Windstream's CEO Presents at 42nd Annual J.P. Morgan Global Technology, Media and Telecom Conference (Transcript)

| About: Windstream Holdings, (WIN)

Windstream Holdings, Inc. (NASDAQ:WIN)

42nd Annual J.P. Morgan Global Technology, Media and Telecom Conference Transcript

May 20, 2014 3:20 AM ET


Jeff Gardner - President and CEO


Tom Egan - J.P. Morgan

Tom Egan - J.P. Morgan

Okay, I guess, we will get started. As most of you know, I am not Phil Cusick. I am Tom Egan. I am the high yield analyst for telecom and technology at J.P. Morgan. I am -- poor substitute for Phil today. But he did give me permission to switch things up this afternoon. So instead of asking, Jeff, the normal questions, I am going to ask him about 50 questions on bond indenture covenants.

Jeff Gardner

An equity conference, that’s good. Good luck.

Tom Egan - J.P. Morgan

But, I will appreciate that. Anyway, Jeff, you just had your first quarter done, not too long ago, gave us, what I thought was pretty good tone for the quarter. Maybe you could talk a little bit about -- you said something about strength carrying into the second quarter?

Jeff Gardner


Tom Egan - J.P. Morgan

Maybe you could talk a little bit about that and then any other key takeaways that you would like to highlight for us?

Jeff Gardner

Yeah. Just -- thank you. Thank you for feeling in today and thank you all for being here today. Just in terms of the first quarter, we did see some pressure year-over-year on our revenue number in enterprise, which I think was a little disappointing to our investors. But importantly, what we are seeing near-term in terms of our sales capabilities is very positive. We have a lot of momentum in the business.

For the year we expect enterprise revenue we got 1% to 2% in a tough market. Some things that I pointed to in the first quarter, I was particularly pleased with, first of all, March was our best quarter ever in terms of enterprise sales, which is really good news, anytime you get anything that's the best ever, that's good.

And so some of the things that we had envisioned when we plan the PAETEC acquisition and the dramatic transformation of Windstream in a kind of product and service offerings that we believe we could deliver in integrating that into a single offering for our customers really started coming to fruition in the first quarter.

And we implemented a new sales and marketing program with two things in mind. We made a lot of investments in the first quarter in the marketing area and really it's about generating future sales and those investments were targeted to around sales enhancements and sales enablement and really focusing on our salespeople.

These folks are really the key to our enterprise sales growth. They have a limited amount of time everyday and our marketing team has been really focused this year on using big data and targeting data to drive them to be more successful, to point them in the right places to be more successful.

So they are targeting to go to places where our customers that are close to our fiber. So that we have a very good chance of winning that business, places where we have very good cost arrangements with an underlying carrier where we can be very competitive.

And so that's going to be very helpful to us, because they are going to be more productive and what I was really pleased about, in a year where we are trying to get enterprise growth of 1% to 2% on a path to longer-term enterprise growth of 2% to 4%. It requires us to increase our sales to quota by about 10% this year.

And so the sales force really achieved very close to that in the first quarter at 9% not only was March a great year, the quarter was one of our best and then we talked about April, because our call was a little late this year comparatively. So April wasn’t -- sometimes when you have these big months you have a big follow up the following month and we saw really good things happen in April as well.

So I think what we have to sales is really resonating and our positioning in the marketplace is very good. Its smart solutions personalized service and what we are selling is a unique offering with equipment, network and cloud computing, and it's really a place that’s between where the cable companies are going with small lower margins, simple business and where AT&T and T and Verizon are going with more global capabilities.

And to top that off, our consumer business showed some strong signs in the first quarter, which is very encouraging. So, both of our core businesses, it's much smaller, it's a much smaller part of Windstream today, but it’s still extremely profitable.

We saw one of our best months ever in terms of the churn of our broadband customers, which really says that our networks are running better than ever. We still have a competitive advantage versus our cable competitors in the consumer business.

And so, all in all, we feel very bullish about the first quarter, particularly because the marketing investment that we are making in the -- in terms of the not only what I talked about sales enablement but advertising, mostly electronic, it’s really going to payoff over the balance of the year. And so we only saw a little bit of that help in the first quarter. In addition to that we have some price increases that are going in place in both enterprise and consumer that are going to lead to better revenue trends.

