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TW Telecom (NASDAQ:TWTC)

Q2 2012 Earnings Call

August 07, 2012 11:00 am ET

Executives

Carole Curtin

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

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

Michael A. Rouleau - Former Senior Vice President of Business Development & Strategy

Analysts

Michael J. Funk - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

Barry McCarver - Stephens Inc., Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Operator

Good morning, and welcome to tw telecom's Second Quarter 2012 Conference Call. Today's call is being recorded. With us from the company is Chairman, Chief Executive Officer and President, Ms. Larissa Herda; and Executive Vice President and Chief Financial Officer, Mr. Mark Peters. At this time, I will turn the call over to Carole Curtin, Vice President of Investor Relations. Please go ahead.

Carole Curtin

Welcome to tw telecom's conference call. We're pleased to have you join us today. To review our results for the quarter, please visit our website at www.twtelecom.com, where you can find our press release, supplemental quarterly information and SEC filings. Before we start, I'd also like to draw your attention to our Safe Harbor statement included in our supplemental materials, which you can find on our website.

Information in our quarterly earnings materials and our discussion today contain statements about expected future events and financial results that are forward-looking and are subject to risks and uncertainties. A discussion of factors that may cause our results to differ materially from our expectations is contained in our filings with the SEC under Risk Factors and elsewhere available on our website. I'd also like to point out that our earnings materials and discussion contain certain non-GAAP financial measures. You can find reconciliations between the non-GAAP and GAAP financial measures in the materials on our website.

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

Larissa L. Herda

Thanks, Carole. Hi, everyone, and thank you for joining us. I'm pleased to share our second quarter results with you today, as well as some significant product news. Our story is one of consistency and innovation. Consistency including our long-term track record of strong financial and operational performance and innovation as we continue to bring unique capabilities to the market, including new game-changing services for enterprises.

We delivered another quarter of solid results, including our 31st consecutive quarter of revenue growth as we achieved strong margins and cash flow, again, underscoring our ongoing consistent performance. At the same time, we continue to innovate and execute new opportunities to drive our top line growth. Today, we're announcing some significant product accomplishments, including the launch of our Dynamic Capacity service, which is part of our Intelligent Network capabilities that we rolled out yesterday, and further progress on our new national Ethernet service, which we're conducting technical trials on and expect to roll out in the fourth quarter.

At the end of June, we also successfully launched our Enhanced Management service, which is also part of our Intelligent Network capability. All of these new capabilities represent thoughtful and strategic innovation, including unique foundational design and scalability that we believe will continue to distance us from the competition. I'll talk more about these products later, but now I'd like to turn to the broader trends we see in the business.

First, let me start with our bookings or sales. We have seen sales continuing to strengthen. As we told you last quarter, we had a seasonally slow start to the year, but gained momentum throughout the first quarter. That momentum continued into the second quarter. And in fact, our second quarter sales grew compared to both our seasonally slow first quarter bookings, as well as our sales from the same period last year as we've steadily increased bookings to deliver our highest sales quarter on record.

Now let me turn to the timing of our sales cycle, as there seems to be a lot of discussion in the market about this recently. Let me start by saying, we've not seen any lengthening in our sales cycle due to the macroeconomic environment, which some other providers seem to be facing. And here's why we believe our situation may be different. Anecdotally, we're hearing from our customers that they're focused on running their businesses smarter. That means they may not be doing as many expansions of their network, but they're issuing a lot of request for proposals, or RFPs, to improve their networks as they know they have to address their growing network needs and cloud capabilities while becoming more efficient.

As a result, our teams are seeing a lot of deal flow, which may be why we've been continuing -- we've seen continuing strengthening in our sales as the year progress. We believe this is because our solutions solve customers' complex network needs while providing them operational efficiencies. Another positive sign we're experiencing is a lot of excitement about our new product deployments coming from both enterprise and carrier customers alike. I've personally not seen our sales team this excited and bullish since we deployed our converged service offering several years ago, which you may recall, resulted in strong sales and contribution to revenue growth. Obviously, this will take time to show up in revenue growth, but we believe we've positioned ourselves very well to drive ongoing growth in the business with these new products.

Here are a few insights on what we're experiencing regarding demand. Our recent sales funnel compared to the same period last year reflected steady growth in potential new revenue opportunities, as well as customers, traction in on-net opportunities and strong demand for our most advanced Ethernet solutions. As we look at future revenue opportunities, we believe that data and Internet will continue to be our growth engine. And with this revenue now representing half of our total revenue, we've reached a tipping point as these products are producing strong results, including nearly 16% revenue growth the first half of this year compared to the same period last year. We believe these data and Internet products, as well as our new product launches, will enable us to take market share, sell more to our current customers and continue our strong revenue growth trends. So there's clearly a lot of strength and positive trends in the business, and everything we're doing is focused on further distancing ourselves from the competition. So with that, I will turn the call over to Mark.

Mark A. Peters

Thanks, Larissa. We continue to deliver incredibly consistent and solid financial and operational results. Today, I'll spend time providing more color on our revenue growth, capital investing and balance sheet strength.

Let me start with the revenue growth. With our data and Internet revenue growing at 16% for the first 6 months compared to the same period last year, and now representing half of our total revenue, one can envision a path to continued revenue expansion as this growth segment continues to be a larger part of our business, particularly as our new product launches begin to gain traction later this year and early next.

