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Edited Transcript of WIN earnings conference call or presentation 11-May-20 12:30pm GMT

Q1 2020 Windstream Holdings Inc Earnings Call

Little Rock May 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Windstream Holdings Inc earnings conference call or presentation Monday, May 11, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony W. Thomas

Windstream Holdings, Inc. - CEO, President & Director

* Robert E. Gunderman

Windstream Holdings, Inc. - CFO & Treasurer

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for joining Windstream's First Quarter 2020 Earnings Conference Call. Joining me on the call today are Tony Thomas, our Chief Executive Officer; and Bob Gunderman, our Chief Financial Officer and Treasurer.

To accompany today's call, we have posted the presentation slides, earnings release and supplemental schedule on our Investor Relations website.

Today's discussion includes statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. A discussion of factors that may affect future results is contained in Windstream's filings with the SEC, which are available on our website.

Let me know turn it over to Tony Thomas.

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Anthony W. Thomas, Windstream Holdings, Inc. - CEO, President & Director [2]

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Thanks, Chris. Good morning, and thank you for joining us today.

To begin on Slide 4, I'd like to address our response to the COVID-19 pandemic and its effect on how we do business and our network performance. The mission of Windstream has never been more critical as our nation and world face a serious public health crisis. We are a critical infrastructure provider to governments, hospitals, pharmacies and wireless carriers. As students transition to online classes and businesses send employees home to work, we are responding quickly to meet our customers' needs.

First, I want to begin by thanking our employees across the company for their dedication and flexibility as we've entered this unprecedented time. In February, we established a task force of leaders from around the company to monitor, advise and manage our response to COVID-19, including employee health and hygiene guidance, compensation and benefits, facility cleanings and supply chain management. Windstream has quickly and efficiently implemented numerous actions across the company to do our part to mitigate the spread of the virus. We rapidly focused on increasing the number of employees that are able to work from their homes, ending March with less than 7% of employees, working on location in our 5 largest offices. To provide seamless service to our customers across the company, we also quickly enabled the bulk of our call center employees to work from home with laptops and softphones.

Given the increased demand for residential broadband connections, our field technicians are front and center in our ability to provide new service and repairs to existing service. Their safety and our customer safety are paramount during this pandemic. As a result, we implemented home garaging to limit face-to-face interactions with technician work groups and acquired and distributed hand sanitizers, gloves and face masks to allow our technicians to continue to work safely with adequate protection. We also increased our compensation levels temporarily for our field technicians, considering the current work environment. I want to specifically thank them for their efforts over the past weeks as customer demand has never been higher and personnel safety concerns have never been greater.

I also want to recognize our procurement team for effectively managing our various supply chains across the company during this global crisis. Our team managed to definitely avoid any significant supply chain issues through constant communication with our vendors and suppliers while closely and effectively managing our existing inventory.

As seen on Slide 5, our network has performed seamlessly throughout the past couple of months. Our network is well equipped to handle the expected incremental capacity given our past modernization efforts that migrated Windstream to scalable, robust IP ethernet services. The upper graph illustrates the increased demand on our Kinetic data networks since the beginning of the pandemic, while the lower graph highlights the strong increase in demand seen for our OfficeSuite HD meetings as demand for video conferencing services continues to grow. Kinetic network data traffic has increased approximately 30% above pre COVID levels, while our OfficeSuite total meeting minutes have roughly tripled since early March. We continue to remain focused on our customers and are doing what it takes to deliver essential telecommunication services. I'm proud of our teams and thankful for their unwavering dedication during these uncertain times. The situation continues to evolve and remains very fluid, but we stand ready to adapt and respond.

Turning to the latest developments regarding our restructuring. In early March, we announced a settlement with Uniti, which allowed both companies to avoid costly litigation while establishing a new framework for our relationship.

As seen on Slide 6 and as part of the settlement agreement, Uniti will invest up to $1.75 billion in network investments for Windstream through 2030. This will support our investment strategy to drive 1 gigabit speed to approximately half of our ILEC footprint, which represents approximately 2 million homes over the next 5 years. In addition, Uniti agreed to pay Windstream $490 million as part of the settlement agreement and agreed to purchase certain unused and underutilized fiber assets, which currently generate approximately $29 million in annual OIBDAR for Windstream for an additional $285 million. As a result of the settlement in the modified lease agreement, Windstream's annual payment to Uniti will be reduced by an average of $294 million per year for the next 5 years beginning in 2021.

In conjunction with the Uniti agreement, Windstream also entered into a planned support agreement with our first lien creditors regarding the terms of our financial restructuring. This plan provides for a reduction of more than $4 billion in Windstream's existing debt as well as access to exit financing after emergence from Chapter 11.

Slide 7 shows our current planned time line for emergence. Following last Friday's court approval of the Uniti settlement, we are now scheduled for confirmation of our plan of reorganization on June 15 and hope to exit Chapter 11 in late August of this year, subject to regulatory approvals.

As seen on Slide 8, Windstream delivered solid first quarter results for the new year achieving flat sequential adjusted OIBDAR of $423 million for the third consecutive quarter. Notably, our Kinetic segment achieved sequential revenue growth in the quarter, driven by 1.6% sequential growth in high-speed Internet revenues.

Our focus on expenses continues to drive higher margins. And in the first quarter, our margin percentage was up 140 basis points year-over-year to 35.2% driven by consolidated cash expenses that fell by 11% year-over-year.

In our Windstream Enterprise segment, we continue to see an acceleration in our strategic products, with OfficeSuite demand increasing sharply in March as more companies across the country began using this technology to optimize engagement while working remotely. Consequently, our strategic enterprise revenues increased 28% year-over-year.

We also saw a notable increase in consumer broadband demand in March as families began attending school, performing work and managing essential functions of everyday life from their homes to lessen the impact of the COVID-19 pandemic.

Turning to Slide 9. Windstream added 18,000 net subscribers during the quarter, the highest quarterly subscriber growth in our history. Our broadband subscriber growth increased 58% year-over-year and accelerated throughout the quarter as we added almost 10,000 subscribers in the month of March alone. This market share growth has been driven by our continued improvement in broadband speed capability across our Kinetic ILEC footprint as shown on Slide 10.

As of the end of the first quarter, 70% of our ILEC households now have access to speeds of 25 meg or greater, up 900 basis points from the year-end 2018 levels. In addition, we almost tripled our availability of 100 meg or greater speed with 43% of our Kinetic households now capable of receiving those speeds, up from 15% at the end of 2018.

On Slide 11, 54% of our Kinetic customer base now enjoying speeds of 25 meg or greater, up from 44% a year ago. While impressive year-over-year growth, we still have tremendous opportunity in front of us to increase the number of customers that enjoy these faster broadband speed tiers.

Slide 12 illustrates that opportunity. Only 36% of our ILEC households capable of receiving 25 meg or greater are enjoying those speeds. That metric falls to 15% for our ILEC households that have access to 1 gigabit speeds. Driving greater penetration of faster speeds across our customer base remains a key priority for us to continue to drive subscriber growth and higher ARPUs.

Turning to our Enterprise results on Slide 13. Our emphasis on our strategic revenue product set continues to help offset some of the underlying pressures from our core and legacy products. Windstream remains the nation's largest SD-WAN service provider with over 3,200 SD-WAN customers under contract, representing over 29,000 endpoint locations. OfficeSuite demand also remains strong as we now have approximately 540,000 UCaaS seats installed.

Windstream's total annualized strategic product revenue reached $322 million in the first quarter, representing 28% year-over-year growth and now represents 14% of our total Enterprise service revenue.

Now let me turn it over to Bob to discuss our first quarter financial results.

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Robert E. Gunderman, Windstream Holdings, Inc. - CFO & Treasurer [3]

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Thank you, Tony, and good morning, everyone. Turning to Slide 14, we show our first quarter financial results.

During the quarter, Windstream generated total revenues of $1.2 billion and adjusted OIBDAR of $423 million, our third consecutive quarter at that level. Consolidated margin of 35.2% during the quarter represents an increase of 140 basis points year-over-year, driven by our strong expense management initiatives. Notably, our total cash costs improved by $94 million or 11% year-over-year.

The Kinetic segment delivered solid results. For the quarter, service revenue was $505 million, up sequentially, driven by a 1.6% sequential increase and an approximate 1% year-over-year increase in consumer Internet revenues. Internet revenue increase was driven by both higher net subscribers and a sequentially higher ARPU in the quarter.

Contribution margin was $302 million or approximately 58%, up $12 million and 190 basis points sequentially. Consumer broadband units increased by 18,000 during the quarter, representing our eighth straight quarter of broadband subscriber growth.

In the Enterprise segment, service revenue was $590 million, and contribution margin was $113 million, down $8 million sequentially. The segment delivered an approximate 19% margin, up 10 basis points year-over-year. Notably, while some Enterprise customers are clearly feeling the macroeconomic pressure caused by the coronavirus pandemic, we estimate that only 13% of our current monthly recurring revenue is coming from what we would consider to be high-risk segments, such as the retail, hospitality and leisure industries.

In the Wholesale segment, service revenue was $85 million, up sequentially, and contribution margin was $62 million, with margins of approximately 73%.

One modeling note regarding our Wholesale segment. Due to the Uniti settlement and the pending sale of underutilized and unutilized fiber assets, we experienced lower fiber sales than seen in previous quarters.

On Slide 15, I wanted to provide an update on our continued interconnect and expense reduction results. Our total annualized interconnection expenses fell by almost 20% on a year-over-year basis during the first quarter.

We reduced interconnection expenses on an annualized basis by $242 million in the quarter or 20.6%. Notably, we still have over $900 million of annualized interconnection expense over $450 million of which is legacy TDM related. These expenses comprise almost half of our total interconnection expenses and are falling by almost 25% annually.

