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Windstream Corporation (NASDAQ:WIN)

Q3 2007 Earnings Call

November 8, 2007 8:30 am ET

Executives

Rob Clancy - Senior Vice President, Treasurer

Jeffery R. Gardner - President, Chief Executive Officer,Director

Brent K. Whittington - ChiefFinancial Officer, Executive Vice President

Analysts

John Chaplin - JPMorgan

David Janazzo - Merrill Lynch

Guarav Jaitly - UBS

Michael Nelson - Stanford Financial Group

David Barden - Banc of America Securities

Thomas Seitz - Lehman Brothers

Christopher Larsen - Credit Suisse

Jason Armstrong - Goldman Sachs

Operator

Good morning. My name is Darlene and I will be yourconference operator today. At this time, I would like to welcome everyone tothe third quarter 2007 Windstream Communications earnings conference call.(Operator Instructions) I will now turn the call over to Windstream's SeniorVice President and Treasurer, Rob Clancy. Sir, you may begin your conference.

Rob Clancy

Thank you, Darlene. Good morning, everyone. Thank you forjoining us this morning. Today’s conference call was preceded by our thirdquarter 2007 earnings release, which has been distributed on the newswires andis available from the investor relations section of our website. Today’sconference call should be together with our earnings release and relatedfinancial information.

Today’s discussion includes statements about expected futureevents and future financial results that are forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to uncertainties that could cause actualfuture events or results to differ materially from those expressed in suchstatements.

Other factors that could cause actual results of Windstreamto differ materially, many of which are beyond the control of Windstream,include but are not limited to the items listed in the Safe Harbor statementcontained in our third quarter 2007 earnings press release.

Today’s discussion will also include certain non-GAAPfinancial measures, including the term OIBDA, which is defined as operatingincome before depreciation and amortization. Again, we refer you to the IRsection of our website where we posted our earnings release and supplementalmaterials, which contain information and reconciliations for any non-GAAPmeasures.

Before we get started, there are a few reporting items thatI would like to briefly cover. As part of the CT Communications integration, wereviewed our access line and long distance customer counting methodology andconcluded that a revised methodology would be more consistent across our base.This resulted in a reduction of approximately 25,000 reported access lines inour legacy business, which were predominantly related to certain of the specialcircuits that are now counted as a single access line. We also reduced the CTaccess lines by approximately 23,000, as CT had been reporting access lines ona voice grade equivalent basis.

In addition, we restated long distance units, resulting in areduction of approximately 34,000 units. Most importantly, these changes haveno effect on revenues or expenses, or access lines reported for the thirdquarter and have been reflected in our supplemental schedules for all priorperiods.

Today we will discuss our GAAP results, which include ourpublishing business and the results of CT Communications for one month. Inaddition, we have provided pro forma results from current businesses, whichinclude our results as if the Valor and CT acquisitions had occurred on January1, 2005. These pro forma results from current businesses exclude the resultsfrom our publishing business and one-time transaction related fees.

We will make reference to these pro forma results from currentbusinesses, including the year-over-year comparisons, during our call. And keepin mind that since CT represents approximately 5% of our overall business, thepro forma results are largely influenced by the legacy Windstream results.

Participating in our call this morning are Jeff Gardner,Windstream President and Chief Executive Officer; and Brent Whittington, Windstream ExecutiveVice President and Chief Financial Officer. At the end of the call, we willtake a few questions.

With that, here is Jeff Gardner.

Jeffery R. Gardner

Thank you, Rob and good morning, everyone. This morning, Iwill start our discussion with an update on a couple of strategic initiativesand review our operational highlights. Brent will then discuss our thirdquarter financial results.

First, on August 31st, we completed the acquisition of CTCommunications, nearly doubling our presence in North Carolina by adding132,000 access lines and 31,000 broadband customers. This transaction providesan opportunity to realize $30 million in annual cost saving synergies andapproximately $10 million of capital expenditure reductions.

