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Windstream (NASDAQ:WIN)

Q2 2010 Earnings Call

August 05, 2010 8:30 am ET

Executives

Brent Whittington - Chief Operating Officer

Robert Clancy - Senior Vice President of Investor Relations and Treasurer

Jeff Gardner - Chief Executive Officer, President and Director

Anthony Thomas - Chief Financial Officer

Analysts

Donna Jaegers - D.A. Davidson & Co.

Daniel Gaviria - Morgan Stanley

Batya Levi - UBS Investment Bank

Jason Fraser - Raymond James

Michael Rollins - Citigroup Inc

Scott Goldman - Bear Stearns

David Barden

David Coleman - RBC Capital Markets Corporation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Windstream Communications Earnings Conference Call. [Operator Instructions] And now I would like to turn the conference over to our host, Mr. Rob Clancy. Sir, you may begin.

Robert Clancy

Thank you, Sharon, and good afternoon, everyone. Thanks for joining us this morning. Today's conference call was preceded by our second quarter 2010 earnings release, which has been distributed on the newswires and is available from the Investor Relations section of our website. Today's conference call should be considered together with our earnings release and related financial information.

Today's discussion will include certain forward-looking statements, particularly as they pertain to guidance and other outlooks on our business. Please review the Safe Harbor language found in our press release and in our SEC filings, which describes factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements. Today's discussion will also include certain non-GAAP financial measures. These terms will include OIBDA, which is operating income before depreciation and amortization, and adjusted OIBDA, which excludes non-cash pension expense, stock compensation expense and restructuring charges. Additionally, adjusted free cash flow is defined as adjusted OIBDA, excluding merger and integration expense, cash interest, cash taxes and CapEx. And it’s presented on an actual basis to reflect the NuVox and Iowa results from the date on which we acquired those businesses. Again, we refer you to the Investor Relations section of our website where we have posted our earnings release and supplemental materials, which contain information and reconciliations for any non-GAAP financial measures.

On June 1, Windstream completed the acquisition of Iowa Telecom. Our pro forma results include the results of Iowa Telecom for all periods shown, and also include D&E Communications, Lexcom and NuVox, and exclude our former non-affiliate Product Distribution business. We will make references to these pro forma results, including the year-over-year comparisons, during our call.

Participating on our call this morning are Jeff Gardner, Windstream President and Chief Executive Officer; Brent Whittington, Windstream Executive Vice President and Chief Operating Officer; and Tony Thomas, Windstream Chief Financial Officer. At the end of the call, we will take a few questions.

With that, here is Jeff Gardner.

Jeff Gardner

Thank you, Rob, and good morning everyone. This morning, I will make up a few comments about our performance and provide an update on our strategic initiatives. Brent will discuss our operating results and Tony will review the financial performance.

First, I am very pleased with the second quarter results. Our business is performing very well despite the economic conditions, and we are on track to meet the operating and financial goals we set forth earlier this year. Our innovative marketing strategies, including our Price For Life bundles, have been well-received by consumers and small business customers alike, and are yielding continued improvement in our Access line trends, which are already the best in the industry.

The integrations are all on track and should be essentially complete over the next few months, yielding synergies, incremental synergies, in the back half of this year.

During the second quarter, we completed the Iowa Telecom acquisition, gaining approximately 247,000 Access lines and 96,000 high-speed Internet customers in Iowa and Minnesota. This transaction adds very attractive and well-run rural markets to our footprint and provides an opportunity to grow our free cash flow. In fact, we are updating our full year 2010 guidance as a result of the Iowa deal. And importantly, we are increasing our adjusted free cash flow guidance to $770 million to $810 million, which results in a lower expected dividend payout ratio of 57% to 60% for this year, as compared to our initial view of 59% to 65%. Tony will provide the details of our updated guidance shortly.

Turning to the regulatory front. We continue to share the core goal of making broadband available to everyone. Today, Windstream has deployed broadband Internet access to almost 90% of our current Voice customer base. Earlier this year, we applied to the Rural Utilities Service for $264 million in Round Two Stimulus funding, which includes three applications from Iowa. If received, this would extend our broadband availability to roughly 93%, as well as enhance broadband speeds in underserved areas. Importantly, we were recently notified by the RUS that eight of our 33 applications have been approved, amounting to roughly $67 million in grants. These eight applications also require us to invest an incremental $22 million, or 25% of the expected total cost.

