Windstream Holdings (WIN) Anthony W. Thomas on Q2 2016 Results - Earnings Call Transcript

| About: Windstream Holdings, (WIN)

Windstream Holdings, Inc. (NASDAQ:WIN)

Q2 2016 Earnings Call

August 04, 2016 8:30 am ET

Executives

Christie Grumbos - Treasurer & Senior Vice President

Anthony W. Thomas - President, Chief Executive Officer & Director

Robert E. Gunderman - Chief Financial Officer

Analysts

Matthew Niknam - Deutsche Bank Securities, Inc.

David William Barden - Bank of America Merrill Lynch

Frank Garreth Louthan - Raymond James & Associates, Inc.

Umesh Bhandary - Jefferies LLC

Batya Levi - UBS Securities LLC

Brett Feldman - Goldman Sachs & Co.

Michael I. Rollins - Citigroup Global Markets, Inc. (Broker)

Mike L. McCormack - Jefferies LLC

Operator

Good day, ladies and gentlemen, and welcome to the Windstream Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Christie Grumbos, Windstream's Treasurer. Ma'am, you may begin.

Christie Grumbos - Treasurer & Senior Vice President

Thanks, Liliana. Good morning, and thank you for joining Windstream's second quarter earnings call. Joining me on the call today are Tony Thomas, our CEO; and Bob Gunderman, our CFO. To accompany today's call, we have posted the presentation slides, earnings release and supplemental schedule on our Investor Relations website.

Today's discussion includes statements about expected future events and financial results that are forward-looking and subject to risk and uncertainties. A discussion of factors that may affect future results is contained in Windstream's SEC filings, which are available on our website.

With that, here is Tony Thomas.

Anthony W. Thomas - President, Chief Executive Officer & Director

Thanks, Christie. Good morning, everyone. It's an exciting time to be part of Windstream. July marked our 10-year anniversary as a public company, which has been an incredible journey. I am very proud of the many accomplishments over the past decade, and most importantly where we are headed.

Today, our vision has never been clearer, providing best-in-class customer experience through our network and our people. This includes serving our customers with advanced, reliable services while making smart, targeted investments to better leverage our extensive network and generate higher returns for our shareholders.

Our 2016 priorities to advance our strategy are shown on slide four. First, we expect to grow consumer revenue this year by monetizing our enhanced broadband capabilities and expanded product offerings. Second, Project Excel, which enables faster Internet speeds to more people and upgrades the network for the future continues to advance.

Third, within the enterprise segment, we have already delivered meaningful improvements in contribution margin and expect further margin expansion in the back half of the year. Last, we are improving our debt maturity profile and reducing cash interest with our balance sheet initiatives.

On slide five, our second quarter achievements demonstrate continued progress towards our 2016 priorities. During the quarter, we further expanded enterprise contribution margin through significant cost improvements and a greater focus on higher margin sales.

Enterprise contribution margin of $80 million was up 68% relative to the same period last year. On a consolidated basis, adjusted OIBDAR increased almost 1% year-over-year and margins were consistent at 35%.

From a capital allocation standpoint, we are pursuing growth initiatives to support the operational strategy and stabilize and grow adjusted OIBDAR over time. We continue to advance our broadband capabilities which yield attractive high margin growth opportunities. We also return value to shareholders through the dividend.

Much was accomplished optimize the balance sheet during the quarter. We completed the CSAL debt-for-equity exchange for $672 million and continued making open market debt repurchases to further reduce debt. This was a tremendous accomplishment that greatly enhances our balance sheet and reduces cash interest going forward.

Turning to the consumer and SMB ILEC business strategy on slide six, we are upgrading our broadband network to establish a foundation for sustainable growth. This segment generates attractive cash flow by serving our largely rural footprint and the network enhancements we are making position us well competitively in our markets.

During the quarter, we increased Internet availability across all speed tiers, and can now offer premium Internet speeds of 50 meg and higher to approximately 23% of our footprint. In addition, we've expanded our product portfolio with Kinetic IPTV service and 1-Gig Internet service in several of our larger markets. These enhanced capabilities will improve the customer experience and position Windstream to take market share and generate growth in revenue and contribution margin.

