Windstream Earnings Call Insights: Wholesale Products, CapEx Trends

On Thursday, Windstream Corp (NASDAQ:WIN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Wholesale Products

Michael Rollins – Citi Investment Research: If you could just go through a little bit more detail of what especially took you by surprise to stop the offering of some of these wholesale products and as you look through now that you had more experience with PAETEC and what’s happening on the regulatory front, are there any other areas that you are reviewing to discontinue products or to restructure and optimize revenue portfolio. Thanks.

Anthony W. Thomas – CFO: This is Tony. I’ll get it started this morning. First to provide some clarity these wholesale switched access products are simply providing access to the PAETEC network and facilitating the origination and termination of voice traffic just to get some definitions out of the way. But when the PAETEC deal closed to kind of give us some more color on the timing, there were some carrier disputes related to certain wholesale products. But PAETEC had a prior lower court ruling that supported their billing practices. That ruling was appealed and the appellate court asked the FCC to provide some guidance. And the FCC made a court filing in mid March which attempted to clarify certain billing practices that formed the basis of those disputes, and obviously that court filing by the FCC was unfavorable to Windstream (NASDAQ:WIN) and is one which we did not agree with. In light of these disputes and moreover in light of the larger strategic relationships that Windstream (NASDAQ:WIN) has with these carriers we thought it prudent to suspend and modify these products. And based on the ongoing negotiations with these disputes we are going to limit our comments specifically on this issue to that. To kind of get to your next question which I think is an important one. We do believe we’ve capped the P&L exposure related to this issue and to your point we have done a thorough setting and review of the remaining products and see little risk. I would describe these as primarily just routine retail products that PAETEC was deciding. Those are products which Windstream has a deep level of experience and expertise.

A Closer Look: Windstream Earnings Cheat Sheet>>

Jeffery R. Gardner – President and CEO: Michael, this is Jeff. As it relates to PAETEC, the transaction is so important for Windstream and I am so pleased with the results that the combined business channel is generating. PAETEC brought tremendous enterprise level expertise and product offerings we’re seeing that, the benefits of our national footprint, it’s really introduced Windstream (NASDAQ:WIN) to a whole new set of sales opportunities with these capabilities, we are having tremendous success selling to larger multi-location customers as I said earlier. So with PAETEC we have the unique ability to offer sophisticated business solutions combined with our strategy which we really believe and really have seen evidence in the marketplace that is differentiating by delivering this with a personal service that larger companies aren’t able to execute on and so, overall we are very pleased with the PAETEC transaction, their employees are playing a significant role in our company, if you look at our core business results which is what that transaction was about. On that first slide that we included in our investor presentation, every quarter, we’ve seen increasing sequential business sales. And so, as it relates to that, we’re very pleased with how the core business is performing and coupled that with our consumer business continues to be in my view, the best performing consumer business in the country.

CapEx Trends

Simon Flannery – Morgan Stanley: Just to follow-up on Mike’s question. How much revenues were there in Q1 from the products that you are now discontinuing. Is there any accounts receivable or sort of about that type of provision that you’ve taken this quarter? And then perhaps you could update us on CapEx trends for the year, you gave a fairly wide range for this year, how do you think that is tracking? Is that also tracking to the low end of guidance and this 11% to 13%, can you get into that range next year or is that more kind of two or three year target?

Jeffery R. Gardner – President and CEO: I can start with the CapEx, Simon, I mean, I’m telling you CapEx is going to be a number that’s going to increase in the mid part of the year kind of typical construction frankly where it gets a little heavier in the summer timeframe and if you think about really the drivers of increased CapEx intensity this year versus past and certainly in the future it’s all about fiber-to-the-tower and the stimulus projects. Those are the biggest initiatives we have going on and we started the year with momentum that will pick up in Q2 and Q3 and then those really begin to wind down later in the year. So we talk about the 11% to 13% intensity levels we are thinking about that in the context of as we head into the 2013 and beyond really.

Simon Flannery – Morgan Stanley: So that’s a good range for 2013 as a whole?

Anthony W. Thomas – CFO: Yes.

Jeffery R. Gardner – President and CEO: Yes.

Anthony W. Thomas – CFO: This is Tony, I will amplify on my comments around on the wholesale products. Specifically about your question about the impact to the first quarter and to frame it up it did lower our first quarter 2012 revenue adjusted OIBDA by – in terms of pressuring it by $12 million and $5 million but more specifically to your question that left roughly at $10 million of remaining revenue in the first quarter. So when you step back and look at the year as a whole we really removed from our plans $64 million of revenue and $37 million of adjusted OIBDA related to the wholesale products. And as we said we believe we have capped the P&L exposure related to this issue. We believe we have a reasonable and appropriate reserve associated with these items and from AR perspective it should not be an issue from a P&L perspective going forward.

Simon Flannery – Morgan Stanley: So Q2 will have now revenues from this source and then it will sort of be flat lined from there.

Anthony W. Thomas – CFO: Correct.

Simon Flannery – Morgan Stanley: And then on the accounts receivable any of these carrier disputes you need to provision for.

Anthony W. Thomas – CFO: No at this point there are no additional provisions that are going to be required with these carriers, based on our current debt view.

Jeffery R. Gardner – President and CEO: I’d just say one other thing. As you look at Windstream (NASDAQ:WIN) and what we’ve been trying to do to transform the business. Even with this issue that we are discussing this morning our top line growth was minus 0.5% and as I looked across the industries results its one of the strongest numbers in the heritage telephone businesses that are out there today. so we are proud of that we do believe that we’re continuing to see improvement about 2012 and I’ll just remind everyone what Tony said, that we still expect to be in our guidance range on both revenue and OIBDA for 2012.