tw telecom's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: tw telecom (TWTC)
This article is now exclusive for PRO subscribers.

tw telecom Inc. (NASDAQ:TWTC) Q4 2011 Earnings Call February 9, 2012 9:00 AM ET


Larissa Herda - Chairman, CEO and President

Mark Peters - EVP and CFO

Carole Curtin - VP, IR


Simon Flannery - Morgan Stanley

Frank Louthan - Raymond James

Barry McCarver - Stephens

Colby Synesael - Cowen and Company

Dave Coleman - RBC

David Dixon - FBR Research

Tim Horan - Oppenheimer

Donna Jaegers - D. A. Davidson

Michael Funk - Bank of America Merrill Lynch


Good day, and welcome to tw telecom's fourth quarter 2011 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.

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 where you can find our press release, supplemental quarterly information and SEC filings.

Before we start, I'd like to draw your attention to our Safe Harbor statements 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 future expected 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 the 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 discussions 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 Herda

Thanks, Carole. Hi, everyone, and thank you for joining us. 2011 was a great year for us, financially, operationally and strategically. Let me recap some of our key achievements.

Starting with our financial accomplishments for the year, we accelerated our revenue growth to 7.4% in 2011 from 5.1% in 2010 which is 45% expansion of our organic growth rate. We grew our data and internet revenue over 18% in 2011 and we ended the year with a strong growth engine representing nearly half of our total revenue.

We also grew total revenue for the 29th consecutive quarter which speaks to the strength of our model, the consistency of our performance and the validation of our strategy. And we achieved low revenue churn of 0.9% for the year as well as 0.8% in the fourth quarter which is the lowest since we started reporting its metric over 10 years ago.

We attributed this low churn to the attractiveness of our product portfolio, ongoing retention efforts and our continued success with the overall customer experience.

Turning to the bottom line for the year, we grew modified EBITDA margin 7.4% and we delivered a strong 36.4% modified EBITDA margin which is particularly impressive for an expanding growth company like ours. We increased our pre-tax net income by over 100% and delivered $58 million in net income reflecting ongoing financial strength in the business.

We also have expanded levered free cash flow by more than 10% as we increased cash flow margins to 6.7%. Additionally we continue to return value to our shareholders in the form of share repurchases which totaled $59 million as we completed one share repurchase plan and announced another multi-year plan for $300 million in November.

In addition to those financial accomplishments we advanced the business strategically positioning us for more growth in 2012 and beyond. Here are some highlights of those accomplishments. We grew our fiber-connected building additions by over 2,200 which is an increase of more than a third of those added in 2010. This was a company record reflecting our momentum in customer wins for connectivity to enterprise self-side and data center locations.

We also strategically advanced new products. This included great success in selling our converged services that we launched in the middle of 2010 which contributed to our strong 2011 revenue growth. Additionally, we added product enhancements to Ethernet portfolio that contributed to our ongoing leadership position in Ethernet solutions.

Additionally we designed, developed and introduced new network capabilities including the first phase of our intelligent network solutions. We believe our roadmap for these solutions will lead to greater differentiation and continued ability to take market share.

Last but not least, was the fact that we increased our Net Promoter Score to its highest level ever. This key metric not only measures our customer satisfaction and loyalty, we believe it played a key roll in propelling our revenue growth in 2011.

So let me summon 2011 as a terrific milestone in our continuing growth story. A year ago, we talked to you about breaking away from the pack and we believe that we clearly have done that with these accomplishments which demonstrate our ongoing growth and cash creation story, our differentiated market position and our ability to execute all of which were driven by our ongoing strategic choices. And of course, none of this would be possible with our most strategic asset which is our incredible team of employees. So let me say thanks to our team for breaking away from the pack and putting us on such a strong trajectory for 2012 to help our customers make their operation function better, faster and easier.

Now I'll turn the call over to Mark.

Mark Peters

Thanks Larissa. Today I'm going to provide a few comments on the fourth quarter including bookings, demand and overall customer sentiment, some insights on our 2012 capital allocation strategy, and some color on margins including a remainder regarding seasonality.

Let's start with the fourth quarter. We delivered another strong performance that contributed to our accelerated revenue growth for 2011.

Now, some revenue highlights for the fourth quarter. Total revenue grew 8.2% year-over-year and 2% sequentially, as data and internet continue to be our growth engine. Data and internet revenue represented 49% of our total revenue, up from 45% a year ago and grew more than 18% year-over-year. Within data and internet revenue, our strategic services which grew 27% year-over-year and represented about a quarter of total revenue. This subset includes our Ethernet and VPN data related products.

Our voice revenue grew 6% year-over-year due to growth from converge and dedicated voice services, boosted by the volume and rate growth and taxes and fees and partially offset by churn. And our services revenue declined 4.5% year-over-year primarily reflecting churn and reprising for contract renewals largely in transport services, which outpaced growth in high capacity and co-location services. Intercarrier compensation at 2% of revenue continues to represent a very small aspect of our business. And you can see our press release for further guidance related to this item.

Now, move to our fourth quarter highlights for margins and our bottom line. Modified EBITDA grew 7.3% year-over-year as we delivered a strong 36.4% modified EBITDA margin. Pre-tax income grew 40% year-over-year primarily driven by modified EBITDA growth as we delivered $16.4 million of net income, which declined about 6% year-over-year reflecting a higher effective tax rate.

However, due to our net operating loss carry forwards including about $1 billion in federal NOLs, we pay nominal cash taxes comprise primarily of alternate minimum taxes and state income taxes. We also delivered a 7.3% leverage free cash flow margin as we continue to generate cash closing the year with $485 million of cash equivalents and short-term investments even after using $59 million for the full-year under our share repurchase programs. To sum up the quarter, revenue growth was strong, margins were solid and we had healthy contribution to the bottom line and the cash flow.

Now, let me turn to booking, demand and overall customer sentiment. We followed our 2010 record level of bookings with increased bookings in 2011 through sales to our sweet-spot customers and contribution from our indirect sales channel. As it's typical for the end of the fourth quarter, we experienced seasonally lower sales reflecting the impact of our holidays and fewer days of selling opportunities.

But as we headed into 2012, that activity has picked back up to strong level of bookings. We started 2012 with the strong sales funnel with many n opportunities across our portfolio, especially in the areas of our strategic Ethernet and VPN services, which includes our newer products and services. Lastly, turning to customer sentiment, it remains positive which is why we believe that our 2012 goal of further expanding our revenue growth rate again this year is possible.

Now, I'd like to shift over to our 2012 capital allocation strategy, which we see as one of the most important strategic decisions. As part of that decision, given our market opportunities on strategic differentiation, we continue to view investing in our sales as our highest priority.

