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Windstream Corp. (NASDAQ:WIN)

Q1 2013 Earnings Conference Call

May 9, 2013 8:30 a.m. ET

Executives

Bob Gunderman - Senior Vice President

Jeff Gardner - Chief Executive Officer

Tony Thomas - Chief Financial Officer

Brent Whittington - Chief Operating Officer

Analysts

Frank Louthan - Raymond James

Philip Cusick - JPMorgan

David Barden - Bank of America Merrill Lynch

Barry McCarver - Stephens

Timothy Horan - Oppenheimer

Scott Goldman - Goldman Sachs

Donna Jaegers - DA Davidson

Maura Shaughnessy - MFS Investment Management

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2013 Windstream Communications earnings conference call. (Operator instructions) As a reminder this conference is being recorded. I’ll now turn the call over to your host, Bob Gunderman, Senior Vice President. Please go ahead.

Bob Gunderman

Thank you, Stephanie. Good morning and thank you for joining Windstream's first quarter earnings call. To accompany today's call, we have posted the presentation slides, earnings release and supplemental pro forma results on our investor relations website.

I would like to draw your attention to our safe harbor statement on slide two. Today's discussion will include 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. The presentation also includes certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available on the Investor Relations section of our website. We have also supplemental pro forma financial statements with our earnings material. Please note that we made minor reclassifications to our business line counts which have been reflected in our historical periods shown.

Turning to slide three. For the first quarter we reported earnings of $0.09 per share on a GAAP basis, which include approximately $0.01 in after-tax merger and integration and restructuring expense. Excluding these non-operational charges our adjusted EPS would have been $0.10 for the first quarter. For the remainder of the call, the quarterly growth rates discussed today are presented on a pro forma year-over-year basis unless otherwise noted.

Turning to slide four, participating in our call this morning are Jeff Gardner, our Chief Executive Officer, who will discuss our strategic accomplishments; Tony Thomas, our Chief Financial Officer and Treasurer, who will discuss our financial results; and Brent Whittington, our Chief Operating Officer, who will review our operational results.

At the end of the presentation, we will take a few questions. With that, here’s Jeff Gardner.

Jeff Gardner

Thank you, Bob and good morning everyone. I appreciate you joining us today. In the first quarter we continued to make important progress on our key priorities, including investing in our infrastructure and continuing to expand our strategic growth area. Our vision at Windstream is to be the premier enterprise communications and service provider while maintaining our stable consumer business, which will result in substantial cash flows and long term support of our current dividend.

With this goal in mind, I’ll provide an update on the progress we are making on our priorities for 2013, which appear on slide 5. First, we are continuing to invest in our network to provide a platform for future success. Over the years we have consistently invested in our network to serve both our business and consumer customers and drive strategic revenue growth. On a recurring basis, we reinvest roughly 11% to 13% of our revenues back into our business, which is enabling us to consistently grow our strategic revenues.

Our investment strategy includes using a combination of owned and leased circuits through relationships with other carriers which allow us to deliver service in a more capital efficient manner. In addition, our engineering team is aggressively working to complete our fiber-to- the-tower and broadband stimulus initiatives, both of which are finite opportunities that we expect to substantially complete by the end of 2013.

Second, we are investing in our business channel in two important areas that will drive growth and improve profitability over time. We continue to see the benefit of combining data center and network services to build more valuable and longer term relationships with our customers. And as a result, plan to open four new data centers this year to meet this increasing demand. In addition, we began expanding our business sales force at the end of the first quarter to enable us to further pursue business sales opportunities. Windstream is delivering strong results in the business and enterprise space and we expect these investments to help us improve our competitive position and allow us to capitalize on further opportunities over time.

Third, we are improving and simplifying our enterprise IT systems which support our growing business platform in combination with the integration of the PAETEC billing system. This process is going well and once complete, will simplify our back office functions and improve our efficiency and quality of service. This is an important step in improving our cost structure and providing greater scalability as we continue to grow our business revenue.

And finally, we strengthened our balance sheet during the first quarter by refinancing certain debt maturities and lowering our interest costs. Additionally, we will have further opportunities to lower cash interests in 2014 and beyond by refinancing the 2013 notes coming due in August. We also expect to lower our debt by over $200 million this year by directing excess free cash flow after our dividend to debt repayment.

Turning to slide 6, we have made significant progress in continuing to increase our revenue in strategic growth areas. These revenues, which include business and broadband services now account for 71% of total revenues and grew 2% during the quarter. We are successfully repositioning the company for growth despite revenue pressure from declining switched access and consumer voice.

Fifth, combined with aggressive expense management, will allow us to maintain relatively stable OIBDA in the near term despite the impact of regulatory reform and evolving consumer preferences.

