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Windstream (NASDAQ:WIN)

Q1 2011 Earnings Call

May 04, 2011 5:00 pm 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

Christopher King - Stifel, Nicolaus & Co., Inc.

Shing Yin - Citadel Securities, LLC

Daniel Gaviria - Morgan Stanley

Batya Levi - UBS Investment Bank

Barry McCarver - Stephens Inc.

Michael Rollins - Citigroup Inc

Scott Goldman - Goldman Sachs Group Inc.

David Barden

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to your First Quarter 2011 Windstream Communications Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I'd now like to turn the conference over to Mr. Rob Clancy. Sir, you may begin.

Robert Clancy

Thank you, Sahid, and good afternoon, everyone. Thank you for joining our call to discuss Windstream's first quarter results. Today's conference call was preceded by our first quarter 2011 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 describe 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, restructuring charges and merger integration expense. Additionally, adjusted free cash flow is defined as adjusted OIBDA minus cash interest, cash taxes and CapEx and is presented on an actual basis to reflect all acquisitions from the date on which we acquired the businesses. Again, we refer you to the IR section of our website where we’ve posted our earnings release and supplemental materials, which contain information and reconciliations for any non-GAAP financial measure.

To assist investors, we have provided pro forma results from current businesses, which include all acquisitions we have made to date for all periods shown, and we will make references to these pro forma results from current businesses including the year-over-year comparisons during our call. Additionally, as a result of the Iowa billing conversion, we reclassified certain categories, and those minor adjustments have been updated in our historical pro forma results.

Participating in our call this afternoon are Jeff Gardner, Windstream President and Chief Executive Officer; Brent Whittington, Windstream 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 afternoon, everyone. Today, I will make a few comments about our first quarter accomplishments and provide an update on our progress towards completing our key initiatives for 2011. Brent will then discuss our operating results and Tony will review our financial performance.

First, I am very pleased with our performance in the first quarter and our solid start to 2011. We delivered strong operating metrics on all fronts and, importantly, continued to show improvement in year-over-year revenue trends. For the quarter, business in broadband revenues comprised over 60% of our total revenues and collectively grew at 3.6% year-over-year, an improvement of 40 basis points over the comparable fourth quarter growth rate. In total, on a year-over-year basis, revenues declined 1.8% and adjusted OIBDA declined 1%, both in line with our expectations.

As we mentioned on our previous call, we expect the year-over-year financial performance to improve throughout 2011 as a result of the continued improvement within our business sales organization, the investments we are making this year to drive revenue growth and the additional synergies we expect to realize from last year's transactions. We are off to a great start on our key initiatives for 2011, which include completing our integration activities, investing capital for future growth and deleveraging the balance sheet.

During the quarter, we completed the Iowa billing system conversion and have fully integrated that business into Windstream. The Iowa operation is performing extremely well. Our team is now focusing on integrating Q-Comm and Hosted Solutions, which are progressing in line with our expectations.

This quarter, we made investments to improve our Internet speed and capacity, expand our fiber-to-the-tower initiatives and to grow our data center operations. In fact, we have had tremendous success at winning wireless backhaul contracts and have seen very solid demand in data center services. And as a result, we are planning to make more investments in these areas than originally expected given the attractive growth prospects and return on investment opportunities. We are confident that these success-based capital investments will further improve our financial performance going forward.

During the quarter, we made significant balance sheet improvements as well, leading to greater financial flexibility, a much better debt maturity profile and the ability to meaningfully lower cash interest expense going forward. In fact, with our refinancing activities to date, coupled with our refinancing and deleveraging plans later this year, we could see cash interest savings of more than $90 million in 2012 and beyond as compared to the expected spend this year.

I am very pleased with our start to 2011. Our team is executing well on all fronts and continuing to deliver industry-leading operating and financial performance. It is clear that Windstream is on a different strategic path as we have built the company focused on improving top line trends to sustain and grow cash flows over the long term. We have positioned our capital structure so that we can invest in significant success-based opportunities such as fiber-to-the-tower, data center services and our broadband network, all of which have very attractive rates of return and at the same time manage our leverage to our historical range of 3.2x to 3.4x adjusted OIBDA. Additionally, we will continue to explore strategic opportunities that further advance our strategy, while at the same time being mindful of leverage. We have positioned this company for long-term success while delivering industry-leading shareholder returns since our spin-off nearly 5 years ago, and I'm very optimistic about the potential for us to continue creating value growing forward.