In 2011, our strong financial and operational performance and healthy balance sheet allowed us to simultaneously invest in the business, execute share repurchases and maintain flexibility for strategic opportunities. We executed our 2011 capital allocation plan based on a balanced and disciplined financial approach that allowed us to deliver impressive revenue growth, maintain strong margins, drive continued strong cash flow and further expand our return on invested capital.

As part of that balance approach, in 2011, we invested $343 million of which about 80% which were success based opportunities to serve customer wins to build into new location as well as expand our network capacity including our central offices and IP backbone. And about 20% was for the longer term initiatives including strategic expansion and product development, as well as corporate and IT spending that continues to support our product innovation, enable our customer experience and drive ongoing productivity.

Our goal in 2012, is to continue with similar capital allocation plan to 2011 design to invest in the business to enable current and future growth, leverage cash flow to continue to execute the share repurchase plan we announced in November and maintain flexibility for strategic initiatives such as opportunistically expanding our network reach. As we execute this plan, our goals include expanding our revenue growth rate, delivering ongoing strong margins and growing cash flow.

For 2012, we expect to invest $345 million to $355 million and capital investments with the vast majority and success-based capital. However, as always if we buying greater sales opportunities and forecast or identify other expansion opportunities. We may increase that guidance later in the year. In a moment, Larissa will discuss further, where we are investing a new product capabilities and features.

Now let me touch on margin for a moment. As I mentioned last quarter, we deployed numerous products and features to meet our customers rapidly changing requirements, including the development and introduction of our intelligent network. As part of these growth initiatives, we've accelerated our product introductions over the past couple of years to continue to break away from the pack.

With higher velocity of product and service initiatives, the company and by the development training introduction cost, primarily impacted operating cost, which naturally suppressed overall margin expansion in the near-term. Another item that has held back margin expansion is network expense, both due to the higher volume and support of our growing revenue and higher rates being charged by the incumbents.

Our ability to continue to deliver our consistently strong margins is largely due to the over 15,000 buildings we have connected with our own fiber. And remember, about two-thirds of our revenue is fully on our own network as a result of these building. Speaking specifically to our fiber connected buildings we're really good at growing our reach.

In fact, over the last two years we increased our base by nearly one-third, growing to nearly 15,500 buildings. As a result of the rapid increase in buildings, we're doubling up our ongoing initiative to drive more revenue from our existing buildings, as we have so many untapped customer opportunities. This large base provides us fertile ground for selling to new customers without the need for increase network expenses, which results in very high margin contribution.

Considering those items in the context or ability to maintain our strong modified EBITDA margin and expanding topline in 2011, I believe very much demonstrates the growth and the strength of our model. Also one reminder on margins, due to the resetting of payroll taxes, we expect that these costs will increase sequentially by about $3 million in the first quarter.

In closing, let me emphasize that the key to our long-term success has been our balanced approach, to revenue growth with strong margins in cash flow as well as critically evaluating capital projects against return on investment objectives. As we entered 2012 this approach has not changed as we continue to strive to deliver even more shareholder value.

With that, I'll hand the call back to Larissa.

Larissa Herda

Thanks, Mark. So today I'd like to spend some time sharing our 2012 priorities. To do that I'll start with, where we always start and that's with the customer. I'll take you through our customers rapidly changing needs and drive for greater operational efficiency, their growing reliance on the network, and as a result the growing demand for our services.

Our customer requirements create an important foundation for understanding our priorities for 2012 and our goal of increasing our revenue growth. So I'd like to touch on three key areas, including first, how we expect to leverage our current capabilities in leadership. Second, new products and solutions we're developing. And third, how we're further leveraging our cloud and data center strategy. Let's start with our customers evolving needs, because that's impaired us to being successful.

Customers' networks have never been more center stage to the success of enterprise businesses than they are today. Their networks are being strained even as they're rethinking their approach to core operating functions, critical business applications and network design, to allow them to gain more efficiencies and drive greater margin in their operating environment. These changing needs as well as the growth in network applications and the adoption of cloud delivery platform are all part of the growing demand that's putting more requirements pressure on their networks.

In addition to these challenges, their growing security concerns, as applications move to the cloud and pressure to achieve greater productivity through automation. As result of all these factors, businesses continue to be challenged with growing bandwidth requirement and changing traffic patterns. In fact Cisco recently predicted that more than 50% of all application workloads will be in the cloud by 2014.

So customers have to do more, do it better and do it faster. And at the same time manage cost and maintain reliability, which provides a great opportunity for us to provide market leadership and grow our business. Based on these customer requirements let's talk about how we plan to continue to expand our revenue growth.

First, let's start with leveraging our current capabilities and leadership to continue to grow revenue. Over the last three years we've expanded our revenue growth from 4.5% in 2009 to 5.1% in 2010, and then to 7.4% in 2011. That's a 45% increase in the growth rate in just the last year and that's been largely driven by our data and internet capability.

As part of those data and internet capabilities, let me provide some color on our leadership in Ethernet solutions, which is a key growth area where we're clearly outpacing the competition. We've not only been successfully on this area, we believe we can continue our strong growth trends with our current assets and capabilities in areas of differentiation, including our integrated national network over 15,000 fiber connected buildings, key relationships with medium-to-large enterprises, innovative solutions like fractional 10 gig Ethernet and seamless relationships with other top Ethernet providers, where we can extend our reach and footprint with enterprise customers.

To help you frame this opportunity, let me share some data by industry analyst. First, we are ranked third in the nation for Ethernet port share by vertical system. Now couple that with predictions by IDC and Frost and Sullivan of five-year Ethernet revenue CAGRs from roughly 20% to 30% and this paints a clear picture of our ongoing opportunities.

We believe our capabilities and leadership in Ethernet together with our strong success in VPN and converge will continue to be our primary growth driver this year, as they were in 2011. As these services are our bread and butter and we play successfully every single day.

Now let me talk about areas we're developing to drive future revenue growth. One area is our ongoing development of our intelligent network services. Think of the intelligent network as the brains to leverage our strategic Ethernet and VPN services, making them even more beneficial to the customer. These are capabilities that add the intelligence to our network that provides new opportunities for us to help customers manage their network, enable business critical applications as well as adopt new cloud-based services with confidence.

And one of the intelligence networks services includes customer's visibility into their network, to what we called enhanced management. With this capability, we are providing end-to-end network visibility, which means we're providing unique real-time data with great granularity, allowing customers to pinpoint performance on any network segment.

By contrast, other providers that offer this visibility just between points of presence, our solutions provide visibility doorstep-to-doorstep, which is scalable to all of our managed service customers. By the way, we will provide enhanced management not only for VPN services, but also for Ethernet services which will be a unique offering. We've also begun developing a Phase-2 of the intelligent network to provide dynamic capacity of bandwidth, when and where customers need it.

