Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Brent K. Whittington - Chief Operating Officer

Robert G. Clancy - Senior Vice President of Investor Relations and Treasurer

Anthony W. Thomas - Chief Financial Officer

Jeff Gardner - Chief Executive Officer, President and Director

Analysts

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division

Michael Rollins - Citigroup Inc, Research Division

Scott Goldman - Goldman Sachs Group Inc., Research Division

Simon Flannery - Morgan Stanley, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Windstream (WIN) Q3 2011 Earnings Call November 4, 2011 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Windstream Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Rob Clancy. Sir, you may begin.

Robert G. Clancy

Thank you, Sam, and good morning, everyone. We appreciate you joining us today to discuss Windstream's third quarter results. Today's conference call was preceded by our third 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 filed 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. Again, we refer you to the IR section of our website, where we have posted our earnings release and supplemental materials, which contain information and reconciliations for any non-GAAP financial measures.

To assist investors, we have provided pro forma results, which include all acquisitions we have completed to date for all periods shown. We will make references to these pro forma results from current businesses, including the year-over-year comparisons during our call.

Participating in our call this morning are: Jeff Gardner, President and Chief Executive Officer; Brent Whittington, Chief Operating Officer; and Tony Thomas, Chief Financial Officer. At the end of the call, we will take a few questions. With that, here is Jeff Gardner.

Jeff Gardner

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

First, I am very pleased with the top line improvements we have accomplished this year. Our goal over the past few years was to transform our business to achieve revenue and cash flow growth.

Given our shifting revenue mix, success-based capital investments and expected deal synergies, we are on the verge of showing growth in both of these areas.

Our activity level is high, and we have made progress on a number of fronts, including business sales momentum, data center expansion, fiber-to-the-tower builds and integration. Importantly, we are seeing the benefits of this transformation and have created the unique opportunity to provide our investors with a combination of both growth and yield.

In the quarter, our business and consumer service revenue trends were in line with our expectations. On the cost side, our expenses are running slightly higher than normal, given all the activities in anticipation of the PAETEC integration, as well as increased activity around capital projects. I'm very confident that we will achieve or exceed our targeted synergies, which will result in nice improvement in adjusted OIBDA trend next year.

Turning to our strategic initiatives. In early August, we announced a transaction to acquire PAETEC. This is a great strategic combination for us and advances our strategy to expand our business and broadband services which drive top line growth. In fact, following the PAETEC deal, roughly 70% of our revenues will come from business and broadband. The combined company will have a nationwide network, with a deep fiber footprint of 100,000 fiber route miles, which will expand our capabilities in strategic growth areas and allow us to improve our cost structure by moving more traffic onto our own network.

In addition, this transaction offers attractive financial benefit, including approximately $110 million in annual operating and capital synergies and provides meaningful tax benefits. We have received Hart-Scott-Rodino approval, and the PAETEC shareholders voted to approve the deal last week. At this point, we are awaiting approval from the Federal Communications Commission and several state public service commissions and expect the transaction to close before the end of this year.

Since this announcement, we've been encouraged with the opportunities we see ahead for our combined company, which reinforces our belief that PAETEC will create significant value for our shareholders and make Windstream a force in the enterprise space on a national level.

Turning to our other key initiatives for 2011, which include completing our integration activity, deleveraging the balance sheet and investing capital for future growth.

First, as I mentioned last quarter, we are largely complete with the integration activities for deals that closed in 2010. In fact, our efforts over the past couple of months have centered around planning for the upcoming PAETEC transaction, and I am pleased with where we are at in this process.

Second, we've improved our capital structure this year to yield significant cash interest savings going forward, and we are committed to reducing our leverage to our historical range of 3.2x to 3.4x adjusted OIBDA.

Finally, we are making great progress with our success-based capital investments, including expanding our data center operations and deploying fiber to the tower to capitalize on the significant growth opportunities.

As Brent will discuss shortly, our wireless partners are aggressively building their 4G wireless networks and accelerating their deployment plan, resulting in significantly more tower projects than we initially planned. And as we have said before, these are absolutely investments that we are eager to make. It is important that we take advantage of this rare and time-sensitive opportunity to achieve highly attractive returns from growth in the wireless industry.

