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Time Warner Telecom Inc. (NASDAQ:TWTC)

Q4 2007 Earnings Call

February 12, 2008 11:00 am ET

Executives

Carole Curtin - Senior Director, IR

Larissa Herda - Chairman, CEO and President

Mark Peters - EVP and CFO

Analysts

Tom Watts - Cowen and Company

Tim Horan - Oppenheimer

Tom Seitz - Lehman Brothers

Donna Jaegers - Janco Partners

Simon Stanley - Morgan Stanley

Rai Archibold - Kaufman Brothers

Erin Schmitz - Citi Investment Research

Garnet Edmunds - Wachovia Securities

Frank Louthan - Raymond James

Mike McCormack - Bear Stearns

Operator

Good morning and welcome to Time Warner Telecom's fourth 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, and Executive Vice President and Chief Financial Officer, Mr. Mark Peters.

At this time, I will turn the call over to Carole Curtin, Senior Director of Investor Relations. Please go ahead.

Carole Curtin

Welcome to Time Warner Telecom's conference call. Let me start by directing you to our website at www.twtelecom.com where you can find our press release and supplemental quarterly information.

Before we begin, I'll read our Safe Harbor statement. Issues discussed on today's conference call include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are naturally subject to uncertainties and changes in circumstances.

Actual results may vary materially from the expectations contained herein due to the risks described in the company's annual and quarterly filings with the SEC, especially with 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 presented to provide additional insight into our performance. Please see our press release and other information posted on our website for more details on these and other matters.

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

Larissa Herda

Thanks, Carole. Hi, everyone and thank you for joining us. 2007 was a transformational year for Time Warner Telecom, which included significantly growing our revenue stream and retooling our business. This included operationalizing our acquired business, integrating all major support systems and accelerating product capabilities in our new market. And we accomplished all this while maintaining our focus on driving growth and profitability in the business.

This is a terrific year for building scale, capabilities, talent and the value of the business, and we have never been more positive about our future. Mark will take you through an overview of our quarterly results and outline some of our financial targets and objectives for 2008 and I’ll come back and talk to you about our strategic vision for the year.

With that, I'll hand it over to Mark.

Mark Peters

Thanks, Larissa. I'll direct you to the press release for all the financial highlights and detailed result, as I'll discuss general trends and comments on the quarter. For the year 2007, we achieved strong revenue growth generally at positive levered free cash flow, even during a major integration and expanded our margins throughout the last three quarters of the year.

A few noteworthy accomplishments for the year include the following; revenue increased 33% to over $1 billion, modified EBITDA increased 19% and we reduced our net loss by 59%. Our enterprise growth engine continued with enterprise revenue growing at an impressive 29% compounded annual growth rate over the last three years. As compared to the prior year, our quarterly growth sales increased 33% demonstrating our productivity growth and strong demand.

Capital expenditures excluding that related to integration were $230 million for the year. The vast majority of our investments were success based investments, meaning they were directly tied to new sales. Our spending on capital expenditures was at the low end of expectations, as a result of the timing of projects and savings from our new centralized inventory management process.

Our integration related CapEx was $30 million also lower than planned, due to about $7 million of projects moving into the first quarter of 2008. In 2007, we move through the integration of a major acquisition with our team managing the process very cost effectively.

By the end of the year, we grow our margins to near pre-acquisition levels reflecting a major benefit of the acquisition, which is expanding our company to achieve scale of operations. Further demonstrating scale and efficiencies through the year levered free cash flow excludes of integration and branding costs was up 94% to $43 million for 2007 reflecting a momentum in growing the business and our ability to generate cash.

Turning to the quarter, we achieved solid results with modified EBITDA margin expanding 190 basis points sequentially to 33.4%. Our three quarter trend in margin expansion reflects profitable growth, continued progress on gaining integration cost synergies and overall scaling of our business.

Consolidated revenue for the quarter expanded by 2% sequentially. This was led by strong growth in data and internet services as well as voice services, offset by a decline in intercarrier compensation and a slight decline in network services. Our strong growth and recurring revenue was masked by a few items in the quarter, specifically the loss of revenue from mortgage related enterprise customers, fluctuation and dispute, and a decline in intercarrier compensation of $1.2 million primarily related to rate reductions and discontinuation of certain acquired products.

We expect to see further rate reductions for intercarrier compensation in the first quarter. We delivered $8 million and levered free cash flow for the quarter or about $14 million exclusive of integration and branding costs representing a 5% levered free cash flow margin.

Enterprise revenue had grown for 22 consecutive quarters posting a 3% sequential growth this quarter and now represents 71% of our total revenue. The enterprise segment driven by our data and internet product portfolio remains our growth engine. Exclusive of the mortgage related disconnects I mentioned, enterprise revenue grew 4% sequentially.

Carrier revenue trends remained similar to last quarter with ongoing new sales for large and small carriers offset primarily by consolidation related and other grooming activity, contract renewals to current market pricing and volume discounts. We expect these factors will continue in the future. Given the sensitivity of the market to macroeconomic issues, let me provide our point of view on this area.

First on the sales front, other than normal quarterly fluctuations and seasonality, we have not seen a slowdown or delay in our customer's purchasing decision or any notable changes in the pricing environment. In fact, if we monitor our sales activity and a variety of leading indicators over the past several months, we are seeing activity as strong as the year ago. Of course, things can change and we are closely monitoring trends. We are optimistic about our forward looking opportunity.

To further comment in our view of the economy and how we approach it, I'd like to reiterate our long held philosophy and that is to focus on generating long-term growth and to do it profitably. We have proven that we know how to guide our business through various economic cycles with the ability to pull expense and CapEx levered quickly, if the need arises. I won't go into detail on that topic.

But what we believe is most important to understand is because of our financial strength and overall capabilities, we are well positioned to take advantage of abundant growth opportunities in our business. Because our solutions solve problems for our customers and provide a strong value proposition, I believe, we have terrific growth opportunities ahead.

Let me walk you through our customer advantages. First, our service is to generally provide increased operating efficiencies and lower the total cost of ownership for our customers by using next generation services like Ethernet versus legacy services like frame and ATM providing solutions that scale very easily and cost effectively.

Nexstar solutions often require much lower or even no capital expenditures for our customers, as in most cases they already have the necessary routers to drive their solution. This is particularly the case with Ethernet services.

Also, we are often designing a converged platform that also contributes to customer saving, as customers do not require as many physical network connections with converged services. Additionally the need for vendor network diversity continues to be a driver for our customers. These are simply network imperative.

In short, our solutions address demand for scale, while managing customer needs that handle more demand with greater efficiency and demand is clearly there. With our value proposition, we think we will continue to win market share regardless of changes in economic cycle. Remember, we have very small market share relative to the incumbent carriers, who have a hundred years of history both the value of our services, our track record has been to win away market share, as a part of our overall growth.

As part of our disciplined approach, we expect to continue to aggressively build connectivity to our existing and new customers deliver our solution. And our strong liquidity position allows us to continue to execute our strategy, when others may be constrained.

A major underlying strength of our business is our highly diversified customer base. As a business-to-business service provider, we attract a wide variety of enterprise customers. As of the fourth quarter, our highly diversified revenue stream is demonstrated by the fact that 71% of our revenue comes from the enterprise segment with no enterprise customer representing more than 2% of total revenue.

