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Time Warner Telecom Inc. (NASDAQ:TWTC)

Q2 2007 Earnings Call

August 8, 2007, 11:00 AM ET

Executives

Larissa L. Herda - Chairman, President and CEO

Mark A. Peters - Sr. VP and CFO

John T. Blount - COO

Analysts

Timothy Horan - CIBC World Markets

Jonathan Schildkraut - Jefferies & Company

Tom Seitz - Lehman Brothers

Vance Edelson - Morgan Stanley

Colby Synesael - Merriman Curhan

Frank Louthan - Raymond James

James Breen - Thomas Weisel Partners

Raimundo Archibold - Kaufman Brothers

Donna Jaegers - Janco Partners

Presentation

Operator

Good morning and welcome to the Time Warner Telecom's Second Quarter 2007 Conference Call. Today's call is being recorded. With us from the company is 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, Senior Director of Investor Relations. Please go ahead.

Welcome to Time Warner Telecom's second quarter conference call. Let me start by directing you to our website at twtelecom.com, where you can find our press release as well as our supplemental quarterly information. Before we begin, I will read our Safe Harbor statement. The issues discussed in today's conference call include certain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are naturally subject to uncertainty and changes in circumstances. Actual result may vary materially from the expectations contained herein, due to the risks disclosed in the company's Annual and Quarterly filings with the SEC, especially the section entitled Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31 2006 and our supplemental materials posted on our website.

Time Warner Telecom Inc. is under no obligation and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. In conjunction with SEC Regulation G, I want to point out we report several financial measures that are non-GAAP including modified EBITDA. Our non-GAAP measures are not intended to replace our GAAP disclosure; rather they are merely presented to provide additional insights into our performance. Please see our press release and other information, posted on website for more details on these and other matters.

Now I am pleased to introduce Time Warner Telecom's Chairman, President and CEO, Larissa Herda.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Thanks Carole. Hi everyone and thank you for joining us today. Let me start by saying this is clearly a great quarter all the way around, completing our major systems in organizational integration in nine months, while delivering accelerating Enterprise revenue growth is simply phenomenal.

With me on the call today are Mark Peters and John Blount. Mark will walk you through the financial performance first, then John will take you through our integration accomplishments and then, I am going to close by taking to you about some of the great opportunities we are seeing in the Enterprise space.

With that, I will hand it over to Mark.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Thanks Larissa. We have achieved solid progress on all fronts this quarter. We accelerated our Enterprise growth, expanded our margins, substantially increased our modified EBITDA and improved our bottom line. As a reminder, when I refer to our consolidated results, I am speaking to a GAAP results including core and acquired operations. Revenue from our core and acquired operations, excludes the change to present certain taxes and surcharges on a gross versus net basis, with took effect from January first as detailed on pages 14 and 15 of the press release.

Among our significant integration accomplishments, we completed the integration of our billing systems to a common platform. Due to the integration of the customer data as well as the fact that we are now managing the business as one cohesive integrated operation, this quarter is the last that will we will presenting separate core and acquired revenue results.

Total revenue for the quarter was $268 million, reflecting 40% growth year-over-year and 3% sequentially. This included core growth of 9% year-over-year and 3% sequentially. Enterprise revenue continued its steady upward climb with the largest composite growing segment of our customer base, now representing 68% of our total revenue. Our consolidated enterprise revenue grew 57% year-over-year, which likely to impact our acquisition and strong organic growth. Sequentially consolidated enterprise revenue grew 5%, reflecting a strength of our voice data and the Internet product sales.

Enterprise revenue grew from core operations... the enterprise revenue from core operation grew 19% year-over-year. Sequentially our core operations grew 5% reflecting incremental growth of $7.1million for the second quarter as compared to $4.8 million sequential growth for the first quarter. On the absolute dollars, year-to-date core enterprise revenue growth was up 60% as compared to the first six months of last year. It was also the highest percentage growth sequentially and over two years, on obviously a much larger base.

Additionally, we're beginning to show progress with out acquired enterprise revenue posting modest growth this quarter. Carrier revenue continues to mean important revenue stream, representing 28% of revenue this quarter. Due to the acquisition, carrier revenue grew $7.3 million as compared to last year, and it was otherwise relatively stable in our core business for the past several years. However we are seeing some pressure this year as a result of consolidation-related grooming from Cingular and others, as well as the normal grooming and contract renewals at current market pricing.

On the sales side, we are generating new sales from large and small carriers alike as they look for quality providers to connect their networks in the metro area to reach their customers, other players and sales guys.

Our revenue churn is 1.1% of monthly revenue this quarter, the same as that of second quarter last year and improved from last quarter, which was 1.2%. Growth in core customers remain strong. Our consolidated customer count decreased due to unexpected churn rate for the acquired operations as well as converting them to a common customer profile as part of our integration. The acquired customers churn had an impact of less than $1 million to revenue for the quarter, while the change in customer profile had no impact no revenues.

Respective reduction of customer counts from the acquired operations may continue as we work through our remaining integration activities. Our modified EBITDA was $83 million for the quarter, up $6.6 million or 9% from last quarter. Sequentially our gross margin grew to 57% from 55% and modified EBITDA grew to 31% from 29%. The change in modified EBITDA and margins was primarily due to strong revenue growth, integration cost synergies, seasonal reduction and payroll taxes and improved access cost due to volume discount and network optimization. I want to remind you that the margins of the acquired business were in the mid-teens and ours were in the mid-30s. Now, just eight months post closing, our overall margins are already back into the 30s for the quarter and the years.

