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Windstream Communications (NASDAQ:WIN)

Q2 2007 Earnings Call

August 8, 2007, 8:30 AM ET

Executives

Rob Clancy - Sr. VP and Treasurer

Jeff Gardner - President and CEO

Keith Paglusch - COO

Brent Whittington - EVP and CFO

Analysts

Gaurav Jaitly - UBS

Jonathan Chaplin - JP Morgan

Michael McCormack - Bear Stearns

Patrick Rein - Lehman Brothers

Frank Louthan - Raymond James

Presentation

Operator

Good day ladies and gentlemen and welcome to the 2007 second quarter Windstream Communications Earnings Conference Call. My name Gendy and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would like to turn your call over to Mr. Rob Clancy. Please go ahead, sir.

Rob Clancy - Senior Vice President and Treasurer

Thank you Gendy and good morning everyone. Thank you for joining us this morning. Today's conference call was preceded by our second quarter 2007 earnings release, which has been distributed on the newswires and is available from the IR section of our website. Today's conference call should be considered together with our earnings release and related financial information.

Today's discussion includes statements about expected future events and future financial results for the forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. Forward-looking statements are subject to uncertainties that could cause actual future events or results to differ materially from those expressed in such statements. Other factors that could cause actual results at Windstream materially, many of which are beyond the control of Windstream include, but are not limited to, the items listed in the Safe Harbor statement contained in our second quarter 2007 earnings press release.

Additionally today's discussion will include certain non-GAAP financial measures including the term OIBDA, which is defined as operating income before depreciation and amortization. Again, we refer you to the IR section of our website where we posted our earnings release and supplemental materials, which contain information regarding these non-GAAP financial measures, including the reconciliation of each such measure to most directly comfortable GAAP measure.

To assist the investment community in providing meaningful year-over-year comparisons, we've also provided pro forma results from current businesses. These results include the Alltel wireline and VALOR results as if Windstream had existed since January 1, 2005. Incidentally, we have updated our historical pro forma results by adding back the severance expenses that were excluded in the past two quarters as this type of expense should not necessarily be viewed as nonrecurring. In addition, our pro forma results from current businesses exclude the results from our publishing business and fees associated with the upcoming split off that business.

Participating in our call this morning are Jeff Gardner, Windstream President and Chief Executive Officer, Keith Paglusch, Windstream Chief Operating Officer; and Brent Whittington, Windstream Executive Vice President and Chief Financial Officer. At the end of the call, we will take a few questions. And with that, here is Jeff Gardner.

Jeff Gardner - President and Chief Executive Officer

Thank you Rob and good morning everyone. This morning I will start our discussion with a few highlights from the second quarter and then provide updates on various strategic initiatives. Keith will review the operational highlights and Brent will cover our financial results.

Let me start with the quarterly results. For the second quarter on a GAAP basis, Windstream generated consolidated revenue of $827 million, operating income of $293 million and $0.24 of diluted earnings per share. On a pro forma basis from current businesses, which exclude the results of our publishing business and $1.6 million of transaction expenses related to the upcoming split-off of that business, Windstream generated revenue of $783 million, an increase of 4% year-over-year and OIBDA of $403 million, an increase of 1% year-over-year.

Our pro forma results from current businesses include a favorable $13.3 million cash settlement received during the quarter, resulting disputes over a period of a few years with a large wholesale customer.

On the operational front, our broadband customer base increased 37% year-over-year as we added over 37,000 net broadband customers this quarter. This is down sequentially, which is seasonal to a large extent, but likely also due to our overall higher penetration rates. That said, we are pleased with our performance thus far year-to-date as we have added roughly the same level of broadband customers in the first half of 2007 as we did in the first half of 2006 despite higher overall penetration rate.

We also added approximately 28,000 digital TV customers, bringing our total customer base to over 150,000. Access lines are down 4.5% year-over-year as we lost approximately 35,000 access lines this quarter, which is an improvement year-over-year. We are encouraged that our operating and marketing efforts are having a positive effect on access line losses as competition, competitive pressures continue in our market.

