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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 - Chief Financial 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 your conference operator today. At this time, I would like to welcome everyone to the third quarter 2007 Windstream Communications earnings conference call. (Operator Instructions) I will now turn the call over to Windstream's Senior Vice President and Treasurer, Rob Clancy. Sir, you may begin your conference.

Rob Clancy

Thank you, Darlene. Good morning, everyone. Thank you for joining us this morning. Today’s conference call was preceded by our third quarter 2007 earnings release, which has been distributed on the newswires and is available from the investor relations section of our website. Today’s conference call should be together with our earnings release and related financial information.

Today’s discussion includes statements about expected future events and future financial results that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 of Windstream to differ 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 third quarter 2007 earnings press release.

Today’s discussion will also 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 and reconciliations for any non-GAAP measures.

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

In addition, we restated long distance units, resulting in a reduction of approximately 34,000 units. Most importantly, these changes have no effect on revenues or expenses, or access lines reported for the third quarter and have been reflected in our supplemental schedules for all prior periods.

Today we will discuss our GAAP results, which include our publishing business and the results of CT Communications for one month. In addition, we have provided pro forma results from current businesses, which include our results as if the Valor and CT acquisitions had occurred on January 1, 2005. These pro forma results from current businesses exclude the results from our publishing business and one-time transaction related fees.

We will make reference to these pro forma results from current businesses, including the year-over-year comparisons, during our call. And keep in mind that since CT represents approximately 5% of our overall business, the pro 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 Executive Vice President and Chief Financial Officer. At the end of the call, we will take a few questions.

With that, here is Jeff Gardner.

Jeffery R. Gardner

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

First, on August 31st, we completed the acquisition of CT Communications, nearly doubling our presence in North Carolina by adding 132,000 access lines and 31,000 broadband customers. This transaction provides an opportunity to realize $30 million in annual cost saving synergies and approximately $10 million of capital expenditure reductions.

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

Second, with respect to the split-off of our publishing business, we have recently received the private letter ruling from the Internal Revenue Service and should be able to close this transaction by the end of the fourth quarter.

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

From a regulatory perspective, Windstream recently petitioned the FCC to migrate the balance of our ILEC properties from rate of return regulation to price cap regulation at the federal level. The FCC’s initial comment and reply periods have passed, during which we received no opposition to our request. In fact, we had a number of carriers file in support of our plan, including our two largest wholesale customers.

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

Let me turn to our pro forma operational results. This quarter, 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 over year. This is quite an accomplishment, given the fact that new cable voice services were introduced in certain markets, which led to higher disconnects and we saw higher non-paid disconnects across our customer base early in the quarter.

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

All in all, we have been pleased with our results of our marketing initiatives throughout the year, which have allowed us to be more competitive, 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. Broadband net additions increased 27% sequentially, driven somewhat by seasonality but also by enhanced promotional offerings and increased marketing spend.

We plan to continue our increased marketing spend and promotional activities into the fourth quarter, given the strategic importance of continued growth in broadband going forward.

We are focused on increasing sales of faster broadband speeds and expect to have ADSL 2-plus technology operational in the early part of 2008, allowing us to essentially double the speeds currently offered and deploy 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 began offering this service in the former CT markets and have bee pleased with the initial response. We believe that having a video product will be an attractive addition to our bundled offering in those markets.

During the quarter, we added over 3,000 long distance customers, driven by solid demand for our new flex bundles within our Windstream territory. The long distance customer additions were partially offset 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 expanded distribution channels and new sales strategies, and we are working hard to preempt new voice competition, which we will expect to occur at a moderate rate for the balance of the year.

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

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

Financially, we will continue to look for additional opportunities to drive incremental revenue and continue to improve our cost structure. Our network is well-positioned competitively in terms of broadband speeds, and we will closely manage capital expenses while continuing to modernize the network.

As we have previously stated, we are aggressively managing this business to sustain cash flows for over a long period of time. Over the past 18 months, the RLEC industry has experienced significant consolidation and given the continued decline in access lines, this is a business that demands scale. Accordingly, we continue to believe it is important to maintain the capacity to pursue strategic opportunities that are free cash flow accretive should they arise.