Our enterprise revenue is diversified of many vertical market segments. Our single largest customer is a carrier who represents only 7% of our fourth quarter revenue with the majority of their revenue under contract until the end of 2010. Furthermore, focusing specifically on the mortgage industry, which we broadly define as traditional banking institutions as well as businesses like title companies, builders, REITs, contractors, developers and the like makes up only about 6% of our total revenue for the quarter.

Two large enterprises comprised more than 40% of the $1.4 million revenue decline in the quarter. As we exited the year, our largest customer in this group, a Fortune 100 customer, represented less than 1% of total revenue in the quarter. Many of these customers are high credit quality financial organizations, which have long-term commitment. In addition, we continue to see new opportunities among other customers in this group as well.

Further demonstrating the quality of our customers as our impressive metric of 29 day sales outstanding, and our bad debt expense representing less than 1% of revenue reflecting the strength and stability in our business. As for liquidity, we remain in an extremely strong position, in fact we have never been stronger.

We reported $322 million of cash equivalents and investments, as of the end of the quarter, an increase of $12 million over the end of last year. In addition, we had only $6 million of annual debt maturities until 2013 and we have strong leverage ratios. For example, our modified EBITDA covers our net interest expense by more than 4.5 times and our net debt to modified EBITDA is about 3:1 for the year. The strong liquidity position allows us to continue to aggressively pursue profitable growth opportunities and to consider strategic investments.

Now, let me turn to one of our financial goals for 2008. We continue to focus on achieving a mid 30% modified EBITDA margins during the summer of 2008, as a result of revenue growth, continued cost synergies and overall scaling of the business. In fact, we are pretty close already with the 33.4% margin on the quarter, which includes the burden of integration and branding costs.

I want to remind you that our quarterly margins always have been and will be impacted by the timing of sales, installations, seasonality, and other normal business fluctuations including usage, as well as integration synergies and costs. We believe it is most important to focus on long-term trend not short-term fluctuations. While margins are very important to us, it is equally important to balance all key financial metrics. We'll continue to keep the proper focus on balancing revenue growth, margins, and cash flows.

Although we have said this numerous times over the past several years, I want to repeat our commitments on seasonality. Historically, we have seen seasonality have some impacts on both revenue growth and expenses going into the first quarter. As you would expect that we approach Thanksgiving Holiday and continuing for the first of the year, sales activity is slower as our customers focus on the year end activities, which has historically impacted first quarter installations and related sequential revenue growth. With that said, our sales trends are strong going into the first quarter, seasonally adjusted.

We have also historically seen the seasonal cost impact specifically caused by the resetting of payroll taxes and granting of merit raises in the first quarter resulting in an increase in cost. In the first quarter, we expect about $4 million to $5 million increase related to these costs. This seasonality is just another item that causes short-term fluctuation.

In 2008, we expect the investment capital expenditures of between $240 million to $260 million for our general operations, a vast majority of which will be used to fund growth opportunities, plus $10 million to $14 million for integration and branding expenditures. Relative to re-branding, we expect to spend a total of $6 million to $7 million for the effort, $2 million of which will be capitalized primarily for new assignments. We will no longer be breaking our operating expenses related to integration activities, but we will include them in normal operations.

Let me sum up 2007 by saying, we delivered strong performance and we have done this while continuing to move efficiently through a significant acquisition. Looking forward, our strong financial position will enable us to take advantage of growth opportunities. We remain focused on growing the business profitably, leveraging our acquired operations and overall infrastructure and growing our enterprise business.

I'll now turn the call over to Larrisa to take you through our vision for 2008.

Larrisa Herda

Thanks, Mark. As I said earlier, 2007 was a transformational year for Time Warner Telecom. In addition to our strong financial results, we significantly grew the business from a scale, systems and talent perspective essentially retooling for the future. This year marks an important milestone for us passing $1 billion in revenue, which is a stepping stone on a continued path of opportunities we see for the company to grow the business.

Let me put this accomplishment into perspective. At the time, I joined the company in 1997 and we had just generated $24 million in revenue in the prior year. Since then, we have kept the same broad strategy of building fiber infrastructure and selling a wide variety of services starting with TDM solutions then evolving to an IP-based infrastructure, including Ethernet and IP VPN solutions.

Throughout our evolution, we have always kept our strategy focused close to the customer and maintained our strict discipline around making money. Also over this time, we greatly diversified our revenue stream by growing our markets to a robust national footprint and expanding our capabilities from serving a few locations to up to hundreds of locations, we announced concert for a single customer today.

And most importantly, we have owned our operations deal a business that is now producing levered free cash flow with positive net income in our side. Those are impressive accomplishments for an emerging telecom player that has traversed the competitive economic and regulatory landscape of the last 11 years. We have grown the company by being strategic, disciplined and agile. And we have always focused on building long-term shareholder value. We have come a long way proving our ability to make the right strategic decisions for the future.

I'd like to take a moment to provide you with an overview of our operational plan, which is framed within the context of a multiyear transformation of the company of which 2007 was the second year of an effort that is still work in progress. This plan required a sequence of bold committed steps with the successful execution of each step representing a series of significant accomplishments along the way.

In 2006, the first year of our transformation, the company freed itself from its controlling owner, allowing us to execute a major strategic acquisition, which significantly extended Time Warner Telecom's market footprint and asset base, while simultaneously refinancing our debt structure. This has allowed us to reduce our annual net interest costs by over 30% from 2005 compared to 2007.

These events in 2006 set the stage for 2007 to be a pivotal year, not only to successfully complete our integration, but to also implement a much stronger operational foundation to support future growth. The significance and magnitude of this achievement cannot be overemphasized. The fact that within 12 months of the major acquisition, the combined company's operations have been converted into one consolidated foundation of networks, systems, processes, and organization is rarely, if ever achieved in this business. Even more notable is the fact that Time Warner Telecom has been able to deliver solid financial and operating results during this very demanding integration period.

One of the many things that has continually set Time Warner Telecom apart from most emerging competitive carriers, is that we have achieved strong financial results while making significant long-term investments, and this past year was no different. During 2007, we have been able to identify and implement overall operational improvements for the new company, so that the consolidated operations are stronger than before the acquisition. This included strengthening our customer experience capabilities, strategically investing in the talent of our workforce, significantly accelerating the rollout of advanced services to our acquired markets and greatly improving our overall systems capability.

From a financial perspective, as you heard from Mark, it was a very strong year as well as with the constant focus on perpetuating our enterprise growth engine and growing operations profitably putting us near the dipping point to turn the company to positive net income. Remarkably in a year with so many resources intently focused on integration and during a period that we believe our efficiency was low, as a result our revenues per employee actually expanded reflecting our ability to scale the business.

Clearly all of these have not been accomplished without a lot of hard work along the way. As we continue to improve our performance by retooling and simplifying processes, systems and support structures based on the needs of our customers, which will lead to process and cost efficiencies this year.

We’ll have a more powerful and scalable foundation upon which to accelerate the company's organic cash flow growth and to implement new products and services, which we expect will generate continued revenue growth in the future. In addition, we created a platform to consider future opportunities more efficiently whether it is a market expansion, a product capability or some other type of transaction.

Now let me turn to the next stage of our transformation. This includes the groundwork we began laying in 2007 to successfully leverage our strength in selling to customers including investing in our acquired markets, expanding product capabilities and upgrading our talents in a few strategic areas.

Let me start with how these investments have set up our growth initiatives for this year. As we have always said, there are no silver bullets in this business. However, time and time again we have successfully demonstrated that when we focus on a series of incremental growth initiatives with the right priorities, when taken together they yield strong long-term growth with each initiative contributing with some lift to revenue.

