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Edited Transcript of WIN earnings conference call or presentation 1-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Windstream Holdings Inc Earnings Call

Little Rock Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Windstream Holdings Inc earnings conference call or presentation Wednesday, March 1, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christie Grumbos

Windstream Holdings, Inc. - SVP, Treasurer & IR

* Tony Thomas

Windstream Holdings, Inc. - President & CEO

* Bob Gunderman

Windstream Holdings, Inc. - CFO

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Conference Call Participants

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* Gregory Williams

Cowen and Company - Analyst

* Simon Flannery

Morgan Stanley - Analyst

* Scott Goldman

Jefferies LLC - Analyst

* Matthew Niknam

Deutsche Bank - Analyst

* Batya Levi

UBS - Analyst

* Angela Zhao

BofA Merrill Lynch - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Windstream fourth-quarter earnings call.

(Operator Instructions)

As a reminder this conference call may be recorded. I would now like to turn the conference over to Christie Grumbos, Senior Vice President, Treasurer of Windstream. You may begin.

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Christie Grumbos, Windstream Holdings, Inc. - SVP, Treasurer & IR [2]

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Thank you, Nicole. Good morning everyone. Thank you for joining Windstream's fourth-quarter and full-year 2016 earnings conference call.

Joining me on the call today are Tony Thomas, our CEO, and Bob Gunderman, our CFO. To accompany today's call we have posted the presentation slides, earnings release and supplemental schedule on our investor relations website.

It is important to note that the financials that are discussed and presented in this presentation are on a pro forma basis as if the merger of EarthLink occurred on January 1, 2015 unless otherwise noted. Today's discussion includes statements about expected future events and financial results that are forward-looking and subject to risk 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.

With that, let me turn the call over to Tony.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [3]

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Thanks, Christie. Good morning, everyone, and thank you for joining us today to discuss what has been a transformative period for Windstream.

It has been just over two years since I became CEO and last July marked our 10th anniversary as a public Company. I'm extremely proud of the progress our team has made during this time in positioning Windstream for long-term success. We have a clear vision and we are making smart, targeted investments to better leverage our extensive network to provide advanced reliable services to customers and create value for our shareholders.

Starting on slide 4, on Monday we announced the completion of our merger with EarthLink to create a stronger, more competitive Company to serve our customers. This merger provides improved competitiveness and the ability to serve our customers through increased scale and enhanced product portfolio; an expanded network in key areas with the addition of EarthLink's unique fiber assets; significant annual synergies of more than $150 million within three years, an increase of $25 million over our previous estimates; an enhanced balance sheet that will provide financial flexibility for the long term; and, finally, significant adjusted free cash flow accretion which we use to reduce debt, support our continued network investment and provide greater coverage of the dividend.

We remain very excited about the prospect of working with our talented new colleagues at EarthLink to better serve customers and drive value for our stakeholders. To our EarthLink colleagues welcome to the team.

The completion of the EarthLink merger is an appropriate capstone for 2016. And so before I discuss our goals for 2017, let me first review on slide 5 Windstream's standalone achievements over the past year.

Our strategy continues to drive solid financial performance and we delivered consistent results across our core business units. We expanded our network on all fronts and increased its capabilities. For our ILEC consumer and SMB network that meant providing faster speeds and improved competitiveness, including the launch of gigabit Internet service in four markets.

On the wholesale front we expanded our long-haul express fiber transport network throughout the western United States, increasing our access to some of the fastest-growing technology and start-up companies in the country. Our enterprise unit made great strides in its ongoing effort to expand our metro fiber network in key cities. We also announced our intention to expand our fixed wireless offering to 40 markets.

And we laid the groundwork for the launch earlier this year of SD-WAN, a technology that will transform how businesses design and manage their networks. Our focus on enterprise sales with higher margins has significantly improved our enterprise contribution margin with a year-over-year increase of 32%. We exited 2016 with margins in the high teens and are on track to meet our goal of 20% contribution margins in 2018.

Debt reduction remained a focus in 2016. We completed the last step in our spinoff of Uniti Group by executing a debt for equity exchange for $672 million. Combined with 2015 and 2016 open market debt repurchases, we have reduced debt by $748 million.

Additionally, we refinanced debt and approved our maturity profile and lowered our cash interest expense. Finally, we returned significant value to our shareholders in the form of the dividend.