Our strategic Ethernet and VPN services, which are a subset of data and Internet revenue, continue to increase at strong double-digit growth rates. This category grew 24% this quarter compared to the same period last year and represented over half of our data and Internet revenue.

Looking forward, our new products will also be a driver of growth for these strategic services, as we expect them to create stickier relationships, provide new selling opportunities to our current customers and help us to attract new customers and continue to take share.

Turning to the revenue growth for the quarter. Our underlying business trends have gained momentum as the year progressed, and we're optimistic about the remainder of the year. I'd like to walk you through both our trends for the quarter, as well as a few discrete items that are reflected in our results.

First, as Larissa mentioned, sales started the year off seasonally slow and then began to strengthen in the first quarter and into the second quarter, as sales momentum contributed to our data and Internet revenue, which sequentially grew 3.2% this quarter compared to 3% last quarter, reflecting our differentiated offering and strong enterprise capabilities.

Next, as we've previously shared with you, we had one particularly large carrier disconnect last quarter. Because that disconnect occurred at the end of the prior quarter, the bulk of the revenue loss occurred this quarter, which negatively impacted our network services revenue.

In addition, we experienced rate fluctuations for certain taxes and fees, including both a rate increase last quarter and a small decrease this quarter that impacted our revenue growth rate for voice services. So some noise on a few items in the voice and network categories that somewhat obscured strong fundamental trends in our data and Internet revenue category. We believe our final customer bookings and revenue all reflect continuing positive trends driven by our data and Internet services that will be further enhanced as the new products that we have and will be launching start gaining traction.

Now let me change gears and talk about our capital investing. For the first 6 months of this year, CapEx was about $160 million, which decreased 6% from last year, reflecting ongoing strong customer demand, offset by higher technology and infrastructure investment last year that did not recur, the timing of projects, and some gradual gains in the overall capital efficiencies. Together, this resulted in a slight improvement on our CapEx to revenue ratio with a reduction from 25.4% last year to 22.1% of revenue for the first 6 months of this year.

Let me touch further on a few of those that will be specific for changes from the first 6 months of this year compared to last year. This year, we increased our success-based CapEx for both building additions and co- location investments as we continue to invest to serve ongoing customer demand. Additionally, we continue to increase our strategic in-market expansion of this year over last to further reach new customer opportunities. Offsetting capital spending were certain technology and infrastructure investments made last year in advance of new product rollouts, which did not recur. Also reducing spending were some gradual capital efficiencies from advanced inventory system and processes, as well as gains from the efficiencies of next-generation infrastructure.

We expect capital investments will trend out for the last half of the year over the first half. But as a result of capital efficiencies and the timing of projects, we anticipate we may be at the lower end of our estimated full year CapEx guidance of $345 million to $355 million with the majority of success based -- in success-based opportunities. Of course, with the right opportunities, we could increase our investment.

Next, I would like to turn to our ongoing liquidity and balance sheet strength. This quarter, we continue to deliver strong metrics, grow cash and equivalents and increase levered free cash flow. Here are a few highlights. Our accounts receivable remains strong at 27 days sales outstanding. Our cash and equivalents grew to about $530 million, providing us the ongoing opportunity to invest in the business, buy back stock and retain flexibility for fiber and other strategic opportunities. And our levered free cash flow grew to 10.4% of revenue for the first 6 months of this year, compared to 6.3% last year, reflecting strong modified EBITDA growth and lower CapEx.

Regarding our stock buyback program, we've been measuring and executing the $300 million program. As you can see, we took a positive quarter. We will continue to be thoughtful about our stock purchase program going forward.

As I close, I want to leave you with a summary on our consistent financial performance, which includes among others, strong metrics, 31 consecutive quarters of total revenue growth, 20 consecutive quarters of positive levered free cash flow and a growing return on invested capital. It's this type of consistent performance that allows us to focus on the long-term strategic positioning of the business, including the ability to invest for further differentiation and growth and continue to evolve our market leadership positions. With that, I'll turn it over to Larissa.

Larissa L. Herda

Thanks, Mark. I want to spend some time today on 3 topics: first, providing insights into the changing world of enterprise networks; second, sharing how we're well-positioned and differentiated from others to address these dynamic network needs; and third, reviewing our progress on new Ethernet and Intelligent Network capabilities.

So let's start by looking at the changing world of enterprise networks through the eyes of enterprise CIOs. We believe that one of the greatest transitions we've seen in telecom is happening right now, as enterprises change how they consume resources. Enterprise CIOs want the flexibility to consume the resources real-time, which does not match the topology and services model of the traditional telecom company. These CIOs want to leverage their fixed network with the flexibility to consume best-in-class applications that are constantly changing and are now being sold by the slice, by the hour or by the compute cycle in a compelling new consumption model. Until recently, enterprises have had to fit their needs into traditional fixed networks. So they had to spend time completing orders, waiting for service, dealing with trouble tickets and worrying about their ever-growing bandwidth needs. Now contrast that to today, where literally every enterprise application that they either already buy or would like to obtain on a real-time basis, these on-demand applications are proliferating to address mission-critical needs that enterprises require on a secure, reliable network connection. We believe the future is about providing enterprises both the day-to-day fixed network environment, as well as the additional ability to flex up their bandwidth for on-demand needs. Each of these 2 distinct network needs has its own unique role. And together, we believe they will provide enterprises with a better combined network solution. As we look to the future, our Intelligent Network technology is critical to enable the next level of capabilities. Enterprises are addressing the traditional needs of storage, computing, hosting, disaster recovery and new business applications in new and innovate ways to grow and serve their businesses, including leveraging cloud technology.