From a regulatory perspective, as we have stated before, as it relates to USF, Windstream supports compressive forward-looking reform that targets explicit supports to high cost areas. In fact, we recently participated in a study submitted to the Federal State Joint Board and the Texas PUC concerning the unique challenges faced by carriers in high-cost regions. The study concluded that the current USF mechanisms do not adequately address the cost of carriers serving high-cost rural areas. We are hopeful that the Federal State Joint Board considers this very important study in their deliberation on the overall reform within the universal service system.

In addition, earlier this week, we filed a petition with the FCC to migrate the balance of our properties from rate of return regulation to price cap regulation at the federal level. We believe that the price cap form of regulation aligns very well with our desire to run this business efficiently and provides us the ability to deregulate the remainder of our broadband offerings.

Let me provide an update on a couple of strategic initiatives currently underway. First, with respect to the split-off of our publishing business, we expect to receive the private letter ruling from the Internal Revenue Service in the third quarter. As a result, we should be in a position to close this transaction within the next few months. As a reminder, this transaction allows us to repurchase approximately 19.6 million shares, retire approximately $200 million of debt and receive roughly $50 million of cash, which must be used to either pay down debt or repurchase stock.

Importantly, we have established the necessary restricted payment capacity under our indentures and credit facility agreement to close the share exchange in one step rather than two steps we initially planned. During the second quarter, we signed a deal to acquire CT Communications which fits strategically with Windstream and advances our strategy of continuing to grow through acquisitions that expand our free cash flow. With this transaction, Windstream adds attractive markets in North Carolina, which are adjacent to existing operations, providing the opportunity to generate approximately $30 million in annual cost synergies and realize additional capital expenditure reductions which we expect to exceed $10 million.

In addition to acquiring quality properties in a growing area, this transaction improves Windstream's overall position in the market by growing free cash flow and lowering the dividend payout ratio while maintaining Windstream's strong balance sheet. The transaction should be approximately 4% accretive to free cash flow in the first year assuming achievement of the operating and capital expense synergies.

Brent review our funding strategy, but importantly, we have adequate liquidity with our cash and revolver capacity to finance this transaction. At this time, we are still awaiting final approval from the FCC. The CT shareholder vote is scheduled for August 23rd and if this transaction is approved at that time, we would expect to close shortly thereafter provided we have received FCC approval. Our transition teams are working on the integration and the employees at CT Communications have been extremely helpful and cooperative in this process. Our goal is to complete the integration by the end of the first quarter of 2008.

As always, I would like to thank the entire Windstream team for all their hard work. Our first year as a public company has been very successful. We have outperformed the industry in many key metrics, established a foundation for a great brand, and created a culture at Windstream that will serve us well going forward.

Now let me turn the call over to Keith to discuss the operations.

Keith Paglusch - Chief Operating Officer

Thank you Jeff and good morning everyone. This quarter we added over 37,000 new broadband customers, bringing our total broadband customer base to approximately 753,000, an increase of 37% year-over-year and a penetration rate of 24% of total access lines. We are seeing increased demand for faster broadband speeds as 35% of our broadband gross adds subscribed to 3 megabit speed and higher this quarter, up from 27% in the first quarter. With the addition of approximately 28,000 digital TV customers, our total digital TV customer base is now over 150,000, which represents 5% penetration of total lines, are almost 8% of primary residential access lines.

We have recently implemented several key initiatives with the DISH product, including a marketing campaign aimed at migrating existing DISH and Windstream customers currently receiving two bills to a Windstream bundle. We believe this bundle offers value to the customer and provides an opportunity to sell additional products and services, which should reduce overall churn. This quarter, we lost approximately 35,000 access lines, a decline of 4.5% year-over-year. While competitive landscape did not change significantly during the quarter, we do expect voice competition to increase somewhat in the second half of the year. Our focus has been and will continue to be implementing marketing plans in front of competitive voice launches and improving our gross additions by expending our distribution channels and marketing more aggressively at the local level.

Importantly, this represents the 10th consecutive quarter that our broadband net adds have more than offset our access line declines, which is a result of solid execution by the Windstream team.