Clearly this was a strong quarter for us. Our Enterprise business contributed to our margin growth, and we achieve integration efficiencies and cost synergies. All of these positive events converts in the quarter providing us a strong margin expansion. As our business continues to grow, we expect to reach 30% modified EBITDA margin during the summer of 2008, which is why our margins were prior to the acquisition. As said, I want to remind you that our quarterly margins, all has been and will be impacted by the timing of sales, installations, seasonality and other normal business fluctuations, as well as integration synergies and costs. We expect the integration cost synergies related to network costs, which is the majority of our expected synergies will be primarily realized unlike 2007 and into 2008. What this all means is that our expected margin expansion will not necessarily be on a straight line.

Our 2007guidance or total integration costs remain unchanged at $35 million to $45 million. The expected net has changed a bit with some dollars moving from operating expense to CapEx. For the year, we now expect $5 million to $7 million in operating expenditures and $30 million to $38 million in capital expenditures. They are reducing our estimates for operating expenditures to reflect integration efficiencies and cost avoidance that we have achieved to-date. We eventually have a lot of hardworking employees were in second half, thereby avoiding some of our plans consulting related costs as well as very effective contract negotiations which allowed us to avoid certain costs. We are increasing our integration capital expenditures to reflect the acceleration of capacity and product deployment to our credit markets. In the current quarter, a large portion of the increase in integration CapEx was the result of accelerating product deployment in cannot-be-acquired markets. We expect to continue this accelerated process beyond these ten markets throughout the remainder of the year. Thanks to the shift of saved OpEx dollars to CapEx.

Now let me turn to our balance sheet; with all the churn out in the debt market, I feel that I should comment on the fact that we are in a very strong liquidity position. We have nearly $300 million in cash equivalents investments which have declined only $10 million year-to-date despite the fact that we incurred $23 million for integration and branding cost. In addition we only have $6 million of annual debt maturities until 2013 and we have strong leverage ratios. For example, if we analyze this quarter's results, our modified EBITDA covers our net interest expense by more then four times and the net leverage ratio is only slightly over three to one.

Let me sum up the quarter by saying, we delivered very strong financial performance in addition to achieving substantial progress on our integration. We will continue to focus on growing the business, leveraging our acquired operations and continuing our strong enterprise success. With that I will turn the call over to John who will take you through our integration progress accomplishments.

John T. Blount - Chief Operating Officer

Thanks Mark. Unlike both Larissa and Mark's comments that we made some tremendous progress with our integration this quarter, in fact nothing is short of impressive. We grew the momentum of our core business, while very efficiently moving through the integration of a large acquisition. Our employees did a great job stepping up to this large effort, while at the same time accelerating the availability of our full product capabilities into our acquired markets. Let me take a few moments to share with you our philosophy with regards to integration. Our objective is to combine these two companies in a manner which positions us for the long-term. This means we have worked and we will continue to work, to identify and implement the best practices of each organization in order to be able to scale the business in the future and create strategic momentum. This is the essence of what integration really means for us.

Our approach has been to unite the organization and its people to achieve best-in-class capabilities. Our intention is to provide seamless end-to-end customer experience supported by fully interconnected network assets in all the systems, processes and tools necessary to execute efficiently. And that is exactly what we are doing. While this was not an easy task, we have made remarkable progress in the last nine months, since closing of this acquisition.

Let me walk you through our accomplishments. We breakdown our integration at the three major initiatives including organizational systems and network activities. Our first major initiative, organizational integration is essentially complete. Let's face it, when you take about 700 new employees and add that to our existing 2100 employees, and at the same time add 31 new and 12 overlap markets that takes some planning to truly integrate. And it takes time to implement our plans and get people trained. As a result of our efforts in this area, we have achieved our planned employee-related synergy, cost synergies. Completing this initiative means that we are now operating as a single organization for our sales, customer care, field operations, marketing and headquarter functions, which is essential to leveraging the business. In addition, we now have two national operation centers, each with a capability to provision nationwide across to all customers and major products. Obtaining an additional national operation center was one of the strategic gems in our acquisition.

In addition, to addressing redundancy and business continuity, we are implementing a structure that will simultaneously scale and drive efficiencies for our customer base, providing a more tailored service experience within each customer segment. Our next major initiative of integrating our major systems is also complete. This means, we now have a common data and system platform nationwide, which includes integration of our human resources, financial, sales and customer management systems, and more recently our billing, provisioning, network and surveillance systems. This work involved combining and converting a significant amount of IT applications and the underlying data, so that we now have all employees using the same systems across the business.

We are now refining and optimizing our newly integrated operations which remain a work-in-progress, as our teams get accustomed to working out the inevitable challenges of the new systems, structure and processes. Change is not easy for anyone, but we have invested significant time in training and our teams are adapting with great attitudes and energy. This hands-on production experience and ongoing system enhancement will allow us to get more and more efficient with time.

I just want to pause here for a moment. We say it is a significant and sizeable accomplishment. In fact completing this extensive system inauguration in this timeframe your industry is unheard of. We are in position to do this because we have always invested in our systems. Their ongoing investment have created a strong foundation for this successful inauguration. The punch line of all this is that, we will be able to maximize our efficiencies, expand our salability and prepare us for serving growing market demand, while enabling excellent customer care, that is what we are focused on.

The remaining major initiative involves our network integration which includes fully inaugurating our networks as well as network grooming. Shortly after the acquisition, we inaugurated our IP and transport networks, and since then, we have inaugurated our national SS7 signaling, long distance and voice networks. This enables our full product suite which is now available in the majority of the acquired markets. The remaining inauguration to be completed includes further deploying our advanced product portfolio into additional acquired markets and completing our network grooming.