Turning to the regulatory front. Last week, the Federal Communications Commission adopted a plan to modernize its intercarrier compensation and universal service policies. We have long supported the need for these reforms and have worked extensively within the industry to achieve a rational result.

The detailed order has not been released yet, but based on what the FCC has announced so far, the intercarrier compensation transitions outlined by the commission appear to provide a manageable path to the future bill-and-keep environment, with reasonable opportunities to recover a majority of the revenue losses resulting from the elimination of access charges over time. Additionally, IP traffic will be compensable and phantom traffic should be eliminated.

With regards to universal service funding, we have supported moving future funding to an efficient, forward-looking model and repositioning USF to drive broadband expansion in high-cost areas. The FCC has also said it will make additional funding available to us in the first year of their plan to further expand broadband service availability in high-cost rural areas that remain uneconomic to serve.

While the plan outlined differs from the ABC plan that we submitted, along with others in our industry, we believe the results will be manageable and, importantly, are encouraged that this reform will provide meaningful certainty to our business model going forward. We will continue working with the FCC and the industry as the commission works to finalize the reforms of the universal service fund. Going forward, we will remain -- we will be mindful of strategic opportunities, particularly those that advance our strategy around top-line growth. In the near term however, we will be very focused on completing the PAETEC integration, achieving our targeted synergies and making more improvement in our core business that lead to better top line and cash flow trends. Simply stated, over the next several months, we are squarely focused on execution and integration. With that, let me turn the call over to Brent, who will discuss our operating results.

Brent K. Whittington

Thanks, Jeff, and good morning, everyone. Our third quarter operational results were in line with our expectations, and we continue to see nice growth in our business channel, accompanied with very steady performance in our consumer business.

In the business channel, revenues increased by 2.3% year-over-year, driven by a variety of factors, including growth in our strategic services and improved focus on servicing our business customers. Organizationally, we have made great strides and have added resources in sales and service delivery to improve our focus and execution in the business channel. We are seeing very nice productivity gains in all of the sales channels that support our business customers, and we have been successful selling higher ARPU services.

In addition, we have developed a more robust product suite, tailored around IP services to strengthen our competitive position in the enterprise space. For example, we've seen great success selling MPLS services, virtual LAN services and dedicated Internet access, and we are seeing nice growth in our data center services. We continue to see circuit growth from wireless backhaul demand, which has led to consistent growth in special access revenues.

In the consumer channel, we added approximately 8,500 high-speed Internet customers, growing our total subscribers by 4.4% year-over-year and increasing our penetration to 65% of primary residential lines. Consumer broadband revenue grew 7% year-over-year, driven by customer growth and sales of broadband features.

Video customers increased by 5,500 units, bringing our total video customer base to 449,000, an increase of 4% year-over-year.

Consumer access lines declined 4.6% year-over-year, which was flat sequentially. Total access lines declined 3.9% year-over-year, which was up 30 basis points sequentially, but importantly, this increase relates entirely to one wholesale customer and will have very little financial impact.

Turning to our integration efforts. As a reminder, we have largely completed the activities related to our previous transactions. At this time, we are focused on preparing to close the PAETEC acquisition, and our integration teams are in place and working through project plans alongside PAETEC, who has been very helpful throughout this process. Our team has a great deal of integration experience, and I'm confident that we will successfully integrate PAETEC and achieve the targeted synergies.

As we have learned in past deals, we have many opportunities to extract the best practices from each organization and leverage those across the entire platform, and PAETEC has done many things well, and we look forward to them being the part of the Windstream family.

As Jeff mentioned, we have made tremendous progress on our capital initiatives this year. Given the demand for wireless backhaul and Windstream's successful track record of delivering these services, our opportunities to make fiber-to-the-tower investments are abundant, and we believe that these are important investments for the future.

When we started this year, given the rural nature of many of our markets, we expect to deploy fiber to less than 50% of the towers within our ILEC footprint over the course of 2011 and 2012. Today, however, given the growing bandwidth needs being fueled by explosive data growth, wireless carriers have aggressively accelerated their fiber deployment plans and significantly increased the number of towers targeted for fiber. As a result, we now expect to roll out fiber to nearly 90% of the towers within our ILEC footprint by the end of 2012.

