Windstream's (WIN) CEO Jeff Gardner Presents at 2014 Sanford C. Bernstein Thirtieth Annual Strategic Decisions Conference (Transcript)

May.29.14 | About: Windstream Holdings, (WIN)

Windstream Holdings, Inc. (NASDAQ:WIN)

2014 Sanford C. Bernstein Thirtieth Annual Strategic Decisions Conference Call

May 29, 2014 9:00 am ET

Executives

Jeff Gardner - President and CEO

Analysts

Paul De Sa - Bernstein Research

Paul De Sa - Bernstein Research

I think we'll get started. Thank you for coming this morning. My name is Paul De Sa. I'm the U.S. Telecom Analyst for Bernstein, and it's a great pleasure for me to welcome this morning Jeff Gardner, who's been the President and CEO of Windstream Communications since 2005. Jeff is a long-time industry veteran. He had many positions in the industry including EVP and CFO at Alltel, and Chairman of the U.S. Telecom Association. So, Jeff, welcome to SDC.

Jeff Gardner

Thank you, Paul.

Paul De Sa - Bernstein Research

I thought we maybe start, because some people in the audience may not be familiar with Windstream, maybe we could just start with a quick overview of the Company before we get into Q&A?

Jeff Gardner

Great. Thanks for having us and thanks everyone for coming out to hear a bit about Windstream this morning. Windstream is a $6 billion telecom company in the U.S. We've got the fifth largest network. In 2006, we started out as a rural telephone company mostly focused on ILEC properties where we were the incumbent telephone company. Over the last seven or eight years, we've been transforming Windstream with a goal in mind to become the premier enterprise communications player in the country. We've done that both organically and through a series of acquisitions. To-date, we've made nine acquisitions, none in the last two years, but I think we're very uniquely positioned in the industry today as a competitive enterprise player in this space.

We are the largest competitive player in the U.S. About $4 billion of our $6 billion of revenue is from our enterprise business. We're really uniquely positioned in the industry as well. Our sweet spot is the midsized enterprise carrier, and so we are competing in a space that many of the cable companies don't play in because our customers are mostly multi-location managed services customers on the enterprise side. And we're really focusing on a space where the larger players in the industry are really focused on bigger companies. So we've got a unique opportunity coming in these competitive markets.

We have a full suite of services. I'm very proud of our product set. We offer everything from simple voice to cloud applications for our customers. We can do anything from small companies to large companies and we can do that in a very unique way. Our tagline is 'smart solutions, personalized service', and so we try to look more like a small company, a trusted advisor to our enterprise customers, and that's really a position I think that we can do well in over time.

And so, we really focus the Company on the enterprise space. I think we've done a nice job on that. 2014 is a critical year for us. We're about two years past the PAETEC acquisition, which was our largest acquisition in 2011, and we're really making progress in terms of making Windstream look like one company. We have a 'One Windstream' initiative that is going quite well.

We just announced our first quarter which was a great way to start the year, in that March of this year was our best sales month ever on the enterprise side. So the 'smart solutions, personalized service' approach that we are taking in the marketplace is resonating, and April was a strong month for us as well. So we're off to a good start. Our plan this year is aggressive and cause for us ramping up revenue throughout the year. And so, we've got a lot of work ahead of us but I think we've got the right team, we're focused in a very good spot in the industry and positioned to do well going forward. So I think you'll continue to see sales expansion as we go through the year.

We also continue to own a consumer business, although not our primary focus strategically, is a very good business. It's really allowed us to produce a lot of cash flow for us over the years, allowed us to make the investments that we need to make on the network side to really grow the business, and it's also been a very steady performer. It's not a growing business because of just the cyclical pressures of that business, I mean the changing consumer preferences on the landline side, but it's one that has been steady for us and predictable. So the combination of our enterprise business and our consumer business really uniquely positions us in the industry.

The cash flow that we produce has really enabled us to make the investments. This year we're going to invest around $850 million in our network, last year over $1 billion. So we're making the network investments necessary to compete. And Windstream also pays large dividend. We pay $1 per share. We've paid that dividend for unbelievably almost eight years. When we came together, people thought that was kind of a two-year play, but the business continues to produce very strong cash flows even throughout our transformation, I'm very proud of that, and our margins are at about 38%.

So that's a quick overview of Windstream. Our future is all on the enterprise side. I think that we're well-positioned to have 2014 be a good year. And really over the long run, what we've been trying to get to a place, Paul, where we can grow both revenue and OIBDA modestly, however really provide something unique in the marketplace in terms of becoming that premier enterprise provider.

