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Windstream (NASDAQ:WIN)

Q3 2012 Earnings Call

November 08, 2012 8:30 am ET

Executives

Bob Gunderman - Senior Vice President of Financial Planning and Treasury

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

Anthony W. Thomas - Chief Financial Officer

Brent K. Whittington - Chief Operating Officer

Analysts

Michael Rollins - Citigroup Inc, Research Division

Simon Flannery - Morgan Stanley, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

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

Scott Goldman - Goldman Sachs Group Inc., Research Division

Batya Levi - UBS Investment Bank, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Barry McCarver - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Windstream Q3 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Bob Gunderman. You may begin, sir.

Bob Gunderman

Thank you. Good morning, and welcome to our third quarter 2012 earnings call. We appreciate you joining us today. Before we get started, let me remind you that our earnings release, supplemental pro forma results and our third quarter earnings presentation are available on the Investor Relations section of our website.

Today's discussion includes certain forward-looking statements. Please review the Safe Harbor language found in our press release and in our SEC filings which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements. The presentation also includes certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available on the Investor Relations section of our website.

Before I turn the call over to Jeff, I'd like to cover a few items upfront. For the quarter, we reported earnings of $0.09 per share on a GAAP basis. These results include approximately $7.8 million in after-tax merger and integration expense and $7.5 million in restructuring costs. Excluding these items, our adjusted EPS would have been $0.12 for the third quarter. Discussion of our results and growth rates for the remainder of this presentation exclude these non-operational items.

We have provided supplemental pro forma financial results that include the PAETEC business for all periods shown. This quarter, we have provided enhanced business operating disclosures, which include PAETEC and present total business customer locations segmented by enterprise and small business, as well as carrier special access circuits.

In addition, we are separately disclosing our initiative capital expenditures, which include fiber-to-the-tower investments and our portion of the broadband stimulus investments. I'd also like to point out that the quarterly growth rates discussed today are presented on a pro forma, year-over-year basis, unless otherwise noted.

Beginning on Slide 3, participating in our call this morning are Jeff Gardner, President and Chief Executive Officer, who will discuss the progress we're making on our strategic goals; Tony Thomas, our Chief Financial Officer and Treasurer, who will provide a financial update; and Brent Whittington, Windstream's Chief Operating Officer, who will give an operational update. At the end of our presentation, we will take a few questions.

With that, here's Jeff Gardner.

Jeffery R. Gardner

Thanks, Bob, and good morning, everyone. Before we get into the details, let me make a few comments. 2012 has been a solid year for Windstream from a strategic, operational and execution standpoint. We have made significant progress on integrating PAETEC, increasing business sales productivity, improving our cost structure and investing in our network, all of which have advanced our core strategy.

During the third quarter, we grew revenue and adjusted OIBDA sequentially and expect further improvements during the fourth quarter. Earlier in the year, we discontinued certain PAETEC wholesale products, which lowered our expected adjusted OIBDA by $37 million. We identified plans to help overcome this reduction and reached the low end of our guidance range. These plans have been completed and will result in permanent run rate improvement.

During the third quarter, we saw increased promotional pressures in the consumer channel and a slowdown in carrier revenues. As we look to the fourth quarter, we continue to expect considerable improvement in adjusted OIBDA sequentially, and now expect adjusted OIBDA for the full year to be in the range of $2.41 billion to $2.43 billion. Regardless of where we land in this range, the result will be a decline in adjusted OIBDA of 1% or less, which is a solid outcome.

Let's now turn to our third quarter result. Beginning on Slide 4, the key takeaways that I would like to emphasize today are: First, we are confident in our strategy and our business is performing very well. We grew both revenue and adjusted OIBDA sequentially and expect continued momentum in the fourth quarter.

Second, we saw solid performance in our business channel as a result of our strengthened capabilities, advanced solutions and nationwide network. We improved our cost structure with a management reorganization and incremental deal synergies. The PAETEC integration remains on track and we are seeing many benefits to operating as a combined organization.

Finally, we continued to invest in strategic growth initiatives, namely fiber-to-the-tower and broadband stimulus projects. Importantly, the steps we were taking position this business for continued success and I am confident in our ability to deliver strong, stable free cash flow support to our dividend, which is a key component of our investment thesis, and we believe is the best way to provide returns to our shareholders.

