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Edited Transcript of WINMQ.PK earnings conference call or presentation 30-Jul-20 12:30pm GMT

Q2 2020 Windstream Holdings Inc Earnings Call

Little Rock Jul 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Windstream Holdings Inc earnings conference call or presentation Thursday, July 30, 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

* 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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Christopher C. King, Windstream Holdings, Inc. - VP of IR [1]

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Good morning, everyone, and thank you for joining Windstream's Second 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 now 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, everyone, and thank you for joining us today. Before we discuss our quarterly results, I'd like to provide an update on our response to the COVID-19 pandemic. As a critical infrastructure provider, Windstream continues to respond quickly to keep consumers and businesses connected during this unprecedented global health crisis. Our field technicians have performed exceptionally well during this time to install and repair services for customers while following appropriate health and safety guidelines.

The remainder of our workforce has seamlessly adjusted to working remotely and using our various collaboration tools, including OfficeSuite HD Meeting. We continue to work through plans to address how and when we safely and gradually return employees to offices. Our guiding principle continues to be ensuring the safety of our employees, customers and the communities we serve through a standard and incremental approach.

Our network also continued to perform well during the pandemic. Broadband traffic is holding steady at about 30% above pre-pandemic levels. Our network is well equipped to handle the incremental capacity demands as a result of our past modernization efforts. I'm very proud the way our teams have continued to deliver essential telecommunication services. And I thank all of our employees for their dedication and flexibility.

Now let me turn to Slide 4. I'm excited to report that our path to emerge from restructuring is clear. On June 25, our plan of reorganization was confirmed, and we are targeting late summer for emergence, subject to regulatory approvals, which we expect to receive within the next month. As a reminder, our plan provides for a reduction of more than $4 billion in Windstream's existing debt as well as access to exit financing after emergence. Our settlement with Uniti enhances Windstream's cash flow profile by nearly $300 million per year from 2021 to 2024. As a private company, Windstream will have increased flexibility to invest in our network, accelerate our transformation and return to growth.

As seen on Slide 5, Windstream delivered solid second quarter results, achieving consolidated adjusted OIBDAR of $424 million, which represents our third consecutive quarter of flat or sequentially higher adjusted OIBDAR. Our focus on expenses continues to drive higher margins. For the quarter, consolidated cash expenses fell by 9% year-over-year.

In our Windstream Enterprise segment, we continue to see an acceleration in our strategic products with OfficeSuite demand remaining solid as more and more companies across the country use the technology to optimize engagement while more employees are working remotely. Our strategic Enterprise revenues have increased 24% during the first half of the year versus the first half of 2019. In addition, we continue to see strong consumer broadband demand as our enhanced speed capabilities have enabled families to work and manage other essential tasks from their homes during the COVID-19 pandemic.

We have now experienced 2 consecutive quarters of consumer revenue increases. In fact, our net consumer broadband subscriber growth during the second quarter allowed us to exceed our full year goal of 40,000 net consumer broadband subscribers. As a result, and as we announced last week, we were revising our guidance up to 60,000 net new broadband subscribers for the full year, a 50% increase from our previous guidance level and more than double last year's net subscriber growth.

Turning to Slide 6. The investments we have made to extend faster broadband speed tiers to more customers across our Kinetic footprint continue to pay off. Windstream added 22,100 net subscribers during the quarter, surpassing last quarter as the highest quarterly subscriber growth in over a decade and making it the ninth consecutive quarter of consumer broadband growth.

On Slide 7, 56% of our Kinetic customer base now enjoys speeds of 25 meg or greater, up from 47% a year ago. While this is 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 8 illustrates that opportunity. Only 40% of our ILEC households capable of receiving 25 meg or greater are enjoying those speeds. The metric falls to 13% for our Kinetic households that have access to 1 gigabit speeds. As the graph illustrates, we have made strong progress upgrading customer speed tiers over the past year. In addition, we have doubled the availability of 1 gigabit speeds over the past year. Thus, the opportunity to up-sell to that speed tier is actually getting larger for us today. Driving greater penetration of faster speeds across our customer base remains a key priority for us to continue to deliver both subscriber growth and higher ARPUs.

Turning to our Enterprise results on Slide 9. Our emphasis on 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 3,200 SD-WAN customers under contract, representing over 29,000 endpoint locations. OfficeSuite demand also remained strong as we now have approximately 550,000 UCaaS seats installed. Windstream's total annualized strategic product revenue reached $334 million in the second quarter, representing 24% year-over-year growth in the first half of the year. Enterprise strategic revenue now represents over 15% of our total Enterprise service revenue.

Now let me turn the call over to Bob to discuss our second 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 10. We show our second quarter financial results. During the quarter, Windstream generated total revenues of $1.2 billion and adjusted OIBDAR of $424 million, which excludes $4.5 million in COVID-19-related costs that primarily consist of pay premiums for Kinetic field technicians. The adjusted OIBDAR level represents a $1.4 million sequential improvement. Consolidated margin of 35.8% during the quarter represents an increase of 80 basis points year-over-year and 60 basis points sequentially, driven by our strong expense management initiatives. Notably, our total cash costs improved by $71 million or 9% year-over-year.