With the completion of the EarthLink merger I want to review the strategy for each of our four business units on a combined basis. Slide 6 outlines our ILEC consumer and SMB business which produced approximately $1.6 billion in revenue and $899 million in contribution margin. Our network enhancements enabled us to establish a strong foundation for sustainable growth.

This segment generates attractive cash flow by serving largely rural footprint. Approximately 40% of the footprint does not compete with a national cable broadband provider.

Continuing to slide 7, our operational strategy for ILEC consumer and SMB is to continue to enhance the broadband network and deliver more speed to more people by expanding premium speed availability, deploying additional gig markets and leveraging next-generation broadband technology such as vectoring and G.fast. As you know, Project Excel has been a big driver of increasing Internet speed availability, and once completed in the first quarter we will be able to offer premium Internet speeds of 25 meg or higher to over half of our footprint. Our focus will then transition to activating more customers and increasing our penetration where we have implemented premium broadband speeds.

Currently 89% of our existing customer base subscribes to Internet speeds of less than 25 meg. With the increased availability of premium broadband speeds we have a significant opportunity to migrate customers to faster speeds which will reduce churn and improve the customer experience. This will position Windstream to take market share and grow revenue and contribution margin.

Turning to slide 8, the wholesale business produced revenue of $757 million and $494 million in contribution margin. Our extensive network now spans 147,000 route miles of fiber, providing high-bandwidth Ethernet and wave transport services to wholesale customers including high-growth customer verticals such as content providers, cable and other network operators. With strategic fiber routes in the Southeast and Northeast and the expansion of our long-haul express network throughout the Western US we expect increased sales opportunities.

On slide 9 the enterprise revenue was $2.4 billion with a contribution margin of $372 million, a growth of $75 million over 2015. Our enterprise strategy is to increase contribution margin by focusing on higher-margin sales, reducing costs and improving the customer experience.

Enterprise business unit targets midsize enterprise customers where we can best leverage our network and our people to provide high-value solutions which also produce higher margins. We expect to continue to improve operating efficiencies and reduce network access costs through network modernization and on-net market expansion. These initiatives are driving significant improvements in contribution margin.

On slide 10 the CLEC consumer and SMB revenue was $916 million and contribution margin was $352 million. We will improve contribution margin trends by growing profitable customer relationships and managing costs. The relative scale and the ability to leverage the enterprise infrastructure will drive improved cost efficiency via optimizing the cost of revenue and improving the support cost structure.

Turn to slide 11, our 2017 priorities build on the advancements of 2016. First, we will execute on the merger integration to achieve the higher synergies we have outlined. Second, we will improve our ILEC consumer trends by capitalizing on network investments to enable greater broadband speeds, increase ARPU and improve broadband customer trends. Third, we will grow enterprise contribution margin and reach our margin goal of 20% in 2018. And, finally, we will leverage our next-generation technology, such as SD-WAN, to drive sales and improve the customer experience.

Now I will turn the call over to Bob.

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Bob Gunderman, Windstream Holdings, Inc. - CFO [4]

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Thank you, Tony, and good morning everyone. Beginning on slide 12, we achieved the financial guidance provided for 2016 as our strategy drove improved financial performance.

Before we review our 2017 guidance as a combined Company let me review our standalone performance. On slide 13, fourth-quarter service revenue was approximately $1.3 billion with adjusted OIBDAR of $482 million. Adjusted OIBDAR improved $17 million sequentially and was stable throughout the year with the exception of the third quarter which was impacted by seasonally higher expenses.

The ILEC consumer and SMB segment delivered solid results. For the quarter service revenue was $392 million, down slightly sequentially. Contribution margin was up $21 million or 10% sequentially.

Consumer ARPU increased for the eighth quarter in a row with an increase of 1% sequentially and more than 6% year-over-year driven by speed penetration gains across all tiers and sales of bundled services. Wholesale generated service revenue of $153 million and a contribution margin of $109 million or 71% for the quarter. These results were in line with expectations.

The segment continues to experience revenue pressure from certain declines in legacy services which we are offsetting in part with growth products such as Ethernet and wave sales as well as with sales to new customer verticals. Enterprise service revenue for the quarter was $486 million and contribution margin improved $2 million sequentially to $85 million and a margin of 17%. For the full year enterprise service revenue increased 1% and we expanded contribution margin by $78 million, or 32%.