So pretty pleased with the way things are going and optimistic that we are delivering on. We had a vision with PAETEC. When we bought PAETEC in 2011, one that I wish I could realize about year sooner. I think a lot of you would have been a lot happier. But that was a big transaction for us and it took a lot of work to integrate that and we are really making a lot of progress.

Tom Egan - J.P. Morgan

And I know that when we, for those of us who often have to summarize your earnings in the first 30 seconds I have been hitting the tape, one of the first things that popped out was margins and you talked a little bit about the marketing initiatives that you put in place? How should we think about margins for the rest of the year? How do you make that, you talked a little bit about pricing, maybe you could talk a little bit about where, I know you don’t want to telegraphed too much but maybe where and what you are thinking about in terms of pricing, why you're able to raise prices in an environments that’s always tough?

Jeff Gardner

Yeah. Well, one thing you count out at Windstream, we have been through a dramatic transformation since 2006, when we were largely a local telephone company and if you look at that entire period our margins have remained constant.

So even though we are substituting what -- many would think about higher revenue, higher margin business for more competitive enterprise business, our margins have been pretty flat at 38%.

And so there was pressure in the first quarter, no doubt, part of it was driven by the marketing spend that I talked about earlier that will abate over the course of the year. The other thing on the pricing side, yeah, we were opportunistic in terms of looking at both our enterprise and consumer business and making pricing moves where we thought we could in areas where we saw fast growth where we were competitive.

Fortunately, with our go-to-market strategy of smart solutions personalized service and our advertising campaign that’s built on winning teams, coming in and helping people, understand the cloud and advanced communications and how they can use its benefit their business and their margins internally. It's not all about price.

And so, I think we made some moves strategically and opportunistically around places where we are not going to see a big impact on churn and so I feel good about that. Those are things that we've already executed on. You will see a little bit of benefit in 2Q, most of benefit will be on pricing in the back half of the year.

In addition, we expect our sales momentum to continue throughout the year. We made some expense moves. We had a 400 person reduction in the first quarter that I think is going to really benefit the balance of the year. So there was many things happening within Windstream that are going to lead to improve financials as we go throughout 2014. We end up at a place where we're normally at in that 37% to 39% margin range.

Tom Egan - J.P. Morgan

Maybe switching things up, talk about datacenters a little bit. It’s funny because we’ve had a lot of folks come through here the last couple of days. Some of them are pure hosting, some of them are hosting post managed services. And it’s interesting to hear from them because some of the folks are coming in saying pricing is very, very difficult out there. You had a pretty good quarter, I think, up 23% on datacenters. What do you think we're seeing, maybe first of all tell us what you're doing and then maybe what you think we're seeing some folks struggling with price, some folks not?

Jeff Gardner

Well, datacenter business is very interesting. And we acquired a business in 2010 called Hosted Solutions based in North Carolina. Their secret sauce was they were kind of a mid-market player and that's really Windstream sweet spot. It's very consistent with what we do as -- and when we acquired them, we didn’t say okay we’re going to really bring all of our people in and change out all the team.

We wanted to keep the team in place. What they were very good at was coming in and helping businesses understand how they can use the cloud to not only drive expense savings but really change their business. And we’ve kept through to that. We've lost very few of our folks. They’ve stayed in place. And that's really what we do we have a very high value at cloud business. We serve that mid segment. We’re not competing with Amazon, Google, Microsoft for that self-serve business.

Ours is a very much more what I’d call a regional mid-market business. And we've seen -- you’ve talked about our growth rate 23%. What we’ve seen in that business is very low churn. We rarely lose a customer. In fact, most of our customer relationships get deeper over time. They start out with a co-location or small managed services. They see the capabilities of our engineers and they gradually give us more and more.

And we’ve had a lot of success with that. Even though, we did deliver 23% sales growth in the first quarter, I think we can do much better than that. And in fact, last year, we doubled the size of our cloud computing sales force. We’ve more than doubled the leads that they're getting from our network sales team.