Average revenue per customer for the second quarter was $79.41, an increase of 9% year-over-year, primarily the result of our continued broadband and long distance revenue growth, as well as the favorable revenue settlement. The long distance increases implemented in the fourth quarter of 2006 continue to have an effect on our out of territory customers as indicated by a net reduction of 7000 long distance customers in the second quarter.

Within Windstream's service areas, however, we are seeing growth in long distance customers driven by increased focus on selling bundled products. We have been pleased with the progress that we are making in our business channel, which accounts for over 30% of our total access lines. This channel has been relatively stable in terms of access lines, although we occasionally experienced line losses resulting from product changes as businesses migrate to higher capacity lines, including data services.

This quarter, we launched a small business bundle that simplifies pricing and promotes extended contracts, which should position us well competitively. We will continue to manage this channel from a revenue and profitability perspective, and we will look to add new features and services that enhance our existing relationships.

As we look to the back half of 2007, we recognize that given our current broadband penetration rates, particularly with respect to primary residential households, our broadband growth rates will moderate. That said, we will continue to explore marketing avenues to further penetrate our customer base, particularly within our business channel, as well as continue our efforts to sell faster speeds. In fact, we have already taken steps as we start the third quarter to enhance our broadband promotional offerings and increase our overall marketing spend. In addition, we have been working on improving the processes around provisioning and serving broadband to improve the overall customer experience, which we expect to yield improvements in customer retention in the future.

As we have stated before, broadband and digital TV are very important strategic offerings. Our teams remain energized regarding our market opportunities and will remain focused on balancing the sales and service needs of these offerings for our customers.

With that, I will turn the call over Brent to review our financial results.

Brent Whittington - Executive Vice President and Chief Financial Officer

Thank you Keith and good morning everyone. For the second quarter on a GAAP basis, Windstream generated consolidated revenue of $827 million, operating income of $293 million and $0.24 of diluted earnings per share. As Jeff mentioned, our GAAP results include our publishing business and $1.6 million in fees related to the upcoming split-off of that business. I am planning to spend most of my time discussing our pro forma results from current business, which exclude these items.

We generated consolidated revenues of $783 million, an increase of 4% year-over-year, driven mostly by increase in wireline revenues, which I will cover momentarily, and a 1% increase related to the lower intercompany service revenue eliminations. As we have mentioned previously, certain network access revenues from Alltel before the spin-off were eliminated from the consolidated results, but are no longer eliminated because Alltel is an external customer.

Keep in mind this is neutral to OIBDA as the expenses are no longer eliminated as well. Incidentally, this should be the last quarter when our year-over-year comparisons are affected by this change in eliminations.

For the quarter, Windstream generated consolidated OIBDA of $403 million, an increase of 1% year-over-year. Within our wireline segment, revenues were $762 million, an increase of approximately 4% year-over-year. Roughly 2% of the increase is attributable to the $13.3 million favorable cash settlement recorded in our access revenues.

In addition, we saw a 2% increase driven by continued growth in broadband, special access, and long distance revenues, which collectively have been outpacing the declines we've seen in voice and switched access revenues. Wireline OIBDA was $402 million, an increase of 2% year-over-year, driven largely by the cash settlement I just mentioned.

On the expense side, cost of service is up 11% year-over-year, driven by several factors. First, the success we are having in both our broadband and long distance service offerings is also resulting in higher circuit expenses to support this growth. Second, business taxes increased this quarter as we determined that the price increases we made in our long distance product in the fourth quarter of 2006 were assessable for USF purposes.

Finally, we incurred additional expenses related to pole attachment rentals at several underlying utilities providers completed reviews that resulted in us being charged higher fees resulting in retroactive pricing adjustments. Both the business taxes and the pole attachment costs drove sequential and year-over-year increases in cost of service, although only a portion of those expenses relate to the current quarter.

Within SG&A, expenses are down 9% year-over-year, largely a function of the synergies we have realized from the VALOR transaction.