Our remaining 25 applications are still under evaluation by the agency, and we expect to hear whether we will receive additional funding by September 30. We look forward to finalizing these arrangements so that we can proceed with our plans to expand broadband within our rural communities.

Additionally, we support universal service reform that would direct funds more equitably and rationally across all of rural America, and we believe that the National Broadband Plan can address these issues with effective reform of universal service and intercarrier compensation over a manageable transition period.

Having just passed our four-year anniversary, I am pleased with the transformation that Windstream has made; going from a primarily residential-focused Voice business to a next-generation telecom company focused on broadband and Business. We’ve made significant progress in growing our distribution channels, launching innovative products such as Greenstreak and our Price For Life bundles, which have contributed to our industry-leading operational metrics.

Strategically, we have made very targeted acquisitions without increasing the risk profile of our business, which has allowed us to realize significant synergies, improve our revenue mix and lower our payout ratio. Collectively, these deals added over $1.7 billion in revenue and expanded our presence to 23 states. Over the past four years, we have meaningfully lowered our dividend payout ratio, highlighting the sustainability of our cash flows. Our industry-leading performance and disciplined growth strategy have led to total shareholder returns of 40% over this four-year time frame, which significantly exceeds that of our peer group and the overall market.

Going forward, we will remain focused on improving the trends of our core business, expanding our broadband and Business opportunities and increasing our market share in our competitive service markets. Additionally, we will continue to position the company so that we can capitalize on strategic opportunities that are in the best interests of our shareholders.

We have been very pleased with the NuVox transaction and we are encouraged with the better growth opportunities that exist in the Business and Enterprise segment.

Now let me turn the call over to Brent to discuss our operational results.

Brent Whittington

Thanks, Jeff, and good morning, everyone. On a pro forma basis, we added approximately 14,800 new high-speed Internet customers this quarter, bringing our total customer base to 1.27 million, an increase of 9% year-over-year. Our overall broadband penetration is now at 41% of Voice lines.

In the consumer channel, Residential high-speed Internet customers grew almost 10% year-over-year, and penetration is now approximately 58% of our primary Residential lines. Our Price For Life program continues to resonate well with our customers, and we are having nice success in upselling bundle adds, which include services like Internet security packages, home networking and online data backup, which drive both incremental revenue and improved retention.

In the Business channel, high-speed Internet customers grew about 4% year-over-year. Additionally, Advanced Data and Integrated Solutions, which are largely connections providing both Voice and Data services, was up over 1% year-over-year. This quarter, we added over 8,000 digital TV customers, bringing our total customer base to approximately 420,000, or 21% penetration of our primary Residential customers. And in mid-June, we added DISH TV to create a triple play Price For Life bundle. We’re very excited about this innovative offering which provide a compelling value to our customers, and although early, we've experienced a nice increase in video growth adds and expect this to yield improved retention rates going forward.

Total Access lines declined by approximately 34,000 during the quarter, resulting in a year-over-year decline of 3.7%. This year-over-year loss rate has steadily improved over the last four quarters and improved 30 basis points sequentially during the second quarter. Consumer Voice lines declined 3.7% year-over-year, an improvement of 50 basis points sequentially, and a result of our Price For Life program, growing distribution channel, improving service delivery and a stable competitive environment. Business Voice lines declined 4.7% year-over-year, a slight improvement sequentially due to lower disconnects this quarter.

Special axis circuits were up 3.7% year-over-year due to increasing demand from wireless carriers. And Advanced Data and Integrated Solution units were up 1% year-over-year. But importantly, the revenue associated with the units increased nearly 4% year-over-year, a result of higher next-generation Data services, as well as improved performance in our former NuVox markets.

We're very pleased with the strides we are making in the Business channel, which now represents 44% of our total revenues. Our refined organizational focus on Business sales, service delivery and Business marketing and branding, is resulting in improving revenues in our strategic Business products, which is helping to offset the pressure in the traditional Voice services.

During the second quarter, we launched a new advertising campaign for both our Residential and Business segments. The Residential campaign is centered on our Price For Life program and reinforces that Windstream is fast, reliable and delivers the most customer-focused offering with the best value. Our Business campaign is designed to boost our brand awareness by emphasizing that Windstream provides mission-critical communication services to businesses, and it coincides with the launch of next-generation services, including Voice over IP, and Ethernet and Internet, which we expect to launch in nearly 100 additional markets this year.

