a pretty big deal in the recurring revenue business of our size.

So again, continued strong momentum in the business and I know that there is a lot and year-over-year bookings have been up so I think – you know I know there is a lot of noise out there in the marketplace but enterprise customers are buying. They have to and they have to do that to make sure that their businesses are competitive, bandwidth; I don’t know if anybody looks at any of their businesses but I don’t think bandwidth is going down in any business that we’ve seen.

You know unless it’s some sort of a declining business and you know customers need more bandwidth and that just fits right in our suite spot we’re providing them. It’s all about the network. As customers are moving more services to cloud that’s great for us, because we connect them to the cloud and we connect them to the data centers. So we’re right in the middle of that whole ecosystem of bandwidth – increasing bandwidth.

Operator

We will take our next question from the site of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley

You talked a little bit about the environment in terms of pricing and re-pricing, but can you talk about the impact of consolidation. We've seen a lot of deals in the competitive space in the last couple of quarters, some of them closed fairly recently, how do you see that change in the environment. Do you think there is an opportunity here for pricing to improve with a more rational industry structure and do you really having participated, you talked about buying some 5% conduit, but you really stay away from some of the bigger deals out there; just talk about your philosophy here on M&A given what's been going on? Thanks.

Larissa Herda

Yeah, there is a lot of consolidation and I do think consolidation is good for the industry. I do think it does help provide for a more stable pricing environment. But it is a very competitive environment. I don't know if that's going to change with the consolidation that's occurred. We look at consolidation as really a good opportunity, because typically there is a lot of dislocation that occurs especially with relationships with customers. It has happened in every consolidation that we've seen out there.

So our sales people are obviously out there you know talking to customers who may not be particularly pleased with how things are changing. So there is at least for a few years there is a bit of an opportunity that we can take advantage of.

With regard to M&A, our position on that has not changed. We are very active and looking at opportunities and if we found something that meet our criteria, we would be opportunistic. The good news for our business is that we are growing very nicely organically, a lot of the companies that you see that have been consolidating haven't been growing, so consolidation is really probably the only way they can get to growth.

So we are in a nice position to be able to have option and so if there is a deal that makes sense and its good for us strategically and it’s going to grow shareholder value then we’re interested in it. Being big just for the sake of being big doesn’t makes sense to us and although scale is an important element to this business, we think we have a great scale, because obviously we’re delivering great financial results with the revenue that we have and with strong margins that we have, we talk to a lot of other companies that are much larger than we are.

So we are more interested in being profitable, generating a lot of cash and making sure that we’re strategically well positioned and that we can head off any competitive threats that are out there and maintain a differentiated market position. And again, if you look at our results I think you can see that we’ve accomplished that.

Operator

We’ll take our next question from the site of Barry McCarver with Stephens. Please go ahead.

Barry McCarver - Stephens

Just starting off, you mentioned in your prepared comments growth in both the direct sales and indirect sales; help us break that out just a little bit and kind of what we’re seeing on the indirect side?

Larissa Herda

Sure. We don’t have any numbers to give you on the indirect side, but I can say that we’ve had this group in place now for about a year and a half or so and boy, kind of wish we had done it sooner, because they have been contributing to our growth. They are an extension of our sales organization, our analysis shows that the vast majority of the revenue that they’re bringing in is incremental to what our sales group would be doing; that’s one of the issues that a lot of companies have where the indirect sales channels have the conflict with their sales force. And we’ve got such a great sales force, we definitely didn’t want to create conflict, we want it to become complimentary.

So we have a very unique program and obviously for competitive reasons not going to talk about the differences, but we were selective about the partners that we’ve chosen and they have chosen us and we’re building very good strong relationships with them. We anticipate this to be an area of further growth in the future as we continue to invest in more relationships overtime.

But I think we’ve started off well, we did a lot of analysis of what makes a successful partner program and I think our program is very different than any other carrier out there and I think that we’re getting unique synergies as a result of that, so more to come on that in time, you know, it’s a small group, but they’re making a big impact on our growth.

