Jeff Gardner - President & CEO
Windstream Corporation (WIN) Bank of America Merrill Lynch 2013 Leveraged Finance Conference December 3, 2013 3:30 PM ET
…President and CEO, so Jeff will start out with I think a few slides and overview of the strategies of Windstream currently and then we will have plenty of time for Q&A.
Thanks, Donna [ph]. Good afternoon everyone. I appreciate your coming today. This is our safe harbor. Just to update you on what we are doing at Windstream.
Windstream spun off from Alltel in 2006. Alltel was in the wireless and wireline business and we were the wireline part of that business. And we had a vision to really transform our business from one that was focused on rural and residential. We had modestly declining revenues at the time, very small business deal. We weren’t that focused on the enterprise space. Where we are today through the last six years as we have successfully repositioned the business to growth segments. And over 60% of our revenue today comes from the enterprise space. Our focus from the very beginning was to get to a place where we could grow our top line. We are now national player. So when we sell enterprise services across the country, we can sell to virtually anybody as a result of our acquisition of PAETEC. We have a very strong business focus with advanced capabilities.
On the enterprise side, we are in the equipment business, we are in the network business selling our national network and we are also in the data center business where we have a very extensive managed services and cloud computing business. We’ve got a capital efficient go to market strategy. And what that means is we rely on our own network that also on others’ network to provide this national footprint. And our capital intensity on an ongoing basis is about 11% to 13%. And our strategy is very straightforward, all with the goal of getting to stable, sustainable free cash flow, accelerating our revenue growth opportunities and that’s by focusing on the enterprise base. We have been very focused on optimizing our cost structure. We’ve done another – number of acquisitions and improves our operating efficiencies with each of those generated significant synergies and today I think we maintain a solid margin throughout and we are investing in growth opportunities.
So today in addition to our enterprise investments, we are also making some investments in fiber to the tower, providing fiber services to some of the largest wireless carriers in the country, and we are also a large recipient of stimulus funds from the federal government to really build out consumer broadband in rural areas and we are doing all of that while we are focusing on the enterprise space.
What’s really changed about the company? We’ve really doubled in size over the last six years, at $6 billion in revenue, 72% coming from growth segments, that’s very different from where we started. Our adjusted OIBDA around $2.4 billion, we are in 48 states today.
In the consumer business where we’ve really built out to some of the most rural areas in the country. Our average access lines in the consumer business is about 19 access lines per square mile and even with that, we’ve really built out to the most remote areas and we are going to improve upon that, I think, that’s 97% by the end of 2014.
Our fiber network, this is where a lot of our investment dollars have gone, a lot of our acquisition is in focus on building out fiber. Today we have the fifth largest fiber network in the country, 115,000 miles which allows us to drive this enterprise business with good margin and offer great services to our customers and all throughout this period we paid $1 dividend per share which is through this transformation.
In the third quarter, we focused on just a few things. We are really expanding our data center business. We opened new centers in Nashville, bringing our total data centers to 26. In 2010, we made an investment in that business called hosting solution, at the time they had four data centers, now we’ve built it out what it is today. And again this data center business is not focused on colocation, it’s focused managed services where we can add value in cloud computing.
We are also investing in our consumer network to improve our competitiveness. We are competing against cable companies there and we have improved our broadband network on the consumer side. Our goal is really to grow the enterprise business modestly while maintaining a very stable consumer business. So our future growth will be on the enterprise side but we still consider our consumer business very valuable and a nice generation source for cash.
In terms of our balance sheet, we extended our debt maturities in the third quarter, driving about $45 million in cash interest savings. We paid down about $100 million of our debt in the quarter. So it was a solid quarter.
Where we are focused today – 72% of our revenue was coming from business and broadband. You can see that when people used to think about Windstream they talked about consumer, voice, that’s only 14% of our revenue today. And we are driving growth in the enterprise space albeit in a slow economy that we are in today.
We still generate a strong free cash flow. You can see some of the sources here to support our dividends, allows us to invest in the business. We are investing about $850 million in our network this year, and allowing us to really be competitive on the business side.