On slide seven, the carrier strategy is to expand our network, products and customer vertical to capture new sales to offset legacy declines and improve revenue trends. This business leverages our 125,000 route miles of fiber, which we are strategically building out to reach locations with attractive growth potential.

During the quarter, we extended connectivity to multiple third-party data centers, providing the opportunity to sell Wave, Ethernet, MPLS and IP services to customers within those centers. In addition, we've broaden our sales focus to include high growth verticals, such as content providers, international carriers, and cable operators. In 2017, we expect improving trend as we build momentum with our initiatives and legacy declines subside.

Turning to slide eight, enterprise strategy is to increase contribution margin by growing profitably, reducing costs, and improving the customer experience. We are demonstrating significant progress towards our goal to expand enterprise contribution margins to 20%, and are confident that we will achieve this within our targeted timeframe.

Specifically, we are pursuing sales opportunities where we are best positioned to grow profitably. This is centered on being a strategic solutions based provider to mid-market enterprises, where we best leverage our network and our people to provide high value solutions which typically produce higher margins and lower churn.

Second, we're reducing network access costs through capacity management, network modernization and on-net market expansion. We have completed detailed audits for circuits pace (6:05) and identified opportunities to provide network services in a more cost effective manner. For example, in certain locations, we were able to right-size leased circuits while still leaving ample capacity for network needs.

We also expanded our fiber footprint in several key cities, including Charlotte, Richmond, and Nashville to enable us to bring more traffic on to our own network, and turn down leased circuits. These are just a few of the examples of how we are driving substantial savings through network optimization.

Third, we are improving operating efficiency by further integrating processes in sales and support organizations, narrowing our sales focus, and simplifying our product set. This enhances the customer experience and lowers the cost of serving our customers. Collectively, these initiatives are driving meaningful improvements to enterprise contribution margin, which reached 15.7% in the second quarter, representing a 640-basis point improvement over the second quarter 2015.

Then to SMB CLEC segment on slide nine, for strategies to improve contribution margin trends by growing profitable customer relationships and managing costs. We are protecting and retaining profitable customers. Our sales strategy includes selling incremental services to existing customers and targeting new sales with a narrow, simplified SMB product set. This approach is allowing us to improve cost efficiency through lower network and support costs. The strategy yielded contribution margin of $41 million, which was flat sequentially for the third quarter in a row.

We are making solid progress on achieving our 2016 goals. Each business unit is executing an operational strategy to advance our goal of stabilizing and growing adjusted OIBDAR over time. We are making the right network investments and optimizing the balance sheet, all of which will drive improving results and create value for shareholders.

Now I'll turn the call over to Bob, who will review the financial results. Bob?

Robert E. Gunderman - Chief Financial Officer

Thank you, Tony, and good morning, everyone. Beginning on slide 10, our strategy is driving strong and consistent performance. During the second quarter, adjusted service revenue was $1.33 billion, down 1% year-over-year. Through solid expense management, we reduced cash expenses by $32 million, or 3.5%, relative to the same period last year, and produced $482 million in adjusted OIBDAR. This represented an increase of almost 1% year-over-year and steady margins of 35.5%.

On slide 11, the consumer and SMB ILEC segment delivered solid results. Consumer service revenue was down slightly sequentially. Customer ARPU increased 1.2% sequentially and 5.2% year-over-year, driven by speed penetration gains across all tiers, improved modem rental attachment rates, and sales of bundle adders.

We've continued to see attractive adoption rates of Internet speeds of 50 meg and higher both from new and existing customers. The attachment rates were approximately 38% of new activations qualified for premium speeds.

Broadband units declined more than expected during the quarter. We implemented a pricing action on our standalone broadband product which resulted in modestly higher churn. We expect to return to a more normalized churn rate in the third quarter.

SMB ILEC revenue maintained consistent trends, as growth in integrated voice and data services helped mitigate customer disconnects. Segment contribution margin was 57% or $225 million.

