Windstream Puts Focus on Growth

Since it was spun off from Alltel Corp. in 2006, Windstream Corp. has transformed itself from a company that largely provided landline phone service to rural areas into one that offers an array of data and communication products and services to consumers, businesses and even the big wireless carriers. Of course, this wasn't something that just happened.

"What happened over the last five years was clearly part of a five-year plan we put together to pretty radically change the focus at Windstream," said Jeff Gardner, president and CEO. The plan called for concentrating "on areas that were growing, to put us in a position to pay our dividend for a long time and show investors that we can grow the top line of this company."

As consumers continue to abandon their traditional landlines in favor of wireless and Internet-based phones, historically rural carriers like Windstream and Frontier Communications have seen revenue declines. Excluding lines gained through acquisition, Windstream lost about 122,000 voice lines in 2010.

According to a recent Associated Press story, Arkansas and Mississippi lead the nation in the number of adults - about 35 percent in each state - who depend solely on cell phones.

Windstream's 2010 revenue declined 2.2 percent to $4.1 billion. For 2011, the company predicts revenue that is no better than flat and could be down as much as 3 percent from last year.

But analysts who spoke to Arkansas Business said that for 2011, Windstream could see organic growth - that is, revenue increases that aren't purely a result of acquisitions, of which Windstream has made north of $4.5 billion.

"I think probably 2011 and 2012 are very interesting years for the company, because I think they will begin to show some positive organic growth in the business as enterprise services overtakes residential services," said Barry McCarver, senior vice president of equity research with Stephens Inc.

Donna Jaegers, vice president and senior research analyst with D.A. Davidson of Great Falls, Mont., was also upbeat on Windstream's future.

"I think it's bright," she said. "I think what they've done in the last two years to really change the complexion of the company and morph it more into business services and broadband is going to enable them to actually show positive revenue growth in 2011, compared to their peers Frontier and Century that are just trying to slow down the shrinkage."


Pushing Data Services

One area in which Windstream has made a big push is data services, such as data backup, managed hosting and cloud computing, evidenced by its recent $310 million all-cash purchase of Hosted Solutions of Raleigh, N.C.

Windstream had gained several data centers as part of its various acquisitions and offered some data services prior to the Hosted Solutions purchase. But most of the Hosted Solutions staff and management stayed on board to provide expertise in this area.

Gardner said Windstream customers of all types had been clamoring for these services, from very small businesses seeking data backup or outside IT infrastructure to larger enterprises that want to increase their network efficiency by outsourcing some of the processing horsepower they need.

Another element of Windstream's strategy is selling backhaul service to wireless carriers. As wireless data use increases, these carriers will have a greater need for leased fiber from companies such as Windstream to handle the increased load. "It's one of the big reasons we bought KDL last year," Gardner said, referring to Windstream's $818 million acquisition of Q-Comm Corp. of Overland Park, Kan., which owned fiber-rich Kentucky Data Link Inc. of Evansville, Ind. KDL has a contiguous fiber network of 30,000 miles across 22 states.

"Fiber is going to be an ever-important part of the infrastructure, whether it's on wireless calls or home phone data broadband usage in your home. So a fiber company like KDL was perfect," Gardner said. "We're really getting a lot of our new business opportunities from cellular companies who need fiber-to-cell, because not only are things like Netflix being used on televisions at home, but also more and more smart phones are accessing video clips and people are watching Netflix on iPads, etc."


The Bandwidth Battle

As a broadband provider itself, Windstream also has to contend with bandwidth-hungry applications like Netflix, YouTube and Hulu. The advent of high-definition video has increased the strain on Internet providers. Gardner didn't disclose how much of Windstream's Web traffic is taken up by video applications, but it is likely a significant amount.

"Video is here to stay," Gardner said. "It's definitely something customers want and it's both an opportunity and a challenge for telecom companies. You have to figure out how to most effectively and efficiently transform your network to handle that."

So is this a net neutrality issue?

"It is in the aspect that for the network to work in the long run, people just can't expect the telephone companies and the infrastructure providers to provide an unlimited amount of bandwidth for the applications," Gardner said.

Windstream has long offered television service through its partnership with satellite provider Dish Network. But a new sales avenue it has developed during the last three years involves signing deals with apartment and condo owners to provide video, broadband and phone service.

"This is one area we're real proud of, because over the last two or three years we've made an effort to try to grow a channel that, before, we were losing in a big way to wireless and cable," said Brent Whittington, Windstream COO.

Instead of each unit having its own satellite, Windstream installs one large dish at the site to serve each unit through existing coax. The apartment owners pay Windstream a bulk rate, build the cost into the rent price and make money on the margin, he said.


Dividends and Revenue

A big part of what has attracted investors to Windstream has been the $1 dividend the company has paid each year since it was spun off.

"It's very important to our shareholder base," CFO Tony Thomas said of the dividend.

Windstream's stock has fluctuated between $6.02 and $14.40 in the last year and opened Thursday at $12.53. While the company's shareholders "also want stock appreciation - and we're working to get that back into the stock over the course of 2011 - we are absolutely committed to paying that dollar dividend," Thomas said.

Since Windstream was spun off on July 17, 2006, the company's stock has paid out about $4.70 per share in dividends, including a prorated dividend in its short first quarter of independent operation. Its stock price has fluctuated and is up about $1 over its debut price of $11.50.

Alltel stockholders got 1.04 shares in Windstream for every Alltel share they owned. When the spin-off was announced on Dec. 8, 2005, Alltel shares were worth $64.82. They closed at $53.65 on the day the spin-off was completed, the sum of the parts being valued at about 1.2 percent more than the combined Alltel.

Of course, Alltel stockholders subsequently realized a big gain when that company was taken private in 2007 and they were paid $71.50 per share.

McCarver, of Stephens Inc., offered a long-term view of Windstream in which the company attracts investors based on stock appreciation, in addition to the attractive dividend.

"The company still views the dividend as the most important vehicle for providing shareholder return, so I think the dividend is very safe and will be around forever," he said. "But we're closing in on a period in the company's history since their spin-off that they could put up some positive revenue and positive [pre-tax earnings] and net income," he said.

The growth will likely be a result of the revenue mix at Windstream shifting away from residential voice service in favor of increased broadband and business services. For 2010, that mix was about 60-40, with broadband and business making up the bigger share.

But a changing revenue mix doesn't mean Windstream is ceding residential business, said Rob Clancy, treasurer and senior vice president.

"The way we think about revenue here at Windstream is, we've been trying to improve the top line trends in total," he said. "Now the way in which we've been able to accomplish that is, we've been able to make improvements in broadband and business, and those now represent 60 percent of the total. And we've been able to show improvements on the consumer business, where those declines were once 5 percent and are now 3 percent."

"It's a multi-pronged approach," Clancy said. "When people ask me what do I think that percentage will be in three to five years, it's a difficult question to answer, and here's why: If our consumer revenue decline really exaggerated to 10 percent, that 60 percent would grow pretty quickly but it would do it the wrong way."

The right way is to pursue growth in broadband and business sales while slowing the decline of consumer voice lines as much as possible.

"But it's hard to land on a percentage and say, ‘Hey, look, in five years we want it to be X,'" Clancy said. "Because here's what I'm more interested in: I'm more interested in the top line trends being better in five years than they are today."