So while these important demand drivers continue, how enterprises are addressing them is changing. Enterprise CIOs are saying to us, "I need an application on demand for an hour to test a new IT development project and another resource for a week to run a new sales promotion. And I also need more resources at the end of the month to close the financials." These enterprises need to flex up their existing networks to the fast-paced and rapidly changing business environment that they are faced with today. And we are designing and delivering the capabilities to make that happen.

With Dynamic Capacity, our Intelligent Network enables customers to increase bandwidth real-time, allowing them to better react to traffic spikes, bandwidth-hungry applications and both planned and unforeseen events, and also leverage cloud capabilities and data center services much more effectively. Our new Intelligent Network is designed to augment this entire new ecosystem. With our enhanced management Dynamic Capacity and future applications-aware capabilities, enterprise CEOs will be able to acquire those resources with visibility, control and security, to achieve a real-time network in a new marketplace.

So let's turn to how well we're positioned and differentiated from others. We see the future of enterprise networks as no longer being about a circuit but rather, it's about a service, an Intelligent Network service. Anyone can become a commodity network player. However, most can't deliver the capabilities of our Intelligent Network because of obstacles such as competing business priorities, as well as the time, investment and operational expertise required to address disparate systems and networks and a lack of reliable and consolidated customer data.

We've built a scalable and efficient national and metro Ethernet and IP network for enterprises that is surpassed only by the 2 largest US-based global telecom players in terms of Ethernet port share. We've also built a scalable foundation of 1 network with 1 set of systems and 1 set of data. And we're architecting into that network new product solutions that are offered across our managed services customer base. These capabilities are not only powerful, they're differentiating us in the marketplace today, and we believe will distance us even further from the competition in the future. Additionally, these new services provide customers what they want without historical constraints, such as no traditional order forms, no waiting, no worrying about bandwidth needs. For instance, with our Dynamic Capacity service, in a matter of seconds, customers will be able to dial up their capacity through our online portal and then dial it back down when they are done via the portal or in the near future, automatically through an API that is a machine-to-machine interface.

Now let's turn to the progress we're making toward these new capabilities. Let's start with our Intelligent Network services. As I shared last quarter, we plan to launch our new network visibility services this summer and I'm happy to announce that we fully launched Enhanced Management to all our markets at the end of June. These new capabilities provide visibility into a customer's entire network, segment-by-segment, ubiquitously to all their locations. This service is available to all of our managed services customers with VPN and converged services, as well as for Ethernet services, which continue to be a unique offering in the marketplace. Here's a recent example of a customer using our Enhanced Management service.

A real estate company with 32 offices that sells to 15 surrounding counties is using our network to connect remote offices for voice and Internet capabilities. Given the many applications they're running on their network, they've recently added Enhanced Management to provide greater visibility into their network performance to avoid performance issues, such as latency and jitter, which could have a significant impact on their call quality. They particularly like the ability to view performance by specific location and Class of Service to ensure the quality of their voice network.

As we look forward, we believe Enhanced Management will continue to play an important role for enterprise customers. In fact, in a recent survey we conducted, nearly 70% of customers ranked network performance monitoring as the top tool they need to support a cloud environment. And clearly, cloud services are continuing to gain momentum. Now more importantly, we see Enhanced Management as an important capability to combine with Dynamic Capacity for 1 cohesive offer, which in the future will also include our application-aware capabilities.

And that brings me to an update on the progress of our Dynamic Capacity offering. I am very proud of our team's accomplishments. We've already worked through alpha and beta testing. And this week, we've announced the launch of our Dynamic Capacity, demonstrating the velocity of our product introduction. This offering is focused on enterprises in our current 16,000 on-net fiber buildings, as well as customers in future building additions. Our product launch is enabling customers with our most advanced Ethernet capabilities the ability to sign up today to be able to flex up their bandwidth in a matter of seconds. This new game-changing capability also enables us to not only upsell our existing -- other existing customers, but also attract new customers with this powerful new service. What's fascinating about this product is that virtually every customer we talk to has the unique application that they're thinking of using this capability for, from data storage and retrieval to disaster recovery. And here's another customer application from our beta testing. A national mortgage provider with headquarters in Denver transmits mortgage data between their data centers in Denver and Tempe, including sensitive imaging of customer contracts. They're required by law to document and acknowledge the date and time when these transfers originate and complete, highlighting the criticality of a reliable network solution. However, here's the dilemma they faced. First, they needed to comply with the required handling of these transfers, but in a way as not to impact their current network environment. Second, they needed increased bandwidth to accurately move about a terabyte of data in an efficient manner. And third, given the periodic nature of these transfers, they could not cost-justify adding new fixed capacity. When this customer learned of our Dynamic Capacity solution, they were immediately interested in the opportunity to flex up their bandwidth and only when they need it, manage through our portal, and most importantly, without service interruption.

With Dynamic Capacity, they were able to expand their bandwidth, more efficiently process these transfers and better utilize their overall resources. Dynamic Capacity is very exciting and continues to differentiate us. In fact, industry analysts such as Vertical Systems, IDC, Current Analysis, and InterNetX all saying nobody else in the United States has capabilities like our service. We believe Dynamic Capacity is another way that we'll continue to grow our on-net revenue and help to drive our core services by leveraging our existing infrastructure and investment.