From an integration perspective, we're very pleased with all the progress we have made to date. We expect the Lexcom billing conversion to be completed during the third quarter.

For NuVox, our integration efforts are largely complete. Rather than migrate Windstream's CLEC customers to NuVox's billing system, we are leaving the existing systems as they are, and are considering a plan to enhance the functionality within our consolidated platform by leveraging best practices from both companies, so that both the ILEC and CLEC businesses benefit. With Iowa, we converted their corporate systems the week we closed the transaction and have plans to convert their billing systems by the end of the year. Importantly within the Iowa markets, we have started branding activities and launching Windstream's rate plans and product offerings, including the Price For Life initiative, which are being well-received. I am pleased to say that all of these transactions are tracking toward the free cash flow synergies we outlined when we announced each deal.

In summary, I want to thank the Windstream team for another solid quarter. Our focus on execution, service delivery and innovative marketing programs continues to drive improvement in our operational results.

Now let me turn the call over to Tony and he’ll discuss our financial results.

Anthony Thomas

Thanks, Brent, and good morning, everyone. For the second quarter on a GAAP basis, Windstream achieved consolidated revenue of $917 million, operating income of $254 million and $0.17 of diluted earnings per share. Our GAAP results include $11 million in after-tax merger and integration costs, which lowered EPS by roughly $0.02 this quarter.

Turning to our pro forma results. Windstream achieve total revenues of $960 million, a decrease of 3% year-over-year. Consumer revenue declined $17 million or 4.5% year-over-year, driven primarily by fewer primary Residential Voice customers.

Business revenue declined $2 million or less than 1% year-over-year, driven by fewer Access lines, which was largely offset by growth in Data, Integrated Solutions and Special Access. Wholesale revenue declined $7 million or 4% year-over-year; primarily the result of fewer Access lines.

Specifically by category, Voice and Long Distance revenues declined by $35 million year-over-year or 8%, driven by fewer Voice lines and declining à la carte features. Data and Integrated Solutions increased $15 million or 6%, due to growth in high-speed Internet customers and next-generation Data products, as well as growth in Integrated Solutions, largely driven by our former NuVox markets.

Special Access revenues were up by $2 million or 2%, due to circuit growth and increased demand for wireless backhauls. Switched Access and USF revenues declined $4 million year-over-year or 2%. Within Switched Access, revenues declined by $12 million year-over-year, related to fewer Access lines and decreased usage, as well as an internal network efficiency project which resulted in the elimination of certain Access revenues which is a margin-neutral as we see corresponding reductions in interconnection expense.

Within USF, revenues improved by $8 million year-over-year, most of which is related to higher end-user surcharges, due to the increased Federal Contribution Factor, which is OIBDA-neutral.

Miscellaneous revenues declined by $3 million year-over-year. Total product sales were down $4 million year-over-year, driven by fewer Business sales.

Sequentially, revenue declined by $13 million, largely due to lower Voice and Long Distance, Switched Access and product sales. We are encouraged by the increased revenue from our bundled offerings, which is offsetting some of the pressure with our standalone legacy services. We expect to see further stabilization in consumer revenue trends as more of our base subscribes to bundled services.

Let me turn to expenses, which exclude depreciation and amortization. This quarter, expenses were lower by $37 million or 7% year-over-year. Excluding non-cash pension expense, expenses were lower by $29 million or 6% year-over-year.

Specifically, cost of services was down $25 million, due primarily to lower interconnection expense related to the internal initiative I mentioned previously, a decrease in usage and other network-grooming initiatives. Additionally, pension and benefits expense was $7 million lower. Cost of products sold declined by $2 million year-over-year, due to fewer Business product sales. Within SG&A, expenses decreased $10 million or 7% year-over-year due to deal synergies, lower pension and benefit expense and workforce reduction savings. These reductions were partially offset by targeted investments in advertising to promote our Price For Life bundle and expanded door-to-door distribution, both of which we expect to yield benefits going forward.

Sequentially, total expenses decreased by approximately $3 million due to lower interconnect expenses and incremental synergies, offset somewhat by the increased advertising spend I just mentioned.

For the quarter, OIBDA was $459 million, which was up 1.5% year-over-year, primarily due to lower non-cash pension expense. Adjusted OIBDA was $480 million, lower by less than 1% year-over-year. In fact, our adjusted OIBDA margin improved 120 basis points year-over-year to 50%. Operating income for the quarter was $276 million, up 6% year-over-year.