Moving to Slide 5. Windstream's strategy is based on 3 simple goals, which are leading to steady improvements in our results. These include grow strategic revenue, improve our cost structure and pursue strategic opportunities to further advance these goals. This strategy will produce stable and growing free cash flow and support our $1 dividend.

Here's an update on our third quarter progress in each of these areas. Strategic revenue now represents 69% of our total revenue and grew 2.7% during the quarter. We have successfully repositioned the business in growth segments and fundamentally changed the revenue trajectory resulting in better financial performance.

We improved the cost structure through our reorganization efforts and achievement of the deal synergies during the quarter. Our focus on cost management has allowed us to maintain very steady margins throughout our transformation to a more business-centric company.

Our targeted acquisition strategy has strengthened Windstream. The PAETEC acquisition created a national footprint, which has improved our ability to win larger, multi-location business customers, build a first-class business sales organization, with advanced solutions, expertise and network capability, which are allowing us to gain market share and improve business revenues.

Let me wrap up by saying that I am confident in our strategy, which has driven steady improvements in our financial results over the past several years. We continue focusing on improving revenue trends, managing costs and pursuing strategic growth opportunities, all with the goal of providing long-term support for our dividend.

With that, let me turn the call over to Tony, who will discuss our financial results.

Anthony W. Thomas

Thank you, Jeff, and good morning. Let me begin on Slide 6 with a few financial highlights that demonstrate we are effectively executing our strategy and delivering improving financial results. During the third quarter, Windstream generated revenue of $1.55 billion, a decrease of less than 1%. On a sequential basis, revenue increased by $15 million, which was the best sequential improvement we have seen today. Adjusted OIBDA was $603 million, a decrease of 1%. As expected, adjusted OIBDA improved sequentially by $7 million, driven by continued synergy realization and other cost structure improvements.

Turning to revenue by channel on Slide 7. Business service revenue was $906 million, up $24 million or 3%. Our business team continues to achieve their sales targets and sell incremental value-added services. Specifically, data and integrated services grew by $32 million or 9%, due to growth in IP, next-generation data and data center services. Carrier revenue increased $5 million or 3%, related to fiber-to-the-tower installations, which was offset partially by a slowdown in carrier sales and increased grooming activities. Business voice and long-distance revenue decreased by $12 million, due to ongoing migrations from traditional voice services to integrated voice and data services, offset somewhat by the implementation of higher end-user rates.

In the consumer channel, service revenue was $335 million, down 3%. Voice and long-distance revenues declined $14 million or 7%, due to fewer voice lines and declining feature packages, which are partially offset by higher end-user rates. Broadband revenue increased $4 million or 4%, due to growth in subscribers and sales of broadband features and faster speeds.

Wholesale revenues were $220 million, down 10%. Intercarrier compensation reform was implemented on July 1, and the impact was in line with our expectations. Switched Access revenues decreased by $32 million, due to lower intrastate access rates and traditional declines in access lines, offset somewhat by carrier settlements and better usage trends during the quarter. USF revenues increased by $13 million due to new recoveries designed to mitigate the transition to lower intercarrier rates and higher end-user pass-through surcharges. Overall, we are very pleased with the performance of our business, particularly in the business channel.

On Slide 8, cash expenses decreased by approximately $6 million or 1%. Specifically, cost of services increased by $32 million or 5%, due to network growth and interconnection, increased data center expenses due to growth and expansion, higher benefit costs and higher pass-through federal USF surcharges. Cost of products sold increased by $5 million, consistent with higher product sales. SG&A expenses decreased $42 million or 16%, due to $15 million in incremental deal synergies and other cost management initiatives.

Turning to Slide 9, during the quarter, we spent $289 million on capital expenditures, comprised of $197 million core CapEx and $93 million in initiative CapEx, which includes fiber-to-the-tower investments and our portion of the broadband stimulus investment. In addition, we spent $18 million in integration capital related to PAETEC network optimization opportunities.

Adjusted free cash flow was $182 million during the third quarter. Year-to-date, we have generated $669 million in adjusted free cash flow and paid out $441 million in dividends. During the third quarter, working capital was a use of cash, due in part to higher accounts receivable, driven by our stimulus project receivables and the quarter end falling on a weekend, which impacted the receipt of payments, both of which should reverse.