Now one final product update, which includes our latest Ethernet solution, which we call one-to-many connectivity, that offers ubiquitous national Ethernet coverage from a single connection point. As we shared last quarter, we expected to roll out this capability in the last half of this year and we're on track to introduce this product in the fourth quarter. For infrastructure customers that don't have their own network everywhere they need to go, they can now access just one of our locations and be connected to any building or data center in our national service area, and therefore, can avoid capital investments, reduce operating costs and more easily manage their business operationally to make the solution very attractive. We can do this when others are not because of the national platform and integrated back office we've built combined with our very robust Ethernet capabilities, which allow us to deliver a logical service that leverages the physical network we've already established. International carriers will be one of our targeted customer groups for this service, and I'd like to talk about one that's currently participating in a technical trial.

This carrier serves Latin America and operates an extensive broadband network in the Caribbean across dozens of islands, and provides connectivity for their customers to key points across Mexico, South America and the Southern U.S. With our new solution, we will interconnect this carrier using our on-net presence in Miami that will in turn, help their customers including major hotel resort chains, oil and gas companies and other key Latin American businesses to continue to all of our U.S. buildings and data center locations.

We believe our overall Ethernet portfolio, including this new one-to-many capability will continue to resonate with more and more carriers as they continue to adopt a more ubiquitous Ethernet environment and bodes well for the future opportunities for our carrier revenue.

So in closing, let me paint a picture of what we see for our future, which includes strong ongoing long-term demand drivers and the ability to strategically position ourselves with unique Intelligent Network and Ethernet capabilities. We believe these new capabilities provides a great opportunity, and here's an example of why we think we continue to win market share.

Imagine: You're a CIO, and you need to procure additional network capabilities. You're looking at 2 network providers. One can sell you a fixed network to serve your current needs and the other provider can sell you all the necessary network connections, but will also provide you network visibility and the capability to flex up your bandwidth on demand. So you're a CIO, which network would you choose? We believe, because of the incredible flexibility that these new capabilities provide, we will be able to go in and upsell our existing customers as well as win new customers as these new services open more doors and close more deals. While others are participating in the cloud environment, in a variety of ways we believe we're the only one who is designing, architecting and progressing with these new capabilities the way we are, which is why we expect to continue to further differentiate ourselves, break away from the pack and continue our strong growth track record. And with that, we'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Michael Funk with Bank of America Merrill Lynch.

Michael J. Funk - BofA Merrill Lynch, Research Division

Larissa, if you can just remind us of how you're pricing some of the newer products like the Enhanced Management and Dynamic Capacity? And then also, if you just had some thoughts on the number of buildings or percentage of customers it will be available to initially?

Larissa L. Herda

I'm going to let Mike talk about the pricing on Dynamic Capacity.

Mark A. Peters

Yes, so with Dynamic Capacity, customers will have a sort of nominal service charge for the future, but really having the access to the capability of the bandwidth that will be priced on a per megabit hour basis. So essentially, as customers double or triple their capacity of service, they will be presented through the portal with what it will cost them to upgrade that bandwidth. And then they can choose to move forward and increase that capacity. So it's a nominal service charge on a monthly basis plus the usage element.

Michael A. Rouleau

Yes, I'd like to add, too, if I can, this is a very unique product, as Larissa pointed out. So there really is no comps out there. So as we go through and deliver the services to more and more customers, we'll be doing some experimenting and see what the -- really the right points are for some of the pricing on this product.

Michael J. Funk - BofA Merrill Lynch, Research Division

Okay. And then just on the percentage of buildings or customers this will be marketed to initially?

Larissa L. Herda

We're focusing on all of our on-net buildings, so 16,000 buildings to start.

Operator

And we'll take our next question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Larissa, just following up on that last comment there. How are you getting on in terms of improving sales force productivity around selling into existing buildings to improve the return on investment as opposed to trying to get deals which involves significant CapEx? And there was a comment in the press release about Q3 voice services being impacted by some taxes and fees. Can you just give us a little bit more clarity to maybe size that for us?

Larissa L. Herda

Sure. So at the end of day, you have to sell where the customers are. We focus on our on-net buildings. We focus on what we like to call the blue line of our fiber networks because really, we are most competitive and have the best margins when we have fiber in the solution. So we're always focused on our existing buildings. Last year, we talked about some additional programs we put in place to make sure the salespeople were going back into the buildings. Because at the end of the day, salespeople sell what they can sell, and you need to always keep them focused. And we have been making some progress over the course of the year. It's obviously slow progress, but we like the direction that we're going in, in terms of the percentage of revenue that's being sold in on-net buildings since that's been gradually increasing very nicely. I would anticipate that would continue. But again, we're selling bigger networks. So you do have -- when you sell a bigger network, you will have more potential locations that we'll have to access and provide the -- that are not necessarily on the fiber network and provide the customer with a ubiquitous solution. So some good progress on the selling in the on-net buildings. And I think, with regard to CapEx, most of the CapEx that we spend today is success-based. Obviously, the more we can sell products like Dynamic Capacity in our on-net buildings, that's very capital efficient in a very good margin business because we don't really have to spend any money. If the customer already has certain products -- so for instance, a product that we sell that's called an E-Line service, which is our, really, our highest in Ethernet product, those customers provided, in most cases, those customers already have the capacity sitting there waiting for them to flex up. So we've got -- we've identified a lot of customers in that category where we don't have to spend any incremental capital to be able for them to flex up their bandwidth to take advantage of the Dynamic Capacity. Other customers who don't have those products, we will have to upgrade them to the newer products and obviously, make sure that they have the capacity that they need to be able to flex up to between those locations. But we've got a large number of our buildings that are already set up for this capacity with no capital will be required. The rest of the capital that we'll spend for new customers that don't have these newer products are all success-based anyhow, just like what we always do.