For the quarter, adjusted free cash flow was $198 million or $0.43 on a per share basis. During the second quarter, we spent $104 million in capital expenditures. From a balance sheet perspective, we ended the quarter with $54 million [ph] (38:33) in cash. On June 1, we spent roughly $910 million in cash to complete the acquisition of Iowa Telecom, which included various fees, make-whole premiums and swap breakage costs.

We funded this closing with cash or revolver borrowings, and ended the quarter with a $300-million outstanding balance on our revolver. In mid-July, we opportunistically raised $400 million in senior unsecured notes to repay the outstanding revolver balance and for general corporate purposes.

Last February, we provided the investment community with 2010 guidance on a pro forma basis that included NuVox for a full year. As a result of the Iowa deal, we are providing updated pro forma guidance for revenue, OIBDA, adjusted OIBDA and CapEx, and we have narrowed the initial guidance ranges, given that we are mid-way through this calendar year.

Specifically, we expect 2010 pro forma revenue to be within a range of $3.82 billion to $3.9 billion, which is a decline of 3½% to a decline of roughly 1½% to our 2009 pro forma view, including NuVox and Iowa. We expect OIBDA to be within a range of $1.839 to $1.879 billion, or an increase of a half a percent to 2.6% year-over-year.

We expect adjusted OIBDA to be within a range of $1.92 million to $1.96 million or a decline of approximately 2% to flat year-over-year.

Finally, we expect to spend $390 million to $410 million on capital expenditures, which excludes any expenditures related to our Stimulus application.

Turning to adjusted free cash flow, we expect to generate $770 million to $810 million of adjusted free cash flow, which yields an expected dividend payout ratio of 57% to 60%. Importantly, our adjusted free cash flow guidance is not pro forma and reflects NuVox and Iowa on an actual basis from the date on which we acquired those businesses. We have provided a reconciliation of our adjusted OIBDA on this basis, which includes expected net cash interest of $494 million and cash taxes of $190 million to $210 million for this year. The improvement in the payout ratio from our previous range of 59% to 65% is primarily due to the benefits in accretion with the Iowa transaction.

In summary, we are very pleased with our results for the second quarter and believe the business is positioned very well for future success. Given the progress with the integrations, we expect to realize additional synergies in the next two quarters which should lead to improved adjusted OIBDA in the back half of this year as compared to our second quarter results. Importantly, we expect to realize the full annual synergy targets for all our acquisitions by the beginning of 2011.

With that, we will now take a few of your questions. Sharon, please review the instructions and open the call to questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Barden with Bank of America Merrill Lynch.

David Barden

Tony, to start off, could you just maybe more specifically quantify what synergy number you're baking into the guidance for the second half? And maybe you could kind of allocate it to the different deals. It would be helpful. And then second, on the Switched Access revenue kind of step-down that we saw, is that, like it is typically, we usually see kind of a 2Q step-down. Is that a good run rate for the rest of the year? And then kind of forecast another step-down in 2011? That would be helpful.

Anthony Thomas

This is Tony. I'll start with the synergy question. We expect to realize roughly $55 million worth of synergies associated with the four acquisitions. And I think as we've highlighted on our previous call, we're completely done with the D&E acquisition. So we'll achieve a full synergy on D&E of $25 million. We'll achieve the vast majority of NuVox. And on Iowa, we expect to ramp up the billing system conversion in December. So most of those synergies will realize in 2011. But we're expecting an OpEx synergy run rate in 2011 of roughly $85 million. So we’re running at $55 million of that in 2010, and we’ll be on the full $85-million run rate in 2011. On Switched Access revenues, I think as you looked over our investor supplement, you can see Switched Access and USF revenues have dropped off here from 1Q and to 2Q. And I had mentioned that we had done an internal network-grooming project; that accounts for roughly half of that decline, David, from 1Q to 2Q. And I think, even more importantly, when you step back, within our Switched Access and USF revenues, just to kind of dive a little deeper into 2Q, Switched Access revenues were $72.5 million in the second quarter, or roughly 7½% of our revenues. So as you look at that, we're increasingly less reliant on Switched Access revenue and we do expect continued declines in Switched Access, pretty much in line with Access lines. Importantly, as Access lines improve, and it had been improving over the last several quarters, we expect improvements in Switched Access revenues.