Paul De Sa - Bernstein Research

Terrific. Thank you, Jeff. And everyone should have a Q&A card. If you have any questions, please write on that card, we'll come around every few minutes and collect them. So, Jeff, maybe I'll start with a couple of questions. You mentioned several times that Windstream is focused on enterprise. In the early 2000s, there were many companies that were similarly situated, regional fixed-line oriented carriers, and they've gone in different directions since then, and you've chosen to lead Windstream in the direction of enterprise. So maybe you could talk a little bit about the rationale for that?

Jeff Gardner

Yes. Well, it was very clear. In 2006, from the beginning, we knew that we had to find a strategy. We had a good strong business. The ILEC market was good. We knew what was going on with landline. Telephones, voice communications was a big part of our revenue stream at that time, and that was definitely changing. As we looked out over the next five years and beyond in terms of how we could position the Company to grow the top line, it really was incumbent upon us to focus on the enterprise space.

We worked with Mackenzie at the time to really put together a strategic plan that over five years would get us year-by-year gradually making progress on really turning more into the enterprise space. I think we've done that more aggressively than anyone else in the industry. We've got into the cloud business where we can offer equipment cloud computing. We've grown our cloud business from five data centers to 27 in just three years since we acquired our cloud company. And so, I think that enterprise space is the right place to focus long-term. We believe that that part of our business in the long run can grow 2% to 4% on the top line, not screaming big growth like you see in some of the tech companies but in the telecom space 2% to 4% is quite enviable, and I really believe we can execute on that.

This year, we're going to make progress on that, we're going to grow at 1% to 2%, and if we have a company that can grow at 2% to 4% in the enterprise side and continue to have a constant consistent consumer business, we can grow our top line and OIBDA in years to come, and I think what's unique about us – and you're right, there are a lot of regional players that went one direction or the other, we turned hard in the enterprise space, I think we're doing the right thing and it's positioning us uniquely but we've got great opportunity in front of us because we are just getting to see the fruits of our focus, we're really differentiated in the marketplace. I think we can win against the biggest companies in the country and we get more confident about that every day.

Paul De Sa - Bernstein Research

Terrific. And one other thing you mentioned in order to execute that enterprise strategy was you've done several acquisitions. As a result Windstream I think is in a somewhat unique position in that you have part of your territory where you were the incumbent and then you also as a result of the acquisitions have a number of attacker areas, and I don't think there are any other telecom companies with scale in the U.S. who have a similar kind of structure. So I was wondering if you could talk a little bit about why you chose that structure, how it is to run it day by day, how it distinguishes Windstream maybe from some of the other companies out there?

Jeff Gardner

I think it was a great way to start the business. In our incumbent markets, we've got 90% market share on the enterprise side, and it's really allowed us – that's more of a facilities-based model. We own everything in those markets, we're really competing against some cable companies in some cases, but we're in smaller incumbent markets.

We then have, as Paul calls them, our attacker markets which has been really neat because on the enterprise side what we've been able to do by acquiring these competitive enterprise businesses is now we are in 48 states today and so we can go to any enterprise customer in the country, and especially when they have multi-locations throughout the country, we can provide them with a single point of contact, a single solution for their business and that's been really powerful for us.

So, the competitive markets not only give us a great market opportunity because we have relatively low market share in those businesses and a great market opportunity, the midsized business markets in the competitive markets we serve, Paul, is about $20 billion of market opportunity for us. So we've got a lot of upside, we're going in as the insurgent and we get the benefit, we get the financial benefit of being a mature incumbent with a great cash flow from our online business, and we've got a lot of experience.

We're a very experienced enterprise carrier bringing that enterprise focus into these competitive markets, and I think what makes us unique is that we can scale this business. So many competitive players have been unable to bring scale to the CLEC world, we're big enough to do that with $4 billion of enterprise revenue, and it's really this unique combination of ILEC and attacker markets that allows us to do that.

Paul De Sa - Bernstein Research

And another challenge, as day to day you're running the business and you're talking to sales folks and trying to institute the Windstream culture, are there some flipside challenges of having the attacker incumbent strategy?

Jeff Gardner

Yes, there were early on. I think we get it though in terms of we really try to look like 'one Windstream' and of course our market tactics are different in a market where we have huge share and we're defending more versus some of these markets where we're charging and taking share. But really on the enterprise side, we're trying to look like one company. So, we're running our enterprise group as one. Our President has both our incumbent and our insurgent markets together and I think that really allows us to be progressive.

We're not a sleepy incumbent because we also know what the future looks like as being an attacker. So we've been able to defend and grow those markets very well by offering – I mean I think it will be pretty unique in some of our smaller incumbent markets that the product set that we've rolled out, the IP transition that we've managed has been much more aggressive than I think you'll see in many, and it's because of the unique position of our Company.