Mark A. Peters

And one other thing I would like to add with the buildings, too. We talked a lot last year about -- we have buildings, in particular with the wireless carriers and we're seeing them starting to increase capacity at those existing locations this year, too. So that also contributes to that on-net selling that we're seeing. I'd like to keep in mind that as we look at the capital efficiency, we're very careful to say that we're seeing a gradual capital efficiency. So I don't want you to run too fast with that metric even though at about 22% of our revenue, CapEx revenue this year, that's come down a bit from last year.

Larissa L. Herda

Yes, and I'm going to go back to the Dynamic Capacity because I'm sure there'll be lots of questions, other questions on it. Keep in mind, we're just giving this product to the salespeople now. We're starting the -- their conversations with customers we've had. Obviously, they've known it's been coming, but they hadn't really been able to talk about when with customers. So it will take time to be able to grow that revenue stream. This is a brand-new innovative product. It's what we would call a premium service. It's very unique in the marketplace. We really don't know what to expect, but what we do know is the conversations that we've had with customers, every customer we talk to can find a reason as to why they want to use this. And on an hourly rate basis, it's very economic for them to try it out. So there will be a lot of customers that we'll give this capability to that will start to try it out, and we think it's going to be somewhat addicting for them. So we'll see how that goes, but it really changes the entire conversation that we're having with customers. It puts us in a very different, just as I said at the end of my script, it puts us in a very different position with the customer because if they have the decision to buy a plain-vanilla Ethernet circuit from a couple of different carriers, and one provides this as an opportunity that they can use to flex up, all things remaining equal, they're going to go with the one that gives them the better capability. So we're pretty excited about that competitive position that it's going to give us for our overall portfolio of products.

Simon Flannery - Morgan Stanley, Research Division

And on the voice services?

Michael A. Rouleau

Yes, on the voice services, and then the taxes and fees and the fluctuations that we're seeing there, just keep in mind, the taxes and fees and the biggest piece that we're seeing in the fluctuation is the Feb USF. So that rate fluctuates quite a bit from quarter-to-quarter. And as we've talked to you about in the first -- and it primarily impacts voice services. So we talked about this in the first quarter where we had a big contribution for the voice growth rate in the first quarter due to a big [indiscernible] rate increase in the taxes and fees. And then there's a slight decline this quarter, so we didn't see that impact of voice services that we saw last quarter. Now we expect the rate to go down in the third quarter. You have rate and volume fluctuations, so it's hard for us to say it's going to be x dollar impact to voice services next quarter. But we'd expect to see a negative impact and we haven't specifically sized it, but we would expect to see some pressure there going into the third quarter.

Operator

Our next question comes from Barry McCarver would Stephens Inc.

Barry McCarver - Stephens Inc., Research Division

I know we talked about it a little bit in the first quarter, but could you give us an idea of the dollar impact into network services and the loss of that one customer? I'm trying to get an idea of what that segment would have looked like on a more apples-to-apples basis?

Mark A. Peters

Yes. So in the hit from those 2 big circuits, and the hit was, I guess, a couple hundred thousand dollars plus for each of those circuits, so let's just say roughly, about $0.5 million in monthly hit. And we took approximately a month hit in the first quarter and so we took full 3 months in the second quarter. So it's a pretty bit hit coming into this quarter. But again...

Larissa L. Herda

Which is why we even mentioned it.

Mark A. Peters

Yes, last quarter. So it's a kind of unusual big hit from those 2 circuits. So it's not a trend; that's why we called it out specifically. We just happened to hit -- took that big hit.

Barry McCarver - Stephens Inc., Research Division

Sure. Well, this is very bullish commentary about the outlook, which is great. But I'm just trying to get comfortable with what to expect in the second half of the year, given what we've seen from network services. And then you've got the $2 million in headwinds from Intercarrier. Are you still pretty confident that total revenue growth can maintain the kind of sequential ramp we've been seeing? Or is it going to be a little tougher in the second half of the year?

Mark A. Peters

Yes. Well, I think it's really important to look at where our growth engine's in -- where the growth engine is, and that's really in the data and Internet category and from enterprise customers. So when you look at our business, took a step back, get away from some of these fluctuations we're seeing, particularly in voice and network services, we're generating a 7% to 8% top line growth rate with very strong growth, 10%, almost 1% enterprise growth year-over-year, which is really where our growth engine is. Our enterprise business -- our enterprise segment that represents almost 80% of our revenue now has grown every single quarter for the last 10 years. And so that's really where all of the growth and investment innovation is going into the enterprise customer and into the data and Internet space. And so we're going to -- so the noise in the voice category and some of the noise in the network services category, the intercarrier comp, those are there; we're going to deal with them. But the real growth, the driver, the differentiation is really in the data and Internet. And then couple that with our 36% EBITDA margin and our growing cash flow in the balance sheet. So where the total growth rate goes, because of some of the noise in some of the other categories, we don't give guidance. And I'm not going to speak to that. But we see so much opportunity on the data and Internet category and enterprise space that we're very bullish on not just this year, but with the long-term trends.