Let me talk about just a few of these areas, we expect to help drive our growth this year and beyond. Let's start with our sales strategy. In 2007, we turned over more than half of our acquired sales force, sales engineer and other commission sale positions. We replaced those acquired personnel over the course of the year and gained more advanced skills in sales and engineering expertise as well as advanced data expertise and that has been no small task.

This upgraded talent in our acquired markets has positioned us to sell into our sweet spot of medium to large enterprises that require innovative solutions for complex business needs and it will take sometime for them to reach full productivity. As we said in the past it takes about 12 months to 18 months for new sale people to achieve our targeted sales productivity.

With our new hires last year, we started to see some increased productivity over the later part of 2007 and we expect to see further traction providing us sales lift over the course of the year as these employees gain more tenure in their roles. By the way this is exactly what we did with the GST acquisition and as a result many of those markets are our fastest growing markets today. And in time, I'm confident that many of these new markets will also be strong contributors.

Also as part of our investment in 2007, we have taken a page from our previous success by adding customer relationship specialist to our acquired market. These positions are designed to specifically expand or cultivate sales to existing customers hence are farmers and they free up our primary sales force to be the hunters for new accounts.

For some color, let me share some of our previous success. After implementing this program in 2004 along with some other initiatives overtime we dramatically decreased our total revenue churn by over a third from 1.7% in mid 2004 to 1.1% for the quarter ending right before our most recent acquisition. We achieved this while at the same time we substantially increased the size of our customer base and grew our top line revenues, as these farmers up sold our existing customer base.

Evaluating the impact of the program to accounts we targeted, we increased our revenue retention from 96% to over 99% which is a very effective effort. Using this program today, we selected 10,000 acquired customers to include in the effort initially. Considering that traditionally a large percentage of our new revenue comes from existing customers, we expect to have a lot of success in making this happen with the acquired customer base as well. Again as we have in the past, it will take sometime, but we expect some revenue lift with this initiative.

Next, let's look at our new markets. We have a wealth of opportunities created with the markets we acquired. To demonstrates our ability to leverage our new markets, I'll point you back again to our GST acquisition and our proven track record. Those markets, many of which were not much more than skeleton operations, when we got them much like those of the experience in Xspedius markets. They were cultivated with incremental investments culminating in some of our fastest growing markets in recent years, such as, Seattle and Phoenix.

In fact, over the last three years, we have seen a compounded annual growth rate of 47% and 31% for each of these markets respectively. In that same vein, we are using a multi step approach to leverage our most recently acquired markets in these three key areas. First, we fully integrated the acquired markets that overlap with our core markets to function as one cohesive organization harnessing all of our capabilities to attack the local market and we expect to see the results of those additional resources throughout this year.

Already Memphis, one of our overlapped markets, is showing impressive synergies of a combined organization. Since our integration last summer they have been able to up sell many of the acquired customers. They have also been able to sell co-locations based connective acquired customers to many other Time Warner Telecom markets and upgrade them to new platforms like Ethernet. In short, with this integration of our two units, we are now the go to service provider in that market.

Next, we invested in 49 overlap markets adding strategic personnel including a general manager, salespeople, technicians and engineering support in each of these markets with more yet to come. In addition to ceding these markets with the right compliment of talent we have added our strongest selling advanced products including IP based services such as the Ethernet.

None of these markets previously had all the requisite skills or products to produce optimal results and that is why we see this is a key opportunity for growth. This is the model that we have used over and over successfully as we incrementally grew our core markets in prior years. In fact for the 10 markets we completed last summer, I'll have to say that for six months out of the gate they are doing really well and we are happy with their progress.

National, which was the first of our 14 markets to build a new team and activate the Time Warner Telecom services added 12 new on-net buildings in the last half of 2007 along with a combination of over 50 existing and new customers purchasing data and IP products. These accounts in Multi-State Network Solutions still that are available national co-location space with new co-location space now in development as a result.

This team leveraged our close to the customer model by coining the phrase to serve along the blue line, which is our continued sales focus sliding fiber in the on-net building. Also, let me revisit the city of Louisville, which we discussed on our prior calls, where we are seeing similar results including 15 new on-net buildings and 40 new data and IP customers. This new team continues to leverage these on-net customers for additional multi-site and multi-city solutions and they have only just begun.

Finally, we are leveraging our new and existing markets to serve our multi-city customers. As enterprises continue to grow, they require a service provider that can reach more and more locations. We have already seen in 2007 favorable traction through this expanded reach and we expect more in the future.

Proposals delivered to enterprise customers in our sales pipeline that include multi-city solutions have grown by over 40% in the past six months, many of which include our new markets. So, with integration behind us these markets are ready to come into their own and we expect to capitalize on the many facets of these local market opportunities. And again, we expect this will provide another contribution to incremental revenue lift.

Finally, let me talk about co-location. I talked to you about this one before and it continues to be a really great path for new revenue opportunities, so I'd like to talk to you about it again. During 2007, we found co-location to be a growth engine in overall customer solutions and experienced growth in co-location revenue by more then 50%. By hosting our own co-location business, we have open doors to additional sales opportunities, which have provided another incremental lift to revenue.

To remind you, our co-location facilities are typically adjacent to our central offices allowing us to leverage our HVAC power capabilities and secure environment. The draw off for our customers is the benefit of easy access to our local market facilities with separately caged areas and the necessary power and cooling conditions and the ability to meet their growing space requirement in a cost effective way. Most important to customers is the fact that they are directly in our space and on our network and in each of our local markets so that their technicians can easily access the sites.

While we are not in the business of building mega co-location facilities or selling rackspace, we see co-location as an important component to meet the multifaceted needs of customers. Our strategy is to provide network services over our secure fiber networks to serve headquarter locations, customer data centers and connecting enterprises to our co-location facilities. These key three areas are the epicenter of corporate data, which is the pulse of a customers' business.

When you own this part of the customers' network relationship then you can leverage it to expand to other locations, such as satellite offices and adding incremental applications, such as voice services, which is exactly what we are doing. I believe this strategy differs from how other competitors approach this business since we are primarily focused on selling network services versus ColoSpace.

Another key aspect is that our approach allows us to invest incrementally and to rapidly respond to local market demand and opportunities. A good example for demand in this area is Minneapolis. We had increased our Co-location Space not once, not twice but five times in the past four years with two of these expansions in the past 12 months and we are now planning an additional expansion which we may have to make bigger because we have already pre-sold the future new space. With this expansion, we will have more than 50,000 square feet of ColoSpace in Minneapolis alone which is very impressive for a company whose main focus is not co-location.

I want to share a very real time story and the value of co-location for customers, as they design their disaster recovery network. Recently, one of the acquired customers in our Memphis market upgraded their services through an extended contract that included connectivity to other Time Warner Telecom cities as well as co-location services.

Last Tuesday, the customers' main corporate office suffered a direct hit from an F2 tornado, which destroyed their facility. Our business recovery and disaster planning solutions backed by generated power provided the customers remote sites the connectivity needed to continue operations and provide the data necessary to keep running the business. Without the Time Warner Telecom solution, this would have yielded a much different outcome for our customer.

In addition to this customer, we also had another customer temporarily move some of their personnel into their co-location space in our facilities in order to process their payroll. Following this event, our request for this type of service has increased particularly for those touched by the storm and this is just the kind of solution that we do all the time.

