Time Warner Telecom Q1 2008 Earnings Call Transcript

May.13.08 | About: tw telecom (TWTC)

Time Warner Telecom Inc. (NASDAQ:TWTC)

Q1 2008 Earnings Call

May 13, 2008 11:00 am ET

Executives

Carole Curtin - Senior Director, Investor Relations

Larissa L. Herda - Chairman of the Board, President, Chief Executive Officer

Mark A. Peters - Chief Financial Officer, Executive Vice President

Analysts

Colby Synesael - Merriman Curhan Ford & Co.

Tom Sykes - Lehman Brothers

Jonathan Schildkraut - Jefferies

David Dixon - FBR Capital Markets

Timothy Horan - Oppenheimer & Co.

Erin Schmitz - Citigroup

Donna Jaegers - Janco Partners

Raimundo Archibold - Kaufman Brothers

Frank Louthan - Raymond James

Analyst for Earl Rugman - Rugman Capital

Michael McCormack - Bear Stearns

Operator

Good morning and welcome to Time Warner Telecom's first quarter 2008 conference call. Today’s call is being recorded. With us from the company is Chairman, Chief Executive Officer, and President, Miss Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over to Carole Curtin, Vice President of Investor Relations. Please go ahead.

Carole Curtin

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

Before I begin, I will read our Safe Harbor statement: issues discussed in 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 uncertainty and changes in circumstances.

Actual results may vary materially from the expectations contained herein due to the risks disclosed in the company’s annual and quarterly filings with the SEC, especially the section entitled risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2007, and our supplemental materials posted to 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 that 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 merely are presented to provide additional insight into our performance. Please see our press release and other information posted on our website for more details.

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

Larissa L. Herda

Thanks, Carol. Hi, everyone, and thank you for joining us today. This was another solid quarter for Time Warner Telecom. Our results reflected solid revenue, continued strong margins, significant cash flow creation, and we are on the cusp of positive net income as we continue to be a key player in the medium to large enterprise space.

Our evolution and migration of our acquired business continues to be on track and we feel good about the marketplace and our ability to compete and gain market share. Also, as we pass our 18th month of operating our acquired business, I am happy to report we’ve achieved our promised integration synergies. Yet again, we’ve done what we said we would do as we attained our expected integration synergies with more cost savings in our sights as we continue to scale the business.

Mark will take you through the quarterly results and I will come back and talk to you about customer demand and ongoing opportunities, as well as some of our local market and customer successes.

With that, I’ll hand it over to Mark.

Mark A. Peters

Thanks, Larissa. Let me direct you to the press release for all the details as I turn to an overview of key trends and accomplishments. This was a solid quarter with continuing momentum as we move into the second quarter. Let me touch on a few of the key highlights. On the revenue side, our continued momentum is demonstrated by the fact that our sequential organic revenue growth rate for the quarter exceeded that of the prior two years. So what that means is normalizing for the acquisition, this quarter’s sequential revenue growth exceeded that of the organic sequential revenue growth for the first quarter last year and the year before, and that’s on a much bigger base.

Given the seasonal nature of the first quarter, we were pleased with our growth. This is our 14th consecutive quarter of total revenue growth, demonstrating the strength, consistency, and success of our sales effort.

Further, our service revenue, which is our product revenue before inter-carrier compensation, grew more than 9% year over year. For the quarter, our leverage free cash flow grew by six-fold year over year to nearly 6% of total revenue. It is important to note that during that same period, we also invested 8% more in capital expenditures, primarily directed at new sales opportunities.

We also had increased expense of about $1 million related to our increased staffing and other costs to support the rollout of our advanced product capability in the 14 acquired markets.

We grew modified EBITDA an impressive 22% year over year. This strong growth resulted in significant margin expansion. Modified EBITDA was 33% this quarter, expanding 380 basis points compared to the same period last year.

Our modified gross margin was 57.6%, expanding 220 basis points year over year. This expansion of margin demonstrates our achievement of the cost synergies of the Xspedius acquisition and overall effective scaling of our business.

Another favorable trend in the business is our move to within $900,000 of positive net income, or a $0.01 loss per share for the quarter. So stay tuned as we continue to work toward yet another milestone, further demonstrating the strength of our model.

Turning to our revenue mix, enterprise revenue was 71% of revenue for the quarter, followed by 25% from carrier revenue and 4% from inter-carrier compensation. During the quarter, we experienced continued enterprise revenue growth through ongoing strong customer demand, which I will talk more about in a moment.

On the carrier front, we continue to see solid sales results, which were outpaced by ongoing customer grooming and repricing of customer contract renewals. However, this quarter we actually would have seen growth in carrier revenues except for disconnects from one wireless carrier related to their consolidation.

Finally, inter-carrier compensation makes up only 4% of total revenue but was impacted this quarter by usage in dispute fluctuations. It was also impacted by regulatory rate decreases, which we expect to continue throughout the year.

Enterprise revenue grew for the 23rd consecutive quarter and grew a strong 16% year over year. The strong, long-term consistent growth had been driven by the strength of our products, differentiated customer care, and network reach. This was a solid quarter but even stronger when you take into account some seasonal and other items that impacted sequential enterprise growth this quarter, including the residual impact from the mortgage industry, normal fluctuations in usage for VOIP products, and expected churn from very small low margin customers that we acquired from Xspedius.

Let me touch briefly on each of these. This quarter we lost about $1 million of gross revenue from the prior quarter due to the mortgage industry, which is an improvement from the $1.4 million gross sequential loss last quarter. About half of this quarter’s lost revenue related to customers who also disconnected revenue last quarter.

Additionally, I would like to point out that we actually had net sequential growth of about $100,000 from this segment, which indicates continued opportunities for us from this mortgage segment.

Another item impacting sequential growth was about $1.5 million of fluctuation and usage from VOIP products versus the prior quarter. Usage fluctuates based on the time of the year and the number of days in the quarter, both of which were factors this quarter.

Finally, we continue to execute on our strategy to migrate our acquired customer base toward our sweet spot. Sequentially this quarter, we churned about $1 million of net revenue as part of this effort. In some cases, those customers decreased revenue as they moved away from these lower end acquired products, or they fully disconnected as a customer, as they fell below the size and profitability of our service profile.

To put this into perspective, the vast majority of our customer churn this quarter came from customers billing less than $500 a month, which includes customers churning from these lower end acquired products. Remember, our model is focused on mid to large-size customers, so we view churn from very small, very low margin customers as non-regrettable churn. In fact, as the number of small customers continues to decline, we will repurpose our resources from serving those marginally profitable to higher margin customers with more complex and hence stickier products.

Our sales momentum continued, as demonstrated by our strong overall sequential organic growth compared to the prior two years. But we continue to keep our eye on the economy to assess any impact on our revenue and overall business. This quarter’s metrics were favorable and showed continuing strong trends with no meaningful impact of the macroeconomic environment. For example, this quarter’s results included seasonally strong revenue growth, growing cash flow, low bad debt expense, days sales outstanding of only 28 days, and a high level of liquidity, which all provide a strong foundation for continued growth.

Our ability to provide customers a better solution and lower total cost of ownership is a key strength of our sales effort. Here are a few more dynamics which demonstrate the strength of our business, including a highly diversified revenue stream, a significant amount of our revenue fully on our own fiber network, the strength of our recurring revenue business, a substantial amount of our billing on long-term contracts and, in an environment where cash is king, we have ample liquidity to allow us to continue to invest in our business to leverage the best growth and return opportunities.