We are also having a high level of success winning sites outside of our ILEC territory. Importantly, all of these investments are success-based and secure with 5-to-7-year contracts that drive attractive returns in excess of our cost of capital.

Furthermore, although we have not yet realized much revenue from these investments given the average 12-month investment cycle, on the few sites that we have turned on, we are encouraged by the demand for incremental capacity we are already seeing. As a reminder, we price these services on a per meg basis and thus, additional capacity drives incremental revenues at very attractive margins with little to no capital requirements.

Additionally, during the third quarter, we increased broadband speeds to residential and business customers that can now offer 12 meg service to over 40% of our footprint and 24 meg service in our most competitive markets. We expanded our Raleigh data center to increase the floor space by 10,000 square feet to keep up with the rapidly growing customer base and demand for cloud-based services.

Finally, work is underway on several of our broadband stimulus projects. These investments all offer exciting opportunities to continue growing our strategic areas of focus and better position the business for future success. With that, let me turn the call over to Tony, who's going to discuss our financial results.

Anthony W. Thomas

Thank you, Brent, and good morning, everyone. For the third quarter, on a GAAP basis, Windstream achieved consolidated revenue of $1.023 billion, operating income of $267 million and $0.14 of diluted earnings per share. Our GAAP results include $13 million in after-tax merger and integration costs and $13 million tax-effected loss on early extinguishment of debt. Excluding these items, our adjusted EPS would have been $0.19.

Turning to our pro forma results for the third quarter. On a year-over-year basis, Windstream achieved total revenues of $1.023 billion, a decline of 1%. Specifically, business service revenues increased $11 million or 2%, while consumer service revenues declined by $11 million or 3%. Our wholesale revenues declined $17 million or 10% due in part to challenging year-over-year comparisons. Total product sales were up $2 million.

Let me discuss the revenue trends by category. Data and integrated solutions increased $21 million or 7% year-over-year, driven by growth in IP, nex-gen data and data center services. Special access revenues increased $7 million or 5% due to circuit growth from increased demand for wireless backhaul. This quarter, our special access revenues reflect credits for incremental volume discounts, some of which is not recurring. As we look forward, we expect special access growth rates to accelerate from this level, as we begin to realize revenues associated with our fiber-to-the-tower investments.

Voice and long distance revenues declined by $27 million or 7% year-over-year due to fewer voice lines and declining feature packages. Switched access and USF revenues declined $14 million year-over-year or 9%, primarily related to fewer minutes of use, an unfavorable cost study true up this quarter and higher USF state revenues recorded in the third quarter of 2010.

Let me turn to expenses, which exclude depreciation and amortization. This quarter, expenses were lower by $11 million or 2% year-over-year and were down $7 million, excluding pension costs.

Specifically by category, on a year-over-year basis, cost of services was down $8 million due largely to lower benefit costs, lower bad debt expense and incremental synergies, offset somewhat by higher interconnect charges related to circuit growth, higher fuel expenses and storm-related costs. Cost of products sold increased by $2 million due to slightly higher product sales.

Within SG&A, expenses decreased $5 million or 4% year-over-year due largely to lower benefit costs and incremental deal synergies. Sequentially, total revenues declined $7 million due largely to the wholesale revenue declines I mentioned earlier, and our cash cost declined by $3 million.

For the quarter, OIBDA was $490 million, a decrease of 1% year-over-year and adjusted OIBDA was $508 million, a decline of 1% year-over-year as well. Our adjusted OIBDA margin improved 10 basis points year-over-year to 49.6%.

This quarter, we spent $178 million on capital expenditures, which was largely related to our growth initiatives, including fiber-to-the-tower projects, data center expansions and enhancing the capabilities of our broadband network.

Given our success winning more fiber-to-the-tower contracts, combined with our wireless partners' desire to accelerate deployments of these projects, it is likely that we will modestly exceed the high end of our guidance range in capital spend this year, although weather will be a significant factor in our fourth quarter capital spend.