As we move to 2014, the impact of inter-carrier compensation reform lessens, which will result in further improvement in our revenue and adjusted OIBDA trends. Over the long-term we believe our strategy and investments will allow us to grow and create shareholder value. Windstream generates strong and sustainable free cash flow supportive of our capital allocation strategy, which strikes a prudent balance between reinvesting in the company, returning cash to shareholders, and reducing debt.

The dividend remains core to Windstream's strategy and we believe it is the best way to return value to our shareholders. With that, let me turn the call over to Tony who will discuss our financial results.

Tony Thomas

Thank you, Jeff, and good morning everyone. Turning to slide seven. Total revenue in the first quarter was $1.5 billion, down 2%. Our strategic growth areas represented 71% of total revenues and collectively increased 2%. As the revenue mix shift continues, we expect further stabilization in our top line trends. Turning to revenue by channel on slide eight, business service revenue was $914 million, up $18 million or 2%. Specifically, data and integrated services grew by $28 million or 8% due to growth in integrated voice and data services, VPN Ethernet and data center and managed services.

Carrier revenue increased $4 million or 3%, related to fiber to the tower installation which were partially offset by TDM connections due to fiber migrations and weakness in carrier transport services. Business voice and long distance revenue decreased by $17 million or 5%. And ongoing migrations from traditional voice to integrated voice and data services were offset somewhat by the implementation of higher end-user rates as part of the inter-carrier compensation reform.

In the consumer channel, service revenue was $328 million, down 2%. Voice and long distance revenue declined $14 million or 7%, due to fewer voice lines and declining feature packages, which were partially offset by higher end-user rates as part of ICC reform. Broadband revenues increased $5 million or 5%, driven by increased sales of broadband features and faster speeds. Wholesale revenues were $152 million, down 17%, primarily due to switched access revenue declines of $42 million. Roughly $12 million of this decline was related to the discontinuance of certain switched access products in the first quarter of 2012. The remainder of the pressure came from lower interstate access rates as part of the inter-carrier compensation reform implemented in July 2012, and fewer minutes of use consistent with declining access lines.

USF revenues increased by $11 million due to new recoveries implemented to mitigate the transition to lower inter-carrier rates. Other revenues were $61 million, which is comprised of the pass-through surcharges and taxes, and the residential CLEC business. These revenues declined by $10 million or 14%, related to the lower USF contribution factor and decline in CLEC residential revenues. As a reminder, we stopped marketing the CLEC residential services to new customers in early 2012. Both of these revenue streams have little or no margin and are classified in other as they are non-core.

Product sales were $45 million, down $7 million. This decrease is related to a decline in business product sales where we are seeing some softness and delayed decision making related to a weaker macroeconomic environment. Sequentially, revenue declined $38 million or 2%, and was primarily related to switched access revenue declines of $15 million and weaker product sales.

On slide nine, total cash expenses decreased by approximately $38 million or 4%. Specifically, cost of services decreased by $21 million or 3% due to incremental synergies and cost management initiatives as well as lower benefit costs associated with retiree medical plans. These savings were partially offset by seasonally higher increases in payroll taxes. Increased data center expenses due to new locations than last year and a few other onetime expenses.

Cost of products sold decreased by $2 million, consistent with lower product sales. SG&A expenses decreased $15 million or 6% due to incremental deal synergies, other cost management initiatives and the benefit savings that I just mentioned.

Adjusted OIBDA was $587 million, which was flat year-over-year and Adjusted OIBDA margin was 39%. Sequentially, Adjusted OIBDA decreased by $31 million, driven by lower revenue, which was partially offset by an improvement in expenses

On Slide 10, during the first quarter we spent $234 million on capital expenditures, comprised of $165 million in recurring CapEx and $69 million on fiber-to- the-tower projects and our portion of broadband stimulus investments. Recurring CapEx remained at 11% of revenues, comfortably within our expected range of 11% to 13%. In addition, we spent $10 million in integration capital related to PAETEC network optimization projects and work on the billing system convergence.

Turning to Slide 11, during the first quarter adjusted free cash flow was $248 million. This excludes certain onetime costs such as acquisition expenses, restructuring and debt extinguishment costs as well as working capital. During the quarter, working capital was a use of cash of $115 million, consistent with prior year trends due to seasonally higher payments in the first quarter such as prepaid expenses, payroll and property taxes and annual compensation payments. Working capital will improve throughout the year and should not be a significant use of cash on an annual basis.

By normalizing for onetime expenses, we believe that adjusted free cash flow provides a better and more accurate picture of Windstream’s ongoing ability to generate cash flow and is supportive of our ability to return cash to shareholders via our current dividend practice.

Turning to slide 12; we refinanced certain debt maturities during the quarter, which lowered our cost of capital and effectively addressed all significant maturities through August of 2017. We have $800 million of debt maturing in the third quarter and plan to repay a portion of this debt with free cash flow and have ample flexibility to refinance the remaining portion with revolver borrowings at our discretion. Utilizing the revolver is an attractive option that provides significant interest savings as well as a flexible vehicle for retaining debt without breakage costs.

