Windstream Sees Change in the Air

by Sarah Campbell-Miller  on Monday, Dec. 4, 2017 12:00 am   7 min read

Windstream Holdings Inc. of Little Rock has been reinventing itself since shocking investors by ending its traditional dividend over the summer.

Now it hopes to reward shareholders by raising its stock price, which could be an uphill battle for a business that started in the distinctly retro business of landline telephones.

Windstream’s strategy is selling new products, developing and owning software and helping customers shift from legacy offerings to new technologies.

Two new products for businesses are SD-WAN, offered in partnership with VeloCloud Networks Inc. of California, and OfficeSuite, an asset that came with Windstream’s $225 million acquisition of Broadview Networks Holding Inc. of Rye Brook, New York, in September.

Windstream also offers faster broadband speeds and DirecTV Now to residential customers. The residential products have been rebranded as “Kinetic.”

So the dividend was “no longer the right focus for our company as we looked at the sector we’re in and where we’re headed,” President and CEO Tony Thomas told Arkansas Business in a recent interview.

“Our shareholders are going to make money as Windstream moves to be a more growth-oriented company, as we pay down debt and invest back in the business and ultimately drive stock price appreciation,” he said.

It’s a long-term strategy, Thomas said. But the short-term picture, thus far, has been a plunging stock price, losses and layoffs.

Windstream’s stock, already barely half what it was starting the year, dropped by more than a third after the Aug. 3 announcement that its dividend would end immediately. The closing stock price that day was $2.38, down from $3.72 the day before. And that was despite the simultaneous announcement that the company would buy back up to $90 million worth of common stock, a move that typically improves a stock’s price.

The stock sank as low as $1.73 in September but by last week was back in the $2.50 range. Ten Wall Street analysts expect the price to reach $2.59 over the next 52 weeks, according to PostRegistrar.com. StandardOracle.com found no analysts that had a buy recommendation on Windstream stock last week; two said it would outperform, six recommended holding it, two said it would underperform and one recommended selling it.

But one analyst who covers Windstream called the shares underappreciated. Gregory Williams of the Cowen Group of New York, wrote a Nov. 9 report citing the company’s stabilizing margins, potential asset sales and a subsequent cleaning up of its balance sheet. Thomas confirmed to Arkansas Business that Windstream is looking at the possibility of selling “dark,” or unused, fiber optic cables.

Losses and Acquisitions
Windstream has been in the red for nearly two years. Thomas took the reins in December 2014, and that, he said, is when a team focused on building “industry-leading” products was formed.

Windstream reported net income of $27.4 million, or 24 cents per share, in 2015. That was the year it spun off most of its copper and fiber assets into an innovative real estate investment trust, the publicly traded Uniti Group Inc. of Little Rock (originally known by the nondescript name Communications Sales & Leasing Inc.).

Windstream reported a net loss of $384 million, or $4.11 per share, in 2016, and has racked up $280 million in losses for the first three quarters of 2017.

The company, in several earnings releases, has attributed the losses to the cost of recent acquisitions, including the Broadview purchase. Windstream also bought Earthlink Holdings Corp. of Atlanta in February in an $1.1 billion all-stock deal.

Another loss is expected in the fourth quarter, with seven analysts predicting an average decline of 39 cents per share, according to Postregistrar.com. That’s a significant improvement from the loss of 83 cents Windstream posted for the fourth quarter of 2016.

Meanwhile, revenue has been a mixed bag. After being down in 2016, revenue was flat in the first quarter of 2017, and up by double-digits in the second and third quarters. Asked when Windstream will return to profitability, Thomas said that “it’s always a journey,” but the company is focused on making progress every quarter and is “definitely on the right track.”

“Nowadays, you’ve got to drive multiple paths to success,” he said. “We’re focused on having industry-leading product capabilities. We’re focused on improving the balance sheet and, at the same time, making sure we have everyone focused on helping customers migrate from the legacy technologies to next-generation technologies. I think we have the right strategies and focus inside the company. And if you’re focused on the right things, you’re focused on your customers, you’ll get good answers for your shareholders and employees as well.”

He said the company had refinanced more than $1 billion in debt, and improving the balance sheet goes hand in hand with its focus on free cash flow.

“What we’re really focused on is our ability to generate free cash flow,” Thomas said. “And while there will be a lot of attention applied to earnings per share, that’s really not how most investors look at Windstream.

“They look at it in terms of what’s our cash flow generation,” he said. “And we continue to believe, as we indicated in this last quarter, we’re targeting roughly $200 million in adjusted free cash flow in 2017. And we’re confident we can continue to make progress in moving the business forward.”