On slide 12, carrier generated revenue of $160 million and contribution margin of 72% or $115 million. Core carrier and wholesale revenue was $149 million, down $1 million sequentially. The carrier segment continues to experience revenue pressure from certain legacy services, which we are offsetting in part with growth products such as Ethernet and Wave sales as well as with new sales – sales to new customer verticals.

Turning to slide 13, enterprise service revenue was $491 million, up 2.7% year-over-year. We continue to see solid demand for our advanced suite of services and are being disciplined in pursuing sales opportunities that generate higher absolute contribution margins.

As we mentioned on our first quarter call, we've tightened sales margin standards, which is resulting in a lower revenue growth rate. Importantly, this sales focus combined with cost optimization is driving significantly better enterprise contribution margin. For the quarter, contribution margin was 15.7% or $80 million. This is an increase of $32 million or 68% year-over-year and $9 million sequentially.

Looking forward, we expect modest sequential growth in service revenue in the third quarter. In addition, we will continue to improve enterprise contribution margins throughout 2016, such that we exit the fourth quarter with margins in the high teens.

As shown on slide 14, SMB CLEC delivered another solid quarter. Revenue was $125 million and contribution margin remained steady at $41 million or 33%. We are improving the profitability of existing customers through targeted price increases and incremental sales of additional services.

We've simplified the product lineup to provide a better customer experience and drive operational efficiencies. This combined with cost management is resulting in improved revenue and contribution margin trends. For the full year, we expect to reduce the contribution margin declines by more than half relative to 2015.

Moving to slide 15, we have taken multiple steps to optimize our balance sheet. First, we completed a debt-for-equity exchange for Windstream's retained stake of CS&L, enabling debt repayment of $672 million. Second, we have used our revolver to repurchase our debt in the open market.

Since the third quarter of 2015, we have repurchased $786 million in face value of debt at a discount, driving debt reduction of $69 million. These two steps have collectively reduced debt by over $740 million. We've taken a balanced approach, designed to reduce near-term maturities and improve our debt maturity profile while also retiring longer dated bonds at a discount to drive deleveraging.

Slide 16 provides a closer look at our 2016 capital initiatives. We are pursuing strategic initiatives to advance our high-speed Internet capabilities, strategically expand the carrier network, enhance overall network performance and improve cost efficiency. In addition, we're investing $200 million on Project Excel this year to upgrade our fiber-fed DSLAM infrastructure with VDSL2 electronics while enhancing our middle mile network to address future capacity demands. These strategic network initiatives support the operating plans for our business unit and advance our goal of stabilizing and growing adjusted OIBDAR.

We continue to make progress towards our 2016 goals, and affirm our previously provided guidance for revenue, adjusted OIBDAR and CapEx on slide 17. From our original guidance provided in February, we have improved cash interest by $20 million and lowered cash taxes by $10 million, which largely offset the reduction in dividends from CS&L such that we continue to expect to generate around $100 million adjusted free cash flow.

In addition, contemplating balance sheet actions to-date imply 2017 cash interest would be approximately $345 million. We have ample secured debt capacity and will continue to pursue opportunities to drive further reductions to our 2017 cash interest.

We will now take your questions. Operator, please review the instructions and open the call to questions.

Question-and-Answer Session

Operator

And our first question comes from the line of Matthew Niknam with Deutsche Bank. Your line is now open.

Matthew Niknam - Deutsche Bank Securities, Inc.

Hey, guys, thank you for taking the question. Just two if I could. One on the enterprise margin front, so segment OpEx was down about 3% sequentially. Can you give us maybe a little more color on, A, where the efficiencies are coming from, and then, B, where you think incremental opportunity for cost savings come from?

And then on the consumer side, you talked about growing consumer revenue for the year, yet down about 1% this quarter. Maybe you can give us a little more color on where you expect the positive inflections to come from in the second half of the year? Thanks.

