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|Business Network and IT Services
Rating Update Summary
tw telecom’s investments in network expansion, improved sales tools, and development of its partner channels are contributing to growth in 2010.
Current Threat Assessment :
tw telecom identifies its fiber access strategy, service innovation, and customer service as keys to the carrier’s success. The carrier is steadily increasing the number of commercial buildings attached to its fiber, reaching 10,967 locations as of June 2010. tw telecom was an early mover in the Ethernet space, launching nationwide VPLS in 2003, well before its largest competitors. tw telecom mainly targets its Ethernet-centric collection of optical services at multi-location, mid-sized and large enterprises, customers on which incumbent carriers may not focus their greatest amount of attention and which are difficult for cable operators to serve. tw telecom also serves a base of mid-market customers, many of which were inherited from its 2006 acquisition of Xspedius Communications. In H1 2010, tw telecom’s focus on Ethernet and IP services paid off as the carrier’s revenue from that segment increased around 15% year-over-year: The carrier has seen particular success in the healthcare and financial services verticals.
In 2010, tw telecom launched its E-Line offer, a point-to-point/point-to-multipoint Ethernet WAN offer that supports the carrier’s new fractional 10 Gbps capability. Fractional 10 Gbps enables customers to purchase bandwidth in increments of 1 Gbps (from 2 Gbps up to 9 Gbps), allowing clients to purchase the bandwidth necessary to support varying applications. tw telecom has also launched Converged Services, a fully managed solution that includes local and long-distance voice, IP VPN, and secure Internet access. Converged Services offers bandwidth options from T1 to 1 Gbps Ethernet; its voice line, trunk, and PRI options include free long-distance minutes (based on bandwidth) and free calling to any other tw telecom customer in the U.S. In 2010, tw telecom expanded its class of service tiers from two to five, and it achieved MEF 9 and 14 certification with its Ethernet Private Line (EPL), Ethernet Virtual Private Line (EVPL), and Ethernet LAN (E-LAN) services.
tw telecom sells its services through a mix of direct sales and partners. The carrier has sales offices throughout its 30-state footprint, local to almost all of its 75 markets. Its highest concentrations of sales offices are in California (10), Texas (six), and New York, Florida, and Louisiana (four each). Each office has a named sales representative that the customer can contact directly. In 2010, tw telecom invested in the systems that its salespeople use to increase their efficiency and effectiveness. The carrier has automated administrative functions such as credit checks, proposal pricing, and automatic population of service orders, and tw telecom has integrated customer data into a single system to make it easily available to sales and support teams. tw telecom is also working to build sales by investing in the development of its partner channels. In Q3 2010, tw telecom relaunched its channel partner program, offering partners several options in how they can work with tw telecom. The carrier is expanding its channel support organization, hiring more channel managers to work with partners and increasing dedicated channel support.
Customer Service and Support
tw telecom touts “extremely high levels of customer service” that include soliciting customer feedback for every service installation, repair, or other service call. tw telecom's operational departments' compensation is tied to positive customer feedback. The carrier uses collected information to gauge what individual customers like and dislike about tw telecom's approach, and can adjust accordingly. Customer feedback can also lead to commending employees for positive responses, or for additional coaching to correct customer criticisms. The carrier launched its customer self-service portal, known as MyPortal, in early 2009. Development for the portal is ongoing, and it is driven by customers’ feedback. tw telecom provides customers with the choice of contacting the carrier via the portal, e-mail, or by phone, citing that customers can pick up the phone and talk to a live person in less than 20 seconds on average. The company launched its first agent portal in January 2010, and it is in the process of upgrading the portal further to include features such as quoting functionality, in addition to existing address validation.
Though tw telecom was born out of Time Warner Cable, the company has been its own entity since 1998, and it finalized the separation from its cable roots when the carrier dropped the “Time Warner” from its name in 2008. The single largest carrier partnership tw telecom has is with AT&T, which represents a shrinking source of revenue for the carrier (though at nearly 5% of revenues, the AT&T relationship is still very significant). tw telecom in turn purchases special access and Type 2 interconnection services from AT&T, as well as from other incumbent local carriers, to extend its services to off-net customer locations. In August 2009, tw telecom announced a network interconnect agreement with an unnamed third-party carrier to take its MPLS IP VPN services to 64 countries worldwide.
Perspective Current Perspective
We are taking a positive stance on tw telecom, because the carrier seems to have weathered the difficult economic environment of the last couple of years, a tribute to a sound product strategy, conservative cost management, and the success of the carrier's customer-centric approach. tw telecom’s revenues grew 5% for H1 2010 over H1 2009, and the company had nearly $70 million operating income for H1 2010, up 30% from the same period in 2009. tw telecom receives 75% of revenues from enterprise customers; about two-thirds of that revenue comes from higher-margin on-net services. The carrier has built up its strength in carrier Ethernet, and it was an early adopter of VPLS; more recently, the carrier expanded its metro Ethernet and managed services options, adding an E-Line offer with fractional 10 Gbps Ethernet bandwidth and a managed solution that packages voice, IP VPN, and Internet access.
tw telecom benefited greatly from its decision early on to focus on carrier Ethernet delivered to enterprise-class customers. However, competitors have worked to close these gaps. AT&T and Verizon now have national and global VPLS Ethernet fabrics. XO has built up, while Level 3 has rationalized, a comprehensive portfolio of Ethernet services. XO, Level 3, and now PAETEC also are pursuing tw telecom's mid-size enterprise focus. XO launched a division to focus on enterprise wins; Level 3 is in the midst of a metropolitan market expansion initiative; and PAETEC announced it is acquiring Cavalier Telephone, greatly bolstering its fiber footprint. These competitors present alternatives to tw telecom, offering low prices nationwide and international reach. The incumbent carriers also have been working on strengthening their portal automation and tightening customer service, as well as offering one-stop portfolios that include a more comprehensive on-net reach and more complementary services such as mobility and broadband access.
|Business Network and IT Services - US
Network Access and VPNs
Voice and Unified Communications
| Strengths and Weaknesses Strengths
• tw telecom is net profitable, with almost $237 million in net income in H1 2010, which reflects a $227 million tax gain from the reversal of a valuation allowance. The company's revenues are up 5% year-over-year for H1 2010 over the same period in 2009, led by strong sales in business services that more than offset shrinking wholesale and inter-carrier compensation revenues. The carrier has around $1.4 billion in long-term debt, most of which does not come due until 2018. Enterprise customers can have confidence that tw telecom is a safe choice and a stable partner.
• tw telecom's enterprise strategy has given it a strong base of business, education, and local government customers. Business customers account for 75% of revenues, while carrier revenues, including inter-carrier compensation, represent 25% of revenues. More significant is that about two-thirds of its customer base is under contract terms of three years or longer, and about two-thirds of tw telecom’s customers are on-net. The former provides more stable revenues, while the latter translates into higher margins for tw telecom.
• tw telecom’s primary focus is on fiber-based services, and it had 10,967 buildings on-net as of June 2010. The carrier was never in the dial-tone voice UNE-P or DSL resale business, instead using special access leased from the ILECs where it did not have fiber. The company was less affected by incumbent local exchange carrier deregulation than many of its peers.
• tw telecom bet big on Ethernet-based services, and it was one of the first carriers to offer multipoint long-haul VPLS. Carrier Ethernet has made rapid gains in popularity, and tw telecom offers Internet access over Ethernet, as well as Ethernet-over-TDM circuits and even integrated voice/data access with an Ethernet port, making the company one of the largest carrier U.S. Ethernet providers in terms of ports sold.
• tw telecom’s MyPortal customer portal is a comprehensive effort to pull together the carrier's services under one presentation framework. tw telecom used customer input to guide the creation and ongoing development of the portal. However, the company has also custom-built features specifically to meet the needs described by some of its larger customers.
• tw telecom is working to increase revenue through increased investment in both direct and indirect sales efforts. The carrier has streamlined and automated sales administration tasks such as credit checks, quotes, and proposal pricing, and it has integrated customer data into a single database to make information easily accessible for sales and sales support teams. tw telecom has relaunched its channel partner program, increasing the number of channel managers and upgrading its partner portal to include enhanced quoting capabilities.
• Though tw telecom is generating net profits, the carrier would be even more profitable were it not for the interest payments on the CLEC’s relatively high long-term debt. The carrier had $1.4 billion in long-term debt and capital lease obligations as of June 2010, and it had interest expenses of $40.7 million for H1 2010.
• tw telecom’s strength lies in its Ethernet service portfolio, but the carrier’s voice service options remain basic compared to competing incumbent carriers as well as fellow CLECs. Competitors offer a range of options from basic business lines to integrated access and SIP trunking, and most are touting a VoIP/unified communications strategy while tw telecom's options are limited to analog voice and integrated access.