Windstream’s discontinuation of the dividend and its commitment to using free cash flow to pay down debt should remove over $150 million of debt each year going forward, according to a Nov. 9 note by analyst Frank Louthan IV of Raymond James & Associates Inc. of St. Petersburg, Florida.

On Tuesday, Windstream announced another debt exchange offer it said could to further strengthen the balance sheet by extending maturities.

Workforce Changes
Another change that’s taken place at Windstream is in its workforce. The company said in January that it would eliminate 164 positions, including 25 in Little Rock.

Twenty-one people in Arkansas were laid off in September, and there were layoffs in other states as well, although Windstream declined to disclose the total.

The company now has about 13,000 employees, including some 1,400 in Arkansas.

Thomas said the recent layoffs were a result of efficiencies created by the Earthlink and Broadview acquisitions and that Windstream has more automated “next-generation technologies” that require fewer hands on deck, though more skills are necessary.

Those new technologies include SD-WAN, or software-defined wide-area networking.

SD-WAN shows business customers which applications are using their bandwidth, allows them to prioritize those applications and provides the customer with multiple ways to access the internet, whether through an ethernet or broadband cable or through the towers smartphones use to connect to the internet.

“The beauty of it is the software does all the work for the customer,” Thomas said. “And what we’ve spent a lot of time on is making sure that user experience is very intuitive.”

To explain the bandwidth priority function, he cited an example: A retailer complained about network congestion slowing its point-of-sale system. SD-WAN determined that employees were hogging the bandwidth by listening to music on Spotify while stocking shelves. SD-WAN allowed the store to prioritize the bandwidth it had, so sales got bandwidth before earbuds.

Another product Windstream is touting is OfficeSuite, a UCaas product. UCaas — Unified Communications as a Service — is a cloud-based platform that replaces traditional business telephone systems.

OfficeSuite provides a way for businesses to move voice communications to the cloud and integrate with other services like instant messaging and web and video conferencing.

To customers, benefits can come in the form of transcribed voicemails that arrive by email, or high-definition video conferencing from desktop computers, tablets or smartphones. Some employees may not even need desk phones.

Products like SD-WAN and OfficeSuite are what the market demands, Thomas said, and 36 percent of Windstream’s enterprise sales in the last quarter were associated with such “next-generation” products.

‘Agile’ Development
Windstream has also changed the way it develops products. “The big breakthrough we’ve had has been this transformation from purely being a connectivity provider to being a software development company,” Thomas said. Windstream now deploys an “agile” software development process.

Thomas said its old “waterfall” process involved developers writing 100-page documents that laid out every requirement for a project to be successful for one year. By the time the document was finished, it was out of date, he said.

The agile process has the developer putting out mini-updates every three to four weeks and pushing the software to market much faster. Many companies are deploying the agile process.

But what separates Windstream from its competitors, Thomas said, is that it owns the software, owns the customer experience and is investing in internal research and development while other companies are relying on other providers.

The business products and software are just one side of Windstream, however. The company has two units as of its last earnings report: Cloud & Connectivity and Consumer & SMB.

Cloud & Connectivity sells products and connectivity to businesses; Consumer & SMB sells high-speed internet and entertainment products to residential customers.

In fact, Windstream has invested more than $200 million since 2015 on Project Excel, which upgraded and modernized its services, bringing faster broadband speeds to residential customers.

Windstream also offers DirecTV Now to residential customers. Thomas described it as classic cable for cord cutters and said it’s similar to Netflix, with the signal being transmitted over broadband connections instead of satellite or cable box.

The digital video recorder also operates from the cloud rather than a physical, on-premises box.

The speed enhancements and bundling opportunities like the leveraging of DirectTV Now should help reduce churn and increase customer lifetime value, according to Louthan, the Raymond James analyst. He does not expect broadband to be profitable before 2019.

The residential customer offerings are yet another way Windstream is embracing one of the most “transformational times” for technology in his 20-year career, Thomas said.

Traditional phone systems have seen double-digit declines in recent years, Thomas said, but cloud-enabled technologies and UCaaS products are growth opportunities.

“We’re in a massive migration here from older technology to newer technology,” he said. “We’re seeing that at Windstream, and we’re at the forefront of helping customers make this migration from old technology to new technologies … We want to be the trusted adviser that helps our customers navigate this transformation that’s taking place.”

At the same time, Windstream will continue to be opportunistic about acquisitions, he said.

Asked if the company might be acquired, Thomas said Windstream takes its fiduciary duty to shareholders very seriously and, as a public company, must consider all options.

“We’re here operating a business for the long term,” he said. “We’re making investments, substantial investments, to make sure we have an industry-leading product set, whether you’re a very large enterprise or you’re a residential internet customer. I think, when you look at our track record, it’s one that we make decisions that are in the best interest of our shareholders over a long period of time. And I think that is the right recipe for success.”

 

 

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