We ended the quarter with net leverage of 3.7x adjusted OIBDA, and plan to direct roughly $200 million in excess free cash flow toward debt to reduction this year.

As we look through the remainder of 2013, we expect to see sequential improvements in business revenue and steady trends in consumer revenues, which will help mitigate declines in wholesale revenue related to the inter-carrier rate shift down associated with ICC reform. As a reminder, we expect this reform to result in roughly $20 million in adjusted OIBDA pressure in 2013. As we exit 2013, the rate step downs are much smaller and will be easier to outpace.

From an expense standpoint, we expect cost of services and SG&A to increase versus the first quarter run rate. Due to normal seasonal expenses, combined with the investments we are making to expand our business sales distribution and data center operations, both of which will aid future growth and business revenue. Capital expenditures will trend higher during the first half of 2013 and then decrease considerably in the third and fourth quarter as the fiber-to- the-tower and stimulus investments decline.

Looking beyond 2013, we expect stable adjusted OIBDA results, combined with further reductions in capital spending and cash interest, which will position us to deliver solid and sustainable free cash flow. Even with the expectations that cash taxes will increase after the continuation of bonus depreciation. Importantly, we are well positioned to maintain our current dividend practice. With that let me turn the call over to Brent, who will provide more color on our operating results.

Brent Whittington

Thanks, Tony, and good morning everyone. Beginning on slide 13, I will cover some of the business channel highlights. During the first quarter, average service revenue per business customer increased 6% as the business team is leveraging our full suite of products and services to increase profitability and promote stronger business relationship. Enterprise customers are customers who have generated $750 or more in revenue per month, grew to 7% year-over-year. We are leveraging our strength, which include a national fiber footprint and our value proposition of smart solutions, personalized service to drive new enterprise sales.

Small business customers declined by 8%, in part related to migrations from the small business market as those customers crossed the $750 per month threshold and are reclassified as enterprise. Our business sales strategy involved a two pronged approach, including increasing the value of existing customer relationship, as well as adding new logos. Importantly, as a key indicator of the performance of the combined channel, business service revenue grew 2% year-over-year.

Carrier circuits declined by 8% as our wireless partners continued migrating from traditional TDM circuits to our fiber network. In many cases, carrier disconnect multiple TDM circuits and turn up a single high capacity fiber connection. While our fiber investments are positive to revenues, evidenced by 10% growth in average revenue per circuit per month, we expect units to reflect decline during this migration period. In addition, we continued to see some softness in our carrier transport services as carrier purchased fewer dedicated circuits to transport traffic between points on their network. Importantly, total carrier revenues continued to increase year-over-year and sequentially.

Our business channel represents 63% of total revenue and will be an essential driver for our growth in the future. Late in the first quarter, we began to add the business sales teams in targeted markets in order to capitalize on new sales opportunities and maximize our relationships with existing customers. In addition, we are expanding our data center locations to a total of 27, with the addition of state of the art centers in Nashville, Chicago, Raleigh, and Charlotte. Sequentially business service revenue was down slightly. While sales started the year a little weaker than expected, we did see an increase in activity particularly in March.

In addition, business product sales were softer than normal due to delayed decision making relating to a weaker economy. On slide 14, our consumer strategy is focused on increasing bundle penetration to reduce churn and selling additional internet services to improve profitability. During the quarter, consumer voice lines decreased by approximately 29,000 and high-speed internet customers declined by 9000, a result of our already high penetration rate of 71%, which makes adding incremental units more challenging. The consumer team is leveraging this high penetration rate by selling vertical services and faster speed into your base, resulting in a 5% increase in the average revenue per broadband subscriber.

In addition, we will have an opportunity to win new broadband subscribers from the stimulus project that we will complete later this year. Turning to our integration activity which are referenced on slide 15. Our primary focus now is on completing the PAETEC billing systems conversions. In the process, we plan to improve and standardize back-office service and provisioning systems, which will simplify Windstream's business IT platform, making it easier to effectively serve our customers while bringing added efficiency and functionality to the process.

Moving to our capital initiatives on slide 16. We are investing in several key areas including, deploying fiber, [deepening] our network, expanding our data centers, enhancing our broadband facilities and pursuing success based opportunities. We are investing consistently in increasing our broadband capacity and are expanding our addressability from 90% to 93% of our residential customers through our stimulus investment.

Additionally, we’re making great progress on our fiber-to- the-tower initiative and have completed 3,000 towers to date and have another 1,600 in progress. As a reminder, both the fiber-to- the-tower and stimulus initiatives are expected to be substantially completed this year, resulting in CapEx declines in 2014. We expect the investments in these projects to strengthen Windstream’s network capabilities and enhance our growth prospects and consequently, result in attractive investment returns for our company and shareholders.