Barry McCarver - Stephens

And then just secondly, kind of just a broader question about I guess gross margins have been pretty flat this year, retrieved a little bit in this quarter. If you think about sort of sales activity, the numbers new, buildings you are bringing on that, haven’t really seen a big change in fiber miles, but still a very active paces of buildings and customers coming on that. Is that kind of in short-term hurting gross margin, is that going to change in the near future or am I looking at that the wrong way?

John Blount

Well I like the gross margin; it’s really a combination of a couple of things and buildings really isn’t one that were negatively impacted over because when we have a customer that say entirely on net, you’re going to have a very nice gross margin contribution. But generally what we do with customers is they have a couple of locations or few locations that we connect with our fiber and they might have a handful or 50 locations that are in multiple markets that they might be another access solution versus our direct fiber. And so that’s where we get an impact from the gross margin, so it’s kind of that on the net versus off the net component of it, all driving very nice margins, so depending on the mix of customer that going to impact the gross margin.

In the more recent term, like I mentioned in the remarks we have been doing a lot in our business. We have been deploying and developing lots of products. We have been rolling those products out to our sales force to sell. We have been rolling it out to the delivery and our back office and our customer care areas to deliver those services and we have been doing that on a very high velocity.

So we’ve got a change in the business, we had to invest in people and related costs, but they’ll have an impact in the margin in near term as we further automate those processes. We have a great roadmap and how we’re going to do that to further leverage those systems and those products to drive that gross margin. So there are few items that have been kind of holding it back in the near term.

Barry McCarver - Stephens

So then I think it’s fair to say then that the kind of expanding product portfolio is maybe withholding the margin there?

John Blount

Then everything that goes with it; to launch those products and holding it back.

Larissa Herda

Until the revenue growth catches up.

John Blount

But the good thing is then when we look at all of those buildings were added like we mentioned we’ve already added as many buildings this year as we added all of last year and I think we have more buildings in a year than a lot of our competitors have. We’re doing a lot and that also – that leverages our infrastructure and also contributes to that margin overtime too. So there are things that (inaudible).

Larissa Herda

We’re in the process of putting together some new programs around our existing buildings and although we always maintain a sharp focus on adding revenue in those buildings. Sales people do have a tendency to sell what they can sell and adding new buildings is part of our D&A. But over the course of 2012, we will be deploying even more emphasis on our existing buildings because, quite frankly we have put lot of buildings on in the past few years, and we’ve just not touched the surface above the opportunity in those buildings. So there will be more to come on that over the course of next year, but I think that we've got this incredible asset that nobody else has and we can certainly continue to leverage it even more.

Operator

We will take our next question from the side of Frank Louthan with Raymond James. Please go ahead.

Frank Louthan - Raymond James

Great, thank you. Can you give us an idea on a broader sense, what are the main solutions that you are seeing customers come to you with now? And with a weaker economy, you’re still seeing some improving top line growth. Where do you think that you are taking the most shared from it? Is it from some of these weaker competitors that are growing or the traditional [I-likes] or where do you think you are getting your new resources of growth?

John Blount

Yes, Frank this is John. With our sales force, everything starts and begins with our data and internet product suite, and that's where we always start. From there we grow and we sell into those customers more and more services. As you look at our competitors that are out there, not many of them have the footprint that we have. Most of them rely on the incumbents to get their services and most of their services start with a TDM-based solution. So we feel like we have a real strategic advantage as we come into enterprise customer, offering our Ethernet solution and it’s really a solution that we can offer across the nation in all of our markets, easily and seamlessly, for them. So you see it in our enterprise growth, you see that in our data services growth, and so as we bring on new customers and continue to selling to our existing customer base, it really starts with those solutions.

Larissa Herda

So, and what’s happening is, customers are less likely to just be interested in having provide a single point-to-point type of circuit back when -- back when I first started with this company in the late 90’s. That’s a lot of what we did with a lot of point-to-point type of solutions. Today what customers are looking for is a total and complete integration of all their sites across the country, and if they got an international sites as well. And so, we have to provide the ubiquitous and seamless solutions to meet those needs. Otherwise you don’t get those -- all those on-net locations that you want to. So with the combination of solutions, every often now its also including a third party data center. We’re in a lot of those.