Anthony W. Thomas - President, Chief Executive Officer & Director

Good morning, Matthew. This is Tony. I'll take the first question, and then let Bob handle the question on consumer. In terms of where are we seeing the expense reductions and will continue to probably emphasize this point, we spent roughly $1 billion in the enterprise business unit on third-party access costs. As we've alluded to, we continue to pursue multiple paths to drive a more efficient network that includes characteristics like network grooming, using more of our own facilities. It is just a very large opportunity for us.

And as you look forward, this will be the single biggest driver of our ability to drive improved enterprise contribution margins. As Bob alluded to, we'll end the year in the high teens, and given the amount of spend we have and mechanical nature of the actions we're taking, we're very confident we can achieve it.

Robert E. Gunderman - Chief Financial Officer

And Matt, this is Bob. In terms of the consumer revenue question, yes, we do expect to see continued improvements in consumer revenue in the back half of the year. Obviously, our strategy here is to continue to monetize the significant investments that we've made in the broadband networks to improve our premium speed availability. That continues to progress, and will progress even more as the year plays out with Project Excel.

So we continue to be optimistic about our ability to capitalize on those investments to drive improvements in our broadband units, and at the same time, monetize those investments via ARPU increases, through up-speeding of the base, and while we have continued to do that on the ARPU side year-to-date, and that's driven some pretty stable revenue streams, we do think that the continuation of those improvements in ARPU, along with improving broadband unit trends, will give us the lift that we need to get to consumer revenue growth in the back half of the year.

Matthew Niknam - Deutsche Bank Securities, Inc.

And if I could just follow up on the enterprise margin, so if you are exiting the year in the high teens, given the kind of pace that you're on right now, are there any updates to the timing on achieving 20% contribution margins?

Anthony W. Thomas - President, Chief Executive Officer & Director

No updates at this point, beyond the fact that we feel very confident in our ability to achieve that. We'll look to give investors greater guidance on margins as we wrap up 2016 or in February of 2017, when we give our 2017 guidance. Our key message is, we have a lot of opportunity here from a third-party access cost takeout. The team has done a nice job executing. We feel confident about our ability to do it. Optimizing the cost associated with existing customers is a large part of what we're doing as part of our enterprise strategy, and that's on track.

Matthew Niknam - Deutsche Bank Securities, Inc.

Got it. Thank you.

Operator

And our next question comes from the line of David Barden with Bank of America. Your line is now open.

David William Barden - Bank of America Merrill Lynch

Hey, guys. Thanks a lot. So, on the enterprise revenue side, it was basically flat, obviously, with margins up as you focused more on higher margin customers. I was wondering if you could kind of speak to what you see the kind of revenue trajectory in the second half and out into 2017. Is it really just about mining the existing base for cost, or is there some acquisition opportunity?

And then similarly, on the outer region CLEC, actually it was – actually outperformed our expectations in the quarter. Could you kind of talk about the dynamic there? I know you are trying to wind it down in an orderly fashion, but if you can give us an update on that as well? Thanks.

Robert E. Gunderman - Chief Financial Officer

Sure, David. This is Bob. In terms of our enterprise revenue growth rates, as we talked about in 1Q, we have tightened our sales margin standards, and we have been more selective about some of the opportunities that we are pursuing, and obviously still focused on mid-market enterprise with kind of a higher value, more complex solution set and that's, I think, a more valuable customer for us longer-term.

And while the revenue growth rate is slowing, we have been getting better absolute dollars earned on the new sales that we are increasing. And that, in combination with the cost structure improvements which have been substantial, both in the back office cost optimization that we have been able to accomplish, but more so on the access cost takeout, that's really allowed us to make really good progress on our enterprise contribution margin plan, and we expect that to continue. We are optimistic about those continued opportunities for us.

As you look at the drivers of our enterprise contribution margin plans, and stability in OIBDAR and the aggregate, the most important driver for those plans in 2016 and 2017 is going to be to reduce expenses with existing customers. Beyond that, it's about maintaining the right cost structure and really still being very disciplined on the sales strategy and going after those customers with the higher absolute contribution margins, and while we've seen tremendous progress on the contribution margin side, we've seen a little bit of fall off on the revenue trajectory. We do see continued progress in the back half of the year, we will see some modest increases sequentially in 3Q on enterprise service revenue, but I do think we will start to see a moderating revenue outcome for enterprise, but we still remain very confident that the progression in absolute contribution margin dollars, both in the back half of 2016 and into 2017, will still be very attractive, and we continue to see that as a great opportunity for us looking ahead.