In our product distribution business, revenues were $86 million and OIBDA was $500,000. As we mentioned on our previous call, the vast majority of the revenues in this business is internal. Our external business, although relatively small, allows us to leverage our spin and gain efficiencies in our procurement activities.

This quarter, capital expenditures totaled $98 million. We continue to manage capital expenditures aggressively while delivering on all our planned capital objectives. And as we mentioned last quarter, we are upgrading our network to enable us to introduce broadband speeds of 10 to 12 megabits and we expect to complete this effort late this year or early next year. This upgrade will also result in us being able to offer 3 megabit speeds to our entire broadband footprint. We view these faster speeds as an opportunity to potentially increase broadband ARPU, as well as remain competitive in the marketplace.

From a cash flow perspective, we are aggressively managing this business to generate sustainable cash flows. For the first half of 2007, we generated free cash flow, defined as net cash provided from operations less net cash used in investing activities, of $337 million, which has resulted in a dividend payout ratio of approximately 71%, right in line with our expectations.

We ended the quarter with the cash balance of $484 million and given our very strong cash position, plan to finance the $585 million CT Communications transaction with cash on hand and additional borrowings that will likely come from our existing revolving credit line which has roughly $500 million of capacity.

In summary, we are pleased with our results for the first half of 2007. As we mentioned earlier this year, we thought the first half of this year will present challenging year-over-year comparisons and generally speaking, that has been the case. As we look to the back half of the year, the year-over-year comparisons are not as challenged and while we will continue to aggressively manage our cost structure, we will likely invest more marketing dollars to grow our broadband customer base.

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

Question And Answer

Operator

[Operators Instructions] And your first question will come from the line of Gaurav Jaitly of UBS.

Gaurav Jaitly - UBS

Great, thanks. Good morning guys. This is Gaurav Jaitly. Just a couple of questions. First on the access line trends, you saw a year-over-year improvement. Wondering if you could give us more detail on that, what is the status of cable VoIP competition in your footprint and how of the decline was related to residential versus business lines year-over-year. And then secondly, on the margins, it would be great if you could quantify the impact of the two items you mentioned in the business taxes and the pole attachment costs that were related to prior period that would likely go away? And as we look at margins going forward, you've talked about increasing marketing spending on broadband. So should we expect margins to continue to decline from where they are right now? That would be great, thanks.

Jeff Gardner - President and Chief Executive Officer

Okay. I will take the first part of that on the access lines and ask Brent to address the questions on expenses, on the income statement. First of all, we didn't see material changes in the competitive mix in the quarter. So roughly 40% to 45% of our markets have VoIP competition today. What we did see, as you asked, we are working really hard to sell into our residential base trying to push some new distribution in that space, and providing great service to our existing customers so that we retain those. And we believe those incremental marketing efforts, even though we are in markets that are a little more urban than some of the other carriers in the space, we've been able to achieve these results and we are very-very pleased that our actual access line losses were down year-over-year. When you look at residential and business, pretty much the same story there, we have lower line losses in those markets where we don't have VoIP competition, those... some 60% of our markets today. And on the business side, that's been pretty flat. And I think that our real strength in this business model in that 30% of our business, as Keith said, 30% of our lines relate to business today and we're seeing some real strength there. And as you heard Keith mention, his team rolled out a small business bundle this quarter. We think there's more opportunities to focus on that business sector, not only to accelerate the growth, but also to sell additional products and services into that base.

Gaurav Jaitly - UBS

Great. So just to clarify, so your business lines were flat year-over-year and your residential was obviously then down year-over-year. And where do you expect cable VoIP to be at the end of the year, internal overlap?

Jeff Gardner - President and Chief Executive Officer

I think the guidance that we provided was that we thought that cable VoIP competition would grow in our markets at about the same rate that it did in 2006, which was an increase of about 10% to 15% over the course of that year. And so, that's what we are expecting. But I think what you have to keep in mind is we are not idly sitting by waiting for that competition. Not only are we getting better at defending when new entrants come into the marketplace, but our bundle penetration is much higher. Not only do we have some of the best broadband penetration rates in the industry, but I think when you look at how successful we've been in selling digital television into our customer base, that makes a huge difference as well. So we're much better prepared to face that competition.