We are very pleased with the progress we have madeintegrating CT and continue to expect to complete this integration, includingthe billings version, by the end of the first quarter of 2008.

Second, with respect to the split-off of our publishingbusiness, we have recently received the private letter ruling from the InternalRevenue Service and should be able to close this transaction by the end of thefourth quarter.

This transaction allows us to repurchase approximately 19.6million shares, retire approximately $210 million of debt, and receive roughly$40 million of cash which must be used within the next 12 months to eitherrepurchase stock or pay down debt.

From a regulatory perspective, Windstream recentlypetitioned the FCC to migrate the balance of our ILEC properties from rate ofreturn regulation to price cap regulation at the federal level. The FCC’sinitial comment and reply periods have passed, during which we received noopposition to our request. In fact, we had a number of carriers file in supportof our plan, including our two largest wholesale customers.

At this time, we are optimistic that the FCC will approveour petition in the first half of 2008. We run an efficient business in acompetitive environment and believe that price cap regulations is theappropriate regulatory framework for our business.

Let me turn to our pro forma operational results. Thisquarter, asset lines declined by approximately 46,000 or 4.7% year over year.In our ILEC business, our absolute line loss was relatively flat year overyear. This is quite an accomplishment, given the fact that new cable voiceservices were introduced in certain markets, which led to higher disconnectsand we saw higher non-paid disconnects across our customer base early in thequarter.

The increase in absolute lines lost year over year is morerelated to changes in our CLEC business. Specifically, in the third quarter oflast year, we added a few thousand lines, whereas this year we lost a fewthousand lines, most of which related to contracts to provide wireline serviceson a wholesale basis to student dorm rooms at two universities.

All in all, we have been pleased with our results of ourmarketing initiatives throughout the year, which have allowed us to be morecompetitive, particularly for new growth additions.

This quarter, we added over 48,000 new broadband customers,bringing our total customer base to approximately 830,000, an increase of 32%year over year and a penetration rate of 26% of total access lines. Broadbandnet additions increased 27% sequentially, driven somewhat by seasonality butalso by enhanced promotional offerings and increased marketing spend.

We plan to continue our increased marketing spend andpromotional activities into the fourth quarter, given the strategic importanceof continued growth in broadband going forward.

We are focused on increasing sales of faster broadbandspeeds and expect to have ADSL 2-plus technology operational in the early partof 2008, allowing us to essentially double the speeds currently offered anddeploy a 10 to 12-megabit broadband service in certain markets.

This quarter, we added over 27,000 digital TV customers,bringing our total customer base to approximately 178,000. We also beganoffering this service in the former CT markets and have bee pleased with theinitial response. We believe that having a video product will be an attractiveaddition to our bundled offering in those markets.

During the quarter, we added over 3,000 long distancecustomers, driven by solid demand for our new flex bundles within ourWindstream territory. The long distance customer additions were partiallyoffset by losses from our out-of-territory customers.

Overall, we are very pleased with our results this quarter.Operationally, we are more competitive in our markets with expandeddistribution channels and new sales strategies, and we are working hard topreempt new voice competition, which we will expect to occur at a moderate ratefor the balance of the year.

In addition, we are doing a nice job selling broadband anddigital TV, which are extremely important service offerings that when bundledwith our voice, allow us to improve customer retention.

That said, although we recognize that broadband growth ratesare slowing, we continue to see further sales opportunities, particularly withrespect to increased speeds, as well as developing new products to leverage ourexisting broadband infrastructure, such as home networking, security software,and integrated video and broadband offerings.

Financially, we will continue to look for additionalopportunities to drive incremental revenue and continue to improve our coststructure. Our network is well-positioned competitively in terms of broadbandspeeds, and we will closely manage capital expenses while continuing tomodernize the network.

As we have previously stated, we are aggressively managingthis business to sustain cash flows for over a long period of time. Over thepast 18 months, the RLEC industry has experienced significant consolidation andgiven the continued decline in access lines, this is a business that demandsscale. Accordingly, we continue to believe it is important to maintain thecapacity to pursue strategic opportunities that are free cash flow accretiveshould they arise.