Barry McCarver - Stephens Inc., Research Division

Okay. And then just lastly, if you touched on it, I missed it; I apologize. But the decline in SG&A expenses versus 1Q is a pretty sizable difference.

Mark A. Peters

Yes. So I mean, the impact there were really -- so we had improvement in bad debt expense and also in payroll taxes in particular, so those progressed throughout the year. So we had some benefit there on the top of the SG&A.

Operator

And we'll take our next question from Frank Louthan with Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Can you give us an idea on -- just back to the capital intensity, it's good to see that coming down a bit. I mean, to what extent is this more of a permanent shift in capital intensity declining and how should we think about that? If it's going back up, is it going to back up to more of the historical levels again or is this your -- the days of sort of 25% capital intensity behind us?

Mark A. Peters

Okay. So let me touch on that. A couple of things. One, I just do want to point out that the -- the investment for building additions and collocation that we talked about, we've put them in a -- in-market expansions are continuing, so we're continuing to make those investments. We're seeing some of the fluctuations year-over-year and some of the efficiencies are something we've talked about actually for several quarters here that are tied to the products and also to our one network. So for years, we've been investing in the infrastructure of our network to support the products that we've been talking about now for the last few quarters, support that one network that then allows us to deploy our Intelligent Network and our one-to-many capability. And a lot of those investments we've made over the last few years and those now going forward are going to be primarily really to support current demand in those products. As we look forward to the investment Intelligent Network, it's going to be more so in the IT and the development and all that capability as far as our systems and interface with our customers. So that's where we saw some of it -- when we talked about some of the projects we did last year that didn't repeat this year, it was in those areas to set us up for -- for the launches of those products that we've already launched or we're going to launch them throughout the rest of the year and into next year. So we're going to see some efficiencies where we don't have to replay -- we don't have to repeat in those categories, as well as some of the capacity we've put in place in anticipation of our one-to-many product capabilities. Now on other -- I look at -- so that's kind of the recurring capital theme now. I would keep in mind that if we see opportunities to invest in in-market expansions to either build or buy networks to expand our reach, in particular in more of our less mature markets to pass to more buildings and more customers, we'll do those as well. So we're seeing -- again, so nice efficiencies on the recurring piece of the business, but don't think that we're not looking at opportunities to make other investments as well.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay, great. And then just one clarification, looking at the tax and the fees on the voice side. What's the EBITDA impact from some of that going -- some of that reversing? Is it -- is this pass-through kind of revenue or is there an EBITDA impact from the lower revenue you're going for?

Mark A. Peters

Actually, a good point. I should have made that when I talked about the taxes and fees. And the taxes and fees are really 0 to slightly negative EBITDA margin. So to the extent that we actually -- if we peeled out all of the taxes and fees that go through the revenue, so just netting them out against the cost, instead of a 36-plus EBITDA margin, we'd be at a 38-plus EBITDA margin. So they're quite dilutive to the margin. So again, if those rates go down, that's a net contribution to the margin. But keep in mind it's -- we're not -- it's a subcategory of the taxes and fees that will be impacted.

Larissa L. Herda

And we also have volume that's going up, so we're selling more, a lot of services that those taxes and fees apply to. So the rate may go down, but the rate -- I'm sorry, the rate will go down, but the volume could go up. So we won't really know until the end of the quarter how the actual impact on absolute revenue will be. But we are -- it is, but the top line -- it's working against us, that the rate is going down for the quarter.

Mark A. Peters

Yes, for the right services. Now, that -- they get more pressure to provide services. One other thing on the capital-intensity I forgot to mention, over the last 2 years and then -- and we're starting to feel the benefit for it this year, is we've done, I think, a terrific job in our inventory and management processes for our capital equipment with our essentialized inventory system. And how we manage both our core deployments as well as our spares is also leading into efficiencies in our capital, both our deployment as well as our ability to buy it even more efficiently. So that's all contributing a little bit as well to the overall capital intensity.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

And just one last clarification on the voice revenue. It sounds like that's something that's more of a permanent going forward. Are you -- is your commentary isolated to Q3, just being a little bit more conservative? Or is there something special about the third -- something going on in the third quarter that we should not assume this is going to continue after that?

Larissa L. Herda

It actually -- it does. But the problem with USF is that the government decides what the rate is at the beginning of the quarter essentially or at the end of the quarter for the next quarter. So there are some quarters when it goes up. Prior to the past year and a half or so, it was fairly flat, and it never was a part of our discussion because it really didn't have an impact on things like revenue, being fairly flat. But there have been increases and decreases over the course of the past year and a half or so that are sometimes fairly dramatic that what we're trying to do is help investors understand what is going on with the core business, the health of the revenue stream, the health of sales. When you look at those metrics like the data and Internet growth and the enterprise growth, those are all growing very nicely, very strong core with this fluctuation in and taxes and fees that really has no bearing on the fundamental health of -- and strength of the business. And that's why we've talked about it more, it's because -- and we talked about it last quarter because last quarter, it was up a little bit. So it had a little bit more of a lift in revenue. So you kind of had a double whammy when it comes down. So...

Mark A. Peters

Yes, I guess you remember last quarter, where we actually pointed out that -- because we wanted to make a -- we had a big jump in voice services and we wanted to make sure that everybody understood that a lot of that growth, I think we mentioned that over half of that growth rate last quarter in voice came from an increase in the taxes and fees. And then so, that -- it's come down now. It's going to come down now at the end of the third quarter. So it's been in our revenue for years and years, but it's been pretty stable until the last year or so.

Operator

And we'll take our next question from Colby Synesael with Cowen.

Colby Synesael - Cowen and Company, LLC, Research Division

I have 2 questions. So, did the data and Internet services line item -- we've seen year-over-year revenue growth decelerate in the last 3 quarters. And if I look at the sequential growth that you showed in the second quarter, the 3.2%, which was up from last quarter, that's just -- let's call it roughly 13% annualized, which is actually pretty low. And I'm trying to understand what's been driving that deceleration? And the other point to that though, is that if that's going to be the big growth driver for the company going forward and we assume relatively stable trends in the voice and network services businesses, for your revenue growth to continue to accelerate, we should see the data and Internet services business revenue growth reaccelerate as well. And I'm just curious if my logical thinking is how you're thinking about that as well? And I have a follow-up question after that.

Mark A. Peters

You bet. I'll start with that, though. It really is, we're feeling the trailing effect of the timing of our bookings or sales activity. So as we entered the end of last year, kind of the seasonal holiday effect as we get into from Thanksgiving to Christmas and the New Year's, our sales trended down and we went back into a more historical, seasonal trend. Prior to the recession, that was difficult. And the recession kind of threw off all those seasonal-type things. So we came in with our bookings. They were slow at the end of the year. They were slow coming at the end of the year. They trended up at the end of the first quarter. And then we ended the second quarter with very strong bookings, our best quarter. But then we have been -- and so what you saw as the bookings trended up, you see the data and Internet slowly trend up, too, lagging those bookings. So there's a -- we have a -- we can have a 90- to 120-day lag in bookings to installation depending on the complexity of the application.

Larissa L. Herda

And even longer; it depends, now that we're selling bigger deals, too.

Mark A. Peters

Yes. So we're seeing that lag effect on the data and Internet growth rate. I mean, that -- it's as simple as that when we look at the data and Internet. And that's without clearly piling on the impact of and bookings of our new products that will start rolling out later this year and are feeling, seeing later this year and more so into next year. So that's what we're seeing in the data and Internet. Clearly, you're absolutely right. When we look at our overall growth rate, it's in the data and Internet space. It's where our innovation is where we'll really differentiate from our competitors. So it's the more complex of service, on-net, multi-location. That's where we differentiate. And frankly, that's where we get the best returns and the best margins.

Colby Synesael - Cowen and Company, LLC, Research Division

So your general sense is that the sequential improvement we saw on the second quarter from 3% to 3.2% based on the bookings trends, and which is really my second question, so I'll ask that now, too. But you're basically expecting revenue growth in the data and Internet services on a sequential basis to further accelerate. And just my second question though, just to kind of get it in there on the bookings, you give great high-level color that bookings trends are improving. It seems like every quarter, there's some type of commentary on bookings either being a record for the quarter, for the month or some type of visibility around it that gets us -- confident that revenue growth should continue to accelerate. But it's really hard. At least, I have a hard time putting that into my model and trying to quantify it because it's just -- it's qualitative, it's not quantitative. I was wondering if you can give us a little bit more context or what the financial implications are? In the last year, for example, you talked about I think, 17% or 18% or 19% year-over-year growth. I know this quarter, you're saying it's up sequentially and it's up year-over-year. But I think investors have a hard time trying to figure out exactly what to do with that statistic or data point that you give. And I was hoping you could just give us a little bit more detail?

Mark A. Peters

We feel that the growth in the bookings is a very consistent trend. So it's not just something that was an aberration when we look at our metrics. And when we look at the quarter, like we said, we're -- as we talk about it, we're afraid to say it's our best quarter ever because we're afraid to overbuild your expectations in the future growth rate. So as Larissa mentioned, we feel very bullish about the business and our future trend.

Larissa L. Herda

But we don't focus on quarter-to-quarter type of [indiscernible]. We're a long-term -- this is a long-term view. And everything that we do is based on long-term growth trends. And you're always going to have fluctuations in the quarter. For instance, this last quarter had 1 customer, 2 circuits that caused some noise in the quarter. That's hardly what I would call an impact -- a trend in the business, right? And we think that investors should be more interested in what the overall holistic trends are. And...

Colby Synesael - Cowen and Company, LLC, Research Division

I was going to say, based on the bookings growth then that you had in the second quarter, assuming everything else remains flat and churn is stable, would you then assume that longer term, so not necessarily the third quarter, that we should continue to see revenue growth accelerate?

Mark A. Peters

Yes, right. So we're not going to talk about specifically, the third quarter. But our trends and our expectations is that, with our bookings trends, with our product innovation, the differentiation that we would expect to see over a period of time -- look, we don't give guidance; I'm not going to say, "Okay, over this period of time or this quarter" -- more growth and faster growth in the overall business as a result of that.

Larissa L. Herda

And notwithstanding a fluctuation here or there in a quarter like intercarrier comp going down, which the whole industry is going to experience in the second half of this year. Or various USF fluctuations, which really have no bearing on the overall business. They just are what they are. Again, all of our trends are good. And so -- with the exception of network services, which has been a declining revenue stream, a slowly declining revenue stream. But the core business services, the data and Internet revenue stream, has continued to grow and the enterprise business continues to grow very nicely, and we would expect that.