Let me take a moment to help you understand more on network grooming and why it takes time. The network is a dynamic asset this is constantly changing. Network optimization and grooming is time-intensive because it involves highly coordinated efforts to deploy investment capital for analyzing, designing, provisioning and ruling traffic onto new and more network architectures. All of this were must be managed and coordinated with our customers, the carriers we interface with, as well as our own network activities, which with our ever-increasing customer demand is an extensive effort. In pursuing this network optimization, we've to make the changes to our network as transparent and minimally disruptive to our customers as possible. So at the end of the day, it takes a lot of effort and time, but we are making great progress and we are seeing synergies in this area already. And we are committed to getting all of our planned synergy savings as well as implementing a combined network that will serve us and our customers well into future.

Moving on to network integration, I want to give you an update on the product rollout to ten of our acquired cities that we announced last quarter. The rollout is completed ahead of our original schedule. The markets are enabled with the advanced products and we have started selling in these ten locations. These cities include the Baltimore, Washington DC area, Birmingham, El Paso, Jacksonville, Louisville, Kansas City, Las Vegas, Nashville, New Orleans and Greenville, South Carolina. We selected these markets because of the robust nature of the market characteristics relative to our market strategy and our estimates of the immediate market demand in those local markets, as well as customers in our existing markets, with the need to connect to these new locations. In fact, in a short period of time that we've been selling, we have seen many customer wins that were specifically enabled by the rollout of these services.

Here are just a few of the deals we've won in these ten markets. Representing our multi-city and regional strength was demand from core customers buying into these acquired markets. For example, three customers in Minneapolis purchased service in the Kansas City, including WageWorks, Marshall & Ilsley and TMP Directional Marketing. TMP also extended service to Baltimore. Also extending our service to Baltimore from Austin was our customer Activant. In addition we have provided a new 7-side [ph] solution for Lewis & Roca in Phoenix, which includes service to Las Vegas. Another multimarket win was with Burnett Staffing, extending service from Houston to some of our core markets as well as El Paso, another one of our ten rollout markets. This was a new customer win we achieved in-part due to our ability to serve El Paso. The point is that all of these sales included the extended network LAN, integrated LAN or IP-VP end services leveraging our IP backbone, right in our sweet spot, demonstrating why we are enabling these acquired markets with a full product capabilities.

The name of the game is improving the efficiencies and capabilities. As we become more efficient serving our 31,000 business customers, we are better able to support new and existing customers with new services, transporting their communication traffic to all parts of the country, and delivering them improved business communication. The progress that we have this quarter is a win-win for our us and our customers. So stay tuned as we look for more success-based opportunities to rollout these product capabilities to more of our acquired markets. With that I will turn the call over to Larissa.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Thanks John. Let me start by simply saying, the time is right for Time Warner Telecom, because to our history we have always taken the long-term view to building shareholder value. We have made the right investments in people, network, technologies and products, and we invested in the right network strategy. This has yield us nearly 8000 cyberconnected buildings, created a national reach, achieve this scalable platform and assemble the great team to grow the business, as demonstrated by our successful integration. Most importantly, we have invested in the right infrastructure to provide the products for the current and future demands by enterprise customers. The time is right for Time Warner Telecom today, because we have start making the right investment ten years ago, with an enterprise strategy that takes years to cultivate. We are well positioned with a metro fiber-based strategy to serve medium and large customers with innovative technologies and solutions, and that started a long time ago, including technologies decisions that are paying off today.

Our metro fiber-based strategy has, and we believe we will continue, to open door to lucrative sales to medium and large business that other strategies will not. We are selling to large, complex multilocation customers with growing demand for our communication services. These enterprises are entrusting us to serve the core of the communications networks and enable their mission critical business applications, in short the pulse of their business. These applications require critical network services such as they are diversified route through a data center, which can only be served with a strategy that has the power of a metro fiber network. In addition, we are augmenting our strategy with the very efficient business operation we recently acquired from Xspedius. With their very effective approach for the small to medium-sized business customer, we are adding density in our markets with customers that are not capital-intensive, yet leverage our investment in fiber, switches and central office infrastructure, which compliments are overall capital investment.

With our acquisition, our market reach now covers two-thirds of all U.S. businesses or 8 million enterprises. Out of those 8 million enterprises, 1.6 million of what we would consider, targeted businesses, which consist of sites with two or more DS-1. More importantly, nearly 900,000 are targeted businesses that are within a mile of our network, which is a conservative count, given we excluded single T-1 base customers in that analysis that we also serve. So, I don't care how you slice it, there is a tremendous opportunity and demonstrates the sheer reach of our fiber networks.

The time is right for Time Warner Telecom because we are well positioned for the growing enterprise opportunities that are ahead of us. We see demand continuing to grow for enterprise solutions from a variety of places, including the significant role Ethernet has in this opportunity. But today I am going to talk about just a few different dimensions of this demand. This includes the enterprisers that are rethinking and reengineering their IP infrastructure to manage more IP-based applications with scalable network bandwidth and a strong focus on meeting regulatory and operational requirements for data management and storage. These enterprises had an ever increasing focus on this after-recovery and business continuity, and have growing data center and collocation needs.

Let me walk you through some of these dynamics and how they are creating opportunities for our company. Enterprisers are reengineering their IT infrastructure to support a wide range of IP-based applications to meet mission critical business services for certain users. In the consumer space, we hear a lot everyday about the growing demand for Internet bandwidth for applications like MySpace and YouTube. These services which clearly impact consumer demand also drives demand from many of our customers and benefit us as well. However for us, the real story is growing enterprise demand, which we don't hear people talking about much. So let me tell you about these... the opportunities we see.

In the enterprise space, we see a growing need to support IP applications. Think about collaborative applications like employees communicating in Web-based conference calls, or electronic sharing of data. It also includes enterprises IP-based applications with vendors or customers to automate and enable efficiencies in their businesses for bill payments, customer service and other communications. It might also be Web-based portal to support such things as secured board communications. Here at Time Warner Telecom, our employees use these type of IP-based applications everyday. This includes online applications like PeopleSoft, which we use for our financial reporting and human resource needs, as well as Web-based training applications such as product, legal, other compliance training. These types of Web-based applications are pervasive in our business and we see them growing in many other businesses as well.