We continue to be disciplined with our focused sales approach and reducing cost to drive higher contribution margin. In the quarter, CLEC SMB service revenue was $111 million and contribution margin was $35 million or 32%. We are focused on selling a simplified product lineup while managing margins at the account level.

Our CLEC SMB business unit performed better than expected for the year with a contribution margin $155 million representing a full-year decline of $26 million. This compared to a decline of $69 million in 2015.

Slide 14 shows quarterly and full-year pro forma financial results for Windstream and EarthLink combined. This information will be hopeful as we review our 2017 outlook.

Let me begin by providing directional color by business unit as shown on slide 15. Starting with ILEC consumer and SMB segment, service revenue declined less than 2% in 2016 with a contribution margin of $899 million or 57%. For 2017 we expect improvement in broadband customer and revenue trends relative to 2016.

We will capitalize on our network investments, allowing us to provide higher broadband speeds to enhance the customer experience, increase ARPU and improve market share. Further, we see additional opportunity as we leverage new network capabilities. We are confident in the success of our ILEC consumer and SMB strategy for 2017 and have already seen the benefits with solid first-quarter sales and units.

2016 pro forma wholesale service revenue declined 6%, generating contribution margin of $494 million or 65%. In 2017 we expect the decline in revenue to accelerate slightly compared to 2016 due to continued pressure in our legacy TDM services with similar trends in contribution margin.

2016 enterprise service revenue declined less than 1% with contribution margin of $372 million, which is a $75 million increase over 2015. In 2017 we expect a modest decline in enterprise service revenue as we continue to focus on more profitable sales. Importantly, this sales focus combined with cost optimization will drive continued growth in enterprise contribution margin dollars in 2017.

As such, we remain confident we will achieve our enterprise contribution margin percentage goal of 20% by 2018.

The CLEC consumer and SMB segment service revenue declined 15% with a contribution margin of $352 million or 38% in 2016. For 2017 we expect a decrease in service revenue similar to 2016 trends and an improved rate of decline in contribution margin as we narrow our customer focus to higher margin opportunities.

Additionally, in 2017 we expect continued pressure in switched access and state USF revenues.

With the directional color of our business units in mind, 2017 guidance is provided for the combined Company on slide 16. In 2017 we expect service revenue declines to be similar to full-year 2016 trends and we expect adjusted OIBDAR to be in the range of $2.0 billion to $2.06 billion. We expect adjusted CapEx to be between $790 million and $840 million for the year.

Our network initiatives support the operating plans of our business unit and advance our goal of stabilizing and growing adjusted OIBDAR.

Our EarthLink integration planning is progressing well and we have identified an incremental $25 million in synergies over our previous estimates and now expect more than $150 million in synergies within the next three years. We expect to exit 2017 with annual run rate synergies of $85 million, which consists of $60 million in OpEx and $25 million in CapEx synergies.

On slide 17 we have continued our efforts to optimize the balance sheet. We have an attractive debt maturity profile with no near-term maturities and have continued to improve on this in early 2017.

Earlier this year we refinanced an existing term loan to extend the maturity from 2019 to 2024 and closed on the remaining portion of a $600 million term loan add-on to refinance EarthLink's debt. Additionally, to the benefits of our EarthLink merger we have already reduced leverage by 0.3 times and we will reduce leverage by a total of 0.5 times after synergies and will continue to opportunistically look for ways to optimize the balance sheet.

Slide 18 provides a closer look at our 2017 capital initiatives. At the midpoint of our CapEx guidance we are targeting total adjusted CapEx of $815 million as we pursue strategic initiatives to advance our high-speed Internet capabilities, strategically expand the wholesale network, enhance overall network performance and reduce network operating expenses. These strategic network initiatives support the operating plans of our business unit and advance our goal of stabilizing and growing adjusted OIBDAR.

On slide 19, in 2017 we expect to generate adjusted free cash flow of approximately $200 million based on the midpoints of the adjusted OIBDAR and adjusted CapEx guidance. We expect cash interest to be approximately $360 million and cash taxes of $5 million.

We will now take your questions. Operator, please read the instructions and open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Gregory Williams, Cowen and Company.

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Gregory Williams, Cowen and Company - Analyst [2]

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Great, thanks for taking my questions. Just a few if I may. One on contribution margin in the consumer segment, one of the highest in a very long time at 60%.