Anthony W. Thomas - President, Chief Executive Officer & Director

On the other territory, SMB or the CLEC SMB business, Dave, they just continue to do a fantastic job operating that business ahead of our expectations and we continue to bring new products to bear to that customer segment, we are encouraged we are driving the churn rates down and we've launched some simpler product sets that we think can improve the profitability with the existing customers but also give us a chance to win new business in a very cost effective manner.

So, we're not expecting significant changes in those trends over the long-term, but the near-term results have been very encouraging and the team has just gotten there through strong execution.

David William Barden - Bank of America Merrill Lynch

Great. Thanks, guys.

Anthony W. Thomas - President, Chief Executive Officer & Director

Thanks for the question.

Operator

And our next question comes from the line of Frank Louthan with Raymond James. Your line is now open.

Frank Garreth Louthan - Raymond James & Associates, Inc.

Great. Thank you. Can you give us an update on the outlook for the FCC Special Access proceeding. Can you quantify what sort of impact you think that would be and I think it's generally viewed as being (22:09) positive for you. But can you give us an idea of where you think that shakes out for you?

And then on the larger enterprise side, is there any change in the sales trends or customer demand there, are customer seeing any change in their business that are slowing or pushing out demand? Thanks.

Anthony W. Thomas - President, Chief Executive Officer & Director

Good morning, Frank. In regards to the business data services or Special Access reform, we are currently in the middle of the proceeding. The FCC has extended the reply comments deadline until August 9. At this point, it is too early to speculate on the potential outcome. But maybe just a few comments around the business services reform efforts. What we are focused on at Windstream is ensuring that the largest ILECs in the belt (22:58) are not charging excessive wholesale (23:01) input rates. Alternative facilities based competitive alternatives are more limited in a lot of our areas in which we compete, so it's not economic to build in those connections ourselves at lower bandwidth speeds.

So the reforms that produce a more balanced Ethernet ecosystem are necessary to enable the competitive choices for consumers. And we want to compete for that business, but we need these reforms to do so. And as you alluded to, Frank, our carrier business sells special access services to other providers and our enterprise and CLEC SMB businesses lease wholesale special access services to provision retail services. So we're on both sides of this and the FCC reforms (23:44) an impact on both of those segments

But, importantly on balance, we think reforming the system to address this market power will be positive for our customers. That's hospitals that's not for profits. That's government and corporate enterprises. And it's going to be positive for competitors like WIN that seek to serve those customers.

In regards to enterprise sales trends, we're continuing to see probably the two biggest trends I would point out is still the increased need for bandwidth. That's a consistent trend. We see our customers continuing to buy faster speeds. That's a transition from TDM to Ethernet, and that's also a transition from lower Ethernet bandwidth speeds to higher Ethernet bandwidth speeds.

The second big trend and one where we've seen a lot of success is in our Unified Communications as a Service product, the UCaaS product. It's a cloud-based contact center tool and it's a real asset that Windstream has that differentiates us from those in which we compete and we're continuing to see strong demand for that with very large opportunities. So we're excited about both of those – both of those are good for the business over the long-term.

Frank Garreth Louthan - Raymond James & Associates, Inc.

Okay, great. Thank you.

Anthony W. Thomas - President, Chief Executive Officer & Director

Thank you.

Operator

And our next question comes from the line of Umesh Bhandary with Jefferies. Your line is now open.

Umesh Bhandary - Jefferies LLC

Hi, guys, thanks for taking my questions. May be just first to focus on the balance sheet, obviously, you guys have done a pretty decent job in terms of reducing the total amount of debt. So what is next in the playbook here? What is left?