Other applications like supply chain management, the process of ordering, managing inventory, shipping and billing are all growing opportunity of IP-based applications, which will drive ongoing IP demand. These IP-based business applications are not only driving demand in corporate headquarters locations, but also at brands locations which we actively serve. We are saying enterprisers upgrading bandwidth for branch location connectivity to achieve improved application performance as well as greater scalable connectivity for storage application. Today's IP Manager has to support a wide variety of new applications and needs, and needs dependable, scalable bandwidth to support those applications. And our Ethernet and IP solutions deliver on those requirements.

At the end of the day, increased bandwidth all begins an end [ph] in the metro arena, and with 75 markets with a the capability to reach two out of three U.S. businesses, we are well positioned and the time is right for our networks to serve a future demand from enterprises. Clearly, we are already benefiting from this type of demand with our 17% compounded annual growth rate form our core enterprise revenue over the last three years.

Another strong enterprise driver has been the demand for data center and collocation services. The story here is that more and more business are seeing the need for these services. Right now, we are capturing the data centre and collo opportunity in three ways; the first aspect is where we constructed direct fiber builds into customer's data centers. These customers buy from the supplier that can build the network the way they need it for diversity, reliability and high availability for instance. After working with Wheaton Franciscan Healthcare, who provides comprehensive healthcare throughout Wisconsin, Iowa and Illinois. We designed the solution between our operation centre and disaster recovery site, which allows them to access their growing of volume of patient data. With the ability to chart and back up medication management in lab systems their staff is able to improve patient outcomes through secure, reliable and fast electronic access to patient data. In the solution all dated is generated is neared in the disaster recovery sites across high secured links that we provide.

The second aspect to data center opportunities include building fiber into third party data centers for clients like Hewlett-Packard, Peak 10 and SunGuard clearly experts in the data center business. Hewlett-Packard and Time Warner Telecom continue to work together in conjunction with the growing data center and network solutions market. We have built fiber into ten HP data centers across five states. Peak 10 own and operates ten enterprise class data center in seven southern markets. They also support virtualization for business for the complete portfolio of managed services. We have connected our fiber into five of their centers including Charlotte, Jacksonville, Atlanta, Tampa and Reilly. Peak 10 sell solutions bundling our network services as a part of their solutions and enterprise customers can access the center with Ethernet purchased directly from us. For SunGuard, Time Warner Telecom currently has on net fiber to five data centers in four states with a sixth center under construction in the new state.

Given our extensive fiber footprint there are also several network meet points in other states that help both our company's to support data center and network requirements for enterprise customers. Both the trend of customers wanting to access these sites as well our ability to partner with third party data center companies like Peak 10 and is creating a great opportunity for us. The third area we are participating in an increasing demand for our collocation services. We've had a nice collocation business of our own and we had it for more than ten years. The reason customers want this service from us is because we have collo sites in most of our markets. So it's local, easy to access and because it's on our network they optimize their network costs. This collocation addresses the growing needs for a secure, separately caged area, necessary power and cooling conditions and the ability to meet the growing space requirements.

All of these demands have caused enterprises to seek our collocation services as part of their network services. While collo is not the largest component of our service to these customers, it is often a ticket to play. Just to be clear, we're not -- just in the business or just selling rack space. This offering allows us to build a more robust solutions and some more network services to our customers. Our collocations are typically in space adjacent to most of our central offices, thereby leveraging our HVAC power capabilities and the secure environment. To give you a sense of the importance of our collo business, more than 10% of enterprise billing is from customers who require some amount of collocation as part of their total service package. So you can see, it's an important draw for customers and demonstrate their ability to get closer to the mission critical elements of our customer's networking needs, enhancing the stickiness of our customer relationships.

I touched on some different aspects of demand today, including the growing enterprise demand for service to support increasing use of IP-based solutions and the need for data center connectivity and collocation services. Together all of these customers needs along with our leadership position, Ethernet technology, coupled a the technology transition in progress come frame in ATM, will position us to grow existing and new customers to take market share to continue to grow enterprise business.

In closing, I would like to reiterate. This was a great quarter and we've accomplished a lot in our integration and we are better sized on doing much more to fully optimize our business. Our excellent progress in combining our operations is a testament to the quality of our employees, the outstanding accomplishments they have accomplished and our focus on making our company the best in the business. Thank you for joining us today and we will now take your questions.

Question And Answer

Operator

[Operator Instructions]. And the first question comes with Tim Horan with CIBC World Markets.

Timothy Horan - CIBC World Markets

Good morning guys, thanks a lot. Two questions, one on the synergy side, maybe I missed this but can you update us on the expense synergies and timing. It sounds like you've already accomplished a lot, but when we will start to see that in? It sounds like you're starting to get some revenue synergies; have you been able to kind of quantify that, touch more? And then secondly on the wholesale front, it looks like it was down $2 million sequentially, the wholesale revenues. Anything... is that a trend and maybe how much longer that might happen? Any update maybe on the grooming and talking to your private customers what's the outlook there is? Thanks.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Okay thanks Tim. On the cost synergies in particular, as we mentioned the bulk of our expected synergies really come from the network access costs. So we've purchased from other carriers a portion of the services that we deliver to our customers and that's the longer take a longer timeframe to get those synergies, because it is just a laborious process that John took you through a little bit to coordinate taking those circuits down, and we've started some of that, we have started to see some of those synergies through the first half for the year. But I would expect those to build throughout the year but really not to see building up really getting to the full run rate starting to get there towards to the end of the year, but really into the beginning of next year.

Timothy Horan - CIBC World Markets

And are you still thinking $40 million to $50 million there for total synergies?