Now let me turn the call over to Brent to discuss thefinancial results.

Brent K. Whittington

Thank you, Jeff and good morning, everyone. For the third quarteron a GAAP basis, Windstream generated consolidated revenues of $823 million,operating income of $289 million, and $0.25 of diluted earnings per share. OurGAAP results include $3.1 million in restructuring expenses related primarilyto the CT acquisition.

As Rob mentioned, we have provided pro forma results in oursupplemental financial schedules, which include the CT business for the entirequarter, as well as prior periods. However, we recognize that some of you mayhave modeled our third quarter to include only one month of the CT business,since we closed that transaction on August the 31st. Thus, excluding thepublishing business, $2.8 million of transaction expenses, and including CT forjust the month of September, Windstream generated $792 million in revenue and$411 million in OIBDA during the third quarter.

For the remainder of this call, I am going to focus on ourpro forma results from current businesses, which exclude the publishingbusiness, $2.8 million of transaction expenses, and reflects the closing of theCT transaction on January 1, 2005.Keep in mind that since CT represents approximately 5% of our overall business,the pro forma results are almost exclusively influenced by our legacyWindstream business.

On a pro forma basis, Windstream generated consolidatedrevenues of $823 million, an increase of 2% year over year. Operating income of$280 million, an increase of 5% year over year, and consolidated OIBDA of $420million, an increase of 3% year over year.

Within our wireline segment, revenues were $799 million, anincrease of approximately 3% year over year. Collectively, broadband, specialaccess, and long distance revenues grew at 14% year over year and continue tooutpace the declines we have seen in voice and switched access revenues.

In addition, this quarter we recognized an additional $7million net in USF revenues related primarily to revised cost studies for thepast two years. However, these additional recoveries were somewhat offset by areduction in revenues regarding current disputes related to previously receivedstate USF subsidies, but the $7 million I referred to before is the net amountof those two items.

Turning to cash expenses, cost of services increasedslightly, driven largely by higher bad debt expense related to the increase innon-paid disconnects, which was partially offset by savings from organizationalimprovements. The increase in cost of products sold was simply a result ofincreased equipment sales year over year.

Within SG&A, expenses increased almost 3%, largely aresult of increased marketing spend to drive broadband sales, offset somewhatby additional synergies this quarter as compared to a year ago.

All in all, cash expenses increased 3% year over year, whichwas in line with our expectations. Our total cash expenses were downsequentially by $5 million, due primarily to the one-time, unfavorable itemsreported in the second quarter that we discussed at that time.

Wireline OIBDA was $419 million for the third quarter, anincrease of 3% year over year, driven mainly by the revenue items I mentionedearlier. Within our pro forma wireline results for the quarter, CTCommunications contributed approximately $37 million of revenue and $13 millionof OIBDA.

At our other operations, which include our productdistribution business and the wireless business we acquired in the CTtransaction, revenues were $102 million, up approximately 11% year over year,mostly attributable to higher internal sales within our product distributionbusiness. OIBDA was $1.4 million.

This quarter, capital expenditures totaled just over $100million. We remain focused on improving our network capacity and increasingbroadband speeds, and have plans to introduce broadband speeds of 10 to12-megabits early next year. This upgrade will also result in our being able tooffer up to 3-megabit speeds to most of our addressable broadband footprint,which is approximately 83% of our total ILEC access lines.

As Jeff mentioned, we closed the CT transaction on Augustthe 31st. We financed the $585 million transaction with a mix of cash on hand,as well as $250 million in borrowings under our revolver.

We ended the quarter with a cash balance of $68 million anda revolver balance of $210 million, leaving approximately $290 million inadditional revolver capacity. At the end of the third quarter, our net leverageratio was 3.3 times.