In closing, I’d like to thank the Windstream team for a solid quarter. Although sales got off to a slower start than we hoped, our business sales team finished the quarter with solid momentum. We remain confident in our progress towards our initiatives for 2013 and believe the investments we’re making in our network and our business channel, combined with the improvements in our enterprise IT systems, will lead to better growth and profitability in the future.

We’ll now take a few of your questions. Operator, if you would please review the instructions, and we’re ready to open the call to questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Frank Louthan with Raymond James. Your line is open.

Frank Louthan - Raymond James

So looking at a couple of the declines in the metric, can you give us a little bit of color on the trends there in the small enterprise business. Can you give us a little bit of color on what’s exactly the makeup of those smaller business customers? Are they mostly resale? And where do you think the satellite customers are going as you’re losing some of those customers and is that pressuring some of the broadband ads as well? You’ve got very high penetration and it makes some sense. But just curious where you see that and where do you see the erosion in those categories stopping?

Brent Whittington

Frank, this is Brent. I’ll take that and start with the business side on the small biz. A couple of things going on there. If you look at enterprise we’re seeing really nice growth there and that’s greater than the $750 a month where we’re growing at almost 7% and that kind of midterm what we’ve got going on there. So our account managers are focused on moving customers up in terms of revenue. So, we do have a chunk of that growth is coming from small biz just migrating into that enterprise category. And then to your point about, a lot of where we’re seeing the losses on the small biz is in those CLEC markets where it’s tougher for us from a distribution standpoint just simply because the fact that our enterprise sales force is largely focused these days on deals that exceed $750 a month and they set up in distribution. And that channel, specifically in CLEC markets, our focus is primarily on more direct mail telemarketing, selling to our base and retention where we’re seeing great trends in terms of churn improving year over year. But it’s really a distribution issue, Frank and more in line with our field sales force in those CLEC markets focused on larger deals than that.

In our ILEC markets to be specific, we still have a dedicated small business sales team. So we count on much more than our call centers as well. And on the, no question maybe the last point I’d make on that, definitely that’s a competitive space in both ILEC and CLEC, but just simply because the margins that we can make in the ILEC are much easier for us to afford that expanded distribution than it is in the resell CLEC markets where we did have lower margins there. On the consumer side, maybe as it pertains to video, I think it really is a function of the tremendous success we’ve had over the year selling dish. We have phenomenal penetration greater than 20% and there’s nothing I’d say going on there. In fact during the quarter we had a promotion that was focused on dish included in our package with our bundles, but simply we just sold that extensively over the years. And as we got a larger base we have to continue to outrun churn with new adds and we just didn’t do that in the quarter.

Frank Louthan - Raymond James

And with the broadband, what’s the typical profile of customer that’s leaving? Is it very low speeds? Is it single play? Are they correlated with the defections on the satellite side?

Brent Whittington

Definitely some tie into that simply because again so many of our products are bundled with the triple play, over 20%. 70% penetrated the double. So when you have customers leave and that probably plays into some of our access line streams as well, you do have a higher correlation to a voice than to a broadband and then at a smaller scale the dish as well, Frank. So no question about that. And again, that’s where some of our past success makes the business a little more challenging, just simply because of where we are from a credit penetration standpoint you know and not to be lost in on the broadband side. And we kind of talked about this now really over the past year that it's not just about units, it's about revenue. And our team recognizes that from a sales standpoint and that’s why you are seeing us continue to grow broadband revenues despite where we have been, which is effectively flat in the last year on units with growth at 5%. So we are pleased with what the team did on that point.

Operator

Our next question comes from Philip Cusick with JPMorgan. Your line is open.

Philip Cusick - JPMorgan

Can you expand a little bit on the incremental synergies to come over the next year and give us a little bit of a view or more view on the PAETEC billing system and integration? Thanks.

Tony Thomas

This is Tony. We made tremendous progress last year, really, into realization of our synergies. We have approximately had $15 million of synergies to obtain this year. And then we will really exit the year, at nearly our $100 million run rate. It's a little bit short of that and we will achieve the remainder of those synergies in 2014 when we accomplish a few of our key IT milestones. We feel very good about the progress we have made to date and feel very comfortable that we will meet or exceed our $100 million goal of PAETEC synergies.

Brent Whittington

And Phil maybe, this is Brent, on the PAETEC billing conversion, what we are really trying to do, if you think about how our business has changed over the last three years, you know our focus on the business customer is tremendous as we talk about them all the time. And so we are really trying to bring all of our back-office functions into what we kind of talk about is our consolidated systems platform, which is one kind of go-to-market system that’s going to be used in all facets of our business. From a billing perspective to [trouble visiting] perspective, all the way through to sales force implementation. And we are in the midst of deploying that now in stages but it's a continued focus throughout this business. Really as I kind of shared, improving our chance to provide a great customer experience and improving what we think customers will feel about their service with Windstream. And then on top of that, really a platform for us in the future to draw more efficiencies throughout our operations.