And so, our presidents, we have four regional presidents of sales, they have a mix of incumbent and attacker markets, and I think it allows them to kind of see the benefits of both sides and really take the learnings from our incumbent position into the attacker markets, and the opposite where we tend to be more aggressive, and I see it more now than ever. I used to be able to quickly discern who is from the ILEC business and who was on the competitive side. Today it's much harder. And that's really what we're trying to do to approach the market as one, so when our customers look to us, they view us as one Windstream, they think about us as an enterprise flair.

Paul De Sa - Bernstein Research

And talking about the structure of the Company, as you mentioned you have sort of the enterprise side which is the main focus, you also do have consumer, you also have wholesale. For investors thinking about the outlook for each of those segments, could you maybe tick through a little bit how you see each of them in terms of the prospects going forward for Windstream?

Jeff Gardner

Yes. Of course we've talked about the enterprise, long-term growth rates 2% to 4%, great market opportunity in that middle space for us, we don't compete directly with the cable companies who've been doing really well on the small business side, we're in that midsize space.

On the consumer business, our two largest markets are Lexington, Kentucky and Lincoln, Nebraska. So we're in small markets. The average access lines per square mile in our consumer business are under 20 and those rural markets are a little bit different than some of the urban markets. They tend to be more consistent in terms of financial performance. The changes that you've seen in some of the urban areas are slower. We've got very high penetration of broadband in those markets. 72% of our customers buy broadband from us. We have a market share advantage versus the cable companies. We're very competitive.

In those markets, we partner with Dish networks to offer a triple play. So in our markets today, you can buy voice, broadband and satellite television as an effective competitor to the cable companies, and we've done very, very well in that business. It's growing at about – it's declining about 2.5% to 3.5% a year, and again that represents a much smaller part of our business today.

The other side that investors don't focus on in much is the wholesale business where we do a lot of business with the other carriers in the country. We have the fifth largest network as I said in the U.S. and that allows us to sell capacity to some of the other carriers. The reality in today's marketplace is, for us to serve the country well, we don't have to work with one another. There's times when we need to rely on Verizon to connect a couple of our enterprise customers, there are times when they have to rely on us.

We are also building out fiber-to-the-tower projects for many of our carrier partners. The biggest wireless carriers in the country are building fiber optic cable to cell sites. We've been a leader in that space. We're going to deliver over 5,000 fiber-to-the-tower projects. And so, that business is transitioning too. The wholesale business, it's moving very quickly into IP. So we see growth in some respects on projects like fiber-to-the-tower and long-haul fiber access for some of our partners, but there is also some pressure there because some of the old TDM revenues are declining.

On the wholesale side, I think we'll see much more stability for Windstream. That's been a real pressure point over the last couple of years with all the inter-carrier compensation reform. That outlook gets a lot better. 2012 and 2013 or 2013 and 2014 have been really difficult for Windstream in terms of our transition from a legacy telephone company to an enterprise player. The FCC has some rather big changes as it relates to the way carriers pay one another over the last couple of years. The first big cut went in place in 2012, the second in 2013. That's really affected Windstream's numbers in a big way and that really slows down over the next couple of years and makes it a better story going forward.

Paul De Sa - Bernstein Research

Let me pick up this on a couple of things you mentioned. First, cable competition, I think for many investors thinking about wireline telephone companies, cable is a big theme, cable attack in residential, cable attack in enterprise, you mentioned you may be a little bit more immune on the enterprise side. Could you just talk a little bit more about how you think about yourselves versus cable on competitive dynamic and also any implications of the Comcast-Time Warner merger?

Jeff Gardner

Great question. I think we get that often, and as we should because the cable companies are showing such nice growth. The clear focus of cable is on small customers that don't require managed services. Those are very different customer set. In our competitive markets, we're really not even focusing down there on those smaller customers. We define those customers as SMB customers spending less than $750 a month, and that's where cable is really doing well.

And again, what we do very well is focusing on the enterprise customers. When somebody wants to buy cloud services, managed services, where we can really add value, we can help them manage their storage, their Web-site, we can do more than just provide a pipe, that's really where we add value, that's where our 2,000 salespeople are focused every day. And so, we're really in a unique position.

When you look at cable in terms of how they are affecting our business, in our ILEC markets we're still investing in not only defending against cable but continuing to grow our SMB space. In our attacker markets, Paul, we're more focused on preserving the revenue stream. We've rolled out loyalty programs there. We don't have to meet on the street because our salespeople are focused upmarket from the cable companies.