Turning to Slide 10, our debt maturity profile is well positioned, with maturities staggered in a very manageable way. We have roughly $1.1 billion of debt maturing in the third quarter of 2013 and have created the flexibility to refinance this with revolver borrowings, should we choose to. We ended the quarter with net leverage of 3.7x adjusted OIBDA and plan to direct excess free cash flow towards debt pay down to bring us closer to a leverage range of 3.2x to 3.4x.

Slide 11 provides a few more details on our outlook for the fourth quarter. As Jeff mentioned, we had increased promotional activity during the third quarter, which we plan to continue in the fourth quarter. In addition, we also saw a slowdown in carrier sales and an increase in carrier grooming activity on our TDM network. The net results of these items will offset from the improvement we originally anticipated during the fourth quarter. Having said that, adjusted OIBDA in the fourth quarter should improve appreciably over the third quarter related to the momentum we are seeing in our business channel. Incremental fiber installations, additional PAETEC synergies and roughly $10 million cost savings related to our reorganization efforts.

Importantly, the investment thesis for Windstream remains the same. We produce a very strong free cash flow and returned a significant portion of it to our shareholders in the form of a dividend. Our strategy has resulted in stable and improving revenue and OIBDA trend, and we expect CapEx to decline from current levels beginning next year, all of which support our ability to continue paying a very attractive dividend to our shareholders for the long term.

With that, let me turn the call over to Brent to provide more color on our operating results.

Brent K. Whittington

Thanks, Tony, and good morning, everyone. Turning to Slide 12. The business sales momentum remained strong during the third quarter, led by sales in data and integrated services. Enterprise customers or customers who generate $750 or more in revenue per month grew 7% year-over-year. This was driven by our improved ability to win multi-location deals as a result of our nationwide network.

We are generating higher ARPU by selling additional offerings such as cloud and managed services, co-location, equipment and network services to name a few. With small business customers, we are differentiating Windstream by creating innovative bundles that combine our voice and data offering with other managed services such as website design, hosting, and security. Our brand promise of smart solutions, personalized service is resonating across our business channel and business ARPU, excluding carrier revenues, grew 5%. Carrier circuits were up 3% due to fiber-to-the-tower installations, which were offset partially by a slowdown in carrier sales and increased disconnects related to carrier grooming activities and migrations to our fiber network.

On Slide 13, our consumer channel continued to deliver steady operational results. We added 6,000 new high-speed Internet customers, bringing our penetration of primary voice lines to 70%. Given this high penetration, growing broadband units has become more challenging. During the third quarter, we increased our promotional activity to improve our success in switching cable customers, which we expect to continue during the fourth quarter. Consumer voice lines declined by approximately 22,000 and represented a 4.4% decline in total customers year-over-year.

On Slide 14, our engineering team is making great progress on our capital initiative this year. Through the end of the third quarter, we have installed fiber to over 2,100 towers and have around 1,900 towers currently under construction that we expect to complete in the next 12 months. We expect to reach between 4,000 and 5,000 towers, both in and out of our ILEC footprint.

In the consumer markets, we are launching VDSL in 87 markets here in the fourth quarter, which will enable roughly 45% of our customers to receive 10 to 12 meg speeds and 12% to receive 24 meg speeds, providing the opportunity to increase ARPU and improve our competitiveness.

Additionally, work is continuing on the broadband stimulus projects, which should add roughly 75,000 new addressable lines upon completion and provide an opportunity to further increase our broadband penetration. While our capital spend is elevated this year. Beginning next year, we expect CapEx intensity to decline as the fiber-to-the-tower and stimulus projects wind down. Excluding the initiative CapEx, our core CapEx intensity was below 13% during the third quarter.

To wrap up, the Windstream team is focused on executing our strategy and performing well. We are seeing steady progress in our integration efforts, business sales momentum and capital initiatives.

Thanks for your time this morning. We'll now take a few of your questions. Kevin, if you could please review the instructions and open the call to questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Rollins with Citigroup.

Michael Rollins - Citigroup Inc, Research Division

What's happening in the variance between the normalized free cash flow and the reported free cash flow? And if you can just give us maybe some perspective on where those different items are going to end up maybe both for the fourth quarter and just heading into 2013?