Can you just help us understand what is driving that and how we should think about that segment going forward as we think about the legacy services going away and the high-speed adoption that you guys mentioned?

The second question is around just your guidance. I think you mentioned it was really, the revenue guidance was really on a consolidated basis because on the segment levels it seems consumer trends are improving, and more specifically on the enterprise side you said there is going to be a modest decline. Does that modest decline include temporary dissynergies with the EarthLink merger as you realign your sales guys? Thanks.

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Bob Gunderman, Windstream Holdings, Inc. - CFO [3]

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Greg, this is Bob. Thanks for the question. Yes, so as you look back at fourth quarter we were certainly pleased with the sequential progress in our ILEC contribution margin.

Keep in mind third quarter for us is typically a heavier cost quarter. I would point back to our prior comments, this past third quarter we actually had some higher overtime, just better working days in the summer months that really drove some higher costs in third quarter. Obviously, in fourth quarter that reverses.

I think this year that sequential trend was a little bit more pronounced than what we have seen in the past. But we just found some additional efficiencies in addition to what we have typically seen in that seasonal trends.

Your second question in terms of what does that look like going forward, really our ILEC business we expect to have continued improvement in our ILEC and consumer trends on revenue and units. And so we are encouraged by the progress that we've seen early in first quarter really on both fronts. And so we are continuing to see the benefits of the investments that we've made over the prior year in Project Excel and some of the other speed enhancements, and so the team has done a nice job of really capitalizing on that and we are encouraged by the start that we have.

Speaking to the guidance more broadly around revenue, certainly as you look at the trends in 2017 we continue to expect progress both in the consumer business but certainly the ILEC SMB trends we expect to improve somewhat. As you look at enterprise we are seeing a little bit of pressure on top line. However, the way that we are getting those sales we are targeting the right types of opportunities.

We're really focused on the most profitable sales driving more of an on-net mix which is driving improved contribution margins. You saw that continue in the fourth quarter. Really we are going to keep looking to do that in 2017, and as you think about the progress in enterprise we continue to see that opportunity continue for a very long time.

We do have a view that the revenue trends can improve over time, but we want to be selective in the types of deals that we sign up and the types of margins that we get from those. As you look across the rest of the revenue guidance, certainly we are not making as much progress on the wholesale revenue trends as we had hoped in 2017. We have seen a bit of a headwind there.

While our team has done a really nice job of selling strategic services and extending sales into our added network on strategic routes, the pricing compression on the legacy base of TDM has been more consequential than what we expected. So that's holding back the top line just a bit in 2017.

And then certainly within our CLEC SMB segment we continue to make progress there being very focused on account management and profitability at the account level. And we expect to make some good contribution margin trends there in 2017, as well.

So keep in mind, if you look at the EarthLink overlay to our combined trends that certainly does influence the trends modestly. As a point of reference, in full-year 2016 the revenue trends on a combined pro forma basis relative to the Wind standalone are about 100 basis points less because of that overlay, then the adjusted OIBDAR trends are about the same. But as you look ahead, we expect, obviously, the synergies from the EarthLink transaction to really significantly improve the trends going forward in addition, of course, to our legacy initiatives.

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Gregory Williams, Cowen and Company - Analyst [4]

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That's great color. Thank you.

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Operator [5]

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Simon Flannery, Morgan Stanley.

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Simon Flannery, Morgan Stanley - Analyst [6]

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Great, thanks very much. So on Project Excel can you just talk about where you are in terms of the marketing? I think you said you basically want to finish Excel before you roll out the marketing, or have you started to market the 25 meg product and what sort of success are you seeing where you've done that?

And related to that is I noticed the breakout with Charter. What are you seeing in terms of Charter's rebranding and the impact on your business?

Then any perspective on M&A going forward? Is this going to be a quiet year for you given you've just done the EarthLink transaction? Are there opportunities to do other smaller deals or asset sales, sale-leaseback, etc.? Thanks.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [7]

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Good morning, Simon, it's Tony. I will jump in with Project Excel.

Project Excel, we have been turning that up throughout 2016. I think we mentioned on our November call we were roughly 30% complete. We have continued to make progress there, and as we do turn up those assets we are marketing to them.