Upon closing the publishing transaction, we expect to paydown roughly $210 million in debt and receive roughly $40 million in cash,which together will slightly reduce our net leverage to 3.2 times.

Earlier this year, we discussed our OIBDA expectations andthe specific year-over-year comparisons we would experience for the first andsecond half of 2007. For the first half of 2007, our year-over-year comparisonswere somewhat challenged by the fact that we did not have a fully loadedcorporate cost structure in early 2006, as we were in the ramp-up stage of theseparation process.

This certainly materialized in our performance for the firsthalf of 2007 as OIBDA declined roughly 1% year over year. It was ourexpectation that the year-over-year comparisons would look more favorable forthe back half of the year, particularly the third quarter. In fact, OIBDA grewat 3% year over year, largely driven by the additional revenues I discussedpreviously.

As we look to the fourth quarter, the year-over-yearcomparisons will be affected somewhat by no longer having the comparativebenefit of the long distance pricing changes we made a year ago. In addition,we expect to spend more marketing dollars than initially planned to continuedriving broadband sales, which we believe is prudent, given the importance ofowning the broadband connection to the home.

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-AnswerSession

Operator

(Operator Instructions) The first question comes from the line of JohnChaplin with JPMorgan.

John Chaplin -JPMorgan

Good morning. A quick question on CapEx, if I may; so itsounds like there is a decent amount of spent this year for rolling out ADSL2-plus in some of your markets, but I’m wondering if CapEx will come down as aresult next year and I’m wondering if an incremental driver of lower CapEx nextyear might be the slowdown in housing starts. That’s something we’ve heard froma couple of your peers. Thanks.

Jeffery R. Gardner

With respect to CapEx, I think that yes, the ADSL 2-plusrollout is contemplated in our plan for 2007 and we are pleased with theprogress that we’ve made. We think that even while spending judiciously on ournetwork this year in terms of percentage of revenue, we’ve really made goodstrides in stabilizing our network and modernizing that network at the sametime.

We are not going to discuss 2008 guidance explicitly, but Ithink I’ve said a number of times that our view of this business is that we’vegot a very good handle on CapEx, we are largely success-based in terms of ourinvestment strategy, and we feel good about going forward that we are going tobe managing CapEx flat to down in the coming years, and we’ll provide moreguidance on that obviously when we give our 2008 guidance.

John Chaplin -JPMorgan

Thanks, Jeff. I’m wondering if I could ask a quickfollow-up, just on your M&A comments. So when we looked at the landscapeearlier in the year, it seemed like some of the smaller public RLECs that wouldmake attractive -- could potentially make attractive targets were trading at adecent premium to where you guys were trading. That made M&A difficult. Butover the course of the last quarter or so, there’s been an adjustment invaluations and a lot of those RLECs are now trading at a decent discount towhere you guys are trading on a free cash flow basis. Does that pave the wayfor -- does that make it a lot easier for a consolidation to take place withlarger scale deals than some of the ones we’ve seen over the course of the lastfew months, do you think?

Jeffery R. Gardner

I think fundamentally, there is a lot going on. Obviouslywe’ve got the credit markets, et cetera, which always have to be considered aswell, but our premise on M&A remains the same; is that consolidation inthis space makes for a lot of sense. When you are working really hard to manageyour business to a flat to slightly increasing OBITDA, when you can do a dealthat generates such significant synergies, that provides a great deal of valueto our stakeholders.

With respect to -- when the markets get difficult, I thinkthat one thing that has been good is we’re beginning to see somedifferentiation based on results, with I think the larger scale, better coststructure companies that are doing a better job growing revenue, stabilizing OBITDA,and ultimately producing cash flow are beginning to get recognized. I think inthe long run that will be good for M&A.

John Chaplin -JPMorgan

Great. Thanks, Jeff.

Operator

Your next question comes from the line of David Janazzo withMerrill Lynch.

David Janazzo -Merrill Lynch

Good morning. Jeff, you had mentioned the proposal toconvert to the price cap regulation. How do you think, assuming that getsapproved, how will that affect you from a competitive positioning standpointand also financially?