Again, co-location is another incremental revenue initiative providing additional revenue life and we will continue to make thoughtful incremental investments in this area tailored to each market to meet local demand. So, these are just a few of our initiatives, but I though that it would be helpful to give you a glimpse of the size some of these efforts each of which we expect to provide revenue lift and to contribute to our strong revenue growth engine.

In closing, as we considered the future and opportunities for Time Warner Telecom, I pointed to our evolution dating all the back to 1996, which has included these actions. We have always been prudent, managing well through various economic cycles and being visionary about our strategy, capitalizing on new opportunities such as Ethernet. We have always been return focus allowing us the successful path we have been moving on resulting in positive levered free cash flow creation.

We have always focused on diversification, creditworthy customers, and value-added product suite, which is why we would experience the enterprise growth of 29% compounded growth rate over the past three years. We have continuously invested in platforms to scale and automate the business, when others have not.

We have created an impressive talent base that is well-equipped to compete in the market place for additional enterprise share. And most importantly, we have created a track record of performance and execution. In fact, I would say we have never been stronger in terms of our financial position, the talent base of the business, or our capabilities and we have never been more excited about the future. We look forward to 2008, as we continue on our path for future growth.

Thank you for joining us and we'll now take your questions.

Question-and-Answer Session

Operator

Thank you very much. We'll conduct the question-and-answer session electronically today. (Operator Instructions) Your first question comes from the line of Tom Watts from Cowen and Company.

Tom Watts - Cowen and Company

Congratulations on the progress this quarter.

Larissa Herda

Thank you.

Tom Watts - Cowen and Company

Couple of quick things, one you mentioned your target of modified EBITDA margins in mid 30s by summer. Looking out the year or two, how much farther can we take those up and what are the barriers to achieving higher margins?

Mark Peters

Tom thanks. And our guidance is our expectations is to reach about mid-30% margin again during the summer of this year and I just want to reiterate how we are going to reach that, it's really growing the business, some additional cost synergies in the business and then really building on the efficiencies and then process improvements throughout the business.

Expanding margins isn't an easy task. – We have been saying it for a while but I don't want to take it categorically either that is going be just matter of practice because we're growing the business. We are focused on growing the revenue and growing the cash flow. So it's important to focus on all of those metrics as we look into the future.

But now as we expand beyond 2008 in that target, to further expand the margins is really going to be more the same growing the business, scaling the business, looking for efficiencies in our business. Now does that continue to expand into the high 30% EBITDA margin? That can be, it's going to be a combination of factors really and that is product mix and we're doing a lot of expanded products like BPM and reaching a lot more locations for customers.

So that can drive revenue growth and cash flow and capital efficiencies to expand the cash flow, but does that allow the margin to go up to the high 30%, time will tell on the mix and the customer base over the long-term feature of the business.

So it's important to kind of factor all those in. And all things being equal, I do think there are further opportunities though to expand the margins and to get over long-term, it takes a lot to move the margins by 50 or 100 basis points.

Tom Watts - Cowen and Company

Okay. And then second we've certainly seen a lot of acceleration of business from the former RBOC as they've gotten there acts together over the last 12 months. Have you seen them being more actively competitively? And are there any other updates in terms of who you are bidding against?

Larissa Herda

The market really hasn't changed all that much. RBOC had been fairly active for a quite some time and there are always the competitors we're competing against and in many of our markets, there are the only other ones. So they are our biggest competitor, sometimes they may choose a particular customer that they really, really, really want and now get very aggressive. But in general, they are very rational competitor and we win some we lose.

Tom Watts - Cowen and Company

Okay. And then just finally, you have done a great job on your acquisition and integrating that, but the characteristics are of an additional acquisition that you would look at?

Larissa Herda

Well, it could be more of the same companies that have fiber assets; they are always attracted to us. Although we're in normal stepping market we need to be in where feel like we want to be in. There might be a few out there that we would be interested in but covering 75 markets that we do with fiber optic network is fairly impressive. We may be interested in capabilities, increasing our capabilities in certain areas that we're not obviously ready to talk about and embed it at this point. But that could be something we look at in the future as well. Thus, we sell to larger and larger customers, there maybe some capabilities that we decide that it's better to acquire than to grow organically.

Tom Watts - Cowen and Company

Okay, thanks.

Operator

Your next question comes from the line of Tim Horan from Oppenheimer.

Tim Horan - Oppenheimer

Larissa, I am not sure if you can answer this, but can you talk about maybe your average quarter per sales, exact where it is now and where you think it's going or maybe percentage-wise how much do you think the increase?

Secondly, on the wholesale front, I know it's kind of tough to call a bottom here but it looks like you found a good deal of stability, maybe just your opinion on where you think we go from here?

And then lastly, once again, just your opinion because I respected as do most of the industry here. What do you think a slow economy means for Time Warner Telecom and how do you take advantage of a slowing economy, maybe what's different this time around than last time? Thanks

Larissa Herda

Sure Tim. Well, with regard to the sales quote, it's fairly broad. We had segmented our sales force into various different types of sales people. So you have kind of your junior sales people who sell to the smaller customers and on the low-end, they may have a quota of around $3,000 a month. You have account managers who are selling to local large customers like maybe, hospital systems or local universities, so they may have a quota of around $7,000 a month. And then you had your national enterprise sales people.

And by the way, these are ranges because a lot of it depends on the account modules that they have, the experience that they have, etcetera, but this is around the range. And then when you get your national enterprise sales people who sell nationally to the Fortune 1000 or so, their quarter can be anywhere from $12,000 to $20,000 a month. And then you have carrier sales people who are plus that.

So, again, it depends on the module they have. We have a local regional carrier sales people, we have national carrier sales people and then we also have the customer relationship specialist which I talked about earlier. Those are our farmers and they have a quota too with obviously much smaller but they're bringing a nice little chunk of change. They can bring in and not are they retaining revenue for a large swap of the customer base, but they could also bring in up to half of what a sales person we bring in and new incremental revenue too. So we've got them all work in. We have got them all work in different ways so it really is a fairly broad spectrum of quotas for each group.

Tim Horan - Oppenheimer

Sure. But I guess with all those changes in last year, do you think you're operating at 70% a quarter and you can get that up at 90% or some sense of that?

Larissa Herda

Well, you always have, I can't answer that question for you right now. But you always have some percentage of your sales people who are not producing anything. We turned over half of the acquired sales force that was probably around -- we had about a 150 of them or so when we got them so we turned over a lot of people. So I would say we've got a lot of people who are still -- just for the acquired sales force that still have yet to contribute anything.

And then obviously you have normal sales person shun in the core base which for us is actually very low which we've never talked about publicly, but surprised to say that it is very low compared to what we've heard is fairly standard in the industry. So yes, there is a large portion in sales force that always is to some degree not productive, so you kind of have to discount that.

So on the wholesale carrier side; yeah we've come a long way, haven't we? But I have yet to tell the marketplace that I expect to see growth, I think a few years ago the analyst community was really hopeful that I was going to do that. But until I see growth in the carrier segment for a several quarters, I am not going to commit to it in the future just because there is still so much consolidated related stuff going on with the carriers.

With that said, we've made tremendous progress. We have an upgraded sales team that's been selling to them. We have modified our strategy over the course of the year to have some of our people in our local markets where there's local relationships with some of the more regionally focused carriers but still strong financially to go after them.