With that, let me turn the call over to Brent, who will discuss our operating results.

Brent Whittington

Thanks, Jeff, and good afternoon, everyone. As Jeff mentioned, we delivered very strong operating results this quarter on all fronts. Specifically, we added roughly 29,000 new broadband customers, bringing our total Internet customers to 1.3 million, an increase of 6% year-over-year. Our overall broadband penetration is now at 44% of total voice lines. We ended the quarter with approximately 440,000 video customers, representing 6% growth year-over-year and 23% penetration of our primary residential customers. Total Access lines declined by approximately 23,000 during the quarter, resulting in a decline in Total Access lines of 3.6% year-over-year and our lowest absolute decline in units in our company's history.

In the Business channel, High Speed Internet customers grew by 4% year-over-year. Advanced data and integrated solutions increased 2.5% year-over-year, driven by growth in integrated VoIP and data services, Ethernet Internet access and managed services. Special access circuits increased 7% year-over-year due to increased wireless backhaul demand. In total, Business access lines declined 1.9% year-over-year. Importantly, Business revenues grew 2.3% during the first quarter, an improvement of 50 basis points over the fourth quarter year-over-year growth rate and a result of strong sales in our strategic Business products.

In the Consumer channel, we added over 27,000 residential High Speed Internet customers growing total customers by 6% year-over-year, largely the result of a new advertising campaign targeting cable switchers. Our Consumer broadband penetration is now approximately 63% of primary residential lines. Consumer broadband revenue increased 11% year-over-year, driven by growth in subscribers and in broadband features.

This quarter, video customers increased by 7,000, bringing our total video customer base to 440,000 or 23% penetration of primary consumer lines. Consumer access lines declined 4.5% year-over-year, which was flat sequentially. But importantly, consumer revenues were only down 3.5%, a result of the success we are seeing with our pricing strategy and increased sales of broadband services and related features.

We've been focused on improving our distribution mainly within the multi-dwelling units and door-to-door channels. In this quarter, we closed on several larger MDU opportunities and our door-to-door channel outperformed our expectations.

From an integration perspective, our team is well underway with the Q-Comm and Hosted Solutions integration efforts. The business integration is complete for both companies and the system integrations are underway and should be complete by the end of the year. The integrations of all other acquisitions are complete, and these businesses are performing in line with our expectations.

We continue to be excited about the capabilities and new product offerings the acquisitions bring to Windstream, which collectively position us very well to provide a complete suite of business services while improving the cost structure and positioning us for future growth.

I'm very pleased with the progress we are making with our operational goals. We continue to enhance our business capabilities, and with Business Services representing approximately 50% of total revenues, the growth in this channel has a significant influence in terms of improving our top line trends. Additionally, our solid execution, pricing strategy and expanded distribution are driving improving results in our Consumer channel.

2011 is another pivotal year for Windstream, offering the opportunity to make success-based capital investments that will better position the business for future success. In the first quarter, we made investments in our fiber-to-the-cell initiatives and are very encouraged with the number of contracts that we have won, which greatly exceeded our expectations. We also expanded our data center operations in Charlotte, given the robust growth and success we've experienced in that market. And we made investments in a new Little Rock data center, which should be operational later this year. In addition, we made investments to increase our broadband capacity and speeds that will allow us to deliver 10 to 12 meg Internet speeds over 40% of our footprint and 24 meg speeds in our most competitive markets.

Lastly, although very early, we have started work on several other broadband stimulus projects, which will expand and enhance our broadband capabilities in unserved rural markets. These investments are all exciting opportunities, which should yield attractive returns and provide opportunities to grow in the near future.

With that, let me turn the call over to Tony to discuss our financial results.

Anthony Thomas

Thank you, Brent, and good afternoon, everyone. For the first quarter, on a GAAP basis, Windstream achieved consolidated revenue of $1.02 billion, operating income of $282 million and $0.05 of diluted earnings per share. Our GAAP results include $64 million in after-tax loss on extinguishment of debt and $6 million after-tax merger and integration costs, which lowered EPS by roughly $0.14. And thus, our adjusted EPS would have been $0.19.

