TW Telecom today filed an 8-K with the SEC, warning that economic weakness may be spreading and may affect their growth in the near term. As readers may recall, I spent some effort trolling through the earnings reports for Q2 looking for signs that network providers are feeling economic pressure. A few saw pressure, most seemed ok but cautious, and a couple just shrugged it off. Well, TW Telecom was one of those that shrugged it off, having a great Q2.
The fact that they are now warning that things are getting worse cannot be ignored. It’s not that they gave out horrible new numbers like Paetec did last month. In fact TW Telecom didn’t give out any hard numbers at all, just a qualitative assessment. It’s that they said anything at all that is telling, because they didn’t have to. If you take out the restatements of past comments, here is the sum total of the 8-K they filed:
The Company is also seeing potential extension of the impact of the slowing economy into its Southeast region and certain individual markets in other regions, based on results to date for the quarter. In addition, the Company may experience an increase in very small business customer churn in the third quarter due to the Company disconnecting certain non-paying customers. The Company expects continued long term revenue growth, but with possible further downward pressure in the near term as a result of these factors.
So the softness has spread geographically somewhat and churn is rising slightly – not a disaster. To be honest, Q2 was so big that it was going to be hard to live up to for Q3 even without economic weakness, it may be that the company is simply trying to lower expectations here. So I’d guess now their revenue growth will probably be flat sequentially. The question now is whether this is local to the SME that TW Telecom favors or will spread all the way up through the larger customer base of Level 3 to the multinationals that make up much of Global Crossing’s customer base – both have weathered the economic downturn reasonably well so far.
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They are churning the smallest of customers, more than likely Type 2 customers. These customers provide thin margins compared to on-net customers.
Per the release, they are churning these customers because they are not paying their bills. I don’t consider this bad management or a bad thing.
The area to benchmark is margin quality and margin growth. These two areas benefit highly due to TWTC’s metro fiber footprint. Those without local fiber can’t come close to TWTC margin growth, quality or sustainability.
Churn out enough type 2 customers, your overall margin picture improves.
This news is creating a buying opportunity if anything. TWTC is a company that operates its business for the long run which contradicts Wall Streets constant Chicken Little quarter-to-quarter mentality.
No disagreement here, the market is reacting the way it always does – sell first and ask questions later. Economic pressures may put revenue pressure in the short term on everyone, but the companies which operate superior assets effectively will improve their position relative to the competition during the bad times.