Operator

Our next question comes from Batya Levi with UBS.

Batya Levi - UBS Investment Bank

Just one question on NuVox. Can you provide some color on how revenue growth and margins have been trending? How is the competitive environment and customer demand for NuVox? And another question on your Price For Life program. You mentioned that you launched it for the triple play in June. How does that pricing compare to the other players in the market? Some of the cable guys have been suggesting that they're increasing broadband pricing but they’re promoting bundles and giving aspirational gifts. So do you believe that your Price For Life program is going to put a lid on your ARPU gains going forward? Or is the decrease in churn and upside in growth made up [ph] (45:42) for that?

Brent Whittington

This is Brent, I’ll take that. I mean, maybe to NuVox first. I mean, we continue to be very pleased with everything we’ve seen out of that transaction across the board. Last year, NuVox saw year-over-year revenue growth in the low single digits and we expect to see similar growth this year. I'm excited, again, about that and seeing sales productivity lift every day. So I remain optimistic on what we're going to experience out of the transaction. In terms of the Price For Life triple play, a little different. So that's actually one bundle for us that when you actually bundle up three services, you pay a little more for it. And the reason for that is because you get the Lifetime Price Guarantee. And that's priced right now in our markets between $85 and $95. And it is a little cheaper than our competition, but the main reason for that is it's also a very limited selection of cable content. And that's the primary reason for that. It’s really a good kind of teaser offer. It really helps us effectively switch, we believe, broadband subscribers from cable back to us. And so far excited about that. Now, does it limit ARPU as we think about both the triple play Price For Life as well the double play bundle we've been promoting? Perhaps. One could argue that. But if you think about the broadband product and what we’re trying to do with penetration rates where they are today, it's really all about selling increased speeds to customers and incremental value-added services that revolve around that broadband connection. That's where we see the future in terms of revenue growth, and we think there's a mile of upside there still. And just one more thing on the NuVox deal. The other thing it -- Brent’s exactly right. We're incredibly pleased with the synergies, the way that business is running. But we've also seen some very nice benefits across our business. The sales philosophy that we brought over with NuVox, the aggressive approach in the marketplace, is evident throughout our company, even on the ILEC side, as is a much better focus on customer service in the Business channel. So as we expected, that deal had a lot of ancillary benefits. The fight’s [ph] (47:52) just getting us more focused on the Enterprise space.

Operator

Our next question comes from Jason Armstrong with Goldman Sachs.

Scott Goldman - Bear Stearns

It’s Scott Goldman on for Jason. So I guess I'll ask the obligatory broadband question. Net adds seem to be coming down across the industry a little bit more, so seasonally, than we would’ve expected going into the quarter. I've been speaking to different people over the last couple of days and some seem to think that it’s an industry-wide slowdown; others seem to think that maybe it’s within some of the company controls and are more company-specific issues. I'd love to get your thoughts in terms of what you see as far as broadband seasonality and what we may be able to expect going into the third quarter with back-to-school. And then I have a follow-up after that.

Jeff Gardner

Our decrease in broadband, as we look at the numbers and what we saw in Q2, consistent with what we've seen in the past, it’s always kind of a soft quarter seasonally. It is not unusual to see this kind of decrease from 2Q to first Q. In fact, if you look at our broadband adds for the first half of the year versus the first half of '09, they're almost exactly the same. So we had slightly heavier net adds in the first quarter; a little less in the second. I think both years added about 51,000 customers combined. We’re not seeing aggressive new cable competition in the form of rollouts or promotions, and we continue to believe with our Price For Life promotion that we're well positioned.

Scott Goldman - Bear Stearns

Okay. Then are you doing anything different for the third quarter in terms of back-to-school promotions or anything like that? Or is it going to more just status quo, focused on the Price For Life?

Jeff Gardner

We're seeing a ton of activity around our Price For Life, a ton of interest. So I think we'll stick with that. Tony mentioned that we made some advertising investments in the second quarter that I think will yield some better sales as well. So we're going to stay the path.

Scott Goldman - Bear Stearns

Great. And then just one question on the Stimulus. Just wondering what the grants that you did receive mean for potential broadband expansion availability. I realize they’re kind of small dollars in the grand scheme of things, but wondering where that takes you and what the timing of that is. And then if you were to get approval for the remaining 25 applications, what would be the implications of that as well?