Anthony W. Thomas

Michael, there is a variance between Windstream's definition of adjusted free cash flow and the GAAP, the Generally Accepted Accounting Principle definition of free cash flow. The difference in the third quarter was $83 million. Importantly, the items that make up that difference are temporary items and will disappear specifically related to the integration. And the breakdown of the $82 million relates to $13 million of merger integration, $12 million associated with our restructuring that we did in order to obtain $40 million in cost structure improvements and $18 million in integration CapEx. There was also some working capital used within the quarter of roughly $40 million, of which we expect to reverse in the fourth quarter. So I look at those differences, importantly, we think those are temporary, specifically associated with our integration activities with PAETEC or more temporary in nature. And as you look to 2013 obviously, our integration will be more complete and we expect to incur substantially less charges going forward.

Operator

Our next question comes from Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Perhaps you could just give us a little bit more color around 2013 cash flows. You talked about the CapEx coming down a little bit, although we certainly heard AT&T yesterday talking about the need to invest heavily in expanding speeds to the 75- to 100-megabit-type levels, I'd be interested in your comments on their strategy. And then any updated color on cash taxes in '13 and pension contributions?

Jeffery R. Gardner

Simon, thanks for the question. We're going to stay away from 2013 guidance, but just with respect to if you look at -- if you look to our business and specifically related to our investments, I think the reason that we began breaking out our core CapEx versus our initiative CapEx this quarter is to show even this quarter we're in that range of 11% to 13%. And that's really what we expect that Windstream can run on, on a long-term basis. And so we remain comfortable with that. We delivered on that in the quarter. Our fiber-to-the-tower and stimulus projects both will end in 2013, and so we feel good about that. As it relates to the AT&T announcement, we too have been making investments all year to improve our competitiveness relative to the cable players in our markets to increase our speed. So I think directionally, they've got that right. And we feel good about where we are performing today in that segment. You can see that we picked up some net gain versus the last quarter, albeit with some increased promotional activity as Brent referenced during his comments. But I think directionally, we're doing the right thing to really get the most bandwidth out of our network that we can today and be competitive as possible.

Operator

Our next question comes from David Barden, Bank of America.

David W. Barden - BofA Merrill Lynch, Research Division

I guess, 2 if I could. Just first, I guess we've got about 7 or 8 weeks left in the quarter. It's a fairly -- still a fairly wide band between the lower end and the upper end of the guidance now relative to where we were in the third quarter. Could you kind of walk us through what are the 1, 2, 3 things in the next 8 weeks that are going to move us between maybe the lower and the higher ends of the guidance range. And I guess, the second question was just looking backward 7 or 8 weeks, I think that there was a greater degree of comfort in the original guidance at the low end of the original range and it sounds like that was related to promotions and the carrier grooming that happened maybe over the last several weeks, could you give us a little bit more color about why and what's going on in those areas?

Jeffery R. Gardner

Okay, great. Good questions, David. And yes, we will let you ask 2 questions. First of all, we had a plan with initiatives that we believed would allow us to reach $2.43 billion. I think that's what you're referring to on our last call. However, we've had some headwinds come up that will offset some of the expected benefits that give us some pause in terms of whether we can get all the way there. We're still doing everything we can to get there. Initiatives have been achieved. So we've done everything that we said we were going to do and they've resulted in nice improvements in the business, which we will continue in our run rate going forward, so they're permanent. During the quarter, specifically, we saw promotional pressures in the consumer channel and a slowdown in carrier revenues. As we look to 4Q, and much of that happened later in the third quarter, and so that's what affected our view of the range that I gave earlier. As we look to 4Q, we continue to expect considerable improvement in adjusted OIBDA sequentially. And as I said, our current view is that we'll come in between 2.41 and 2.43. Regardless of where we end or land in this range, it's about a 1% decline, which is a very solid outcome. And importantly, I think as investors are concerned about, the dividend is secure, whether we come in at $24.15 or $24.30, it really doesn't affect our view on the dividend with respect to 2013 and beyond. We're just -- we're seeing some temporary pressure and working very, very hard to overcome that. We can talk about some tailwinds that we have in the fourth quarter that lead to our confidence about our ability to improve our OIBDA sequentially. And those are, first of all, it'll be the first full quarter of the complete savings from our reorganization, so $10 million there. Very proud of what we're seeing in the business channel. As other -- some others in the industry have been reported some tough results on the business side, as Brent said, our strategy is continuing to resonate in the market and our business channels continuing to hit their sales quotas. We've got a considerable amount of fiber-to-the-tower installations going in, in the fourth quarter, which will help offset some of that carrier pressure that we talked about. We've got some additional PAETEC synergies. And finally, just as we look through the fourth quarter over the year, seasonally, we have lower costs. And the headwinds, as we said earlier, are carrier grooming on the TDM network and more aggressive consumer promotions. I'll let Brent give some more color on those specific headwinds that might help you better understand that.