Let me add a little insight in each of these. Our revenue stream remains highly diversified, demonstrated by the fact that 71% of our revenue this quarter comes from the enterprise segment, with no enterprise customer representing more than 2% of total revenue. Our enterprise revenue encompasses many vertical market segments with no vertical greater than 8%. Also, our single largest customer, which is a large carrier, represents only 6% of our first quarter revenue, or only 5% excluding inter-carrier compensation, with the majority of the revenue under contract until the end of 2010.

Our on-net revenue -- that is, the revenue which rides fully on our own fiber network end to end all the way to customer buildings without involving another carrier’s network is a very key differentiator for us. For Time Warner Telecom, this represents the majority of our revenue. In fact, well over 60%, and that is after absorbing the acquired business, which had a significant off-net component.

Even for the balance of our revenue, which includes a component of type two or special access, the vast majority of those services also rides on our fiber network.

Having revenue on our network means we can offer better solutions, install services faster, manage response times, control the quality of our network, achieve higher margins, and the most important factor, we more fully control our own destiny and we don’t depend on another carrier.

With nearly 8,600 buildings on our network and growing, we have the most fiber connected on-net buildings of any competitive player, and we have created an infrastructure of assets which we can leverage for years to come.

As for the strength of our recurring revenue business, our medium to large enterprise customers are investing in more complex products and solutions which allows us opportunities to grow our relationship and provide additional future services. This is also a customer segment with extremely low churn.

At the same time, about two-thirds of our billing is on contract terms of three years or greater, demonstrating our ongoing long-term relationships with our customers, and customers are continuing to lock in long-term contracts.

Finally, as we look at liquidity, we remain in an extremely strong position. We reported $318 million in cash and equivalents at the end of the quarter. In addition, we have only $6 million of annual debt maturities until 2013 and we have strong leverage ratios. Our annualized modified EBITDA covers our net interest expense by more than five times and our annualized net debt to modified EBITDA is about three to one. This strong liquidity position allows us to continue to aggressively pursue profitable growth opportunities and to consider strategic investments.

As we turn to our future margins, let me remind you of our philosophy. We believe it is most important to concentrate on long-term trends and while margins are very important to us, it is equally important to balance all key financial metrics, including revenue growth, margins, and cash flow.

That said, we continue to focus on achieving mid 30% modified EBITDA margin during the summer of 2008 as a result of revenue growth, continued cost synergies, and overall scaling of our business. 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 and branding costs, as well as integration synergies and costs. Keep in mind going into the second quarter that branding costs will increase and the higher merit increases will continue as a step function to costs.

And while we march toward our margin goal, we don’t want to become so focused on that one metric that we forego growth opportunities. In fact, we are seeing opportunities to add additional sales people in numerous markets throughout the country to capitalize on our favorable competitive position. We are also taking advantage of our strong liquidity to continue to expand our products and capabilities, and our network reach within our existing markets to reach high growth business areas, which Larissa will share a little more color on in a moment.

Let me sum up this quarter by saying we delivered a solid quarter while balancing all of the important aspects of generating cash, investing in the business, and streamlining our operations. Our strong financial position continues to enable us to take advantage of growth opportunities. We will remain focused on growing the business profitably and leveraging our acquired operations and overall infrastructure.

I will now turn the call over to Larissa to take you through our vision for 2008.

Larissa L. Herda

Thanks, Mark. I’d like to spend a little time on the drivers we see in the business, touch on some of our local market and customer successes, and provide some color on the current demand environment. First, let me provide you a quick refresher on demand drivers for our business.

Our customers have a growing need for a wide range of IT based applications to serve their mission critical business operations, which in turn drive demand for our network services. We also see growing demand for the transport of information for data storage, as well as companies with regulatory requirements to store and access data. Again, this drives demand for our network services.

For other companies, preparing for disaster recovery and business continuity is a priority and we’ve played a key role in maintaining critical business lifeline services for many companies through a variety of natural disasters that have occurred across our nationwide footprint, some as recently as last week. In fact, disaster recovery and business continuity are top of mind for the vast majority of our customers and co-location services are at the heart of that plan.

Co-location services the way we deliver it is very strategic, which is selling it to drive our own network services in our own facilities. We are clearly not carrier neutral, which means our customers buy our network when they are in our space.

Looking at the contribution of this product is proof. About 10% of our enterprise billing is driven by customers who also have our co-location services, which is an impressive number. We find the strategic nature of this relationship drives further revenue. Once customers locate in our co-lo facilities, we find they rarely move and they continue to purchase network services. It’s kind of the gift that keeps giving.

An important driver for many businesses like ours are mission critical services to webify. For our business, that has required more bandwidth for external needs, such as enabling our customers to pay their bills online and for internal applications such as web-based conference calls, electronic sharing of data, and customer portals. Also for our business, it includes efficiency applications for our employees for things like online healthcare enrolment, payroll reporting, viewing of pay stubs, expense reimbursement, and online performance reviews, just to name a few.

We at Time Warner Telecom are webifying our business to achieve scale, efficiencies, and new capabilities and the good news is so are our customers. As a result, these applications in enterprise businesses are contributing to increasing and sustainable demand for bandwidth. It’s sustainable because these applications are fully embedded and meshed into enterprises’ operations. In fact, it’s becoming part of their corporate DNA and unlikely to go away, thereby providing great opportunities for our network services.

We also continue to see customers making network choices to optimize their IT budgets, including moving away from legacy solutions such as frame relay and ATM and to IP-based and data solutions like ethernet. In fact, research in March by industry analyst IDC acknowledges the power of ethernet services.

First, IDC indicates that ethernet services may be shielded in a slowing economy because they are a replacement for other services, and second, they find that to the extent cost-savings or performance improvements can be shown, ethernet is more likely to be adopted in the face of the potential downturn. IDC has estimated that the market for ethernet services will grow to $6 billion in 2012 with a compounded annual growth rate of 36% from 2007 to 2012.

We are in a unique position to benefit from this opportunity given our strong port share growth, robust ethernet offerings, and significant fiber footprints. With our 33% year-over-year growth in data and Internet services, we’ve clearly had a lot of success with ethernet and other IP products.

The fact of the matter is that at the end of the day, all bandwidth demand begins and ends in the metro area at the customer’s location and that is our prove area of strength. Our fiber connects more commercial buildings to local metro networks than any other non-incumbent carrier in the United States. We have nearly 900,000 targeted buildings which are medium to large customers requiring two T1s or more of service that are within one mile of our network. Now, when you compare that to our more than 30,000 customers today, you can see that dynamic provides a great opportunity to win market share.

So let me now shift to our nationwide footprint and the success of our local markets. I would like to highlight several, several markets that demonstrate not only the diversity of our revenue stream but the power of our national footprint.

For instance, San Francisco, one of our fastest growing markets is a market we acquired in a 2001 acquisition and has always been a highly competitive tier one market. It is also a market we put into hibernation during the telecom downturn. However, with our recent investments, it has really blossomed over the past year, despite the real estate issues in that market. We see the same strong trends in San Francisco that we are seeing in many other markets across our footprint. San Francisco is a technology and financial services hub, which is a key area of strength for us, and part of our local success which is driving demand for higher speed ethernet.