Gaurav Jaitly - UBS

Great, thanks. And on the margins?

Brent Whittington - Executive Vice President and Chief Financial Officer

On the margin front, I'll take that question. Really you've got to try to think back for what we were faced with in the first half this year. I spent a lot of time trying to explain that in 2006 really we were... our costs at that time were reflective of a full year of operations. We hadn't ramped up the infrastructure we needed to run this business on a standalone basis. That was creating some challenging comparisons. We've spent a lot of time talking about the first half of this year and we saw that show up in our first quarter and our second quarter results. I've talked during my prepared remarks about some specific expense items that create a pressure sequentially and in the quarter. We talked... I talked about the broadband and LD revenue growth that we have seen that is driving some incrementally higher costs, but also as implied in some of the business taxes line that I mentioned, there is about $4 million in sequential growth in that line item that also stowed up in revenues as well because we can pass those costs onto our customers. So that's a little bit that was going on. As a reminder too, the first half of the year we have been working on the reorganization in our IT and call center areas of our business that we knew was going to drive incrementally higher cost in the first part of the year as well. As we complete those efforts, we do expect to see some of the benefits from that in the back half of the year, specifically probably in the fourth quarter. To your point on margins, we will probably see some benefit as a result of that, but related to marketing, as our penetration rates continue to grow, we've really got to aggressively kind of think about how we further penetrate this market. That's making us consider some incremental marketing investments that could have an impact on margins, very small, we are not talking about material amounts of money here, but perhaps I think the right thing to do for the business to continue to grow that important area for us.

Jeff Gardner - President and Chief Executive Officer

Okay. So the business taxes again, that would... that's a recurring item then, the $4 million in revenue and cost that you said?

Brent Whittington - Executive Vice President and Chief Financial Officer

A portion of that is recurring. As I mentioned, $4 million of that was probably out a quarter, that's the part I mentioned that was out a quarter.

Gaurav Jaitly - UBS

Okay, great, thanks.

Brent Whittington - Executive Vice President and Chief Financial Officer

You're welcome.

Jeff Gardner - President and Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Jonathan Chaplin of JP Morgan.

Jonathan Chaplin - JP Morgan

Hi, thanks. I am wondering if you could give us an idea of what the impact would be from transitioning from rate of return to price cap in terms of revenue and EBITDA. And it sounds like from your comments that you are seeing a slowdown in demand for broadband in absolute terms in your markets. Wondering if you could give us an idea of what your consumer broadband penetration is of... of primary lines or of household? Thank you very much.

Jeff Gardner - President and Chief Executive Officer

Right, thanks Jonathan. The first question was on the OIBDA impact of going to rate of return, or going to price cap from rate of return. There is no specific impact from doing that right away. Rather what we were doing there is better aligning the regulatory structure that we operate in with how we run the business. For years, we have been managing our business in a competitive model, understanding that as time went on it would be more and more competitive and more and more market-based. So, I don't think you will see any specific impact from that in 2007, but over the long run, we think we are better positioned from a price cap philosophy where we can benefit more from the expense reductions that we generate and the efficiencies that we realize, given our position as the largest RLEC in the country.

On the broadband side, yes, you are getting to the point of what is our penetration. We talked about 24% penetration of our total customer base. Obviously that's higher when you look at residential. I don't know if we have given out that number somewhere in the mid-30s, but what I wanted to point you to is even with that sequential downturn that we saw that gross adds are up year-over-year when you look at our total broadband and that discos [ph] are also slightly up year over. So we are working real hard on it. I think that we all know that it is going to take some more effort to continue to improve our broadband. Brent talked about a little bit of I think voice [ph] additional investment on the advertising side to drive some of that gain and I think that we should see some improvements on that and that's really the story there.

Jonathan Chaplin - JP Morgan

And the higher discos [ph] that your are saying, is it actually churn... the churn percentage going up or is it just a factor of you having the base that's 30% or 40% bigger than you did a year ago?

Jeff Gardner - President and Chief Executive Officer

I think both of those issues are affecting that.