Turning to our pro forma results for the first quarter. Windstream delivered total revenues of $1.02 billion, a decrease of 1.8% year-over-year. Specifically, business service revenue increased $11 million or 2.3%, driven by growth in advanced data in integrated solutions, special access and data center services, all of which outpaced pressures from voice and long distance. Consumer revenue declined $13 million or 3.5% year-over-year, driven by fewer voice customers offset partially by growth in Price For Life bundles, broadband features and long-distance packages.

Wholesale service revenue declined $20 million or 12% year-over-year, primarily the result of declining Switched Access revenues. Total product sales were up $4 million or 16%. Specifically, by category, voice and long-distance revenues declined by $32 million year-over-year or 8%, driven by fewer voice lines and declining feature packages. Data in integrated solutions increased $22 million or 7%, driven by growth in integrated VoIP and data offerings and advanced data services to business customers combined with solid growth in consumer Internet and broadband features.

Special access revenues increased $8 million or 6% due to circuit growth from increased demand for wireless backhaul. Switched Access declined $17 million year-over-year due to fewer minutes of use and the least cost routing initiative implemented last year. USF revenues were flat year-over-year. Product sales increased by $4 million related to better contractor and residential sales.

Let me turn to expenses, which exclude depreciation and amortization. This quarter, expenses were lower by $18 million or 3% year-over-year. Excluding noncash pension costs, expenses were lower by $13 million or 2% year-over-year. Specifically, cost of services was down $8 million, due primarily to lower Internet connection expense related to the least cost routing initiative mentioned previously and lower pension benefits expense. Cost of products sold increased by $1 million year-over-year due to higher product sales. Within SG&A, expenses decreased $11 million or 7% year-over-year due to incremental deal synergies, which were partially offset by increase in advertising expense related to our new advertising campaign and an increase in commissions driven by strong Business and Consumer sales.

Sequentially, total expenses decreased by approximately $8 million, due primarily to lower restructuring charges. Cost of services decreased by $7 million, driven by seasonal declines in overtime and a decrease in bad debt expense. Cost of products increased by $2 million due to higher product sales. SG&A increased by roughly $4 million, due to new advertising campaign costs and higher commissions from strong sales in the first quarter. Going forward, we expect SG&A to decline sequentially throughout 2011 due to deal synergies and other cost management initiatives.

For the quarter, OIBDA was $497 million, which was flat year-over-year. Adjusted OIBDA was $512 million, a decrease of roughly 1% year-over-year, and our adjusted OIBDA margin improved 40 basis points year-over-year to 50.1%.

On a GAAP basis, adjusted free cash flow was $169 million for the quarter, a decrease of roughly $39 million year-over-year due to higher capital spending and higher cash interest costs related to our refinancing activities, which include the early payment of accrued interest.

This quarter, we made significant improvements to the balance sheet. Specifically, we refinanced over $1.5 billion of debt and improved our debt maturity profile by moving over $1.2 billion to 2020 and beyond at very attractive long-term rates. We also increased our revolver capacity from $750 million to $1.25 billion and extended the maturity of these commitments to December 2015, which will provide additional borrowing capacity and flexibility, particularly as it relates to future refinancings.

As a result of our refinancing efforts, we realized $101 million loss on the extinguishment of debt, which was principally the tender premium costs. Importantly, we have better positioned the balance sheet and maturity profile going forward. Furthermore, with the increased revolver capacity, we have an opportunity to refinance the remaining 2016 notes at significantly lower interest rate. Following the August call date, and as Jeff mentioned, we are in a position to realize cash interest savings of more than $90 million in 2012 and beyond as compared to the expected spend in 2011.

During the quarter, we completed a $60 million stock contribution to our pension. This resulted in the issuance of 4.9 million shares, which were contributed directly to the pension plan, bringing the funded level to above 80%. This quarter, we spent $160 million on capital expenditures. As Brent mentioned, we have won significantly more fiber-to-the-cell business than we expected. In fact, we are likely going to more than double our expected fiber-to-the-cell project this year. In addition, we've experienced very nice growth in our data center operations and have accelerated expansion plans in several key markets. We are also investing in our Internet speeds and capacity to drive future growth.

Given the attractive returns and long-term recurring revenues associated with these initiatives, we are eager to make these investments. As a result of the growth in these success-based capital projects, we are increasing our CapEx guidance for the year by $50 million to a range of $570 million to $630 million. At the same time, we are lowering our cash tax guidance by roughly $55 million to $1 million for 2011. The reduction in cash taxes is a result of the early debt extinguishment fees and higher CapEx spend, which will benefit from 100% bonus depreciation. Lastly, because of our refinancing activities and the timing of interest payments, we are raising our cash interest slightly to $569 million for the year, which excludes the loss on debt extinguishment.

Collectively, we now expect adjusted free cash flow to be $845 million to $965 million, resulting in a dividend payout ratio of 53% to 60%, a slight increase from our previous view of 52% to 59%. The success-based capital investments we are making today combined with our refinancing activity will improve our revenue and cash flow in 2012 and beyond. In fact, going forward, even with an expected increase in cash taxes, we have positioned the business to grow free cash flow through revenue adjusted OIBDA growth, more than $90 million of cash interest savings and, after 2012, lower levels of CapEx intensity.

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

Question-and-Answer Session

Operator

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

David Barden

Thanks for taking the question; a couple, I guess, if I could. It's been a while since we heard companies get so excited about spending money, especially companies that have really attracted an investor base that's concentrated on the dividend yield and values that income stream pretty highly. When you guys have done M&A transactions in the past, you've always kind of attached a synergy number to it and we'd be able to kind of get our arms around the rationale for what you've done in terms of these deals. But as the CapEx kind of ratchets up and you talk about the long term and maybe the CapEx will come down some day, there doesn't seem to be a lot of quantification around, "What am I getting as an investor who likes dividends today for all this money that you're spending now because it looks like that money could be coming to me in the form of a dividend instead, and I might like that better." Can you help walk me through why I should be as excited as you guys are about the CapEx going up? And if I could, just the second question was I think you talked about $90 million of interest savings in '12 coming from refinancing the debt. But how much more taxes are you going to pay in '12 versus '11 when the bonus depreciation steps back down?

Jeff Gardner

Great. I think that's a great question, David. And really, why I think investors should be excited is we've got some real investment opportunities, much of it's centered around fiber-to-the-cell side. That's going to be a phenomenon that will take place between 2011 and 2012. So when investors get a slightly higher capital intensity, but long-term contracts with good returns that over the long run make them feel better about the cash flow, improve our ability to generate cash flow over a long term and better position us for the dividend. We said in our remarks that we really have a capital structure that allows us to make these success-based capital investments. And in fact, the reason we did the KDL deal, the Hosted Solutions deal was that we saw these success-based opportunities. We thought we were there -- we had a good chance to be aggressive there, and we won. As Tony and Brent both mentioned, we've been very successful on the fiber-to-the-tower initiative. So in our view, investors should be thrilled that we have this chance to further improve. You're already looking at a company that's showing improving revenue trends sequentially. That's the plan for the balance of the year, and these will only accelerate that. And as far as capital intensity, we didn't mean to leave it unclear. What I think Tony said very specifically is that 2012 will be another year where there's a lot of fiber-to-the-tower business to be won. We want to win as much of that as we can because we believe that offers great returns to our investors. After that, our capital intensity returns to the levels that our investors are used to. So from my perspective, the reason we're so excited about it is because it makes Windstream a stronger company in the long run with better growth characteristics. Today, you're looking at a company that has one of the highest dividend yields on the S&P 500, but we are also driving some of the best year-over-year revenue comparisons in the industry, and I think that should give investors comfort not concern.

Anthony Thomas

And David, this is Tony. In regards to cash taxes, you're right, cash taxes will be going up in 2012 compared to 2011, principally due to the 100% bonus depreciation we have this year, which is also another reason that we're looking to place capital and spend capital in 2011. But there are a lot of moving parts when it actually comes to cash taxes. And historically, when we've had 50% bonus depreciation, which is what we'll have in 2012, we've had a cash tax rate in the mid-20% range. But there's a lot of moving parts in that analysis. But as I kind of wrapped it up, cash interest is going down, we're trying to grow and will grow our OIBDA and revenue in the future. All those things should give investors the confidence in our payout ratio and hence the dividend over a long period of time.

Operator

Our next question comes from Scott Goldman from Goldman Sachs.

Scott Goldman - Goldman Sachs Group Inc.

Also a couple of questions, if I could. One, I guess just staying on, sort of, the CapEx theme that we were just talking about. It looks as though you're obviously able to take advantage of some lower cash taxes this year and able to put that money towards increased capital spending. Is that a fair way to look at it, that you may not have spent that money without the cash tax benefits that you're seeing as a result? And as you look at that, I mean, you guys have no shortage of projects out there, so fiber-to-the-cell broadband coverage, broadband speeds, data center, just wondering how you prioritize those. As you look at the returns, where do you see the greatest return potential amongst those opportunities? And then I have a follow-up after that.