Jeffery R. Gardner

I think competitively what it does, it really aligns ourregulatory framework with our business model, and that is we are a company thatis very focused on increasing our efficiency, taking costs out of the business.We feel like we are very competitive today with regard to our wholesaleservices, and while we don’t believe there is going to be immediate impact fromthis, I think, David, over the long run that’s going to put Windstream in abetter position related to our ability to maintain prices on the wholesale sideof the business.

I think when all things considered, and there’s a lot ofmoving parts when you look at that, that absolutely makes the most sense.

We for a long time had a view that this business is going toget more and more deregulated over time and so we’ve managed our business thatway, and this is just another step toward that end.

David Janazzo -Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Guarav Jaitly withUBS.

Guarav Jaitly - UBS

Great. Thank you. Good morning. Just a quick question onmargins; from your comments, it sounded like you are going to increasebroadband spending, you expect margins to be down. I was wondering how that isoffset by synergies from CT and how you are tracking versus your target of $30million of annualized synergies. I would assume a lot of those synergies wereprobably realized day one of the close.

And then secondly, if you could just tell us what your --give us what availability is in your footprint right now. Thank you.

Brent K. Whittington

I’ll take the first part of your question. With regard tothe CT transaction, that transaction integration is going very well to date.However, as Jeff alluded to in some of his comments, we do have a billingconversion that’s scheduled in the first quarter of 2008 and until that reallyis completed, we are not going to see a significant amount of those synergiesrecognized until that time.

We did talk about in fourth quarter the spend increaserelative to marketing, and we saw a little bit of that this quarter as well,really in an effort to continue to grow broadband penetration. That’s havingabout a $2 million to $3 million impact on a quarterly basis in our coststructure. That was really what I was referring to there, but CT overall is goingvery well -- not a lot of synergies really at this time.

Guarav Jaitly - UBS

And then on the cable VOIP availability?

Jeffery R. Gardner

We’re at about -- we started the year at about 45% and Ithink that we’re around 50% now, so that’s been increasing as we expected. Whatwe are really pleased about is with every new entrant, we are getting betterand better about defending our position and so we are really focused on that,obviously, and have been pretty pleased with respect to, as I talked about inmy comments, the fact that we did have in this quarter in particularly, anincrease of voice-over-IP competition, but we were able to maintain flat accessline loss trends in our ILEC business year over year, so that’s a reflection ofdoing a better job managing those new competitive pressures.

Guarav Jaitly - UBS

Thank you. If I could just follow-up with one more question;on the broadband, as you think about your broadband opportunity, you’ve said26% of total access lines. Can you tell us what percentage of households, whereyour broadband penetration is, and where do you think broadband penetration isin your markets overall? That would be very helpful.

Jeffery R. Gardner

Okay, thanks. Well, I think if you just do the math on thatand you take out our business customers, you are looking at somewhere around40%, so we have very high penetration rates and yes, the broadband rates --growth rates are going to slow down. We still have a belief that broadband isreally key strategically to our future and so we still are going toaggressively attack that market and really grow our customer base, albeit atslower rates.

We also have good opportunities for upselling and again,really the broadband connection into the customer’s home is really the beginningof a platform for us, and so new products and features that you will see usroll out over the next 12 months or so, like home networking, broadbandsatellite products that enables to really take advantage of both of those greatproducts will allow us to further leverage that broadband relationship that wehave with our customers.

And so I think we are just entering a different stage, a bitslower growth, much more of a focus on up-selling, and really taking advantageof some complementary products that make use of that investment.

Guarav Jaitly - UBS

Thank you. That’s very helpful.

Operator

Your next question comes from the line of Michael Nelsonwith Stanford Group.

Michael Nelson -Stanford Financial Group

First question, do you see anything going on in the broaderregulatory environment, maybe any prospects for a phantom traffic reform? Andthen the second question is on wireless, it looks like you acquired about51,000 wireless customers. Is there any change to your wireless strategyoverall? Thanks.