And the answer is we've been selling a lot to them. And at some point if we can see some of the carrier-related churn go down, we might actually see growth, but I'll wait to tell you that when the time comes. But we feel pretty good. There is still, the one thing about carriers too that you have to keep in mind is that, when you have a lot of carriers who just like to have shorter-term contracts because they believe pricing will go down in the future.

And so, you do find yourself in re-rating contracts over time. And last year, we did go through quite a bit of re-rating as carriers signed new contract. So that does have a negative impact on carrier revenue and that doesn't necessarily show up -- it doesn't show up in our churn numbers because it's a re-rate. So you always have that impact as well. But overall, we feel very good about the carrier sector.

With regard to the economy, well let me take it in a few different ways. Number one on customer demand, customers continue to require more bandwidth; a lot of it is in applications that they're putting on the networks, they've got to become more productive. And to become more productive, they depend more on their networks. So with that bandwidth increase that really plays to our strength especially with our Ethernet product capabilities. Ethernet is very scalable, customers as I said in the script they don't have to spend capital on the converged networks.

So, we look at the economic environment and we view ourselves as being able to help customers get more productive and lower their costs, at the same time while they have to address the bandwidth demands that they are confronting. So, they really don't have a choice and I don't see that trend going in the other direction.

So, we really fit that need. So, much of what we do today as well is with the enterprise space, which when you look at what happened in 2001, when we went through a bit of a downturn in the telecom industry specifically we had 65% maybe of our revenue coming from carriers and they were the ones going through all the dislocation and quite frankly look how well we managed through that that's actually when the enterprise revenue really started to grow.

So, we feel really good about how we've diversified the revenue stream and strengthened the base with so much enterprise revenue. So, we are not afraid of a slowdown in the economy. We actually are looking at this as an opportunity because we are so strong financially, we've got the liquidity to invest, customers are still looking for solutions to their network problems to address all their bandwidth requirements and other changes in their networks and they move away from legacy frame and ATM to IP based services.

And we've got what they need and we are one of the last alternatives to the big incumbents, which customers still view as very big bureaucratic and hard to deal with. So, we like the way we are positioned relative to what's going to go on in the economy, or what could -- who knows what's going to go in the economy, but we're ready for it.

Tim Horan - Oppenheimer

Thanks Mark.

Larissa Herda

Okay.

Operator

And your next question comes from the line of Tom Seitz of Lehman Brothers.

Tom Seitz - Lehman Brothers

First can you give a little more color on a comment you made, Larissa. I think you said that something like multi-city market RFPs have grown 40% year-over-year or something to that effect is that a function of now being qualified as an end-to-end facilities based player given your expanded reach with the Xspedius acquisition or is that a function of just acceleration of migration to IP of legacy platforms?

Larissa Herda

So, let's go ahead.

Tom Seitz - Lehman Brothers

Yeah. And then the second question, you mentioned Colo was an opportunity. Can you just briefly remind us of your capabilities in this area? Do you have Colo facilities with excess square footage in all 75 markets or is this an area where obviously some of the CapEx budget is going to go?

Larissa Herda

Okay. Let me answer the first question first. The multi-city quote that I gave you was really in just the past six months. We've seen a 40% increase in our proposals that include multi-city. I think it's a combination of things. Number one, we've more market, and so we qualify I think better for a lot of the deals that are out there. We've a fairly well-known among our customers, but a really nice Internet IP backbone network that allows us to provide customers with Ethernet and IP VPN services end-to-end which is also I think helping us.

Often what we do is we are very focused on targeting customers, who have their core fiber infrastructure needs in our markets. And so, we are more competitive as a result because not very many other companies can do that besides the incumbents to a fiber in a market.

We've got cycle could go on, on and on. Having the co-location facilities, which I'll expand on a little bit in a moment too really helped because a disaster recovery site for data or alternate data center space is very important to customers and not all of them want to go and spend the kind of money that they would have to spend in these mega-data space locations. Ours is -- we're not focused on the cost of the space and the racks. We want the network and we want them marry to us. So, it provides a very sticky relationship and so for us Colo is just an enabler of selling network and becoming part of the core for the customers' data need.

So, you kind of combine all of those things together and you know we are getting better. I'd say that a year or two ago, whenever we start selling, we do had a tendency to do things incrementally and we've been incrementally growing our capability in this area and we still have a ways to go but we are getting better. And the reality is as customers' can't go to, there are many enterprise customers can't go to their, there are many other carriers to provide specially through facilities based network for these types of thing. So, we're heading a sweet spot there and I think that and we're really just beginning in this area. This is a large opportunity that we just have to surface up.

Tom Seitz - Lehman Brothers

Just a quick point clarification I mean the bottom line here is that and these are RFPs that you likely wouldn't have even seen two years ago prior to the acquisition just because your reach now is so much broader?

Larissa Herda

I think that's true yes and our capabilities are broader too. And actually consolidation really played well into our hand here because we consolidate -- consolidation of the big player's customers' realized they were having fewer and fewer choices. So, I think the combination of all of those things has really worked well for us.

Tom Seitz - Lehman Brothers

Great, thank you very much.

Larissa Herda

On the last question on co-location. Yes we've co-locations based in most of our markets. We do it in a very incremental way. We don't fill these big mega centers it took us four or five expansions in Minneapolis to get the 50,000 square feet of space so that should give you some idea of the kind of space we build.

But we like doing it in an incremental way because we're not putting too much of our investment too far ahead of revenue. So, we're not going to be in a position, where if something happens in this space that we're left with the bunch of empty Colo facilities, its build based on demand.

And so when we build these fast, I mean what we do is we get adjacent space and then we'll build out a part of that adjacent space for Colo and then as we've additional demand or we fill that space we just build out the other adjacent space. And so, we just keep on growing it that way and it's kind of like having a super building it's a super on-net building because we have it's like having all these customers in a building and it just makes that we've already got the fiber in the building. We've got all of power and HVAC requirements.

So, for us, they are like, they are incredibly profitable buildings because the customers have put their racks in this space. I was in one of our markets a few months ago and the general managers were taking me for a tour of our states and we are coming out of the co-location space and in walks the customers with his technician and his customer showing them the space. And it was so cool because he just walked down there from a few box away and he was just revealed the forum and that's one of the neat things about our strategy is that's a very local base strategy customer doesn't have the technician to have to get on a plan, someone else doesn't have to do something for them. Their tech uses this space in which their own and again it fills the need that others are not and it's been very effective for us.

Tom Seitz - Lehman Brothers

Thank you very much.

Mark Peters

Okay.

Operator

Your next question comes from the line of Donna Jaegers from Janco Partners.

Donna Jaegers - Janco Partners

Thanks for taking my questions. Just three quick questions on the ColoSpace, can you give us any sort of revenues or square foot that you have in ColoSpace that we can compare you again with some of the other ColoSpaces?

Larissa Herda

We haven't done that. The problem was that it's a very manual process for us because Colo is a piece of the overall network and honestly when we first started providing Colo services and we've been doing it ever since I joined the company. In fact I started it 10 years ago. We started doing this. It's just an adjunct to the other products that we provide in so it's not something that we easily can callout and so we've been looking at trying to figure out how to do that for you guys and maybe one of these days, we'll get to it. We don't really have it right now.

As far as the space is concerned, I think the thing there to realize is that or to keep in mind is that we sell three times more networks to a customer when we have a piece of their ColoSpace, when they Colo with us. So there is a -- the value is not focusing on the Colo and the revenue coming from the Colo. Because honestly we don't charge what other people charge, other companies charge for the space. That's not the point for us, the point is we are a network provider and we want to sell more networks. And so it enables us to do that.

Donna Jaegers - Janco Partners

And then two other questions. The re-branding cost that you guys broke out and thanks for your guidance on expenses. – Since you guys had the change in name through mid-year, what, should we look at that re-branding cost as being so to spread over the full year or more in the front half, more in the back half. Any sort of color there?

Mark Peters

Yeah. I would expect the majority of that will be in the first half now. I mean some of the traction stuff might trail on some of the scientists could may be mechanically do it. But I would look at it to be weighted towards the first half of the year.

Donna Jaegers - Janco Partners

Great. And then, I was little surprised just by the slower sequential growth in the fourth quarter on enterprise revenues. And thanks for calling out sort of the impacts that you did. But was there any sort of -- can you talk a little about timing of installs, was that lumpy and were there a lot of installs in December that should have made the revenues a little lighter in the fourth quarter than seasonally what they normally had been?

Mark Peters

No. Actually, if you look at the trends on -- going into the fourth quarter from the third quarter and the second all the way the throughout the year, it was really within trend line, give or take a little bit. And that's why we always spoke with you on long-term trends and not any particular quarter.

But if you consider the mortgage items that we called out for instance and you can know sort of the bulk of that was a couple of large customers and adjust for that and then you look at -- we had the record installation in the third quarter which we're very proud of but you look at the trend lines and say you had a bump in the third quarter and you had the mortgage in the fourth and it really kind of normalizes and flows out quite nicely. So nothing in particular going into the [first] quarter other those items and like we've said we see the strength in the activity over the last few months too. So we feel good about the quarter frankly.

Donna Jaegers - Janco Partners

Okay and then just one last small clean up items too on the reciprocal and the carrier comp you mentioned that it’s going to be trending down again in the first quarter so with this $10 million range around it that’s a good going rate for the rest of the year or for '08?

Mark Peters

Yeah I have given guidance into the quarter but we just adjust some of the rates we have to go in a parity with lack for those can adjust the rates not at any particular time and we see additional declines at the end of the first quarter. So we expect to see some more declines in the carrier comp category and that can also be impacted by usage too. So we've fluctuations in and usage. We see it here on the holidays so obviously usage goes down, in summers usage goes down because we felt that – universities and so those kinds of things also can impact in a carrier comp and voice services for that matter.

Donna Jaegers - Janco Partners

Okay Thanks.

Mark Peters

You bet.

Operator

Your next question comes from the line of Simon [Stanley] of Morgan Stanley.

Simon Stanley - Morgan Stanley

Back to the moment if you call that can you just say exactly what happened with those companies did they go out of business or were they just perhaps going on their services they were buying from you and continuing on the economy to what extent do you think that there is an opportunity for you in that customers maybe a lot more price sensitive in the coming quarters and that they'll be looking for ways to save money versus their account provider. So that there might actually be -- your value proposition might actually resonate more in the coming quarters than it has done even in the last year or two? Thanks.

Larissa Herda

Customers are always price sensitive and so I would anticipate that's not going to change. The good new is that we're very cost competitive. We’re very price competitive. We don’t focus on price when we sell to our customers. We sell on the total value that we're providing and the total cost of ownership for them. And we always get high marks in that regard so I would see us being able to compete very robustly going forward as customers are continuing to look at their networks and reducing costs. So I think that bodes well for us. On the mortgage industry it was actually, well I'll start and you could finish.

Mark Peters

Okay.

Larissa Herda

There was actually one customer there which was First Magnus which literally was open one day and closed their doors the next day. And so they I don't even know if they're going to go through a bankruptcy they may have just liquidated, they kind of evaporated. And other companies there are some other smaller bankruptcies in there, but mostly just reducing services that they have.

Mark Peters

Yeah. So sort of the combination of those that we've identified, the one bankrupt and actually some of them haven't even processed disconnect orders to us yet. But obviously -- appropriate process to take that out of our revenue and account for that as gone revenue even though we keep billing them and we'll keep them pursuing that.

Larissa Herda

We don't think they're going to pay us.

Mark Peters

They are not going to pay, so we…

Larissa Herda

So we will just assume have it out of our revenue stream.

Mark Peters

Out of our revenue stream, so, but some are those who have closed their doors some have gone bankrupt, and so that's why we stopped.

Simon Stanley - Morgan Stanley

But would they recur then in the first quarter in terms of additional companies that you haven't billed yet?

Larissa Herda

Yeah, First Magnus and the other company that was in that list was Ameriquest. They were kind of two of the biggest kind of standalone mortgage companies. I would anticipate that you are going to probably continue to see disconnects and I am sure some of these companies are going to go out of business. But the good news is a lot of the companies we have in that category are major financial institutions that have contractual commitments to us. So, we feel good about that. But that's not to say that we may not see some -- yeah we don't know the answer to that, but we would expect just continue to see some disconnects in the area of the mortgage industry, depending on what continues to go on in the macro economic environment.

Simon Stanley - Morgan Stanley

Great, that's helpful. Thanks.

Larissa Herda

Sure. And one other point and this is the point we have made before is you may see it, you may not. It depends on when these things come in. We were more aggressive in taking the revenue out because of some of these companies we know are never going to pay us. In the fourth quarter we just decided that even though they haven’t processed disconnects, we didn’t want the revenue that we didn’t think was going to be ever get paid to be in our numbers. So we were fairly aggressive about taking that revenue out as we will be in the future with this group. So if it is possible we will continue to see some disconnects going forward in this but it may just be part of the normal churn as well.

Operator

And your next question comes from the line of Rai Archibold of Kaufman Brothers.

Rai Archibold - Kaufman Brothers

And thank you. Just wanted a follow up on the 14 Xspedius markets where you have turned on the new services. I think you mentioned throughout the 18 months pipeline building et cetera. One I guess is, are there additional markets that you are looking to turn on and if so when? And two, the nature of the business that you are booking in those markets, are they comparable to if you were a core Time Warner or is there any kind of difference in terms of the quality or the nature of business you are booking now in those new markets?

Larissa Herda

Yeah. In the 14 markets, if they are looking -- they are looking -- starting to look just like the core in that regard. They've really been focusing on adding buildings. You know, they've never been able to do that before in those markets, because they were capital constrained when they were owned by private equity. So it wasn't something that they were doing I must say if you get like a really, really immediate return.

We're a bit longer-term focused, and so there is selling Ethernet services, voice-dedicated services, Internet services, just a full range of Time Warner products in those markets. In the other markets, they really are just selling Internet, voice and transport. They are not selling the Ethernet products because, we haven't deployed the equipment in those markets, and we will only do so and will only upgrade that when we see the appropriate demand where we feel like there is enough demand, it's not enough to have one customer.

You know, we need to make sure that we're going to get a return on the equipment invested in those markets. It's not just equipment, it's also people, because you have to have technical people who can put the solutions together and this is a whole infrastructure that goes along with adding product capabilities into the market.

So I thinkover time we'll see some of them get those product capabilities. And some of those markets, quite frankly, are extremely small and we may just continue to let them sell some of the other products all of our products that they have today that I just mentioned. But they will only get the data stuff if it warrants there at this point, but I think we've taken kind of the cream of the crop, and there is a few more that are nice markets that I would expect over the course of this year, but we don't have anything that we want to talk about at this point.

Rai Archibold - Kaufman Brothers

Okay, and not to beat a dead horse because there has been a lot discussion about Colo business, but based on, I think your comment, that you sell three times network services where you capture a piece of Colo and I am going to infer that you are not leading with Colo in any of this but this is basically sort of an additional sale from existing or potential customer as opposed to you leading with Colo. Is that fair?

Larissa Herda

Well, we lead with whatever we think is going to get us the deal.

Rai Archibold - Kaufman Brothers

Fair enough.

Larissa Herda

So I'll tell you but the way it works with Colo is -- the way it works in general is you go into with a customer and you listen to them. And you find out what it is that really pulls their chain. As far as what is really resonating with them and what are their problems, what do they need, and invariably we find that they all need to have data center or some portion of their networks somewhere else other than their main corporate location.

And there are not a lot of options, and lot of them, I really don't want to send it all the way to this company, 10 states away. And then I've got a buy the capacity to that location and it's more expensive and we kind of fix this little niche for them and the main thing is two is because we have this IP backbone network and if you look it some of our regional clusters. In Texas for instance, we've got a customer in Dallas while they wanted to stay in Texas but they may not want it in Dallas right. Then, so we are in Austin, Houston, San Antonio. We are across the whole state. So, there is a lot of that kind of synergistic opportunity too with Colo.

So, it's a very great strategic tool for us and it really allows us to connect the customers headquarters locations to their internal data centers to an alternate data center, which would be our Colo and provide them with as the case that I talked about in Memphis, t we've had many instances like this were especially in places where there is hurricanes and there is earthquakes and we've had a disaster,– disasters are happening all the time across the United States since we've networks everywhere we get experienced and then so do the customers. And the bad news is that diasters happened, the good news is that, we're there to help them and quiet frankly after these types of events it sensitizes businesses to just how vulnerable their networks are and how much they really do have to diversify their data into other locations.

Rai Archibold - Kaufman Brothers

Okay. And then last thing would this be an area where you look consider acquisitions in as a way to acquire customers?

Larissa Herda

No it's really not -- and we don't -- no. Nobody does it the way we do it. It's so an expensive for us to expand our Colos. We are so good at it. We've got so many of them. We've managed these in almost all of our markets. So, many Xspedius markets don't have them. But we've been doing this for 10 years. We're just -- up and till this year, we just never really talked about it, it's just imparted the heart and soul of our business. And we're not interested in selling the space it's all about the network.

So, the neat thing about it is that we can ratchet it out as quickly as we need to and we also and since it's a local strategy, if there is sensitivities in particular markets like if the macroeconomic environment happens to head a particular market. We just don't built Colos there because the demand might not be there. Although I'd argue that even in places like Florida, they are still they still want disaster recovery because we may be there's a macroeconomic environment that's happening there because of the housing.

But people still need to be conscious about hurricanes that occur and tornados that occur. So, these are certain things that customers just need to have. They are I think Mark put it exactly right these are network imperatives and so that we can just continue to incrementally grow it and that's what we're going to do. So, you'll see us continue to make investments in this area this year as always.

Rai Archibold - Kaufman Brothers

Very good. Thank you.

Larissa Herda

Sure.

Operator

Your next question comes from line of Erin Schmitz of Citi Investment Research.

Erin Schmitz - Citi Investment Research

I was wondering if you could talk a little bit about the sales associates? You mentioned that the sales turnover has been very low versus your peers; it looks like the sales have actually came down in the quarter. Are you going to add more and what's your target number of sales rep. I know you are finding it more difficult to find talented sales reps in this market?

Larissa Herda

I wouldn’t pay too much attention to quarterly fluctuations in salespeople. They come and go and a lot of it is just the timing of when some of them go and some of them start. And we like the number of sales people that we've right now. We're not a big believer in throwing a lot of heads at a particular market because you can saturate it and make all your sales people unhappy and then you have voluntary churn because nobody is making any money.

We are a big believer that most of the churn by the way that we've in our sales force is typically on the lower end of the spectrum. The sales people, who are focused on selling to small business customers which is fairly typical, that they churn out. The good news is in our business, they also have a career path. So, if they are really good at that, they have an opportunity to move up, but that's typically where you see the churn. Sales people, who fall to the medium and large customers, almost never churn, once they get going, but like I said, it takes 12 to 18 months and some people don't have the patience to wait that long. But once they do, they do get productive and they do very well.

So, our key focus on sales people is not necessarily adding them, it's making them more productive and sales productivity is the major initiatives here. Part of that process is just making life easier for them since they can sell. Having them have less administrative burden, giving them the right tools to work with to make proposals easier. And we've being doing a great job of that and we continue to have more initiatives and make it even better for them.

It's not easy to sell these products and services. We also provide them with adequate support. So, they have sales engineers, who put the solutions together and having those people are the Holy Grail quite frankly because I'll say they are worth their waiting goals. You bring them into customers, they speak the right language, the sales people can -- they can find the opportunity. But let's face it not all sales people have the depth of all the products. And so, having them paired with good sales engineers has been very critical to our success. And so, it's really a combined team efforts that make them successful.

So I don’t know, we may increase sales people this year as we tell our market. If you make most of them productive and the market can take more sales people you can have them. And we've some market like Houston and I think have -- they are on their fourth sales team because they are just big market and they are very productive and they just keep on making their sales people more productive. So, that's kind of our philosophy on sales.

Erin Schmitz - Citi Investment Research

Thank you.

Operator

Your next question comes from the line of [Garnet Edmunds] of Wachovia Securities.

Garnet Edmunds - Wachovia Securities

First of all I might have missed this but what is the let’s say standalone Time Warner Telecom Core enterprise group this quarter?

Mark Peters

We haven’t break that out for the last couple of quarters because we are so integrated with the business that it's just not practical to break it out. It will take more time than it will be worth…

Larissa Herda

Well it’s impossible. I mean look at the overlapped markets the overlapped all year and they are now part of the core I guess you could say so it's just we can't do it ourselves.

Garnet Edmunds - Wachovia Securities

All right, that's fair enough. And then the next one is I think I've been asking this for the past year so the RBOC out-of-region opportunity you said that you will start to see some activities over there from them starting in 2008 is that really happening or do you think there was going to be sometime in the future?

Larissa Herda

Well part of the stability of our carrier revenue stream is RBOC out-of-region deals that we've been doing and nothing happens overnight with the carriers like that it sometimes takes years. But we're having some good traction with the few of them some of them maybe just disconnecting in some areas, where would be in-region things but also buying from outside region because the realty is that they would rather buy from an alternative carrier than each other. So yeah we're definitely seeing some traction there on the carrier side and I'd expect that to continue overtime.

Garnet Edmunds - Wachovia Securities

All right, great. And just one last question I mean other than the mortgage vertical have you seen any other weakness in your other verticals?

Larissa Herda

No, no.

Garnet Edmunds - Wachovia Securities

Not at all.

Larissa Herda

Not at all, no. It's actually the, the momentum -- and we are on regular calls with sales management on this because we're just waiting to hear something, and I know it's been well advertised in the press and the media. But we see continued good momentum. The sales folks are pretty jazzed about the year. If certain parts of the US like Texas for instance and the southern area there where -- bad news for all of us is good news for them gas prices go up they are all singing in the streets because it means more jobs and everything. And so, I guess it depends on where you are. But we're seeing just good strong momentum and no indication that customers are -- in fact we actually have customers in that mortgage segment that we talked about that are buying more. So, I guess that's good news.