For example, for ethernet solutions a year ago, we saw a predominantly sub-100-meg requirement but today, 200-meg, 300-meg, and one- and 10-gig requirements are becoming more typical, propelled by all the demand drivers I discussed earlier.

Remember, to offer these high bandwidth services, you must have fiber into the buildings, which positions us well against the competition. The bottom line here is our model works, whether it’s a tier one, tier two, or tier three market, and even in the face of strong competition or other market impacts.

Now let me turn to Atlanta. Atlanta was launched as a greenfield market in 2001. Like San Francisco, is it another market that we put into hibernation and then as the business and competitive climate improved, we began investing in recent years. We targeted our network investment in high growth areas of Atlanta and created a differentiated fiber asset by constructing when and where others did not.

With the acquisition of Xspedius and the footprint we added throughout the Southeast, Atlanta has become a hub in that area of the country, providing synergistic revenue opportunities. For instance, cities like Birmingham, Nashville, Lexington, and Jacksonville, just to name a few, make this a strong business corridor for us. We see a clear link between the success of Atlanta and the Xspedius acquisition, which will drive ongoing revenue synergies.

And I have to say that based on my visit to Atlanta last week and the meeting with the local team there, the enthusiasm and energy was palpable. Atlanta, like San Francisco and many other markets, are a great proxy for what we can and are doing with our acquired markets.

Finally, let me touch on our success on our Texas markets. While the high price of oil is felt by all of us, it is considered great news by our Texas employees. Clearly the energy market is driving terrific opportunities for cities like Houston, Dallas, Fort Worth, and Austin, all of which are very strong markets for us. We see the demand in these markets continuing to grow. In fact, so much so we have further invested in our regional network which connects up all of our major Texas cities with high bandwidth capacity, and this investment has already been paid for by current customer contracts.

This is an example of how we saw an opportunity, reacted quickly to expand the network, and had new customer traffic riding over this network all within 90 days. It actually took less time to engineer, turn up, and activate service on this regional network than the time it would have taken to turn up a single circuit between two of those markets from a third-party carrier. This quick response demonstrates our agility and ability to capitalize on market demand.

With this investment, we have continued to blur the lines of those communities, creating one large mega metro environment or community of interest with strong growth opportunities for the future.

So those are a few of our core markets. Now let me update you on some of our acquired markets. As you know, we’ve recently rolled out our advanced product capabilities in 10 markets. In the first quarter, we completed four additional markets, including the Miami, Fort Lauderdale area, Colorado Springs, Lexington, and Little Rock. We also expect to have Tulsa upgraded with these services in the second quarter. In fact, we were able to build into Tulsa with success-based demand from customers, including Choice Pay.

Choice Pay is a leading e-payment provider headquartered in Tulsa. We won this business based on our ability to offer a unique blend of fiber-based services. We provided them with a reliable and scalable solution for both their headquarter location as well as their back-up site in Denver. This included selling our extended native land solution along with ethernet Internet service, voice products, and co-location services.

Again, this is a great example of the synergies between our core and acquired markets and a terrific customer win that leverages many aspects of our product portfolio. And Tulsa is just one example of where we are gaining traction in our acquired markets. Here are a few more.

Also in Greenville is Mustang Engineering, a firm focused on providing the highest quality engineering design to their clients. After an acquisition, they wanted to connect two facilities in Greenville. One of the most important factors for them was to select a vendor with the ability to provide local support, a fact that was more important than price. Having a local team that could reach out at a moment’s notice coincided with Mustang’s core values. As a result, Time Warner Telecom was selected to provide native land service between their two locations.

Another win in our acquired markets was in Nashville, where we sold new services to Life Way Christian resources. They are part of the Southern Baptist Convention, a large private publishing house -- actually, the largest private publishing house in the world.

A new application for their online ordering, coupled with over 144 new stores caused them to require additional bandwidth. Life Way was working with another vendor; however, due to our consultative approach, we were able to provide a more scalable and affordable solution through our ethernet Internet services, as well as co-location services and we won the business.

Now these are just some examples of customer wins but I wanted to share them with you to demonstrate how we are gaining traction in these markets.

The question I’m sure most investors have is have we been impacted by the economy. From an overall basis, as Mark enumerated, we had a solid quarter and our trends are stable. However, in a more robust economy, would we have seen even stronger growth? Perhaps, but that’s hard to gauge, particularly in a more seasonal quarter. The beauty of our nationwide network is that despite some pockets of sensitivity for areas like Phoenix and Hawaii markets, we are seeing very robust growth in the vast majority of our markets, like San Francisco, Atlanta, and our Texas markets. This demonstrates the power of our nationwide network, which provides the diversity of 75 markets and multiple regions and business corridors.

In short, overall demand remains strong and we feel good about what we’ve seen in the business thus far. In fact, as you heard Mark mention, our offices are planning for additional sales teams. These additional sales resources can help capture opportunities in this unique environment where our total cost of ownership and value proposition resonate with customers.

As we move through the year, we will stay focused on all of our financial goals; however, we will also balance those goals in a way to ensure that we don’t miss strong high margin customer opportunities.

Achieving ongoing success is about the right strategy, balance, focus, and a strong business model, all of which we have. We are well-positioned to compete. We have a leadership team that is experienced in managing growth in all economic cycles. This leadership team, combined with our metro fiber networks, growth bandwidth demand, and a marketplace with fewer competitors with our capabilities than ever before makes Time Warner Telecom a powerful force in serving business customers.

We have the team, the assets, the financial liquidity, the operational experience, the momentum, and most importantly a long track record of execution. We will continue to apply these strengths to serve the business opportunity.

Thank you for joining us. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Colby Synesael of Merriman.

Colby Synesael - Merriman Curhan Ford & Co.

I understand that you guys have mentioned that you are not getting impacted by the economy, but if you look at your gross adds this quarter, they are down quite significantly, at least compared to the last three or four quarters. I was wondering if you could explain what is going on there.

Also, the co-location business, I think you mentioned 10% of your customers are now taking that service. I wonder if you can put that in context compared to maybe six months ago or a year so we could try to understand what that growth rate looked like. Thanks.

Larissa L. Herda

So on the gross adds, we don’t provide gross adds. Never have, never will and the reason for that is because it’s a stat that really doesn’t -- has never really applied to our business. We don’t sell widgets. We don’t sell products that are all around the same price, so if we sell a bunch of $50,000 customers or $100,000 a month customers versus $2,000 a month customers, the gross adds really don’t become relevant.

So I think it’s important to note that that’s just a -- you know, that’s really a stat that is probably more geared towards a company that sells to small business customers.

When we look at the number of customers that we churned off, they were from very -- primarily from very small customers that are now in our sweet spot. We are actually seeing good strength at the low end of our sweet spot, which is the integrated -- we call it a Versapack customer -- it’s an integrated T1 customer with voice, data, and Internet on a variable bandwidth T1 service and it’s a very strong product for us and that demand continues to be good.

The churn that you are seeing is primarily from the acquired customer base and as Mark indicated, we view that churn as non-regrettable. It’s very low margin, some of it no margin, in fact, and we have been seeing that churn over the past year and we expect to continue to see that churn over the next year as well.

Colby Synesael - Merriman Curhan Ford & Co.

Is that at the same level that we are seeing in the first quarter? I mean, how much -- I guess I’m trying to get a better understanding of how much further we have to go.