We also have an additional $343 million in annualized expenses associated with network real estate, colocation and fiber expenses that we are focused on reducing over time, which represents another material cost reduction opportunity.

We continue to believe that we will see greater than 10% annual reductions over the next several years. In addition to the significant reductions in costs already achieved, we anticipate exiting 2020 with a run rate improvement of approximately $75 million in incremental annual cash cost through targeted cost reductions versus 2019 levels. We look forward to emerging from bankruptcy later this summer with greatly improved financial flexibility with over $4 billion in reduced debt compared to our current debt levels as well as the economic benefits of our new agreement with Uniti.

Now I will turn the call back over to Tony for some closing comments.

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Anthony W. Thomas, Windstream Holdings, Inc. - CEO, President & Director [4]

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Thank you, Bob. In addition to our strong quarterly results, I wanted to highlight several of our new product announcements, as shown on Slide 16.

First, in mid-March, we announced a new WE Connect Partners portal for our channel partners, which give our partners the ability to easily manage and configure end user services, gain critical analytical insight in real-time and access support whenever and wherever they need it. Windstream Wholesale announced a successful trial in conjunction with Infinera to commercially offer 400-gigabit wave services to support our customers' high bandwidth needs and firmly places Windstream Wholesale as an industry leader in optical infrastructure.

Kinetic also announced a partnership with YouTube TV during the quarter. This arrangement allows Kinetic customers to access an affordable and innovative streaming solution for both live and on-demand content from over 70-plus top networks. Membership comes with free unlimited cloud DVR storage and can be accessed on any screen.

I want to wrap up by reiterating our 2020 priorities. As seen on Slide 17, we are off to a strong start in achieving our 5 primary priorities for Windstream. First, our focus on growth. Last week's court approval of our settlement agreement with Uniti has us on a schedule to emerge from restructuring later this summer, in conjunction with our planned support agreement with certain creditors. Upon emergence, we will have a significantly delevered balance sheet with plans to reinvest significant capital into our Kinetic ILEC footprint. These CapEx plans, partially funded by Uniti's cash contribution of $1.75 billion over the next 10 years, will allow us to pass approximately half of our ILEC footprint with speeds of 1-gig or greater. Given this investment strategy, our record-breaking first quarter broadband net adds and the revenue growth seen in Kinetic during the first quarter have us well positioned to capitalize on the Kinetic network investment plans going forward.

In addition, we will continue to maintain our leadership positions in telecom products and software. Our 2020 focus will be on continuing to expand our broadband speed capabilities, continuing to enhance our SD-WAN and UCaaS products, expanding metro fiber and long-haul network services and enhancing our customer-facing digital experience through our customer portals and interfaces.

In addition to the upcoming Rural Digital Opportunity Fund, significant attention in Washington is being devoted to the digital divide in rural America. This is an important issue that has come to the forefront quickly given the pandemic.

Whether it's the need for expanded telehealth efforts or broadband availability for employees or students that are now being forced to work from home, rural broadband deployment has never been more important for the country. Windstream looks forward to continuing to be an integral and vital part of these efforts in the coming years.

All of these objectives are part of our third priority to consistently deliver excellent customer experiences. This will be achieved through enhanced network visibility and design as well as continued expansion of software tools and automation efforts to better and more efficiently serve our customers. We have continued to deliver consistently high levels of customer service, despite having to migrate many of our customer service representatives from physical call centers to individual remote locations as a result of the COVID-19 pandemic.

Our final 2 priorities for 2020 have been multiyear priorities for several years now. Our fourth priority is to drive adoption of our strategic product set, leading with our best-in-class SD-WAN and UCaaS product lineups. We expect to see solid growth in our strategic revenues this year, and we will continue to work tirelessly to convert existing customers from legacy to strategic products. This conversion is not only beneficial for Windstream in terms of its long-term financial profile, but more importantly, it benefits our customers by providing state-of-the-art products to help customers grow their own businesses, while also providing many operational efficiencies at generally lower price points.

Lastly, we continue to manage our costs aggressively, as evidenced by the 11% reduction in cash operating experiences year-over-year achieved in the first quarter. We continue to expect to see costs come down across the company once again this year.

In summary, Windstream's operations continue to perform well in spite of the significant impacts seen due to the coronavirus pandemic. Our flat sequential first quarter adjusted OIBDAR level demonstrates not only our continued focus on expense reduction efforts, but also strong and increasing demand for our consumer broadband products, which drove sequential revenue improvements in our Kinetic business.

We continue to stand alone among major U.S. telecom service providers with 2 years of consumer broadband subscriber growth as well as positive net adds for 8 consecutive quarters, coming on the back of ongoing strategic investments in our network. The transformation is also being seen in our Enterprise business, which is focusing on strategic products such as SD-WAN and UCaaS to provide a better, more robust customer experience. As I mentioned earlier, the mission of Windstream has never been more critical. We connect people and empower business, and we will rise to the challenge.

I want to thank our Windstream team for continuing to remain focused on our customers and for tirelessly providing essential communication services.

Thank you for joining us this morning. Have a great day.