Sometimes, we’re offering our own data center or co-location facilities as in a alterative. And so, it’s a very, very board suite of products that customers are looking for you to provide, and they’re dealing in a very complex world. They want us to make it easy for them. They want things to be done for them and we’ve been able to step up to the plate and have created a very -- it’s a very great suite of products to wrap up the customer’s data needs regardless of where they need it. And by the way most of your second question was on who we’re taking the business from. I mean, the incumbent still have 90% of the market. So you know, nine times out of ten, that’s who we’re taking it from. Every once in a while, you run into another competitive carrier but the competitive carriers altogether are pretty small compared to the incumbent. So it’s really incumbent services. So it’s typically like a TDM-type service or a frame relay services.

John Blount

And having that consistent field across all of our markets has been really, really important to our customers as they choose us. You know, I talked earlier about one network, one set of systems, one set of data that allows us to give a very consistent field to those customers that have multi-location needs nationwide.

Frank Louthan - Raymond James

Okay, great and can you remind us what, you know you said, you expect for the seasonal impacting Q1 usually see over higher cost? Can you walk us through some of those items and what do you expect the dollar value, that impact could be this year?

Mark Peters

Yes, I don’t have an estimate yet for the dollar value. So traditionally when we look into the first quarter, the seasonal impacts, sometimes they can be on the revenue side too as we get into the holiday season close to Thanksgiving, you know things sometimes slow down on the sales front. So that can impact the first quarter and revenue. But then on the costs side as we go into it, now those things like payroll taxes that we said. So that’s been several million dollars in the past, and we’ll be giving an estimate on the fourth quarter. I would expect on that. So those kinds of costs that come in the quarter. So those are the big ones that are going to come in the quarter. I am trying to think of the other ones off of the top of my head. It’s usually a combination of those two that then can impact the topline growth and the margins going into the quarter.

Operator

We’ll take our next question from the side of Michael Rollins with Citi Investment Research. Please go ahead.

Michael Rollins - Citi Investment Research

Hi, thanks. Couple of questions. First, can you talk about the renewal process with your customers, is that becoming a source of revenue growth or is that still in the area where it’s unusual to some slight churn as customers are refreshing their contract, and then secondly if I could just ask a broader question whereas to the management team at times has talked about the aspiration of getting back to double-digit revenue growth as a company. How do you see that aspiration today? Is that something we could expect for next year of 2013? Can you give us maybe some color on how you are feeling about that today, that will be great? Thanks.

Larissa Herda

Sure. So on the renewal process we have different type of sales people in our organization and I guess the best way to categorize them would be hunters and farmers. And so, we have a lot of the smaller business customers after those deals are sold or go into the farmer sales force, and their job is to make sure the contracts are renewed, a lot of the smaller things occur and take a lot of the burden away from the hunting sales force, they can go out and continue to hunt, and so a lot of renewal activity takes place in that group in terms of just volume of customers. There is thousands of customers in that category, and that group is compensated on not just maintaining that revenue, but also increasing that revenue and when they do an outstanding job, and I would say that they are net positive on the revenue growth side. So renewals in that side, you know, flat to slightly positive and probably a good way to look at that existing base.

Renewals for bigger customers are a bit different, typically bigger volumes, and so it’s a bit of a different process. We like to get to our customers long before their contracts and typically with the larger customers we’ve already sold them other products from their first contract which is usually multiple agreement that you can then combine into one when it’s time to do an overall renewal.

So that’s very helpful in terms of continuing to grow revenue because you just add other products and services. It’s one of the reason why product development is very important in our business because you are constantly going back into that existing customer base and selling new services than, and at those times you use those opportunities to renew your contracts.

But, you know, there is a -- it is competitive. So we do have certain customers where it is, you do lose revenue when you renew those contracts especially for those IP bandwidth, if you look at what happens to IP bandwidth, for instance, over the past several years, the prices have come down to just ridiculous levels, I am not exactly sure how some companies make money selling it at some of those levels, but they continue to sell at those level.

We are in the business to make money and continue to make money. So sometimes you overdo those contracts. So, it really depends on what you are selling. When we sell a big, national Ethernet type network, renewing those contracts, I think is a lot easier because of the stickiness and the complexity of the networks than we’ve usually added other products and services on there.