Larissa L. Herda

You know, I think it’s going to vary on a quarter by quarter basis, to be honest with you. And I’m not saying that some of that churn may not be economy related. It’s very possible. The good news for us is those are customers that if they don’t qualify for our sweet spot product suite, we’d just as soon that they churn off because we are not really in a position to serve that low margin customer base, nor do we want to.

So you are going to just see fluctuations I think in that on a quarter by quarter basis.

Mark A. Peters

And if I could interject too, if you take a glance at the supplemental information, you can see that the impact on revenue churn -- I mean, I think we are pretty unique in we provide customer churn and revenue churn. Obviously the difference is if the customer goes away, they are both a customer and revenue churn but also the size of the customer matters. So small customers churning off have nominal impact on our overall revenue churn, and you can see that in the trendlines. Our revenue churn has really been very consistent over the last few years and actually over the last year, it’s been favorable to the prior couple of years.

So again, even though we had a higher customer churn from these very small customers, it really had a pretty small impact on the overall revenue churn.

Larissa L. Herda

Right, and the question on co-location, we don’t have that information to provide to you. You were looking for what was it, a year ago?

Colby Synesael - Merriman Curhan Ford & Co.

Just some context in terms of how fast it’s been growing.

Larissa L. Herda

We don’t have any context to provide you.

Mark A. Peters

-- the year-over-year comps, I mean, but other to say that we continue to see great opportunities to really expand our co-location space. In one hand, we almost look at it as a super on that building because frequently we get the returns similar to just pulling fiber into a brand new building, and then the pull-through on overall revenue like Larissa mentioned, the 10% of our enterprise customers have co-location associated with them makes it a very, very sticky product.

Colby Synesael - Merriman Curhan Ford & Co.

Thank you.

Operator

The next question comes from the line of Tom Sykes of Lehman Brothers.

Tom Sykes - Lehman Brothers

Probably for Mark -- can you just talk about trends in EBITDA and gross margin? You hit our EBITDA number but the -- you know, we had apparently mis-modeled gross margin a little bit and you did terrific on SG&A. Was the improvement in gross margin or the comparison in gross margin versus 4Q impacted by the fully distributable taxes and what not and employees that you see seasonally?

And then if you could just talk about where you were able to find improvements in SG&A, that would be great.

Mark A. Peters

It is important to note that our gross margin operating costs are a bit different than others in that it’s fully loaded. Other carriers might just put in their network costs into their operating costs and impacting their gross margin but our gross margin has in it not just network costs but it also has our two centralized network operation centers, centralized engineering, a technicians operations people, really what it takes to run the business.

So when we, going into the first quarter when we gave merit increases to our employees and we had the payroll tax impact, all of those types of things, as well as headcount fluctuations, all of those kinds of things impact our gross margin. So there was an impact sequentially there and like I mentioned on the call, you have to remember that merit increases are something, it’s step function of costs, so they will obviously continue throughout the year.

Now on the SG&A side, from the standpoint of fluctuations there, obviously they are impacted by the -- also by the merit increases and taxes and there is also obviously the variable piece of that is the sales piece and depending on timing of when installations happens, commissions can go up or down from quarter to quarter, and just other normal fluctuations going through that category.

Tom Sykes - Lehman Brothers

Okay, great. Thank you very much.

Operator

The next question comes from the line of Jonathan Schildkraut of Jefferies.

Jonathan Schildkraut - Jefferies

-- just about strategy. On the housekeeping side, it looks like D&A came in a couple million bucks from the run-rate over the last year, and I’m wondering if this is a good jump-off point here or if there were some kind of one-time impacts in the quarter.

More on the strategic side, and I think you have Larissa have done a nice job of kind of addressing the economic impact on your customer base, I was wondering if you are seeing a little bit of difference between the traditional customer base and the acquired base in terms of economic sensitivity.

And also following up on that, if you can give us a sense as to kind of bookings in Q1 or pipeline kind of at this point in the quarter relative to where we were when you held the Q4 conference call, that color would be much appreciated. Thank you.

Mark A. Peters

I’ll touch first on the depreciation and amortization. Really the changes that would go, and this can be from any quarter to quarter, can be a combination of depreciation will go up, obviously, as we add more asset into our base and have to start depreciating them, but also at different points in time we’ll have assets that become fully depreciated and therefore obviously they fall off of depreciation expense. So nothing unusual, I would say, in the quarter. We just -- it was a combination of both of those that impacted the trendline.

Larissa L. Herda

With regard to economic sensitivity question regarding our sweet spot customer base and the acquired customer base, you know, we really are seeing good demand coming from the customers that we target every day. As I said earlier, we have seen strength at the lower end of the sweet spot, which is about a $2,000 a month customer and above. Very little churn from customers above that level as well, at that level and above. And lots of demand for multi-city applications, ethernet within the markets, between the markets. I have a call with our regional vice president usually -- and I always have it a few days before we have our earnings, just to make sure that we are getting the temperature. And I also was traveling last week to a few of our markets as well and I really get the temperature of what is going on there.

And with the exception of some markets that are like I mentioned, like a Phoenix that is having some impact from the downturn in the mortgage related sector, and Hawaii that’s experiencing some impacts from the tourist industry, we are seeing good strong trends across the board from all of our enterprise customers.

The acquired customer base has a lot of customers in our sweet spot and so we are seeing the same type of activity there. And keep in mind our acquired markets are really starting to come on because those are markets where we’ve recently made investment in for additional product capability and those customers who have never really had the opportunity to get a lot of these products from anyone in the past because certainly the Bell companies aren’t out there hawking it when there isn’t any competition because it does cannibalize their existing service base.

So we are seeing some really good traction in those markets as well. Are they all showing traction? Some of them are going to just take longer. We are still adding people in some of those markets. Remember that we didn’t -- there was not a lot of infrastructure in terms of headcount in a lot of those markets. I actually think our financial results are amazing when you consider the fact that we’ve been adding a lot of people to address the market demand in these markets. Everyone from general managers to central office engineers to technicians, the sales people, the sales directors, because many of the markets didn’t have that infrastructure.

So we like what we are seeing in those markets. Again, just like we said on the last call, if we weren’t reading the newspaper and listening to the news every day, we’d just feel like this is just another -- you know, it’s a seasonal quarter for us. The first quarter always is, has been for years. It always starts off slow and then it picks up momentum as the quarter goes on and that’s what we saw this quarter just like we saw a year ago and the year before that.

So we feel good about the demand coming into the second quarter and we are just focused on those sweet spot opportunities.

Jonathan Schildkraut - Jefferies

Great. Just as a follow-up, we are hearing from a number of other players out there that over the course of this year, they are planning on bulking up their sales teams and while it varies market by market, I was wondering if you were sensing a tightened market for high quality sales people, or there seems to be a good availability? Thanks.

Larissa L. Herda

We have absolutely no problem attracting high quality sales people. It is a -- and as many of you know, I personally get in front of -- and I would like to say 100% but I would say probably closer to 95% of the new sales people who come into this company come here to Denver for training and I get to meet with them. And we have teams coming in every few weeks and I listen to where they -- I ask them where they came from, why they came to our company, and most of them tell us that they came to work for us because they were always losing to us and they thought they needed to join the team that was winning. And so we are very fortunate.

We also have extraordinarily low relative to the rest of this industry, churn of our sales force. We are a big believer -- we’ve worked very hard on that. We are big believers that that’s how you get sales force productivity, is keeping people in their seats and getting them productive over time. It’s a long process of getting a sales person up to speed and meeting their quotas. It can take at least -- it can take a year in many cases, so you don’t want to lose them when you’ve invested all that time and energy into them.

