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Executives

Carole Curtin – Vice President-Investor Relations

Larissa L. Herda – Chairman, President & Chief Executive Officer

Mark A. Peters – Chief Financial Officer & Executive Vice President

Analysts

David Coleman – RBC Capital Markets Equity Research

Colby Synesael – Cowen and Company

Michael Rollins – Citigroup

Brett Feldman – Deutsche Bank Securities

Barry McCarver – Stephens Inc.

Frank Louthan – Raymond James & Associates

Timothy Horan – Oppenheimer & Co.

Donna Jaegers – D.A. Davidson & Co.

Michael Funk – Bank of America Merrill Lynch

Tom Sites – Jefferies & Co.

tw telecom inc. (TWTC) Q1 2012 Earnings Conference Call May 2, 2012 11:00 AM ET

Operator

Good morning, and welcome to tw telecom’s First Quarter 2012 Conference Call. Today’s call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters.

At this time, I would like to 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 will find our press release, supplemental quarterly information, and SEC filings.

Before we start, I’d like to draw your attention to our Safe Harbor statement included in our supplemental material, which you can find on our website. Information on our quarterly earnings materials and our discussion today contains statements about expected future events and financial results that are forward-looking and are subject to risk 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 on our website.

I’d also like to point out that our earnings materials and discussion today contains certain non-GAAP financial measures. And you can find reconciliations to the U.S. GAAP financial measures on our website.

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

Larissa L. Herda

Thanks, Carole. Hi, everyone, and thank you for joining us today. We posted our 30th consecutive quarter of sequential revenue growth, delivered strong margins and grew both our bottom line and free cash flow this quarter. These results along with our strong operational execution reflect another good quarter and demonstrate the remarkable ongoing consistency of our business.

A key driver of our consistency, the ability to anticipate, adapt and position for future opportunities customer’s needs are quickly changing and the strategic architecture and products that we’ve been innovating position us well for what we believe is a pivotal time for the future of network capabilities.

We are very excited about our intelligent network roadmap and it’s resonating really well with our customers, and here is why? Our intelligent network is designed to provide customers network capabilities, including bandwidth when they needed, where they needed, and how they needed. And most importantly, real-time and with the capabilities or intelligence to automatically see critical performance data, add bandwidth, prioritize traffic, as well as enable customers to dynamically access best-of-breed cloud solutions.

We’ve led the way through much strategic change, yet two of these changes standout as truly transformational, not just for us, but for the entire industry. One of these changes was when we’ve moved to Ethernet and the world followed, and the other we believe is unfolding now with the power of the intelligent network capabilities. When we reflect on the evolution of Ethernet, we see a parallel with our intelligent network today.

We were one of the first to promote Ethernet and at the time 10 years ago, we were way out in front of the pack. I clearly remember that we had to educate the market on Ethernet’s value and as a result, it took time for customers to adopt it and implement it. Now fast-forward to today for Ethernet with its scalability and flexibility is a leading industry platform, is the leading industry platform for serving enterprises, data centers and carrier demand, and we remain a leader in the space. Clearly, the adoption of the Ethernet was a very pivotal time in the history of network evolution and we were at the head of the pack.

Today, we believe we’re at the forefront of another pivotal time, and again we are leading the way. Few in the industry are providing the advanced in soldered network division that we have and some are even contemplating these capabilities yet, again much like what we experienced with Ethernet. However, there is one key contract to be adoption of the Ethernet and that customers not only need these new capabilities, the CIOs we are talking to, they are clamoring for this suite of products.

As we talk to customers, industry analysts, and leading technology companies, we can see that we are clearly on the right track to dramatically change the fabric of our customers businesses, our business and the industry with these new powerful solutions. We design divisions, the platform, the capabilities, the service, and the scale to rollout our Intelligent Network roadmap, and we expect to further deploy some of these services in the very near future. We see the development of these network capabilities at transformational and much like the Ethernet transformation, we are leading the way.

So now I will turn the call over to Mark to take you through the quarterly results and then I will be back with more progress on our Intelligent Network and a new powerful Ethernet solution we’re coming out with this summer.

Mark A. Peters

Thanks, Larissa. As Larissa shared, we delivered another solid quarter as we continually evolve our business with the rapidly changing needs of our customers. I like to provide more specifics on our financial results in several areas, including an update on demand, bookings, and overall customer sentiment. A few more details on our revenue growth, and some additional color on our modified EBITDA margin. Let me turn to what we are seeing for demand and customer sentiment. Our sales funnel remains strong and reflected ongoing market opportunities across our national footprint.

These opportunities are driven primarily by our data and Internet growth engine. Our first quarter bookings or sales grew over our seasonally lower fourth quarter sales and gained momentum throughout the quarter. In fact, March was one of our best sales months in the past three years. Another positive sign was our continued growth in buildings connected to our fiber network as we continue to expand to more and more customer locations. Over the past year, we’ve added over 2,000 buildings to our account. Remember, the building connections are an output of our sales success, which means we have signed sales contract in-hand before we invest to connect them.

These on-net buildings are a great place to acquire new customers and revenue with very attractive returns. With nearly 16,000 buildings connected with our fiber-to-the-home, we have a lot of opportunities to grow at existing locations. Now, turn to customer buying sentiment. In addition to our strong funnel and bookings, our local and national sales leadership remains bullish regarding ongoing opportunities as we continue to win sales based on our differentiation and products, capabilities, and customer service. We continue to find good opportunities and customers continue to buy as the network remains integral to enterprises, customers success.

Now, let me turn to revenue growth. Total revenue grew 7.9% year-over-year and 2.1% sequentially as data and Internet continued to be our growth engine. A sequential revenue growth this quarter reflected strong ongoing enterprise demand and an increase in taxes and fees, partially offset by seasonally lower sales in the prior quarter, as well as an increase in the revenue churn. Together, all these factors contributed to a nice overall revenue growth with underlying seasonal trends.

Last quarter, we achieved an exceptional 0.8% revenue churn, our lowest in over 10 years. This quarter revenue churn increased to 1.1% largely due to increased carrier churn including two large capacity circuits disconnected by single carrier later in the quarter.

Now let me run through a few other revenue metrics for the quarter. Data and Internet revenue represented 49% of our total revenue, up from 46% a year ago and grew 16% year-over-year and 3% sequentially. Our growth engine within data and Internet revenue with Ethernet and VPN data-related products, which grew 24% year-over-year and 4% sequentially.

Our voice revenue grew 8% year-over-year and 3% sequentially due to ongoing growth from converged and dedicated voice services boosted by increase in taxes and fees and partially offset by churn. Of the side note, the majority of our taxes and fees are recorded in our voice services, which benefit revenue but we’re also diluted churn margin due to faster nature of these items.

Our network services revenue declined 5% year-over-year, and 1% sequentially primarily reflecting carrier churn and re-pricing for contract renewals, largely in transport services.

Looking to the rest of 2012, we believe we’re well positioned to increase our annual revenue growth rate as we continue to leverage both our direct and in-direct sales channels and our next generation data and Internet services.

Now move to our highlights for margins and our bottom line. Modified EBITDA grew 8.5% year-over-year, and 2.9% sequentially as we delivered a 36.7% Modified EBITDA margin. Net income grew 53% year-over-year, primarily driven by Modified EBITDA growth as we delivered $19.3 million of net income.

Levered free cash flow increased 43% over the same period last year as we delivered a 10.4% levered free cash flow margin and generated our 19th consecutive quarter of positive levered free cash flow. We closed the quarter with $487 million of cash equivalents and short-term investments after using $12 million this quarter for our share repurchase program.

Next, I will provide more color on Modified EBITDA margin, which is 36.7% for the quarter, compared to 36.4% for the prior quarter. Modified EBITDA increased 2.9% sequentially, primarily reflecting revenue growth, seasonally lower maintenance and utility costs, as well as increased payroll tax expense primarily related to the resetting of payroll tax limits, offset by decreases and commissions associated with seasonally lower installations, as well as lower contractor and other employee costs. As it relates to the lower costs and commissions this quarter, we expect both costs will trend backup in future quarters.