Robert E. Gunderman - Chief Financial Officer

Sure, Umesh, this is Bob. Thanks for the question. Yes, we've been pleased with the progress that we've made with the balance sheet today. As a reminder, we've reduced debt by just over $740 million with the combination of the CS&L debt-for-equity exchange, and also the deleveraging and the absolute debt paydown that we got from using our revolver to purchase bonds in the open market at a discount that added another $70 million, and so that's been very helpful for balance sheet. We've driven deleveraging now of over 0.5 turn, which is great to see it.

In addition to that, it's (25:58) some substantial improvements in free cash flow via cash interest savings. As a reminder, at the beginning of this year we started with guidance of $385 million of cash interest. We have now lowered that down to $365 million, improved it by $20 million. That in combination with our cash tax guidance being improved by $10 million as well has really replaced the lost dividends on CS&L for the back half of the year.

As we look into 2017 and really the balance of 2016, we still have a lot of opportunity. We have roughly $1 billion of undrawn revolver capacity, a very low cost revolver at 2% plus. And in addition to that, we have, in the aggregate, inclusive of the revolver, about $1.5 billion of secured capacity in total. And so we continue to see opportunities to do similar things that we have done with the secured balance sheet to drive opportunities to lower cash interest next year as well.

Umesh Bhandary - Jefferies LLC

Got it. So, I guess in terms of addressing – reducing debt through secured debt rates, then I guess what are some of the – what it will be for the I guess next milestone income stuff for you to do that?

Robert E. Gunderman - Chief Financial Officer

Sure. Sure. Yes. Sure. So we continue to have certain of our bonds that trade below par, so I think there could be some modest ability to deleverage by doing that, certainly the ability to get cash interest savings via (27:38) outcome. Outside of that, I think the cash interest savings that we would expect to get just through lower cost secured financing outcomes, taking out potentially higher cost unsecured that I think is our best opportunity to improve the balance sheet and cash interest next year.

Umesh Bhandary - Jefferies LLC

Got it. And then just – well obviously this is good to see that maybe in a long time that year-over-year EBITDA (sic) [OIBDAR] (28:03) growth. Is that something that we should expect going forward or is that primarily sort of driven by the tax revenues?

Robert E. Gunderman - Chief Financial Officer

Yes, so this is Bob again. As a reminder, our adjusted OIBDAR guidance for the year is $1.9 billion to $1.95 billion. We have increased adjusted OIBDAR 1% year-over-year. Keep in mind, while we made substantial progress in enterprise contribution margin and other parts of the business primarily around the cost structure and stabilization of our revenues within consumer, a part of the benefits that we are seeing year-to-date, certainly have come from the comparables around Cap 2 (28:42). We will see a little bit of a tougher comparison in the back half of the year, because of that, as a reminder, in third quarter of 2015 we had a very large catch-up payment for Cap 2 receipt (28:54). So, I think it's north of $70 million (28:55).

So, that will weigh in on trends and as you all think about our organic progress in third quarter that will need to be taken into consideration. Having said that, we continue to be optimistic about our ability to improve our margins and our adjusted OIBDAR longer-term, and so the things that we're doing around consumer and enterprise in particular, I think, will drive us to that OIBDAR stability longer-term.

Umesh Bhandary - Jefferies LLC

Thanks, guys.

Anthony W. Thomas - President, Chief Executive Officer & Director

You're welcome.

Operator

And our next question comes from the line of Batya Levi with UBS. Your line is now open.

Batya Levi - UBS Securities LLC

Great. Thank you. A follow-up on enterprise, as you focus on profitable growth and you look at your current revenue stream, is there a customer segment that you think is unprofitable right now that you would deemphasize, maybe don't mind losing, and if you can quantify that for us within enterprise?

And second on CapEx, as you finish Project Excel this year, do you think that there will be another CapEx cycle to expand the broadband capabilities? I believe about 1/3 of your footprint will get 50 megs, some of your peers are expanding that over the next few years. And how should we think about capital intensity going forward? Thank you.