From a balance sheet perspective, we refinanced $350 million on our 2016 notes with revolver proceeds, which will help lower our interest costs going forward. We also contributed 5.9 million shares to our pension plan to address the remaining small contribution required in October of this year, as well as our projected contributions required in 2012.

Looking to 2012, we are very pleased with how we have positioned our company. We have made great strides expanding our focus on the growth drivers in our business, which, combined with our success-based capital investments, should result in further improvements in our revenue trends. Additionally, with the synergies from the PAETEC transaction, we expect accelerated growth in adjusted OIBDA.

This year, our capital spend has been higher than normal due largely to our fiber-to-the-tower investments, which will total between $100 million and $125 million. Given the significant increase in the number of tower projects we now expect to complete, we will likely spend $75 million to $125 million more on fiber investments next year as compared to 2011. We also plan to spend $50 million in capital next year related to the stimulus projects that we were awarded. Recall that Windstream's total out-of-pocket capital related to these projects will total $60 million. We expect our capital investments to return to more normalized levels in 2013 and beyond, given that the fiber-to-the-tower and stimulus investments should be substantially complete. Importantly, our cash flows will benefit from the significant reductions to Windstream's legacy cash interest of roughly $80 million in 2012 and beyond. Additionally, we expect to receive a slight refund in cash taxes in 2012 due to the 50% bonus depreciation rules and other tax-saving initiatives. Thus, we are in a great position to finance these success-based investment opportunities.

As is customary for us, we will provide specific guidance details in February 2012, and we expect our guidance to include PAETEC, given the deal should close by year end.

In summary, while we have several moving parts, the steps we are taking to continue transforming this business will derive higher revenue and adjusted OIBDA and provide security to one of the most attractive dividend yields in the S&P 500.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question or comment comes from Michael Rollins.

Michael Rollins - Citigroup Inc, Research Division

Just a couple of things. First, can you quantify, it sounds like you had some, I guess, one-time hits to revenue. You mentioned that, I think, in the access discussion and, I think, in one other part of the product discussion on credits. And then the second thing is are you basically implying with the CapEx commentary that if you take the incremental stimulus and you take the amount incrementally on fiber to the cell that CapEx just from a base-case perspective could be up between $115 million to $165 million next year, or are there other offsets to the CapEx that would bring that down?

Anthony W. Thomas

Michael, it's Tony. I'll start with your first question in regard to one-time items. You're correct. We do have a couple one-time items in the revenue outlined this quarter, specifically in the wholesale revenue streams in USF. We had $2 million to $3 million of unfavorable cost study true ups and other adjustments. And in special access, as I talked about that, which goes to business services, we had an unfavorable adjustment of roughly $2 million this quarter, which is nonrecurring. So when you think about that, that was really a customer ultimately you landed in a higher tier or received a higher discount. So from base line, we're still seeing that great demand that Brent spoke to on the special access side, and it just resulted in a hiccup here in the third quarter. Turning to capital, we are -- as we look at our capital for 2012, we think this is a unique opportunity for us to make success-based capital investments that we spoke to on fiber to the tower. Combined with the stimulus spend, we were going to make in the 2012, we do believe capital will go up in 2012 similar to how I think you were surmising, which I talked about, as the increase of fiber-to-the-tower of roughly $75 million to $125 million and the increase in stimulus of $60 million. But importantly, as you look forward, we expect the CapEx to decline in 2013 as the success-based capital investments are largely complete. And importantly, we make these investments because they change the trajectory of our business. They continue to drive revenue higher and also, adjusted OIBDA higher. And importantly in 2012, the other commentary I gave was in regards to cash interest and cash taxes. It's very fortuitous for us that we're making these capital investments in a time when our cash taxes will in fact be very low in 2012. Well, in fact, we'll be in a refund position. And we've been very busy on the balance sheet this year, and we expect to achieve $80 million in cash, interest savings year-over-year. So we look at these investments and, coupled with the other offset in cash interest to cash taxes, we're very comfortable with how the company is positioned in 2012, and we expect at 2013 for CapEx to come back down to more normalized levels.

