tw telecom Reports Second Quarter 2014 Results

LITTLETON, Colo., July 30, 2014 /PRNewswire/ -- tw telecom inc. (NASDAQ: TWTC), a leading national provider of managed services, including Business Ethernet, converged and IP VPN solutions to enterprises across the U.S. and to their global locations, today announced its second quarter 2014 financial results, including $419.7 million of revenue, $11.1 million of net income, $138.4 million of Modified EBITDA¹ ("M-EBITDA"), or $142.5 million of M-EBITDA excluding merger-related costs⁸, $109.3 million of net cash provided by operating activities and $20.0 million of levered free cash flow³.  

"We delivered another quarter of strong financial and operational results including accelerating our revenue growth as we successfully executed on our growth initiatives," said Larissa Herda, tw telecom's Chairman and CEO.  "We also announced a merger agreement with Level 3 during the quarter, bringing together our complementary businesses by combining tw telecom's premier domestic network with Level 3's extensive international network to create what we believe will be an enhanced competitive position to provide customers greater capabilities and services.  Our focus between now and the closing of the merger is to continue to execute on our financial and operational goals," said Herda.

Highlights for the Second Quarter 2014

• Grew total revenue at a higher rate, including 2.8% sequentially and 7.8% year over year
• Grew enterprise revenue 2.3% sequentially and 8.7% year over year
• Grew data and Internet revenue 3.8% sequentially and 15.0% year over year
• Generated net income of $11.1 million, or $0.08 basic EPS, or $13.5 million of net income, or $0.10 basic EPS excluding merger-related costs⁸ 
• Achieved M-EBITDA of $138.4 million, representing a 33.0% M-EBITDA margin¹or 33.9% excluding merger-related costs⁸
• Delivered $109.3 million of net cash provided by operating activities
• Achieved $20.0 million of levered free cash flow, or $24.1 million excluding merger-related costs⁸

Business Trends

"We achieved strong comprehensive results this quarter, including an accelerated revenue growth rate of 7.8% year over year, which represents the 39^th consecutive quarter of sequential revenue growth," said Mark Peters, tw telecom's Executive Vice President and Chief Financial Officer.  "We also delivered a healthy Modified EBITDA margin while continuing to generate cash and maintain our strong balance sheet."

The Company's growth initiatives have resulted in strong second quarter bookings⁷, or sales, which grew compared to the same period in the prior year and over the prior quarter. 

Based on strong business trends, the Company remains confident in its previous outlook for revenue and Modified EBITDA margin.  This included the expectation that its 2014 revenue growth rate will be greater than that of 2013 and Modified EBITDA margin (excluding merger-related costs) will begin to expand toward the end of the year, as a result of anticipated higher revenue growth.

The Company continues to expect business fluctuations to impact sequential trends in revenue, margins and cash flow.  This includes the timing, as well as any seasonality of sales and installations⁵, usage, rate changes, disputes, settlements, repricing for contract renewals, and fluctuations in revenue churn, expenses, capital expenditures and taxes and fees. 

Merger Announcement

On June 15^th, the Company entered into an Agreement and Plan of Merger with Level 3 Communications, Inc. and certain subsidiaries, which is subject to closing conditions, including regulatory clearances and shareholder approval.

Strategic Market Expansion

The Company continues to advance its previously announced strategic market expansion initiative to extend its metro fiber footprint into five new high demand markets and accelerate the density of its metro-fiber footprint in more than a third of its existing markets.  Year to date through July 30, the Company has activated 16 of its 33 targeted markets. 

Operational Metrics

Revenue churn⁴ was 0.9% for the second quarter of 2014, comparable to the same quarter last year and up slightly from 0.8% in the prior quarter. As a component of revenue churn, revenue lost from customers fully disconnecting service remained low at 0.2% for the second quarter of 2014, which is consistent with the prior quarter and the same quarter last year, and indicative of a loyal customer base, effective customer experience strategy and competitive product portfolio.

The Company served more than 29,700 customers as of June 30, 2014.  Customer churn⁴ was 0.8% for both the second quarter of 2014 and the prior quarter, down from 0.9% in the same quarter last year.  Additionally, the Company ended the quarter with approximately 34,000 fiber route miles, the majority of which were metro miles.

Capital Investments

Total capital investments for the second quarter decreased sequentially by $7.0 million and year over year by $5.8 million, primarily reflecting efficiency gains, favorable equipment pricing and the timing of projects. 