So, you know, the renewal process hasn’t changed a whole lot, over the years. It’s been basically -- just part of the nature of being a company that’s over 15 years old, you are always going to have a contracts that are being renewed nearly every week.

With regard to aspirations on double-digit revenue growth, we are absolutely continue to inspire to that, but I think we made one point very clear when we set that as a goal and that was that we were going to need a little help from the economy. Thus far we are growing a lot faster than GDP which is impressive. We obviously want to grow faster; we need a little bit more help from the economy. That would certainly help us to get double-digit growth.

But that doesn’t mean that we are not continuing to innovate and work the sales process, and do all the things that we need to do adding new products expanding sales, adding new sales channels, all those things have put us in a very good position to be able to continue to work our way towards double-digit revenue growth.

We have a nice chunk of our revenues that’s growing, I think 48% of our revenue is growing at around with 18%. Every -- it seems like almost very quarter or so that percentage of revenue seems to increase. So there is some virtuous things that occur once we get to 50% and if we can obviously maintain an 18% growth rate.

So, we think we are well on our way, I mean we’ve obviously made a lot of progress since last year, and we think we are going to continue to make progress as we go into the next year.

Operator

We’ll take our next question from the side of David Dixon with FBR Capital Markets. Please go ahead.

David Dixon - FBR Capital Markets

Thanks very much and good morning. Larissa, I had a question for you on the CapEx outlook from here. We’ve ramped up through the recession, as you referred to, and you may have touched on this in the prior question that CapEx was largely success based, and I am just wondering if we do get a lift from the economy here, should we be modeling for a step up in CapEx or do you think we are prepositioned for that growth with the extended farther reach deployed today and then I just had a separate follow-up question for John, if I may.

Mark Peters

I’ll jump in first on the CapEx. So we’ve been historically of that 23%, 24% of our revenue that we’ve been investing in CapEx and through the recession first investing in the product and other initiatives that we’re talking about. We took that up to that 25, 26. It might have been one quarter I think at 27 when we were investing and a particular push in some products initiatives this quarter dropped down to about 25%.

So and the majority is going to success based, always understanding that success-based has a customer tied to it. So some real near-term demand that were supporting with that investment. So to the extent that the economy comes back and we have higher growth rate, so a much faster economy growth and we’re selling more. From a timing standpoint you might see CapEx then, but leave the revenue because first we have to deploy the CapEx. We’ve to connect up to the locations for the customer before we turn up the revenue.

So whenever there is a shift in growth rates, the shift in growth rate for the revenue is going up, then what you will see us, we will have to lead with CapEx and sometimes OpEx as we absorb that higher growth rate. Then we absorb that and then you absorb that spend in CapEx and OpEx with that now that a higher runrate annuity business, let them bring those margins there that the margins and the relationship of the CapEx to revenue back down. So that’s kind of the dynamic that happens when you have a shift in growth rate and then you compliment that when you get to that higher sustained level of growth with the further density in our markets in and particularly those less mature markets we have that just aren’t scaled and then we have over time, you know the infrastructure the more deployed, so then the relationship to CapEx to revenue you know also declines over a longer period of time.

David Dixon - FBR Capital Markets

And in terms of the follow-up question for John, appreciate we have got the superior SLA model and from a connectivity standpoint we are well positioned. I wanted to better understand the intelligent network vision outlook here and specifically how far we could step into the software-defined network architectures that see happening inside versus outside the data center today, if you could help with some thoughts there John that will be terrific.

John Blount

Well David, if you think about the intelligent network what it does is it allows enterprise customers to seamlessly with great flexibility react to the changing dynamics in their business. You think backwards, it used to be that a CIO had control of everything that he had in his network, his or her network. It was all within the walls of their business and today, enterprise customers they are going out and they are grabbing applications from the cloud. They are growing out and they are grabbing infrastructure as a service.

They are interacting with their vendors differently than they have before with APIs. The world has changed a lot and so as we look at the vision of the intelligent network kind of going forward, what we want to do is we want to give them a much better chance at managing that network as it comes inside their walls.

So we are going to give them the visibility to see what’s happening, you know what their applications, we are going to give them the flexibility to move those applications around and then we are going to give them the capacity and the dynamic flexibility to increase or decrease the capacity according to what their business needs dictate.

So we think it’s going to be a very powerful engine for us going forward. Now as I said earlier this is Phase I. We are just in the controlled release of the visibility piece. To the initial customers we've talked to have been very excited about it and so this is, it’s a long-term strategy for us, it’s one we've been investing in actually for years and we think it’s something where we are going to be able to have a unique offer and hopefully the enterprise customers will see it the way we do and we think that will lead to much greater sales.

David Dixon - FBR Capital Markets

And just lastly if I may Larissa, we've seen a step up in the quality of yourselves and engineering support teams on a local market basis. I wondered if it’s an ebb and flow in each market or are you trying to attract or consistently attracting better quality solutions-based sales and support teams having invested hard through the recession relative to your competitors that may not have.

Larissa Herda

I think it’s a number of things. This is a place that employees want to come because of the innovation that we are executing on sales people who like to sell that. Sales engineers is one of our strengths. Sales engineers are able to utilize their full set of skills that they have and so we've also become I think a place that people want to come and work at.

I just think that that people want to be excited about the company that they are, that they are selling and the products that we sell, we do a very good job with that. When I meet with our sales organization who comes through all the new sales people come through training, one of the things they always tell them is that I know that when I was a sales person I wanted to make sure because off sales are local and it’s about relationships and sometime you’re selling to people who you’ve known for many years and if you come us new from a new company, these are people that have come to trust you and I would tell them that they never have to worry about, if they happen to bump into their customer in the grocery store, they don’t have to worry about hiding in the next aisle because they just sold them something that didn’t quite work and you would be surprised that how many sales people who come to us tell us that, that is the case at other places that the companies that they sell, that they don’t have confidence that they can execute and execute on what they’ve said and you know it’s about your reputation and we happen to have a really good one and we’re very proud of that and so you right and it’s interesting that you say that you’ve seen a step up and it’s a continual evolution. You know with consolidation a lot of good people don’t have jobs and so we’re able to take advantage of that as well and it’s not necessarily the best people stay. The whole company is consolidated. So we’re constantly searching for the best people and fortunately we are able to attract them and keep them.

David Dixon - FBR Capital Markets

So it’s a part of the shift from a legacy sales person into more of a solution-centric sales person, isn’t it?

Larissa Herda

Exactly, yes, and that’s very true and we look for people who have that acumen and that ability to be able, we don’t sell widgets and I always tell sales people, if you were selling which is before and you think you are going to sell widgets, you are in the wrong place because we expect our sales people would be business people and they need to understand what internal rate of return is which is not something, most of them have never paid any attention to. They need to understand solutions, they need to understand what the customers’ problems are. And they have to understand how to listen and help customers solve their problems because that’s what we do.

Operator

We’ll take our next question from the side of Colby Synesael with Cowen. Please go ahead.

Colby Synesael - Cowen & Co.

Just want to get a little bit of granularity on the financials. I apologize for being so detailed, but basically you talked about why you need to get to double-digit growth or 10% with an improvement from the economy obviously in this last quarter you did 7.5%. I am just curious if its still management’s view that with the economy what it is today that they’re still viewpoint that revenue growth should continue to accelerate?

And then the other question I have is on churn, churn obviously specked up just a little bit in the wholesale business this quarter. I am curious if we saw the full financial revenue impact in the third quarter if there should be anything lingering as we move into the fourth quarter?

And then my last question again is on financials; on the margins, I know someone asked the question about how margins have come down slightly over the last few quarters. I realize this is a business of scaling and investing in that platform and overtime we should see margins start to increase. But is that something we should be looking for in the next quarter or two or are we talking like a year out? Thanks.

Larissa Herda

Okay, let’s see if we got all these. So on the growth going from 7.5 to double-digit, yeah we’re getting close, do we think it will accelerate; that’s what we live for, that’s what we do, that’s everything that we’re focused on; it’s accelerating our growth, but doing so profitably. And that’s where the balance comes in.