Jeffery R. Gardner

On the regulatory front, we don’t see significant change. Wecontinue to hope that there can be some comprehensive USF reform. There’s anindustry group that’s working on the phantom traffic initiative. I don’t seeanything happening in the real near-term there, so nothing that should reallydrive the results in the short run, but obviously that’s always an importantcomponent of our business.

The wireless access lines that you saw that we added relatedto the CT acquisition. They were in the wireless business. They were in apartnership with AT&T that was apart of the transaction there. There has been no change in our strategy. Thatwas just a part of that transaction, and so we’ll continue to run that businessgoing forward and have no plans to deploy wireless further in our network.

Michael Nelson -Stanford Financial Group

So are there any incremental costs associated with runningthat wireless going forward?

Jeffery R. Gardner

Well, they are in the run-rate for CT Communications, sowhen we talk about the synergies and that deal in its entirety, they areincluded in those. This management team, all of us have been very active in thewireless and the wireline space, so incrementally, this is a very smallbusiness that we are able to manage day to day. And of course, over the longrun, depending on where we think our focus should be strategically, we haveoptionality with respect to what to do with that business ultimately.

Michael Nelson -Stanford Financial Group

Great. Thanks a lot. Good luck.

Operator

Your next question comes from the line of David Barden withBanc of America.

David Barden - Bancof America Securities

Good morning. Maybe just two questions; one, if you guyscould just elaborate a little bit more on the billing system conversion comingup in 1Q08. It kind of I think sets people’s teeth on edge always when we haveto go through one of these processes, and if you could talk a little bit abouthow you plan to manage it, what you are going from and to, and what thecompletion timetable for that would be, that would be appreciated.

And then I guess, I guess it’s incumbent to ask in thecurrent climate, we’ve been hearing this from all the carriers, but if youcould maybe expound a little bit on the economic environment in your territory,whether you feel like it’s made an impact yet. Bad debt seems to have beengoing up in some areas, limited business affect to this point in time, mostlyon the housing market seems to be the issue here. But if you could just talk alittle bit about that environment and how you think it’s going to trend for youguys in your footprint, that would be great. Thanks.

Brent K. Whittington

I’ll take both of those questions. On the billingconversion, a couple of things; one, if you look at not only our history withValor but also before many of the folks in our company came from Alltel, we[got through the acquisitions], we’ve handed integrations a number of timesvery successfully, so we’ve done a significant number of billing conversions.So we feel like we’ll be very successful here.

We are going from CT’s existing billing platform -- they arelargely on one platform -- to our own internal billing application that all ofour customers run on today. If you look at their customer count versus ours,it’s not a huge number, so it’s something that we’ll be successful at, webelieve. But you are right -- billing conversions always complicate it andwe’re always on edge as well until we hit the finish line. But we feel like wewill be successful there.

David Barden - Bancof America Securities

And what’s the timetable for that, sorry?

Brent K. Whittington

The timetable for that is the first quarter of 2008, whichis pretty quick, shortly after the acquisition closed. By the end of thequarter for sure.

In terms of the economic environment we are seeing in ourmarket, we mentioned the fact that we saw a few higher disconnects early in thequarter from some non-pays. We looked at that data and really determined thatit wasn’t anything specific in a certain credit class or in a certaingeographic area in our market, but it was more pervasive.

But I’ll tell you, we only saw that early in the quarter andoverall, we still feel like the economic conditions in the markets where weoperate are strong. We feel like that was a one-time spike for many reasonsthat we’ve speculated about, but we’ve got that under control, still feel verygood about the job we are doing on collection efforts and don’t expect to see asignificant increase as a result.

Jeffery R. Gardner

I think the other thing that gave us confidence there isthat although we did redouble our efforts with regard to broadband, we werevery pleased that we saw that 32% -- or 27% sequential improvement in broadbandnet adds in what people were referring to as a difficult environment. We are insome good areas of the country. I think that our business is somewhat defensiveand I think that all played out in the third quarter for Windstream.