• tw telecom won a major advantage by being one of the early movers among competitive carriers to focus heavily on enterprise carrier Ethernet services. That advantage is eroding, as competitors such as XO and Level 3 have developed and groomed their own carrier Ethernet portfolios and worked to build up their enterprise sales force, particularly for mid-sized and large enterprises.
Recommended Actions Recommended Vendor Actions
• tw telecom needs to adjust to market changes, as incumbent carrier competitors AT&T, Qwest, and Verizon Business each have launched long-haul VPLS Ethernet. What the CLEC may lose in competitive differentiation it may be able to make up by describing itself as an industry pioneer with years of experience in the technology and an understanding of how to support multipoint Ethernet services for mid-sized and large enterprises, while the incumbents focus first on large enterprise sales, particularly for multinational services.
• tw telecom does not have a strong story around its IP telephony strategy. The carrier offers integrated access and analog voice lines, but it has not launched a SIP trunking offer that can provide customers with a more cost-effective, potentially higher-quality voice solution that can support next-generation unified communications applications.
• tw telecom has been building up its MPLS IP VPN reach and managed router options, but the carrier has not yet clarified how its Ethernet and IP VPN services work together seamlessly. The carrier should be sure to demonstrate Layer 2 Ethernet/Layer 3 IP interworking, so that customers understand they can get coordinated capacity, network, and managed services from the carrier.
• tw telecom always has opportunities to succeed as a secondary provider in a customer contract. The company can provide backup fiber-based access to enterprises that insist on both carrier and route diversity. This presents an opportunity to build up a track record and gradually “edge in” to take on increasing levels of responsibility for the customer.
Recommended Competitor Actions
• RBOCs, IXCs, and other established carriers should show off their ability to support existing conventional business data services while helping customers migrate to new generations of services. They can contrast tw telecom's Ethernet and IP-centric service lineup against their broader portfolios that still offer business network standbys such as private line and frame relay. Customers will appreciate being able to migrate at their own pace, without the trauma of switching carriers.
• Incumbent carriers, including ILECs and IXCs, can show off their more comprehensive local and regional, blanket national, and/or international reach. They can position tw telecom as competitive only to fiber-connected buildings in the metros where it operates, positioning themselves as having a much more comprehensive incumbent local carrier presence, plus a strong fiber-based services presence in other U.S. markets and internationally.
• IXCs and CLECs that do not have their own local exchange facilities should continue to utilize tw telecom where necessary, keeping in mind that the company occupies markets that are aggressively targeted by numerous competitors. These IXCs can show off comprehensive national services reach and contrast tw telecom's infrastructure as mainly focused around a collection of metro area networks.
• AT&T and Verizon Business can show off their customer portals, Business Direct and Verizon Enterprise Center. These two carriers have made significant investments in their customer portals, adding a wealth of information for customers that includes access to billing information, online tools and remote applications, and easy access to customer support. These tools let AT&T and Verizon Business customers self-manage a broad spectrum of services and get a near real-time view of their enterprise networks.
Recommended End-User/Customer Actions
• Enterprise customers, government agencies, and educational institutions that want to connect multiple locations within a metro area or in a campus-like environment using IP and Ethernet should include tw telecom when issuing RFPs, if the carrier is present in the market. The company focuses mainly on Ethernet services, but it also offers IP VPN and fiber-based transport services.
• Mid-market customers may consider tw telecom's integrated T1 services, which will allow them to consolidate their voice and data services over to a single connection through a single provider. Mid-market customers are not tw telecom's primary focus, however, and a SMB-focused regional CLEC may be able to offer a high level of service and a more diverse portfolio of voice options at a low price.
• Carriers that need local network access out of region should evaluate tw telecom as a viable source for local network transport and loop elements. Wholesale customers and end users should investigate tw telecom's service offerings to determine if the services suit their needs. They can use tw telecom's pricing as leverage in negotiations with their current provider(s).
Fast Facts Company Description
||National CLEC and competitive access provider
||Consolidated: $1.211 billion (2009), $628 million (H1 2010): Data & Internet - $263 million, Network Services - $180 million, Voice - $186 million, Intercarrier Compensation - $17 million
||75 metro markets in 30 U.S. states plus Washington, D.C.; also, international coverage to 64 countries via undisclosed NNI partner
||June 2010: 2,901
||Enterprises, the government/public sector, system integrators, carriers
||U.S. Air Force – tw telecom has been awarded several contracts to provide data, Internet, and voice services to several Air Force bases in the U.S., including Lackland AFB in San Antonio ,TX and Wright Patterson AFB in Dayton, OH.