But, of course, that means we've made a lot of progress here in the fourth quarter and we made progress already in the first two months of 2017. So as we turn on those assets we are definitely seeing the benefits flow through in terms of consumer broadband units and ARPU. Bob talked about the eighth quarter in a row of growing consumer ARPU.

Bob also mentioned we've seen significantly better trends in the first two months on our consumer broadband units, so that's all very encouraging. That will only continue as we ramp up Project Excel in the first quarter. That's what gives us confidence as we lean into 2017 that we are on the right path in our consumer and ILEC business.

In terms of Charter and its rebranding, obviously any time you go through a rebranding there is always potential noise associated with it. I wouldn't tell you right now it's anything significant. We know both Charter as well as Comcast are formidable competitors, but they were before, as well.

So we are focused on what we can control. And that's increasing the speed into the marketplace and making sure we get that into the hands of our customers as quickly as possible.

And as Bob mentioned I will reiterate, we've seen really good trends in the first two months of the year. So I think we are holding our own, but it's clearly something we continue to focus on.

Your last question on M&A, you are right, obviously we are focused first and foremost on moving forward with the EarthLink integration. On legal day one Windstream's practice is to integrate the corporate systems, that's the HR and finance systems. We completed that with no issues.

And then we will integrate the operational elements, think about that as OSS and billing support systems, over time. Think about that over a staged implementation that takes place over a 24-month period. And that minimizes disruption to customers and makes sure we can provide the experience that our customers expect from us.

But in terms of our capabilities I feel very good. The team did a really good job integrating the plan and we will, obviously, be very cognizant around M&A opportunities to make sure they advance our strategy in terms of either improving our financial performance on a free cash flow basis, improving our leverage goals, advancing our product and network capabilities.

But given where we are at I feel good about our ability to take on additional M&A. And, of course, we will continue to look for ways to be creative around structure as you alluded to the sale-leaseback with our friends at Uniti Group. Obviously, any transaction there has to be a win-win for both of us, but we continue to look for ways to augment transactions to get the most value from them.

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Simon Flannery, Morgan Stanley - Analyst [8]

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Thank you.

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Operator [9]

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Scott Goldman, Jefferies.

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Scott Goldman, Jefferies LLC - Analyst [10]

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Good morning, guys. A couple of questions. One, I guess on the enterprise side, a lot of releases around metro fiber expansions that you guys have been doing.

Tony maybe you guys could just talk a little bit about what that entails from a cost perspective but probably more importantly what are you seeing around a demand or response in those markets? Is it predominantly just to get the enterprise margins up or are you actually seeing that drive incremental sales?

Secondly, on the CapEx just wondering it sounds like Project Excel is wrapping up this quarter. How much if any I don't think Project Excel CapEx may be in the budget for this year and whether or not the low teens capital intensity as a percentage of service revenue is the long-term view going forward? Thanks.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [11]

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Scott, certainly I will kick it off with the enterprise metro fiber. And we've mentioned this before, but it definitely bears repeating, one of the advantages that Windstream has had with its metro fiber expansion is we had a lot of latent fiber in the network.

You are probably alluding to a couple of announcements we've done recently, one in Dallas last week. There was latent metro fiber rings where we simply had to go in, dust that off, put the right electronics, Metro Ethernet capable electronics into that network, and now we are selling on-net and near-net Ethernet services to those customers.

And it advances two goals as you alluded to. First and foremost, it gives us increased competitiveness in the marketplace so we can win more sales opportunities. We sell a lot of multilocation opportunities at Windstream in the mid-market, but being able to leverage our own network helps us improve the competitiveness of the salesforce.

You are right, where we also are using another carrier we will transition from using that carrier onto our own network and all those are advancing our goals of expanding margin. When you look at our enterprise margins, you will see on page 15 in our presentation the blend of the Windstream where you saw modest growth and EarthLink had a high single-digits contractions for the year, it's worth noting that contribution margin on a pro forma basis expanded $75 million year over year. And in legacy Windstream it expanded $78 million and you saw minor contraction at EarthLink.

With the smart targeted investments we are making in Metro Ethernet combined with access cost initiatives, the benefits of the synergies, we are confident we are going to be able to grow that enterprise contribution margin through a combination of actions including metro fiber capital investments. Bob, do you want to take the question on CapEx?