Turning to CapEx, our capital investment this quarter of $79.1 million were predominantly success based, comparable to the $79.3 million invested last year, and down from $86.6 million sequentially.

With sequential decrease reflected timing of ongoing projects, seasonally lower spending, and the completion of certain first quarter strategic initiatives that did not recur. We expect CapEx will increase throughout the year as our guidance remains unchanged, at approximately $345 million to $355 million, with the majority tied to newest sales opportunities.

Before I close, I want to say that we are excited about our growth opportunities and ongoing market demand. Looking forward, we remain focused on strong comprehensive results, including growing revenue, Modified EBITDA and cash flow, balanced with strong margins and liquidity. With that I will turn the call back to Larissa.

Larissa L. Herda

Thank you, Mark. We’ve been innovating many new services and capabilities over the last several years, all designed to continue to fuel our data and Internet growth engine as customers evolve their businesses including moving from their company based data centers and applications to third-party data centers and the cloud.

As a result of our development and innovation, I’d like to talk about some of our upcoming product rollouts including first a new national Ethernet-based connectivity solution for infrastructure customers including carriers, data centers, software and other key technology companies. And second the roll out of some of our new intelligent network solutions.

So, let me start with our newest Ethernet solutions. Enterprises have been embracing Ethernet for years and understand its scalability and cost efficiency. And now we’re seeing growing demand from infrastructure customers who want the same benefits. To service growing demand, we developed a new Ethernet solution we refer to as one-to-many, one-to-many connectivity. So let me tell you why our solution is important to our customers and why we can offer it when others have not.

First, let me talk about what the solution means to our customers. Our one-to-many solution provides customers with easy and scalable [ubiquitous] Ethernet capabilities through a single Ethernet connection across our national footprint with up to multiple 10 gigs of capacity. For infrastructure customers that don’t have their own network everywhere they need to go, they can now connect in just one of our locations and be connected to any building or datacenter in our national service area and thereby leverage this one-to-many connectivity.

With this new Ethernet capability, we can help these customers avoid capital investments, reduce operating cost, and more easily manage this capability operationally making this solution very attractive.

Second, we can view this when others aren’t because of the national integrated platform that we built with a very robust Ethernet capabilities, which means we’re using a virtual circuit in leveraging the physical network we’ve already established between these locations. So we can connect these infrastructure customers to many locations across our network very effectively.

Let me share just one potential customer application to illustrate the value of the service. So picture given the international carrier with no physical US network and you need access to top U.S. data centers and enterprise locations. Previously, you had to negotiate an agreement and connect to each carrier you wanted to do business with not once or twice, but in each market and sometimes even by each individual circuit where you needed connectivity.

With our one-to-many solution, this customer can by, say 10 gigs of Ethernet connectivity in Miami and be connected to enterprise buildings or data centers at varying capacities in anyone of our 75 markets. We’ve already started to pre-sell the solution in anticipation of our launch with some really good traction.

We expect to rollout these services and generate revenue from carriers in the second half of the year followed later by a rollout for data center, cloud, and other infrastructure companies. Our one-to-many connectivity provides another opportunity to fuel our data and Internet growth engine as we move up the value stack with our next-generation Ethernet services and Intelligent Network capabilities.

So now let me turn our progress to our progress with our Intelligent Network, including more color on our product roll-out timelines.

In late 2011, we launched a limited release of enhanced management, which is Phase I of our intelligent network with our VPN and converged services. With these capabilities, we are providing end-to-end network visibility. So CIOs can see real-time the performance of their networks.

This means we are providing unique real-time data with great granularity allowing customers to pinpoint performance on any network segments. And because of the way we’ve designed this into our common architecture, this capability is scalable to all of our managed services customers. As part of our controlled introduction, we targeted enterprise customers who are addressing critical dependencies between their business applications and network capabilities and recognized the need to improve both.

These customers understand that enhanced management is the missing link between the networks and the applications, which made them prime candidates for these services. We’ve been learning firsthand from this controlled introduction how customers are applying enhanced management within their businesses. And the feedback we are receiving is further validating our expectation that this product will have wide customer appeal.

As we talk to customers about how they are using enhanced management here is what we heard. Some customers are leveraging the service for managing class and quality of service to support real-time applications like voice and video. While other customers say that these capabilities are critical to managing their networks for ongoing deployment and changes to applications and servers.

Here are a few examples to give you a better sense of how our enhanced management solves our customers’ everyday challenges. Our first customer example is an international insurance company headquartered in Dallas. That provide underwriting management and wholesale broker services. We provided a national 13 site wide area network comprised of our managed IP, VPN and converged services, as well as our new enhanced management functionality. This customer is using Enhanced Management to assess the performance impact to their network as ongoing applications are rolled out.

For example, they are rolling out a new release of an industry application is stream lined all front end insurance activities like quotation, correspondence, and policy management, to drive further productivity and enhanced customer service with faster turnaround times. Our using enhanced management at several sites before doing a full software release, they can see the location-by-location impact to their network performance and other applications with traffic.

Enhanced Management gives this customer the data needed to make adjustments to bandwidth and class of service settings to achieve the best possible user experience, and the ability to review trending and historical performance metrics to help them understand the overall network performance.

Our next customer example is a national law firm headquartered in Atlanta that specializes in labor and employment law. As part of their practice, video conferencing is a key application that they use to conduct live depositions, with witnesses at remote locations. In order for video conferencing to be effective for these depositions, it needs to deliver a high-quality video, with consistent performance. We are providing a national, 19-site, managed IP VPN network with enhanced management to address this customer’s need.

In addition to our deep fiber penetration, solid account management, and reputation for excellent customer service, this national law practice was interested in the granular visibility of location by location performance metrics. And this is an important point, having segment by segment information for bandwidth utilization, latency, jitter, and packet delivery for every class of service level allows them to fine-tune your network to ensure peak performance of their video depositions. Our next customer example is, Presidio Coleman Technologies, which is an IT consultant and integration company, specializing in cloud computing, collaboration, network infrastructure, and managed services.

They are also part of tw telecom’s indirect agent program, selling our networks services to provide comprehensive solutions to their customers. We provided Presidio a national, 23-site, managed IP VPN network that they use primarily to demonstrate Cisco’s TelePresence and CallManager solutions to their prospects. By adding our Enhanced Management capabilities, Presidio is getting visibility to segment by segment key performance metrics that will help ensure the high-quality performance of their TelePresence and CallManager solutions.

Utilizing our Enhanced Management service not only helps them address latency and jitter, but it also provides them a sales tool to showcase tw telecom’s network performance [how nice]. Our services help Presidio provide one-stop shopping for their customers for hardware, integration, and network services. I hope these three examples help you better understand why we believe these Enhanced Management capabilities will become critical to the operations of enterprise customers.

So, as you can see, we’ve already learned a lot from our controlled introduction. And we’re now planning a nationwide rollout of Phase I for these Enhanced Management capabilities for VPN, converged, and importantly, Ethernet services this summer. And by the way, we believe, based on talking to industry analysts and others in the marketplace, that our Enhanced Management for Ethernet services is completely unique and cutting-edge, which is obviously very exciting for us. After these we expect to continue to evolve our enhanced management capabilities.

One of the next plan futures will include capabilities for customers to set threshold alerts or alarms, so they are notified automatically when the network is operating outside of their prescribed parameters. Once the customer is notified, they can quickly assess the issue and implement a solution.

One solution might be to increase network capacity, which brings me to another intelligent network capability. Phase II of the Intelligent Network, which is called Dynamic Capacity. And it enables customers to increase bandwidth real time allowing them to better react to traffic spikes, bandwidth-hungry applications and both planned and unforeseen events. With this solution, our customers will be able to quickly and easily increase their bandwidth real time.