And we’ve -- you know, they have products that sell. Customers, as I always tell the sales people, they can always -- they never have to be ashamed bumping into their customer at the grocery store because our products work and the customers are happy and they -- you know, in one of our markets, I was in Boise not too long ago where the GM there told me that a lot of his customers, you know, this is a small town and they are friends and they know each other over the years, and so it’s a good environment for sales people. They have the ability to make a lot of money at this company and that’s why sales people leave companies. When you see high churn in a sales force, it is typically because they are not selling and here they do, so no, very, very good opportunities to hire good people.

Jonathan Schildkraut - Jefferies

All right. Thank you very taking the questions.

Operator

The next question comes from the line of David Dixon of FBR Capital Markets.

David Dixon - FBR Capital Markets

Larissa, I wondered if you could provide some commentary on the success-based capital trends going forward. Currently I would assume we’re focused on the on-net opportunities but as we shift away from the direct on-net opportunities to opportunities adjacent to the network, I’m thinking about the opportunities that are within that one-mile radius. How should we think about the incremental CapEx trends that are likely to incorporate a high proportion of fiber laterals going forward? I would be interested in your thoughts on that.

Larissa L. Herda

Sure. We’ve always done that. That’s the name of the game of our business. We do a lot of targeting of services that are close to the network. Generally it’s closer than a mile but those large opportunities that are a mile or several miles away from our network are opportunities that we build to all the time. The good news is the majority of the capital that we spend, over 80% of it is success-based and they have contracts in hand and internal rate of return guaranteed.

Nothing would please me more than to see CapEx go up because of that metric. It just is -- that’s where our highest margin business, that’s where our lowest churn business is, those are the customers that you get your foot in the door and they just keep on buying from you, so that’s how we expand our business.

So I don’t see the dynamic changing at all in how we spend our CapEx. It’s really the same. It’s business as usual for us.

David Dixon - FBR Capital Markets

And Larissa, just as a follow-up, as you are looking to capitalize on these growth opportunities just with your improved competitive positioning here, can you share your thoughts on how your thinking may have changed on the M&A versus the organic approach?

Larissa L. Herda

Well, you know, we are always taking a look at what’s out there. I think that it’s prudent to do so because you may find something that fits. The good news from our perspective, and it’s been this way for years now that we’ve had top line revenue growth since the -- I think it’s been the first quarter of 2005 or so. We don’t have to make acquisitions to continue to grow because we’ve had organic, strong organic growth for many years. Now obviously when you do an acquisition like we did with the Xspedius acquisition, it enhances our growth opportunities and we are seeing that like I talked about in Atlanta.

I mean, Atlanta is just on fire. I think those were the words that the GM used. They are absolutely on fire and you can feel it, you can see it, you can -- I mean, it is exciting to be in a market like that and they are getting a lot of their energy and their opportunities from markets that are around them. They are coming from a lot of the Xspedius markets, so this was an acquisition that that made a lot of sense and is over time creating revenue opportunities for us and revenue synergies for us.

And again, this business doesn’t turn overnight. It takes time. It takes time to put new capabilities in the market. It takes time to hire people, train them, get them productive, cultivate the customer base. I mean, these are -- this is -- our growth has never come overnight. It always comes over time. What we like are the trends and what we seeing in those markets.

So if we could find that type of an opportunity somewhere else, we’d certainly consider it but we are not -- you know, prices are coming down on some of those companies and we are very choosy about what we do and we like where we are right now with the business. We’ve really -- and this business has changed so much, just even in the past year. Our scale and our capabilities and the internal capabilities that we’ve been building are really quite exciting.

So we’ll see. We’ll be opportunistic but we don’t need to jump on anything.

David Dixon - FBR Capital Markets

Is the product mix as well something that’s been changing somewhat, Larissa, just over the past 12 months? Have you seen much of a shift in the mix of products, which I guess goes to relative variability in EBITDA going forward?

Larissa L. Herda

You know, no. We are selling bigger customers, so we are selling more multi-city deals and that’s just -- I wouldn’t say that’s a shift in any product mix. It’s just I think we’re becoming more mature and we are getting better at it, so we are getting more opportunities. So I think that’s probably more of what I’m seeing. But otherwise, no, it’s just more of the same, continuing to build on the strength and the -- you know, we are getting better. I would say that a couple of years ago when we did multi-city deals, we weren’t particularly good at it, just like we weren’t particularly good at ethernet when we started doing it in 2000, 2001 timeframe. But we became the leader in it and we are steadily seeing our capabilities grow for these large, multi-city applications and we are going to continue to do that. And I think that you will see more of that.

David Dixon - FBR Capital Markets

Well, congrats on the quarter. Thanks very much for the questions.

Operator

The next question comes from the line of Tim Horan of OPCO.

Timothy Horan - Oppenheimer & Co.

Two maybe higher level questions, partially kind of guidance related but Mark, do you -- revenue growth is kind of lowest you’ve done in a while. Do you think this is a good trend for the year or what would maybe cause it to accelerate off of here? And then secondly, can you remind us why you think EBITDA margins will get to the mid 30% this summer -- what the drivers are of that from a high level basis as part of your guidance? Thanks.

Mark A. Peters

First of all, as you know, we don’t give revenue guidance of EPS guidance, so I won’t give it here. I mean, it’s important to note that as we mentioned, the overall revenue growth for sequentially was actually higher, the organic growth was actually higher than it was for the prior two years. So keep in mind that as Larissa mentioned, that the seasonal quarter as we talked about frequently, but we’ve also talked about is we’ve seen the sales trends to be strong, installation trends to be strong and those we are seeing actually better than last year, so we are feeling good about the trendlines as we get further into the year. The future will play out everything we are doing from a growth and meeting the demand standpoint. Like we mentioned, we think we have great opportunities for the year but time will tell.

Larissa L. Herda

Tim, I have to -- I just have to remind you, because I know you were watching us and a lot of people on the call were watching our numbers first quarter of last year, and I seem to remember we had some wringing of the hands after our first quarter results last year too. And even though we had told the market that they were seasonal impacts, nobody was really listening to us. So we think we did a much better job this year communicating the seasonal impacts and that’s just the way the quarter is, although when we look at the performance year over year, we look at it and it’s better. And despite what may be going on out there in the macroeconomic environment, it didn’t seem to impact our growth for the quarter.

Timothy Horan - Oppenheimer & Co.

Great, and on the [down] margin, Mark, what’s really going to drive that over the next six months?

Mark A. Peters

What’s really driving it, and I’m going to repeat what I said on the call a little bit too, is that as you know, we are really focused on balancing all the metrics -- revenue growth, EBITDA margin, as well as cash flow. And we’ve made obviously terrific progress over the last year with a 380 basis point expansion of our EBITDA margin. And that was really a combination of us delivering on the cost synergies that we had indicated we were expecting from the acquisition, as well as just the overall growth in our business and scaling of our business that contributed to that expansion as well.

So going forward, and it is true that to get a 100 basis point improvement in margins is a huge feat and so that 380% was an enormous feat and we are expecting more expansions to get to that ultimate goal of the mid-30s again during the summer. Don’t forget the summer goes all the way through September, but it’s going to be more -- really more of the same reasons why we expect to get continued expansion, which is continued growth in revenue, scaling of the business. We have numerous initiatives internally to continue to retool and simplify our business to do things simpler and more streamlined to help contribute to the incremental margin in our new sales, as well as we also see more continued actually network cost synergies related to the acquisition.