When customers talk about better, faster and easier network solutions, dynamic capacity is the key service. This capability will enable customers to increase bandwidth real-time allowing them to better react to traffic spikes, bandwidth hungry applications and unforeseen events. The best thing about this solution is that the customer is in control.

Customers will be able to use our portal to increase bandwidth or even establish threshold for the intelligent network automatically delivers more bandwidth, when and where customers need it. We expect our self-service feature for completely automated capability will be unique in the industry.

Now let me talk about our cloud and data-center strategy and how we believe that will drive future revenue growth as well. Today, the majority of our customer's networks will remain within the enterprise. But that dynamic is changing. The growing bandwidth demand and increasing velocity of application developing are driving enterprise customers to connect to third-party data centers as part of their overall network solutions for hosting solutions, co-locations, disaster recovery and cloud computing services.

As a result these data centers are in turn evolving, in order to address how enterprises want to buy services. And they need network providers that can evolve their networks in order to match those requirements.

We believe that the future for serving enterprises isn't addressing the rapidly changing consumption model. Data centers are no longer just about providing customer space and power for locations outside of their own environment. The future is about delivering applications that enterprises can purchase by the hour, by the megabits or some other fashion to address their need to effectively consume resources.

For instance, with Sunguard, you can acquire disaster recovery, backup and storage service and be charged by the terabyte. With Amazon, you can spin-up additional server capacity in minutes and only get charged by the compute cycles you use. And with Equinix, you can connect to hundreds of these new suppliers like Google, Microsoft, and many more and pay by the application.

So there's a variety of different players participating in different aspects to the data center, all working to serve this growing data center trend and changing consumption patterns. Which leads to the question, how are customers going to get to these services in a secure, reliable and efficient fashion?

Enterprises are enthusiastic about the cloud that they cannot trust the mission-critical applications to best efforts internet. Likewise, enterprise customers can't wait 45 days for additional network services, particularly when they need it right now and they may only need it for 30 days. They want flexible and immediate bandwidth and they want to have visibility to their networks end-to-end including for their network that ends up in the cloud.

And that's where our combination of intelligent network services will address their needs. Utilizing our enhanced management and dynamic bandwidth capacity solutions together can uniquely solve customer's challenges and needs, as these capabilities built upon one another to provide the customer the greatest capabilities to evolve their networks where they need to go.

So as you can see with about 350 third-party datacenters connected to our fiber, combined with the recent announcements that we have made with Equinix and Amazon and our 27,000 enterprise customers, how we're continuing to deepen our relationships with enterprises, date centers and cloud providers, as we works to provide comprehensive network solution to participate in the growing demand. And the most important aspect of leveraging the cloud opportunity is that we have the network to take this traffic back to enterprise locations, which are outside of the data center.

As I've said before, datacenters and the cloud can not exist without the network. Therefore, as reaching enterprise locations is the corner stone of our business strategy. We're in a terrific position to continue to capture this growing opportunity.

To amplify our strong position here's an interesting piece of information to consider. A recent Cisco study indicated that there is about two-and-a-half times the amount of traffic leaving the data center and going to the enterprise location than there is between data centers, further highlighting a key position of extensive fiber connectivity to enterprise location.

So you can see why the network is so critical for the cloud and data center strategy to be successful. And why we expect to further grow our revenues by serving enterprises and cloud data center needs. So I hope that gives you a sense of how we see the marketplace and how we've selected our top priorities for this year.

We're very pleased with our results for 2011. And we're looking forward to executing on our priorities for 2012. So stay tuned as we will provide more color throughout the year on our progress on these initiatives.

And with that, we'll now take your question.

Question-and-Answer Session


(Operator Instructions) Our first comes from the site on Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

I was interested in the capital expenditure guidance for 2012. You're only taking it up a couple of percent at the midpoint and you had revenue growth as expected to accelerate. So we should be seeing a nice drop in capital intensity, even though revenues are accelerating. Perhaps you can just expand on why you fell comfortable with that? And I think it may relate to your focus on selling more into your existing buildings. And could you just expand on some of the initiatives to take advantage of that opportunity?

Mark Peters

Thanks, Simon. Honestly, I think you've summarized it quite nicely there. We've put on so many buildings over the last few years. And like I said, in the last couple of years we've increased our base of buildings by a third, up to about 15,500. And our focus always have been on selling on-net and that's why two thirds of our total revenue it comes entirely from services we provide with buildings. So that always in our focus, but what we're doing this year is keeping focusing on expanding our reach going to new locations but really redoubling our efforts and our program to selling into that existing opportunity.

And then obviously when we sell under those existing net buildings we don't have to spend capital to get to them and it really contributes to both EBITDA margin and to the overall cash flow contribution margin. So that's a big piece there. Now having said that and as I said in my prepared remarks and we've done this in the past, we see other opportunities this past year. We've got some opportunities to expand our reach by buying some dart fiber. If we find some more those opportunities or more sales opportunities to expand to reach to other areas, we're not going to hesitate on expanding that the capital guidance. But right now we feel that's the right place to start the year.


Our next question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James

And just sort of follow-up on Simon's question. Can you give us some ideas of what exactly you're doing as far as redoubling efforts to selling the buildings, I know it's that you've something done in the past and have in hand as much success with it. Are you going be selling may be focusing more on a wholesale special access to other carriers when coming in the buildings. What sort of things do you found that you think are going to be effective in that?

And then secondly, if you could comment on, as in your press release you mentioned some intercarrier comp revenue going away with USF changes, can you give us a sense for how much offsetting cost is also going to go away? What's with the net effect would be to EBITDA that going to be positive or negative?

Larissa Herda

So first on the intercarrier comp, Mark, why don't you respond to that one.

Mark Peters

And again, interesting I found that we're the only one to spoke about this. But it impacts our carriers.

Larissa Herda

Some carriers, it's interesting because you have carriers either your wholesale carriers that sell LD, there are some of their cost will go down but your some wholesale carriers who sold LD that terminated it as IP. And so they were paying recent comps, so their costs are going to go up, we think because they are now going to have to pay interstate access rates.

You're going to see with carriers going to see some revenue loss, some expense loss. But I think just everybody in the industry who sells the voice services is impacted by this. So we put the number out there because I think unlike a lot of other carriers, we've always broken out intercarrier comp as a separate line item. We've done it I don't know it's only 2% of our revenue. And we just wanted investors to know that how small it was, quite frankly. And so therefore we put out there.

So you're going be probably be hearing some other carriers on this probably this quarter or next, if they have to do it by next quarter because everybody is impacted at the same time.