Mark A. Peters - Senior Vice President and Chief Financial Officer

Yes and our expectations haven't changed. But we've gotten away from really putting out a number. I am really drawing you all to focus on what the overall consolidated margin of the business is. Still as we get those synergies, that's where we the overall margins back to the mid-30s where we were before the acquisition.

Larissa L. Herda - Chairman, President and Chief Executive Officer

And on the revenues synergies, I would say we are obviously seeing revenue opportunities that are coming our way as a result of the new product capabilities that we've put in the market. However we are still have some sharing going on in that customer base and we have had some wholesale carrier revenue that we've had to do some rating on that as we brought them on to our contracts and brought their contracts up to the more recent pricing. So there is some drag there. But yes, on the enterprise side, there is definitely... really good demand. I was in Louisville, Kentucky, last week and had the opportunity to talk to the sales force and there is... as just an example of just some real excitement out there with the new product capability you send, so it's going to take time though. Those... the selling cycle is really just beginning. We talked a little bit today about some of the wins. So lot of those things still needs to be installed or in the process of being installed. But we have high hopes, our expectations though was that you wouldn't really see it necessarily show up until the end of the year or the beginning... towards the beginning of 2008

Timothy Horan - CIBC World Markets

And on the wholesale front, I know you cannot touch on that?

Larissa L. Herda - Chairman, President and Chief Executive Officer

Yes,on the wholesale front we are... obviously we have been talking about Cingular for three down years and it's been coming out quite extensively over the past year, particularly thus year and we still are seeing that. So that's that's probably taking us over the top in terms of some of the carrier losses that we have seen. So one more bad end I really... it really depends on their schedule. I mean it could kind of... it could end up... you have it in the quarter and then they could take a break for a quarter and then they can come back in a quarter. So we are expecting that they are going to continue to go until most of those services in region go away. So you do not expect it there and it will continue to be a drag on carrier revenue for a little while. On the upside we are also seeing lots of really fund carrier opportunities as well. So a lot ... the carrier group has been really doing a great job in replacing revenue that we've lost I should say, when you have one big carrier like a Cingular that's moving quickly to reduce its revenue then you can see that impact in a given quarter

Timothy Horan - CIBC World Markets

Thanks so much

Larissa L. Herda - Chairman, President and Chief Executive Officer

Sure

Operator

Your next question comes from Jonathan Schildkraut with Jefferies.

Jonathan Schildkraut - Jefferies & Company

Good morning. Thank you for taking the questions. Yes, I just had a couple of questions. Mark you addressed some of the shift in kind of OpEx to CapEx change on the integration cost side. Some of that... you kind of rewind [ph] it... if you could review that I would appreciate it and additionally, I think from the language in the release that the company maybe anticipating additional integration cost into 2008. If you could address that? Thank you.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Sure Jonathon. On the first question, the shift of dollar from OpEx to CapEx; on the OpEx side specifically, really we are able to avoid costs in CapEx that we had in our original estimate for going through the integration. A lot of it had to do with negotiating contracts with the vendor that we thought we were going to have some costs that would transfer over part of the integration and we were able to avoid those costs. We also, frankly our employees I mean are doing double duty getting the work done, getting the integration done. Our IP group has done a phenomenal job in really carrying the load as well as on the systems integration and so we don't have go outside and incur those costs either. So we actually we avoided costs that we originally expected to incur on the operating side. But then what it allows us to do is we looked at the... as we got the systems integrated and also saw the success... the initial success we are having in a ten market acceleration. If you recall, we originally these ten markets we accelerated up to the middle of the year here, we can have those plan for until the end of the year. And now that we have on those eventually integrated with the products deployed that allows us, gives with the opportunity to do more and I mean more of those on acquired markets. So that's why we took the cost savings on the OpEx side and allowed us move in over into the CapEx side as we look for opportunities there.

Larissa L. Herda - Chairman, President and Chief Executive Officer

And I just want to point out that the reason why we had the new product deployment target for towards the end of the year is because we have thought that it would take longer to do the systems integration. I have never seen a system integration go as quickly as this one did, and so we really did think it was going to take a lot longer because they typically do. Fortunately the acquired operations back-office was in very good shape, and we had an idea that it was in pretty shape, but we didn't... it was in good shape and our ability to be able to... and the data was in good shape which was typically one of the problems when you acquire companies there is lot of data issues and that's not to say anything is ever completely clean. But it was in good shape and the teams really worked together in a great partnership. So by accelerating and being able to complete the systems integration, has enabled to put the new product capabilities in the acquired markets sooner than we would have... had expected and we really would...and we are really at least six months ahead of where we would have expected to have been as far as our planning was concerned. So that in turn allowed us to save money as well on the OpEx side, because we were hanging on to consultants as long and spending a lot of money over that additional period of time too. So overall, we were able to save money on that side and move really move the process along faster and make the investments in those markets and quite frankly the sales force was the driving factor in that too because we were getting so much demand coming from the sales where can we get it, when can we do this, ones we do is I have the customer that want this and it helped us move faster in that regard too because we want to get those opportunities, so overall that's really what happened.

Unidentified Company Representative

And I think Jonathan, your last question regarding integration costs next year. We already expected integration to really take 12 to 18 months, which takes us in the beginning of next year and there will be some dollars that we will spend next year on integration activities, but obviously much smaller dollars.

Jonathan Schildkraut - Jefferies & Company

Alright, great. Larissa, in last quarter you gave us some color on bookings, strength of certainly you mentioned the strength of bookings in March and kind of how that it flowed into the second quarter. Could you give us a similar kind of color commentary on this quarter?