Brent K. Whittington

Yes, David. On the carrier side, really, there's a couple things that I mentioned. One, is we turned up towers that we've been working hard to deliver. The speed of disconnects of the old copper access there was very fast, and that happened during the quarter. In addition, we saw in a couple states where we had lost that business. Those disconnects when those other competitive providers turned up fiber to our customers came in during the quarter much quicker than we thought might happen. The second thing we've seen and to Jeff's point, a little consistent with what we've seen from others in softness in sales. I mean, our carrier customers have seen sales to their retail base slow and that resulted in fewer carrier sales in the quarter as well, below the run rate we'd seen earlier in the year. But we step back and look at the carrier overall, it's still grown 5% year-to-date. And we've got momentum on delivery of our new fiber towers and continue to have conviction around wireless data usage and what that's going to mean for the future. In terms of the consumer side, we talked last time when we are slightly net negative on broadband adds in the second quarter, that we are stepping up our aggressiveness in the third quarter. And we really did that. I mean, that resulted in lower pricing and a little higher, for us, first month bill credit to offset some of the cost our customers experienced when they switched to Windstream. And that was reflected in our consumer business. But we felt we had to do that. And as you see in our broadband net, we showed a 10,000-unit net improvement from Q2 versus Q3, so that message resonated in the marketplace and it's just frankly a more competitive space and if we're going to retain our share and grow, we needed to respond. And I've been happy with how our team did just that.

Operator

Our next question comes from Frank Louthan with Raymond James.

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

Couple of things. Can you give us a little more color on the carrier activity? I mean is it just the overall business slowdown and everything else we've heard ahead of the fiscal cliff, et cetera, or are you actively seeing customers putting traffic on their own network or just taking it off of you, going somewhere else, give us some color on that. And then in regards to the churn activity, the promotional activity in the broadband business, how has that lined up in the past? What is sort of the long-term churn for that, if you signed up a customer on a promotion, 6-month promotion or whatever it is, what's sort of the stickiness, what percentage of those customers stay after the promotion is off? Or you do end up capturing a lot of switchers that are just flipping for a free deal? How should we think about the -- over the next 12 months, these customers that you brought on, if they're going to be around?

Jeffery R. Gardner

Great. Frank, first on -- I wanted to point out one thing that I think I'm really pleased with on some of the -- we've talked about that others in the industry have reported some softness. Our business sales were very strong, coming in at 3% for the quarter. And maybe, Tony, you can provide some color on what happened with respect to our carrier activities. And then, Brent, if you could just address that promotional activity question.

Anthony W. Thomas

Really, just to kind of reiterate what Brent said, Frank, the change in carrier was driven by really a combination of carriers' sales, other carriers simply having less activity in our network. We don't have absolute clarity, but I think it's a logical conclusion to assume that they've seen a slowdown in their activity, as the they've talked about externally. And as Brent mentioned, there's also been some grooming of the network onto their -- once we up-slice fiber to the wireless tower, they groom that and they eliminate the old copper TDM technology. I'll tell you that those are the 2 principal trends that we're seeing in the carrier business right now.

Brent K. Whittington

Yes, and on the churn, Frank, I mean our churn actually continued to improve versus prior year. So that's been a good story. I mean, think what we continue to see, I mean, it's harder to get customers to switch from one provider to another. And once you do get them though, we're successful in retaining those customers. And so we're not really seeing a big impact in churn, it's really just a more aggressive pricing market is the biggest issue there.

Operator

Our next question comes from Scott Goldman with Goldman Sachs.