Mark Peters

So from the number standpoint we know that's small number. Our total intercarrier comp is only about 2% of our revenue. This order that takes it, it impacted about half of that and starting the middle of the year that's going to go away over six-year timeframe. So it's a really a small amount and so just thought that we call it out because it's always been there and we've had some questions.

It's pretty high margin, but we do have some expense that go away. As a result, it's hard to quantify that. There'll be some impacts in different places. It's pretty high margin. The other benefit of this frankly is that we occasionally get here with big disputes because there was a lack of clarity on this and the arbitrary is going out. So I think that's to going clear up some negative hits we've had over the years too. But again, the small amount starting to move over a year, some going to go away and it's going to trail off over about six years. So not a big impact, but we just wanted to provide that clarity.

Frank Louthan - Raymond James

So I understand it's not that big of an impact but its margin you could look at it, as its maybe if half of that's going away, its 2% or 3% of EBITDA going away. Can you give us some ballpark of an idea of how much of that is offset by the cost disappearing? Is it completely offset or virtually all or how?

Mark Peters

It's high margin it's over 50% of the EBITDA margin but again if you have $2 million about going away this year and that's the second half of the year. The dollars aren't that big and there's other fluctuations in there comparable volumes and all that sort of things too. So again on the scheme of things, we are a $1.4 billion company, couple of million dollars it's not a big impact.

Larissa Herda

Even on the margin?

Mark Peters


Larissa Herda

Looks at it this way, the price increases that we got from the incoming carriers had a much bigger impact on our margins by far. And you've seen that and we still mange to grow our margin over the past few years as those cost increases have come into play on the buildings and redoubling our efforts, so you know you can't do so many things at one time and very often when the sales people are out there selling they're focused on getting a deal.

Our competitive advantage, our differentiated market position obviously is when we provide a solution to customers with fiber in the solution. And that's the reason why so much of our revenue is 100% on our fiber and why our margin is so high

Now with that said, we very often get those first deals in the building. Over the past couple of years alone we've added over 4,000 buildings. That's more building than many other competitive players have all together. And so it's impossible for us to have gone through and called all the revenue out of those buildings. Not to mention, our other buildings that we probably could do a better job on that as well.

So towards the end of last year, as we were looking at our goals for this year and we wanted do, we decided that we needed a little bit more emphasis. Sales people are generally paid a higher amount for our net services, but we wanted to total even more in that favor. So we affected product offerings, compensation, some of the tracking mechanisms that we were using, promotions that are tailored to individual buildings and the various different competitors there.

We're doing a lot of different things to refocus and redouble our efforts in that area. We've identified a lot of opportunity in the buildings. We think that we have more buildings than any other non-incumbent carrier in the United States connect to our fiber. We still have a fairly overall low penetration in those building. So we think that it's a very capital efficient way for us to go after the business.

Now, keep in mind, a lot of the revenue that goes into buildings also goes to off net buildings. You're going to get off net too, because you need to go where the customers are, by putting and I think a bigger focus this year, generally as a company. When we focus on something, we do very well at it. I'm pretty excited about the potential impact and it takes time, obviously, for the impact.

We also find quite frankly that our win ratio for our net solutions is much higher than when the sales people go and try to sell thing that don't have as much of a fiber solution. And you know in that the sales people try to sell whatever they can. And so some times they get a little distracted, because they see a big deal. But the reality is we don't win big deals, if we don't have a lot of fiber in the solution.

So I think that this might actually help our win ratio. We'll see as time goes on. And certainly we have a much better competitive position. So overall, we think it's just this huge number of buildings that we have, redoubling our efforts, and really putting some additional focus in this area. We were expecting that over time, we'll start to see some really good results from it. But again, nothing happens overnight in this business. But we think it's the right strategy.


And the next question comes from the site of Barry McCarver with Stephens.

Barry McCarver - Stephens

So I guess maybe, Mark, back to the question on EBITDA with the little bit of margin pressure we've seen as TW has very successfully accelerated revenue growth on top of the intercarrier comp. Are you pretty positive that you're going to see margin expansion in 2012 with those two factors?

Mark Peters

We take, as you know, a very balanced approach to the revenue, the EBITDA margin and the cash flow margin that we don't want lose side of either. We deliver pretty nice levered and unlevered free cash flow. So we've been doing a lot of investing for growth for both the current period and for the future.

We talked a lot about the intelligent network and those investments there. And there's a lot of other investments we are making along the existing products. The Ethernet products continue to differentiate and given more opportunities to take share. So that's not stopping this year. And there's a lot around that that I talked about. There are good things really to continue our track of being a growth company. And that's really where we're focused.

So on a balance approach, the margins have been very strong. I expect the margins to expand gradually overtime. But we think the right thing to be doing now is to be investing for the growth. Investing in products and capabilities and the customer satisfaction, truly maintain the leadership position that has enabled us to grow the topline for the last 29 consecutive quarters.

So I guess, and while you know we don't give guidance and I'm not going to give you guidance on the EBITDA margin. We're going to keep delivering very strong margins. I'm not going on the call commit to saying they're going to expand or they're going expand by x-percentages points. The longer-term timeline is positive.

Barry McCarver - Stephens

And then, in the press release and in your comments, you had talked about contract renewal pricing for the transport service. Could you give us just a little more color on what that pricing looks like? And is that just primarily from some competitive pricing?

Larissa Herda

I'm sorry, what pricing?

Barry McCarver - Stephens

The transport pricing in the press release, you mentioned there a slight decline on the revenue line from contract renewals. I just want a little more color on that?

Mark Peters

With the transport and that's largely from the carriers, those can be lumpy. I mean we always have contract come up for renewal or specific circuits or specific networks that we're selling to customers and carriers in particular, that will come to current pricing. I can't give you a percentage on what those are. But those can be lumpy. And so that's kind of a nature of the carrier revenue and the transport business.

Larissa Herda

Yes. I mean the reality is DS1s and DS3s are going down. Waves are going up. And so you're going to see them in the separate category. Obviously you're seeing data going up which includes our Ethernet product portfolio. So you know there is actually some good news, I think a lot of good news and that is that on our network services revenue line, a big chunk of that is from the carrier customers.

And really prior to this past year, we didn't see the carriers prolifically trying to sell Ethernet services. And then there was a reason for that because it's hard for them to go to their sales force and buy Ethernet from a company like us when they had to have a solution that was more ubiquitously an Ethernet solution and until the larger incumbent carriers were offering Ethernet solutions on a wholesale basis, you know other types of carriers that don't have fiber into a lot of buildings really couldn't offer those services.