As far as Comcast-Time Warner, an enormous deal in our space, and yes, it will have implications. The good news is, I don't really think it will change their focus in the short run. They will still be focused on the small business side. That's where both companies have been focused to-date. But they'll get better. And so it's incumbent upon us to really focus over the next 15 to 24 months, as they are preoccupied with this large transaction and all the challenges that a big merger like that brings, to really continue to improve our game, to get better at that enterprise space so that we're well-positioned with our customers as they get better in this space.

I think we've got to continue to get better. We've got to be farther down the road with IP, we've got to continue to work on our managed services and our product set so that we are really differentiated. So I think about the cloud and the complexity in the telecom space, a company of this size is something that you would never take for granted, but I think we are well-positioned. I don't think it's going to – as we think about our prospects to grow 2% to 4%, I don't think it affects us that much because we are focused on the right spot here.

So, there are a couple of things that we need to be concerned about with this merger because as a competitive player, we rely on other partners to really offer our services to our customers. And so today, Time Warner is a big partner for us, Comcast is not as involved in the wholesale side of the business. So that's going to be an important issue for us to watch as this unfolds and I think it's important that, again I said, for all of us to be successful and serve our customers well, we have to work together. And so that wholesale relationship that you mentioned earlier is critical to the whole telecom ecosystem working well.

Paul De Sa - Bernstein Research

Terrific. And then the other piece in your previous answer you mentioned was regulation. I think about the regulatory outlook for the year, there seem to be a number of issues, the policy issues, things like net neutrality in the headlines that a lot of investors sort of trying to figure out what that means for carriers, and then also issues that really moved dollars, so things like universal service reform, Connect America Fund, special access. Could you just maybe give us a little bit more depth on for Windstream how you see that regulatory outlook, what are the issues that you are most concerned about?

Jeff Gardner

Yes, there is a whole lot going on and the FCC is busier than they've ever been with Comcast-Time Warner and now they have the AT&T-Direc deal as well to look at. So they're going to be busy this year. There are many important issues for us. Probably the most important is the IP transition and what's going on in the enterprise space in terms of how we work with these other carriers long-term, and there's a couple of – the FCC is looking into doing a couple of trials for IP transition.

As the largest competitive player in the industry, we have a lot at stake here. So we are very, very focused on – that's how we're investing the most of our time in DC working with other competitive carriers like Time Warner Telecom to really help ensure that we all have great access to the same kind of ecosystem that we have today.

Paul De Sa - Bernstein Research

And just could you say a word about just for investors who spend a lot of time following the IP transition, what exactly is at stake in that? So this is a transition from the old legacy networks to new IP oriented networks. So for a company like Windstream, what's actually at stake?

Jeff Gardner

There's many things at stake. I mean we've got a system today that allows us to work together to hash out commercial ranges between one another to provide services to our end customers. And so, sometimes as I said, when we sell a national customer, we'll have to work with Verizon or AT&T to really complete that service offering to our customer. The same is true on their side. What's really at stake – we want to continue to have that access going forward, that's very important to us. As we go to a world, as we convert from TDM to IP, we want to make sure that we continue to have that access to these carriers and that we can strike these commercial agreements. And there may be the need for some oversight there. That's what's unclear right now. And so we are working through that. We've got great relationships with the big carriers but it's so important to us that we've got to pay very close attention to that issue.

The other issue is, we've got to take our – look at this from our customer's perspective. While there are a lot of great new products coming out in the IP area, there's many customers out there today that are very satisfied with their TDM product, and there the pace of change I think needs to be more driven by the customers versus the carrier. And so, there are many things at play. We're making investments in IP technology but you've got to really look to the customers. And so, we want to make sure that everyone who is overseeing this, and the FCC plays a huge role, understands that customers are in a different spot and they are really most concerned about the economics around their services that they have with us.

All of us in telecom like to talk about TDM and IP. That's not how customers talk, that's not how they think. They have a business need they want us to solve. How we solve it is really up to us but they want to do it in the most effective and efficient way possible. And so as we manage through this IP transition, I think we can't just think about the carriers, we must think about the customers, and I think Windstream is unique because we have so many partnerships with the other carriers in trying to manage that. And so, we've been trying to really put forth that viewpoint and letting the customers drive this transformation.

Some other things on the regulatory side that are important, there's a lot going on in the consumer business, and I mentioned the fact that the FCC inter-carrier compensation reform, that's largely done. That's been very painful for Windstream.

Paul De Sa - Bernstein Research

And actually maybe you could just say a word about what that is?