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Bob Gunderman, Windstream Holdings, Inc. - CFO [12]

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Yes, hey, Scott. This is Bob. Just in terms of Project Excel things are progressing well there.

We came out of 2016 with really a lot of the physical plant builds in the field complete. And so now in first quarter we are really going through and finishing off some of what we call the test and turn-up activities and really making a big push with our vendor partners to get that completed in first quarter. So still tracking well there.

Obviously, once those activities get done you would expect to have additional speed to sell to our consumer customers and ILEC SMB in some cases. So where that CapEx actually lands in terms of completion we could see some of it bleed over into 2Q as the vendor invoices come in. But we are excited about getting that wrapped up real soon, and that team is pushing really hard to really finish that off and get an even greater set of speed capabilities into the hands of our customers.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [13]

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And I think as you look forward in terms of capital intensity I think we feel comfortable where we've been. Obviously, one of the benefits of doing Project Excel was creating a scalable Internet infrastructure. So every fiber-fed note on the backend of Project Excel in our network will be a fully scalable Ethernet architecture, and that's a big advancement.

Not only do we get the increased speed capability, we future proof the network. And prospectively we feel good about our historical CapEx intensity. You see it embedded in our guidance where we have opportunities.

After making investments like we did in the wholesale business we have a chance to ratchet CapEx. And I think that's demonstrated in our 2017 guidance.

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Bob Gunderman, Windstream Holdings, Inc. - CFO [14]

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Yes, and I will just jump on the CapEx color. We did see some benefits in our 2017 CapEx. If you put both of the businesses together, really three or four things helping us there.

Obviously, the CapEx synergies were helpful with the acquisition merger with EarthLink, so that's great. We also saw an earlier reduction. We've been foreshadowing this for some time, an earlier reduction in 2017 of our wholesale CapEx, some of the strategic expansions.

Quite simply this is just an outcome that we've been so active in extending so many routes that we've got a lot of great network to sell and the combination with EarthLink gives us even more. So we were able to back off the CapEx spend there without really hurting our opportunity for strategic sales.

We saw some modest declines in our IT program CapEx. We would expect to see that maybe take another step down in 2018 as we wrap up some of the bigger projects on the Wind legacy side this year. Obviously, the EarthLink merger billing system conversions will go on a little bit longer, but that's, obviously, going to be a little bit of a tailwind for us on the CapEx side as well.

And then back to the point on capacity CapEx, really Project Excel was a nice benefit. What it provided for us was a little bit of a boost in terms of capacity CapEx deflection, if you will, on the organic business. So we have done so much there just to really bring the network to current.

We took a little bit of a step down in terms of 2017 CapEx spend around broadband capacity. And so that's not necessarily linear. That does come up and down depending upon where the consumption is in the network, but it was a nice tailwind for us into 2017.

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Scott Goldman, Jefferies LLC - Analyst [15]

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That's helpful. Just to clarify, how much incremental CapEx should we be expecting on Excel in 2017?

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Bob Gunderman, Windstream Holdings, Inc. - CFO [16]

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We expect to spend probably $25 million or so higher than the $250 million right now but it is still early. We are tracking through that and so we might do better than that, Scott. But that's the current view.

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Scott Goldman, Jefferies LLC - Analyst [17]

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Very helpful. Thanks, guys.

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Operator [18]

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Matthew Niknam, Deutsche Bank.

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Matthew Niknam, Deutsche Bank - Analyst [19]

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Hey guys, thank you for taking the questions. Just two if I could. One on free cash flow.

So it sounds like you are going to do about $200 million. Should on my math give you give you about $80 million in excess cash flow beyond the dividend. So just want to understand how you prioritize access cash post the dividend.

Is it primarily going to deleveraging or other uses to bear in mind?

And then secondly just on enterprise revenue growth, just wondering we dipped slightly negative this quarter in terms of enterprise service revenues. Wondering if some new products like SD-WAN, some potential revenue synergy with EarthLink how we should think about that trajectory and maybe a path towards enterprise stability over time. Thanks.

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Bob Gunderman, Windstream Holdings, Inc. - CFO [20]

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Hey, Matt is Bob here. In terms of free cash flow, yes, so we are going to generate approximately $200 million of free cash flow for the year.