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

Brent K. Whittington

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

As Rob mentioned, we have provided pro forma results in our supplemental financial schedules, which include the CT business for the entire quarter, as well as prior periods. However, we recognize that some of you may have modeled our third quarter to include only one month of the CT business, since we closed that transaction on August the 31st. Thus, excluding the publishing business, $2.8 million of transaction expenses, and including CT for just 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 our pro forma results from current businesses, which exclude the publishing business, $2.8 million of transaction expenses, and reflects the closing of the CT 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 legacy Windstream business.

On a pro forma basis, Windstream generated consolidated revenues 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 $420 million, an increase of 3% year over year.

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

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

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

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

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

Wireline OIBDA was $419 million for the third quarter, an increase of 3% year over year, driven mainly by the revenue items I mentioned earlier. Within our pro forma wireline results for the quarter, CT Communications contributed approximately $37 million of revenue and $13 million of OIBDA.

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

This quarter, capital expenditures totaled just over $100 million. We remain focused on improving our network capacity and increasing broadband speeds, and have plans to introduce broadband speeds of 10 to 12-megabits early next year. This upgrade will also result in our being able to offer 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 August the 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 and a revolver balance of $210 million, leaving approximately $290 million in additional revolver capacity. At the end of the third quarter, our net leverage ratio was 3.3 times.

Upon closing the publishing transaction, we expect to pay down 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 and the specific year-over-year comparisons we would experience for the first and second half of 2007. For the first half of 2007, our year-over-year comparisons were somewhat challenged by the fact that we did not have a fully loaded corporate cost structure in early 2006, as we were in the ramp-up stage of the separation process.

This certainly materialized in our performance for the first half of 2007 as OIBDA declined roughly 1% year over year. It was our expectation that the year-over-year comparisons would look more favorable for the back half of the year, particularly the third quarter. In fact, OIBDA grew at 3% year over year, largely driven by the additional revenues I discussed previously.

As we look to the fourth quarter, the year-over-year comparisons will be affected somewhat by no longer having the comparative benefit of the long distance pricing changes we made a year ago. In addition, we expect to spend more marketing dollars than initially planned to continue driving broadband sales, which we believe is prudent, given the importance of owning 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-Answer Session

Operator

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

John Chaplin - JPMorgan

Good morning. A quick question on CapEx, if I may; so it sounds like there is a decent amount of spent this year for rolling out ADSL 2-plus in some of your markets, but I’m wondering if CapEx will come down as a result next year and I’m wondering if an incremental driver of lower CapEx next year might be the slowdown in housing starts. That’s something we’ve heard from a couple of your peers. Thanks.

Jeffery R. Gardner

With respect to CapEx, I think that yes, the ADSL 2-plus rollout is contemplated in our plan for 2007 and we are pleased with the progress that we’ve made. We think that even while spending judiciously on our network this year in terms of percentage of revenue, we’ve really made good strides in stabilizing our network and modernizing that network at the same time.

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

John Chaplin - JPMorgan

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

Jeffery R. Gardner

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

With respect to -- when the markets get difficult, I think that one thing that has been good is we’re beginning to see some differentiation based on results, with I think the larger scale, better cost structure companies that are doing a better job growing revenue, stabilizing OBITDA, and ultimately producing cash flow are beginning to get recognized. I think in the 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 with Merrill Lynch.

David Janazzo - Merrill Lynch

Good morning. Jeff, you had mentioned the proposal to convert to the price cap regulation. How do you think, assuming that gets approved, how will that affect you from a competitive positioning standpoint and also financially?

Jeffery R. Gardner

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

I think when all things considered, and there’s a lot of moving 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 to get more and more deregulated over time and so we’ve managed our business that way, 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 with UBS.