So one of the big attractions to getting into the cloud space was not just that we had this cloud sales organization with the 100 salespeople but the fact that we have 1400 network salespeople who are dealing with enterprise customers every day, who can refer business to our cloud team. And they are working very well together. We’ve kind of left them alone. We have kept the secret sauce.

We've grown that from five datacenters to 27 today. And we’ve got a lot of opportunity. We got a lot of capacity to sell. We’re more in the mid-market and we’re not in, I think, the most competitive part was that low-end self-serve part of the datacenter space. So there's no doubt there's pricing pressure and we've got to fight every day. But we've got some tools to bring to the table.

We've got the fact that we sell equipment, network and cloud and that’s powerful in the marketplace. If you find the right customers, what I find today when I talk to CEOs run the industry and that’s something else that we do at Windstream. Myself, our Head of Sales, our Head of Engineering, we get very involved, we want to really demonstrate quickly.

The dealing with Windstream is very different than dealing with the big company. You'll get exposure from the most senior people at our company. When we talk to them, they want someone who's going to help them understand how to navigate through this cloud world and figure out what's best for their company, because people usually dip their toe in first before they go to a full private cloud or a public cloud scenario.

And so we've been quite flexible in developed customized solution. And I think that is the key to our success so far. In the fact that we’re a big telecom company that acquired a small entrepreneurial cloud company and we’ve left them alone. We let them do what they need to do. We’re supplying with more leads and we’re trying to replicate what they've done to be successful in 27 datacenters across the country.

And these new salespeople that we hired last year, there's about 40 of them that have been here less. Now they're coming up on their one-year anniversary. They are going to be -- the first year is not very productive for these folks. And they are going to be much more productive this year. So we're really looking for that 23% growth rate to accelerate from here.

Tom Egan - J.P. Morgan

Okay. And maybe wrapping things up on the business side, would you talk a little bit about fiber-to-the-tower, where are you in that ballgame. And are we getting to a point where the headwinds start to diminish to zero and you start to be able to grow organically some of the traffic over the fiber that you’ve put in place?

Jeff Gardner


Tom Egan - J.P. Morgan

And that offsets, more than offsets what’s being cannibalized on the copper side?

Jeff Gardner

Well, first of all wireless data is growing incredibly fast across the country. And so that's -- that's the good news part of the fiber-to-the-tower story. And we've -- now we're substantially complete. We've invested just under $600 million in our fiber-to-the-tower projects. We've got about 5,000 or so budgets of scheduled. We’ve completed about 4,700 across the country.

So we’re getting to the end. Last year, we invested $185 million fiber-to-the-tower, this year we’ll invest $85 million. So that's all good, but what you saw show up in our quarterly results and you're seeing is that we saw a lot of headwinds, because when these carriers turn up their fiber transport to the towers, they also turn down their circuits and their TDM circuits.

And so we saw some very aggressive grooming of networks in the first quarter, more aggressive than we've seen in prior year. So I think like Windstream, I mean, we’re to doing that on our side of the business is getting aggressive in managing our networks and lowering our cost with other carriers, some of the big carriers in the company, the two biggest wireless carriers have gotten to be much more proficient with that.

And so I think that that will run its course throughout 2014. I don’t want to say that it hit its peak. This will be the peak year. I don't know the first quarter was at its peak but it was very aggressive disconnect in terms of those traditional circuits. The good news if you, kind of, if you look at the end game in terms of what it look looks like, these companies that have signed up for originally 50 meg of service for their fiber-to-the-tower investments, they have quickly turned that up. And that fiber activity is really ramping up quickly.

And so I think that once you get all the noise out from these disconnects around the TDM circuits you are going to see what it is. It's a very fast-growing wireless data business and we will benefit from that as they go up, we have much more capacity. We are -- our two biggest customers are the two biggest wireless carriers in the country and we see that as a very good business. And importantly, when we did our investment analysis on one of these deals make sense. We did not consider the fact that they would keep these TDM circuits up for a long period of time. We thought they disconnected rather quickly.