Keep in mind on the pro forma basis the full-year dividend impacts around $115 million, $116 million. And so the excess that we would have after satisfying the dividend, obviously, we are looking to pay down debt and continuing to make progress on the balance sheet there. So that's our current views on free cash flow use.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [21]

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Thanks, Bob. And on enterprise revenue growth, Matt, asked we look forward I think it's important as we look back on 2017 even in the fourth quarter where we saw a sequential decline from 3Q to 4Q and service revenue, contribution margin in the enterprise business unit expanded by over $2 million. So we are definitely bringing the right types of sales opportunities and driving access costs out of our business.

As we look forward that will be important. We have $1.7 billion of access costs that we spend across the entire Company with other carriers. That will remain an opportunity for us to make sure we leverage our own network when it's available to us to advance margin goals.

And when I think about the opportunity for EarthLink revenue synergies I think it's real. I look at the combination of the SD-WAN portfolios of our two companies. They are significantly improved by putting these two companies together.

This merger will advance both of those. It will also enable incremental investment. We are putting a lot more investment into SD-WAN on a combined basis, and I think there will be opportunity.

I don't think that probably materializes much in 2017. But I think you will see it as we go out of 2017 into 2018. And that's what gives us confidence that we can get back to growing our enterprise business unit at the top line.

Regardless of whether we can grow to the top line or not in 2017, we expect significant absolute dollar margin contribution expansion in 2017. We did $75 million in 2016. We will take another big stair step up in 2017.

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Matthew Niknam, Deutsche Bank - Analyst [22]

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Got it. Thank you.

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Operator [23]

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Batya Levi, UBS.

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Batya Levi, UBS - Analyst [24]

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Great, thank you. Couple of questions. First on the guide to bridge the revenue decline to margin, I think you are looking for flat margins for 2017 and with a lot of focus on improving the margin contribution.

What are some of the drivers that would keep margins flattish in 2017?

And the second question on CapEx, a lot of focus on, again, profitable enterprise growth. But it looks like CapEx for enterprise on-net expansion is coming down a little bit in 2017. Why not expand that more to move more traffic on-net?

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Bob Gunderman, Windstream Holdings, Inc. - CFO [25]

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This is Bob. Thanks for the question.

In terms of the revenue guide and how does that influence our margins, if you look on a pro forma basis in comparison to WAN on a standalone, so for 2016 we ended up on a standalone basis right around 35%, 35.5% of OIBDAR margin and percentages on a combined basis when you put in EarthLink's lower OIBDA contribution. So we land somewhere around a couple hundred basis points light of that.

But because of the significant synergy opportunities that come from this transaction, we expect that by later this year we will be back up to that 35% range. Obviously, quarter to quarter you have some changes then in the results in terms of seasonal cost, and so that will be an influence. But certainly by the end of the year we expect that to help us considerably.

The other thing I would say is as we get more profitable within the enterprise business, our largest revenue segment, we continue to make progress on the contribution margins there. That, obviously, supports margins.

And then we've seen some good results in our consumer business, our biggest cash flow generating business, good stable margins there. I expect that as we look into 2017 as we've make more progress on ARPU and really stabilizing and getting to some good trends on revenue we expect to carry a lot of that momentum down to the bottom line. So those will all be things that support the trends into 2017.

I will point out while we are talking about just the trajectory of OIBDAR in 2017, keep in mind that first quarter for us is typically a higher cost quarter. We typically have a higher spend around advertising, and we also have higher cost around payroll taxes and other resets that happen in the first quarter. So that's something to keep in mind as you look at the first-quarter trends.

But notably as the year plays out largely because of the legacy access and interconnection cost take-out initiatives that support the enterprise and SMB businesses, and then in addition to the SG&A synergies they will start pretty quickly for the merger, we start to really make some significant progress in OIBDAR margin trends as the year plays out. So keep in mind that there will be a little bit of a difference as you look at the quarters over the year. We will start out with a higher decline but significantly improve as the year goes on.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [26]

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And then on CapEx, really the bucket we refer to in the CapEx is a blending of two sets of initiatives. One is on-net metro expansion and the second is interconnection cost savings. Really the bucket that's going down significantly there is interconnection cost savings.

Our Metro Ethernet investment will be very similar in 2017 to 2016. Our interconnection cost savings is going down because we are able to deflect some of that capital because the network capabilities that we picked up in the EarthLink merger.