Larissa L. Herda - Chairman, President and Chief Executive Officer

We continue to see the strength, and yes I would raise wasn't I? The strength on the enterprise side is just continuing, and we've just had some large customers that have installed, and that moved the process and made for some really good quarters here, but we are continuing to see that kind of momentum. So, enterprise demand is not slowing down, and as you can see by our numbers that it appears to be accelerating there's just a huge transformation in going on with a lot of enterprise networks right now, and we fortunately have built the right networks to be able to compete for that kind of business that is being requested out there the customers want diverse fiber connectivity on a metro level you know, all the things that I just talked about in the call, and then their conversion from frame relay and ATM over to Ethernet and IP VPN is very significant and it is a trend that I think it's go on for quite some time, and we've got the right products and networks to be able to compete for it.

Jonathan Schildkraut - Jefferies & Company

Well done

Larissa L. Herda - Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Tom Seitz with Lehman Brothers.

Tom Seitz - Lehman Brothers

Yeah, thanks for taking the question. This is just a bit of follow-up to the first two. I mean usually by this time in the year you know, we are winding the CapEx has began to creep, you know the given the CapEx is 80% success base you know, we are complaining usually about a bullish signal. And I am wondering given the your head of plan on rolling out into the acquired markets, I would assume that customer wins an extensions in those markets are regular CapEx not integration CapEx maybe I am wrong and that's the point of clarification. But, you know should we read anything into the micro environment that CapEx guidance is staying good, any slowdown or whatsoever in Raps are just a function you guys having a lot more visibility going into the start of this year? Thanks.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Yes, let me hit the one piece of it and I will let Larissa jump in what we are seeing as price booking. But you are right ones we build into one of the acquired markets that have been connecting up a new building location or locations with the customers that will just going to a normal success base CapEx. What you're seeing here particular in this quarter when we deploy the products then required electronics or our advance products suite that's what we put into the CapEx, the integration CapEx category.

Now as far as any signaling for CapEx guidance keeping where it is I mean we have already provide you a range of that as -- because there is some of the straight line and either sales or booking or installation, and so you didn't see variations from quarter-to-quarter and I would to expect to continue.

Larissa L. Herda - Chairman, President and Chief Executive Officer

And also keep in mind that we did acquire an operation that self services that doesn't require a whole lot of CapEx either. So, you know we expect that you know, there is goal there obviously is to become more capital efficient overtime. So, I would say their is definitely no negative signals there, in fact we have plenty of opportunities to spend CapEx, and we are bidding on them and if we win some of the big ones, we make come out and talk about CapEx a little bit differently, but some of those take a long time to win, and we think that we are...we are in the right place as far as our guidance for CapEx at this point.

Tom Seitz - Lehman Brothers

Okay, terrific. Thank you very much.

Operator

Your next question comes from Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

Thanks. First I just wanted to follow-up on an earlier question regarding the number of customer additions last quarter was about 494, I think you said this was the highest in the company's history. Can you give us similar apples-to-apples number there so we can track the progress? And second on the EBITDA margin guidance about reaching pre-acquisition levels next summer that's more then you have offered in the past, so can you also kind of take this opportunity to comment on what you think on long-term scalability and power of the business model is so therefore you know, the margin potential beyond the mid-30s after next summer? Thanks.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Sure. Yes just to remind core customer growth rate really as we did mention in the last quarter was a terrific quarter and this quarter was about the same number. As far as core customer add they are very strong on the core side, and so obviously the churn and actually customer profile and do the integration on the impact of the consolidated customer accounts.

Now as far as long-term margin goes, I have to say that miss 30% EBITDA margin that, that we have before pretty impressive I mean that's really at the top of the industry. But, when you look at our business model, and you look at the size of our business, and our more mature market versus our less mature markets there is a great disparity where the local margins are, market that we have been in for from the beginning, and that we have great density and impressive market and have grown the revenue that have been there for so many years those local EBITDA margins can be in the 50% plus category.

Now clearly, in the newer market the less mature market, and the acquired market, those EBITDA margins at the local levels, and those can be in the teens or 20% range, and we have many doubt in that lower-end of the category. And so I would expect with continues time selling into those markets, and investments into those markets to reach more and more customers, but those local EBITDA margins would go up. And then with the scalability of our business, I will contribute to overall margin expansion. So, clearly over the long-term think that we can grow from where we had been pre-acquisition into that high-30s. And you know can we go beyond that well what kind of reserve judgment on that and so you're further down the past, but I think we do have opportunities for continued margin expansion once we get to the inflation.

Vance Edelson - Morgan Stanley

Okay, that's very helpful Mark. And on the $1 million spend on branding initiatives in the first half and then you know less than the million I guess that was in the second quarter and then less than a million for the rest of the year. I am just curious is the reasons spend the money, so early is there going to be additional spending in the second half or rather in the first half of next year ahead of the June switch over or do you just think you can get it done now so you may as well?

Larissa L. Herda - Chairman, President and Chief Executive Officer

Well, there is plan...there was also planning associated with getting ready to change your brand, and so we are continuing to do those activities or working with outside firms, so we are...we have some costs that we are paying and so we are going to be spend as we think...as we think we need to spend a lot that will depend on the timing of when we transition to a new name, if we decide transition earlier, and we not yet made this decision by the way then obviously we are trying to do what we need to do now to prepare for that.

Vance Edelson - Morgan Stanley

Okay, that's great. Thanks a lot.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Sure.

Operator

Your next question comes from Colby Synesael with Merriman.

Colby Synesael - Merriman Curhan

Hi, guys how are you?

Mark A. Peters - Senior Vice President and Chief Financial Officer

Good, thanks.