Garnet Edmunds - Wachovia Securities

All right guys. Thank you very much.

Larissa Herda

All right.

Operator

Your next question comes from Frank Louthan of Raymond James.

Frank Louthan - Raymond James

Thank you. Couple of more questions back on the wholesale side. What are you seeing in trends in pricing there for the long haul networks that you leased, is there any changes in pricing there that would anymore stability or anything they will push you to lock in some of those leases for longer terms?

And then on the network grooming side, continue to see a little bit of disconnects, got to be fair the way through while the recent -- the impact from recent industry consolidation. How would you handicap that you say 80% to 90% through lot of those carrier changes, still little bit more to come or is it earlier then that? Thanks.

Larissa Herda

On the long haul, long haul has continued to be competitive. The main (inaudible) still have plenty of competitors on them that you want your power business. The players on overall appear to be rational. You have one or two that are low balling the others but execution is important as well.

So, there are fewer providers and we have not reached a point where we feel like we need to sign long-term contracts for most routes now. If there is a route that we think is particularly congested, I mean particularly full, in terms of not a lot of capacity and not a lot of alternatives then we will find longer-term agreements on those. But the vast majority of what we are doing still remains on shorter-term contracts.

So, new technologies have really been driving lower cost for a lot of the long-haul providers on some of the routes and that technology I think has helped to keep pricing fairly attractive for us. So with regard to network grooming, I hate to make a prediction because tomorrow someone could acquire someone and there you go. And sometimes it takes years for carriers to get through their grooming; it has been our experience time and time again with one of the carriers.

So I think to some degree though there is always network grooming going on, consolidated network grooming, consolidation-related network grooming I think is going to continue, not at the speed right now at least where I can see as it's gone through over the past couple of years because we haven't heard of any big deals that are occurring, but they are still out there and it does take companies time to get through the process.

So I think we will still see it and I really hate to give you a number as to how far through the process we are. But suffice to say that we continue to see it as something that prevents us from growing our carrier revenue aggressively at this point.

Frank Louthan - Raymond James

Okay, great. And can you give us idea of where you think you stand as far as within the market for Ethernet. I know in the past you've been well ahead of some of the incumbents on those offerings, so they began to show up earlier with Ethernet offerings and where do you think you stand in the industry?

And as far as your new demand from businesses, how much of that is really being driven by customers adopting Ethernet in a faster fashion, maybe they did a few years ago?

Larissa Herda

Customers are definitely more educated on Ethernet and are adopting it much faster, so the demand continues to remain strong. And I think we're just at the beginning of the demand curve with Ethernet.

There are not a lot of carriers that actually provide it, the big carriers; the incumbents anyhow have obviously shown through the regulatory environment that they are not really crazy about wholesaling of those services.

So unless you've got fiber in the buildings, you're really not a player in this field. So our market share is about the same, we're maintaining I think a strong market position in number three, behind $120 billion companies which I think is pretty impressive.

I would say that just by their share size, they should be getting a bigger portion of the port shares, and I think in time they will just because they are so big. I mean we just hit a $1 billion, and I think relatively speaking we're hoping it's played well in terms of our shares.

So I can tell you that when we're not there, they don't appear to be extremely aggressive or don't even talk to customers about Ethernet from our customers tell us. They do in our market because they know we're probably going to be there too, but it's not been something that they have been anxious to move forward unless the customers are anxious to move forward with.

So that may change over time but that's still what we see. And so we liked the position we're in with over 8000 buildings and we will have over 9000 by the end of the year, hopefully a lot more than that as we continue to grow the number of buildings that we've and those are all customers that will be able to get our Ethernet services very easily.

Frank Louthan - Raymond James

Great, thank you.

Mark Peters

Okay. Operator, we have time for a one more question.

Operator

And your final question comes from the line of Mike McCormack of Bear Stearns.

Mark Peters

Hi Mike.

Mike McCormack - Bear Stearns

A couple of quick ones on the EBITDA for the current quarter, it looks like, if I am doing the math right, it's about a, there is $5 million benefit this quarter from the property taxes legal and regulatory. Is that ongoing thing or is that just a one timer for the quarter?

Mark Peters

Yeah. And we haven't called up specifically what the dollar amounts related to those items are. In our business, we have fluctuations from quarter-to-quarter in many categories that we've already spoken about. So, just the tuning part to look at the trend line and our SG&A as a percent of revenue, it's really been declining over the last three quarters. So we'll have quarters that have different things going on timing out, timing of installations and when they happen and when we pay the commissions can cause fluctuations from quarter-to-quarter and also volumes can change that.

So, we also have one time item, we have property tax settlements. So, that helps in a particular quarter but those aren't unusual, though the lower spending on regulatory and legal related regulatory in the quarter compared to the prior quarter. So there is always puts and takes in SG&A. So I won't necessarily say that anything that would artificial in the quarter but also they can go up and down from quarter-to-quarter depending on what's going in various categories.

Mike McCormack - Bear Stearns

But looking in, obviously called up the issue for one Q but sort of the run rate for the other quarters. Is this something where we can anticipate a benefit throughout the 2008 timeframe? Or is it sort of just moving around on?

Mark Peters

I think it would be moving around and then improvement in SG&A will just be on as the business grows. But you will see puts and takes on that from quarter-to-quarter.

Mike McCormack - Bear Stearns

And on the top line, I know that…

Mark Peters

And obviously you pointed out in the first quarter that seasonality in particular around payroll tax and merit increases and those kind of things.

Mike McCormack - Bear Stearns

So the top line, I know historically if you go back to 2000, 2001 when we used to do these calls and I know Larissa would talk about the tough economic times, I think the biggest issue back then was that it was the decision making process. Your customers were taking just longer to get the deal done. No lack of interest but just dragging their heels and trying to postpone signing something. Is that going on now?

And secondary a follow-up to Donna's question, on the sequential growth rates because it did look like you went from 4.9% sequential growth in both second and third quarter down to 3.2% not normalized probably high 3s normalized. Is there something there with seasonality? Or is there something else we should be thinking about?

Larissa Herda

So on the decision making in 2001 it was you're right it was decision making and it was the kind of a wholesale disintegration of the telecom industry definitely that really hurt us. We've not seen customers taking longer to make decisions, that's not occurred. It's normal cycles. Obviously, we've some customers, the larger ones always take a long time, it's just a cycle that you go through, but there's nothing, we don't, we had not seen any notable change in any of their behavior with regard to buying.

Mark Peters

And then regarding the first quarter and the revenue growth enterprise in particular, I think if you, I really just look at it again taking some of those items also we've already spoken about. But if you look at our trends in enterprise growth, take it over the last three, four years; you see growth rates that bounced around. So I don't think there is anything particular in the current quarter.

You just have some quarters that generate because of timing or volumes or even usage that can cause variations quarter-to-quarter. So I don't think it's really, I don't see anything off-trend really, especially if you look at the couple of items around the mortgage company that I already mentioned in the quarter and then the large customer in the third quarter. So kind of normalize for some of those things and the trend lines are.

Mike McCormack - Bear Stearns

They are about the same.

Mark Peters

It is same, if you look back over the last few years.

Mike McCormack - Bear Stearns

All right. Thanks guys.

Larissa Herda

Okay, well, thank you all for your time and thank you for your support at Time Warner Telecom. Have a good day.

Operator

That concludes our program. Thanks for joining us today.

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Source: Time Warner Telecom Q4 2007 Earnings Call Transcript
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