Philip Cusick - JPMorgan

And is that conversion still scheduled for sort of second half of this year or is that being pushed out a little bit?

Brent Whittington

Well, as I mentioned, it takes part in phases, so there will be some activities that will occur in the second half of this year. But it actually won't be fully completed until 2014, Philip.

Operator

Our next question comes from David Barden with Bank of America Merrill Lynch. Your line is open.

David Barden - Bank of America Merrill Lynch

I guess a couple. Just a housekeeping item, I could. Tony, could you confirm or update guidance from last quarter? It didn’t kind of come up in the release or the conversation in the quarter, so it would be helpful kind of just set the table and reiterate that. I think second, I think you gave some commentary, Tony, about there is going to be higher sales force spending, there is going to be higher data center related spending into 2Q, but also there is some expectation that some sales improvement will occur. Could you kind of try to steer the market to the right expectations level for whether EBITDA is kind of flattening out here, growing, trending towards the full year guidance number. Kind of getting the market on the right page on that front would probably be helpful. And then I guess just the last thing if I could, maybe Jeff, I know that it was shared in the proxy, the filing that came out, that management has -- the board has aligned management compensation now to the dividend payout. I wonder if you could elaborate a little bit on that and what you guys were hoping to achieving by doing that. Thanks.

Tony Thomas

Yeah, good morning, David. I will get it started. As we reflect on our first quarter results, we are well positioned to achieve the goals that we set out in February and we are seeing growth in business service revenues, stability and consumer. We are doing a good job managing our costs. So as we look forward to the remainder of the year, we feel very confident about how we are positioned to achieve our goal in 2013. And specifically, as we look towards the next quarter and beyond, you are right, there is a normal seasonal increase in our cost of services. That’s not atypical. We have kind of a bell curve on our operating expenses, where we see lighter expenses on cost of services in the first quarter and a little seasonal expense pressure in 2Q and 3Q that alleviates in 4Q. And as you think about SG&A, I think as Brent alluded to, we began a ramp up of our sales force but that really began later in the quarter. So we do expect to add a few million dollars of expense and SG&A in 2Q. So I think that would be consistent with how we’re thinking about it. And on the revenue side, we expect to see growth in business service revenues as we saw last year. We expect to see continued stability in the consumer channel and I think when you put all those piece parts together, we have a great deal of confidence about achieving our goals in 2013.

Jeff Gardner

David, this is Jeff. On the added component to our management compensation, we’ve traditionally had revenue in OIBDA as components for our performance awards. This year for 2013 the board recommended and management agreed with this is to include payout ratio. And really what it was all about is the sensitivity around the recognition that this was a bigger focus by investors going forward. We had some finite opportunities for some success based capital that we’re elevating our capital spending temporarily. We’re going through a massive transformation as we integrated the businesses and so it was just really to keep everybody focused, a little more focused. I think we’re always focused on the payout ratio, but this just puts it explicitly in our results. So revenue, OIBDA and payout ratio I think very much aligned with what investors are focused on, very consistent with the question you just asked of Tony. So really just a recognition that the dividend is very, very important to our shareholders.

David Barden - Bank of America Merrill Lynch

And guys, I don’t mean to put you on the spot, Tony, but are you reiterating guidance or are you just reaffirming that you can achieve your goals? People are going to be all worked up about the language.

Tony Thomas

Yeah, David. We’ve historically attempted to stay away from reaffirming guidance and that guidance each and every quarter. But really my comments were meant to convey the great deal of confidence we have in achieving our goals for 2013. So I think I’ll leave my comments at that. But hopefully you can infer the intent of those.

Operator

Our next question comes from Scott Goldman with Goldman Sachs. Your line is open.

Scott Goldman - Goldman Sachs

I guess just maybe we could drill a tilted bit deeper into the broadband side of things. I think you lost subs for the first time in 2Q last year. You responded I think with some more promotional activities and increased spend in 3Q and got that back to positive. Obviously you’ve seen some declines since then. Should we infer from what we’ve seen over the last few quarters that you are comfortable now at this point with the tradeoff between the 95% I think ARPU that you’re showing a 5% broadband growth in revenue and willing to see some sacrifice on the subscriber side to do that. And if you could drill a little bit deeper into the growth in the broadband ARPU, how much of that may come from price increases or what percentage of the base do you see trading up into higher speeds? Anything on that would be helpful.