And let me emphasize real time to better manage their entire network and also to leverage cloud capabilities and data center services much more effectively. Another feature on our roadmap for Dynamic Capacity is to automate the Intelligent Network to respond to learn from our Enhanced Management service. Bandwidth utilization is one of those alerts. When a customer establishes an alert, for when their network is operating at say 90% capacity the network can be configure to automatically provision additional bandwidth to alleviate congestion.

And I know I have been saying a lot about real time and automatic. What is really cool about this capability is that when the customer makes the decision they want the additional capacity, it literally happens within seconds and without any downtime and that is pretty amazing. So, with this new Dynamic Capacity feature, the customer will be able to predetermine how they want the intelligent network to automatically respond to the situations freeing up their personal to manage other aspects of the network.

This gives the customer more control than ever over how their network supports their applications. We continue to make good progress with our development of Dynamic Capacity and we are now in a process of identifying data customers, which has been no problem at all since customers seem to really want this capability.

So we believe we’ve accomplished some very exciting progress with the intelligent network and with many key rollout for ahead of us in the near term. So now let me pause here and frame up what our Intelligent Network means to us. We believe that these solutions will give us an advantage in the conversation with customers, putting us in a much strategic position, making our services more relevant, creating stickiness and helping us to open doors and close deals.

But these capabilities are actually even more than that. This is about taking the network into the future. This is about being in the middle of customer changing consumption patterns. This is about leading an industry in transition; and this is about changing the way the telecommunication industry does business. And sure, we believe our intelligent network will continue to fuel our ongoing robust data and Internet growth engine.

In closing, let me say, we have spent a lot of time today on products and capabilities, because they are the future. As I said in my opening remarks, our ability to anticipate the future and strategically evolve the business is the reason we have had 30 consecutive quarters or 7.5 year track record of quarter after quarter, after quarter sequential revenue growth and remains a top leader in Ethernet solutions. So as we look at the rest of 2012, we see strong market opportunities and good momentum in the business and we remain enthusiastic about our prospects.

And with that, we will now take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from the side of Dave Coleman with RBC Capital. Go ahead. Your line is open.

David Coleman – RBC Capital Markets Equity Research

Thank you. One of you could talk about the 1Q churn event in the large carrier customer that disconnected two high capacity circuits, what impact that may have had on 1Q revenue growth. And then secondly, margins were quite a bit better than anticipated with some of the new products specifically the Intelligent Network service, product development sort of behind you, how would you expect margin progression from here on out, are we going start to see continued operating leverage in the business? Thank you.

Mark A. Peters

Okay. So, let me start with the question on the churn. And I do want to remind you, in my remarks, I pointed out too, we had come off the really tough comp in the fourth quarter, we had an exceptionally low churn rate of 0.8% in fact it was a record for the company. And the reason really called out, those two large circuits from that one carrier with the highlights that we haven’t seen any big changes in our churn trends, but that was chunky from a single carrier that was the biggest reason for the increase in overall churn this quarter. And if you were watching us for a while, this happens occasionally, particular in that carrier category. We occasionally see them and they come up for term, we see a big hit from some churn items. And that is what happened this quarter. We haven’t seen any changes in trends. It’s just that kind of typical lumpiness that we see. And we mentioned those two items; again, they are just one facet of it.

But they were kind of unique in that these were off-net circuits, and at the end of the contract term, in that sense, the carrier wanted to acquire them directly versus going through us. So that is on the churn. I guess if I look at the margins, you made the comment that now that the new product development is behind us and what happens to churn, that’s really not the case. We’re continually investing in the products. That’s – it’s really a strategic strength of ours.

As I think you’ve noticed and we’ve been investing in products throughout our history. And particularly when we look at the Intelligent Network and the Ethernet capabilities, the one to many that we talked about, it has really been a foundational piece of our investing. And we have really created a very agile, rapid product development process internally, and we are going to keep doing that as we really invest for the – to continue to invest in all phases of our Intelligent Network.

So we are not going to pull back on those investments. Now, from a margin standpoint, I do want you to pick up on my remarks, we did have a good quarter. We saw some increases in payroll taxes we mentioned that we saw some other seasonally low cost in the first quarter, maintenance costs and lower commissions because of the seasonally lower installation. And as those installations ramp up again, we expect commissions to go up again as we enter into the summer season, and more maintenance activities go on, some of those costs that go up. So I don’t want you to go crazy with the margin.

That isn’t really the point up my remarks here. We have huge leverage in the business. And we continue to scale our people investments, because of how we architected the network. Now the products that we has highlighted this time embed in our network. So the very strong margin products were rolling out, but I don’t’ want to see ahead of that development near term, because of our very strong first quarter.

David Coleman – RBC Capital Markets Equity Research

Thank you.

Operator

The next question comes from the side of Colby Synesael with Cowen and Company. Go ahead your line is open.

Colby Synesael – Cowen and Company

Hey, similar questions but we’ll see (inaudible). And so on the carrier side of things, your carrier revenue growth actually have been very strong two quarter ago, if I just kind of give you some history here although just to kind of remind people in the fourth quarter can you did 4% growth and then you had 4% growth in the first quarter, and then another 4% growth year-over-year, in the second quarter of ‘11, and then really last three quarters it’s board off, and you actually saw a carrier decline for the last two quarters.

Just trying to get a sense of what is the longer term growth opportunity tied to carrier, I know in the second quarter of 2011 you actually mentioned that, wireless now represents 30% of carrier revenue, I know it was growing 13%, as one of you can just kind of give us an update on that aspect as all. But just generally speaking, is carrier now going to continue to decline or do you think that there is actually an opportunity to get back to that being a growth component of the business.

And then also on the carrier churn question that was asked already, is there going to be a residual impact perhaps even more so in the second quarter than in the first quarter, simply because it turned off, so late in the quarter, thanks.

Larissa L. Herda

Well Colby, yeah good question on the Carrier side and you followed us as many on the call for a long time and carrier; we’ve – I can’t remember, I think it was probably 10 years ago or longer with probably the last time that we would have predicted long term carrier growth. For us carriers staying relatively flat is a (inaudible) and we will always see fluctuations in the carrier revenue stream in the case of the couple of circuits that we were talking about before you talking about circuits that are a few $100,000 a piece. So, these are a couple of circuits, not a trend, not a pricing issue, not a additional competitive issue, simply another carrier deciding to buy their services more directly themselves from the provider that we were buying them from.

So nothing unnatural happening there or indicating to us if there is any different trend in carrier services. But, there always be lumpiness in that revenue stream. A lot of the stability we’ve had in the carrier revenue stream has over the past years has been attributable to wireless. So, we continue to do wireless deals and again they come somewhat lumpy as well.

We think that some of the new products like the one-to-many product is a very good future carrier product. Because there is nothing carriers want more than, to have some simplicity in managing their networks across the country.

And so we think that overtime nothing happens here very quickly, right, but over time that will continue to be a strength in the carrier segment where, so we are in some aspects of carrier can decline as our network services revenue stream has demonstrated over quite a few years, other aspects of it will increase like our Ethernet data services revenue stream as a lot of the carriers are moving to Ethernet now.

We really hadn’t done that until more recently and the reason for that was because in order for a carrier to really sell Ethernet to go out and tell their salespeople sell Ethernet they need to be able to have the ubiquitous solution and as much we’ve been willing to sell to them, they haven’t been to get it on the wholesale basis ubiquitously, which means the bigger carriers that the large incumbents have had to sell it more ubiquitously.

And although some of them are selling it, they’re not selling them at particularly attractive rates, and so it’s hard for carriers to really offer those types of services. And in some cases they’re not offering them at a – with much expertise, and so the service quality is questionable. That’s where we come in and I think the fact that we’ve added so many more buildings over the past number of years has really made a huge impact on our ability to be able serve a lot of these carriers, almost a 100% on our networks.