This past year there has been a more incoming carriers' that offer those services, but the reality is that their pricing is not particularly attracted so companies in order to be able to compete are going to have to be able to have something else to build with their solution, fortunately for us we have so much fiber and so many buildings on the network. We're able to leverage those types of offerings.

But we're getting a lot more Ethernet orders coming from the carriers as a result and we would expect that just to continue to grow. So that will help to offset them not buying as many DS1s and DS3s, and we think there is shift that's going to be going on over time to more Ethernet services from the carriers.

Barry McCarver - Stephens

Is it safe to assume that that shift is probably pretty good for your margins?

Larissa Herda

It's excellent for our margins because we sell the Ethernet, its primarily on net to customers. For international carriers we can provide them Ethernet connectivity, but we also will be providing connectivity to these carriers, we don't have to connect to them in every location around the country. We can provide one-to-many locations. So we have a very efficient strategy for connectivity. Companies that want to buy Ethernet services from each individual carrier, even if they go to a common location they generally have to develop contractual agreements. And there is a whole lot of things that go along with that, it's a very time consuming process.

But with us, we can manage the whole network ubiquitously across the country. So it's a very attractive solution for companies who don't have network in the United States. And obviously we all know Ethernet is very scalable. It's very easy to increase the bandwidth and the type of solutions we provide are emendable to that. So yes I think just generally speaking it's a very positive trend. It's a future trend. It's going to take time because the carriers win more Ethernet services. Lot of them are still learning.

We've been doing Ethernet since 2002 or something like that and we've been doing it longer than anybody in the industry. So we know how to do it. And we've been teaching carriers how to do it quite frankly to help enable them to buy from us. So it takes time and there is no real standards. So they've got to do it differently in different places. And I think that's where we come in as a very positive intermediary in that process to be able to offer the connectivity, not only to our buildings, but to really any location that you can get Ethernet.

We're connecting to not only the big carriers, but smaller carriers that are starting to provide Ethernet and have put on that buildings. We've been working really hard to try to build some relationships so that we can have, first of all competition for the services that we're buying. And if we can buy from another carrier that's not an incumbent and they provide better pricing, that's what we're going to do.

So our goal is to be connected to as many buildings that have Ethernet capability and then so that we have this very best reach. And we've done a lot of work in that direction. And we still have some to go. But we're miles ahead of lot of other companies.

Barry McCarver - Stephens

And just lastly if I may, on the share buyback, you kind of given that where the stock has moved up to in the last quarter. Should we think of your buyback as just using your great balance sheet to kind of continue to tick away at any price or will you be able to be a bit more strategic up here?

Mark Peters

We're going to be just opportunistic and we'll be patient as far as executing the plan. I think that's far is the best way to look at it.

Larissa Herda

The world events only seem to provide us with prime opportunities for those types of things, but we're going to be opportunistic.


The next question comes from the site of Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company

I just had two questions, one is I wondered if you can provide any more context around your on-net buildings, for example how many those are multi-tenants buildings versus single-tenant buildings, maybe a ballpark number there? And then also, I was curious if there was a large percentage of those buildings that actually have been disconnected and while there's fiber to them, there may not necessary be any customers at them. Just wondering if you can provide some color on that as well?

And then my second question just had to do with the investment achieved on referencing. Are you expecting to make a larger investment and all these various projects, which are at some point revenue generating in 2012 versus 2011? I mean is the absolute amount of money you're spending on this project is expected to go up in 2012 versus 2011?

Larissa Herda

We've never publicly stated the multi-tenant versus the single tenant. I mean the single-tenant building, and I'm not sure that really makes much of the difference, because very often the single-tenant buildings have a lot more revenue opportunity than in the multi-tenant. But we have a lot of multi-tenant buildings. I mean, if you stand in the middle in that city like Charlotte, you can't point to a building in that city we're not in. I bet you look at, and I've done it believe me.

Especially in the cities that we've been in for many of years, we're just in a lot of the buildings and most of the key buildings. A lot of big tall and shiny buildings are usually big target for us. What we do is, we target the revenue opportunity and we obviously get paid with the first two orders that we get in the building. So anything else we get as you've known our strategy for a long time, Colby. It's the gift that keeps giving.

So we have a nice combination of both. You know, and our single tenant buildings, those are especially nice to us, because we generally get in our foot in the door with these, and they're generally larger customers that are in the single tenant buildings. So we just say they are the gift that keeps giving, those relationships. Sometimes we think we have 100% of their business and then lo and behold their business grows and so do we, with them.

So we have overall still fairly low penetration in our buildings. That's the reality of it. But they're obviously very profitable buildings, because we've got in with such great financial discipline. So we need to do what we're doing on that in just kind of redoubling our efforts on that.

We do have buildings that don't have electronics in them that we actually added all of those buildings into the mix, and it was last year we did that. We added it last year. And we also added in, because what we found is that other companies that provide the building list, we were really on an apples-to-apples comparison.

Most of the companies were providing list publicly that included LSO's that included buildings that didn't have revenue in them. Because the reality is those are revenue opportunities in those buildings. Now some of them maybe empty buildings and that happens. But a lot of them are just buildings, where you've had a customer before that customer probably moved out of the building and you're now trying to sell other customers in those building.

We actually, every quarter we had more of those back-on in terms of getting deals in those buildings. And we have obviously special promotions to try to incent the sales people to go in and get those revenues as well. The number was there last year, but it was a combination of both, all the LSOs that we're in as well as the buildings with fiber, but no electronics. And I can't remember the exact combination was, it was around a 1,000 or 1,300 or so. I can't remember. We have to go back and look. We can point that out to you back in our numbers from last year though, Colby.

Mark Peters

And then as far as the investments, from year-to-year and like I mentioned last few years, we've actually increased our investment as far as our products and capabilities, and just enhancements to what we were doing as well as the new product. And while the emphasis might switch and now we've had more emphasis recently on intelligent network, the actual dollars aren't moving that much from year-to-year. So if you think about the allocation of the big bucket, broadly speaking, they shouldn't differ greatly from last year I would expect.

Colby Synesael - Cowen and Company

So I guess a part to that would be that, if your revenue growth obviously continues to accelerate and the investment number remains same. And obviously you have a largely fixed-cost base and you're not trying to generate some revenues on some of those services that you brought online in the last year or two. Isn't there an opportunity then for the margins to go up in 2012 relative to 2011?

Mark Peters

I guess we're talking about cash flow margin. And I think that's what the conclusion you would draw there, all things being equal that not just the EBITDA. But we think ultimately have to focus all the way to cash flow margins, which is what we do and ROIC. And so with the conversation we had earlier about our programs and I am going back and harvesting the customers that are existing with buildings, that can contribute to that overall cash flow margin.