So all of those together is why we really think that we still have continued opportunities this year for margin expansion and honestly I think beyond that, I’m looking at a very long-term horizon.

Timothy Horan - Oppenheimer & Co.

Thank you.

Operator

The next question comes from the line of Erin Schmitz of Citigroup.

Erin Schmitz - Citigroup

I was wondering if you could provide additional color on the types of deals that you are getting and the time that it is taking to install, kind of what your book-to-bill is. You mentioned some of the markets that you are seeing a lot of strength in and you’ve had some press releases our recently of some of the larger deals that you have signed. If we could just get a sense of the timing of when we can start to expect some of that revenue to come online.

And then also wondering if you could just provide a little bit more color on some of the network grooming activities and opportunities you still have as we move through the back half of this year and into ’09 as well. Thanks.

Larissa L. Herda

Gosh, I thought we provided some color on the deals. They are -- like some of the ones -- you know, they are all over the board in terms of vertical markets. We are getting business from -- I think everyone needs to keep in mind that there just aren’t as many competitors out there anymore who can provide fiber-based services to business customers across multiple markets, and that is a huge differentiator for us and it allows us to compete very effectively against the big guys, which are our primary competitors.

So we continue to see significant multi-city deals, larger and larger bandwidth. A year ago, as I said in the script, we were selling 100-meg circuits all the time and now it’s just not unusual to be -- and it’s not unusual, it’s very typical now to be getting double, triple that bandwidth, a gig bandwidth, 10-gig bandwidth. The number of 10-gig deals that we have installed this year are significantly greater than they were a year ago.

So with regard to the length to install, nothing has changed. The larger deals always take longer. It’s just in many cases we have to construct, so you have to take into account the time to get building permits, permission from real estate owners, the actual construction time, turning up the network.

We had -- I think it was very clearly demonstrated last year. We had a very large single deal that we talked to the market about in March of last year where you didn’t see the full quarters of revenue until the third quarter. It took that long because they are big deals and they are very complex.

Now the smaller customers happen very quickly. You can sell and install them in a 30 to 60 day period, so those -- and we haven’t seen any change in any of that.

When you asked the question on network grooms, what are you referring to? Cost savings?

Erin Schmitz - Citigroup

Yes.

Larissa L. Herda

Okay. Those efforts continue and that is -- that’s really almost an ongoing effort in this business as these networks are living, breathing organisms and you are constantly trying to make sure that you are being as efficient as possible in the deployment of those resources. So we have a lot of network grooming activities. We are going to continue on but what’s actually happening is that our sales are strong as well, and we are selling both on -- 100% on the fiber network as well as with a lot of these multi-city applications, we are acquiring circuits from other carriers as well. So even though you groom the networks, the growth of the business, you are still increasing -- you are still adding those costs back into the business as well, so it’s not like you are just decreasing cost by virtue of the fact that your growth, you are also adding them. So that’s kind of a -- just an ongoing process as well.

Erin Schmitz - Citigroup

Great. Thank you.

Operator

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

Donna Jaegers - Janco Partners

Just to underline one trend, you guys talked about building to within a mile of your fiber networks. That would imply that you are seeing some demand from the wireless back-haul market. Can you talk a little about how much that is in your carrier bucket and what’s going on there, what you are seeing in that market?

Larissa L. Herda

Donna, we have been seeing demand from the wireless carriers from years and yes, we have seen some good growth from a number of customers in that category. It’s been overshadowed a bit by the one carrier customer that we continue to see disconnects from primarily in region, but they also buy from us too. You know, we’ve never quantified any of that but suffice to say that’s been an ongoing growth opportunity for us. It’s actually helped to offset carrier disconnects in general. If you look at the carrier revenue in fact, which includes all that wireless stuff, we would have had growth this quarter had we not had the large disconnects from that one wireless carrier, so demand is good.

Donna Jaegers - Janco Partners

Do you feel like that the disconnects from that larger carrier are almost finished?

Larissa L. Herda

I wish they were. You know, they are getting close. Let’s say we’ve got less ahead of us than we do behind us, right? But they still have services. Sometimes they -- like, they took a break for a while, they put their eye on other balls, cost-reducing balls, I guess. They had their eye on us in the first quarter and we saw some reduction there.

You know, we will continue to see that churn down to very little, except for probably what we have outside of their region. So it’s been -- I know it’s been going on for a few years now but that’s kind of the way it works with these customers.

Donna Jaegers - Janco Partners

Great, and then just a quick question for Mark -- you guys originally I think on the rebranding expenses, you mentioned I think $5 million to $7 million in costs. You spent about -- I just backed out the number -- 0.4, so $400,000 this quarter it looks like. Is that given you just changed the name to TW Telecom? Can you just use whiteout on your trucks or something like that to save money?

Mark A. Peters

Well, that’s what I want to do but the marketing group hasn’t been allowing us to do that, so --

Larissa L. Herda

You’ve got to talk to Mike about that one.

Mark A. Peters

That’s right. No, and that’s why we expect they are going to come up there, the costs in the second quarter as we really get into the meat of the rebranding as we approach when we switch over at the end of June. So no, I expect those costs to come up here in the second quarter and we have not changed our guidance on those.

Donna Jaegers - Janco Partners

Okay, thanks.

Operator

The next question comes from the line of Ray Archibold of Kaufman Brothers.

Raimundo Archibold - Kaufman Brothers

-- success as you’ve pointed to in the new markets, the Xspedius markets and one, I was curious, the productivity of the --

Larissa L. Herda

Ray?

Raimundo Archibold - Kaufman Brothers

Yes?

Larissa L. Herda

Could you start again? Your whole first part blanked out on us so we didn’t hear how you started.

Raimundo Archibold - Kaufman Brothers

Okay. I just wanted to follow-up on the successes you’ve been having in the Xspedius markets that you turned on late last year, and I was curious one, are the productivity of those teams now at the same level as the legacy Time Warner markets, if you will?

Larissa L. Herda

No.

Raimundo Archibold - Kaufman Brothers

Okay, and secondly, you also mentioned that you are hiring, you are looking to hire more sales teams. Can you tell us how many markets and/or which markets you are looking to deploy those teams into?

Larissa L. Herda

No, we’re still looking at it. You know, just to elaborate a little bit more on the productivity in those markets, it takes time for a market to reach the productivity levels, particularly of our better markets or our more mature markets and that’s you know, that’s just natural. A lot of these people we just hired in the second half of the year last year. They are still getting to know the way we do things. That’s just the selling cycle when you first, especially for larger customers, can be six months to a year for some of them, so -- and then for the smaller customers, clearly they have a much shorter selling cycle but they’ve got really good assets there. They’ve got good backbone distribution with the fiber networks in these markets. Really good customer responses so far, but again it takes time to get the order and then it takes time to install it, so we are pleased. I am pleased with those markets, the ones at least that we’ve put the new capabilities in. We still have some really small markets there that we are not expecting to get much out of and we are not putting the resources there. We do have a tendency to put our resources where we think we are going to get the biggest bang for our buck and that’s what we’ve done.

And what was the other question?

Raimundo Archibold - Kaufman Brothers

The sales teams -- how many, what markets, or how many markets?