Jeff Gardner

Yes, inter-carrier compensation reform was really redesigning the way carriers pay one another, and maybe the biggest change was the way carriers get paid when they terminate another call in our ILEC properties, something called switched access that the other carriers pay us. Two years ago in some states, interstate access we were getting an average of $0.025 to $0.03 a minute. That stepped down to $0.005 per minute, so that's a major change. It's going to go to zero over time. The two biggest steps of that took place July 1 in 2012 and 2013. In 2012, that was $150 million of pressure for Windstream on the revenue side, it was $100 million in 2013. That will be about half that this year and then it slows down from there even further. So that's mostly behind us but as you look at our numbers, you need to think about that in terms of it's been a pressure on Windstream over the last couple of years, it's going to really abate.

The other big things are really around the broadband investment in the consumer business, and there's a number of programs in place right now, CAF I and CAF II, that's the Connect America Fund, that is really enabling consumer providers like Windstream to build out into the most rural areas. I mentioned earlier that we've done an effective job moving into the rural markets. Today we get to 93% of our customers with broadband. We've built out into markets that have densities in that five to six access lines per square mile.

So we've done a nice job there but the Connect America Fund I where we were able to receive $87 million from the government, we're going to match that with $87 million of our own money, will really allow us to build out into that last 7% and even further, and I think further solidifies our business. These will be investments where we're going to build new broadband service to the homes and put fiber deeper into the network, that also can be used for our enterprise business eventually by the way, that will allow us to serve these customers with little competition. And so we'll have very high take rates in that.

And then the FCC is working on Connect America Fund II which is a replacement for the traditional universal service funding. That probably will play out this year as well. I think we're well-positioned. The model that the FCC is moving to is one that is consistent with what Windstream and a few other carriers that have been working on this for a couple of years proposed and we should get as much or more in terms of funding than we are receiving today, but there'll be restrictions on that and that will need to be worked out. But importantly, I think we've been very opportunistic working with the FCC on finding ways to get to these rural customers and we've been as aggressive as anyone in this space.

I think it does great things for the country in terms of providing access to these most rural customers. Everyone in this country is using broadband more than ever. So just because you live in a rural area, doesn't mean that you have less of an appetite. They are Netflix customers, they want to watch movies, they want to buy more video content off the net, and this is what's really going to enable that. And from a business perspective, it allows us to further stabilize what's been a very good business in the consumer market.

Paul De Sa - Bernstein Research

And just to clarify, just for investors looking at sort of the Windstream numbers and guidance going forward that come at the strike, so the hit from inter-carrier comp and the money from the first round of universal service is already baked in, there is still some uncertainty around or there's sort of potential impact from the IP transition and the upside from the second round of universal services still uncertain, that will not be baked into the guidance, is that right?

Jeff Gardner

Yes, CAF II is not baked in, right. So Connect America Fund I is baked in, the IP transition is still evolving. Those are probably the two big issues. We've really assumed that we continue to have access to these last – this last mile access. So I think that's where this is going to end up. I think our position is right. But those are the two areas that we need to focus on, IP transition and CAF II. As I talk to our team in Washington who works with the FCC and Congress, those are the two big issues.

And probably another one, this is more legislative than regulatory, but around tax policy. And as you know, there's been a lot of work going on to simplify the corporate tax code in the U.S. That's not going to happen this year or probably next year. In the interim, we've been working with many of the telecom companies and other capital intensive businesses to encourage Congress to extend bonus depreciation in '14 and '15, and that's a bill that's pending. If that gets passed this year, that will be retro to the beginning of the year, which really helps companies like Windstream who are making big investments in our network every day.

Question-and-Answer Session

Paul De Sa - Bernstein Research

Terrific. So let me tick through some of the questions we've got from the audience. They tend to a couple of themes. So there's few questions around enterprise, couple of questions around M&A, one around Dish and the effect of satellite obviously with the AT&T transaction, people are thinking about that too, and then one about sort of cost and systems. So maybe we'll start with the M&A because you had mentioned that. So a couple of questions. So one is, how do you think about M&A, do you look for similar enterprise focus, incumbent footprint, et cetera, so just the whole process for that? And then the other question related, given your leverage, if you were – maybe this is getting a little bit ahead – but if you were to do a strategic enterprise acquisition, how would you sort of think about funding that?

Jeff Gardner

Great questions. So on M&A, clearly our focus, our last five deals have been exclusively focused on the enterprise space. We bought a cloud company, we bought a fiber-optic cable company. To-date we have 118,000 miles of route fiber in the country. So we've really built a nice long-haul network. So, our strategy will be on the enterprise. Fiber-optic cable, cloud computing are the fastest-growing parts of our business. Fiber optic allows us to be more competitive, more facilities-based, drive our margins up.