The Company reduced its previous annual capital investment guidance for 2014 from $440 to $460 million to $420 to $440 million.  The largest component of this revised guidance relates to savings on the strategic market expansion.  This includes greater volume discounts of equipment purchases and more efficient integration of the network than originally forecasted.  The balance of the reduced guidance reflects continuous improvements in inventory management, automation and equipment redeployment as well as the ability to utilize the Company's infrastructure to deliver product enhancements more economically.   

Capital investments ("cap-ex") for the second quarter of 2014 were as follows ($ in 000's):

  

Intercarrier Compensation

Intercarrier compensation revenue represented 1% of total revenue in the second quarter.  Under an FCC order, intercarrier compensation rates are declining over a six-year period that began in 2012.  The next rate decrease occurs in the third quarter of 2014, which is expected to decrease revenue by approximately $1 million for the balance of the year, before any impacts in fluctuations of minutes of use or carrier settlements. 

Year over Year Results – Second Quarter 2014 compared to Second Quarter 2013

Revenue for the second quarter of 2014 was $419.7 million compared to $389.5 million for the second quarter last year, representing a year over year increase of $30.2 million, or 7.8%.  Revenue grew primarily due to ongoing enterprise revenue growth.  Key changes in revenue included:

• $25.6 million increase in revenue from enterprise customers, or 8.7% year over year, driven primarily by data and Internet services
• $1.5 million increase in revenue from carriers, reflecting growth in Ethernet services, offset by churn and repricing for contract renewals, primarily in network services
• $4.8 million increase in taxes and fees reflecting the initiation of billing for certain regulatory fees not previously charged, growth in revenue subject to these charges and an increase in rates  
• $1.6 million decrease in intercarrier compensation revenue, primarily reflecting the impact of a mandatory FCC rate reduction in July 2013

By line of business, the percentage change in revenue year over year was as follows:

• 15.0% increase for data and Internet services, primarily driven by an increase in strategic Ethernet and VPN-based products, Internet and other services, partially offset by churn and repricing.  Data and Internet revenue represents 60% of total revenue for the quarter compared to 56% a year ago
• 1.9% increase in voice services, primarily from converged and other voice solutions and an increase in usage based services, partially offset by churn.  Voice services revenue represented 19% of total revenue for the quarter compared to 20% a year ago
• 11.6% decrease in network services, primarily from the impact of churn and repricing, largely from carrier customers.  Network services revenue represents 14% of total revenue for the quarter compared to 17% a year ago in part reflecting the transition from network services to Ethernet-based technologies

Operating Costs

Operating costs for the second quarter of 2014 increased year over year, which primarily included increases in network access costs as a result of revenue growth including increases in services to customer locations outside the Company's markets, an increase in taxes and fees and higher employee-related costs to support ongoing growth and the Company's growth initiatives, as well as annual merit-based salary increases.  Operating costs as a percentage of revenue were 43.2% for the quarter compared to 42.1% for the same period last year.  Modified gross margin⁶ as a percentage of revenue was 56.9% for the quarter, a decrease from 58.0% in the same period last year, primarily due to higher taxes and fees and network access costs.  

The Company utilizes a fully burdened modified gross margin, including network costs, and personnel costs for customer care, provisioning, network maintenance, technical field and network operations, excluding non-cash stock-based compensation expense, net of costs capitalized for labor and overhead on capital projects.

Selling, General and Administrative Costs ("SG&A")

SG&A costs increased year over year, primarily as a result of higher employee-related costs, including expansion of sales and sales support personnel to support the Company's growth initiatives, annual merit-based salary increases, commissions and incentives, somewhat offset by financing costs incurred in the prior year that did not recur.  In addition, SG&A costs were impacted by $4.1 million of merger-related costs. As a result, SG&A costs as a percentage of revenue increased to 25.9% for the quarter from 24.8% for the same period last year.

Net Income

Net income was $11.1 million for the second quarter of 2014 compared to $17.3 million from the same period last year, reflecting higher depreciation expense resulting from net asset additions, $4.1 million of merger-related costs and higher interest expense, offset by lower income tax expense.  The Company delivered basic earnings per share of $0.08 for the current quarter as compared to $0.12 for the same period last year.  Excluding merger-related costs, net income was $13.5 million or $0.10 basic earnings per share.

M-EBITDA 

M-EBITDA was $138.4 million for the second quarter of 2014, an increase of 0.7% from the same period last year, reflecting revenue growth that was largely offset by higher employee-related costs primarily to support the Company's growth initiatives, as well as merger-related costs and increased commissions and incentives. 

M-EBITDA margin for the quarter was 33.0% as compared to 35.3% last year.  The change in quarterly margin was due to merger-related costs, costs associated with growth initiatives, taxes and fees and network access costs. Excluding $4.1 million of merger-related costs, M-EBITDA margin was 33.9% for the quarter.