Michael Rollins - Citigroup Inc, Research Division

And just if I could do 1 other follow-up. If you to take the high end of the range for this year, which you say you'll be at or slightly above, I think, of 630. Can you give us some, like, basic breakdowns of, like, what fiber to the cell is within that? I think you mentioned the stimulus will be about $10 million in there. And maybe just a couple of the other components, so as we try to conceptualize a more normalized spend in 2013, we have the component pieces to try to figure that out.

Anthony W. Thomas

Michael, as I mentioned in my prepared remarks, we expect to spend in 2011 $100 million to $125 million in fiber-to-the-tower investment. And stimulus this year will roughly be $10 million, with the majority of the incremental spend coming next year that I alluded to. And we also have been expanding our broadband network capabilities, and that comes in the terms of a technology that we call VDSL that enables higher speeds. And that was roughly $40 million in 2011.

Operator

Our next question or comment comes from Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Staying on the revenue and the one-timers. I think you had said last quarter that you expected revenues to have some headwinds this quarter but to return to revenue growth year-over-year in Q4. And I just wanted to ensure that, that was what you were still implying. And then could you just give us some more color on high-speed adds and access lines and just some of the trends that you're seeing there and what the outlook is?

Jeff Gardner

I'll take the first part. This is Jeff. Yes, you're exactly right. We are expecting to see year-over-year -- a slight year-over-year increase in the fourth quarter. Obviously, that will require a lot of execution on our part, but we're very confident in our ability to deliver that. And importantly, as the last question, we've talked about 2012 and going forward, we expect 2012 to be an inflection for Windstream going forward where, really, the expectation is year in and year out, we grow both revenue and cash flow. For the second part on high-speed net adds, I'll ask Brent to discuss that.

Brent K. Whittington

Yes, Simon, I mean, we saw an uptick in net adds this quarter, but a lot of that was just because of the seasonal lift in gross sales. And as I mentioned even on last quarter's call, we did change our promotion heading into this quarter, and that worked well for us here in Q2. The competition and the landscape remains fierce and it's competitive, and that hasn't changed, but I think we're doing well overall continuing to focus on our Double Play bundles with both an unlimited voice and broadband product. And that's worked for us thus far, increasingly turning our attention to positioning our company as -- really, the way I'll say that, capitalizing on video and the movement of customers to more frequently use our broadband connection to obtain video and that's a big part of our promotion heading into fourth quarter. But as you think about kind of our broadband business, as I kind of mentioned, 2 key things to think about: one, we've got 65% penetration; and two, a dominant market share because of our success over these years. And we don't just gauge our success in broadband in terms of our net customer growth. It's really about that coupled with the revenue growth which, as you saw from us, is still 7% year-over-year, and that's how we're trying to achieve that.

Simon Flannery - Morgan Stanley, Research Division

Can you give us some sense on your ability to upsell people to the 12-meg-type product? I understand it's a great number in terms of penetration of primarily lines, but there's a lot of people who just don't want to take a primary line anymore. They may not want Double Play. They may want Double Play with video or just a high-speed connection.

Brent K. Whittington

That's right. And Simon, as I mentioned, that's why we've actually turned our focus to leveraging that video. That's what they're using the broadband for is the video, and the focus is around what you can do with that video in a broadband connection at a price point that's valued by the customer in terms of an entertainment package. And that's really how we're continuing to increase our penetration. In terms of high speed, we have, for a while, made high-speed sales a big part of our sales effort. However, customers still don't want to pay, we see often, incrementally for higher speed services. We try to position Windstream as all the speed you need, which is really trying to help make sure customers understand our parity with cable as it pertains to speeds because some of the perceptions around traditional ADSL services, they've used against us, and that's working for us. But again, customers really just, we find, don't want to spend a lot more for incremental speeds. We see that as revenue upside in the future, but not seeing a great deal of demand there right now.

Operator

Our next question or comment comes from Scott Goldman of Goldman Sachs.