The cloud is growing at 23% today, and I think we're just beginning to see the impact of cloud computing in the enterprise space. The leaders understand it, are implementing private and public clouds across the country, but there is a lot of growth left in that business and that's why we invest into that, first inorganically and then organically as we built up from five to 27.

We have levered up a bit. When we spun off, our leverage was about 3.3x, we've levered up to about 3.8x. We did that to really accelerate the pace of our transformation. From where we are today, we really have transformed the Company. We have got the pieces in place to offer those 'smart solutions, personalized service'. So we can afford to be more patient with respect to M&A and we need to be because we want to continue to protect our balance sheet, we want to delever from here.

So we're very interested in enterprise. Our filters would say we eventually want to get our leverage to 3.2x to 3.4x, and so we've got to be careful. We're not going to be in a position where we lever up to do a transaction, and so that's an important filter. When you look at opportunities out there, you've got to be very cautious.

The other thing, we wanted to wait a couple of years after PAETEC, so we could make progress on this One Windstream initiative. We're really – I'll say by the end of '14, we're going to look like one company, it's going to be one Windstream, both from the network perspective – we're going to be very close to a national billing and provisioning system across the country which is going to mean that we can shorten our intervals from sales to implementation or activation for our customers, so great things for our customers, a lot of efficiencies within Windstream as we get more into a single billing system – and a big competitive advantage. There are very few companies in this country today that have those national provisioning system. So I think that will be a great advantage.

And so, as we look at M&A going forward, enterprise space, focus on the balance sheet, it's got to be accretive to our cash flow payout ratio and it can't put pressure on our leverage goals. So some pretty good filters there, but we can be patient, there's a lot going on in the industry today as you know with respect to M&A, and I think we're at a point where we can look at it but we've got to be very disciplined in doing so.

Paul De Sa - Bernstein Research

Terrific. And then on enterprise, three questions, one strategic and two tactical. So the strategic question, do you worry about cable consolidation allowing cable to compete on larger multi-location enterprises, so creeping up that sort of enterprise size, that's the strategic question? Two tactical questions. What drove the decision to seek price increases in enterprise in 2014 and how is this initiative different from past pricing initiatives? And then the other tactical one, on the earnings call you suggested that March enterprise sales was strong. Is that one month of pent-up demand or is that a sign of a larger inflection point?

Jeff Gardner

Great. So consolidation, yes, it's worrisome. The cable companies, as they get larger, their footprint gets bigger, they'll get better at handling more multi-location customers. They are still constrained because no customer is going to be exclusively in your market. The cable companies do not have deep experience up in the enterprise space where we play. They are not great at managed services today. They will continue to get better. So as I said earlier, I think the key there is to not to have your head in the sand and believe that they will never be able to compete at that level, but really take advantage of this opportunity we have, this special focus that we have, to really build on our strength, build our product set, continue to improve our ability to deliver managed services, continue to differentiate.

So as they go upmarket, we'll only have nice market share but customers are convinced. We very rarely in our big enterprise deals compete against cable companies, very rarely today. We'll see them on the fringes more and more and Comcast-Time Warner has the opportunity to expand that, but we've competed against big companies for a long time, two really big telecom companies in this country, so it doesn't intimidate us. And big isn't always better, right. It really plays into our sweet spot in some respects. We can look more like a personal service provider, a trusted advisor for our customers as these companies around us continue to get bigger. So there's definitely some things to worry about but I think where we're focused on the market is the right space and we've got to be very aggressive as they are going through this merger approval process.

Price increases are important for us because I think that we always have to look for opportunities. There's a lot of pricing pressure inherent in this business. You usually sign up an enterprise customer for a two or a three-year deal. When it comes to renewal, the expectation in telecom is there's always going to be a big reset, and so that's problematic. If you don't really – if you're not very strategic about your pricing, you could just be under constant price pressure, and that's been a big issue in the communications business for a long time.

So we're doing a couple of things. We're really trying to focus in advance on these renewals and getting customers. While the core prices may come down on some of their traditional TDM services, we're trying to sell them more services. So if they are not a cloud customer today, we'll try to sell them something else. And we've also tried to look across our product set, and in areas that are growing, where we think we're adding a ton of value, we took the opportunity to make some opportunistic price moves. Modest, we don't believe that they're going to affect churn, but they really help. It's something that gives you a little bit of momentum about that downward pressure, and I think many of the companies in our space do this.

I think we've been aggressive in terms of this year being more strategic about picking the right places. It's all about where you increase in the prices, where you're competitive, we've got a pretty good sense of that. So, we are still counting on our churn coming down overall for the year, which churn includes both customers leaving us and rate decreases, revenue churn, but these price increases will really help us.