So, I think that puts us in a great position, and these are long term trends. So, Colby I’m not going to call growth on carrier anytime soon, because I think we’re going to continue to see lumpiness, I mean there are some of the services that we’ve seen over the past year, where we’ve seen some of the (inaudible) that are result of, for instance network grooming that’s taking place as a result of some of the M&A that’s been going on, and the consolation that’s been going on.

And so – that’s been happening too, but we’ve been absorbing it, so sometimes we’ll absorb it, you won’t notice it, and sometimes you’ll notice it. So that’s going to continue too, so overall – long term trend on carrier, the best that we’re going to give you is we’d like it to stay flat. So, a lot of effort to having it stay flat.

With regard to residual, into the second quarter, you may see it, you may not. That’s – it’s always hard with our business as we may have some carrier revenue that offsets that, but traditionally if you’re going to have a large disconnect at the end of a quarter, you typically will see some impact in the next quarter. But there have been times, when we haven’t, so it’s kind of hard to tell you definitively. Yeah, you’re going to see carrier revenue go down because of it, you may see carrier revenue go flat because, it could be strong on something else and that this offset that strength. So yeah, there will be an impact whether you see it or not is going to be question.

Colby Synesael – Cowen and Company

Okay, great, that’s helpful. Thank you.

Larissa L. Herda

Okay.

Operator

Your next question comes from the side of Michael Rollins with Citi. Go ahead, your line is open.

Michael Rollins – Citigroup

Hi, thanks for taking the questions. Two questions first Larissa, if you think about the evolution of your customers, and as they take ethernet whether it’s from you or from your competitors is that adoption continues, does it become easier or harder to win that next incremental customer as certain percentage of customers going to choose initially a solution away from you.

And then secondly, Mark I was wondering, if you can go back to some of the disclosures that you made earlier in the first quarter, you discussed in one of the slide your markets that you divide into thirds. And I felt what was interesting about that was the incremental margin that you are getting in the bottom third of markets was a bit weaker than the historical trend, I was wondering if anything was different in the way that you’re either adding capacity into those markets or running those markets and whether this year they could get back to a more historic incremental operating leverage? Thanks.

Larissa L. Herda

So could you just explain your question a little bit more, when you say as customers are evolving to ethernet and they’re buying it from whomever as to our competitors does it easier to win the incremental customer do you mean within the building that we have our fiber?

Michael Rollins – Citigroup

Well, I think within the building or to get just new customers in general. So as customers, I think some of the other bigger telcos would say somewhere between 60% and 80% of customers have begun the migration to IP and to Ethernet and so given your market share, there is more customers that you don’t have then you do have. So those that have chosen other solutions away from you as they make this migration to someone else’s Ethernet, is it easier or harder for you to win that incremental business?

Larissa L. Herda

I think it’s still too early in that part of the cycle, because so few carriers have really been offering robust Ethernet solutions that now those contracts are expiring, I mean why those contracts haven’t expired yet. From our perspective, we’ve been selling Ethernet for 10 years, longer than anybody else has and we are pretty good at it. And what we’ve done with Ethernet as we continue to add, added value capabilities to it. So for instance, we are the only once in the market that we are aware of for instances it’s going to be that they are adding enhanced management through our Ethernet portfolio. So if a customer wants to get that, then they have to come to us right now.

The capability that we just talked about the one to many is another very unique capability that others don’t have. Just our huge footprint on net services is very unique when you take the number of buildings that we have, you take the number of buildings we add in a year, that’s more buildings than a lot of the competitive players out there, haven’t total because most of them are really adding more much building. But we happen to be really good at Ethernet, we have a really good reputation for it. So I would say, it’s never easy this is a very competitive industry, so it’s been a very competitive industry. But we firmly believe that the way you win in this business is by not allowing your business to get commoditized.

And so we always look to the future and that’s one of the reasons why we’re so far ahead on the Intelligent Network and we were so far ahead in for many years. I mean for probably five years, we didn’t really have any competition on Ethernet. We have to educate customers, we have to educate the analyst, we have to educate investors, nobody was really paying attention to Ethernet and our successor until probably around 2005 and suddenly they saw our revenue growth and all by the way it was driven by enterprise, growth, and it was driven by Ethernet. So it takes a while sometime to see these things to show up, but when they do they profound. And so for us, every deal is hard, every deal takes a lot of work, every deal you have to show that you provide additional value over and above anybody else is out there who is competing against you and we win on service.

We have such a great reputation on service and that’s where our salespeople go in and that’s what they sell, it’s the service experience that customers will have with us. And once they try us, they keep wanting more and more and more and that’s why especially with a lot of these larger corporations that we do business with, we just want to get our foot in the door, because once we get our foot in the door and they see what unique experience it is dealing with us, how flexible we are, how willing we are to listen to them and to mobile solution that makes sense for them they want more and more on more of that.

So that’s a big part of our growth engine, as well as selling more and more services to existing customers. We are going to talk about (inaudible)

Mark A. Peters

You bet. Mike obviously, you are familiar with the chart and just to recall on those that aren’t familiar with the chart that you are referring to as we haven’t buy it in our IR presentation and that as we processed at the end of the year. And basically what it does, it sorts out 75 markets by their local EBITDA margin and we fitted in 2007 and help the consents, so you can all see kind of the trends in the three different buckets, the highest bucket, the medium bucket and the lower bucket relative to those local EBITDA margins and how they progressed over the last five years. And the bottom category, Michael, you’re referring to is, it is heavily weighted towards a market that we had acquired in the Xspedius acquisition at the end of 2006.

So, and then your question, I think is, we saw some great expansion in that EBITDA margin for a few years in the last couple of years, we’ve seen expansion, but it hasn’t been as rapid as you saw in those earlier years and why that is and are we going to see that again. So, hopefully, that’s your question, but someone try to answer.

So think about in the earliest. Remember, the Xspedius when we acquired it, heavily off-net focus. They had good core fiber networks, but nobody follows our model, which has really been heavily on-net and connecting up a lot of buildings, they didn’t either. So they had a lot of off-net, so very low margin market.

So in the early years, we are grooming the networks, we were converting them to our model, focus more on-net. So we got some lift in those early years, just from that grooming activity and really rationalizing those networks some of their off-net circuits were. So that contributed in the early years.

Now, in the subsequent years, as we continue to sell more and more on-net in those buildings, but quite honestly, they are still fully integrated, you wouldn’t know they’re different from us from all of our systems and our program, but they’re selling more and more on-net. So that’s good, we’re investing there, you see in those markets actually they have our highest top line growth rate in those markets. And the dollars are very large too relative to other buckets. So they are doing very good in those markets, but we made investments then over the last few years as well.

The early years was integrating and getting them to look like us and the subsequent years is investing for growth in those markets. And that can have an impact on the margin. So as I visualize, there is probably a laundry list of examples like this, but as we’ve invested I mean those markets over the last couple of years I’m thinking about it actually truly they were (inaudible) markets I mean we started with one GM and a certain number of sales people.

Over the years, because those markets are so large and has so much opportunities we have split those markets internally. So we have two GM’s we’ve added sales teams to get better coverage. So there is cost in there initially. So there is an impact to EBITDA margin for those activities. We have to add ops people as we get more success to support that top line growth rate.

So there are impacts there to EBITDA margin. In some of those markets we’ve actually acquired, we have talked to you in the past about how we’ve acquired fiber from other companies, dart fiber and expanded our reach in those markets. So we have to support those investments and that growth and that can have an impact on the margin.

But at the end of day, it’s all driving those really strong top line growth rate and overtime I would expect as we, the overall message of those slides and that we’ve always talked about is getting more and more density in the market. So to get more density with that top line recurring revenue, so more of it, more of that annuity spread over the cost structure, that’s where we expect to see the margins continue to expand.