Jeff Gardner

So the initial grants that we received of $67 million, that's a lot of money. We're very, very excited about it. Mostly because I think the RUS realized that Windstream could give them great bang for the buck, in terms of reaching as many of these underserved customers as possible. I think the number of customers in the areas where we've been awarded licenses are customers in businesses. There’s around 80,000. And so we'll have great opportunity. The number that I have in my mind here, Scott, is if we were able to receive funding for all of our applications, we could drive up our broadband availability to 94%. So this could be very meaningful to us in the long run. Maybe not in one specific quarter, but it is very good news for Windstream. And we're very excited about it and looking forward to getting started as soon as possible.

Operator

Our next question comes from Michael Rollins from Citi Investment.

Michael Rollins - Citigroup Inc

Just an update on the regulatory side in terms of what you expect to see out of net neutrality and on the potential reform USF into carrier comp. And then secondly, just in terms of the business, how should we think about the variability of your cost structure once you get through your operating synergies? So if revenue should continue to decline, how much cost do you think you can take out on average relative to that dollar of revenue change?

Jeff Gardner

First of all, as it relates to Washington, we share the goal, as I mentioned earlier, of making robust broadband available to everyone in the country. The National Broadband Plan takes many steps in the right direction on that, but it cannot be achieved without effective reform of universal service and intercarrier compensation. So we hope that the National Broadband Plan is used as a vehicle to make those changes. And I think it needs to happen quickly. People need broadband today. This market is changing very quickly. So the sooner we deal with those issues, the better. At this point, there are too many unknowns to speculate on the outcome. However, we expect the FCC's plan will be measured and phased in, which is good news for our investors who are really concerned about the sustainability of cash flow. I think that's very good news, and we think that should allow carriers to adjust to the change. We certainly think, with Windstream's relative lack of reliance on USF subsidies, that we're in very good position as it relates to. When you think about this whole Title I and Title II issue, Mike, the biggest issue is, to me, access to the Internet, the wired network, is open, affordable and robust today. And that's really what the principles are after, and we have really done a nice job in the existing regulatory environment, pushing out broadband very aggressively in the country. Many believe the FCC has the requisite authority it needs to implement the broadband plan and make the necessary changes to intercarrier comp and universal service. And as we said in front of the Senate last month, we really hope they deal with an important issue on universal service, which is reforming it and changing it so that it’s focused on treating all customers in rural areas the same way and not differently depending on which carrier provides your service. The second of your part of your question related to credibility of cost and I'll let Tony handle that.

Anthony Thomas

This is Tony. I think we continue to have the view that the cost model that Windstream has is more variable than fixed. And I think we have proven that over the last four years. We've had top-line pressure, but we have continually found, year after year, ways to take out costs. And as we look forward, there's never any single silver bullet that helps you solve the cost problem. It's an organizational focus, it's an organizational culture, and at Windstream, we continue to find those ways to take out cost, in addition to deal synergies. We’re continually finding ways to make this business run more efficiently. And we think that sort of focus is what’s enabled us to generate the returns that we've seen here over the last four years.

Operator

Our next question comes from Jason Fraser with Raymond James.

Jason Fraser - Raymond James

I just want to follow up on the last response just about the exposure to the Access and subsidy revenue. You break out the revenue side; I just wanted to think about more about the cost side. Do you net out the costs against the revenue? What is your exact net exposure to Access and subsidies?

Anthony Thomas

This is Tony. I think the way to think about this is when you look at the revenues that we were talking about earlier on Switched Access of $72.5 million, $24 million of those Access revenues are originating Access that really also show up in Long Distance expense. They’re passed back to Windstream through a Long Distance carrier. So really, where we're most exposed on Switched Access is on terminating access in recip comp [reciprocal compensation] and that's about $48.5 million, or roughly 5% of total revenues. So that's probably the best way to think about it from a net exposure perspective.

Operator

Our next question comes from Daniel Gaviria with Morgan Stanley.

Daniel Gaviria - Morgan Stanley

With the integration soon to be over and done with, Jeff, what is your current view on the M&A front?