Our next question comes from the site of Dave Coleman with RBC.

Dave Coleman - RBC

Just wondering if you could talk about the seasonality of 2012 revenues considering the wireless backhaul contracts, who were awarded last year? And then just on SG&A for fourth quarter. Were there any one-timers in that? I just want to make sure I heard that, sequentially it should increase $3 million over 4Q '11? And then just a final question on the intelligent network services, I think you said Phase I is beginning to be rolled out. Just wondering, what the availability is, if it's available in all markets? And what you're experience is so far with regard to take rates?

Mark Peters

Let me touch on the seasonality. And this is something you've been listening to it for a long time that we say every quarter just to make sure nobody messes it. So on the revenue side and actually when you get to Thanks Giving through Christmas, just giving a hold of the people to do selling to you and the customers and that tends to slow down.

And that was no different this year. So that can have an impact going into the first quarter installations. So just kind of a reminder, we'll see as the quarter goes on, as we've started the January. The sales activities picked right back up again. So we feel very good about where it is.

So it's just that we feel is the seasonality at the end of the year. So we feel good about where the year's starting, but that can have a bit of an impact on the first quarter. And the cost and the backhaul and the wireless careers, now we've been installing that all the way through 2011. So there is no big spike in any given quarter. I would expect that gradually coming on and so.

Larissa Herda

Last year, we were expecting some seasonality in the first quarter. And in first quarter results, we ended up not having it. So ever since, the recession has been hard to rely on any of the standard trends that we've had in the business.

But at the end of the year, the last two weeks of December quite frankly, a lot of people go on vacation, customers go on vacation. It was hard to get our top sales people, who had blown through their numbers for the year to work those last two weeks. And they deserved the time off. It causes a little bit of a slow start, generally in January, but we were presently surprised that January looks strong on the sale side.

It's an annual pause that takes place. As first rating as it is, is we've tried different things over the years to try to change that trend. It's often hard to do. So a lot of customers towards the end of the year, blew out their budgets, and they said, we spent our money and we don't have it right now. But we're ready to go for next year and that's exactly what we're seeing. So we're not concerned about it. The trends are falling right back into place. And it's the kind of the standard annual thing that we go through.

Mark Peters

And on the cost side, that one-item we call it specifically that the payroll tax we're setting for the end of the year, like we said, we'll start over and we think sequentially that will be about a $3 million, sequentially increase to that specific cost, but then throughout the year that tapers off, so we can start the cycle again in the next year or so.

Larissa Herda

I hope that answers your question on seasonality, before I move to your next question.

Dave Coleman - RBC

It does.

Larissa Herda

So the next question was on the intelligent network Phase I. So that phase is called enhance management. And just to remind everybody, it provides visibility to the customers and that leads to control, which is the part of the second phase. And we have a controlled release that we've put out there to customers.

This is a very new and innovative product offering and as we've said in a number of our calls, we're not aware of anyone who is doing it the way we're doing it. And that will have a scale, because eventually what will happen is we will be able to offer this to all of our managed services customers basically right immediately.

But before we do that, we are working with the customers that we have turned up on it to tweak it, to make sure that it is what customers are looking for. And we're also making sure that we can answer all the new questions that we're going to get from customers once they have this new visibility, because if you suddenly release this to all of your customers, you're suddenly going to get a lot of phone calls, because they see things that they don't understand.

So we are still working on how we want to face the rollout of this. But customers seem to be very excited about it. We are going go slowly on it and make sure that we don't fall, because this is different than customers have ever seen before. And we believe, what will happen is as a result, it's a value-add. It's something that when customers start to use this, it makes them really sticky. And that also is going to increase our bandwidth sales. We're pretty sure about that too, because we're going be able to see what's going more and see how they are testing the limits of their network.

And we're already seeing how that's going to happen. So again, as I said earlier, nothing happens overnight. These things take time. But we're pretty excited about the long-term prospects for entire intelligent network strategy, because it is so unique. Because no ones doing it the way we are doing it. Because it's so scalable, the way we've done it. We've made investments for many years really with this vision in mind.

So if you think about a lot of companies to sell various different bundle types of services or what we call convert services, a lot of companies have done that, putting cheap electronic on the edge. We didn't. We paid a little bit more for the electronics that we put on the edge of our networks for all these customers over these years. But we now have this intelligent network capability as the result of doing that. We knew this was what we were going for.

And so therefore, we think that we got ahead of others, who might have been able to sell a few services a little cheaper, because they were putting cheap boxes out there. But we put smart boxes out there. And so we think that was a better strategy. It's a long-term strategy. It's taking years to continue to evolve the strategy. But we're at that point, where we now going to be able to take advantage of all those investments and all that long-term view that we had taken with these services.

Dave Coleman - RBC

And then just going back to the comment regarding some margin expansion in 2012. If the investment in the new products is fairly consistent on an annual basis, should we expect it being achieved just through your efforts sell into existing buildings?

Mark Peters

We're not talking about the investing. I was talking about on CapEx side. So that as we continue to invest, it does like I talked about before is that, a training methodic introduction, now nationwide rolling these products out. So those things that have held it back from expanding more than we have.

Larissa Herda

At the end of the day, we've demonstrated incredible growth and especially relative to anyone in the industry. And it's not just one quarter of growth, its quarter after quarter, after quarter, after quarter, after quarter of growth, and I could go on. And the reason why we have that kind of growth is because we've been making investments both in CapEx and OpEx.

And we view that investment as being critical to continuing to accelerate our growth. But at the same time, because we are making very smart investments all with an expectation of a strong return, overtime the margins are going to continue to expand. But we'll kind of have opportunities that we're jumping at, quite frankly. And we should be, because there is just a lot of opportunity out there and we're uniquely positioned to go after it.


And our next question comes from site of David Dixon with FBR Research.

David Dixon - FBR Research

Larissa, I really appreciated this morning the update on the data center strategy and thoughts on your intelligent access-based approach. I wondered if that means that you would be ruling out any data center acquisitions for the foreseeable future. And maybe if you could walk us through the rationale for not investing more aggressive in areas such as data center storage are now potentially telling that are less returns in connectivity in general going forward. So I'm wondering that it's an issue of scale or perhaps it's as you highlight the addressable markets are heterogeneous?

And then I'll just to just to explore your perspective on the outlook for returns on capital which what's the data is telling us historically, it seems to be suggesting that there is an opportunity to grow significantly ROIC here. And I'd like to just explore that full further if I could?

Larissa Herda

The data center as I was talking about in the script and actually we've been talking about data center and cloud for probably at least four years and our positioning in that arena. And one of the thing, if you look at our history as the business and you look at how successful we've been while others in our segment had not. It's because we're really focused. And we're focused on what we do really well.