Actuant Corporation – tw telecom is providing Actuant, a global industrial products manufacturer, with? colocation, voice, data, and Internet services.
||Direct sales in most local markets and an overlay national sales organization; 528 sales representatives as of June 2010. The sales organization is segmented by customer type: enterprises, communications service providers, public sector organizations, and system integrators. Each sales organization has dedicated sales engineering and support resources. tw telecom relaunched its channel program in 2010, and it is enhancing its partner portal.
||Data & Internet (native LAN, Internet access, managed services); Voice (local/long distance IP trunking); Network (private line, special access, transport, metro/regional fiber); Inter-carrier origination and termination services
|Geographic Network Coverage
||Serves 75 metros in California, Oregon, Idaho, Nevada, Colorado, New Mexico, Arizona, Texas, Kansas, Arkansas, Oklahoma, Louisiana, Mississippi, Alabama, Georgia, Florida, North & South Carolina, Tennessee, Kentucky, Virginia, Minnesota, Wisconsin, Illinois, Indiana, Ohio, Maryland, New York/northern New Jersey, and Hawaii; international reach via partner NNI to Canada, Mexico, Europe (23 countries), Latin America (20 countries), the Middle East/Africa (five countries), and Asia-Pacific (14 countries)
||27,500 route-mile regional/metro fiber network, with a focus on fiber access to buildings (10,967 buildings connected as of June 2010); core 10 Gbps IP backbone employs Juniper routers; mix of TDM voice and Sonus softswitches throughout markets; capital expenditures were $247 million for H1 2010. The carrier has budgeted $300-$325 million in CapEx for full-year 2010.
||tw telecom does not operate a wireless network.
|Network Upgrades or Enhancements
||No specific upgrades noted at this time
|Expansion or Upgrade Plans
||No public upgrade plans at this time
|Network Operation Center (NOC)
||Denver, CO and St. Louis, MO
||71 owned data centers across the U.S.; presence in more than more than 300 data centers including third-party locations.
||About 67 offices located throughout 30-state service territory offer both sales and customer support.
| Select Customer Wins
||Multi-year contract with the U.S. Air Force to install and deliver local voice and Internet services at Andrews Air Force Base in Maryland. tw telecom will provide 30,000 analog phone lines and secure Internet access.
||Cornerstone Mortgage Company
||Multi-year agreement in which tw telecom will provide IP VPN, Ethernet Internet Service (EIS), regional LAN, and colocation services to Cornerstone’s 60 locations in 12 states.
||tw telecom will deliver Ethernet Internet Service (EIS), Native LAN, and VoIP services between the university’s six Kentucky campuses.
||tw telecom will provide voice and advanced data services to connect 21 ProHealth Care locations across Wisconsin, delivering business Ethernet and integrated LAN services.
||Washington Trust Bank
||tw telecom will provide IP VPN services to connect the bank’s 41 branches and offices in Washington, Idaho, Oregon, and Utah with the bank’s technology support centers.
| Key Partnerships and Alliances
|| Wholesale partner represented <5% of tw telecom's revenues in 2009
| Key Mergers, Acquisitions, and Divestments
||Acquired regional CLEC Xspedius Communications in a cash-and-stock transaction valued at $576 million (see “Time Warner Closes Its Acquisition of Xspedius and Gains Key Metropolitan Network Facilities,” November 1, 2006). Current Analysis took a positive stance, as the move increased tw telecom's metro fiber footprint from 44 markets to 75 markets. The carrier also gained about 20,000 Xspedius customers at the time, most of them SMBs that were of lower strategic value.
||Acquired bankrupt assets of western CLEC/regional fiber operator GST Telecommunications
| YellowBRIX News and Financial Data
- [May 25, 2011] Bowman Consulting Group Selects tw telecom for Business Ethernet Services to Connect 14 Locations in 4 States ; - Multi-year contract includes High-Speed Ethernet Internet and IP VPN Services to connect offices in Virginia, Arizona, Maryland and North Carolina
- [May 25, 2011] Bowman Consulting Group Selects tw telecom for Business Ethernet Services to Connect 14 Locations in 4 States
- [May 25, 2011] Core NAP selects tw telecom for business Ethernet services to expand reach in Austin.(CONTRACTS)
- [May 20, 2011] KEMET Corporation Selects tw telecom Business Ethernet Service for BCDR Data Replication ; - Multi-year contract includes Ethernet Virtual Circuit, Ethernet Internet Service and Native LAN Services
- [May 20, 2011] KEMET Corporation Selects tw telecom Business Ethernet Service for BCDR Data Replication
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Stock Symbol: TWTC
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