So I’m not going to give you guidance but say it is going to expand at the same rate as it did two years ago or three years ago, but the model continually works and I expect that category to keep moving up the stack as we gain more density in those markets and keep building on that nice annuity top line recurring revenue stream.

I’m not sure if I answer you question at all.

Michael Rollins – Citigroup

You did, that was really helpful and because when I was just looking at the disclosures that you made after your last conference call and you looked at maybe the slower expansion of the margin in 2011 it look like there are two contributing factors, this lower third of market, and a little bit more overhead and so I am just trying to think about how to relate that into the next year or two and when does that gets back to more of the of the historical pattern that you have seen.

Mark A. Peters

Again I think we have a lot of opportunity to continue to leverage the business. As we – you mentioned, I think we are very efficient when you mentioned our centralized corporate operations and our costs there and that relationship to our revenue growth.

We have been scaling nicely even as we have been transitioning a lot of what we offer to just much more complex services, much more embedded with our customer and we have been scaling nicely good transition to that with intelligent network and other services we offer. I mean that does require different resources, but the business has been scaling very nice.

So I continue to expect to see nice scale from both centralized operations as well as the further density in those less mature markets. So when it happens, I’m not going to put a stake in the ground but I think over the long-term quarter-to-quarter because it is a lot our quarter-to-quarter fluctuations that happen they always will but over the longer-term trend as we invested with a very balanced approach for growth and margins, I would expect our margins to have further room to expand.

Michael Rollins – Citigroup

Thank you.

Operator

Our next question comes from the side of Brett Feldman with Deutsche Bank. Go ahead your line is open.

Brett Feldman – Deutsche Bank Securities

Thanks and just two questions here. One you have talked a lot about the success you’ve had connecting new buildings. We have seen it in the number. So clearly, your sales team is doing a great job bringing in new wins in these new buildings. Of course it also created potential to up-sell into all these under penetrated buildings you have gone in.

But look at the last few years your on-net buildings are up by about a third but your sales force is only up by about 5%. So I’m just wondering if we’re at the point where it makes sense to start hiring again or is it a greater advantage of getting into all those buildings and getting the high margin incremental customer.

And then just the second question is, you’ve been very consistent reporting nice growth in operating income, cash flow from operations has been a little more stable over the last couple of quarters. I’m just wondering if there is a headwind in there that’s been holding back the growth in cash flow and maybe something will be getting through over the next few quarters, so there’s a little more consistency in the growth there. Thanks.

Mark A. Peters

So yeah, we have had enormous success adding buildings to the network, a lot of that is because that is the – that’s the strength of our model. That’s what drives the density that Mark was talking about in our market’s drive to cash flow. It increases our competitive position. So we’re more likely to win. We have a much higher probability of winning a deal, if we have fiber in the building. So, there’s a whole lot of really good things to come out of adding the buildings on to the network.

There’s really not a correlation between how many buildings we’ve added to the network – and the number of sales people we have, I might add that we’ve – we added an alternate channel, which really has more of an expediential impact on – relative to what a regular sales person would sell because they bring, with them a lot of existing relationships and that sales channel continues to perform well and we continue to grow it thoughtfully and we’re also – one of the things that’s happening to us and I think its by virtue of the sophistication of the product portfolio that we now have and the expansive fiber network is, we are moving more and more up market.

It is a feedback that I just got last week from our sales organization, is that the deals that we’re getting – the deals that we’re getting are getting larger, we’re selling to larger customers. There’s more sites that they’re asking us to complete. So that – that’s been a migration over many years, but we are definitely seeing a difference over he past year or so even six months or so that we are getting into bigger deals. And I think again, it is how we positioned ourselves.

With regard to the buildings, we have marketing programs that are very focused on our existing buildings. And we’ve always had programs doing that. We’ve just been tweaking them a bit to put a little bit more emphasis and we are seeing some good traction. I think again it takes time. You don’t want to suddenly shift to sales organizations, because then they stop selling this, they start selling that and there is a time difference between that what they are selling now versus what they were selling before. So you have to do it very delicately with the sales organization and make sure that you are maintaining the momentum, but we are definitely seeing.

Our focus is tell the sales people, sell the blue line that’s the fiber and because that’s obviously where we get, we get all of the great capital efficiency and cash flows and it’s just. And so it’s really where you want them to focus.

So generally speaking, our sales force if we could increase our sales force, I mean our sales numbers have been somewhat flat and what we are doing right now that was, is because we’re finding that there is a lot more a larger opportunities that are open to us than ever before. We are actually moving the sales force more in that direction as well. So we are adding some teams in some markets. We had some markets that where our large markets that we had started with small teens and then you build them and you see how successful they are.

We like to do that. Every market has a little bit of a different strategy, because you have a different competitive environment, it’s a different approach. You may have different network access. So every market kind of (inaudible) and once it does then you build the sales organization in those markets. So, some other markets that we got from Xspedius have been doing – some of the very large markets, have been doing very well. So, we have been adding some sales teams in those markets and shifting some of our resources.

As Mark said, it’s a balance, right, we want to make sure that as we grow this business, we are continuing to expand our margins. Our cash flows are strong, et cetera, revenue is growing. And you don’t want to overwhelm any one measure because you can have a negative impact on something else.

So, I think you will see the sales force continue to evolve, continue to move up market, we’ll continue to see good results from the alternate channel. And you’ll see the sales force continue to grow as well, I would have the expectation, especially in light of what we see as really strong demand. We’ll probably end up growing the sales force some more this year. But right now, we’re shifting a few resources around. So, I hope that answers your question.

Brett Feldman – Deutsche Bank Securities

No, it’s great. And then on cash flow from operations?

Mark A. Peters

Yeah, for the cash flow from operations and that’s one that you can see, it does fluctuate up and down. And that can be the timing of or it can be what our days payable outstanding looks like, or our days receivables outstanding look like can cause some fluctuations there. So, I don’t see any off trend activity there. Well, that’s an important metric, obviously, from a GAAP standpoint.

We tend to look at it all in from our cash flow standpoint. So looking at EBITDA, CapEx, what’s happening with total cash after investing, after returning cash to shareholders with our stock buyback program. So we tend to look at it more all in. But those trends, clearly, with a continued growth in our EBITDA and overall growth of the business, I’d expect obviously, cash flow from operations to continue to expand, but I guess I don’t know that there is anything off trend with what I would expect as we look forward.

Brett Feldman – Deutsche Bank Securities

I was partially wondering, if maybe the huge increase in volume of new on-net buildings creates a working capital headwind during that time, if we sort of normalize around a trend line here that maybe some of the working capital will even out. But that was part of a question, but if that is not, then that’s fine.

Mark A. Peters

Yeah. So, again when you get down the investment in the buildings, I mean, that’s going to drop down below on the cash from operating activities down in the CapEx. So that’s why we are seeing most pressure there, but when you – you’re very absolutely correct though, as we look our total cash flow, we do invest in the dollars and the buildings, while, as you know, they are all return based. But from a cash flow standpoint, they invest a lot upfront and then you earn back the cash on cash returns over a period of time.

So, with the increased intensity over the last two years, clearly, there is an increase in CapEx. And our model always has been, then, to make sure that we give the second sale and the third sale out of that building whether it’s from the existing customer from a new customer and that contributes to the ROIC, which is, then gives you a very good sense of, are we investing in the right places, and then are we getting the promised return from those investments.

And with our ROIC continuing to trend up nicely, pretax pushing over 10%, clearly that’s demonstrating that we are getting the returns, our capital investments, we are investing in a right places both in the buildings as well as our product investments and other investments in the overall business.

Brett Feldman – Deutsche Bank Securities

Great. Thanks for taking my questions.

Operator

We’ll go next to the side of Barry McCarver with Stephens Inc. Go ahead, your line is open.

Barry McCarver – Stephens Inc.

Good morning, Larissa [and Peter] great quarter?

Larissa L. Herda

Thank you.

Mark A. Peters

Thanks.