David Barden - Bancof America Securities

If I could just ask one quick follow-up, just in terms ofthe small, medium business versus consumer, no divergence in trends there thatmight indicate some kind of initial weakness in the footprint?

Jeffery R. Gardner

No, I talked about that kind of one-off situation withregard to colleges, which is just simply the fact that more and more of thesecolleges, students are bringing their wireless phones to their dorms, which isnot a significant trend. I think what is important to understand about our businessis that as our residential base continues to erode at 4%-plus, that more andmore of our business is focused on that small and medium business customer basethat has been very stable and then, as we look forward, represents good growthopportunities for us.

David Barden - Bancof America Securities

Great. Thanks much, guys.

Operator

Your next question comes from the line of Tom Seitz withLehman Brothers.

Thomas Seitz - LehmanBrothers

Thanks for taking the question. You mentioned that you’vegot to use the cash that you get out of the directory sale for either buy-backsor debt reduction within 12 months. Can you talk about how you are looking atthat analysis, and then just a general discussion of options for cash flowabove and beyond what you are paying in the dividend?

And then just one point of clarification, if you would;Jeff, you mentioned that one of the things that you are looking to do with theincreased broadband capacity is integrating broadband with video. Is that justwith the set top box and DBS, or are you beginning in the ADSL 2-plus marketsto maybe test IPTV on your network? Thanks.

Jeffery R. Gardner

I’m going to let Brent take the first part with respect toour strategy on the $40 million related to the publishing transaction and thenI’ll take the second part.

Brent K. Whittington

First on the cash, we’ve got to close the publishingtransaction to get the cash, and as we mentioned, we expect that to happenshortly in the fourth quarter. Whenever that occurs, at that time we’ll take alook at the options available to us and certainly as we’ve mentioned before, weare going to be focused on things that are free cash flow accretive. I thinkright now and post close of that transaction, our leverage will be right atabout 3.2 times, and we are happy with leverage right at that range, but thoseare decisions we’ll have to make at the appropriate time.

Jeffery R. Gardner

So Tom, the second part is clearly we’re still focused on asatellite offering across our markets. We think that satellite is the rightproduct competitively, with the big advantage in terms of HC channels versuscable today, and with respect to IPTV, that’s not in our -- even in our mediumterm plans with respect to the network. We’ve got a very viable triple playtoday.

When we reported our numbers, the 27,000 adds in thequarter, if you compare that, I’m very pleased with what we are selling withrespect to our relationship with EchoStar and really look forward to buildingon that.

Thomas Seitz - LehmanBrothers

Okay, great. Just a quick follow-up; so you are comfortablewith leverage essentially where it’s at? You are producing a fair amount offree cash flow above and beyond the dividend, so is it fair to say that sharebuy-backs is one of the things you are looking at with respect to the --

Jeffery R. Gardner

I think absolutely. Just to follow up on -- especially whenyou look at where our stock price is today and the dividend yield, that wouldmake a lot of sense. But as Brent said, we’ve got to close that deal first tohave that optionality.

Thomas Seitz - LehmanBrothers

Great. Thank you very much.

Operator

Your next question comes from the line of Chris Larsen.

Christopher Larsen -Credit Suisse

I’ll take that question just a little bit further; maybegive us a sense for how high you think net leverage could comfortably be? Andthen secondly on USF, if you could talk about ’08 thoughts on payments there.And then just a clarification; I’m pretty sure that the directory spin hasabsolutely no impact on any of your subsidies. I just wanted to make sure thatthat’s true.