Anthony W. Thomas - President, Chief Executive Officer & Director

Yes, when we look at the enterprise business, all of our existing segments are profitable. Importantly, last year, when we moved to the business unit structure, we moved our SMB customers, where we did have some unprofitable relationships in our out-of-territory SMB relationships. We moved those into the CLEC SMB segment. The biggest opportunity we have within enterprise is to increase the profitability of our enterprise relationships, but all of those are profitable, you know, some more so than others. But they are all profitable relationships. And what we're doing, through our cost optimization efforts, is ensuring that we provide services in the most cost effective way we can.

And I'll let Bob address some of the capital investment questions.

Robert E. Gunderman - Chief Financial Officer

Yes, Batya. In terms of – is there another Project Excel? The answer is no. This year is – Project Excel is expected to complete; that's a $200 million program. We're making substantial progress there, and are optimistic about the impacts that that will have on the business. Looking into 2017, I do think our CapEx need for 2017 will still be similar to 2016, but beyond that, I do think we could see some relief in a couple of key areas around our CapEx spend. The first would be in our IT spending area. We do think some of the projects that we've been working through, to really give us some back office efficiencies and some margin enhancement opportunities, those will start to wind down in the back half of 2017. So that could drive some improvements in CapEx.

And then the carrier CapEx needs, I think, will also start to subside again into 2018 as well. We've just done a lot to really provide network capacity and opportunity for the carrier business, and I think we'll see some fall-off in the needs there. Those on balance could drive anywhere between $50 million and $100 million of improved CapEx.

If you look at the CapEx intensity, we continue guide to this longer-term 13% to 15% CapEx intensity of revenue. Included within that guidance is certainly a view that broadband CapEx to support continuing speed expansion, mostly advantaging the consumer and ILEC SMB business, that will continue. We obviously have made a lot of progress this year in terms of our improvements in speeds, and we see that as a continuing need for us going forward. Keep in mind, (32:40) Project Excel; we spent about $100 million. We will spend about $100 million in 2016 around those types of projects.

Anthony W. Thomas - President, Chief Executive Officer & Director

And I'd just add to Bob's comments, we're obviously working with the various industry groups around leveraging new technologies like G.fast to get faster speeds to multiple dwelling units where we have vectoring trials going on across the market. As part of Project Excel, we're upgrading our entire infrastructure fiber-fed DSLAMs to the VDSL2 bonding Ethernet backhaul capabilities. So we're going to have a robust infrastructure exiting the year, and the continued investments will continue to build up our higher premium speed capabilities.

Batya Levi - UBS Securities LLC

That's helpful. Thank you.

Operator

And our next question comes from the line of Brett Feldman with Goldman Sachs. Your line is now open.

Brett Feldman - Goldman Sachs & Co.

Thanks for taking the question. Just a few more on free cash flow. It's good to see that the cash tax outlook for this year is a bit lower. I was hoping maybe you could take a longer-term view on where you see your cash tax obligations trending. Is there any reason that we're going to meaningfully deviate from a very low cash tax rate you're going to see this year?

And then, is there anything on the working capital side we need to be thoughtful about as we model your cash generation in the second half of the year? Thanks.

Robert E. Gunderman - Chief Financial Officer

Yes, hey, Brett, this is Bob. In terms of cash taxes, we don't expect to be a material payer of cash taxes for the next several years, and the reason for that is we still have a substantial NOL position that is shielding our income, and so really, cash taxes are not a consequence for us for the next several years. In terms of working capital, we see working capital as likely being use of around $25 million to $30 million this year. We've seen some nice improvement in 2Q, I think we generated a source of just over $60 million, we expected that to occur. First quarter is always our more significant use quarter for working capital and then as the year plays out for various reasons, we start to see a recapture in a source there.

So, we do see some continued opportunities there. We work very hard to make that most efficient. We have seen some substantial improvement in inventory management, carrier accounts receivable and even our (35:03) have been very positive. So, I do expect us to continue to make some progress there, but still use for the year.

Brett Feldman - Goldman Sachs & Co.

Great. Thanks for that color. I appreciate it.

Anthony W. Thomas - President, Chief Executive Officer & Director

You bet.

Operator

And our next question comes from the line of Michael Rollins with Citi. Your line is now open.