Colby Synesael - Merriman Curhan

So, I have two questions. The first one if I look at the Xspedius revenue on a quarter-over-quarter basis in the network and voice segments. It looks like that was down about $4.5 million, $5 million, I think you guys mentioned that about $1 million came form the customers that are on the lower-end churning-off. Can you explain what the rest of that difference in you how much more do you think of that actually decline before that starts to grow? And then the second question if you look at the voice revenue that seems like we saw a nice sort of start functioning growth in this quarter, and give us historically recent 2006 that number has been roughly flat. Do you see trends that is placing this quarter that were different that what we see in the past and is there one specific thought that might be outperforming versus your expectation? Thank you.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Let me answer the second question and Mark can answer the first on the voice side really over the past years, so we have done a much better in bundling our voice services into packages. In previous years I think we were little...all over the board in terms of what we were going with our voice product, and not as concise. We've got a lot more concise, we put together very powerful packages, and keep in mind we do have the usage fluctuations for our voice services, as well on a quarter-to-quarter basis. So, the first quarter would have reflected some usage fluctuations, as well on the numbers. But, overall we are seeing strong demand on the voice side with the extended product portfolio there. We bundled the products well, and it just been really consistent strong demand, and you are going to see on a sequential basis you'll see quarter-to-quarter fluctuations due to usage going up and down.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Yes. And then your first question I think and see if I am addressing correct question here, I think when you see the down the acquired operation you saw the client voice services that are increase in Data & Internet services 4.4 and 4.1 respectively. And part of that we had to do reclassification of the products as we're doing in integration for some of the products that reclassified from voice services to Data & Internet services, so that was the big fluctuation in those two particular categories.

Colby Synesael - Merriman Curhan

Okay, so the Xspedius core revenue is continued to grow then as well?

Mark A. Peters - Senior Vice President and Chief Financial Officer

We are actually on the enterprise side we are trying to see some initial success so that we've got some growth in the enterprise from the acquired operations.

Colby Synesael - Merriman Curhan

Okay. Thank you.

Operator

Your next question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James

Thank you. Can you give us an idea the enterprise obviously showing some strength, and you talked again, you know, last quarter Larissa about 400,000 customers and starting to see you know that be a little bit more common place if you look in those type of customers. Can you give us an idea on the trends of your average monthly billings for new customers maybe what that was a year ago, or just some sort of ballpark there? And on the carrier side. What are you seeing as far as year-over-year price declines for new contracts on the wholesale traffic that is. Are you seeing more pressure there? Is it stable and can you get us an idea of what the price declines are? Thanks.

Larissa L. Herda - Chairman, President and Chief Executive Officer

So, on the carrier side you know, it really depends on the contract. We had some carrier contracts that where we rated from pricing from several years ago, we had in the past quarter. So, that price decline was obviously more significant. But, what's happening now on the carrier side is that they are just signing one year contracts overall for their big agreements 18 months or so. So, we are going to see I think less smaller price declines because most of these contracts are becoming price to market. So, you know, and on a percentage basis it really does vary all over the Board. It really depends on how old the contracts were and we are pricing ones at that time.

But no...no additional, you know nothing we have carrier re-rates you know that just a common thing that you have. In the quarter we had a couple of network just a little larger and yet some of that on the Xspedius side that kind of made it, seem a little more because those were contracts that just had to be, you know, completely redefined, and so that what you saw there.

On the enterprise side a lot of it is, we are seeing... growing on the meeting of large customers these are... we are getting larger and larger orders all the time. There's a mix of different products that we are offering. We are selling a lot more IP VPN type services. So those have higher per customer dollar numbers. So I don't have any specific numbers to give you, we've never given those numbers. In general as a trend those customers we seem to be doing more and more for them in general.

Mark A. Peters - Senior Vice President and Chief Financial Officer

Yes, and it's important to recognize that we have a broad spectrum of products we sell to customers. So we have a lot of customers that we might bill $2000 or $3000 a months but then we have billed 20,000 or 50,000 or --.

Larissa L. Herda - Chairman, President and Chief Executive Officer

or a 150,000. Yes so part of the average --

Mark A. Peters - Senior Vice President and Chief Financial Officer

It's important in our business and our papers [ph] to pay the wireless carrier.

Frank Louthan - Raymond James

Okay that's helpful. Back to just one more follow-up back to the wholesale side. I understand the rerate of the contract you've been in for three years, had some compounding effect. But let's say what are you seeing say in the spot market for 12-month contract on a rather new customers versus what you might have expected last year. Can you give us some idea of what sort of?

Larissa L. Herda - Chairman, President and Chief Executive Officer

Everything has been fairly steady on our side. We buy services from carriers too and we've been seeing... continue to see some good competition on the longhaul side. Bu pricing has been steady on the... pretty steady on the carrier side... on the local side yes.

Frank Louthan - Raymond James

Okay. Thank you very much.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Sure.

Operator

Your next question comes from James Breen with Thomas Weisel.

James Breen - Thomas Weisel Partners

Thank you. Good morning. Just a along the lines of Frank's question; can you talk about the incremental revenue you are gaining year-over-year, kind of the color on what's going in terms of new customers versus existing and then maybe if there is... what percent is coming from existing customers? What kind of additional services are taking that's coming on the year-over-year growth?

Larissa L. Herda - Chairman, President and Chief Executive Officer

We get a lot of both. A good portion of our... of the LR revenue growth every months is coming from existing customers who are buying new products from us, adding new locations. Keep in mind now that we have added 31 new markets. We have all of those new markets that they now want us to sale into. So that's going to become I think an even growing opportunity for us. But we are seeing on enterprise side, it really... it's coming from both. We are adding a lot of new customers and we are also selling a lot of new products to existing customers. I hope that answers your question.

James Breen - Thomas Weisel Partners

That's good. Is there any you can't really quantify that in terms of the percentage of the revenue?

Larissa L. Herda - Chairman, President and Chief Executive Officer

We have never done that.

James Breen - Thomas Weisel Partners

Okay, thanks.

Operator

The next question comes from Ray Archibold with Kaufman Brothers.