Guarav Jaitly - UBS

Great. Thank you. Good morning. Just a quick question on margins; from your comments, it sounded like you are going to increase broadband spending, you expect margins to be down. I was wondering how that is offset by synergies from CT and how you are tracking versus your target of $30 million of annualized synergies. I would assume a lot of those synergies were probably 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 to the 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 billing conversion that’s scheduled in the first quarter of 2008 and until that really is completed, we are not going to see a significant amount of those synergies recognized until that time.

We did talk about in fourth quarter the spend increase relative 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 having about a $2 million to $3 million impact on a quarterly basis in our cost structure. That was really what I was referring to there, but CT overall is going very 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 I think that we’re around 50% now, so that’s been increasing as we expected. What we are really pleased about is with every new entrant, we are getting better and 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 in my comments, the fact that we did have in this quarter in particularly, an increase of voice-over-IP competition, but we were able to maintain flat access line loss trends in our ILEC business year over year, so that’s a reflection of doing 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 said 26% of total access lines. Can you tell us what percentage of households, where your broadband penetration is, and where do you think broadband penetration is in your markets overall? That would be very helpful.

Jeffery R. Gardner

Okay, thanks. Well, I think if you just do the math on that and you take out our business customers, you are looking at somewhere around 40%, 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 is really key strategically to our future and so we still are going to aggressively attack that market and really grow our customer base, albeit at slower rates.

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

And so I think we are just entering a different stage, a bit slower growth, much more of a focus on up-selling, and really taking advantage of 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 Nelson with Stanford Group.

Michael Nelson - Stanford Financial Group

First question, do you see anything going on in the broader regulatory environment, maybe any prospects for a phantom traffic reform? And then the second question is on wireless, it looks like you acquired about 51,000 wireless customers. Is there any change to your wireless strategy overall? Thanks.

Jeffery R. Gardner

On the regulatory front, we don’t see significant change. We continue to hope that there can be some comprehensive USF reform. There’s an industry group that’s working on the phantom traffic initiative. I don’t see anything happening in the real near-term there, so nothing that should really drive the results in the short run, but obviously that’s always an important component of our business.

The wireless access lines that you saw that we added related to the CT acquisition. They were in the wireless business. They were in a partnership with AT&T that was a part of the transaction there. There has been no change in our strategy. That was just a part of that transaction, and so we’ll continue to run that business going 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 running that wireless going forward?

Jeffery R. Gardner

Well, they are in the run-rate for CT Communications, so when we talk about the synergies and that deal in its entirety, they are included in those. This management team, all of us have been very active in the wireless and the wireline space, so incrementally, this is a very small business that we are able to manage day to day. And of course, over the long run, depending on where we think our focus should be strategically, we have optionality 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 with Banc of America.

David Barden - Banc of America Securities

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

And then I guess, I guess it’s incumbent to ask in the current climate, we’ve been hearing this from all the carriers, but if you could 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 been going up in some areas, limited business affect to this point in time, mostly on the housing market seems to be the issue here. But if you could just talk a little bit about that environment and how you think it’s going to trend for you guys in your footprint, that would be great. Thanks.

Brent K. Whittington

I’ll take both of those questions. On the billing conversion, a couple of things; one, if you look at not only our history with Valor 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 times very 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 are largely on one platform -- to our own internal billing application that all of our 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, we believe. But you are right -- billing conversions always complicate it and we’re always on edge as well until we hit the finish line. But we feel like we will be successful there.

David Barden - Banc of America Securities

And what’s the timetable for that, sorry?

Brent K. Whittington

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

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

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

Jeffery R. Gardner

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

David Barden - Banc of America Securities

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

Jeffery R. Gardner

No, I talked about that kind of one-off situation with regard to colleges, which is just simply the fact that more and more of these colleges, students are bringing their wireless phones to their dorms, which is not a significant trend. I think what is important to understand about our business is that as our residential base continues to erode at 4%-plus, that more and more of our business is focused on that small and medium business customer base that has been very stable and then, as we look forward, represents good growth opportunities for us.

David Barden - Banc of America Securities

Great. Thanks much, guys.

