TW Telecom reported results after the bell today, their conference call is tomorrow morning. The speedy release was understandable though, because their results were powerful. Revenues of $290.1M exceeded most forecasts as did EBITDA of $98.8M, and most importantly they did in fact break through to positive earnings of $0.7M, although that just barely rounded down to an EPS of $0.00. In fact, if one discounts the $4M impairment charge, the underlying business produced an EPS of $0.03. To compare with my own projections last night, here is the table:
|Q1/08||Q2/08 est||Q2/08 act|
|Adjusted Gross Margins||57.6%||57.8%||58.5%|
Macroeconomic worries have weighed on earnings throughout the economic sector, but except for the case of PAETEC, the economy has not hurt anyone much. But TW Telecom just blew on past those worries, the only place in which the macroeconomic environment showed up was in a slight sequential increase in churn from 1.4% to 1.5% that came from their less sticky acquired assets. They expressed no worries for the remainder of the year, and I’m inclined to believe them.
I believe these results should reassure the street about TW Telecom. Its positive earnings, solid cashflow, and healthy growth should allow them access to the capital markets that others in the sector probably don’t have. Hence, I think the time is now right for CEO Larissa Herda to make her move on whatever asset she has her eye on. She has proven she can integrate telecom assets quite effectively, TW Telecom stock remains high enough to use as currency, and valuations are low across the sector. The timing only gets worse from here, as Level 3 and others might be back in the game when winter comes along. My bet remains that she will make a play for XO.
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tw Telecom made a smart strategic decision a decade ago … build a business for the long run.
Many years of analysts putting tw Telecom down for building and owning local metropolitan infrastructure. Well, you can’t put up margins and margin growth like this while partnering with Ma Bell.
Ma Bell limits margin growth, innovation, delivery and provisioning. tw Telecom has “built-in” flexibility and a competitive advantage with metro fiber.
It is going to be a bandwidth game for quite a while as 90% of business buildings remain served by one copper carrier Ma Bell. The importance of integrated applications will follow.
It’s not a chicken or egg thing. Customers need bandwidth, reliable bandwidth first long before integrated applications soar. Why? Applications are about the users experience. If you don’t have enough bandwidth or unreliable bandwidth the user experience will suck.
It’s all about an enriched user experience when it comes to applications. Without robust and relaible bandwidth underneath the apps, you might as well be delivering cheese.
What is modified ebitda ? How does that compare to LVLT’s ebitda ?
TWTC’s modified EBITDA simply leaves out stock compensation, similar if not identical to LVLT.
TWTC deals with gross margins differently from LVLT though, theirs is ‘fully burdened’ meaning it includes network operations costs as well as payments to other carriers.
Didn’t TWTC have significant problems integrating their last acquisition ?
TWTC may be ready to buy XO, however, if I were Icahn would I be ready to sell ? Seems to me that he knows he will have at least one more interested buyer in LVLT & perhaps more if he waits 4 months .
Not really, it is a matter of perspective. In one quarter, TWTC had a loss of sales focus in the acquired assets that lost a couple million in quarterly revenues. Trouble yes, but compared with the many tens of millions of dollars worth of revenue that LVLT was unable to provision, it was very minor. Especially since the effect was a single quarter long rather than a year long and did not spread company-wide.
Also, they have brought the combined assets to an mEBITDA margin of 35% – that is very strong evidence of a successful integration. They drove cost out of the business and generally maintained their growth rate. It is always hard work to integrate telecom assets properly, and there are always problems to overcome. Overall, in my opinion TW Telecom did a good job on Xspedius and they deserve credit for it.
Regarding Icahn, you have a point that he might get more for his money in a more competitive environment. It all depends on what his mood is I think. But I’m not sure that LVLT is really a ‘more interested’ buyer even then – I think there is a clash in customer profile. Qwest might be in the mix too, as could outsiders like Reliance Globalcom.
Rob, what is your longer term projection on ebitda margin and capex for TWTC? My model assume they ultimately (i.e by 2011) get to a steady state of 37% ebitda margin and 18% of revenue for capex.
Interested in your views.