TW Telecom Inc 1stQ 2013 Results with Bold Statements by CEO on Earnings Call; Commentary by FBR & Telecom Ramblings

TW Telecom Inc announced first quarter 2013 financial results, including $381.2 million of revenue, $13.1 million of net income, $136.0 million of Modified EBITDA, $81.6 million of net cash provided by operating activities and $23.9 million of levered free cash flow

“We’ve had a productive start to the year, as we commenced our growth initiatives, delivered ongoing revenue growth and cash flow generation and executed several strategic balance sheet activities,” said Larissa Herda, tw telecom’s Chairman, CEO and President. “The growth initiatives we announced in February are under way as we focus on delivering additional product innovation, increasing our sales coverage, as well as further automating the business and expanding our market reach.  Everything we’re doing is to increase our sales momentum and the trajectory of our revenue growth as we continue with our comprehensive balanced approach to win market share.”

David Dixon of FBR Capital Markets wrote in an email:  “tw telecom inc. (TWTC) reported 1Q13 results, with EBITDA and Free Cash Flow below consensus. Capex spending was in line with estimates. Management is aggressively investing in fiber deployments in growth markets and is planning to increase the sales force by 10% in FY2013, anticipating revenue improvement in 2014.”

Author’s Note:  Our sources reveal that tw telecom did NOT follow through on their planned fiber network build-out in the San Jose, CA/ Silicon Valley metro area.   Instead, the company was forced to resell AT&T facilities (referred to as Type 2 circuits or facilities). I guess Silicon Valley is NOT considered a growth market.  Key features like “Dynamic Capacity” are not possible using Type 2 telco facilities which are actually provided by a facilities based carrier.  In addition, there is no automated customer problem reporting or fault diagnosis for Type 2 facilities.  Instead there’s a hierarchy of phone call escalation procedures the customer must adhere to when an outage or other problem is experienced.

Mr. Dixon of FBR added, “The trend away from dynamic network provisioning (on its own) to combined dynamic provisioning of the application AND network by major carriers (e.g. network virtualization and/or software defined networking) suggests that medium-term revenue growth will be more challenging over time.”

Bold statements by Larissa Herda, CEO and President, during tw telecom’s earnings call:

“We’re advancing the development of our Constellation platform. With this unique platform, we’re creating a powerful operating paradigm for enterprises to increase the velocity of how they buy our network services, driven by the ability to  more quickly access and consume network and IT services. We’re in the process of hiring the right talent, establishing and evolving key data center and vendor relationships and developing and deploying the required technology as
we move forward with these new capabilities.”

“We’ve also continued to gain market awareness with our Intelligent Network services that are within the Constellation platform, with ongoing momentum showing up in our Ethernet revenue. And we’ve launched several new product
capabilities that enhance and freshen our current portfolio, which reflects the bread and butter of our business, with more production for later this year — “

“As we head into the second quarter, we’re executing on our growth initiatives, optimizing our capital allocation strategy and continuing to differentiate ourselves in the marketplace with capabilities that we believe will change the industry.”

[Ms. Herda turned the call over to Mark Peters- see below for his quotes]

“Let me start first with our product initiatives, including how we’re addressing our customers’ current and future network requirements, as well as some specific progress on this year’s product roadmap. We believe that the reason we keep growing is that we continue to invest, innovate and enhance our value to customers because in this business, you have to do so to remain relevant. We also believe that there is a direct correlation between our innovation and development and the fact that we posted 34 consecutive quarters of sequential revenue growth.”

Customers are buying from us, both through our track record to serve their current needs and our integrated vision to solve their future business challenges. For instance, who else in the industry has delivered a Dynamic Capacity solution today? No one. And who else is talking about click and connect, reliable and secured network capabilities for dynamic connections between buildings, data centers and other cloud services, which we’re developing through our Constellation platform? No one.”

“Our success is driven by constantly leveraging our core strength. For example, our Dynamic Capacity, Enhanced Management and E-Access, our one-to-many Ethernet service, are all very innovative solutions. But the real power is how they enhance our Ethernet portfolio, which is foundational to our growth engine. Collectively, these products make us more differentiated and competitive, helping us to open more doors and close more deals. For example, let me give you some color on how Dynamic Capacity is driving our Ethernet sales. As a reminder, our Dynamic Capacity solution, which is part of our Intelligent Network services, is delivered via E-Line, our most advanced Ethernet offering. Looking
back over the 9 months from the initial Intelligent Network launch through the first quarter of 2013, E-Line revenue has grown by about 2.5x in that time frame. We believe our Intelligent Network capabilities, including our Dynamic
Capacity solution, greatly complement our E-Line sales and has been a factor in this revenue acceleration. And we have seen the adoption rate between E-Line and Intelligent Network steadily increase in concert with our growth.”

“In addition, this summer, we plan to expand our Dynamic Capacity from our current offering that can flex up to 1 gig to be able to provide customers the ability to flex all the way up to 10 gigs. This has been driven by interest from our large  enterprise customers. Again, because of our powerful operating platform, this service will be embedded into our infrastructure scalable and available across our footprint.”

Mark Peters, Chief Financial Officer and Executive Vice President:

“Data and Internet revenue continues to be strong, and now represents 53% of our total revenue and grew 14.3% year-over-year. Data and Internet revenue grew 2.2% sequentially, reflecting the impact of the customer settlement last quarter that did not recur.”

“Modified EBITDA margin was 35.7%, compared to 36.7% in the same period last year and 36.6% in the prior quarter. The strong margin naturally will be impacted by our growth initiatives, and we expect these initiatives will continue to pressure margins in the near term until they are absorbed by higher top line growth. Additionally, we had a $4.1 million sequential cost increase, due primarily to the annual resetting of payroll taxes.”

Robert Powell wrote in a blog post:  “The biggest surprise here is m-EBITDA margins of 35.7%, which is the lowest they’ve turned in since the first quarter of 2009.  In the fourth quarter they took on an additional 60 headcount (40 in sales), and this quarter they added another 41 (but just 4 in sales).  So it’s no secret where the extra expenses are going.  They’re planning to roll out further managed services as the year goes on, as well as 40/100G (Carrier Ethernet) offerings and their constellation network platform, in the interests of a potentially higher growth rate down the line.”

“Last fall, the rumors were that tw telecom was about to be gobbled up by CenturyLink.  The long term investments for growth and the resulting m-EBITDA margin compression don’t really fit with that thesis, and suggest to me that tw does not really see itself as a consolidation target at this time.  But likewise, they don’t seem any more interested in pursuing inorganic growth than they have over the past few years.”