Scott Goldman - Goldman Sachs Group Inc., Research Division

I guess couple of questions. Just maybe looking at some of the business metrics, special access circuits, you called out some of the impacts on the revenue, but the actual net adds on the circuit seem to have slowed, and just wondering if there's anything we should be looking at there. Same on the advance data and integration. We heard one of your peers talking about pressure in the low-speed private line. I'm wondering if that's what contributed to the sequential decline there. And then just wondering on the regulatory front. Just wondering, Jeff, maybe you -- should we surmise from your comments that we shouldn't see much in the way of a cash flow impact in 2012, 2013 coming out of the reform with the FCC?

Jeff Gardner

Yes, so I'll let Brent take the first part, and I'll take the regulatory question.

Brent K. Whittington

Yes, Scott. In terms of business net adds on maybe the special access circuits that you're mentioning, we did see a slowdown in what I call traditional TDM circuit adds during the quarter. Not surprisingly, given so much of our effort is focused on rolling out ethernet fiber services to those carriers. They've added a great deal of capacity on the TDM side earlier this year just in preparation for what was coming. That slowed because we are nearing the point in Q4 and certainly heading into 2012 where we'll begin to turn on a significant number of those towers. In terms of advanced data and integration, just overall customer account there is really more a function of declines in older and mature services. We continue to see very nice momentum in terms of our data and integrated product sales, and you see that showing up in the revenue line item there as well. So the customer account is more a function of some older services.

Jeff Gardner

Great. And Scott, on the regulatory question, I think you've got it exactly right. While we didn't get everything, we're pretty pleased, overall, with what is coming out of the FCC in that mostly what we've been focused on as we've worked on this over the last several years is that we have a manageable transition with adequate opportunity to recover cost as we go through that and that we have an opportunity to really focus the universal service fund on these non-economic rural areas. And I think both -- all of these things have been accomplished with this order. Having said that, we've not seen the detailed order at this point. Once we've had a chance, we can provide additional clarity, but based on the initial summary, I think you're exactly right. We believe that this result will be manageable and, importantly, provide Windstream and others in the industry with greater stability and certainty for the future, which is what we were hoping for.

Operator

Our next question or comment comes from Phil Cusick of JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

Let's go back to the fiber to the cell a little bit. Has there been less competition than you expected, have you been a little more aggressive in pricing, or are carriers just looking to contract more sites this year?

Brent K. Whittington

Phil, I'll tell you. It had been more competitive than we expected. We have definitely not lowered prices. Our return expectations have stayed steady. It's really a function of a couple of things. Number one, an effort by us to really lock up our franchise and territory. We had great relationships in terms of service with those carriers for a number of years, and the last thing we wanted as part of this effort was to see a lot more competition in our ILEC franchise. So we worked to lock up of that base and have done so with, what I'll say, market prices that have stayed stable this year. Secondly, the carriers have been, as we kind of indicated, much more aggressive about rolling out fiber to the tower this year, even in rural areas. And that's a function of the competition in the wireless space, and we're seeing that show up as you -- as I kind of talked to earlier, actually, a lot of circuit growth early in the year, and they need more capacity. And we're working to deliver that right now. The second element of that really for us has been in areas outside of our footprint, trying to win business in markets that also offer CLEC expansion opportunities, yet the business case pays for itself alone with just the fiber to the tower. And secondly, because of the KDL transaction, we picked up fiber all over the place. But to the extent we can leverage fiber and towers close to that fiber, we wanted to win that business as well, and it's literally just been a function of more success than we counted on that yielded those results. But as Tony kind of indicated in his numbers, I mean, what a perfect time to spend the capital because of the reasons he shared. And we know that in terms of the revenue growth we've seen year-to-date on special access has been 7% year-over-year if you look year-to-date through the third quarter, and we want to see that continue in the future.

Philip Cusick - JP Morgan Chase & Co, Research Division

So can you help me, the within the ILEC footprint, give me an idea on what percentage of this fiber lines being added are replacing what right now is a copper-driven service that you provide?