Barry McCarver – Stephens Inc.

So, again, you got most of my questions, just a couple of housekeeping, on the revenue side you attributed part of the growth in the quarter to some taxes and fees, can you give us a little more color on exactly how much of the growth was from those and make sure I understand what those exactly are?

And then my second question, you reiterated on the Intercarrier comp, $2 million coming out of the second half of the year that’s seems a little high for being 2% of revenue is that just back in little rush at the front end loaded to 2012?

Mark A. Peters

Yeah, (inaudible) out of the Intercarrier comp plan first, you’re right, our Intercarrier comp it’s only 2% of revenue both the small amount and then we think, obviously, should be talking about it, that’s so small. But the piece on the terminating traffic, there is more heavily weighted on the way the regulation is currently written. If those that are heavily weighted and than we expected in our estimates about 2 million in second half of the year.

But other moving parts there might be benefits on cost, so we just haven’t quite concerned yet, but so that’s the number we’re looking at for the second half of the year. Again, not a big number for us, it’s not a key part for our revenue sales.

Larissa L. Herda

And there is always potential for puts and takes on that because it’s just the way it is and some of this been subject to interpretation in the SEC just came out last week with another change on this as well. So we are still evaluating that could have potential positive impact, but so but we’re thinking for the second half of the year it’s in that $2 million range.

Mark A. Peters

And on the taxes and fees, so primarily what these are I mean the taxes and fees and heavily weighted toward USF, the Universal Service Fund. And those rates have been moving around frankly, going up so that they can fluctuate from a quarter-to-quarter. And so these taxes and fees (inaudible) booked those into our voice services, so that we can see the biggest impact. And then we have all the exact numbers you’ll see them in the footnote total amount, total hour amount.

But the impact on revenue growth that was primarily in the voice services, which of the biggest contribution problem, there’s virtually none of the data and Internet and there is a little bit in transport services that’s primarily in voice services. I guess before I even go into some of the details that I want to say that even without the taxes and fees that we were out performing the factor on voice services with growth because and the industry voice is declining 7% to 10%.

So that’s kind of a over voice services are but within taxes and fees standpoint that if we look at our growth rate and taxes and fees and voice services I’m sorry, and although we were heading over half of the growth rate came from the taxes and fees. And it’s both the rate and volume, services that we’re selling some of the new products we introduced two years ago I guess it is now, a lot more of it is subject to these taxes and fees so that’s contributing and they’re growing very fast those products and services. So there is more taxes and fees that they hold with them plus the U.S. operation going up a lot over the last few years, so that contributed to it.

So from a voice impact to a revenue growth, the voice services is over half of the growth rate from the voice services comes from these taxes and fees, that’s one side of the coin. Now the other side of the coin because they have to report us, they are diluted from margin so the other side of the coin if we didn’t have, if we netted out these taxes and fees so they come out of the revenue and just netted them in the cost. Our EBITDA margin will go up to almost 39%, so it’s highly diluted to the margin when you look at the whole impact with taxes and fees. So, that created some noise and what’s going on there but that hopefully gives you a color what the real impact is.

Barry McCarver – Stephens Inc.

You know absolutely that’s – that answers the question and then lastly if I may, you talked about either the sales funnel and activity still remaining quite high. Can you discern between that activity and what is just maybe a tick up in the industry and spending versus how much this is generated by the broader product portfolio and new services that tw is offering.

Larissa L. Herda

I would say, as you know, at the end of the year, we talked a bit about the fourth quarter seasonal sales that, it was actually quite typical before the recession. During the recession there was nothing typical about anything. So it was hard to compare the previous two years anyhow, but it has never been unusual for us to have lower sales at the end of the fourth quarter and then have them pick back up in the first quarter, and obviously you saw that in the revenue growth in the first quarter, because it was impacted by what we booked.

In the fourth, so over the course of the first quarter, we saw a nice progression and we then we got to March and had a – and we loved March, because March is the good indicator of kind of what’s going in the business, because things after the holidays, it takes a while for the customers to start buying and the deals are rolling again and then they start to build momentum.

So, it gives us a good feeling for going into the rest of the year. I think a lot of it has to do with our product portfolio. I’m not sure that we see any real change in the broader market. It is a tough market out there, but as you know, we actually were able to grow revenue during the both years of the recession when the market was pretty darn bad. So, having a little bit of lift in the market has obviously been very helpful to us, but I think a lot of the reason why we are winning is, we are obviously taking a lot of share.

We have to be, to be growing at the rate that we are growing when the rest of the industry for these types of services is not at least the bigger players are not. So and a lot of that has to do with how we positioned ourselves. Do you need to serve our product portfolio? You need other service experience that we provide to the customers, and the relationships that we build with the customers.

So I think it’s a combination of a lot of things, but I think a lot of it is how we do what we do. There really isn’t anybody out there in the marketplace who does things the way we do or has the combination of the assets, the sales leaderships, the products leadership and the operational execution there. There really isn’t anybody out there quite like us. So I would say it has more to do with us than it does have to do with the macro environment.

Barry McCarver – Stephens Inc.

Great, thanks a lot.

Operator

(Operator Instructions) We’ll go next to side of Frank Louthan with Raymond James. Go ahead, your line is open.

Frank Louthan – Raymond James & Associates

Okay, great, thank you. Just a follow-up on some of the voice trends. So you’re still sort of trending a little higher, any read through on hiring, it’s on at your base customers are they hiring more employees, is that why your voice products are taking off any economic read through. And then, if you could also just can also elaborate a little bit on the bookings in sales.

Any thoughts on your ability to take the bookings and turn those into revenue, I’m seeing some strong booking, is this going to be – you’re turning into revenue and in one month and four or five months, what sort of the trends there as far as the size of deals that you’ve been booking? Thank you.

Larissa L. Herda

Yeah, that’s always hard to predict Frank on the bookings. You saw the lower bookings in the fourth quarter, and you saw the impact of revenue in the first quarter, right? So sometimes you can see it right away, and sometimes it takes a few quarters that really depends on the combination of things we are selling to bigger customers, it does take time, it always seems to take a longer to feed the increased revenue that it does to see the decreased revenue growth, I don’t know why that is, so I think its hard to predict.

But on the voice side, I wouldn’t attribute it to economic impact, I would attribute our strong consistent voice services to the strength of our converged product portfolio, so the customers are buying the voice application after they buy, with the data network basically, so it’s all combined.

And I think that’s more of a newer trend in the way we’ve seen in our business anyhow. So that really has been going on in our business since we deployed the converged product in 2010. We leave with Ethernet and we provide the converged product, and then the voice kind comes along with it.

So I think that has more than do with our strength on the voice side. And we also don’t sell wholesale voice, so some of the, I think the decline that you have seen in other carriers’ voice revenue streams, probably has a lot to do with the fact that they sell wholesale voice; and we just don’t that, so we don’t have that negative legacy product that just keeps on getting smaller and smaller and smaller.

Frank Louthan – Raymond James & Associates

Okay, great. And just one follow up, looking at from the industry with Kakatech being taken out and AboveNet 360 last few months – in the coming months, different kinds of company, slightly different product sets in many ways, but can you comment on your thoughts on how that’s going to impact the industry from a capacity standpoint, from a pricing standpoint is going to be good or bad for you or how did that affect you?

Larissa L. Herda

Yeah, I’d argue that the word slightly isn’t exactly accurate, but I would say significantly different in many cases products that, but I really don’t see any change on in pricing from our perspective, some of the players that you’ve talked about really felt more much smaller business customers, I think they were probably competing more at the cable companies than where we compete with GM every once in a while. Some of them are very specialized so selling to primarily to data centers and a very high commodity type business more focused on selling fiber, and low latency bandwidth than we are selling more bigger huge network.

They were piece of the network where we are looking for the whole network, so a much less sophisticated type of product portfolio, and than others regionally oriented more long haul regional haul type of business that again, really isn’t any place for where we really find ourselves competing, and there is plenty of opportunity to buy from other carriers too.

So I don’t think the recent consolidations really going to have a negative impact or a positive impact quite frankly, I do think I guess positively speaking consolidation is always good. It’s typically good because you get a little more fewer competitors out there competing for the same customers, but on the other hand and I guess the other good thing from our perspective is that while all these companies are deeply involved in integrations and we all know how hard integration is in this business, I don’t care what anybody says it’s extremely distracting.

It keeps you from rolling out new products that it takes you away from the customers, it’s hard to integrate in this business. So, while both companies are out there spending their time integrating, we are growing very nicely organically and able to focus on the customer and the product and the evolution of the product.

In our business, as you know, it’s not just about having fiber, there are a lot of companies that have fiber you know you can build fiber that’s not anything magic, it is what you do with it. It is the capabilities that you build. It is the operational execution that you can perform with these networks and it’s a differentiation that you provide to the customer when you combine all those things together that’s what makes the company really unique.

And again, as I look at any of the companies that have been acquired, none of them were even close to the kind of business that we’ve created, clearly, I mean the consistency of the growth and our ability to evolve as a business, again, as we were thinking about what we wanted to talk to the marketplace about today, it dawned on us that we’ve gone through this evolution – these type of evolution before and there has been and we’ve really benefited from it, because we look out very far. We are operating this business on a quarter-to-quarter basis. We are looking out five years, 10 years, where is the network going; where are the customers going. What are they going to need in the future and we’ve taken the time to position ourselves. And it has taken us a long time to get to the Intelligent Network and to create the capability, be able to do it, and it’s going to take anybody else in the industry, if they even can a long time to do it too.

So we’ve done a lot of that work already and so we are pretty excited about that. So I think that’s the key in this business regardless of what goes on in consolidation, if you can continue to evolve and innovate, then you can continue to have strong margins like we had consistent performance and exciting futures. And I think that’s probably more important than all this consolidation that’s being going on.

Frank Louthan – Raymond James & Associates

Okay, great. Thank you.

Operator

We’ll go next to the side of Tim Horan with Oppenheimer. Go ahead, your line is open.

Timothy Horan – Oppenheimer & Co.

Thanks, great quarter guys. Can you touch on pricing a little bit, is voice pricing maybe stabilizing I mean I know it was kind of a free fall for a long period of time and maybe just something you haven’t though about or have been asked about much over the last couple of years but it clearly seems like revenue growth here.

And maybe just pricing also for your Ethernet product and maybe for legacy network services, which I assume are probably under a little bit more pricing pressure and so maybe just really high level comments on pricing and what you’re seeing out there with competitors? Thanks

Larissa Herda

Yeah, at some point pricing can’t go down anymore, right? Or you are giving away for free. When it comes to voice pricing it’s been very flat and I think that’s probably in that category and it’s a nice margin business for us. We sell the services with on top of our networks so its, it’s a great wrap in with other services, so it’s fairly sticky too as the results of that.

In our other products and services, we always have elements of it – of your products that are probably more price, have more pricing pressure on them. So IP, Internet type services has experienced over the past number of years considerable pricing pressure and although that has been leveling off, it’s still a highly modernized product in certain areas.

So, for certain types and services particularly very high capacity services for some of these file sharing companies or things like that. We don’t really play and we don’t play at all in that area because our service is not about being the cheapest, it’s provided the best value when you combined with all the other things that we do. So nothing has really changed I think on the pricing side, it’s a very competitive business, we are always out there competing, you never just win things because you’re there.

There is always someone on the other end, whose is helping to drive prices down little bit further, but again if you can differentiate and you can provide added value and you have all these other aspects, and when you are competing against somebody and all they have is this, and you have this big capabilities and that really helps to provide you with strength and pricing, because you got something else that they want and that others can’t, and again that takes to me back to our side around the Intelligent network because there is nobody else going to be doing, what we are doing and we feel like we’re going to be so far ahead of everybody else on this.

Even if they dream it right now, there is still not going to be able to do it for a long time so that’s really the key in this business. It’s really figuring out where the, where the [puck] is going, not hate that because everybody uses that, but true, it’s not where it is, not where the puck is today it’s where it’s going to be and that’s, that something we just happen to be very good, and it is the reason why we’ve had so many consecutive quarters of revenue growth, I think it’s for - we become very adapted trying to figure, how they continually strengthen our comparative position.

Timothy Horan – Oppenheimer & Co.

I guess the company historically had been what customers are paying now with so much above the spot markets, contracts have come up, you have to re-price so how long do you think Voice pricing has been stable at this point relatively stable, I know it’s clearly trending down, but on a relative basis.

Larissa L. Herda

Well assets it’s been years, yes it’s been several years but you’re right that is one of the dynamics in the telecommunications industry is that when contracts renewed, so the key there we’d found again is the strength of ours is that we keep going back to our customers with our new products and we get them to renew with new revenue. And so that helps us maintain some stability there.

But churn is always, churn is always that revenue churn is always kind of an issue when or –actually it’s not really churn it is more repricing. The repricing element of this industry is always a factor and we are always fighting against its. Let’s say, it’s a current that we are always swimming against. But the key there again goes back to differentiation. If you can go back to a customer that you feel something to a year or two ago when their contracts coming up in a year and you can say hey guess what I now have this to add on to it and you all you know you’ve got this other stuff coming up in the year why don’t we wrap it altogether well it provides you a better competitive position.

And so we try to do that. During the recession, we couldn’t do that that was one of the reasons why a lot of the repricing had a more dramatic impact on our business because customers were buying as much. They were worried about all of that stuff but customers are back to it again and I think that that obviously helps us, but I think on voice anyhow it’s been for us anyhow because again we’ve been wrapping it with this big package. It’s not just voice right, we don’t go in and judge our voice in fact I don’t think we ever choose to sell voice it’s part of a whole network so it’s a much different conversation.

Timothy Horan – Oppenheimer & Co.

Thanks a lot.

Larissa L. Herda

Sure.

Operator

Your next question comes from the line of Donna Jaegers with D.A. Davidson. Go ahead Donna.

Donna A. Jaegers -- D. A. Davidson & Co.

Hi, Guys great quarter. So going on your comments that you just said that during the recession customers were not buying so much you could not up sell them as easily. I know you never give guidance on sales, but over the last few years you’ve been saying you wanted to get to double-digit total revenue growth. Do you think that chances of this new product set give you a higher probability of getting to that double-digit revenue growth over the next say, 12 months?

Larissa L. Herda

So before I answer that question, I just want to point out that we are way over our time, but we’re going to continue to go, but we still have a lot of people online. So you can all be patient, we want to try to get to as many people as we can. We’re going to extend the call a bit longer. When I get to everyone and I’ll apologize ahead of time, but we’re going to try.

So part of our – what we talked about and we continue to talk about getting double-digit revenue growth. We do so with the knowledge of what our roadmap is, right, on products, capabilities on what we’re doing internally to make ourselves more efficient. And so, when we talk about getting to double-digit revenue growth, we’d also talked about needing to get some help from the macroeconomic environment. We still don’t have quite enough help yet. I will tell you that, it would be nice to have a bit more help from the economy. We’re getting little help and thus you’ve seen our revenue growth continue to expand each year.

So, our new products are all part of that discussion, right, we talked about this several years ago, we had this roadmap in front of us, we just weren’t talking about it necessarily because we’ve learned that we tell the market when you’re doing things closer to when you’re actually doing them because otherwise, they’re waiting and waiting and waiting. And so, now we’re actually doing them and executing on them, so it’s been a good time to speak about it.

So, yes, the answer is, it is part of our ability to continue to expand our revenue growth rate, which is what we’re focused on obviously in a balanced way, we want to do it while we’re expanding our margins and all the other strong financial results that we continue to give.