Anthony Thomas

Yes, Scott, this is Tony. In regards to the increase in CapEx, I would describe it probably as fortuitous that we're able to offset the CapEx with the $50 million increase on our CapEx guidance with cash taxes. But because we looked at the fiber-to-the-tower business, as Jeff mentioned, and we were very comfortable with the returns that we're achieving in that investment, and when we looked at our original guidance in 2011 we contemplated a little less than $60 million of fiber-to-the-tower investment. And our new guidance now contemplates over $100 million of fiber-to-the-tower business. I mean, we're going to be very aggressive in that business as long as we can get the returns that we've been able to achieve in the past 6 months.

Brent Whittington

Well, in terms of priority. This is Brent, Scott. If you think about the fiber-to-the-tower business, we kind of talked about that. Really, that demand and that rush to win that business is right now and next year. As a result, that's a huge priority for us this year. But certainly, the initiatives we've got to roll out higher speeds across our footprint and we've got a tremendous broadband penetration. As you saw our results in the quarter, great momentum still in the marketplace growing our broadband customer base and so having a very competitive offering that's priced reasonably in the marketplace and to keep that momentum strong, that's also really our number one priority in our consumer channels. So a lot going on but we think we've got the right balance and are committing the right capital to those important investments.

Scott Goldman - Goldman Sachs Group Inc.

I guess if I could just follow up to that, I mean, so you raised CapEx guidance by $50 million. But at the same time, revenue guidance and EBITDA guidance are unchanged. I realize there's obviously time, a lag from when the time the money is spent to when you may start seeing revenue. But I mean does this imply that it's mostly back half or later in the year loaded on that front?

Anthony Thomas

Exactly, Scott. And those construction projects are generally 9 to 12 months. So those are long-term builds to win that business and some -- not all that money that we talked about in terms of committed capital is business we've won yet. We still expect some of that success to continue so that's setting us up nicely for future years.

Scott Goldman - Goldman Sachs Group Inc.

I appreciate it.

Operator

Our next question comes from Chris King from Stifel, Nicolaus.

Christopher King - Stifel, Nicolaus & Co., Inc.

Good thing we've got most of the CapEx questions covered that I had. But just wanted to follow up on your comment about kind of improving metrics throughout the year and, obviously, your EBITDA guidance is guiding to a slightly higher margin than you guys reported in the first quarter. Just was wondering if that would be a gradual kind of ramp throughout the year. Or do you see a step function in EBITDA margins in the second half of the year? And then secondly, just wanted to ask whether you guys had any significant damage that we should be thinking about with respect to the storms that tore through the South a couple of weeks ago.

Jeff Gardner

I'll take that second part of your question first, and I'll ask Tony to talk about your first question. Related to the storm, we did -- our markets were hit pretty significantly, but fortunately not a lot of significant damage to our network. We had some customers that were out, mostly related to power outages. There was some awful devastation in our markets, but remarkably we came out of it pretty good. So I don't see that being a significant drag on the financials going forward.

Anthony Thomas

And Chris, this is Tony. Let me begin the conversation around our expectations really in terms of the ramp in the back half. I'll start on the expenses and I'll hand off to Brent to talk about the revenues. On the expense side, as we mentioned on our call in February, we are expecting the synergies to continue to ramp throughout the year. And as a reminder, with the KDL acquisition, more of our synergies, our network synergies, meaning we're actually turning down leased circuits and putting them on the KDL network, and that process is ongoing throughout the remainder of 2011. And that'll happen pretty much ratably, but there's also some billing system conversion work that takes place in the back half of the year that we also benefit from.

Brent Whittington

And kind of building off my comments earlier on the revenue, really, as you kind of looked at the rest of the year, we had, as we stated, great success from business sales. As we get those things installed, we expect continued improvement in our data and integrated solutions line and coupled with as we start turning out more of these towers that we’re winning in the back part of the year, you'll see improvements in Special Access as well. It's the combination of those things, along with what I'm real excited about, continued improvement in the distribution we've got in our business channel. That's also going to drive improving results. That's why we talk about, for us, what it's all about, which is continuing to improve our revenue trajectory in that important channel for us, and we're hoping to do that each and every quarter.