We could get to double-digit growth rather quickly, but it doesn’t add calories to the business that we like to say; we’re not having more cash in the company’s pocket then it doesn’t make a whole lot of sense for us. So we’re very focused on our cash flows and so that’s the kind of growth that we’re looking for and that does take a little bit more time because there is a lot of discipline associated with doing that. Yeah churn, if you do want to answer on the growth?

Mark Peters

No. Go ahead.

Larissa Herda

Okay. On churn, 0.91% that’s a pretty good place to be hanging out, so I wouldn’t look into anything on that. If we can maintain around 1% churn, obviously we don’t have to work as hard on the sales side to get that growth, the revenue growth. So I wouldn’t – yes.

Mark Peters

The only thing I have is – and maybe call it wholesale like we did from the carriers and those tend to be the lumpy, so that is we see more fluctuation at sub-category than we do in the enterprise. But the enterprise which is so consistent and they don’t leave it that often.

Larissa Herda

So nothing and you have a question on wholesale lingering effects, I don’t think there is any impact – there is no lingering effects on the wholesale. I think we saw it in the quarter and then do you want to talk more about margins?

Mark Peters

Yeah the margins, I mean just like – we’re a big recurring revenue business and so to move the metrics it takes some time you move our top line from 5% to 7% growth rate in one year was pretty extraordinary when you’re talking about a recurring revenue business. So we have accelerated nicely even with the economy doing what everybody has kind of observed here.

From a margin standpoint, that again is a very gradual process. Our margin doesn’t go up rapidly and it doesn’t go down rapidly which is the beauty of our business. So at a 36% EBITDA margin, it’s a great margin and a great place to be at, but I would expect it can take longer than a quarter to for that to grow at all, a very gradual process in our business and…

Larissa Herda

I think one other point to make is that if you think about our EBITDA margins and how they have actually grown despite the fact that we’ve had some kind of step functions in our cost structure as a result of the LECs increasing their cost on Type 2 services too. We had Verizon last year who increased quite significantly the price of Type 2 service – I am sorry, AT&T and that we had full effect to that this year and then in the summer we had Verizon increase and so that takes some time to absorb too.

John Blount

And I think to Larissa’s earlier point, we are being pretty disciplined in how we’re getting that top line growth. You know we’re not falling down on the price just to draw that top line revenue which is reflected in the strong margins.

Operator

We’ll take our next question from the side of Donna Jaegers with D.A. Davidson. Please go ahead.

Donna Jaegers - D.A. Davidson

Two quick questions; on fiber to the tower, can you give us any color as far as how your installs are going there and when if we’re seeing the revenue ramp already or should we expect more? And then on the enterprise business, you guys are at 10% growth in enterprise and Larissa when I talked to you earlier about it this year you saw that double-digit growth in enterprise would take longer than this year to get to, but you’re there already. So that seems like it’s coming in ahead of plan is that set of good read?

Larissa Herda

Well, you know, enterprise growth has been obviously it is the growth engine of our business and you make a good point and that we have 77%-78% of our revenue is enterprise and it’s growing at a nice clip. So I would say is it better than we expected? No, I would say it’s what we’ve expected.

As far as fiber to the tower is concerned, we are seeing installs every quarter and so yes you are seeing some of the revenue from that and that’s actually providing some stability to the carrier revenue stream where in the quarter we had some lumpiness, but we also had a lot of good guys in they are coming from the -- we don’t call it fiber to the tower, we don’t sell fiber, we sell services, we’re selling Ethernet primarily to the tower.

And we’ve had a number of services that we sold for Ethernet usually start off around 100 meg and those customers have already gone to 200 meg, they are increasing their capacity and we love that because we’ve already spent the capital. So with ever increasing bandwidth demands coming through mobile services, we expect to continue to benefit very nicely in a very capital efficient manner because of the network solution that we provided.

One of the problems with selling fiber to the towers I think is that you kind of cannibalizing your future, because most companies that sell fiber to the tower and not selling anything else to those customers. Our customers, we like customers to keep [listening]. So by selling an Ethernet solution to the fiber to the tower providers we’re able to continue to benefit from their ever increasing demand.