Larissa L. Herda

Right. So we are still evaluating, we are still looking at that and we have a tendency -- we tell our markets they are not limited to a certain number of sales people. What we do require is the sales people that they have maintain a certain level of productivity because what you don’t want to do is throw a bunch of sales heads at a market and have them floundering around for a year, costing you a lot of money and never being productive. So what we do is we look at -- we have some markets that have multiple sales teams in them and some markets that want multiple sales teams and they have to build to that. And we have some markets that absolutely can justify putting another sales team in and we are evaluating that right now.

So no target number at this point. It’s a -- we will evolve, you know, as time goes on we’ll continue to evolve these markets. Certainly the new markets like Louisville and Colorado Springs and Lexington and Vegas and some of those markets, they are going to get -- you know, they’ve been getting new sales people in some of those markets, because they are newer markets. So as they get the sales people productive that are there, then we will let them add more people.

Raimundo Archibold - Kaufman Brothers

And then if I could just follow-up on the EBITDA margin, you are sort of within spitting distance of that mid-30% range and obviously I would -- it looks like you probably -- you will get there some time over the summer. I was just curious beyond that point then, is there any inhibitor in terms of the margin going higher or was it more your intention that once you hit that mid-30% level that any incremental margin gains would be reinvested in the business going forward?

Mark A. Peters

Well, you know, we are always balancing investment in the business against margin. But we’ve also been to -- like on the sales headcount, for example. If we seen an opportunity to make an investment that we know that we are going to get our return and that’s -- you know, it can be sales people, it can be systems enhancements, it can be network expansion, you know, we’ll be making those investments.

Now, is there a natural cap to which our EBITDA can grow to? You know, it can’t grow infinitely but I think with continued scale, our continued enhancing our internal capabilities from an efficiency standpoint, and continue to sell additional services to customers, all that should lead us to the opportunity and longer term margin expansion.

But then you do mix that with products. You know, if we have an opportunity to grow our cash flow more rapidly but not necessarily grow the margins, is that a good thing? Well, I think so. So there might be opportunities to do that with the different product mixes too but net net, we are always focused on that balance or revenue growth, margin growth, and cash flow growth, and it’s important that we keep all of those in the right perspective.

Raimundo Archibold - Kaufman Brothers

Very good. Thank you.

Operator

The next question comes from the line of Frank Louthan of Raymond James.

Frank Louthan - Raymond James

Thank you very much. You mentioned on the co-lo business 10% of some of your enterprise customers coming out of co-lo. Do you think that that sort of business is going to drive more revenue going forward? And looking out a year or two, do you expect that to be materially different or has this been a pretty similar trend that you’ve had for a while? And can you give us an idea of how much, what percentage of your revenue is on type two circuits? And then lastly, are you utilizing or looking at any ethernet over copper technology?

Larissa L. Herda

Okay, so with regard to the co-lo, it’s actually not 10% of -- it’s not 10% of the customers; it’s 10% of the revenue. That revenue has -- is from customers that buy a co-lo service, just to be accurate there.

We have been selling co-lo for years. We are seeing an increase in demand from customers because more customers are looking for alternate sites for their data centers, so what we are doing is they are not just in our co-lo; we’re connecting the co-lo to their main data center and they are wanting to connect other locations that they have either in a market or in multiple markets, and then they want more bandwidth, so we are seeing bigger bandwidth, which is -- I mean, our co-lo, as you know, Frank, is something that we -- it’s we do it -- no one does it the way we do it. It’s really -- we really focus on selling our network and the co-lo enables us to do that and it also fits a strategic gap in a lot of customers’ network needs because a lot of customers don’t want to have to put their data equipment in these big mega data centers and spend all this money with all these bells and whistles.

They just want -- what was it -- it was ping, power, and pipe is what one customer told us, ping, power, and pipe. Real simple -- just give us the space, give us the network and some of them use it actually as their technicians’ technical space. They bring customers into it.

Last summer I was taking a tour of one of our co-los in one of our markets and a customer was coming in with his customer and his technician, showing him the co-lo space as part of their business. And so yeah, I think it’s going to continue to grow and we have some markets, markets like Minneapolis where it’s just -- by the time we build it, it’s time to build another one. But we are incremental. We are not into building these big mega data centers because we don’t like putting a lot of capital out there ahead of demand. That’s not our style. We like seeing the revenue follow close behind our investment.

So that’s on co-lo. On the percentage of type two, we talked about on the call that over 60%, that the stat that we’ve given, which is not exactly the stat you are looking for but over -- because this is not quite -- it won’t match exactly but over 60% of our revenue is 100% on our fiber network, meaning we are not using another carrier. So I guess you could say the other percentage has a type two element in part of it, but the way we do it, if we have 90% of the circuit riding on our network and there is one zero-mile type two circuit that’s there, that it’s a couple hundred dollars of a $5,000 order, we call it -- it’s not in that over 60% category. It’s in the other category. So even in the other, the type two that’s part of it, they are still heavily -- part of that network is heavily on our fiber network.

I don’t know if that answers your question. And then the next one was on ethernet over copper; so we actually do some -- we connect to some remote sites for lower bandwidth. We use TDM, which is special access copper today but most of our ethernet is on our fiber, the vast, vast majority of it. We have a few of them out there and we do utilize that. When it makes sense to use it, we’ll do it. But it’s -- you know, you don’t want to make that your primary -- it’s not a -- it’s something you do as part of a bigger offering because the margin with that type of business is not the greatest. But if you have a bigger application to serve a few of the sites that way, it’s efficient to do that, we’ll do it because obviously most of what we are doing is on the fiber network and therefore high margin services.

Did I answer all your questions, Frank? Hello?

Operator

He has disconnected. Your next question comes from the line of Earl [Rugman] of [Rugman Capital].

Analyst for Earl Rugman - Rugman Capital

This is [Shibu]. Just to expand on the competitive dynamics, you talked about how there’s much fewer competitors right now, but they are larger and the number has gone down but the competitors are larger, so if you could address that situation.

Larissa L. Herda

Well, you know, just because someone is larger doesn’t mean that they are better. I am a big believer that big isn’t necessarily better. You have to be smarter, more nimble, and flexible and one of those things that we do is customer surveys, and our customers really give us high marks for our flexibility and the relationship building that we do. We have local sales people in our cities. We believe in that model. We believe in the relationships with the customers.

I was meeting with a customer in Charlotte last week and he was just amazed at his ability to be able to build a relationship -- he knows the name of our techs. He doesn’t know the name of the techs at the big guys. He never knows who is going to show up and when they do show up, he’s got to go through and show them everything because chances are they are not familiar with his network and what was done at his location and where things are, whereas our techs know that. And so I’m not worried about the larger portion of it. That actually works to our advantage.

Analyst for Earl Rugman - Rugman Capital

No, definitely but just expanding on that a little bit, on the situations when you compete, whom do you compete against mostly? Is it only the big guys or are you seeing other people or it’s you are the biggest guy when you are competing and everyone else doesn’t have the product bandwidth or the breadth of product?

Larissa L. Herda

It obviously depends on the customer that you are competing against. We focus on customers ranging from about $2,000 a month up to -- you know, some of them are starting to bill close to $1 million a month on the enterprise side. But even the ones that we are selling to that are billing on the high-end, we still have a very small portion of their overall spend. We are not a multi-national company and so we are not going to be all things to those customers.