Jonathan Chaplin - JP Morgan

Okay, thank you very much.

Jeff Gardner - President and Chief Executive Officer

You are welcome.

Operator

Your next question comes from the line of Michael McCormack of Bear Stearns.

Michael McCormack - Bear Stearns

Hey guys, thanks. Can you give us a sense for sounds like you had a bit of a change in the DISH bundle offering there, is there any cost associated with that? I assume the relationship hasn't changed, it's just something you are doing to combine the billing. But is there only cost there? And secondly with respect to ARPU, obviously very good trends there, but if you are getting maybe more aggressive on the DSL side, are we going to expect to see some price pressure on the ARPU? Thanks.

Brent Whittington - Executive Vice President and Chief Financial Officer

I will take that question Michael. Really during the quarter there wasn't a change in our DISH bundle. We talked about some aggressive promotions that we are rolling out in our marketplace, but really that's centered around a $5 off on our broadband product at the various kind of tier speeds. So that was the key change we made in our promotions really to drive some broadband sales and that carries on right now. To your ARPU point, we do expect that you have slight impact on ARPU. However, that's really kind of a teaser promotion for us to get sales, calls, interest in the door, and then our sales team really capitalize that and move those customers up the broadband tier. Keith talked about the fact that we saw 35% of our customers this quarter, which subsequently was higher than the first quarter, subscribe to broadband speeds at a 3 megabit price point. If we can keep that trend up and really even begin to improve on that, that won't have a significant impact on our broadband ARPU.

Michael McCormack - Bear Stearns

Okay, thanks

Brent Whittington - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Your next question comes from the line of Patrick Rein of Lehman Brothers.

Patrick Rein - Lehman Brothers

Good morning guys. Thanks for taking the question. Just quickly on CT Communications; I was just, first of all, wondering if you had any sense of when you are expecting to hear back from FCC and then also assuming your close in say September, would you expect to see some synergies in the fourth of quarter of this year or that's something that would kick in in the first half of next year? Thank you

Jeff Gardner - President and Chief Executive Officer

Okay. In terms of the timing, I think in the script, we talk about the fact that we are still waiting for the approval from the FCC. The shareholder vote is on august 23rd. So assuming we get approved at the shareholder vote, we think it will happen shortly thereafter. I don't want to get in to the business of predicting exactly when the FCC will approve it. We don't see anything that would stand in the way of that. And so we are confident it will be shortly after we get the shareholder vote approval on August 23rd.

Brent Whittington - Executive Vice President and Chief Financial Officer

On the synergy front of CT, we are working hard on that integration effort right now. And Jeff kind of alluded to in his comments the fact that we hope to complete the bulk of our effort in the first quarter of 2008. We will be working on things obviously in the third and the fourth quarter that might result in small synergy savings. But we don't expect to see the real full run rate of that until the second quarter of next year. Probably see significant amounts begin to be realized in the first quarter of '08 as well, but nothing material in the fourth quarter.

Jeff Gardner - President and Chief Executive Officer

And if I can add one thing about CT, it's been a very good transition. Keith Paglusch is leading that for us on the operation side. The folks at CT have been incredibly cooperative and as we discovered through our due diligence and have confirmed in working with these folks afterwards, that's a really strong ILEC business there and we're looking forward to bringing that into the Windstream family.

Patrick Rein - Lehman Brothers

All right, thanks a lot guys.

Jeff Gardner - President and Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Frank Louthan of Raymond James.

Jeff Gardner - President and Chief Executive Officer

Hi Frank.

Frank Louthan - Raymond James

Good morning, thank you. Just looking at again the CT acquisition, how quickly do you think you can get some of the synergies there? And then give us a little bit of idea about the... how a little bit more broadly by your M&A strategy, obviously it's a pretty broad mix here, you could either go after much larger acquisitions or smaller ones, and give us some idea of where that fits. And then what do you plan to do with some of their video initiatives such as the fiber-to-the-home, is that something that you are interested in? Do you think that has some... they have some advantages; maybe you could look at in other network, or is that something that you are not interested in pursuing? Thanks.