Brent K. Whittington

Well, if you look -- I mean, overall, out of the towers we're going to serve, it's going to -- effectively, you'll have copper and fiber going into those towers. But the carriers are going to be able to disconnect all the copper that they had before. They've got handsets. They're going to continue to use those older copper services for a long period of time. We don't see a mass migration in the short-term because of the capacity reasons we shared from those TDM services. There will be a gradual turn down of that. But at the same time, the way we've priced these contracts, they're on a per meg basis. And as you begin to turn that down, the revenue accelerates, helping offset that, because you're charging for that on a bandwidth usage basis. So it's a very different model than historically, which was more tied toward just circuits.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. I'm just trying to think about -- and forgive me if I'm misunderstanding you, but I'm trying to think about the potential lost revenue. Because it sounds like as you turn these fiber sites -- it sounds like there's a lot of potential revenue growth. What I'm trying to think about is, is that really just offsetting lost copper growth, and so the incremental is not that much, but retaining the contract is actually -- absolutely makes sense.

Brent K. Whittington

It's a combination of both. There's no question there will be loss over time. However, the way I think about it, really, Phil, is trying to continue to lock in a growth rate like we've seen this year. When you look at the aggregate of all that activity, that's kind of what we're expecting. So we do expect the net increase in bandwidth to offset the declines you'll see from TDM. But importantly, locking up a franchise that's historically been incredibly profitable to us has been important as well, and you can understand why we want to spend the capital to maintain that relationship.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. So sort of maintain this growth rate but not an acceleration?

Brent K. Whittington

Exactly. Acceleration perhaps will be tied to the bandwidth increases over time.

Jeff Gardner

And so as -- I think as Tony, in his comments, Phil, this is Jeff, indicated, our growth rate in special access has been around 5% to 7%, and as we see these fiber-to-the-tower builds out, we expect it to accelerate from there. The other point I'd like to make is that through a combination of the strategic acquisitions we've made that included fiber in many cases and it's build out of these fiber tower, our network is getting more and more facilities-based. We have more and more opportunities, as Brent said, on the CLEC side and on the cost savings side. So that is not inconsequential. So going forward, we feel very good about the relative quality of our network and the opportunity that will afford us for even better revenue growth and further expense savings down the road.

Philip Cusick - JP Morgan Chase & Co, Research Division

If I can ask one more, what's the sort of relative proportion of out of region versus in region, do you think? Because the other region is pure revenue upside, right? How do those sort of weigh within the business opportunity?

Anthony W. Thomas

Yes, it's about 40% of our efforts are directed toward out of the region, Phil.

Jeff Gardner

And that's a little bit different. Remember, we've purchased KDL in 2010, and that's really allowed us to be much more successful out of region.

Operator

Our next question or comment comes from Frank Louthan of Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Great. A little bit more strategic. Looking at -- again, back to your penetration on high-speed Internet. Over the long term, you got very high penetration. Obviously, that growth is going to -- is slowing a little bit. To what point do you expect to see some of the -- what do you do now to protect the access line losses going forward with the market share you've got on broadband? Do you see an inflection point there over the next couple of years as well?

Brent K. Whittington

Frank, it's hard to say exactly when we'll see an inflection point. I mean, we don't see a major change in access line trend rates. Again, back to penetration, we do see today with disconnect a higher proportion of disconnects from access lines on security broadband not surprisingly just simply because of our penetration. But our goal is to continue to grow share, recognizing it's a more mature market. And as I kind of indicated, we see our opportunity to really do that different than in the past, which was focused on that Double Play bundle. It's really speaking to who our customers are today, which are video consumers in the cable company. And we think we can kind of stake out a position that's a bit unique in helping customers leverage our broadband connection to trim their cable bill by utilizing all the over-the-top technology that's available today and driving the increased usage of our broadband product we see in our business. That's really how we see growing that franchise. And then importantly, the way we just think about the business, what a customer is paying us today, whether that's for voice and for broadband, we understand their perception of value is all around that broadband product, and everything we do in our sales channels just trying to wrap around that product value-added services that further cement the customer with the goal to over time improve churn as well, helping protect a large base.

