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tw telecom inc. (TWTC)

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tw telecom inc. (TWTC)

Q4 2008 Earnings Call Transcript

February 10, 2009 11:00 am ET

Executives

Carole Curtain – VP of IR

Larissa Herda – Chairman, President and CEO

Mark Peters – EVP and CFO

Analysts

Frank Louthan – Raymond James

Tom Seitz – Barclays Capital

Jonathan Schildkraut – Jefferies & Company

Simon Flannery – Morgan Stanley

Donna Jaegers – D.A. Davidson

Michael Funk – Banc of America

Robert Dezego – SunTrust Robinson Humphrey

Mike McCormack – JP Morgan

Michael Rollins – Citi Investment Research

Colby Synesael – CIS Research

Operator

Good morning and welcome to TW Telecom's fourth quarter 2008 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 would like turn the call over to Carole Curtain, Vice President of Investor Relations. Please go ahead.

Carole Curtain

Welcome to TW Telecom’s conference call. Let me start by directing you to our website at www.twtelecom.com, where you can find our press release and supplemental quarterly information.

Before we begin, I will read our Safe Harbor statement. Issues discussed on today's conference call include certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are naturally subject to uncertainty and changes in circumstances.

Actual results may vary materially from the expectations contained herein due to the risks disclosed in the company's annual and quarterly filings with the SEC; especially the section entitled Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2007 and our supplemental materials posted on our website.

tw telecom Inc. is under no obligation and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. In conjunction with SEC regulation G, I want to point out that we will report several financial measures that are non-GAAP including modified EBITDA.

Our non-GAAP measures are not intended to replace our GAAP disclosures, rather they merely are presented to provide additional insight into our performance. Please see our press release and other information posted on our website for more details on these and other matters.

Now I'm pleased to introduce TW Telecom's Chairman, CEO and President, Larissa Herda.

Larissa Herda

Thanks Carol. Hi, everyone and thank you for joining us today. With the economy in recession, we recognized good news this year. However, our performance does in fact reflect good news and we are proud of it. We substantially grew the business in 2008, despite the headwinds of a challenging economy. We grew net income, further enhanced our liquidity position, and achieved record growth in our levered free cash flow, resulting in our strongest overall financial performance ever. We also achieved a very challenging margin goal.

About two years ago, in a vastly different environment, we set an aggressive goal to grow our EBITDA margin 500 to 600 basis points by the summer of 2008. We not only accomplished this, but we strategically grew into our targeted margin by scaling the business through revenue growth and effective retooling and streamlining of our operation. Rather than blindly and dramatically slashing costs, we were deliberate and thoughtful in ways that would not compromise customer service or future growth. So not only did we take significant costs out of the business, we created a strategic integrated platform of systems, processes, and people while delivering our targeted margins.

As we look to 2009, we recognize the realities the current economic challenges are having on all businesses. But despite these challenges, we see opportunities for our business that others may not in this environment. Customers are continuing to make their network an imperative for running their business. Therefore, with their network as the lifeblood of their company, businesses are faced with the dilemma of addressing ever-increasing bandwidth and applications need, while at the same time managing cost efficiencies. This puts us in a strong position to serve these customers with our innovative and cost-effective solutions.

For 2009, we will focus on leveraging opportunities provided by demand drivers that have previously fuelled our growth, such as a conversion from legacy technology to Ethernet and VPN solutions, as well as new demand that is created from what some refer to as the new telecom economy. We believe this new environment is going to continue to require enormous amounts of metro capacity and network management skills to meet future enterprise needs, which we can capitalize on.

In a moment, I will share with you more on these new opportunities, but first Mark will take you through some comments on 2008 and 2009. Mark?

Mark Peters

Thanks, Larissa. Let me start with our assessment of 2008 and then turn to our view for 2009.

Overall, 2008 was a terrific year for us, especially when considering it was in a tough environment. Summing up the year, we delivered 7% revenue growth, generated positive net income, achieved our target EBITDA margin goal, and impressively grew levered free cash flow; all against the backdrop of a year-long recession. Given the environment, we are pleased with our revenue growth. We continued to grow revenue for the year as sales continued to increase. However, the impact of the economy dampened our revenue growth rate, because of the impact of things like higher churn from segments such as the mortgage industry and small customers as well as others. We also managed our costs well, with about 80% of revenue growth dropping to modified EBITDA for the year. In an environment where cash is king, delivering an 800% improvement in levered free cash flow for the year, demonstrate strong results from our proven business model, even in the tough business climate.

People and network expenses are our largest costs and we have managed both well by being proactive long before the economic cycle was felt by most companies. Managing these costs closely contributed to our strong annual modified EBITDA margin of 34.4% for the full year. In addition, we negotiated the volatile credit markets well by being proactive in managing our cash investments. We have avoided the problems that many others have had in this marketplace and we are clearly in the driver’s seat as it relates to our liquidity. We are in a very strong position with no significant debt maturities before 2013, an undrawn revolver which we continue to view as dry powder, and no finance of that maintenance covenant unless we draw the revolver.

We grew our cash to $352 million by year end, which was invested nearly 100% in treasury money market accounts. Our fully available cash balance gives us the choice of continuing to invest in growing our business, as well as consider other options for our cash. Our long term investors know that we are a conservative team and like to be in a position to weather any storm that comes our way. That approach has put us in an attractive position for what appears to be one of the worst economic environments any of us has ever experienced. For this reason, we have been hesitant to date to use our cash for anything other than reinvesting our business and holding it in reserve.

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