Jeff Gardner

So Chris, taking all of that, we were right on our internal plans for the first quarter. And with what the guys talked about on the revenue and expense trends, we expect each quarter to get a little bit better and with the fourth quarter being our strongest quarter of the year. And that's the way we saw developing from the beginning and it still looks that way to us.

Christopher King - Stifel, Nicolaus & Co., Inc.

I appreciate that color.

Operator

Our next question comes from Batya Levi from UBS.

Batya Levi - UBS Investment Bank

I do have a follow-up question on the revenue guidance. I understand the timing difference between the CapEx spend and revenue pool. But given the starting point of just 1.8% decline in the first quarter and strong commentary for the sales funnel, I'd like to hear why you would still want to keep the low end of your guidance range in there for a 3% decline. Do you think that we will see some lumpiness in the revenues? Or why isn't this an opportunity to tighten that range? And also second question on if you could maybe give a sense on what you're seeing from cable competition in the SME sector.

Anthony Thomas

Batya, this is Tony. I'll take the first question, and then Brent can give us an update on the competitive environment. And just to kind of amplify Brent's remarks, these projects that we're doing in terms of fiber-to-the-tower take 9 to 12 months. So I mean, there is a substantial amount of work you have to do in terms of getting right of way, make ready for pole attachments. And the reality is it just takes time for those investments to ultimately enter billing. Now importantly, we've had experience delivering; that's why these wireless partners are choosing Windstream is we've been able to deliver for them consistently last year and this year, and that's why we've doubled the number of sales we expect. But the reality is most of that revenue benefit will manifest itself in 2012 from the incremental $50 million of CapEx that's really going to the fiber-to-the-tower business in our revised guidance.

Brent Whittington

And on the other point, Batya, on S&P and the cable space, they've been an aggressive competitor and continued to be so. We saw that last year. We started this year trying to react to that by adding what I'd call more feet on the street, targeting small businesses. We had a lot of success last year in our business sales channel, but much of that moved upmarket to larger ARPU customers. And I mean, frankly, we weren't as focused on those smaller customers as we needed to be. And we've made some incremental investments in people to improve our distribution there and really better target that segment and off to a good start on that in the first quarter. I shared the business access lines in the quarter. And so we're pleased with that, and that's generally what you'll see there as well as the voice revenues. So real excited about that, but definitely still a competitive space for us.

Jeff Gardner

And definitely, just to be clear on the -- of course, with the CapEx guidance and the duration of these jobs. I just want to be clear, we do expect better revenue comparisons. It is going to be in 2012 because we're concerned just like all of you would be. Is it just maintenance capital that's increasing, but definitely there's revenue with this. We like the returns, and we'll see it in 2012.

Batya Levi - UBS Investment Bank

Just one follow up on that, you are starting with 1.8% revenue decline and you expect that to improve sequentially throughout 2011, correct?

Jeff Gardner

Yes, I guess we just didn't that granular on updating our revenue guidance, but we do expect it to improve from there. Absolutely.

Operator

And our next question comes from Frank Louthan from Raymond James.

Unknown Analyst -

This is Alex [indiscernible] for Frank. I've got 2 questions for you. The first is I'm looking if you can provide any color on the trends for the NuVox properties? And then second, I'm wondering what your net exposure is to the access and USF revenue. So you provided the revenue, you said it was flat. But I'm looking less the access cost, I think you usually provided that number.

Jeff Gardner

On the trends on the NuVox properties, without getting into a lot of details, what I can tell you there, Alex, is we’ve seen consistent improvement in sales productivity out of that team. Very pleased with that sales organization who remains a big part of our leadership here at Windstream. But overall, the revenues this year versus last are much better. So we're happy with what's going on with the NuVox organization. That's been a great thing for us culturally across our business channel entirely.

Anthony Thomas

In regards to the access and USF trends, really no change. Those were down roughly 12% year-over-year, and we continued to see pressure on our Switched Access revenues from lower to mid use. In 2010, our terminating intrastate Switched Access, which is the most at-risk revenue item, was $124 million and we're expecting that to decline at a rate of roughly 15%. And as we've been talking about before at the FCC, that really we're talking about a phase down of those rates to a lower rate over a period of time. So it's a transition, Alex, as you well know, that we've managed now for the last 5 years, and we're confident that we can manage it into the future.