Jeffery R. Gardner

That is true. With respect to net leverage, we’re not goingto give you a precise number, Chris, but just the way we think about it is that3.2 isn’t religion with us, but we do very much value our access to the capitalmarkets and pay very close attention to our leverage ratios, and so should wesee an opportunity to meaningfully create shareholder value that would involveleveraging up for a short period of time and then subsequent deleveraging. We’vedone that a couple of times as Windstream and many times previously in ourcareers in terms of managing the acquisition environment. That’s something thatwe’d be real comfortable with. We would work really closely with the creditagencies and make sure that we were absolutely comfortable from a leverageperspective, but that’s what we are comfortable saying.

The second part of the question was ’08 USF. So this year, Ithink what happened, we saw a slight decline in federal USF because ourexpenses went down, and so we fully expect to continue to manage this businessas if it were competitive, because it is. And so we’ll see similar pressure in2008 as a result, but not significant.

Christopher Larsen -Credit Suisse

Thank you.

Operator

Your next question comes from the line of Jason Armstrongwith Goldman Sachs.

Jason Armstrong -Goldman Sachs

Thanks. Just a couple of follow-ups, first on the networkside, you said IPTV is not in the plans, yet 10 to 12 megs across certain partsof your footprint, I’m just wondering -- can you help us think through, is thisjust building way ahead of basic demand for data transmission services? Whatare the other things we should be thinking about that will require that type offeed across parts of the network anytime soon?

And then I guess a related question on video; you’ve seenpeers moving to home zone type of product with DISH, you recently announced adeal with TiVo for video-on-demand content through DSL. Can you help us framethe thought process here, sort of one versus the other?

Jeffery R. Gardner

First of all, competitively, 10 to 12 will be available notacross our entire base but to our most densely populated markets, which willequate to somewhere between 25% to 30% of our marketplace. And really our viewon that is that again, broadband is the strategic core to our relationship withour customer. This allows us to be very competitive with any offering out therein the marketplace. It allows us, our customers to continue to take advantageof what we see as a macro trend with respect to increasing usage of theirnetwork and increasing demands for faster speeds as customers are using morevideo, et cetera.

We think that’s a level that is going to allow us to be verycompetitive over the near to medium term with respect to broadband on the homezone versus TiVo, so I think it’s very -- both kind of different strategies,but I think both quite opportunistic.

Home zone is a way to leverage both our broadband productand the EchoStar product, and we will be deploying a similar type of productthat will integrate these two important core products for us that will reallygive us a platform not only to provide more of a Windstream branded videoexperience but also a platform to begin selling and monetizing that broadbandconnection more into the customers home with things like movies initially, butover the longer run there is going to be a lot of focus in terms of how you canfurther develop that opportunity.

When you look at -- so the great thing with respect to satellitein our marketplace is that we are very rural and satellite penetration is veryhigh. The other part of the segment that we want to attack are the cablecustomers. And the fact of the matter is, I think the numbers are somethinglike 35% to 40% of cable customers across the country are analog. Analog cablecustomers have no access to a DVR. A TiVo partnership bundled with ourbroadband is a great way for us to go directly after that customer base, soit’s actually getting to more of the switcher market as opposed to thesatellite market that we’ve been successful in already.

Jason Armstrong -Goldman Sachs

If I could just follow-up on that, so you talked aboutmonetizing the broadband pipe. Clearly makes sense. If you are provisioningmore and more content across your DSL pipe, can you help us at least thinkabout a framework for what the economics would look like for you, what revenueshare agreements would look like, et cetera?

Jeffery R. Gardner

I wish I could. I think that really is going to be a key to2008 and beyond, and it’s just too early for us to give a lot of detail there.But obviously that’s going to be where a lot of our marketing focus is going tobe in the next 12 months.

Jason Armstrong -Goldman Sachs

Okay. Thanks.

Operator

There are no further questions at this time. Do you have anyclosing remarks?

Rob Clancy

I would just like to thank everyone for joining us thismorning. We certainly appreciate your interest and support. Mary Michaels willbe available for additional questions throughout the day. Thanks again.

Operator

This concludes today’s conference call. You may nowdisconnect.

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Source: Windstream Q3 2007 Earnings Call Transcript

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