Operator

We'll take our next question from Tim Horan with Oppenheimer.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Larissa, what metric are you looking for? Maybe just a signal that the economy is slowing down if your customers are pulling back at all? What should we monitor from the outside?

Larissa L. Herda

Well, you know, the last recession, what we saw we actually thought in the fall of 2007, we saw immediate big disconnects, fairly rapidly. Now, of course, those were somewhat limited to the mortgage industry that was decimated rather quickly. But you could see -- you saw over time, you saw customer buying, patterns changing, which we have not seen. You see disconnects increasing. We haven't seen that either. We're right on top of what enterprises are doing. The first recession that we went through, as the management team, we had mostly carrier revenue. So it took us a while before we actually saw the impact of what was going on with enterprises because we had 75% or so of our revenue coming from carrier customers. Today, we've got that much revenue or more coming from enterprise business. So you really see things very, very quickly. So it's -- I think it's interesting because we're -- again, I think a lot of the commentary that we've been hearing in the marketplace this quarter, a lot of the commentary that we've been reading about is coming from very large companies that have most of the market. So they are trying to hold onto the market and understandably, having a hard time doing that because they've got -- it's a very competitive marketplace. We're one of the companies out there trying to chip away at their market share. So we're really -- we're market share takers and we're pretty good at it. So when you have customers out there who are saying, "Gosh, we really need to look at our networks. We need to become more efficient. We need to do all this stuff with cloud." Well, they're putting RFPs and most of them have services today with the incumbents. And so, it's an opportunity for us. And it's an opportunity for any competitive carrier, actually, out there to go after those businesses. Because typically, a company like us, we're providing a much more cost-efficient solution for them. So it makes sense to me that as customers are trying to figure out how to do more with less, regardless of what the tone is in the marketplace with regard to the economy, we're seeing plenty of opportunity out there.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

And then lastly, you're fairly under-levered. You're producing a lot more free cash flow. Sales are really strong. Why did you pull back on the stock buybacks? Particularly when we saw in the last quarter, a private transaction firm, at multiples much higher than you're at now?

Mark A. Peters

Okay. With any of the programs we look at, we're just very thoughtful and measured and very opportunistic in executing the program. And so that's just the approach that we've taken. And we're going to just maintain our discipline as we continue to look at executing that program.

Larissa L. Herda

Yes, we're not in a rush. If we decide that we want to take a pause just to see what's going on in the marketplace for a while, that's what we're going to do.

Operator

Our final question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

Given that you guys are such a -- you have such good visibility on your demands, have you thought about instituting a continuing dividend?

Mark A. Peters

There's a time for everything. So we've announced a stock buyback program. And the time may come at some point for that. But clearly, we don't think we've reached it quite yet.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then on the fiber to the tower, you guys mentioned earlier that you guys were seeing increased demand from the carriers that you had contracts with. Are you also seeing other carriers as they launch out the E starting to look at put -- starting to, I guess, sign contracts to go on those same towers that you already have linked?

Larissa L. Herda

We have proposals out there for various different tower deals, but there's actually been a slowing of those types of deals out there. One of the reasons why one of the capital investments that we made last year, we had a lot of those. We are seeing carriers start to increase the capacity to the cell sites on those deals, which is really what we were hoping for. And that's slowly starting to happen now, too. And those are obviously very capital efficient because we provided Ethernet to the cell sites, and we can just turn those up without additional CapEx. So that's a -- we'll start to see, I think, a slow ramp of that type of activity. So and just as -- I wouldn't say -- I wouldn't expect anything big coming from that segment. As you know, we've only done the cell site deals to the degree that it made sense for -- in the different markets that we have where we had a lot of fiber reach or it helped us get to other locations and it made financial sense to do. We didn't do all of the ones that we probably could've done. A lot of that is part of our management of our portfolio of customers where we don't really like to have too much exposure to any one customer segment. We like the exposure that we have to this segment. It's healthy. It will be, to some degree, the gift that keeps giving over time. But we're not too leveraged to it, which we think is wise.

Mark A. Peters

And if I could also add, I think a part of your question, Donna, was, are we getting more revenue from these routes than just from the original carrier, and why it might not be another carrier? We are seeing, because we built them to, like Larissa mentioned, to the buildings -- buildings also can be a cell site. So it's from other enterprise customers, or we pass to other buildings that we could drop off and provide services. So we are seeing some of that as well from the routes that we've built under the clinical wireless backhaul investment.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And, Mark, just one quick follow-up question. The intercarrier compensation this quarter sort of spiked up a little. Should we sort of, as you guys step down in the third quarter, should we use that more 7.6%, 7.7% seemed to be much more of a consistent rate. Is that sort of the revenue amount we should use to step it down?

Mark A. Peters

Yes. I mean, the intercarrier comp can fluctuate from, again, volume, not just rate. So that can impact it. It's not unusual, as you know, I think, from -- to have disputes. It's one of those kind of arbitrages. There's always some disputes going back and forth. So that can cause some fluctuation. So I'm not sure if I'd look at it necessarily, the second quarter, as the run rate. But it's in the ballpark, I would say, give or take. And I think it might had a dispute or some favorable settlement in the quarter, too, that could have helped it a little bit. So it's in the ballpark or it might be just slightly higher from our run rate.

Larissa L. Herda

All right. Well, thank you, everyone. We appreciate you taking the time with us today. And I hope you have a good day. Thank you for supporting tw telecom.

Operator

That concludes our program. Thank you for joining us.

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