And when we do compete for I’d say the medium, the large customers, you know, our -- those are customers that want a fiber-based network solution and it’s really us and the really big carriers. That’s really it.

Now when we are selling to the smaller end of our sweet spot, there’s obviously a few more emerging carriers in that category as well and we win some and we lose some. It’s just -- especially if there is fiber in the solution, we typically win because they don’t have it and we do.

So the sweet spot that we spend the most time in in that medium to large space, you know, that -- I don’t know, $5,000 to $10,000 to say $50,000 to $100,000 a month customer really doesn’t get a whole lot of attention from the really big guys because they are really focused on those big, multi-nationals. They are kind of at both ends of the spectrum. They are focused on those big multi-nationals and then they are focused at the SME end because they are getting a lot of competition from the cable industry and we don’t play in that space.

So those customers in the middle, they’ve been disenfranchised in many ways because as these -- as the mergers have occurred with the big carriers, they’ve changed out their account teams. As a matter of fact, one of the customers I met with last week, their whole account team had been changed out and a new account team was put in, even though they asked for that account team not to change and their new account team isn’t even in their market. So that’s fairly typical.

So there is a real opportunity for us with the local relationship building that we have, the stability of our account teams and our technical teams. They’ve been around for a long time. You go to a market like Charlotte and you’ve got people who, some of them who have been there longer than I have and I’ve been here a long time. And so I think that’s really meaningful in how we compete in those markets.

Operator

The next question comes from the line of Mike McCormack of Bear Stearns.

Michael McCormack - Bear Stearns

Just a couple of questions; one, there was some commentary in the press release on repricing of carrier contracts. Give us a sense if you can just the magnitude of those repricings and also on the enterprise side, if you are seeing the same kind of repricing activity.

And lastly, the enterprise discussion had indicated seasonal growth I believe, or seasonal strength on the enterprise side and I know there’s counter-balancing seasonal impacts. If you or Mark could just walk through whether or not the seasonal issue is a benefit or not on the enterprise side, that would be great.

Larissa L. Herda

So repricing is a fact of life when you are a 13-year old business, particularly you’ve got -- we have some mature relationships with customers. As you know, the majority of our contracts are on three and five-year contracts and so over time, they eventually come up for renewal.

On the enterprise side, when those contracts often get renegotiated, it’s often because the customers are adding additional services and so what we always try to do is mitigate the downside effect of renewing a contract and actually in many cases, increasing the revenue and that’s especially with the larger customers. That’s typically what we see because they are giving us more and it actually becomes a much more positive revenue impact for those. When the smaller, real small customers, or what I would say the lower end of our sweet spot, they may not have as much to give you so you may see some pricing reductions. But we are kind of out of that cycle of when prices went down really dramatically years ago, so the repricing is not as dramatic these days as it was several years ago when there was that steep decline in pricing right after the downturn of the telecom industry, so it’s fairly moderate.

And then the carrier side as well -- I mean, we did a big repricing of the carrier contracts years ago and you reprice contracts with carriers, that happens but another element of that is that they meet certain volume thresholds and that inherently reprices their base for a period of time until they build it up and build it up and build it up again. So that’s kind of almost an automatic process with some of the carrier business. The good news there is they continue to buy more and therefore the price reductions that they are getting are a result of increased volume.

I’m not sure I understand the question on the seasonal growth. Could you repeat that, Mike?

Michael McCormack - Bear Stearns

Yeah, there was -- one of the things that you guys wrote in your press release, you said on a year-over-year basis, enterprise customer revenue was up $3.6 million, reflecting strong seasonal growth.

Larissa L. Herda

That gets to the whole concept of seasonality in the first quarter and actually it’s a function of the seasonality that occurs in the fourth quarter with the holidays and the slower sales towards the end of the year, and that’s the cycle that we’ve seen year after year after year. As much as we try to break that cycle, I think it’s just a natural part of what happens with enterprise customers. They just -- many of our larger enterprise customers actually freeze their networks at the end of the year for the holidays. We have big customers like Federal Express that you can’t touch their network because they depend -- so much of their revenue for the year depends on stability of those networks. So there’s a -- you know, that activity, the sales -- you know, the customers are closing down their years, they are going on vacation so sales really do slow down from Thanksgiving through the end of December and sales in the fourth quarter are your installs in the beginning of the first quarter, and then with the rule of sixes in the quarter, if January starts off slow, you don’t -- you have a repeat of that three times in the quarter and -- very similar to last year, if you remember. March, the end of the quarter was really strong but January was low, and so therefore the overall quarter has this seasonal impact. It just takes a while for people to start scheduling their installs at the beginning of the year and that momentum has a tendency to build as the year goes on. And so you know --

Michael McCormack - Bear Stearns

The release makes it sound like it’s a positive, so you are saying that existing customers are using more in the first quarter versus fourth quarter, and then potentially there’s an offset from lack of installs and sales in the fourth quarter?

Mark A. Peters

Yeah, the impact of the -- the seasonal impact causes a weaker sequential growth rate into the first quarter, so it’s really what Larissa just spoke about, so December sales go into the beginning of the first quarter, installations and revenue growth, and so --

Michael McCormack - Bear Stearns

The commentary in the release is a positive.

Mark A. Peters

Well, the seasonal was a modifier. We had strong growth but it was seasonal, so if you were to take the first quarter sequential growth and didn’t understand that it was a first quarter and thought it was a different quarter, you might not think it was a strong quarter but because of the seasonal nature of the first quarter --

Larissa L. Herda

It was strong.

Mark A. Peters

It was strong.

Larissa L. Herda

It was strong. It’s almost it was strong despite the seasonal nature of the quarter, I guess you could say, but it’s seasonal and it was strong in a seasonal quarter.

Michael McCormack - Bear Stearns

We’ll talk offline.

Larissa L. Herda

Yeah, I think you are right though. It’s positive.

Michael McCormack - Bear Stearns

Okay. Thanks, guys.

Operator

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

Donna Jaegers - Janco Partners

Thanks for taking this follow-up. I was hearing from another carrier that they had seen a distinct movement in enterprise budgets starting in the second quarter, that the budgets were -- where in the first quarter they had been sort of floaty and the CFO maybe was being cautious because of the economy; second quarter they had their numbers and they were looking to spend them. Have you guys seen any trend like that?

Larissa L. Herda

No, I mean, it’s been very stable. The trend with enterprise customers has continued to be really stable. Now, I don’t know what that other company sells. I think we have perhaps an advantage in that what we are selling is what customers are moving to. A lot of the customers are getting off their legacy networks so they’ve got it and they have to do that. They have to make modifications to the network.

So overall, the demand has been real stable, customers are continuing -- you know, responding to a very good funnel of proposals and yeah, other than that I -- yeah. It could be that they sell to a different kind of enterprise customer base.

Donna Jaegers - Janco Partners

Maybe. They are more IPVPN, so maybe there was some -- and they are exposed to the financial industry, so --

Larissa L. Herda

That could be. That could be. The nice thing about our business is that we’ve got lots of different verticals, so if one is a little weak for a while, then you get the other ones and to is really I think helps us maintain our growth trajectory.

Donna Jaegers - Janco Partners

Okay. Thank you.

Larissa L. Herda

And with that, I’m afraid we are quite out of time but I would like to thank you all for joining us today on the call. Have a good day.

Operator

That concludes our program for today. Thank you for joining us. You may now disconnect.

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