Michael I. Rollins - Citigroup Global Markets, Inc. (Broker)

Hi. Thanks for taking the question. Good morning. Just curious, if you have looked at upgrading some of your broadband (35:26). Is there a playbook that you can reference, where, if you increase fees by a certain amount in a market, you can increase your share or your ARPU by a certain percentage to give us a sense of the opportunities to come as you deploy to broadband upgrades to your larger residential footprint? Thanks.

Anthony W. Thomas - President, Chief Executive Officer & Director

Certainly, Mike, when you think about the playbook we are going to run, I don't think this is what really you need, but we are going to be deploying a multiple paths to kind of achieve our goals. First, we're deploying fiber all the way to the home. That'll be in some more limited instances, but we did launch 1-Gig services this year and we will continue to expand our 1-Gig portfolio.

But the real opportunity we have is to continue to upgrade our copper infrastructure, shortened loop lengths, so these length which enable or the broadband node which enable the service to get closer to the homes that gives us faster speeds and by employing other technologies you actually get more data over those shorter loops through technologies such as G.fast and vectoring.

And the outcomes you should expect by doing that are going to vary by geography. Obviously, in our larger, more urban areas, it's a different competitive environment than it is in our rural markets where the competition is different. But you'll see us kind of employ both, where we will have aggressive offers across all of our footprints sometimes in our less competitive areas simply because we think we can gain greater market share there.

So we will employee, I call it, a series of techniques. We will trial different ideas across the system to get to the optimal economic answer for our shareholders and a great customer experience as well.

So I want to tell you there's one playbook you can look to that you run every single time in a market, you simply have to reflect it to the competition profile you have in that area.

Michael I. Rollins - Citigroup Global Markets, Inc. (Broker)

Thanks very much.

Anthony W. Thomas - President, Chief Executive Officer & Director

You're welcome.

Operator

And our next question comes from the line of Scott Goldman with Jefferies. Your line is now open.

Mike L. McCormack - Jefferies LLC

Hey, guys, it's Mike McCormack. Tony, just a quick comment maybe on standalone broadband, one of your peers reported yesterday sort of also suggesting sort of a de-emphasis there. You talked about a pricing increase which drove some higher churn. I am just trying to think about holistically how you are viewing standalone broadband, but seems like it's going to be popular among other providers, but do you guys seem to be maybe deemphasizing?

And then, secondly, just on maybe follow-up on Mike's question, on price taking, how much power in the market do you have to continue to take price up on the products?

Anthony W. Thomas - President, Chief Executive Officer & Director

Certainly, Mike. To your first point, we still see standalone broadband as an incredibly important part of our broadband portfolio. This was just a tactical move, to, we think, get that pricing really more relative to where the competition is at, but we will continue to expand our speed capabilities on both our bundled and standalone products. So no real change in strategic direction; this was just a tactical move, where we saw an opportunity to increase prices and we made that change.

In terms of our ability to continue to push price increases into the marketplace, that's going to vary by competitor. It will also vary by the capital investment we're required to probably achieve that. But we'll be mindful of competitive environment, mindful being able to balance ARPU and unit growth. And I think we've done a good job to-date doing that, but that's the balance you have to do as you look forward and the team is very much focused on it.

Mike L. McCormack - Jefferies LLC

A quick follow-up on the similar broadband piece on the churn side, is it substantially voluntary or involuntary?

Anthony W. Thomas - President, Chief Executive Officer & Director

That was substantially voluntary.

Mike L. McCormack - Jefferies LLC

Okay, great. Thank you.

Anthony W. Thomas - President, Chief Executive Officer & Director

You're welcome.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Mr. Tony Thomas for any closing remarks.

Anthony W. Thomas - President, Chief Executive Officer & Director

Yes. Thank you, everyone, for your time this morning. Our second quarter results demonstrate our continued progress as we execute our strategy. We are excited about the plans that we have in the back half of the year as we focus on creating value for our investors and serving our customers with excellence. Thank you for joining us this morning.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may now disconnect. Everyone, have a great day.

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