tw telecom Q3 revenue up 7.1% with ongoing adoption of Ethernet, VPN services

Slight decline in wholesale revenues
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tw telecom (Nasdaq: TWTC) reported on Monday that Q3 2012 earnings rose $24.4 million, or 7.1 percent year-over-year, to $368.9 million, compared to $344.5 million in Q3 2011, due to a rise in enterprise customer revenue.

Likewise, net income grew 43.7 percent to $21 million from $14.6 million in the same period a year ago. It attributes the increase to a 9.2 percent year-over-year increase in M-EBITDA, partially offset by an increase in income tax expense. 

As seen in previous quarters, sales of data and Internet services drove enterprise customer sales up 9.8 percent year-over-year to $26.2 million. However, wholesale revenue declined by $1.5 million, a factor it attributes to churn and repricing of contract renewals, which was partially offset by Ethernet services it sells to both wireline and wireless operators to serve their multisite business customers and for backhauling wireless traffic.

"We delivered ongoing revenue growth and strong Modified EBITDA margin as we generated substantial levered free cash flow this quarter," said Larissa Herda, tw telecom's Chairman, CEO and President, in the earnings release.  "We've deployed many new products and features this year to meet our customers' rapidly changing requirements, including recently introducing new Ethernet capabilities and advancing our Intelligent Network."

Ethernet and VPN service sales, in particular, drove a 14.9 percent increase in data and Internet services revenue, which was partially offset by churn and repricing. Overall, data and Internet makes up 51 percent of the service provider's revenue, up from 48 percent in 2011.

One of the new highlights of tw telecom's growing Ethernet portfolio was the introduction of its "One-to-Many" offering, which can provide a wholesale customer with national Ethernet coverage from a single connection to meet their multisite customers' needs. What this means is that a service provider that needs to serve a customer outside of their own network borders will no longer have to establish multiple individual External Network to Network Interconnection (E-NNI) agreements with various carriers in each market where they deliver service. 

Besides Ethernet and VPN, voice service revenues were up 6.8 percent, reflecting sales of converged and other voice solutions in addition to an increase in certain taxes and fees, partially offset by churn.

Network service revenues continued to be a challenge in Q3, declining 6.5 percent because of churn, repricing for contract renewals for transport services, and a decrease in certain taxes and fees, which outpaced growth in high capacity and colocation connection services.

The question remaining is whether tw telecom's dedication to profitability makes it a good acquisition target. During the quarter, a rumor emerged that CenturyLink wants to acquire tw telecom, but as of this date neither company has confirmed any deal is going to happen

tw telecom was trading at $25.30, up 0.02, or 0.08 percent in late afternoon trading on the Nasdaq stock exchange on Monday.

For more:
- see the earnings release

Special report: Wireline telecom earnings in the third quarter

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