TW Telecom (NASDAQ:TWTC, news, filings) picked up an important state government contract expansion today. The State of Texas has awarded the fiber operator a five year contract under which it will supply a comprehensive suite of network solutions to all state agencies and departments. Texas and its capitol Austin have long been tw telecom strongholds, and the state government was already a substantial customer.
For the past several quarters, tw telecom has been greatly accelerating the rate at which it adds buildings to its network to more than five hundred per quarter, or a half dozen a day. That’s an amazing rate, yet thus far we have not seen it lead to an increase in their revenue growth rate or in their EBITDA margins. One or the other seems inevitable, else their capex growth wouldn’t make sense given their generally conservative style.
Perhaps the change in their stance is in response to a change in the economics. Greater bandwidth demand is making it economical to bring a much wider variety of enterprise buildings on-net, and tw telecom simply responding to that new situation within its existing footprint and customer profile. They have long had a substantial amount of leased circuits, and are probably bringing a bunch of those on-net – which would probably show up in margin growth in a quarter or two. We shall see.
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It’s easy to lose sight of the fact that a “sterile” stat like building additions really represents customer and revenue growth since that building will not be added without an anchor tenant and committed revenue.
The other fact that stands out is the standards they apply. A new buiding doesn’t get lit unless it shows a 30% IRR over the contract– and the IRR assumes no renewal at contract maturity (remember they have < 1% churn) and is calculated on a full after tax basis (even tho they currently are not a full tax payer).
Given timing lags this building growth suggests real revenue momentum over the next 12-18 months. Adding this to the very low volatility of this company's results and I think if you own any three telecom stocks then TWTC should be one of them. Also, Larissa sounded uber upbeat on the CC.
On a go fwd basis what are your other 2 ERH? You still AMT & CTL?
My bias is CLWR debt and L3.
AMT is still a core holding but is morphing to become a REIT and a semi-yield play but I still think it has plenty of upside given where the lower growth real estate REITs trade. CTL is similar– a form of “equity bond” with a 9% yield. To the extent it gets to a 7% yield it represents 30+% upside to the stock price CTL currently trades at an 18% yield to its FCF which is remarkably cheap. I own both.
I also own LVLT but that’s a different beast and you’re buying latent growth potential at what appears a reasonable price if they can make the GLBC deal work right– it’s not heroic to now think it could be a $5 stock within 2-3 years.
I know next to nothing about CLWR except they appear to need to rely “on the kindness of strangers”. They don’t control their destiny.
That would be fair for CLWR’s equity but the 1st lien has a 17% YTW due 2015 which includes a point per month but I guess spectrum plays are their own animal. If you want to talk kindness of strangers, the LLNW upgrade by RJ is interesting this morning.
I would worry what the “W” in YTW actually meant. Today, a 17% yield in a large issue implies that a loss of principal or a trip through the court system has real potential, but again I’m just not that familiar with the facts.
scmuck (should i really call you that?),
Took a quick look at analyst views on CLWR and got this:
“Current cash resources may last until 2Q 2012
Clearwire will burn through its cash balance by the end of 2Q12, based on our
estimates. We estimate Clearwire would need to add an incremental 9m
wholesale subscribers in 2012E versus our base case assumption of 4.7m to
close the cash flow gap organically. Putting this into perspective, without its own
retail strategy, this would imply 70% of Sprint’s entire post-paid subscriber base
would need to be on the CLWR 4G network by the end of 2012.
External funding options becoming a guessing game
Based on work with our high yield research group, we believe Clearwire has
effectively exhausted its secured debt capacity and with the second lien bonds
trading at <$0.75, unsecured financing is not a practical option. Equity capital
markets are similarly closed, in our view. Clearwire has suggested vendor
financing and factoring of its Sprint receivable as potential sources of capital, but
these would not close the gap according to our math. CLWR’s only option
appears to be external finance.
Incremental capital from Sprint in doubt
Sprint has been viewed as a funder of last resort for Clearwire based on the
strategic value of Clearwire’s 4G network to Sprint and Sprint management
commentary. Recent events (L2 agreement and CLWR’s go-it-alone LTE build)
lower the probability of a Sprint capital infusion, in our view. Our conversations
with Sprint increase our conviction no near-term funding is coming."
For me, owning the paper would require gonads the size of which I don't possess.
If you want to invest in paper paying a coupon 7-8x as risky as the 10yr it isn’t without serious risk though given some of the valuation work on spectrum, I think I am well covered esp. given the scarcity value of it.
A different sort of risk is this LLNW story. Less than 1x trailing ev/ebitda, 2x net cash, 0.6x EV/Sales with a patent portfolio L3 couldn’t poke holes in after L3 paid more than all of Limelight’s EV to buy Saavis CDN, L3 exchange’s of value for IBM’s 50 patents plus the time to market advantage of someone trying to take AKAM’s $4B+ mkt cap(took L3 4 years to get to scale). Add to that a $110M doubleclick-lite biz purchased in the Dec 09 which if it is up like the mkt is over that time would get you the pre-synergized CDN for free.
schmuck,
Took a look at LLNW. Tough situation to figure out. They missed Q2 badly and guided down. The CDN space continues to suffer from aggressive prcing and LLNW hasn’t scaled yet. Doesn’t look like they do much better than EBITDA break-even this year after ESO expense. That said they have an EV of ~$140 million after netting the cash and with ~$220 in FY ’11 Revenue you would have to figure it’s worth more to someone else.
I saw the report that linked them with LVLT. If that has any substance, I don’t believe LVLT lets go of its CDN (they have pumped it too much as being integral to their value) so it implies a buy of LLNW. Given the price history, hard to figure Goldman is a seller anywhere near the current price unless they have given up. On that basis it looks like a decent spec take-out play but on long term fundamentals and recent performance not so much. Of course, WTFDIK.
No way L3 lets go of its CDN, agreed.
Based on the last LL call, between their words sounds like LL is signalling they want out of the CDN business in that if they can have the data that enables them to sell their value added svcs, they don’t need to run the CDN itself. It may just be a technology purchase by L3. Let’s say L3 just buys the CDN for something north of what Saavis assets were, this stock would be a true net-net. Goldman may take the rest private or run itself as a SPAC.