The strengths that we are leveraging in the marketplace is really the fact that we have a national footprint. We can sell against the biggest enterprise providers in the country. We are uniquely positioning growth segments. We have been very disciplined about managing expenses in our business and I have already talked about our capital efficient model.
This just gives you an idea of our footprint, much we cover the entire country as I mentioned. We are much more focused in the Midwest and the Southeast but our west region is actually our fastest growing region. We are seeing good growth there. 611,000 business customers, 1.2 million broadband customers and 3.3 million consume connections.
Our consumer business has been one that we have seen lower access line declines than we have seen in many of the other larger network [ph] across the country and this has been a steady consistent provider of cash flow for Windstream.
These are the solutions that we sell. We are really focused on the mid-five enterprise customers and I think uniquely qualified. Our tagline is smart solution personalized service. We deliver these services in a much different way than some of the bigger carriers in the country. We can customize our service offerings for our customers. We can give them a lot more personal service than they are used to and this is allowing us to take share in the marketplace and you can see some of the services that we offer today.
Our acquisition strategy was really built around allowing Windstream to be a one stop shop for the enterprise customers. Today they want someone they can buy equipment, network and data services from and we are very well positioned to be that.
The sweet spot is the mid-market for us. If you think about Verizon, P&C focused on the global customer, the cable companies are more focused on the small customers. Our sweet spot is definitely the mid-sized, multi-location customers where we compete very well in a marketplace. That’s where our sales people are focused and where we had the most success.
Consistent with that, we have certainly driven up our target to higher spending customers and that’s increased our average revenue per unit consistently over the last several quarters. We are driving 5% growth in ARPU as we focus on IP based solution. All of our business is focused there. Enterprise customers are up 6% year over year and we’ve also got a nice carrier business.
On the consumer side, we are very highly penetrated on the broadband side. We’ve driven up our internet ARPU consistently over the last couple of years. We increased our revenue on the consumer broadband by 6% year over year in the third quarter. 72% of our customers in the consumer business also buy broadband from us and 25% of them buy satellite video services from us through our arrangement with DISH. So we’ve got a very high fashion [ph] rates which drives that lower chunk.
Throughout this transformation, although people were worried about – we were worried as well about the consumer business that had very high profitability, as we migrated into the enterprise space and these other areas, we maintained consistent margins around 38% and are targeting growing that to 40% over the coming year, which is I think the real test. We’ve had tremendous transformation and still manage to keep those margins in line.
Our capital efficient strategy is really about the fact that we rely on our own network and also lease network from other carriers in it and provide services in a unique way. We are large enough player. We spend about $1.4 billion a year on interconnection. And so if you think about companies like AT&T and Verizon, we are a significant partner there and we have some market power in terms of negotiating arrangement to carry our traffic and to deliver very efficient services to our customers. It allows us to operate in capital intensity in 11% to 13% range. You can see on this slide we’ve highlighted the fact that we have been making these fiber to the tower stimulus investments, the blue part of the slide, those will be largely done by the end of 2013 and we will see some capital reduction as we enter into 2014. We expect our ongoing capital investments to be about 11% to 13% of revenue.
This just shows our maturity profile over the last couple of years. In this current market we have been able to refinance and extend a number of our maturities. I think we are in good shape all the way out until 2017. We’ve done a nice job of managing our balance sheet and taking advantage of the market.
Our 2013 guidance and adjusted free cash flow, and just in summary, when you invest in Windstream, you are investing in a consumer business that’s transformed into a company that’s focused on growth areas, broadband and enterprise. We are leveraging a national platform, compete against the biggest carriers in the country with a capital efficient model and most importantly, what we have been driving towards is a model that sustains our cash flow and our revenue growth. From day one we have been focused on getting to a place where growing revenue and delivering solid cash flow this quarter our investments, our dividend and our debt strategy.
So that’s it – a quick overview and I will be happy to take any questions.