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Batya Levi, UBS - Analyst [27]

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Got it. Just one quick follow-up. How much of the $135 million in OpEx synergies do you expect to reach this year?

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Bob Gunderman, Windstream Holdings, Inc. - CFO [28]

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This is Bob again. So in terms of the OpEx and CapEx synergies just at a high level I will give you all the breakouts here. So for 2017 we would expect to end the year at a run rate level of $60 million of OpEx achievement and $25 million of CapEx, so $85 million total.

But with in the year the amounts that we would see impacting OpEx would be about $20 million and then the CapEx numbers, obviously, we would get that in the year. So as you look at that ramp-up really it's towards the back end of the year that we really start to get more of the OpEx savings. And it's really because we get a first hit of the SG&A synergies and then the access synergies start to build as we get further into the year and, frankly, into 2018.

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Batya Levi, UBS - Analyst [29]

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That's helpful. Thank you.

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Operator [30]

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David Barden, Bank of America Merrill Lynch.

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Angela Zhao, BofA Merrill Lynch - Analyst [31]

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Hi, thanks for taking the question. This is Angela filling in for Dave. So two if I could.

First, could you does a little deeper into the enterprise margin opportunity at EarthLink? Are these in the synergy estimates and what's the revenue mix for off-net and on-net for enterprise post-deal?

And second question is regarding 2017 guidance. Can you give any insights into what the standalone EarthLink and Windstream OIBDAR is for 2017? And for the EarthLink number and just to clarify does that include 10 months of OIBDAR or a full year? Thank you.

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Bob Gunderman, Windstream Holdings, Inc. - CFO [32]

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Angela, this is Bob. In terms of enterprise margin opportunity, so as you look at those opportunities, obviously, even before the merger we were making a tremendous amount of progress at improving the enterprise contribution margins largely through more on-net sales but also significantly through lowering the cost of access and really optimizing the network and the cost of serving those customers that led to the 30%-plus increase in contribution margins in 2016 on a standalone basis. That's going to continue.

We are going to continue to have progress on that in 2017. Obviously, you add on to that the opportunities for the synergies that come from the EarthLink merger, the access synergies in the aggregate by year three when we get to the full run rate will be around $60 million on annualized basis.

Now it's going to take us some time to get there because we have to build out some network and really start to work through those project plans. And so it's not a very big impact at all for 2017, but as you work your way through the next couple of years that becomes a more consequential number for us.

So that is really how to think about enterprise contribution margin, the legacy business continue to have opportunity and, obviously, you overlay the synergy opportunity that adds to it. So that's what gives us confidence on the margin profile of enterprise going forward.

In terms of the revenue mix off-net, on-net we haven't really broken that out specifically, but I will tell you we are still a pretty high percentage off-net. We, obviously, as we sell new customers we take every advantage that we can to push more of those customers on-net. In some cases it's a hybrid approach where continue to have customers that are completely on-net.

That's, obviously, a desired outcome, but in our case that's not always possible. So we try to mix in off-net and on-net together to get the overall lower cost down and make us more competitive and have higher contribution margins. I'm sorry, the last question I forgot --

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Angela Zhao, BofA Merrill Lynch - Analyst [33]

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So regarding guidance, the standalone EarthLink versus Windstream and then for the EarthLink number is it 10 months or full year?

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Bob Gunderman, Windstream Holdings, Inc. - CFO [34]

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Yes, so all the guidance that we are giving for 2017 is a pro forma guidance number. And we are not separating the Windstream guidance separate from EarthLink because, quite frankly, we are going to manage the business on a combined basis, and I just don't think it's going to be that meaningful to look at that going forward. So everything we have given you is on a pro forma basis and it's on a combined basis.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [35]

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So it includes 12 months of EarthLink.

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Operator [36]

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At this time I'm showing we have no further questions. I'd like to hand the call back over to Tony Thomas for any closing remarks.

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Tony Thomas, Windstream Holdings, Inc. - President & CEO [37]

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Great, thank you all for joining us this morning. Our 2016 results demonstrate continued progress in executing our focused strategy.

Looking ahead to 2017 we will continue to build our momentum and, of course, remain focused on creating value for our shareholders. Bob and I will be on the road over the next month. We look forward to meeting with many of you, and thank you for joining us this morning.

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Operator [38]

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Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program.

You may all disconnect. Everyone have a great day.