Operator

Our next question comes from Daniel Gaviria from Morgan Stanley.

Daniel Gaviria - Morgan Stanley

I just wanted to see if you can give us a little bit more color on campaigning and targeting cable switchers. Did that extend into 2Q? Is it over? And then just a broader idea of how the housing market is trending or is performing and your footprint.

Jeff Gardner

On the housing market, tough to say, we hadn't seen any major changes in the fourth quarter, I would tell you. So it still seems like things have steadied out, but no major change there. In terms of the campaign, it was an exciting campaign. It did wonders for us. We did mix it up in the second quarter and have changed that, but the capacity [ph] to the campaign was effectively quitters do win, which is pretty cool. And the number of services that you quit from cable, we'll give you a discount off your bill and number of months free, basically. And that really resonated in the marketplace for us. And we saw that, and all of our sales channels very excited about that. But in the effort just to keep things fresh, made some changes in Q2 we're equally as excited about.

Operator

Our next question comes from Barry McCarver from Stephens.

Barry McCarver - Stephens Inc.

Just a couple of quick questions. First, I guess back on the revenue a little bit. Can you talk about -- you mentioned broadband stimulus grants kind of got underway and are building there. Can you talk specifically about some of the pieces that got underway and kind of what the time frame to revenue on those are? And then secondly, we saw that in April, Hosted Solutions opened up a third data center. I'd love to hear a little bit more about sort of your thoughts on the revenue growth prospects in that business, how much of those sales are cross sales to some of your existing customers? And if not, what are the new customers coming in looking like?

Brent Whittington

Barry, this is Brent. On the broadband stimulus, we're very early in that. Much of what we're doing right now is working with the government to get approval for the contractors as we ready to put basically shovel in the ground. So that's kind of where that stands. Not a lot of spend on that in the quarter, but we're ramping up on that. Our goal is to drive some revenue in 2011. But frankly, much of that is pushing into next year at this point. But still feel excited about where that's headed. It's just taking a little longer, which isn't that surprising. In terms of Hosted Solutions, really I talked a little bit about this last time. But what we're trying to do is leverage not only their existing data centers and max them out from a capacity from a sales standpoint. A modest improvement in terms of the footprint of data centers on an annual basis, and we're doing that. We talked about that in terms of Little Rock, expansion of Charlotte as well, both of which we believe have good exciting growth prospects associated with that, coupled with what I'd say continuing to monetize real estate across the Windstream footprint in terms of co-location revenues. The combination of all those things we believe are going to allow us to see revenue growth rates in the 20% range. Frankly, we think we're achieving that by the fourth quarter. It's still a smaller part of our overall revenue picture. But in terms of balancing what it takes to get top line stability back to where we want it, a big key part.

Barry McCarver - Stephens Inc.

And just in terms of the customer breakout for those Hosted Solution data centers, is a lot of that coming -- for potential cross sales from your existing enterprise base or is it completely new customers?

Brent Whittington

I would tell you that we’ve only touched the surface on the prospecting, cross-selling across the Windstream footprint. That's momentum I expect to really pick up as our broader sales force becomes more comfortable and knowledgeable about that product set, and we've got better infrastructure to really support that. It's starting at the local level in the markets where we've got sales teams where they have a data center asset. But our goal as part of that integration really in the second quarter is to take that to another level.

Barry McCarver - Stephens Inc.

And do you have any idea of what kind of -- just in kind of square footage, what kind of capacity you would expect to open up maybe in the next couple of years and then what the utilization would be?

Brent Whittington

So that's getting pretty specific. But if we're doing 1 to 2 to 3 data centers a year, on average that’s 10,000 to 30,000 square feet that will open up as incremental space to monetize coupled with, of course, continuing to sell through the maxed capacity in existing assets. So it's a combination of both of those that we are counting on to drive revenue growth.

Barry McCarver - Stephens Inc.

Okay, that's real good.

Operator

Our next question comes from Shing Yin from Citadel Securities.

Shing Yin - Citadel Securities, LLC

So you talked about your excitement over some of these fiber-to-the-cell-site opportunities and given the rate of mobile broadband growth, I think we can all understand why that might be an interesting opportunity right now. I wonder if you could help us understand what the economics of that business look like. So for example, for an extra $50 million in CapEx, how do we think about what's the long term revenue opportunity that, that CapEx could yield? And then also what do the margins of this business look like?