The Kinetic segment delivered solid results. For the quarter, service revenue was $502 million, down slightly sequentially. However, consumer revenues delivered the second consecutive quarter of sequential improvements. Contribution margin was $291 million or approximately 56%, down $11 million and 190 basis points sequentially. Notably, these levels include the approximate $5 million in COVID-19-related costs. Consumer broadband units increased by 22,000 during the quarter, representing our ninth consecutive quarter of broadband subscriber growth. Of note, in addition to strong demand for broadband, we continue to see timely payments from our customers.

In the Enterprise segment, service revenue was $577 million and contribution margin was $119 million, up $6 million sequentially. The segment delivered a 20% margin, up 150 basis points sequentially and flat year-over-year. While some of our 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 retail, hospitality and the leisure industries. To proactively combat any pressure, we have implemented a renewal offer program for Enterprise customers that provides service credits upon contract renewal. To date, we have seen negligible impacts on collections. In the Wholesale segment, service revenue was $85 million, flat sequentially, and contribution margin was $62 million with margins of approximately 72%.

On Slide 11, I wanted to provide an update on our continued interconnection expense reduction results. Our total annualized interconnection, network facility and fiber expenses fell by 14% on a year-over-year basis during the second quarter. We reduced interconnection expenses on a recurring annualized basis by over $180 million in the quarter or almost 19%. Notably, we still have over $1.1 billion of annualized interconnection, network facilities and fiber expenses, approximately $700 million of which is legacy TDM-related, including network facility expense. These expenses comprise over 60% of the total interconnect, network facilities and fiber expenses currently incurred and are falling at 18% year-over-year. We continue to believe that we will see greater than 10% overall annual reductions in this expense category over the next several years. We look forward to emerging from restructuring 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'll 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. Turning to Slide 12. An important part of our broadband growth strategy includes the FCC's Rural Digital Opportunity Fund, referred to as RDOF. The RDOF auction is set to begin on October 29. And we have submitted our application to participate and are excited about the opportunity to drive more robust broadband capabilities into rural America.

In addition to the upcoming RDOF auction, a significant attention in Washington is being devoted to the broadband digital divide across America's heartland. This is an issue that has been further exacerbated by the COVID-19 pandemic. Whether it's a need for expanded telehealth efforts or broadband availability for employees and students that are now working or learning 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 this dialogue in the coming years. I wanted to wrap up this presentation highlighting the impressive achievements that Windstream has accomplished in our 3 business segments.

Turning to Slide 13. We illustrate the enhanced Kinetic broadband speed capabilities that are driving market share gains today. This is one of the things that is unique about Windstream. We are in the marketplace today with relevant speeds and winning. You can see on the left-hand side of the slide that our broadband speeds have significantly increased over the last 5 years. Now with over 71% of our customers capable of getting 25 meg or greater and 43% capable of getting 100 meg or greater, we have a highly competitive product and the results speak for themselves. We have gone from losing approximately 40,000 customers annually in 2015 to 2017 to now gaining 40,000 in the first half of 2020 alone. We are very pleased with the momentum we are seeing today. And that will only accelerate as we expand fiber to connect millions of new homes in the coming years.

On Slide 14, our Windstream Wholesale business is creating flexible, creative customer solutions for the increased capacity needs that customers are facing across the U.S. Additionally, we continue to expand our transport network. We just completed a significant West Coast network expansion and we continue to build into new data centers and landing stations on both coasts as well as connecting into Mexico and Canada. We have the sixth largest fiber network in the U.S. and 75% of the fiber long-haul network is owned by Windstream with the remaining 25% being leased from Uniti. In addition, Windstream Wholesale was the first in the industry recently to successfully trial 800 gigabit solutions. Notably, we achieved these record-breaking speeds on an existing fiber route from San Diego to Phoenix rather than in a lab environment. This is yet another example of our technology leadership on a transport level.

Lastly, on Slide 15, I wanted to highlight the strengths of Windstream Enterprise. We talk a lot about our award-winning software-enabled products. But I think it's important to begin with the network. Windstream operates a national network with 169,000 fiber route miles. We connect businesses, their headquarters, retail locations, hospitals and government locations with fiber ethernet services on a daily basis. It's a core competency of our company. We augment that with incredible capabilities around SD-WAN and UCaaS, including our own proprietary solution, where we have ownership economics with OfficeSuite. Of course, we pride ourselves on building a best-in-class service and support model that includes an industry-leading customer digital experience through a portal and mobile app that we call WE Connect.

When you look at our capabilities, a national network, leading software-enabled solutions, such as SD-WAN and UCaaS, and an enhanced customer experience, Windstream Enterprise stands alone. You may see a pure-play provider who can provide a great solution for one piece of the service. But they are unable to provide a true end-to-end experience. Simply put, Windstream Enterprise can. And as a result, we are uniquely positioned in the enterprise space. And I think the results will confirm that as we go forward.

In summary, Windstream's operations continue to perform well despite the impacts of the coronavirus pandemic. Our adjusted OIBDAR contribution margin of 35.8% demonstrates our continued focus on expense reduction efforts but also strong and increasing demand for our services. We continue to stand alone among the major U.S. telecom service providers with positive net broadband subscribers for 9 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. With our plan of reorganization confirmed, our path is clear. With a reduction of more than $4 billion in existing debt as well as our enhanced cash flow profile as a result of our settlement with Uniti, we have never been more excited about the opportunities that lie ahead for us.

Thank you to all of our employees that have put us on this path, and we are looking forward to our future as the new Windstream. Thank you for joining us this morning, and have a great day.