Okay, thanks very much. I will start off with a few questions and happy to open up to the audience as well. So Jeff, earlier in the year the company cited a soft business sales environment on the business side particular as you mentioned. But then as you have gotten into the third quarter of ’13, you had the best sales quarter ever. So it sounds like what we are hearing is there has been increased sales momentum and wondering is that driven by what you are feeling economic improvements within your market and willingness of businesses to spend again and --
Well, I think there is a couple of things. We did start out a little slower in terms of our attainment quota for our sales force. We have 1200 sales associates across the country selling enterprise. We saw that 80% quota attainment in the first two quarters and as you mentioned, in our business some of it goes to sales to service delivery to customers about 60 days. So that slowness in sales that manifested itself from part of revenue comparison year over year. But in the third quarter as you mentioned we had one of our best quarters to date. We saw much better attainment against quota. The economy helped there but also our execution itself. We did a very large acquisition about 20 months ago, PAETEC and every quarter we get back in terms of our sales force efficiency, our effectiveness. We are seeing some of that manifest itself.
So we are hopeful that, that continues. We have a long sure belief that we can grow our enterprise business in the 2% to 4% range, most of this year it can grow at about 2%. But doing that with the percentage of the business coming from enterprise will allow us to grow the top line as a company. So we continue to focus there. Some of the things going on with our sales force in terms of we are spending a lot more time doing non-new sales capability – we’ve added 50 new sales people on the data center side. As I mentioned in our prepared remarks, we’ve grown that business from four data center to 26 over the last two years. Those people take about six months to ramp up. On the data center business we are seeing 15% year over year growth. So a very, good growth there and I think opportunity lies in front of us. We’ve rolled out salesforce.com for our entire sales price. We’ve improved the pricing model so that they can get back to their customers more quickly. So there is many things going on with Windstream. Look everything that we are doing, they are focused on enabling our sales force and driving better year over year numbers.
So I just want to touch on a couple of the points. So on the economy, do you feel that there has been an improvement in terms of resistivity and business resistance over the course of this year or if you are looking into 2014?
I think there has definitely been some modest improvement. This slow recovery as everyone says, you have seen it across our industry where enterprise sales have been a little bit behind where we are full. But that’s been the pop a little in the third quarter, I think people are feeling more competent. It’s not a huge change but one where I think our sales people are seeing more success closing business going forward. A lot of it on our side, we have some very low penetration in our markets, where competitor player often competing against the incumbents in our market. So we have a lot of opportunity. We don’t want our sales people to focus on the macro-economic environment. We don’t want to be some economists, we just want to be 100 quota. So we really focus in on enabling, I think that enablement is equally as important as the miles improvement in economy.
On the issues or your disappointment on the level of productivity of the sales people, you touched on both the PAETEC integration as well as some of the hires. So was it a mix of both? Did you feel that, that PAETEC sales people weren’t integrating their company as quickly as you would hope.
I think PAETEC was a big acquisition, largest acquisition that we have done to date and we are slightly behind where we hope to be at this point. I think we have learned a lot. PAETEC was very acquisitive as a company before Windstream acquired them and really on the enterprise side, as the market has evolved these IP products, the sales cycle is much more positive. Our sales people are selling to CTOs and CIOs and so we had a number of things that we made on the sales force, on the compensation system, we think the managing processing the salesforce.com, so I think a number of things had enabled these – the sales force to be more productive. It was a big transition for the sales team in general, they tended to be more focused selling traditional customers, we were trying to focus on maximizing the revenue from existing customers but also going out and getting those all up.
So we are managing all those expenses at the same time and I think they had an impact. We are seeing much better results, I think as you look at our sales force it’s much more homogenous in terms of thinking about how we operate across the company. Our sales people that what we have done for our new hires is in the last six months we’ve really focused them on a smaller product set. What we are finding is that our product set had grown in both sides in complexity so that it’s very difficult to use sales reps to be successful quickly. So we narrowed that focus for them. A lot of them will get some quick leanings, that’s basically working as well. So pretty pleased with the progress they are making, do there on the sales side, it’s still important. We need these sales people to be effective.