For the first couple of years, that was not the case. They turned this up and they kind of linger out there, which is kind of an extra benefit to our business model. So, I think what we did make absolute sense, we've been successful, we are a great partner. I think that both -- we are serving all the wireless companies in the country but the two biggest carriers are our biggest customers and they are both pretty happy. We're doing a good job there and I think that the outlook for wireless data is great. And that -- as we see this headwind from the TDM disconnects abate in 2014, it will be a good more predictable part of our business. But it is definitely a headwind in the short run.

Tom Egan - J.P. Morgan

And just sort of switching over to the consumer side, the broadband business I think was surprisingly strong this quarter. Is that due almost entirely to the stimulus additions that you are making or, are you making headway in non-stimulus areas as well?

Jeff Gardner

Yeah. I’m very pleased with our consumer business this year and the outlook for it, because I mean, that business has been under a lot of pressure for many reasons. Just changes in consumer behavior, et cetera. But where we are at today, we still have a market share advantage versus the cable companies across Windstream. And so we have over 50% market share in the markets we serve. We compete against the two big guys who are about to get bigger I guess, Comcast and Time Warner. They will become one I imagine. But we are doing very well against them.

And what occurred in the first quarter was not just a result of getting to new markets because of stimulus. And if you recall, Windstream was the largest recipient of stimulus dollars in the country. We got a $180 million from the government, which we match with $60 million of our own to build out to new markets. We are only -- we think that we will get to 75,000 new homes with that investment. We are only at 27,000 today. We will get to those 75,000 homes this year. And so we've got a lot of that goodness in front of us.

What happened in the first quarter was really about our network experience improving for our customers. So as customers have demanded more and more bandwidth, they're using more and more video. Our performance relative to the cable companies has improved. We’ve made big investments in that, in our broadband network and our churn was the best it's been in two years. And that was the biggest contributor in the first quarter. And that makes me very optimistic about the rest of the year. When you think about stimulus, most of it’s in front of us. Most of it’s going to happen. 99% of it will happen in 2014. The fact that, CAF-1 which -- the Connect America Fund, we did very well there. I think we're going to go a long way. We are going to get to 95% of all the customers in our footprint.

And so if you look at Windstream across the board, today 72% of our customers who buy voice service from us on the wireline size subscribe to our broadband products. So we have very high connection rate. And if you even look at on homes passed, which you are also hearing, some of our peers talked about, we are at 38%. We are very highly penetrated. We've got one of the highest connection rates in the business and even with that, we are able to grow it by 2%.

With CAF-1 and then CAF-2, which I’m pretty optimistic about, I mean, there is still lot of work that needs to be done on that. I think our network has much more upside than anything else. And so the fact that lower churn contributed to most of our gain in the first quarter is very good news.

Tom Egan - J.P. Morgan

And you are still targeting 75,000 by end of the year?

Jeff Gardner

End of the year, absolutely. I mean, our engineering team is focused on that. I talked to our guys today, we are going to be substantially complete with stimulus and really starting CAF-1 in the third quarter of this year and so the networks going to continue to get better. We are seeing customers subscribe to higher speeds than they've ever subscribed to. So if you look at our customer base, everybody talks about these big bandwidth customers. But the fact of the matter is most people in America are still subscribing to around four megs of service.

In the last quarter, 60% of our customers subscribed to the highest bandwidth available. This was one of our price increases that was really subtle. We went from $5 to $7 and if you will pay us an incremental $7 today, we will guarantee you the highest bandwidth available to you 24/7. 60% of our customers signed up for that and that's really -- we are benefiting from the increased use of video from the increased capability of our networks and the improved network quality that we are delivering today.

Tom Egan - J.P. Morgan

Let me switch over to my favorite topic, M&A. I think the last time I spoke to you, you were talking about how you would like to get back to doing that this year at some point. And we talked a little bit about what was out there and how it was priced. Is there anything out there right now in terms of datacenters or if you are excited about the enterprise, are there any businesses out there on the enterprise side of the -- service of the enterprise side, will you see value where it makes more sense to do M&A than it does to just try to continue to build it organically?