Jeff Gardner

And Frank, this is Jeff, I think that's exactly right. Even as we thought about broadband 2 or 3 years ago, I think an important part of our marketing team's focus has always been -- obviously, the first part of this is to get the broadband connection into the home. And then it's to really leverage that, to monetize that broadband into the home by selling more and more services. And so as Brent said, even with that high penetration, I'm still pleased with our top-line growth, 7% in the broadband area. And it really is a result of not only -- it's not just a broadband customer gain. It's selling these other features into our customer base.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Okay, great. That's helpful. And then looking at the business sales and some of more of the CLEC businesses, you're clearly putting more fiber in the network for a variety of reasons. Do you see that with some of the PAETEC customers or some of the NuVox customers that are maybe on resale special access circuits? Do you expect to be running fiber in some of your CLEC markets, or how do you see meeting the increased demand for bandwidth that we see from even smaller business customers going forward?

Brent K. Whittington

Frank, I'd tell you that we had modest expansion in our fiber -- in some of our CLEC territories. And generally, we're doing that in support of success-based wins in the marketplace. We're not actively deploying fiber rings in metro areas. We have, as a result of the KDL transaction Jeff mentioned, picked up some fiber assets in a lot of our CLEC markets, and we're continuing to build the customers, I think as I shared, in support of success-based deals, continuing to leverage third parties with metro resale products for high-bandwidth needs in that market where that's appropriate.

Operator

Your next question or comment comes from Tim Horan of Oppenheimer.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Sorry, 2 broad questions, if you don't mind, but one on the tower front. I guess as Phil was kind of hinting at, do you think you're maintaining your market share on the towers? And it sounds like that's a real focus in your arbitrage, [indiscernible] Want to maybe hear. Who else is really competing against you there, and what the success they're having? And then maybe what do you expect the growth rates to be on the usage on the fiber networks, or what are you seeing now in some of the areas that are a little bit more mature with fiber? And then a broader question on the changes here with U.S. [indiscernible] funding. Do you have the ability to go raise local rates? They seem to be so quite low. I don't think they've been raised for a long period of time. I think you have to go through some of the state PUCs, but can you do that without having rate cases, and is that part of the plan at all?

Brent K. Whittington

Tim, this is Brent. I'll take the first one. In terms of towers, absolutely, we've been focused on maintaining our share and, as I've mentioned before, also growing in some strategic markets outside of our footprint. And to date, with the agreements we've won from a sales front with our wireless partners, we've locked up, we believe, 90% of our market share, which was definitely a strategic goal as we entered into the year. And in terms of our growth rate, I kind of mentioned, those are priced on a usage basis with a base kind of monthly amount. But really, the way I think about that, Tim, is our goal was to continue to see the year-over-year growth rate we've seen through September of this year, which is right at 7% looking into the future. And that's going to be because of turning up sites coupled with incremental broadband usage on those sites. So it's twofold there.

Anthony W. Thomas

And Tim, this is Tony. On the -- on your USF question, our ability to pass along price increases. Really, the FCC has provided a mechanism, it is our understanding, in the order that will allow us to pass along price increases up to $0.50 per month to our customers over a 5-year period. That, coupled with the make-whole fund that's going to be available to us is why I think Jeff alluded to the fact that we expect to see a very manageable transition. Because we have both those mechanisms available to us to help offset the pressure that we'll see from the loss of our such switch access revenues as we move to bill and keep over the next 6 years. But overall, in terms of having more flexibility at the local level, we still need to review the detailed order. It hasn't been released yet, but really, our vehicle for price increases will be through the FCC.

Jeff Gardner

Thank you. And thank you all for the great questions this morning. It was a good discussion. We appreciate it. In closing, Windstream is at a very exciting time in our transformation. And as I've said before, I am more confident about our business today than at any point in our 5-year history.

Over the past few years, we have worked extremely hard to reposition our business, to capitalize on the significant growth opportunities within our industry, namely business and broadband services, data center and managed services and the significant growth in the wireless traffic requiring more capacity.

Our capital structure affords us the flexibility to continue returning a significant portion of our cash flows to our shareholders and invest adequately in our business to capitalize on these opportunities, which will further improve our financial performance going forward.

I'm very proud that we have made this transformation while continuing to deliver industry-leading operating and financial metrics and, importantly, shareholder returns. With that, thank you again for your interest in Windstream.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Windstream's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts