Time Warner Telecom Reports Strong Second Quarter 2007 Results

LITTLETON, Colo., Aug. 7 /PRNewswire-FirstCall/ -- Time Warner Telecom Inc. (Nasdaq: TWTC), a leading provider of managed voice and data networking solutions for business customers, today announced its second quarter 2007 financial results, including $268.0 million of revenue, $83.0 million in Modified EBITDA(1) ("M-EBITDA") and a net loss of $9.6 million.

"We continue to deliver strong organic enterprise revenue growth, drive sales momentum, and achieve solid margins while integrating a major expansion of our operations," said Larissa Herda , Time Warner Telecom's Chairman, CEO and President. "We have made substantial progress in all phases of our integration which includes organizational, network and systems changes that impact virtually all aspects of our business. We achieved this progress while accelerating the growth of our enterprise business. Integrating our operations and continuing to leverage our ability to serve the growing enterprise demand is where we are focused and why we are well positioned to capture greater market share."

Highlights for the Quarter

"Core(2)" operations exclude the results from acquired operations and related integration costs. "Acquired(3)" operations exclude integration costs. Both core and acquired exclude the impact of a reclassification of certain fees and taxes(4).

Revenue

Revenue for the quarter was $268.0 million, as compared to $191.3 million for the second quarter of 2006, an increase of $76.7 million, or 40%. The core operations reflected a 9% growth over the same period last year. Key changes in revenue included:

Monthly revenue churn was 1.1% for both the current quarter and the same period last year; however this reflects a decrease from the prior quarter which was 1.2%. The Company expects to experience ongoing revenue churn, including disconnects from carrier customers related to their merger activities and network grooming.

Growth in the core operations customer counts remained strong. Consolidated customer counts decreased due to a higher churn rate for the acquired operations' customer segment, as well as conversion of the acquired customer base to a common customer profile(12) during integration. The acquired customer churn had an impact of less than $1 million reduction in revenue for the quarter, while the change in the customer profile had no impact on revenue. The Company expects churn and reduction in customer counts from the acquired operations may continue as the Company completes its integration.

M-EBITDA and Margins

M-EBITDA grew $13.4 million to $83.0 million for the quarter, a 19% increase over the same period last year primarily reflecting strong core revenue growth and the impact of the acquired operations. M-EBITDA included $2.3 million of integration and branding costs in the quarter, and none in the same period last year. Operating costs increased primarily reflecting the impact of the acquisition and related higher network access costs which were partially offset by integration synergies, and the change in 2007 to present certain taxes and fees on a gross versus net basis. Selling, general and administrative costs ("SG&A") increased primarily reflecting the acquisition of the acquired operations as well as increased employee costs, including higher sales incentive costs associated with revenue growth. SG&A as a percent of revenue decreased to 28% for the current quarter from 29% for the same period last year, reflecting operating efficiencies.

M-EBITDA margin was 31% for the quarter as compared to 36% for the same quarter last year. Modified gross margin(11) was 57% for the current quarter compared to 64% for the same period last year. The difference in margins between periods primarily reflects higher access costs related to the acquired operations.

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 Loss

The Company's net loss was $9.6 million, a loss of $.07 per share for the quarter compared to a net loss of $40.4 million, a loss of $.34 per share for the second quarter of 2006. The decrease in the net loss reflects strong M-EBITDA growth, debt extinguishment costs of $25.8 million for the second quarter of last year that did not recur, offset by an increase in depreciation expense related to both the acquired assets and new capital expenditures placed in service.

Sequential Results -Second Quarter 2007 compared to First Quarter 2007

Revenue

Revenue for the quarter was $268.0 million, as compared to $261.4 million for the first quarter of 2007, an increase of $6.6 million, or 3%. Revenue from core operations grew 3% over the prior quarter. Key changes in revenue included:

M-EBITDA and Margins

M-EBITDA was $83.0 million for the quarter, as compared to $76.3 million for the prior quarter, a 9% increase or $6.6 million. M-EBITDA margin was 31% for the quarter, as compared to 29% in the prior quarter. Modified gross margin was 57% for the quarter as compared to 55% in the prior quarter. The change in M-EBITDA and margins primarily reflects strong revenue growth, integration cost synergies, seasonal reduction in payroll taxes, and improved access costs due to volume discounts and network optimization.