Jeff Gardner

Okay Scott, this is Jeff. Listen, I think you’ve got it exactly right. As we look at it at the end of the day what really matters to our consumer team is that they stay focused on growing the revenue and I wouldn’t say it’s clear that we’re taking the focus totally off units, but at the end of the day we really want to drive the topline and we’ve seen good growth there. We are constantly making tweaks and expect to do better on growth in that going forward. But again the focus will remain on the revenue. On the ARPU side, what’s going on is we’re having tremendous success selling higher speeds to our customers as well as what we’ve been working on here for a long time is monetizing the broadband type line into the home by selling other features around that. Security features, storage, et cetera to really add additional revenue on a monthly basis. And we’ve had a lot of success there with these bundle adders and driving these additional features into our base. But it’s something that we continue to work on. We have definitely seen increased competition. We are definitely still working on improving our network to offer faster speed to improve our competitiveness and to be in a position to drive further revenues. So just saying that we are focused on, throughout the year we will bring more and more of our stimulus sites up, which will add another 75,000 households. And so those obviously will be an opportunity to sell in areas where there is virtually on competition. So that will help in the back half of the year as well.

Scott Goldman - Goldman Sachs

Great. And just as a follow up to that. Could you maybe comment on the speculation out there about a second round of [CAF] which may be earmarked towards areas where broadband speeds are sort of 1.5 meg or above the FCCs threshold on speed. And what opportunity that may have for you in your territories.

Jeff Gardner

I think that’s progressing nicely. I think that could be a nice opportunity for companies like Windstream to really be in a position to offer faster speeds in these rural areas to get these folks up to 4 megabits, which is really the goal there. That is progressing nicely at the FCC. There is a lot of change at the FCC so you never are exactly sure how these things will work out. But we have been extremely involved in that process with the other price cap carriers. And I am encouraged that the progress and the way the FCC is looking at it. So we remain hopeful but can't give specifics at this time.

Operator

Our next question comes from Barry McCarver with Stephens. Your line is open.

Barry McCarver - Stephens

You mentioned in your prepared remark a little weakness in -- or softness in business decisions early in the year, picked up in March. I am wondering if that pick up in March continued into 2Q and could you talk a little more specifically about what exactly they were buying.

Brent Whittington

Barry, this is Brent. Yeah, I did mention that. And really as we kind of looked at the theme in the quarter has been weakness in the economy. But frankly, as we kind of looked at it across the company. The only area where we saw what we might term weakness, was on decision in making products. And that’s why we referenced that specifically. On the business side, we came off of 2012 which was a great sales year, that’s why we are investing and expanding our sales team. But we did start slow, picked it up in March. We got close to our expectations for the quarter. As I kind of shared, I will talk about 2Q but that’s really what's going on. And I will tell you what they are buying still is really more and more of our data products coupled with increasingly managed services and in data center where we have that available. So with the continued need for more bandwidth, migration to voice services, and if you see how that impacts us in the quarter, our revenue still grew 2% but the sequential growth we saw in our advanced data products wasn’t where we have seen it in the past. And that’s really what we attributed to that slower sales starting the year. But, again, we are continuing to bring -- we have got confidence in the team. They had great year last year. We are not seeing that we are losing deals and we think we have got plenty of opportunities in the marketplace. We just got to step-up our execution, get hiring to where want it to be and we are off to the race, Barry.

Barry McCarver - Stephens

That’s good info. Could you tell us what the hosted solution segment did in the quarter? I guess specifically since you talked about you are building additional data centers this year?

Brent Whittington

Yeah, they had a great sales quarter. Right on plan. And I would say it's a much smaller percentage of total sales but they didn’t have the slow start there. And that’s even prior to some of the new centers come on line where we are hiring up the people in terms of our sales and operations as we ramp those expectations in the backlog of the year, Barry.

Jeff Gardner

Barry, the other thing that we are seeing that is very encouraging, as we think about hosted solutions and our goal to sell more and more products across our product set to our customers is the extensive referrals between our direct sales force. Which, remember we have over 2000 people out there in our hosted business. They are at all time high. So we are continuing to see synergies from going to our customers and selling data, voice, network, cloud. And that’s going to drive revenue, it's going to drive improved customer retention and higher average revenue per unit.

Barry McCarver - Stephens

Okay. And then just one last one for Tony, if I may. I think you said CapEx dedicated to fiber-to-the-tower in the quarter was $69 million. Is that correct? I didn’t write it down fast enough. And I wanted to see what you thought the budget for the full year for fiber-to- the-tower was going to be.