We've been doing price increases. We do them every other year basically and look across our enterprise and consumer portfolio, and this year I think we've been most strategic about it. So I'm very confident. These will take place mostly in the back half of 2014 but I'm confident we've picked the right spots and our marketing and sales team have been working together to understand where the best spots are to make these price increases.

Paul De Sa - Bernstein Research

And just to be clear, so the price increases are mostly on the new customers on the renewals, it's not on the existing base?

Jeff Gardner

We have some going to the existing base but more on our new products and services that are adding a tremendous amount of value, where we're very competitive today. In March, that was a good question, there was very – we had a lot of discussion as to whether on the call we should talk about March being our best month ever, because the next question is, okay, what does April look like? And you asked the right question, whoever sent that in. But what was really good news is, often when you have a month like that, you could have drained the pipeline, and that's what I think the investor was asking.

We had a very solid April. It wasn't quite what March was but it certainly wasn't a flop, it was one of our top three or four months that we've ever had in the enterprise space. We just got a lot of momentum. If I look at what we've done with our sales force and our product set, we are in a very good position today. We have really invested in marketing this year. One of the themes of our conference call was, we had some pressure on expenses in 1Q, a lot of that was from very purposeful investment in marketing.

We've invested in this winning team, personalized service approach in the first quarter in a big way, and you see advertising today for Windstream in CIO magazine, CFO magazine, we're in many of the big airports, our electronic advertising is more aggressive than it's ever been, we've hired a new Chief Marketing Officer just about eight months ago from IBM who's really leading that effort, and I think it's going to make a big difference. So, that gives us a lot of confidence.

We didn't see a lot of benefit from that effort. We definitely saw some, because marketing and sales are working together better than they ever have at Windstream, but most of the goodness from that marketing focus is in front of us. And so, as we think about lead generation, the fact that all of our sales force is on Salesforce.com today, that we're working with a company called Marketo on demand generation, giving our sales reps better leads so that they can be more successful, I'm pretty optimistic about our ability to deliver on the sale side, that's going to be critical to us.

Paul De Sa - Bernstein Research

So then one follow-up question on consumer, related to your Dish partnership. So could you maybe talk a little bit about how that satellite partnership, is it effective, and in fact which are the areas where you feel it's most advantageous? I don't know if you happen to know sort of how many of your consumer subscribers do triple-play or double-play with satellite TV. And then sort of any thoughts about if there's impacts from the AT&T-DirecTV transaction on that side of the business?

Jeff Gardner

We've got a great partnership with Dish, and obviously we have the opportunity to work with Dish or Direc and we've been in a competitive process with those companies over the last several years, but Dish has been our partner from the beginning. It's been very effective. About 24% of our customers in the consumer business buy the Dish product. So the unique combination that we offer, voice, broadband and satellite television product, really enables us to offer the triple-play.

Paul De Sa - Bernstein Research

I know there's triple-play, do you sell double-play also?

Jeff Gardner

We sell double-play as well, we sell double-play, but Dish has a broadband product to really be competitive and allow folks to use video. They need their Dish product, Windstream and our voice services, that's the real strength. And that 24% penetration is as high as any business, any ILEC property in the country. So we've been very effective at selling Dish. We've had some more difficulty – much like broadband where we're the victim of our own success, our penetration levels are so high that it's very hard to grow our units from here, we made great progress on that in the first quarter, but the same is true at Dish. We've got very high penetration. In Windstream markets, Dish is very much over-indexed. In other words, their penetration in Windstream markets is much higher than their national average because of this partnership that we've forged.

If you buy Dish from us, it looks like you're buying from one company, it's all in one bill, we sell it, we service it, we rely on them for tier two backup, but it's been a great partnership. Dish has also fit better with us than Direc because their customers are more focused on value, which tends to be the kind of customers we attract in these rural areas. It's a little bit cheaper than the Direc product and it plays a little better in the rural areas. So that's been a good partnership for us.

I don't think the DirecTV-AT&T deal will have a huge impact on us. I need to learn more because there was an aspect of that transaction where AT&T said they were going to build out of territory, which is concerning. Hopefully they're going to avoid some of the Windstream markets when they are building out of territory, but more to come on that, there weren't a lot of details around that. I don't think it will have a big impact on us.

Obviously as I said, we have the ability to work with Direc or Dish at our discretion. We've had a great partnership with the Dish folks over the years and they've been very responsive to us. And so, again, I think it's an opportunity for us to get really focused on our current business, and as these other companies are going through this transition period, to really make some progress there.