Net Loss

The Company's net loss was $9.6 million, a loss of $.07 per share for the quarter compared to a net loss of $13.8 million, or a loss of $.10 per share for the prior quarter. The decrease in net loss per share reflects strong M-EBITDA growth partially offset by an increase in depreciation expense related to new capital expenditures placed in service.

Integration Milestones

The Company achieved substantial progress integrating its acquired operations through three major integration initiatives including organizational, systems and network activities.

"We are very pleased with our integration progress," said John Blount , Time Warner Telecom's Chief Operating Officer. "We have maintained the momentum of our core business while very efficiently moving through a large acquisition. Our employees did a great job in stepping up to this large integration effort, thereby avoiding a large portion of planned integration operating costs and at the same time accelerating the availability of our full product capabilities into the acquired markets. Our systems are integrated and now we continue the hard work of refining our workflow and processes in order to optimize the newly integrated operations. Completing the important process of network grooming will take time, but we expect it will result in us realizing our greatest cost synergies."

The Company continues to expect that integration cost synergies will be primarily realized in late 2007 and into 2008. For 2007, the Company continues to expect $35 to $45 million in integration expenditures, with the mix changing to reflect the Company's expectation of $5 to $7 million in operating costs, reflecting the efficiencies of the Company's integration activities, and $30 to $38 million in capital expenditures, reflecting increased capacity and acceleration of the rollout of new product capabilities.

Other

The Company has extended the right to use its existing Time Warner Telecom name through June of 2008. Prior to extending this licensing agreement the Company had began a branding initiative that resulted in approximately $1 million of expenses in the second quarter. The Company plans to continue certain activities throughout 2007 leading to a name change in 2008. Costs for the remainder of 2007 are expected to be less than $1 million.

M-EBITDA Margin Outlook

"We have made substantial progress on integration and our remaining activities are on track," said Mark Peters , Time Warner Telecom's Executive Vice President and Chief Financial Officer. "We are pleased with our financial results this quarter. Our organic revenue growth and excellent integration progress, both in terms of cost synergies and efficiencies, are reflected in our margin growth. As in the past, we expect future quarterly margins will be impacted by the timing of sales, installations, seasonality and other normal business fluctuations, as well as integration synergies and costs. We anticipate reaching pre-acquisition M-EBITDA margins during the summer of 2008."

Capital Expenditures (excluding Integration capital investments)

Excluding integration capital investments, capital expenditures were $65.6 million for the second quarter. For 2007, consistent with prior guidance, the Company expects capital expenditures, excluding integration investments, to be approximately $230 to $250 million, which will primarily be used to fund growth opportunities.

Summary

"We continue to leverage our leadership position in the enterprise marketplace by delivering customers innovative solutions with our customer service, network and product capabilities which we are extending throughout our expanded footprint with the successful integration of our acquired operations. We remain focused on delivering strong enterprise growth, driving sales momentum and growing cash flow," said Herda.

Time Warner Telecom Inc. plans to conduct a webcast conference call to discuss its earnings results on August 8 at 9:00 a.m. MDT ( 11:00 a.m. EDT ). To access the webcast and the financial and statistical information to be discussed in the webcast, visit http://www.twtelecom.com under "Investor Relations."

Financial Measures

The Company provides financial measures using 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. Modified EBITDA is reconciled to Net Loss, the most comparable GAAP measure, within the Consolidated Operations Highlights and in the supplemental information posted 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 (used in) operating activities 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 related to the adoption of SFAS 123R. Management uses modified gross margin internally to assess on-going operations. Modified gross margin is reconciled to gross margin in the Consolidated Operations Highlights.

Forward Looking Statements

The statements in this press release concerning the outlook for 2007 and beyond, including expansion plans, growth prospects, expected margins, sales activity, expected customer disconnections, expected cost synergies, integration and branding costs, integration activities and results and expected capital expenditures 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 summarized in the Company's filings with the SEC, especially the section entitled "Risk Factors" in its 2006 Annual Report on Form 10-K. Time Warner 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 Time Warner Telecom

Time Warner Telecom Inc., headquartered in Littleton, Colo., provides managed network services, specializing in Ethernet and transport data networking, Internet access, local and long distance voice, VoIP and security, to enterprise organizations and communications services companies throughout the U.S. As a leading provider of integrated and converged network solutions, Time Warner Telecom delivers customers overall economic value, quality service, and improved business productivity. Please visit www.twtelecom.com for more information.

SOURCE Time Warner Telecom Inc.



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