Tony Thomas

Yeah, Barry. We did have $69 million for it and that was released fiber-to- the-tower as well as the broadband stimulus investments. And as we think about the remainder of the year, I’d put that total spend in roughly the $125 million area. There’s still some moving pieces to that. We’re still getting a few incremental tower here and there, but I think that’s a pretty good estimate. And importantly, when you look at recurring CapEx, and excluding fiber-to- the-tower and stimulus, we really feel good about our capital efficiency and the model we have in place. You saw that in the first quarter with 11% capital intensity. And as a reminder, when we talk about recurring CapEx, that includes fiber expansion. That includes our data center expansion and success based capital. And part of the reason I think we’re at the low end of that range and I expect it to be at the low end of the range for the year is we undertook a significant sourcing initiative in 2012 which has really helped us get lower costs per unit when it comes to the purchase of electronics and labor that’s installed as electronics. So I feel really good about how we got off the start, we got off to the year. as I mentioned in my prepared remarks, capital is going to be a little front end loaded this year as we wrap up the fiber-to- the-tower and stimulus investments and then it’s going to wind down nicely in the back half of the year.

Barry McCarver - Stephens

And as it relates to those towers, I noticed carrier service revenue was up nicely sequentially. I know last year in some quarters just the timing of bringing fiber online versus some of your existing copper being cannibalized and maybe fiber from another provider, what was that relationship in the quarter? And are we over the hump on copper cannibalization there?

Jeff Gardner

Barry, I’d say we’re probably not entirely over the hump. We are still turning up a significant number of towers within our ILEC footprint. Obviously the majority of that work was done in 2012. But there could be some periods over the next couple of quarters of volatility as we turn up those remaining sites. But importantly as we’ve talked about, we still are turning up significant numbers of sites out of territory which really have no revenue write down associated with them. But you could see some volatility over the next quarter or two as we wrap up in territory fiber-to- the-tower expansion. So I feel good about the overall trends in the carrier business. The demand we’re seeing from the wireless carriers, they continue to upgrade to higher bandwidth circuits. So the overall trends associated with the wireless special access wireless fiber-to- the-tower, we feel very good about the near term.

Operator

Our next question comes from (inaudible) from Morgan Stanley. Your line is open.

Unidentified Analyst

I know one way you’re managing CapEx relative to where investors were thinking about it is leasing some of the data centers and just wondering of the new data centers coming online this year, how many are leased versus owned and how we should think about the impact that the leased data centers have on margins.

Jeff Gardner

That’s a very good question. We continue to evaluate all of our data center expansions between leased and build and right now I would tell you we’re roughly splitting them 50-50, 50% being leased and 50% being built and owned by Windstream. But notably there are different types of lease arrangements. There’s simply lease arrangements where you’re effectively getting the four wall anchor land and because redundant power. And that’s typically the model we’ve undertaken, because we do believe we want to ensure the data center reflects the capabilities that Windstream wants to bring to bear to its customers. But bottom line we’re going out there and frankly making the most economical decision for our shareholders and that’s how we think about it. So I don’t expect it to have a significant impact when you think about expenses beyond the few turn ups we’re doing here in 2013 that we’ve already talked about.

Operator

Our next question comes from Donna Jaegers with DA Davidson. Your line is open.

Donna Jaegers - DA Davidson

Two I guess. Jeff, yesterday at the annual meeting you mentioned 100 new sales people and it sounds like you’ve started hiring. Is that the right number for the addition this year and how should we think about putting those people in on the cost, over the year.

Tony Thomas

Yeah, Donna, that is the right number. I did talk about it yesterday. Brent's team is actively hiring those people. So those will be added at kind of on a pro rata basis between now and the end of the year, focused on enterprise sales and the sooner the better. We are actively trying to recruit them but as that will play out, it will be more ratable over the rest of the year.

Donna Jaegers - DA Davidson

Okay. And then recently you guys suffered an outage that got picked up pretty widely by the press. Is that having any impact on your sales effort and have you done anything to make sure that no other software cutovers trigger such outages?

Brent Whittington

Donna, this is Brent. And, yeah, you are right. We had no impact is a strong statement. I think something like that always had somewhat of an impact. But what we have done is armed our sales teams and our customers with the information that drove that. And then certainly learn from that. We managed that transition, we thought pretty effectively, but just had something that was unexpected. That crept up in our voice network and definitely was unfortunate. But we will overcome it and that’s when our account management strategy, where our channels have got deep relationship with customers. And, again, sharing with them exactly what happened, apologizing for it upfront, and on being clear with our customers, we can overcome that I certainly expect our team will do so.

Donna Jaegers - DA Davidson

One last quick one, and also the timing on fiber-to-the-tower, you guys got 1600 towers underway. Obviously, weather probably got in the way a little first quarter. When do you think you will finish those up?

Brent Whittington

Yeah, I mean much of that is going to be finished really in third quarter, is where the biggest chunk in terms of delivery occurs between now and the end of the third quarter, with some tailing into December as well, Donna. I mean that’s always dependent on many factors that we are managing on a daily basis but definitely we are pushing for it.

Operator

Our next question comes from Timothy Horan with Oppenheimer. Your line is open.