Jeff Gardner - President and Chief Executive Officer

Brent, why don't you take the synergies and I'll take M&A question.

Brent Whittington - Executive Vice President and Chief Financial Officer

Yes, on the synergies, Frank, we really don't expect any material synergies to be recognized as in the fourth quarter. We do hope to complete that integration plan in the first quarter of next year. We'd expect to see some recognition of the amounts we mentioned before in the first quarter of next year, but not full run rate until the second quarter of 2008.

Jeff Gardner - President and Chief Executive Officer

So your second part of your question was on M&A and how do we see that. And again, we really like our position as the largest RLEC in the space. There's been a lot of volatility in the markets, obviously valuations have come down in this space. At the same time, we've got to really contemplate whether some of these changes in the credit markets are temporary or permanent, and that's going to really affect how these businesses are valued and how we can judge whether these transactions are accretive. But set that aside, we think kind of the short term market phenomena are going to be there and that we are going to have to manage through that. We have done that many times, we've got a lot of experience doing that. But over the long run, what we believe is there're still in great opportunities for us to grow this business through acquisition and drive synergies that will really improve the business and put us in a position to really create shareholder value in the long run. And that's still an important part of our strategy and CT was a good example of that and I think there's more of that to come.

One of the things that comes with a difficult market and I think is some differentiation. And what I mean by that, Frank, is that in the... the market has been so good for the last even 12 to 18 months that there was very little differentiation between the companies. And I think with this market conditions that are out there today, it's going to really give investors a chance to look at the fundamentals of these companies and I think that really bodes well for us because of cost structure scale etc. And then I am going to ask Keith to address the video question as it relates to CT Communications.

Keith Paglusch - Chief Operating Officer

Frank, the investment that CT made on the video front was really a video trial to select customers during the first quarter of '07. They have approximately 11,000 homes that can deliver speeds up to 15 megabits. We like that we think that will bode well for us in the future as we go in and do things on that network as it relates to faster speeds as we have mentioned earlier. It is our intention right after the close that we will begin offering our DISH product to CT customers very similar to as we do today to our customers. We think there is a lot of upside to that and that that will benefit us greatly and we will continue to utilize the investments that they have made in their network on the video front and this broadband front to kind of better our position from a broadband perspective.

Frank Louthan - Raymond James

Okay, great, that's helpful. And just one quickly, you mentioned the change for the pole attachment rates. Can you give us an idea of the magnitude of that change? And then you said it was retroactive, how far back retroactive is that? Does that go back and what sort of caused that to be that retroactive? Was there an arbitration proceeding or something that had gone on?

Brent Whittington - Executive Vice President and Chief Financial Officer

Yes, Frank, I can answer that. I mean, the pole attachment issue was probably about $2 million, not huge. We bring it up simply to help explain some of the sequential increase we saw. Unfortunately when you are dealing with pole attachments in many cases, those can go back a number of years. The largest driver of that for us went back about five years. There are no hearings, things like that that might actually benefit us I think. That's just one of the areas where some of the utility companies have a little bit of a regulatory advantage over us. And it's a cost issue we deal within our business routinely. So that's the explanation I believe.

Frank Louthan - Raymond James

Great, very helpful, thanks.

Brent Whittington - Executive Vice President and Chief Financial Officer

Thank you.

Jeff Gardner - President and Chief Executive Officer

Gendy, we have time for one more question.

Operator

Okay and that will come from Ilan Sender [ph] of Jefferies.

Unidentified Analyst

Hi, thanks, good morning. With regard to the CT deal, can I conclude that you have received all the state PUC approvals necessary?

Jeff Gardner - President and Chief Executive Officer

Yes.

Unidentified Analyst

Okay, great, thank you.

Rob Clancy - Senior Vice President and Treasurer

Well, thank you for joining us this morning. We appreciate your interest and support. Mary Michaels and I will be available for additional questions throughout the day.

Operator

Thank you for your participation in today's conference. This concludes our presentation. And you may now disconnect. Have a great day.

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Source: Windstream Communications Q2 2007 Earnings Call Transcript
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