So on the PAETEC integration you said that it’s a little higher – you initially plan to be, I believe you said that it should effectively be complete in terms of integration about mid-2014. One of your tracking – do you still feel you are tracking for that? And what’s the last kind of big item to be completed?
I think we have done a really good job of integrating the people. Sales force – one sales force is off the company, all those systems like the financial systems are all integrated. The DCs we have in front of us really, really very efficient, back office conversion and that’s where we are going to get in 2014. And I think at the end of the day that’s going to be a huge opportunity for us because few large telcos across the companies have a single billing system, a single provision system for which to roll out services to their customers. So what’s been a challenge for us I think has the opportunity in 2014 be a competitive advantage. So we are really focused on that. It’s been greatly simplified the process for sales folks in our company today. Today if you saw a national customer you may have to position it across the networks. The heritage Windstream and PAETEC network – there will be a single network of the country and we’ve made great progress both on the systems side and on the network side.
I want to touch on the consumer or residential business a bit. So the company has been so successful in achieving broadband penetration in some of your legacy – a lot of your legacy markets that you are actually seeing – you are losing subs now. If you have a net sub loss on the broadband side, so wondering should we think of residential broadband as a declining revenue stream going forward or do you believe that upgrades the higher fees and add-on services that can offset any of that broadband subscriber loss?
I do think that we have growth opportunities in our business. We have 72% penetration to our consumer customers, attachment rate for broadband, which is very high relative to some of our peers. But where we see opportunity in the last quarter, despite the fact that we lost access funds, we’ve had that for three or four quarters now because of our high penetration rate, cable, graphics and competition, there is no doubt about that. But we are also doing at the same time selling additional services to these customers. The store by-product that’s going to add about $10 of ARPU for the month to our customers and we have the dynamics where people are buying more and more high speed. They are using much more as a home, that’s been a big driver for more bandwidth consumption, we are upgrading customers. And so we saw a 4% increase in revenue year over year from these broadband customers. That’s where we are focusing on growth.
When you think about our overall consumer footprint, some of the things that give you, it’s about the revenue there. First, the stimulus project that we have been working on for the past 18 months, we received $180 million. We have the largest recipient of stimulus funds from the federal government. And these are focused on our most rural areas. In many cases whether it’s not going to in cable competition, so we are going to have a very penetration as we have activated new – this plan in terms of customers having services. We are well into the stimulus project. The other thing that we have to look forward to is something called next America’s expanded live, this is another government project focused on under customers and under [ph]. And so if you recall back in our slides we are reaching 93% of our customers through stimulus and Connect America Fund, one where we are going to get to another 4%. These are areas where there is about 8 active lines per square mile and again no competition to speak of, so we have very high attachment rate.
In total we are going to add over 175,000 customers who are either unserved or under-served with the stimulus and Connect America Fund. Again we are very aggressive with that, I think the program worked out very well and these new customers will be able to get the access of 10 net. So it’s going to be a very effective product and with the access rate. So all of that I think bodes well to our ability to grow that broadband revenue over time despite the fact that we are very highly penetrated.
I want to touch on some capital related questions. So the company and yourself has expressed a continuing commitment to the current dividend. And you have also deployed some of your free cash to debt pay down, so I think you paid about $100 million off the revolver so far, you had committed to paying another $100 million in the fourth quarter. And so wondering is this really the way you plan to fund the management capital structure going forward, as you go into 2014, is it the commitment to the dividend, any sort of excess cash above that really goes to pay down debt?
Yes, as we think about – I mean we are very pleased to have a business that generates strong free cash flow and we have three things to worry about. We got the dividend, which is core to our active investors, has been for a long time. They have been very focused on that, we just approved our 30th consecutive $0.25 quarterly dividend to our shareholders in the last quarter. So that’s been totally part of our story. At no other way has the dividend been an obstacle sort of making the investments that we need to make in this business. And so that’s also crucial. We could get asked a lot by investors, is it management ability to make – would you make more investments if you didn’t have that dividend coverage issue? And the answer is no. Today we are able to make the investments that we need to. We have not turned down any suggested projects as a result of our dividend. And lastly, we are still focused on getting down to 3.2 to 3.4 times leveraging about 30 basis points away from that.