John Blount

And one thing I’ll add, we believe we have nice deals in terms of fiber and as we mentioned before we take a measured approach at it too. So we’ve balanced how much we do want to make sure making money on these deals so unlike some others that might have over weighted their business toward this opportunity; we’ve taken a measured approach in this category.

Operator

We’ll take our next question in the side of Michael Funk with Bank of America-Merrill Lynch. Please go ahead.

Michael Funk - Bank of America Merrill Lynch

Great. And I have got two questions, quick ones here. First of all, Larissa, you commented a few times on how recovery in the economy can be additive to top line growth. I think you have a unique position on, both [PBX] and customers. You know your role on as a Director on the Board of the Denver branch of the Kansas City, and as a business leader to may be comment on your expectations for recovery and business formation. And then second, one quick one for Mark, if you can remind us about your leverage target and uses of capital the next year too.

Larissa Herda

So [gosh], Michael, you gave me a lot more credit there for having clue as to where the economy is going, but let me do my best, based on our experiences in what we see because, I think, we do see a lot. We have a lot of customers to begin with, 27,000, and we’re selling to a lot -- we’re in many markets across the country. So I think we do have a good pull. I think for business customers, the ones that we’re seeing, they do -- they’re investing for growth and although, I had not -- earlier in the fall when everybody was feeling so pessimistic, my theme was if I wasn’t reading the paper and watching the stock market, I would never know that there was anything wrong going on out there because we’re seeing very good strong business momentum. I can’t comment on small business community though because we don’t really spend a lot of time selling to those types of customers. I think there’s still a lot of issues there because access to capital and number of other things.

But in the face that we operate in, it seems to be a very healthy business environment and our customers have a lot of cash and they’re willing to make investments in future and they know they have to in order to continue to compete. We‘re doing that ourselves. We consider ourselves to be, kind of, like a big customer of ourselves, right? And so what we do in our own personal ecosystem here is we are making investments to make our business more efficient. It doesn’t help employment all that much because a lot of what we do is doing more with less, right? And so we, by becoming more efficient, we don’t need necessarily as many people as we grow. So don’t add it. We have been adding people but we don’t have to add as many as we may have five years ago when we didn’t have a lot of the investment in the systems and network that we have today. And that’s what businesses are doing. They seeing the importance of technology and how technology and innovation can help them drive their businesses forward. And that obviously helps our business.

Mark Peters

And then to your question on the use of capital and target leverage ratios, you know we’re in a pretty good place now from a leverage stand point, conservative, I think, for a sector like I mentioned earlier that our net debt-to-EBITDA is 1.8 times, our interest coverage is about eight times. So, we are in a conservative position from a leverage stand point. We haven’t set a definitive number that says this is what our leverage ratio is, because opportunistically we would be comfortable to take that up if there was the right strategic opportunity for us, kind of, in that within the boundaries about Larissa spoke about earlier about our M&A strategy. But I also don’t see a need to take it down further north right now. I mean, just from the growth of our business, our leverage ratio have been within delevering just by the growth of our business.

So from a capital allocation standpoint, it really hasn’t changed from what we’ve been doing. It’s primarily focused on investing -- reinvesting into our business for growth, and products capabilities, those success-based opportunities to reach where our customers are. So, signing those good deals to connect. As a result, we connect up more and more locations with our fiber, investing like we’ve been doing in reach -- fiber reach, building out our network to reach more locations. That’s really where the focus is of our investing. Like we mentioned, we completed our $50 million share repurchase program. So that’s on the table for he future opportunities there as well. So, we are looking at different ways to continue to just build value and then reinvesting that our capital. You know we have that $470 million, and we ended the quarter with a strong balance. So we can [see] the balance amount. And I think it will be more of the same going forward.

Michael Funk - Bank of America Merrill Lynch

We say conservative as far as you leverage. I would agree, I mean are you comfortable letting that drift higher in the end term here to you, deliver two times for share repurchases. So, should we think more about two times and below.

Mark Peters

We’d be comfortable -- there is a band, I think, we’re right in the middle of good band. So we will be comfortable if that drifted up for the right meaning you saw of our capital whatever that might be.

Larissa Herda

So it looks like we’ve gone quite a bit of time over, but let’s try and take one more call. Operator?