Scott Goldman - Goldman Sachs Group Inc., Research Division

I guess 2 also. One high level maybe for Jeff. When you look at the margins of the business, they've been, I think, extremely consistent over the last 6-, 7-plus quarters on a pro forma basis. And this comes during a time where you're getting the benefits of the synergies from the PAETEC deal and still perhaps some from the priors. And as you look forward, you're going to get the benefit to the management, the reorganization that'll kick in, in the fourth quarter. But on a longer-term basis, I just want to understand as I see your cost of services go up because of the mix shift in your revenue, how comfortable are you in your ability to sustain the margins of this business once the PAETEC synergies wear off and you anniversary the changes of the reorganization looking out into, say, 2014 and beyond?

Jeffery R. Gardner

Yes, so I think that's a -- Scott, thanks for the question. I think that's a great question. And it's all about how do we plan to continue to get operating leverage out of this business. Importantly, you mentioned it, that we're going to see more PAETEC synergies in 2013. We'll see the full impact of our reorganization. We've always been good at Windstream about finding ways to cut costs. You can expect us to be as aggressive as possible on that in 2013 as well. And so we're constantly working from everything with -- from our interconnection costs to our efficiencies in terms of things like service delivery. We've got a lot of technology improvement happening in 2013 that will help us with that. But fundamentally, we're confident that we can continue to grow our business services with the targeted capital intensity of 11% to 13%, work on somebody's cost initiatives to get the kind of operating leverage that you're talking about. We've got a fairly unique model, which I think that everybody's struggling like -- with a little bit. We don't look exactly like Time Warner Telecom and we don't look like an RLEC. Our CLEC strategy uses an efficient capital deployment process where we use a combination of network options, including leveraging the significant amount of fiber that we have today, making new success-based capital investments and in some cases, leasing last-mile facilities. So I think that's fairly unique. But when you take everything as a whole, we feel confident in our ability to continue to improve the operating margins in the CLEC business. That's what we're betting on in the long term. We see a path there. We've been making improvements sequentially and expect that to continue into '13 and beyond.

Scott Goldman - Goldman Sachs Group Inc., Research Division

Great. And then second question, I guess, just want to understand, I think you go back a quarter, you guided to wholesale revenues being down, I think 16% for the back half of the year. Obviously, came in at a much better level than that. In the third quarter, looks like you've got some -- the access recovery benefit on USF. Just want to understand what's sort of change from the prior guidance on the wholesale and how should we think about the wholesale on a go-forward given some of these changes?

Anthony W. Thomas

Yes. Scott, wholesale Switched Access was stronger than we expected. And as I indicated in my prepared remarks, that was driven by higher-than-anticipated usage trends and some carrier settlements. There is usage seasonality and typically, third quarter is a good usage quarter for Windstream. It was simply a little better than we anticipated. And we'd also had some carrier settlements that were modestly positive to us but that's part of the put and take of just being a telecom company. And finally, we do expect Switched Access decline to drop in 4Q as they do through normal seasonality. But importantly, the wholesale business is now a shrinking part of Windstream. As Jeff indicated, business services and consumer broadband are now nearly 70% of our business, meaning that wholesale and consumer voice represent under 30% of our business.

Scott Goldman - Goldman Sachs Group Inc., Research Division

Okay. Are you able to quantify the carrier settlement this quarter?

Anthony W. Thomas

No, Scott, they're -- the settlements, roughly, I would tell you, are under -- are not that material to the overall trend. I would tell you that ultimately, when you look forward, you should think that there is seasonality in the business, and that's probably the best reflection of what's happening.

Operator

Our next question comes from Batya Levi with UBS.

Batya Levi - UBS Investment Bank, Research Division

Could you provide a bit more specifics on your comments about the carrier grooming. When -- how long do you think that will take and when do you expect that to transition off onto the Ethernet network? And also, when you look at your network expenses, is there a level of increased spending now to integrate the network? I think one of the worries that we had on the PAETEC network, that it wasn't fully integrated and you would need to increase spending levels to drive revenue growth. Can you provide some color on that?