We always go back to what our differentiated market position is, as it is always comes back to the fiber networks, which one of the reasons why we've spent a lot of time expanding into a lot of buildings and really going after the market. And expanding that differentiated market position.

And as a result we have been growing our revenue. We grew it through the recession. We've been accelerating it since the recession. Most of the companies that are getting into this business don't have that kind of growth. In fact a lot of them have huge declines in their revenue stream, so they're trying to figure out how to grow.

And they've made the decision to go on either by data centers or hosting companies. And that's fine for them. And a lot of those companies are large. They have a lot of resources and they're going to buying a lot of companies at ever increasing prices over the years.

As we look at what was going on in that industry, the capital intensity at data centers, the competition, the expertise that's needed. We thought, well how do we play in that environment. We're not a data center company. We have co-location facilities, it's got, I don't 60 other or more so and our largest one is 100,000 square feet and Minneapolis, might even be bigger than that now. But we have co-location facilities, but we decided that we have this incredible network that others don't have. And it's so advanced and it goes into all these data centers.

We're in 350 third-party data centers already. And many of them we've been in for years and they have been good customers of ours. So what we've decided to is enable that business. Enable the cloud, enable the data centers and what you're see happening it's like the Cisco stat that I gave you that there is two times more capacity going from data centers to enterprise buildings and they're between data centers. That's huge for us.

We've got over 15,000 enterprise buildings already and we can just turn up these services, to these customers that want to go to an Equinox site or to an Amazon or SunGard site or whoever else we are. We can turn them up immediately as soon as we get into their building or for already in their building, we can turn it up literally immediately.

So we have worked in a very unique position that really we don't see anybody else is being in because not only do we have this vast fiber capability in infrastructure, we've got tremendous operational capability and managed service capability with our intelligent network really puts us in a very unique position in this data center space because these customers, they need this dedicated capacity, there is going to be some services that they will use at efforts internet.

But if you talk to enterprise customers they have security issues, they don't want to have latency in the network that's where we come in. So rather than going to a business that we know really nothing about, we don't have the ability to run it. We already have wonderful growth engine in our business. We're not looking for some way to find growth. We're just trying to continue to accelerate our growth. We've figured that we were going to continue to focus on what we do really well and really create a much more differentiated market position by how we sold those services.

When we go into Amazon location for instance, we are in a very unique position because compared to other companies because we're more the solutions provider to those companies. We already have to prioritizing their relationship so they are prioritizing the deals for customers to give to their vendors where the vendors already in the buildings, what we're are in more buildings than the other providers that they in there combined.

So that puts us in a really good position. When you add on our enhance network performance management. We're going to provide far superior visibility into the networks performance between the customer location and the data center and then when you add dynamic capacity on that that the bandwidth on demand into the data center, no other provider has at least we haven't seen is been able to say that they're going to be able to do that the way we are going to do it which is automatic real-time type of capacity.

So we think we have a much better strategic position going into these types of locations and it's really helping the data center providers finds help them provide solutions to their customers needs. And it's all about the network because these data center don't stand alone. You need the network, they need the network in order to be able to continue to grow and we're just in a great position to do that.

So our data center strategy is about enablement as opposed to actually trying to get into the applications world and the hosting world which again it's a long road and an expensive road to go down.

We kind of like the position that we are in because it's unique, it's different and I think all the buildings we have in network just put us in a really unique position to be able to capitalize on that strategy.

David Dixon - FBR Research

And just on the ROIC outlook?

Mark Peters

As you know, when you calculate the ROIC, it's really nice being in the position where our overall ROIC is really going over our cost to capital. So that really demonstrates that we're investing it in the right places. And that from the face of the fact that as you've probably seen, you're familiar with our chart, when we lay out all of our markets in the categories from high density to low density. And we have at least half of our markets that really aren't at that dense level yet. And they have to demonstrate the progression that we have shown in ROIC while we're still having really expanding quite heavily in those markets to each of the buildings, but it really tells you that we're giving the returns and when we're investing the capital.

So we're not changing our thresholds. We're going to a new customer location. We still have our traditional 30% internal rate return threshold over the life of that customer contract, so that's not changing. And it's proven to really service well with them, as demonstrated in our financials.

Larissa Herda

I think there is one more point in to data center strategy that it was really important point that I missed. I don't know how I missed it. It all really starts with the enterprise not with the data center.

And we have the local relationships with those enterprises. And even data center companies that we've spoken to has said, yes. We realize that now too. And we bring that to the party which I think is extremely valuable with all the enterprise customers that we had. And we're creating these partnerships like the one that just I talked about, in the script today with companies like Equinox and Amazon and others, with these data centers to be able to do that.

David Dixon - FBR Research

It does seem like enterprises are looking for more than just high bandwidth now and in response some of the network operators are bumbling in the storages of service, they don't see the returns in capacity as much these days. That's just well intrigued me. And so that was really helpful update?


Our next question comes from Tim Horan with Oppenheimer.

Tim Horan - Oppenheimer

I think your core competency really is the network and your enabling cloud, just a couple of questions there. Are there many other companies you to partner with on the cloud front or I guess there it seems to be dozens of them out there and I'm sure you are in discussion with a lot of them. Just maybe what you're thinking. Are you looking for end partners?

And secondly when you talked to Verizon they said the customers want SLAs get better end-to-end and it sounds like what you're doing here with your intelligence network is going to give you something really quite similar. And now the third point just to clarify, when you see that you have the enterprise relationships, when you bring Amazon or Equinox in, do you retain those relationships and is that primarily with the partnerships look like? And then a lastly, do you really have enough footprint? Does the footprint matter to the people that you're talking with on all these managed services on the cloud?

Larissa Herda

First of all, your first question had to do with partnerships and so we have many companies that we're partnering with. In fact it's growing exponentially because we don't compete with them. And if you look at a lot of the companies that are out there right now, who are selling a lot of these types of services, they are very worried about competing with the big carriers who are all getting into their business. And so we have a very open garden approach and customer and these providers love that.

We very often will have a sales person go in with them as they're selling to their customers. And part of our alternate channel by the way is on specifically focused on this. Because these channels and these partners are looking for a neutral party to come in whose not going to come into the back door and say, "Oh, I can provide all that to you" and suddenly the channel has lost that deal.

We're not doing that. And we're one of the few neutral parties in the game here. So I think that gives us a very turf. And a lot of them are reaching these conclusions and have come to us specifically because of these concerns. And I've personally spoken to the leaders of the member of these organizations and it's definitely a concern. So I think that gives us a competitive advantage and when you add on all of our managed services capabilities, we're not just a big fat dump type, and that brings the whole new picture to the game.

