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Edited Transcript of WIN earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 Windstream Holdings Inc Earnings Call

Little Rock Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Windstream Holdings Inc earnings conference call or presentation Thursday, August 8, 2019 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

* Christopher C. King

Windstream Holdings, Inc. - VP of IR

* 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. My name is Chris, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Windstream Q2 2019 Earnings Conference Call. Thank you.

Mr. Chris King, you may begin your conference.

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Christopher C. King, Windstream Holdings, Inc. - VP of IR [2]

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Good morning, everyone, and thank you for joining Windstream's Second Quarter 2019 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. Please note that our financial presentation includes reclassifications of certain revenues and expenses among business units, which we will expand upon later in the presentation.

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 now turn it over to Tony Thomas.

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Anthony W. Thomas, Windstream Holdings, Inc. - CEO, President & Director [3]

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

Before I begin discussing Windstream's operational performance, I wanted to briefly provide an update on our Chapter 11 reorganization process. Windstream remains focused on securing result that maximizes value for all of the company's stakeholders. As part of this process, Windstream continues to work to modify our contractual arrangement with Uniti. To increase the likelihood of an optimal result, Windstream is pursuing both litigation against, and negotiations with, Uniti.

Most recently, on July 26, 2019, Judge Drain approved a mediation with Uniti and a number of other key creditor constituencies. We are hopeful this process will lead to a mutually satisfactory agreement between Windstream, Uniti and our other key stakeholders. Absent an acceptable negotiated resolution, Windstream is prepared to pursue its litigation claims to conclusion.

Specifically, after a lengthy and thorough investigation, Windstream filed a complaint against Uniti on July 25 asking Judge Drain to, among other things, recharacterize our relationship with Uniti from a lease to a financing arrangement. Our complaint asserts that the approximately $650 million Windstream pays Uniti each year was intended to finance the 2015 spin-off of the network assets that created Uniti and was not a true lease.

While the outcome of any litigation is uncertain, we believe we have compelling and value claims against Uniti, and any ultimate outcome should reflect that value. Hopefully, we will reach a mutual agreement with Uniti through mediation, but we will continue to pursue all of our options with respect to our arrangement with Uniti.

Setting aside the Uniti-related matters, Windstream has continued to operate without material business interruption during its Chapter 11 cases. We appreciate the continued strong support we have received from our employees, customers, vendors and financial stakeholders as we work through this process.

Turning to our operations. Windstream delivered another solid quarter. Our team remains laser-focused on serving our customers and achieving our priorities for the year.

Beginning on Slide 4. We delivered $450 million in adjusted OIBDAR in the quarter, a sequential improvement of $3.6 million. Our consolidated adjusted OIBDAR margin of 35% has increased 140 basis points year-over-year as our interconnection and synergy achievements continue to remain on schedule. For the fifth consecutive quarter and now 16 consecutive months through June 2019, we recorded consumer broadband growth, adding over 1,900 subscribers during the quarter, which is historically a seasonally slow quarter for all broadband service providers.

In the Enterprise business unit, we continue to see strong growth in our strategic sales. We remain the largest SD-WAN service provider in the country in terms of customers and locations served and continue to add approximately 600 new locations every single month. Our strategic sales represented over 69% of total enterprise sales in the quarter, up from 55% in the prior quarter.

Turning to Slide 5. Our Kinetics segment is rapidly expanding its broadband capabilities. We have more than doubled the availability of 100 meg speeds across our footprint over the past several months. Today, 40% of our households can receive a 100 meg or greater speeds. In 2015, not a single household could. Today, 69% of our households have access to speeds of 25 meg or greater, which represents a 400 basis point sequential improvement, and over 2 million homes, which represents half of our ILEC footprint, have access to speeds of 50 meg or greater.

Slide 6 highlights some of the results of these network improvements, which contributed to 1,900 new subscriber additions in the second quarter, representing the fifth consecutive quarter of consumer broadband growth. The strength across our consumer broadband metrics shows that our network investments are paying off.

Project Excel, which was completed in the first half of 2017, along with targeted initiatives that are ongoing, are extending faster broadband speeds across our ILEC footprint, and our customers are responding. We continue to expect to add approximately 30,000 broadband subscribers during 2019, reflecting our continued momentum in the marketplace.