Anthony Thomas

Yes, this is Tony. I'll take that. On the fiber-to-the-tower kind of getting with the margins, the margins are very high on the business. They're 90%-plus margins. The fiber-to-the-tower business is all about the deployment of the initial capital. And without getting too specific on the returns, they're well in excess of our cost to capital. And that's simply for that business. What we try to do is simply optimize that fiber deployment. I'd say we don't deploy fiber in a straight line. We move it around the network to ensure that we get the maximum number of businesses and number of broadband network elements fiber connected. So none of those elements are even contemplated in our fiber-to-tower pricing, but it's something we work aggressively to accomplish as we deploy fiber throughout our network. And we expect that long term, that we'll see that type of substantial revenue growth much of which, as you indicated, will be dictated by Smart phone adoption as users continue to push bandwidth across cell towers, and they drop from the cell tower on to a wired fiber network.

Shing Yin - Citadel Securities, LLC

So is the revenue opportunity kind of dependent on usage? So the more traffic there is riding over a fiber link, the more revenue you would get?

Anthony Thomas

That's correct.

Shing Yin - Citadel Securities, LLC

I see. And then can you just clarify, you characterized these investments as success-based. Does that imply that even though it takes you 9 to 10 months to actually roll it out, you actually have a contract in place even before you break ground and start spending on the CapEx?

Anthony Thomas

Yes. We do have a contract before we start spending money. So we sign a contract and then immediately begin to work on the deployment of the fiber-to-the-tower technology. It just takes – it’s just an extended time frame, 9 to 12 months outside of our normal ILEC footprint.

Shing Yin - Citadel Securities, LLC

Got it.

Operator

Our final question for today comes from Michael Rollins from Citi Investment.

Michael Rollins - Citigroup Inc

I don't mean to go over some of the same ground that you guys have covered in the Q&A, but I think the question that investors really want to understand is if you just take -- I know you don't want to be specific maybe for fiber-to-the-cell projects, or specifically for a data center, but if you just take a look at some of these growth assets that you're putting to work in the business, is there a way that you could just describe 12 months from now what that revenue might look like as a percent of a dollar of CapEx spend and maybe 24 months what that revenue might look like? So as you throttle back and forth where the capital falls in the business, investors can get a better sense of maybe how to throttle the revenue change forward and back depending on your inclination to invest?

Anthony Thomas

Michael, this is Tony. I will take a shot at that question. I will tell you that how you ended it is very relevant, and I'm going to make sure we begin there, which is that this CapEx around fiber-to-the-tower is a land grab. And we've made this point repeatedly, but it's worth reminding investors. It's 2, 3 years and it's over. So we'll invest more CapEx fiber-to-the-tower in 2012, and then it will start to significantly ramp down in 2013 and probably be entirely extinguished by 2014. And as we think about it, you're looking at a revenue stream, and you've seen it in our special access results. You saw it again this quarter mid-single digit growth. And we continue to invest in our business in an effort to continue to see growth hopefully in excess of that. And that's where we're putting our money to work.

Jeff Gardner

Right. Michael, the other part of your question, I mean, it's a little bit awkward because we're talking about 2011 investments that are going to pay off in 2012, and we haven't guided on 2012. But I think what you can expect, the way I think about is one, we are absolutely convinced that we're going to earn rates of returns ahead of our cost of capital with these investments. And we're also confident that versus our base case, we're going to improve our revenue trends in 2012 and beyond. And as Tony said, beyond 2012, we expect the capital intensity rates to continue more at historic levels. And so that's the way I would think about it as an investor.

So thank you, all, for joining us today. We appreciate the continued interest. I'm very pleased that at Windstream, we continue to perform at a very high level in our core business. We've spent a lot of time on this call talking about success-based opportunities. I think it validates some of our recent acquisitions and also validates our strategy of focusing more on broadband and business. We're so pleased with the substantial restructuring of our debt. We talked about the resulting approximately $90 million in savings on an annual basis. And the capital structure that we have in this company is really allowing us to invest in these major opportunities, fiber-to-the-tower and data centers. We're going to manage our leverage down this year as well. And at the end of the day, we improved the long-run financial performance of this company in terms of top line and bottom line. And so thank you, all, for taking the time to visit with us today, and we'll be out talking to you soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect. Have a wonderful day.

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