Brent K. Whittington

Batya, yes, this is Brent. On the carrier grooming, I mean really, the length of time it's going to take is kind of tied to our delivery of towers, which we really expect to continue into 2013, and so I think that's a trend we'll continue to see. So how that impacts us is yet to be determined. But I mean, we always knew that those old copper circuits providing that access would be disconnected. The question was really the speed at which that would be disconnected. And as we've seen, once we turn up the networks, we're doing all the testing, they're built to be redundant, they're working as planned, and those copper discos are following very quickly thereafter. So over 2013 is my expectation there. In terms of the network expenses, I mean PAETEC was doing some work to connect those networks. You are right, they weren't fully integrated. They were working to continue that effort, along with connectivity to our own network. That's not something that happens in a short period of time and that's something that's underway as we speak today, and will continue for at least the next 2 to 3 years. That's a long-term effort just given the sensitivity, of course, to outages and the customer ramifications on that kind of activity. But that's something that is in our expense run rate. I wouldn't say you should expect increased levels of cost associated with that effort.

Jeffery R. Gardner

Just something if I could add to that to give you some color on how our thoughts have evolved throughout the year. As we saw our first fiber-to-the-tower conversions, there was a much longer time frame in terms of the carriers, the wireless carriers converting off the TDM network entirely and going to the fiber. And it seems as we progressed through the year and they've gotten more comfortable with their fiber-to-the-tower conversions, they've just done that much quicker. And that, too, quite frankly, has been a surprise, that they've been able to do that faster later in the year, and that's contributing a little bit to the carrier pressure.

Operator

Our next question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

Two questions. On the more -- a little more on business services, can you give us a little more color on how well you're selling your data center services now through the sales organization? And then also obviously, PAETEC was reselling a lot of Verizon last-mile copper in the east coast. What sort of storm damage did you take in the hurricane?

Jeffery R. Gardner

Donna, great questions. On data center, I'll tell you, the momentum on that side continues to really increase. I mean, we don't break out numbers specifically on data center. What I can tell you is during in the third quarter, we had our best data center sales quarter in our history. And I've been -- I'm really, really pleased with how those teams -- we've kind of got a matrix sales team, one focused totally on data center quota and then, of course, the other focused on network, and just how well they partnered together to pursue leads and opportunities in the marketplace, and that's what's driving those results. So making that a bigger part of every discussion we have with customers where we can sell that product line. So pleased with that momentum. In terms of the hurricane, you're right, we do have some operations in East Coast and we have had some impact from the hurricane. Our employees have certainly been working hard to restore service to our customers. Fortunately, we didn't experience just a great deal of plant damage, but we have been dealing with some power and service outages, primarily related, as you mentioned, to some last-mile access we had through Verizon. But the vast majority of our customers are already back in service and we're not expecting the financial impact from that to be material in the quarter, Donna.

Operator

Our last question comes from Barry McCarver with Stephens.

Barry McCarver - Stephens Inc., Research Division

So I guess just a couple of questions. On the -- in terms of the CapEx, I know you said you have a lot of fibers -- a lot of towers coming online in the fourth quarter. Your fiber build out, is that, in terms of CapEx, going to be a little front-end loaded in 2013 or should we expect it to be a little more linear throughout the year? And then just my second question, I think Brent mentioned targeting a leverage ratio of 3.2x to 3.4x kind of longer term and the opportunity to potentially pay some debt down. Is that an in the year 2013 goal you're referring to, Brent?

Jeffery R. Gardner

I'll let Tony take the leverage, Barry. On the fiber buildout issue, I mean I think what you'd expected to see is I mean, we're continuing to keep the hammer down to get delivery as fast as possible. And the run rates we finish on 2012 will continue through 2013, tapering down later in the year as we wrap up delivery. The real dependency there, of course, is always weather, which can be problematic in the fourth and first quarters. That'll be the only thing that gets in our way that could impact that.

Anthony W. Thomas

And Barry, this is Tony, in regards to leverage, we remain committed to directing our excess free cash flow to pay down debt. Given the new adjusted OIBDA guidance we gave this quarter, it's probably unlikely we achieve that goal in 2013, but we still expect to see significant reductions in CapEx next year and we do expect to pay off our debt. And importantly, as you look at our balance sheet, we have $1.25 billion available from a total revolver capacity, so we have a great deal of liquidity to manage our upcoming obligations.

Jeffery R. Gardner

Well, thanks for all the questions today. In closing, I'd like to thank the Windstream team for a solid third quarter. Overall, Windstream's business is performing very well and I am confident in our ability to deliver strong, stable free cash flow to provide long-term support to our dividend. Thank you, again, for joining us this morning and for all your interest in Windstream.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Source: Windstream Management Discusses Q3 2012 Results - Earnings Call Transcript
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