You're right on the SLAs, customers are asking for them to end and that really needs saying a better intelligent network capability instead, we're able to provide the customers a view segment-by-segment. So those of you who have ever been in this industry know that that's extremely unusual. In fact not existent unless there is a solution that's been put together that is very, very custom and very, very expensive.

For the customer, we're going to offer this to all of our managed services customer, that is very unique. So I think that all of our capabilities play very well into the whole demand for SLAs. With regard to the partnership between companies like Amazon, so what it is we've created a marketing agreement and we'll share leads both ways. And we're not the only one there's a couple of other providers in there too. But we have a number of additional capabilities that those other providers don't have. There is a building, the intelligent network capabilities all things that I've been talking about are huge, because they want to be able to turn their customers up really fast.

So our footprint is actually very large, because it's in the right places and it's in very large customers. You've figured today we already serve, t last stat was over 30% I think and correct me somebody if I'm wrong, it might actually be higher than that now of The Fortune 1000 and what we served them, we're in their buildings.

So then we have all these other customers that are nearly 40% it's really growing since I really thought about it. So our footprint is in the right place, but we are also but we are also building a lot. In our older markets and in our more mature markets obviously we have huge footprints in those markets. And our newer markets we are growing that footprint every year quite dramatically.

So the answer to that is yes, but you know if we're there, we generally can build there too for the customer. And we are very good at getting into buildings and going through that process. So overall it's a very strong picture for us as far as our positioning for this marketplace.


The next question comes from Donna Jaegers with D. A. Davidson.

Donna Jaegers - D. A. Davidson

Two different questions, on interest expense treatment, Mark, can you go over that drop significantly. Is that a measure that's due to the treatment of the convert now and can you talk a little about your plans on the converters, I think that's up in what 2014? And then, Larissa, can you talk a little bit about cable competition? Obviously Comcast is talking big about trying to get into mid-sized customers. Are you starting to see them yet?

Mark Peters

First on interest expense, it's been pretty stable to slightly up for the 12 months. Sequentially, it went down. The net interest expense, we had a slot that expired, but then resulted in that.

Donna Jaegers - D. A. Davidson

So fourth quarter has a good run rate going forward?

Mark Peters

There are some obviously that are saying that the rates are going, but they're moving much. The current impact on the convert is that you'll see an increase in debt, and that's because they convert accretes because of the coming treatment of convert. And then obviously that that converts, the first call date of April of next year. So we'll be looking at how we want to address that in the coming month and quarters.

Donna Jaegers - D. A. Davidson

And then, Larissa, on competition you see in cable industry?

Larissa Herda

The cable industry has done a very good job of selling the small business customers. But we saw that happening many years ago which was one of the key reason why we decided that we were going to focus on much large customers. We're in state of that different position then the cable companies are, because most of the deals that we sell in multi-city, multi-site and particularly multi-city. And cable industry is generally local.

So over time it will take them. They have to build the capability to sell between markets. And they're going to have obviously add a lot of buildings to do that. So even when you go to the middle of the market you're starting sell much more complex networks, multiple location, this is not an easy business. There is a lot that goes into it from products to the sales force to the back office to all that.

And to just having the capability to interact with other carriers. We find that the cable companies on the low end where we try not to tread. And we never see them in any other large complex deals we do which is a big chunk of the business that we did today. So I would expect it to stay that way for a while until they're ready to spend some money to make the investments to move up up-market. But for now they seem to be really focused on the smaller business customers.

And I think we have time for one more question.


Last question comes from the site of Michael Funk with Bank of America Merrill Lynch.

Michael Funk - Bank of America Merrill Lynch

So little more color on the under funnel, you know you commented during the prepared statement today that how the funnel was improving during the first quarter or maybe just geographically where and then the verticals. And then, Mark, you maybe you could expand your comments about opportunistically expanding your network reach? And how you might think about doing that through acquisitions versus organic growth?

Larissa Herda

On the funnel, generally the funnel has always remained strong. We've had consistent good strong funnel like, Mark said with the exception of some of the more seasonal stuff that happens in December that you really can't avoid. The funnel remains good, right before we do earnings usually a two days before earnings we have a call with our sales leadership from around the country and each one of them gets to tell us what's going on in each of their regions. Anything that's changed since the previous quarter and this is something we've done for years and it's just to make sure that we are all on track.

We think we know the answers here in Denver but we want to make sure that we've got that the latest greatest competitive information and the total information from the field. And they feel good. And when they haven't felt good they have let us know. And so they feel that they usually look good. And they also have good sentiments from customers, sales people who are excited about the product portfolio, customers who are excited about the product portfolio.

So I think for the long-term, for the year I think that that looks good. Could the first quarter start off a little slow, it's possible, Michael, because of the little bit of the slowdown sales in December. But that's not unusual for us. As a business as those of you who have watched us for a long time. We always have fluctuations on a quarter-by-quarter basis, but we don't manage this business on a quarter-by-quarter basis we manage it for the long-term.

When we look at the business we're pretty enthused about the long term prospects and the funnel activity and our ability to be able to close deal. Geographically and verticals, we are seeing strength across our verticals. I can't think offhand to many that aren't looking good. From a geographical standpoint every regional VP that we spoke to on the call, felt good about the years. So that's good too.

And so I think right now it's really blocking and tackling, that's the name of the game out there as just put your best competitive foot forward and go get the sales. So that's at they're working on. They feel like they've got a really good portfolio to work with. And obviously we've got a great sales organization in general, we've got sales people. They're sophisticated sales people that do a really good job, so they feel good about that.

With regard to network reach and our desire to expand in new locations, we obviously are always going to be opportunistic when it comes to potential M&A. We are not a M&A hungry company, we prefer to focus on things that we think will add value to our shareholders and put us in a better strategic position.

We have been buying lot of fibers as Mark, talked earlier which has proven to be very economic for us. And a much better deals in buying companies that may have a lot of hair on them. So we look at everything and if something make sense and we are price sensitive, we can buy it for the right price. And when we take into account the investment we have to make in those businesses and the return to our shareholders, that's how we make our decision. So if something splits the bill, we are obviously in a very strong financial position to be able to execute on anything like that.

But we've been very focused on our organic growth which is hard to beat in our industry right now. And obviously our strategy is working. So I think if we do something it will be the right deal for the right price and the right reason and otherwise we're just going to be focusing on our very strong organic growth profile.

And mark did you want to add to that?

Mark Peters

I think that's right. Great. Thank you for the time.

Larissa Herda

All right, Michael, thanks a lot. And thanks for running over time. I hope we answered everybody's questions. We appreciate you taking the time with us today. Have a good day.


That concludes our program. Thank you for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!