When Windstream (NASDAQ:WIN) reported second-quarter results last week, the telecom service operator's stock had recently fallen 61% in just three months. The spin-off move that created asset-management company Communications Sales & Leasing (NASDAQ:CSAL) left investors looking for value and game-changing business cases on both sides of the division, finding none.
But the quarterly report turned out to be strong. Bottom-line losses were smaller than expected, and the company's focus on business-to-business services has started to lift profit margins. Windstream shares have now bounced back a bit, gaining 33% since hitting rock bottom.
Decent financial results helped Windstream recover, of course, but that's not the whole story. For a fuller view of what's going on inside the company, you should look at management's quarterly earnings call with Wall Street analysts. I did, and here are five of the most interesting business insights shared on this call.
Planned service improvements ...
Windstream's consumer business has been struggling with subscriber losses. In the second quarter, for example, the total number of customers in the consumer segment decreased 5% year over year. Hardwired phone lines accounted for most of these losses, but Windstream saw declining subscriber numbers even in its broadband Internet services. One way to stem these losses, and maybe even turn the frown upside down eventually, is to improve the services themselves. Management is using that tactic today:
"We plan to launch premium speeds of 50 Meg and higher in the back half of 2015 that will reach approximately one million locations, including 380,000 existing customers," said Windstream CEO Tony Thomas. "This deployment provides a great opportunity to generate higher ARPU and increase market share.
"We also launched Kinetic -- our IPTV product -- in April, which drives a significantly higher bundled ARPU and positions us well to increase market share and approve retention."
... with an immediate payoff
Apart from stemming the flow of migrant consumer-grade subscribers, better services also allow the company to charge each customer a little bit more. Despite the lower customer counts, consumer revenues increased 2% year over year as the service improvements started to bear fruit. All told, that works out to 5% higher revenues per user, or ARPU.
Windstream's management was happy to discuss how they got to that healthy figure. For one, faster broadband speeds open up whole new selling vistas. For another, TV service bundles tend to deliver dramatically higher ARPU than single-service contracts.
"I think the best way to think about the ARPU uplift is more just from the monetization of speed itself," Thomas said. "That's the real opportunity we have, is the vast majority of our customers are on speeds less than 10 Meg. And now we have the opportunity to sell 25 Meg, 50 Meg, and even 100 Meg going forward."
"On average," added CFO Bob Gunderman, "in terms of ARPU, we have about twice the ARPU with a Kinetic customer then just a regular bundled customer."
"Windstream has elected to accept Connect America fund, or CAF-II offers, to expand and support broadband service to approximately 400,000 rural locations," Thomas said.
"The annual support of $175 million over the seven-year period equates to over $1.2 billion, which is an incremental $500 million over Windstream's current federal USF support. We're very excited about the CAF-II program, which will enable us to continue to serve rural locations that would be otherwise un-economic to serve without universal service support and make substantial investments to add many new locations.
"The returns on these investments will be accretive to free cash flow while better positioning our network for the long term."
In other words, Windstream is happy to accept the service requirements tied to the Connect America Fund subsidies. It all works out to stronger networks in the long run while adding to cash flows in the short term. Simply put, there are no downsides to accepting this offer, and Windstream will pocket $1.2 billion of CAF-II grants.
Selling that 20% stake in CS&L
"We retained a 20% equity stake in CS&L, currently valued at $624 million, and are committed to using the proceeds to reduce debt," said Thomas. "We expect to complete the CS&L monetization at the right time. CS&L is undervalued, and we're going to be opportunistic to find the right market conditions."
"CS&L is undervalued at current levels," added Gunderman. "While it is our preference to monetize sooner, we have a flexibility to take up to 18 to 24 months from the date of the spin in order to maximize the value of the investment for Windstream and our shareholders."
That mantra showed up several times in the call: Communications Sales & Leasing is undervalued, and we're going to make the most of our 20% ownership of that stock.
But make no mistake -- Windstream is bound to sell off its CS&L holdings eventually. It may take up to two years, but Windstream made a firm commitment to make this move. You'll find these terms in SEC filings and underwriting agreements. One analyst wondered whether Windstream could get out of this commitment under any circumstances, but the answer was a firm "no:"
"That is set in stone," said Thomas.
Finally, Windstream set up a $75 share buyback authorization. Putting the entire policy to work would reduce Windstream's share count by approximately 12% at current prices. Management sees this as a fantastic use of cash assets.
"It was the board's conclusion and mine that when you look at the current valuation of Windstream, the ability to buyback our shares was simply an unbelievably attractive opportunity that we wanted to take advantage of," Thomas said.
Mind you, buybacks are not always the most shareholder-friendly use of company cash, but it's hard to argue with Thomas' logic here. Windstream shares have fallen a long way in recent months, and the stock never looked expensive to begin with. The current situation only makes sense if you believe that the company is doomed to a slow but certain death. That's not what I see in the second-quarter report, and most certainly not what you'd expect the company's own management to say.
So Windstream is putting its cash to work for shareholders in a very direct way. If you don't like that, you never thought the company stood a chance in the first place.