We levered up a little bit in order to accelerate our transformation from a consumer to an enterprise business. But I think it made sense, it provides us with a better revenue trajectory going forward but we are still focused on getting to that 3.2 to 3.4 range. So I think we can expect that going forward as well.
But good appetite for additional acquisitions, now that you have sort of line of sight for completing the PAETEC acquisition, and if so, in what areas would you be interested, is it products, is it geography?
It’s been over 18 months since we have done an acquisition which is still a long time for Windstream. We were doing – we were quite active in 2010, 2011 in terms of acquisition. PAETEC was a large acquisition for us. And so in the last couple of years and really we are at a point after PAETEC, nothing we had everything that we wanted, but we had to compete so far, so we should be a one stop shop. We have the equipment, network, data center strategies. It was time for us to focus internally on improving our operations and our integrations of that and we have made a great amount of progress there. So I think we are really at a time where we start looking out at acquisition again to really accelerate the transformation, really focused on the enterprise space obviously, and that’s where we said – last where transaction would sit in the enterprise space. We are really trying to sell our equipment in the west. We have done a nice job growing our data centers organically but we don’t have any on the west coast. That strategy has been eased a little bit by the fed at the valuation on both data centers and fiber companies that have been at relatively high.
So it’s not like – we’ve away from investing in those areas but we are doing more of that organically and I think now we have an opportunity, we are opportunistic, we have got to worry about a number of things as we look at acquisitions, leverage, dividend coverage et cetera. But we are focused – I think that we are now very quickly in data time where we can look over to some more acquisitions.
So you mentioned again both dividend and leverage – are there parameters – there is valuation, there’s dividend coverage and there is leverage. Are there parameters that you – as you look at acquisition, is maintaining the dividend sort of sacrosanct and maintaining a certain level of leverage or do you feel that for the right acquisition or provide the right NPV to shareholders, is there flexibility on some of those parameters?
As we think about that, our dividend policy has been one, that’s been very important for equity shareholders. So we take it very seriously. And so as we look at acquisitions, we take a look across all those factors and without talking about any specific transactions, I think that you think about us behaving the same way going forward. Focusing on the dividend, de-levering and containing the adjustment [ph] network.
Jeff, so I thought one of the more features you showed on your prepared remarks is the margin chart, which has shown a lot of stability over the last several years. I think that the sceptics would look at that and go, well, yes, but there has been a lot of M&A synergies that have helped elevate that margins during that period. Right now revenues are under pressure and when they do grow they are going to grow as a function of lower margin enterprise revenue and the higher margin consumer will fall. You mentioned that you have a target for higher margin down the road even then you have been able to generate to this point in time. How do we see the path forward to getting to the higher margins giving the moving parts?
Well, David, that’s a great question. I think that many people are always sceptical of the CELAC [ph] model because they have not been able to deliver the operating leverage. We’ve got a big business there. We’ve got $4 billion enterprise business, so we are going to have Time Warner telecom, we are scale player. When you think about things interconnection, that’s our biggest advanced category, we just completed a request for proposal to [swap] all of our partners and we are going to decide significant savings there we have in 2013 and we will in 2014 as well. And there are many other areas that we talked about these parts of the integration that we are combining to, specifically around service and billing, our company is much more efficient. We kind of unlocked some of our opportunity to demonstrate some of that operating leverage going forward.
And if you go to that chart over the last six years, you’ve got to remember that we also stepped through one of the most difficult times in terms of in the consumer business, US tax reform [ph], during that timeframe where we alluded to some high gross margin revenues replacing it with – and we may be replacing with lower margin revenue, we generated expense savings to really keep those margins stable. So the way I would look at we stepped through and maintained that stability over a very difficult point in our transformation. We’ve got a lot of good upside both on the interconnection and the savings related to our billing and systems integration going forward.
We think we just crossed our time limit. So Jeff, thank you so much for being with us.
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