Timothy Horan - Oppenheimer

Two questions. One, on the enterprise front, I guess everyone on the industry or most people are saying that it's a macro cause for the slow down. But it seems like everyone is hiring sales people at the same time. Seems like a fairly weird dynamic to be adding sales people if there's so much macro uncertainty. And then secondly on the small business side. Can you talk about or give us a little bit more color what's your average broadband speeds to small business? And maybe just update us on what percentage is in the ILEC territory and what percentage of small business is outside.

Brent Whittington

Tim, this is Brent. On the macro slowdown, yeah, I can understand and that’s when we started those plans. Hard to have anticipated what everyone else was doing, but I can only tell you what we are seeing in our markets and the competitive dynamics where we operate in. A lot of that was built on the success we had in '12. And we think the opportunity is there to double-down in some areas where our coverage was not where we needed, and to add one or two in other markets where again we thought the opportunity was in front of us. And that’s really, again, what's caused us to do that. And although there is some macro uncertainty and that has been a theme, as I kind of shared. We really saw that more around our product business. It's much more transactional and short-term in nature in terms of the sales cycle there and typically capital expenses for our customers. And that’s where we were a little more cautious on what we are seeing. But on the enterprise side, I mean we saw the softness, we just didn’t think that was tied to economic weakness. I mean we thought it was targeted markets where we could step up our execution and it does not change our conviction around those expansion plans. So that’s our perspective on that.

And on the small business side, average speed I will tell you, you always have to look at that in CLEC and ILEC differently. But historically that CLEC base was a lot of T type customer business. Then in ILEC you would typically see 3 meg as well type of services. But that’s migrating up over time with more and more Ethernet services focus is really on 10 meg type speeds. Much more common in terms of needs for customers.

Timothy Horan - Oppenheimer

It just seems like that segment, I mean the cable companies are talking 50, 100 megabit speeds and they are growing revenues at 30% per year. It just seems like that segment is going to remain under some pressure here for a couple of years. It does seem like consumer has stabilized a lot more, but just conceptually, we are sort of getting competition really there for the first time?

Jeff Gardner

Well, I wouldn’t say the first time. I mean that’s been going on in our markets for a while now. And the cable companies are focused on a cheap price with a high speed but very very little service wrapped around it. And for many business customers, that doesn’t meet their needs. And so what we have tried to continue to do is differentiate our product versus cable, which resonates with customers. And then importantly for these customers, if you can make things simple for them and wrap around that connection more services that really have an impact on the business and make life easier. That’s the selling message that’s effective and that’s where we continue to have success. We’ve not changed that low speed cheap offer and that’s just not economical for us, either in our CLEC markets and certainly in our ILEC where we have a much higher market share. So it’s the balance there and importantly, if you look overall at our business revenues, the 2% growth that we’re referring to includes all the small business. So we stay hyper focused on revenues, not just units. And we think we’re doing pretty well in the small business channel overall, Tim. But we certainly continue to pay close attention to that. We’ve seen what cable is doing and the continued focus they have their as their growth on consumer gets more challenged. And we’re paying close attention to it and making sure we continue to do our best.

Bob Gunderman

Operator, we have time for one more question please.

Operator

Our final question comes from Maura Shaughnessy with MFS Investment Management. Your line is open.

Maura Shaughnessy - MFS Investment Management

I just want to address the comments on the guidance that Dave Barden asked. Now, you set forth goals in February. We have the first quarter done. So I’m not sure if it’s semantics or what. Are those same goals in place and you have not gone off those goals? In other words you’ve reiterated guidance or have you changed your goals?

Jeff Gardner

No, not at all. We are just trying to be artful around …

Maura Shaughnessy - MFS Investment Management

Don’t be artful. That’s not particularly helpful. Are you still confident about meeting your February 13 goals?

Jeff Gardner

Yes, we are. So let me end any speculation about that. We are confident -- we are comfortable with the guidance that we gave in February and driving the business towards that. And we’re off to a quarter that puts us right on track to where we expect it to be after Q1. So I apologize for the misunderstanding but that’s exactly where we’re focused and how we feel and I appreciate you clarifying that.

Bob Gunderman

Thank you everyone.

Jeff Gardner

It is our vision at Windstream to be the premier communications and services provider in the United States while maintaining our strong stable consumer business. Everything that we are doing at Windstream is in support of that vision. And finally, just to reiterate one more time on Slide 17, this business generates substantial free cash flow which has enabled us to pay a $0.25 quarterly dividend to our shareholders consistently since we were formed in 2006. We’ve evolved substantially over this period of time and have emerged a stronger company that is positioned to benefit from future growth in enterprise and data services. As we look forward, we remain focused on creating and returning value to our shareholders and believe the best way to do this is paying our dividends. So thank you all for joining us this morning and for your continued interest in Windstream. Have a great day.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.

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