So, it is part of it. We’re pretty excited about it, but as you know, with the exception of our converged product portfolio, we’ve never had products that came out of the chute and just blew out of the chute. That product did, and that was because the market was so ready for it. They were already getting it, we were a little bit behind back then because of the integration that we had gone through. And the – what we did to create the single platform for the network and for our systems and for our data, our customer data and everything in it, it took us a little bit longer, and we stopped product development if you remember during that integration phase, because we knew and we knew we had to take a few steps back to move forward, lead forward.

Right now, we’re in the lead forward time of that story, but it will still probably, we are still educating customers and although, it is interesting as we talk to the CIOs and especially when we talk about dynamic bandwidth. They are quite excited about what that could mean for them, so it will be very interesting to see what actually happens on that.

So for us, we don’t like to make predictions that things are going to come out of the chute, really fast, because that’s less likely to happen. It happens over time and you see it, you see it in the deals you are lead into and you see it in customers think, gosh, I’m going to buy for you because I like your vision, that’s where you are going to go and I want to be there as your customer when you have that.

So, we think that both conversations are starting to happen today. We’ve really been spending sometime more time educating the sales force because you really don’t want to spend a lot of time training your sales force and so they have the products to sell, because it gets very distracting for them and we’re right in the middle of doing that with them now. So the word is getting out more and so it will be interesting, let’s see what happens over the next six months to a year with these products but so far we have some good feelings about where they’re going.

Donna Jaegers – D.A. Davidson & Co

Okay, great, let the other people ask questions. Thanks.

Larissa L. Herda

Okay.

Operator

Next we’ll go to the side of Michael Funk with Bank of America.

Michael Funk – Bank of America Merrill Lynch

Great, thank you for fitting me and a couple of really quick ones here. On the new one committee product, I mean you can help us think about how cost might ramp in front of that product launch, started sales force training potentially bringing on some new sales people to address that market and along the same lines, may be you can talk about how you think about the size, this market the revenue opportunity for tw telecom are how disruptive the product you’re entering the market with might be had you have an opportunity. And then finally if you have time, any kind of commentary on the funnel conversion during the quarter timing and success might be helpful.

Larissa L. Herda

All right, so no we really don’t expect to add new sales people to sell the one to many product because that’s a product that our existing sales force will be selling, I can’t say that we have never really spent a lot of time selling to the PTT sort of the international carriers and now we have a product that is extremely exciting for them. And so that is a brand new I would carrier revenue stream that we really didn’t, really had any focus on before and so I think that’s – I think that’s going to be held. And we did actually hire a number of people in that group that had more expertise and relationship.

But again those things take time to develop overtime, and I think that will be hopefully a growing opportunity for us. And the one to many I think is going to be very interesting for that customer base.

Let’s see funnel conversion. I’m not sure, we don’t generally talk about funnel conversion as a matter of guidance or lack out there of that we give or don’t give. So is there another way you want to ask that question, that I might be able to answer it.

Michael Funk – Bank of America Merrill Lynch

Sure. I mean are you seeing improvement in the success rate of translating the funnel into fine contracts or has that, I guess time either grow longer or shorter? Staying away from exact numbers, even if it kind of directionally might help.

Larissa L. Herda

Yeah, I don’t think we’ve really seen many changes there. If we start continue to sell to bigger and bigger customers I’d say it will take probably take longer, and that’s just because of the complexity of the deals. But I don’t think there is enough of that yet to create any trend for us to talk about.

Michael Funk – Bank of America Merrill Lynch

Great, I appreciate the time. Thank you

Larissa L. Herda

Sure.

Operator

And next we’ll hear from Tom Sites with Jefferies.

Tom Sites – Jefferies & Co

Thanks for taking the question. I’ll try to be very quick. As you start to sell more of these enhanced management services is this – a really big, is this a material opportunity for margin improvement given that in most instances you have already got the circuit installed. And then, just as a follow-up to that. Can you give us percentage of the base that use some of these add on products, so that we can gauge what kind of opportunity you are looking at?

Larissa L. Herda

Well, so Enhanced Management is just a piece of a pie, right. So it’s something where we roll it out for summer, you’re right. If we went to over existing managed services customers and we turned it all on and they were all willing to pay for it. It would be a great margin lift for us. That’s probably not going to happen quite like that, but we could, I mean that would be like (inaudible) right. Each side is not big dollar uplift, right.

So Enhanced Management is really the beginning of a path to what we think customers are really going to be willing to pay for it and that’s the dynamic capacity and the applications that we are a network. That’s really what they are looking for. And so, but we got to start somewhere and you need to start, building those relationships with those customers. So, I think over time all of our products have good margins.

And so, I think there is, we haven’t talked about or given any expectations or margins at any of this yet, and we’re not ready to do that.

Tom Sites – Jefferies & Co

(inaudible).

Larissa L. Herda

Yeah, I think your theory or the theme or your thesis around your infrastructure is there, you are adding this capability, if customers are to even pay a few dollars for it. It’s basically a lot of margin that you add high margin business. But don’t go to the stretches on margins, right because you still want to emphasize that margins – this in this business on your stepped functions too of things that you do. We may find that if we turn this on and a whole bunch of customers buy it. We suddenly have to add a bunch of people in our back office to answer questions.

So that’s going to be a learning curve for us because customers are going to be seeing things they’ve never seen before and they’re going to be maybe calling us more maybe they call us less because now they can see if they don’t need to call us, so we still don’t have all the answers on that yet.

So I just remodel that but that is a potential feature, it’s definitely something to think about. I think one of the things, when you think about enhanced management, we really look at is, is helping us to increase the trajectory of our Ethernet and VPN services. So when we go in and we’re competing against somebody else who is selling those services and we say, by the way we’ve got enhanced management, we’ll give it to you for the first year.

Right, and it gives us a much better competitive position that we have this additional capability whereas nobody have guided on Ethernet at all right and we don’t know if anybody else has it, so we create more stickiness, we can go back to those customers that might have turned off may be because of whatever reason and now they’re going to go, oh! Wow, I get this now or this is, so that’s how we look at the first part of the intelligent network, it really about selling our other services and providing another conversation with the customer that differentiated relationship with them, present base, what was that question again?

Tom Sites – Jefferies & Co

Well, just, when you look at your whole base, do you think this is an opportunity for a third of the base, for two thirds of base?

Larissa L. Herda

Oh, traditionally, a very large percentage of our customers and ordinate percentage of our customers buy multiple services from us. So we believe that any one of our managed, any customer who currently buy managed services from us is the candidate for these types of services. So hard to say but it’s a great again its great to go in, you have a conversion with the customer to talk about these services, you can resign a contract, we think hopefully it will return, it will reduce some of our rerating and some of our turn. So I don’t know there’s it’s a pretty broad spectrum of customers in our base. I can’t tell you today what percentage but it’s a good percentage of them that this will be interesting to.

Tom Sites – Jefferies & Co

Okay. Great thank you very much for the time.

Larissa L. Herda

You’re welcome. And we have one, I’m sorry we have only time for one more question.

Operator

The last question comes from the side of Simon Flannery with Morgan Stanley. Go ahead your line is open.

Unidentified Analyst

Hi this is Lisa for Simon. Just a quick question on the share buyback, how do you think about the timing of share buybacks throughout the year?

Mark A. Peters

We’re really just being very opportunistic. We are watching on the market and we’re looking at we would be very patience as we exceed the program. And as refresh everybody, we could plan a $300 million stock buyback program, a multi-year program. We have certain debt covenants that limit us to about $150 million a year that we have $50 million carryover this year, so technically this year we could do $200 million under the existing program. But again, we know we’re going to just be very thoughtful as we continue to execute the program.

Larissa L. Herda

All right and apologies to those whose questions we weren’t able to answer please call us and we will be happy to answer those for you. Thank you all for your patience for all the extra time and thank you for your support tw telecom. Have a good day.

Operator

This concludes our program. Thank you for joining us.

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