Sequential Results – Second Quarter 2014 compared to First Quarter 2014

Revenue for the second quarter of 2014 was $419.7 million, as compared to $408.3 million for the first quarter of 2014, an increase of $11.4 million, or 2.8%, representing the 39^th consecutive quarter of sequential growth.  Revenue grew primarily due to ongoing enterprise growth.  Key changes in revenue included:

• $7.3 million increase in enterprise revenue, or 2.3% sequential growth, driven primarily by data and Internet services
• $1.0 million increase in carrier revenue, reflecting growth in Ethernet services, somewhat offset by churn and repricing, primarily in network services
• $2.7 million increase in taxes and fees reflecting the initiation of billing for certain regulatory fees not previously charged, growth in revenue subject to these charges and an increase in rates
• $0.5 million increase in intercarrier compensation revenue

By line of business, the percentage change in revenue sequentially was as follows:      

• 3.8% increase for data and Internet services, primarily driven by an increase in strategic Ethernet and VPN-based products, Internet and other services, partially offset by churn and repricing
• 0.7% increase in voice services, primarily reflecting an increase in converged solutions and usage based services, partially offset by churn
• 2.9% decrease in network services, primarily reflecting the impact of churn and repricing, largely from carriers

Operating Costs

Operating costs increased sequentially, reflecting higher network access costs as a result of revenue growth and an increase in taxes and fees and employee-related costs, primarily in support of the Company's growth initiatives and annual merit-based salary increases.  Operating costs were 43.2% of revenue for the second quarter and 42.6% for the first quarter.  Modified gross margin for the second quarter as a percentage of revenue was 56.9%, a decline from 57.5% in the first quarter largely due to higher taxes and fees as well as employee-related costs.

Selling, General and Administrative Costs

SG&A costs increased sequentially, primarily reflecting merger-related costs and annual merit-based salary increases, somewhat offset by a reduction in payroll taxes, commissions and incentives.  SG&A costs were 25.9% of revenue for the second quarter, or 24.9% excluding $4.1 million of merger-related costs, a decrease from 26.2% for the first quarter largely due to the reduction in payroll taxes, commissions and incentives.  

Net Income

Net income was $11.1 million for the second quarter compared to $9.8 million in the first quarter, primarily reflecting higher M-EBITDA, largely attributable to revenue growth, and a reduction in debt extinguishment costs and interest expense, partially offset by $4.1 million of merger-related costs, higher depreciation and income tax expense.  The Company delivered basic earnings per share of $0.08 for the second quarter compared to $0.07 for the first quarter.  Excluding $4.1 million of merger-related costs for the quarter, net income was $13.5 million or $0.10 basic earnings per share.

M-EBITDA 

M-EBITDA was $138.4 million for the second quarter, an increase of 1.1% from the first quarter primarily as a result of revenue growth, largely offset by $4.1 million in merger-related costs.  M-EBITDA margin was 33.0% for the second quarter compared to 33.5% for the first quarter.  Excluding $4.1 million of merger-related costs in the quarter, M-EBITDA margin was 33.9%.

tw telecom plans to conduct a webcast conference call to discuss its earnings results on July 31, 2014 at 9:00 a.m. MDT (11:00 a.m. EDT).  To access the webcast and the financial and other information to be discussed in the webcast, visit www.twtelecom.com under "Investors."

⁽¹⁾ Modified EBITDA (or "M-EBITDA") is defined as net income or loss before depreciation, amortization, accretion, impairment charges and other income and losses, interest expense, debt extinguishment costs, interest income, income tax expense or benefit, cumulative effect of change in accounting principle, and non-cash stock-based compensation expense.  The Company defines Modified EBITDA margin as M-EBITDA divided by total revenue.

⁽²⁾ Unlevered free cash flow is defined as Modified EBITDA less capital expenditures, which is reconciled to Net Cash provided by (used in) operating activities in the supplemental information posted on the Company's website. 

⁽³⁾ Levered free cash flow is defined as Modified EBITDA less capital expenditures and net interest expense from operations (excluding debt extinguishment costs, non-cash interest expense and deferred debt costs), which is reconciled to Net Cash provided by (used in) operating activities in the supplemental information posted on the Company's website.  

⁽⁴⁾ Revenue churn is defined for the period as average lost recurring monthly billing from a customer's partial or complete disconnection of services (excluding repricing impacts and usage) compared to reported revenue.  Customer churn is defined for the period as average monthly customer turnover compared to the average monthly customer count.