Slide 7 outlines our customers' growing demand for our increasing broadband-speed capabilities. As you could see, the percentage of our broadband subscriber base taking faster speed tiers continues to improve dramatically. As of June, 47% of our broadband subscriber base now enjoy speeds of 25 meg or faster. As a reminder, this metric was approximately 10% at the beginning of 2017. Additionally, we have enabled 1 gig capability to over 100,000 commercial locations across our ILEC footprint.

Turning to Slide 8. I want to touch on our multipronged approach to improve broadband speeds that I spoke about last quarter. This ongoing effort to accelerate speeds include software enhancements, fiber expansion that includes fiber to the premise and shorter loop lengths and increasingly, fixed wireless.

In mid-June, we were awarded 146 licenses in the 24 gigahertz and 28 gigahertz spectrum band, following auctions conducted by the FCC, which covers approximately 5 million households, including 2 million in our ILEC footprint and 3 million homes adjacent to our ILEC footprint. We spent $26.6 million for the spectrum, which will be used to deliver speeds up to 1 gigabit per second. Importantly, the spectrum and the associated electronics and equipment will be entirely and wholly owned by Windstream. 1 gig speeds will allow consumers to engage in multiple bandwidth-intensive activities at the same time, such as 4K video downloads, streaming music, virtual reality applications and online gaming. For businesses, Gig service will allow customers to enable next-generation network applications and services including cloud, voice, security and business continuity solutions.

Turning back to our first quarter operational highlights, Slide 9 shows our SD-WAN and strategic sales growth in our enterprise segment. Today, Windstream is the largest SD-WAN service provider in the country, while installing approximately 600 additional locations every single month, and that number continues to grow. Our UCaaS leadership position driven by our proprietary OfficeSuite product remains strong as we have reached over 535,000 UCaaS seats installed at quarter end.

Our strategic sales continue to accelerate, representing over 69% of our total enterprise sales during the second quarter. And these strategic products and services now represent an annualized run rate of $280 million in revenues, which represents $100 million increase in our annualized run rate in the past 2 quarters alone. These revenues are growing at approximately 43% year-over-year and are now 11% of our total enterprise service revenues.

On Slide 10, I also wanted to take a minute to highlight an exciting new SD-WAN product launch that occurred during the second quarter. SD-WAN with Fortinet is a more cost-effective SD-WAN solution, which embeds next-generation firewall options directly into the SD-WAN device, enabling a highly secure, flexible solution that maintains many of the features of a higher-end SD-WAN product offering, such as our SD-WAN Concierge product, at a much lower price point. We believe the economics as well as the ease of deployment and installation will make Fortinet a very attractive option for a variety of customers going forward.

Slide 11 highlights a highly prestigious award within the telecom industry that Windstream received recently. We are very proud to announce that Windstream was included in the Gartner Magic Quadrant for Unified Communications as a Service, Worldwide. This first-time inclusion in the Gartner Magic Quadrant demonstrates the emerging recognition and growth of Windstream Enterprises' flagship UCaaS product, OfficeSuite UC, and the unique combination of proprietary technology with a full range of network services. The recognition is further validation that our strategy to become a software powerhouse is being recognized in the market. I want to take this opportunity to congratulate the team for this tremendous achievement, and thank Gartner for their consideration for this award.

Turning back briefly to our Kinetic segment. I wanted to take a moment to provide an update on our progress regarding our CAF-II commitments. We have over 460,000 households in rural America with broadband speeds capable of 10/1 megabits. We are well ahead of our schedule on CAF-II commitments with fewer than 40,000 households remaining to be built before year-end 2020.

Last week, the FCC launched a Notice of Proposed Rulemaking for the new Rural Digital Opportunity Fund, a $20.4 billion program to continue efforts to expand and improve broadband across rural America. We are looking forward to both working with the commission to maximize the economic value for the fund as it develops rules for this exciting new program and participating in the fund in the coming years.

In summary, Windstream delivered another strong quarter, both financially and operationally, and we continue to see significant improvements in both our Kinetic and Enterprise operation following our years of investments in the business.

Now I'll turn the call over to Bob to discuss our financial results.

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Robert E. Gunderman, Windstream Holdings, Inc. - CFO & Treasurer [4]

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Thank you, Tony, and good morning, everyone. Before discussing our second quarter financial results, I wanted to briefly go over our financial reporting changes, which took effect during the second quarter. These changes are outlined on Slide 12 and were designed to improve the alignment of our customer base within our ILEC and CLEC markets.

First, we consolidated our nonenterprise ILEC operations under the Kinetic business unit. Kinetic now encompasses all nonenterprise revenues from the geographic territory of our ILEC. This caused shifts in certain SMB customers and wholesale customers from the Enterprise and Wholesale segments, respectively. In addition, we shifted our government and resale customers from Wholesale to Enterprise and reallocated certain corporate expenses, primarily property taxes, to their respective business units. A full description of the changes is available in our investor supplement.

Turning to Slide 13, we show our second quarter financial results. During the quarter, Windstream generated service revenues of $1.3 billion and adjusted OIBDAR of $450 million, a $3.6 million of sequential improvement. Consolidated margin of 35% during the quarter represents an increase of 140 basis points year-over-year driven by our strong expense management initiatives. This is the highest consolidated adjusted OIBDAR margin percentage since prior to our EarthLink acquisition. Notably, our total cash costs improved by over $93 million or 10% year-over-year.

On our integration and synergy achievement, plans remain on track for both Broadview and EarthLink. As a reminder, we ended 2018 on a run rate to achieve $145 million in OpEx and CapEx synergies and expect to end 2019 with a synergy run rate of $180 million.

The Kinetic segment delivered solid results. For the quarter, service revenue was $509 million, down slightly sequentially. Notably, both consumer revenues and consumer ARPUs were flat sequentially in the quarter. Contribution margin was $303 million or approximately 59%, representing a 30 basis point improvement year-over-year. Consumer broadband units increased by approximately 1,900 during the quarter, representing our fifth straight quarter of broadband subscriber growth.

In the Enterprise segment, service revenue was $673 million, and contribution margin was $139 million, up $6 million sequentially, representing an approximately 20% margin, an increase of 120 basis points year-over-year and 160 basis points sequentially. In the Wholesale segment, service revenue was $88 million and contribution margin was $65 million or approximately 74%.

On Slide 14, I wanted to provide an update on our continued interconnection expense reduction results. Our total interconnection expenses fell by almost 16% on a year-over-year basis during the second quarter. Notably, we still have almost $1.2 billion of annualized interconnection expense, almost $700 million of which is annual legacy TDM-related. These expenses comprise more than half of our total interconnection expenses. Our access team remains keenly focused on reducing these expenses as quickly as possible, and we will -- and we continue to believe that we will see greater than 10% annual reductions for the next several years.

Lastly, turning to Slide 15, I want to reiterate our financial plan for 2019. Our financial plan calls for a 2019 adjusted OIBDAR decline to improve versus the 5% decline seen in 2018 on a pro forma basis. Adjusted OIBDAR has declined 3.8% to the first half of the year. This improvement will be largely driven by an approximate 100 basis point increase in our consolidated adjusted OIBDAR margin driven by a strong improvement of over 8% in our cash expenses. Our first half OIBDAR margin is up 120 basis points year-over-year.

We expect consumer broadband growth from approximately 30,000 subscribers, which will more than double our 2018 broadband performance, which is the best among major U.S. telco providers. We have added 13,300 subscribers in the first half of the year. We expect to drive growth in our Enterprise strategic revenues by approximately 30% in 2019, as our SD-WAN and UCaaS sales continue to accelerate. These strategic revenues have increased 43% in the first half of the year. We anticipate our Enterprise contribution margins to increase by more than 200 basis points year-over-year. Enterprise contribution margin is up almost 180 basis points year-over-year in the first half of the year.

Now I'll turn the call back over to Tony for a few closing comments.

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Anthony W. Thomas, Windstream Holdings, Inc. - CEO, President & Director [5]

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Thank you, Bob. In summary, Windstream's operations are continuing the momentum we saw in 2018. We stand alone among the major U.S. telecom service providers with 16 consecutive months of consumer broadband subscriber growth as well as positive net adds for 5 consecutive quarters, coming on the back of large 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. And while we are continuing to drive material costs out of the business, our vision of driving Windstream to be a software powerhouse is becoming a globally recognized reality.

Our Chapter 11 reorganization process continues, and we are focused on reaching a satisfactory agreement with Uniti and our stakeholders. Windstream will emerge from our current restructuring, a healthier and stronger company.

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