Jeff Gardner

Yeah. There's -- I think there's a lot going obviously. Good gosh, we just had AT&T and Direct getting together. We’ve got Comcast, Time Warner. There's a lot of activity in the telecom space too -- is an understatement. We've been very acquisitive. Nine acquisitions in seven years, I think it allowed us to really transform our business more quickly than anyone in the space. We’ve turned more quickly from a consumer-oriented company to an enterprise company than anyone else in our space.

And so, yes, there are businesses that we like out there that would accelerate our growth. And that’s really what we’d be looking for opportunities to accelerate our growth, our revenue growth which has been the goal from day one at Windstream, but it's different today.

After PAETEC, we’re now a national player. We’re in 48 states. When we started, we’re in 16 states. We’re in the datacenter business. We have 118,000 route miles of fiber. We have the key ingredients that we need to be successful over the long run. Organically without acquisitions, I believe that we can grow our enterprise business at 2% to 4%. And with a stable, although declining consumer business, we still grow. We still grow revenue and EBITDA over the long run in our business. And that's really what we've been focused on.

Ad so when we look at acquisitions, I think we’re going to be very disciplined. And yes, datacenters are very interesting. I think it's a fast-growing part of the business, but you’ve got to be in the right space. We had a conversation earlier about what I like about our business. That's where we can be successful in that mid-market. We don't want to get in a place where we’re competing with Amazon. That's not a good place to be. It's all about price there. We wanted to be about value add.

And so when we look at acquisition opportunities, our filters are a little bit more -- they requires to be a little more particular and we've got to really watch our leverage, your bond guys, you know, we want to -- we promised you guys that we’re going to get down to 3.2 to 3.4 and we’re serious about that. So we've been -- we paid down $200 million of debt last year. We will do that again this year. And so when we look at a deal, it’s got to be priced right and it’s got to be the right formula in terms of our leverage. We lose -- we used some leverage, we increased our leverage a bit to accelerate our transformation, but now that we’re in the right spot, we’re going to be more discipline.

And in terms of prices, I will tell you when you look at the datacenter space, when you look at what we did, you can see what decision we made. There was lot of datacenter activity and private equity is still very, very involved. There's been some recent deals. There's another big company on the market apparently in the datacenter space. We've elected to invest organically. We’ve grown it from five datacenters to 27, that's worked well for us. And so while we look at these opportunities, we got to look at it from those two perspectives, was it due to our leverage, was is due to our cash flow accretion in terms of our payout ratio because we want to continue paying that dividend to our shareholders.

Tom Egan - J.P. Morgan

So given where the business has gone so far this year it sounds like the tone is good. And given all that you just said about being very careful and disciplined, does it make sense for you to sit back and wait for a while? Are you less enthusiastic about M&A in 2014 than maybe were coming into the year?

Jeff Gardner

No, I wouldn’t say I am less enthusiastic. I would say I feel absolutely better about where we are with the PAETEC integration. We’ve made so much progress on that. We did the very biggest billing system conversion on PAETEC in February. We’re going to have that completed integrated by the end of the year. So that’s what I was most concerned about.

In the enterprise space, it's hard, you’ve got to do it right for your customers. You got to activate them, get them online right without any incidents. And so having a national provisioning system and billing system is very, very important. There are very few companies in this country. Some people think AT&T and Verizon have these ubiquitous homogenous enterprise systems, they don't. There's still -- all of have come to where we are because of acquisitions.

We’re going to be in a spot very similar to where we were in the consumer business and our consumer business is on a single platform across the country that generates lots of synergies. It also makes deals much easier, and so we’re in a better place from that perspective, but I think we're in the right place. We also have the right assets so we can afford to be patient about it. So we're looking, there's a lot of deal flow today. We’re looking, but we will continue to be very disciplined about it as is I think our investors would want us to be.

Tom Egan - J.P. Morgan

I think maybe I will turn it over to the audience for some questions, any one?

Question-and-Answer Session

Unidentified Analyst

Can you go over what your current CapEx spending is and how much of it is success based and where they could go over time?