Paul De Sa - Bernstein Research

Terrific. And so then the last two questions. One more of a product oriented question. So when people think about fixed line telecom, really the sort of decline in voice is a big part of that. So could you talk a little bit about both on the consumer side, how does that consumer business stabilize if voice is declining, and then also on the enterprise side, how does enterprise grow if voice is declining?

Jeff Gardner

Two different stories. On the consumer side, today I think the traditional ILEC company only has 25% of customers that we had only six or seven years ago. And so our share of the market has really declined. There's many younger people in the country that are choosing to go wireless only in terms of voice communication. So, that pressure has been consistent for many, many years in our space. We've really offset that. Today our product is really broadband. That's the lead product that we sell. Often times we'll throw voice in there, but the utility, the value is all on the broadband product. Last year, our broadband revenues grew at 4%. And that really is the key to sustaining that business, and working on broadband and the Dish sales are what's going to drive that consistency going forward.

So you had a lot of the pressure to-date. I think you'll continue to see pressure on the voice side, but as I said earlier, a lot of the pricing pressures from the kind of historic revenue streams have already hit us and I think that will more stabilize. It won't stop shrinking but it will abate and we really need to be focused on broadband. And with CAF I and CAF II, all the stimulus investments that we're making, we're doing everything we can to provide the best broadband product, and I think that's the best way for Windstream to really focus on our consumer business and our team has done a great job. We rebranded our consumer business focusing on the benefits that we bring to our consumers and they are off to a great year. It's been a really steady business.

On the enterprise side, voice is not our core product anymore. Voice is very important. Today, customers are signing up for an MPLS service where they can use that data connection for IP, voice and data. We're really focusing on, as the voice falls off, replacing it with integrated services like voice over IP, et cetera, and that's really the key in that business. So it's a very different story. Selling the new stuff, managing the old technology decline, voice declines are really heavy in that business, but even with that we've been able to grow our enterprise side, and I think that will continue to be stable.

I talked earlier about our market opportunity. There's a lot of market potential for us. We will be as successful as we are more effective with our execution on our sales and marketing plan. And so I think there's big upside. The key is selling the new products, the IP, the cloud, replacing the traditional voice lines, so that we can continue to grow that business.

Paul De Sa - Bernstein Research

And do you have a sense of how much longer that sort of voice declines – if you have enterprise growth and underneath that there's some voice decline, so how long before that is more or less pass the inflection point?

Jeff Gardner

Yes, I think we made good progress on that. That was a big issue for Windstream and PAETEC. We've seen some significant declines in those revenue streams over the last couple of years. They'll continue to decline but at much lower rate going forward.

Paul De Sa - Bernstein Research

Terrific. Okay, so then the last question, this is a good kind of closing question, the big vision question. So when you think about Windstream 10 years from now, what do you think Windstream looks like with respect to consumer and enterprise, with respect to other opportunities on the horizon, paint us a sort of 10-year Windstream picture?

Jeff Gardner

Yes, we're really excited about where we're at and I'm glad that – the last three years have been challenging no doubt, but I'm glad that we made this turn into the enterprise space hard. I think we're well-prepared. As I said, I think our best year is in front of us. We're the largest competitive enterprise player in the country. I think our upside is huge. We'll be a much better bigger player five or 10 years from now in the enterprise space.

Since we spun off from Alltel, we've more than doubled the size of our business, we've maintained our margins. I really like where we're at today. Our product set, the talent that we have within Windstream, we're well-positioned to grow, I think we're going to have plenty of acquisition opportunities along the way, I see us getting to our leverage targets over time, continuing to be a company that generates strong free cash flows. Really what's most exciting to me about the next five to 10 years is that we are going to really demonstrate that we can execute in the competitive space and build scale out.

And so, when I talk about that, we're going to be one Windstream, we're going to have these national systems to support provisioning and billing across the country, and that's going to really make us a much more effective competitor going forward. And I think we'll have great opportunities. We are so much bigger than others in our space that we'll continue to cause consolidation, and our ability to handle these multi-location customers in complex fields will just get better as we continue to build our expertise. And we're going to be a leader in the IP space. The IP and the cloud are going to be a big part of our future in terms of our revenue streams going forward. And I think that's where you want to be today.

And so I feel very good about where we are today. As I look back at our Company in 2006, we've really got compelling story to tell our investors. We've got a path to grow, not just for a couple of years but over the long term, and it continues to get bigger, bigger is not always better but scale definitely matters in an industry that's consolidating as quickly as telecom.

Paul De Sa - Bernstein Research

Great. Well, I think we're out of time. So, thanks to everyone in the audience for coming, and Jeff, thank you very much for coming to SDC this year.

Jeff Gardner

My pleasure.

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