Operator

We will take our last question from the side of Tim Horan with Oppenheimer. Please go ahead

Tim Horan - Oppenheimer

Thanks guys. Just two if I might. Could you, maybe, break down what you are spending CapEx on now, and if you had maybe, a percentage it’s going to level, percentage to CPE and percentage of everything else? Or you’ve been, you can only gave us a percentage that’s going towards 5-grance, this follow up at that. Thanks.

Mark Peters

We haven’t provided -- that’s bit for the -- you can see, we can pour into some of that if you look at our 10-K filings, but when we break out end we -- in the past, I guess, several years the differentiation we provided is what we call our short-to-medium term success based CapEx and that’s been over about 80% or so historically of our total capital spend, and that goes to connecting up new customer buildings with our fiber and that includes electronics and includes labor and that includes any capacity we put into the potential office, you know, in electronics to serve the ever growing sales efforts.

It includes capacity and electronics we put into our IP backbone to grow that to support the ever growing sales that we are doing so. So, with all those efforts tied into that, either of that, one specific customer or that the near-term growth that we are seeing in the business. So that’s the bulk of our where our dollars are going, the rest of the capital dollars are investing in products, investing in systems of the automation that we’ve been talking about. You know frankly the IT in the systems all go -- really to go back to support our customer and our product.

So that’s in the bulk of the other 20% of our spending as well as you know fiber extension that we’ve mentioned we brought some conduit and dark fiber this year that goes into that other 20% category historically.

Tim Horan - Oppenheimer

And at a certain point you try to slow the basic civil engineering spending to leverage what you have a little bit more because just looking at the numbers on a quarterly basis like right now, the free cash flow margin is really quite low and then Return on Investment Capital of all the infrastructure at this point is really quite low, is there a certain point that we can really start to leverage away, you have the basic infrastructure to clouds services and a lot of these other value added services that are you talking about where we can really see the free cash flow ramp up with maybe either CapEx decline or the EBITDA margins really jumping up, is that two years from now? Is that five or 10 years from now? How do you think about how the company evolves?

Mark Peters

Well, ultimately we are a growth company. So when we invest dollars we look at internal rate to determine on all specific deals, and in investing in those projects while we’re, like I spoke earlier, when we transition from a 5% growth like to a 7% growth rate, we’re investing dollars in advance of that which we have been doing.

But ultimately, we’re seeing our ROIC continues to expand on an aggregate basis, which supports our model, on IRR model and our threshold where we could deploy our capital on the three deals. So we’re seeing that return in our business.

Now we continually have initiatives that leverages that infrastructure whether that’s focusing on already installed buildings, the infrastructures already deployed. We have sales programs that continually go back and leverage those programs. So, -- I think better infrastructure. That also contributes to our expanding ROIC in the business.

We have a lot of markets that we have good quarter infrastructure, but there’s a lot of growth opportunities in those markets. There’s a lot of place for us to grow and expand. So it really makes a lot of sense both competitively and financially for us to continue to expand in those markets because then we will avail to expand the margins in those markets and the cash on those markets once we pay by density.

On the I have happy, but margins in the 60% category at the local level, and a less mature markets have them closer to a 30% local EBITDA margin, and it really does speaks to how much them to be, how long we’ve been there, how big the networks are and the recurring revenue annuity we built up over that infrastructure. So it’s a long process to bring them up if you look at the track record that we’ve shared with you in prior presentations, the progress is there and the trends are growing.

So we think we are making the right decisions and are still throwing up the numbers.

Larissa Herda

And those matured markets also have a much CapEx-to-revenue ratio as well.

Mark Peters

They absolutely do.

Larissa Herda

To see more efficiency there as you have more infrastructure you can leverage it more in a city like Austin, I don’t remember the last numbers where, but it was something like 11% and it was fairly low --

Mark Peters

That goes from a CapEx to revenue in those matured markets can be in a team. So it’s a gradual process where long term consistent business and the numbers are putting out the model. Thank you.

Larissa Herda

All right. Well, great. Well thank you everybody. We appreciate you taking the time with us today and we appreciate your support of TW Telecom. Have a good day.

Operator

That concludes our program. Thank you for joining us.

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