Jeff Gardner

Yes. This year our guidance is $800 million to $850 million. About two-thirds of that is success-based. And I think that that 11% to 13% range in terms of capital intensity as a percent of revenue is where we need to be. We’re making big improvements in our network this year. We made a lot of progress last year. We hired a new CTO in 2011 and we’ve just made our networks in a much better spot. By the end of 2014, this one Windstream concept that I've been talking about internally is going to be a reality with our network. And so I feel very good about that. We’re encouraging our salespeople to go after CapEX success based opportunities. We’re trying to light more of buildings. We’re working with the analytics company to focus on what buildings that makes most sense to light up this year. We are going to do that all within the confined to that $800 million to $850 million CapEx budget.

So I feel like fundamentally we’re making all the right investments at Windstream. Our networks in the best shape it's been in a long time. And I think better times are in front of us. So we've got the money out there to allow our sales force. They are really unconstrained in terms of their work – we’re constraining them in with respect to pointing them in the right direction, but if there's some capital investment necessary to drive a big sales opportunity, we’re willing and able to make it and that's very important to our strategy.

Unidentified Analyst

You talked about Fiber-to-the-Tower, I may have missed some of the statistics, but how many towers do you have in your footprint and how many have been converted? How many do you expect eventually to convert? And you talked about the revenue hit this year, how do you characterize 2015 in terms of the revenue in that space?

Jeff Gardner

Yes. So of our towers, we’ve won most of the towers in our footprint. We’ve also won some towers outside of our footprint. So our total tower projects that we have, it’s around 5200, we completed about 4700 of those. So we have very -- we’re substantially done. We’re going to spend about $85 million this year in terms of Fiber-to-the-Tower in stimulus. And so, most of big wireless companies in this country have made their Fiber-to-the-Tower investments.

There's going to be some small cell investments. How much that will factor into our capital programs is a little unclear at this point, but we’re working closely with these large carriers on that. I think the 2014, there still going to be some headwinds on the TDM disconnects, but that should be -- I mean that will be worked out. In 2015, you should see more, what I would say with the organic growth around more consistent with the data increases that you're seeing around the country. So we should get back to a point where we’re growing again in 2015.

Unidentified Analyst

Can you give us a little more granularity on the speed that you’re delivering for residential market, what percentage you’re getting 20 megs, for example, just roughly? And then where you think you could be in the next five years with your current CapEx budget?

Jeff Gardner

So today about half of our customers can get 6 megs or better today and that’s important. We’re continuing to increase that throughout the year. The stimulus builds that we’re doing, the CAF-1 builds that we’re doing are all fiber. So customers is going to be able to get anywhere from 10 to 20 megs depending on their distance from the end device and the network.

I think that today we’re very competitive with the cable companies, especially given the fact that Windstream's average access line per square mile is about 18. If you look at a cable company, their access line per square mile maybe 500 or 600. In Texas, we're talking to a cable company that had a thousand access lines per square mile. So they build in the dense areas.

When you look at our footprint, we’re building out to all of our customers. And I think you'll see us continue to deliver more and more speeds. And if 60% of our customers are signing up for this highest bandwidth, I think that’s a trend that you'll see continue. And that a 10 megs or above, especially in the markets that we see, I think that's very, very competitive. We’re not in cities like Boston, Chicago, New York, we’re in more rules cities and so in those places 10 meg and higher is very competitive.

And our marketing team on the consumer side has done a brilliant job. I think, doing two things, one, we have a price for life offering, which basically says to compete with the cable companies. We’re not going to ever increase the price on your consumer broadband bundle as long as you stay at the same speed and then you augment that with this price for life. And it's really proved to be quite successful against the cable companies.

And with Connect America Fund one and two and our stimulus projects you’re going to see a lot more fiber in our broadband networks. So I feel very good about where we are today. The fact that our churn was so low in the first quarter, I think will be the case for the rest of the year. And it’s low because our customers perceive this is a very good value and they’re able to get the speeds. Customers want to be able to watch Netflix right, basically today on their broadband and a lot of it, apparently. And so as long as we’re able to support that and we’re working with Netflix and Google to improve our network everyday. I think our service is very competitive.

Tom Egan - J.P. Morgan

Okay. I think we've hit the reaching hour. That’s about all the time we have. I want to thank Jeff for coming here today and talking with us.

Jeff Gardner

Yeah. Thank you. Appreciate it.

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