Raimundo Archibold - Kaufman Brothers

Thank you and good morning. Just want to follow up one on the ten markets that you announced selling the advance services into. I want to presume that there is a pipeline building affect that goes on here. So can you kind of give us a sense us to what kind of the typical timeline for pipeline building on some of these services? And then second, with these ten markets launched ahead of schedule, can you give us a sense as to what comes next after this?

Larissa L. Herda - Chairman, President and Chief Executive Officer

Good questions. First of all the first thing that starts in pipeline, is hiring the sales people, hiring the technicians, hiring the leadership teams which we have been doing and we been doing now for least the past quarter or so. And so... then you've got to train them, then they got to get out of there and sell. So it's along cycle. Much of what we are selling right now is coming from other existing markets, as well as some... we have some matured sales people in the acquired markets that have been trying to sell these services and types of services to these customers for long time, but Xspedius has never had the product capability. So... but overall we still have organizations to build that and we are going to continue to do that. So that's part of... it's like buying brand new markets, in some of these market there was no leadership. I mean even think about our model as compared to the Xspedius model, we build into buildings. Xspedius did not.

We have people like outside plan engineers and CO engineers, central office engineers and we have certain types of people that they did not. And so before you can so you can... when you sell the services you ourselves have to be able to install them. So we are organization building in those markets. So the time line... it's going take time to really see the momentum in those markets. So we've had some early wins. We are very happy about that but it's going to take time and if you already have an organization in place and you hire a new sales person, it generally take than a year before they get the quota and some times it even takes some longer. And keep in mind, we are also still going through some churn in that customer base. So we are making great progress on the new sales side, we are going to work though the churn because there is some products for instance that they were selling, that we are just not going to support any longer. And so those customers are going to churn off and it's going to take a little while to do that. So you are going to have a little bit of headwind there. So we are very pleased to see some modest growth this quarter despite those headwinds. But to really see the momentum build, it's going to take some time. As far what's ahead? Well, we are already riding up the next market that we are getting ready to deploying this... our new product capabilities and so, we are not ready to talk about those as yet, but there is demand. We will prioritize to get right now quite frankly, based on demand and there is orders that are already people are proposing paying us from other markets and even within some of those market so that we going to prioritize it based on the demand and the opportunity that we see in the market.

Raimundo Archibold - Kaufman Brothers

Alright. If I can follow up on the ten new markets that you have launched. It sounds like you are still building out the infrastructure form a personnel perspective and so we in relation and given the churn that you talked to as well, this shouldn't really be what we should not expect any material revenue contribution from the advanced services until some time in 2008, what seem?

Larissa L. Herda - Chairman, President and Chief Executive Officer

That has been, you know that has... that's exactly right. It's going to take some time and keep in mind that we are adding head counts. So we are adding expense which is why we you need keep that in mind when you are looking at the expansion of our EBITDA margins as well.

Raimundo Archibold - Kaufman Brothers

Very good, thank you.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Well it looks like we have time for one more... a little more time, let's take another question.

Operator

The next question comes from Donna Jaegers of Janco Partners.

Donna Jaegers - Janco Partners

Hey thanks for taking my question. Obviously you have talked a little about the small customer systems that Xspedius had and your confidence in those. How does that change your strategy in existing markets and then going back after some of these smaller customers to fill in on the density?

Larissa L. Herda - Chairman, President and Chief Executive Officer

Well, it's very complementary, Donna. We have some markets. I will say, Minneapolis for instance. Minneapolis is a market that Larry has just been focusing on the high end of the market. We have had quarter operations in that market, just a wonderful opportunity for our target customer base. But we really haven't had the resources to go after the types of customers that Xspedius was so profession at. And so what we will be doing, and now that we have the two network operations control centers that can provision across all of our networks, what we will be doing is starting to build on the sales opportunities in those markets as well, but they kind of fill in... that they fill in the holes and they provide more density in the market, and really have... help us leverage the investments that we have made in those markets.

So we have some markets like Pennington for instance that has but many more smaller customers and that's probably the smaller to medium customers are more indicative of the average customers in those markets. But so many of our markets the demands had have been so great for the larger customers that we just really haven't spent the time going after the smaller ones. So for us this is really a brand new opportunity for us to expand our target market more extensively across all of our markets as opposed to just in some smaller markets where we... that was really... that's really fundamentally what the market is. So that the Xspedius capability is really going to add to our capability to do that.

Donna Jaegers - Janco Partners

So will you be adding more sales force who is dedicated to sort of smaller tier-one kind of customers.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Eventually. I am not ready to talk about any big increases in the sales force at this point. We've got a lot of those things going on that are higher priorities. But yes... as you know, we are very success-based oriented. So as we see a market that we see that there is a good place to start, we will add some sales people, we grow from there. We don't do wholesale increases and sales people. It's not particularly productive. Sales force productivity is really what we focus on in getting each individual sales person more productive and then in each individual market, we add sales... really add more sales people as the market can't sustain it. And so, when you look at Houston for instance, they have... they are up to three sales teams right now. We have some other markets that are adding sales teams as well. And again that happens over time, you have to be able to train these people, make them effective, get them productive. You don't want to be churning. We have fairly low churn rate in our sales force and we have seen fortunately a good reduction in the churn rate of the Xspedius sales force which prior to the acquisition was particularly high by our standards. So, really focusing on making sure that you have lowered the churn of your sale force, make them more productive and then slowly add sales people to the process, that's the formula that works for us.

Donna Jaegers - Janco Partners

Great. Congratulations on the good quarter.

Larissa L. Herda - Chairman, President and Chief Executive Officer

Thanks a lot Donna. And with that thank you all for your time today. We appreciate your support of Time Warner Telecom. Have a nice day.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Time Warner Telecom Q2 2007 Earnings Call Transcript
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