Jeff Gardner

As you said, I mean, importantly, we're very pleased. I would say that we’re actually ahead of plan in terms of the integrations. They're all on track and should be essentially complete over the next few months. The team has done a great job there. With respect to future M&A, we believe that we will have further opportunities to continue to grow and we’ll continue to focus on well-run businesses. I think we've taken a slightly different approach here. It's paid off. You’ve seen what's gone on with our payout ratio. We've improved our growth profile while lowering our payout ratio, which is a difficult thing to do. But it's been a very important part of our strategy and I think we'll have those opportunities going forward. We've been extremely pleased with NuVox. That was the most unique business that we bought in the Enterprise space last year. And that deal, as Brent mentioned earlier, is going extremely well. And when you look at our ILEC deals, we announced the new guidance today related to Iowa. These are accretive deals. And we are very good at assimilating those businesses quickly. So we will continue to position this company so that we can capitalize on strategic opportunities that are in the best interests of our shareholders, and we are in a position to do that.

Operator

Our next question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.

On your promotional activity to push door-to-door and Price For Life, can you sort of break out -- SG&A was up a little more than we expected. Can you break out how much you spent on those promotions?

Brent Whittington

This is Brent. So we actually spent probably about $5 million in incremental advertising in the second quarter. And even despite that, I mean, still I think year-over-year, we saw some nice improvements in SG&A. Because, I mean, those are investments we've got to make. It's a competitive marketplace. I mean, we’ve talked before about increasing alternate distribution because of the competitiveness in the market. And door-to-door’s certainly one good example of that. And it alone probably cost us about $1.5 to $2 million incrementally versus prior year, but again, those are success-based cost. And that channel's driving results, so we like…

Donna Jaegers - D.A. Davidson & Co.

You can certainly see the [indiscernible]. Is the $1.5 million to $2 million on the door to door, that's incremental to what you spent on the ad campaign? Or that's within the $5 million?

Jeff Gardner

That's correct.

Donna Jaegers - D.A. Davidson & Co.

Great. And then just a quick update. I know you guys are working with Sesame [ph] (59:13) and I saw they announced a new product on the West Coast. Anything new as far as really getting more of a product that would work with smaller -- like video-on-demand to meld your satellite video portfolio with the broadband?

Brent Whittington

I mean, we continue to partner with Sesame [ph] (59:31) and are closely evaluating that. I actually have that product in our lab right now. More to come on that later this year. Other than that, Donna, really nothing new to speak about there.

Operator

Our next question comes from Dave Coleman with RBC Capital.

David Coleman - RBC Capital Markets Corporation

Just as far as the Iowa acquisition, I believe they had an application with the FCC to get USF subsidies. I'm just wondering if that's something that you're still pursuing, and if so, where that stands. And then secondly, just on the dividend, it’s nice to see the free cash flow payout ratio continue to decline. Just wondering what your thoughts are as far as use of cash, given that dividend taxes or tax on dividends maybe taxed at ordinary income rates, and whether you’d look to use the excess free cash flow for share buybacks as more shareholder-friendly use of capital versus increasing the dividend.

Anthony Thomas

This is Tony. In regards to your first question with Iowa, I think we're really approaching USF and Iowa through the National Broadband Plan. And really I think we’ve had a consistent message of the rural-rural divide. Iowa has nine Access lines per square mile and receives no high-cost USF funding. So it’s just really an opportunity to make sure that those USF monies are being deployed in a fair way to maximize broadband availability. And that's really our overall advocacy approach on the Iowa USF money. Turning to the dividend payout ratio, as you alluded to, we were able to narrow and lower the guidance here with addition of Iowa, with a new expected dividend payout ratio of 57% to 60%. At this point, what changes are going to be made in the dividend taxation rules are not known. And if there are going to be changes, I think we're supporting a position of parity between the dividend and capital gain tax rate. And we remain committed to the dollar dividend. It has generated consistent returns. It’s enabled total shareholder returns to exceed our peer group and to total market. And ultimately, I think that remains our focus, is generating strong free cash flow. And you’ve got to remember, over half of our shareholder base is tax-exempt, meaning that dividend taxes have no consequence. And additionally, even those taxpayers, if you’re an individual making less than $200,000 or a family making less than $250,000, you’re also not likely to pay higher taxes. So it’s just very difficult at this point to conjecture on what ultimate impact the dividend tax rate will change. But I think we remain focused on generating strong cash returns and returning that cash back to our shareholders.

David Coleman - RBC Capital Markets Corporation

How much of the '09 dividend was return-to-capital versus ordinary income?

Jeff Gardner

Zero was return-to-capital. It was all ordinary income. Quantified dividends.

Thank you, folks, for joining us this morning. We appreciate your interest and support. Mary Michaels and I will be available throughout the day for additional questions.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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