Operator

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

Thomas Seitz - Lehman Brothers

Thanks for taking the question. You mentioned that you’ve got to use the cash that you get out of the directory sale for either buy-backs or debt reduction within 12 months. Can you talk about how you are looking at that analysis, and then just a general discussion of options for cash flow above 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 the increased broadband capacity is integrating broadband with video. Is that just with the set top box and DBS, or are you beginning in the ADSL 2-plus markets to maybe test IPTV on your network? Thanks.

Jeffery R. Gardner

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

Brent K. Whittington

First on the cash, we’ve got to close the publishing transaction to get the cash, and as we mentioned, we expect that to happen shortly in the fourth quarter. Whenever that occurs, at that time we’ll take a look at the options available to us and certainly as we’ve mentioned before, we are going to be focused on things that are free cash flow accretive. I think right now and post close of that transaction, our leverage will be right at about 3.2 times, and we are happy with leverage right at that range, but those are 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 a satellite offering across our markets. We think that satellite is the right product competitively, with the big advantage in terms of HC channels versus cable today, and with respect to IPTV, that’s not in our -- even in our medium term plans with respect to the network. We’ve got a very viable triple play today.

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

Thomas Seitz - Lehman Brothers

Okay, great. Just a quick follow-up; so you are comfortable with leverage essentially where it’s at? You are producing a fair amount of free cash flow above and beyond the dividend, so is it fair to say that share buy-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 when you look at where our stock price is today and the dividend yield, that would make a lot of sense. But as Brent said, we’ve got to close that deal first to have that optionality.

Thomas Seitz - Lehman Brothers

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; maybe give us a sense for how high you think net leverage could comfortably be? And then 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 has absolutely no impact on any of your subsidies. I just wanted to make sure that that’s true.

Jeffery R. Gardner

That is true. With respect to net leverage, we’re not going to give you a precise number, Chris, but just the way we think about it is that 3.2 isn’t religion with us, but we do very much value our access to the capital markets and pay very close attention to our leverage ratios, and so should we see an opportunity to meaningfully create shareholder value that would involve leveraging up for a short period of time and then subsequent deleveraging. We’ve done that a couple of times as Windstream and many times previously in our careers in terms of managing the acquisition environment. That’s something that we’d be real comfortable with. We would work really closely with the credit agencies and make sure that we were absolutely comfortable from a leverage perspective, but that’s what we are comfortable saying.

The second part of the question was ’08 USF. So this year, I think what happened, we saw a slight decline in federal USF because our expenses went down, and so we fully expect to continue to manage this business as if it were competitive, because it is. And so we’ll see similar pressure in 2008 as a result, but not significant.

Christopher Larsen - Credit Suisse

Thank you.

Operator

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

Jason Armstrong - Goldman Sachs

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

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

Jeffery R. Gardner

First of all, competitively, 10 to 12 will be available not across our entire base but to our most densely populated markets, which will equate to somewhere between 25% to 30% of our marketplace. And really our view on that is that again, broadband is the strategic core to our relationship with our customer. This allows us to be very competitive with any offering out there in the marketplace. It allows us, our customers to continue to take advantage of what we see as a macro trend with respect to increasing usage of their network and increasing demands for faster speeds as customers are using more video, et cetera.

We think that’s a level that is going to allow us to be very competitive over the near to medium term with respect to broadband on the home zone 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 product and the EchoStar product, and we will be deploying a similar type of product that will integrate these two important core products for us that will really give us a platform not only to provide more of a Windstream branded video experience but also a platform to begin selling and monetizing that broadband connection more into the customers home with things like movies initially, but over the longer run there is going to be a lot of focus in terms of how you can further develop that opportunity.

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

Jason Armstrong - Goldman Sachs

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

Jeffery R. Gardner

I wish I could. I think that really is going to be a key to 2008 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 to be in the next 12 months.

Jason Armstrong - Goldman Sachs

Okay. Thanks.

Operator

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

Rob Clancy

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

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Windstream Q3 2007 Earnings Call Transcript
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