⁽⁵⁾ Installations reflect monthly recurring charges for services from signed customer sales that are installed and recognized as revenue from the date of installation. 

⁽⁶⁾ The Company defines modified gross margin as total revenue less operating costs excluding non-cash stock-based compensation expense.  

⁽⁷⁾ Bookings, or sales, are defined as monthly recurring charges for services from signed customer contracts.  The timing of when these sales are installed and recognized into revenue varies based on the underlying contract.

⁽⁸⁾ Net income, Basic EPS, Modified EBITDA, Modified EBITDA margin and Levered Free Cash Flow excluding merger related costs are Non-GAAP measures and are reconciled in the supplemental earnings materials to the most comparable GAAP measures.

Financial Measures

The Company provides financial measures using U.S. generally accepted accounting principles ("GAAP") as well as adjustments to GAAP measures to describe its business trends, including Modified EBITDA.  Management believes that its definition of Modified EBITDA (see above) is a standard measure of operating performance and liquidity that is commonly reported and widely used by analysts, investors, and other interested parties in the telecommunications industry because it eliminates many differences in financial, capitalization, and tax structures, as well as non-cash and non-operating income or charges to earnings.  Modified EBITDA is not intended to replace operating income (loss), net income (loss), cash flow, and other measures of financial performance and liquidity reported in accordance with GAAP.  Management uses Modified EBITDA internally to assess on-going operations and it is the basis for various financial covenants contained in the Company's debt agreements and for operating performance and liquidity.  Modified EBITDA is reconciled to Net Income (Loss), the most comparable GAAP measure for operating performance within the Consolidated Operations Highlights and in the supplemental information posted on the Company's website.  Modified EBITDA, as a measure of liquidity, is also reconciled to Net Cash provided by operating activities on the Company's website.

In addition, management uses unlevered and levered free cash flow, which measure the ability of M-EBITDA to cover capital expenditures.  The Company uses these cash flow definitions to eliminate certain non-cash costs.  Levered and unlevered free cash flow are reconciled to Net Cash provided by operating activities and also to Modified EBITDA in the supplemental information posted on the Company's website.  The Company also provides an adjustment to the measure gross margin by eliminating the impact of non-cash stock-based compensation expense.  Management uses modified gross margin internally to assess on-going operations.  Modified gross margin is reconciled to gross margin in the financial tables.

The Company provides Net Income, Basic EPS, Modified EBITDA, Modified EBITDA margin and Levered Free Cash Flow excluding merger-related costs, which management believes is useful to analysts and investors to enhance the comparability of results to prior periods and help identify operating trends.  The supplemental information posted to the Company's website reconciles these measures to the most comparable GAAP measure.

Forward Looking Statements

The statements in this press release and related conference call concerning the outlook for 2014 and beyond, including statements regarding product and platform plans, growth prospects, market opportunities, market expansion and its implementation, sales growth, cash flow and cash balances, growth initiatives, customer opportunities, network capabilities, sales and installations timing, demand, revenue growth, revenue growth rate, Modified EBITDA and margin trends, expense trends, service disconnections, business trends and fluctuations, expected capital expenditures and the expected merger with Level 3 Communications, Inc. are forward-looking statements that reflect management's views with respect to future events and financial performance.  These statements are based on management's current expectations and are subject to risks and uncertainties.  Important factors that could cause actual results to differ materially from those in the forward looking statements include the risks disclosed in the Company's SEC filings, especially the section entitled "Risk Factors" and elsewhere in its 2013 Annual Report on Form 10-K and in its quarterly report on Form 10-Q for the quarter ended June 30, 2014 to be filed hereafter, including the risk that the closing of the merger is subject to regulatory and other conditions, some of which may not be satisfied on a timely basis, or at all, and the risk that uncertainty regarding the pending merger could adversely affect the company's ability to retain employees and could cause customers to delay decisions concerning purchases, which could adversely affect revenue, earnings and cash flow, regardless of whether the merger is ultimately completed. tw telecom undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

About tw telecom

tw telecom, headquartered in Littleton, Colo., is a leading national provider of managed services, including Business Ethernet, converged and IP VPN solutions for enterprises throughout the U.S. and globally. tw telecom also delivers secure, scalable private connections for transport data networking, Internet access, voice, VPN, VoIP and security to large organizations and communications services companies. Employing a resilient fiber network infrastructure, robust product portfolio and its own Intelligent Network capabilities, tw telecom delivers customers overall economic value, an industry-leading quality service experience, and improved business productivity. Please visit www.twtelecom.com for more information.

  

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