Q1 2020 Earnings Call - Pre-Recorded
The earnings conference call.
Joining me on the call today, our Tony Thomas Our Chief Executive Officer, and Bob Gunderman, Our Chief Financial Officer and Treasurer.
To accompany today's call we have posted the presentation slides earnings release and supplemental schedule on our Investor Relations website.
Today's discussion includes statements about expected future events and financial results that are forward looking and subject to risks and uncertainties that discussion of factors that may affect future results is contained in windstreams filings with the SEC, which are available on our website.
Let me now turn it over to Tony Thomas.
Thanks, Chris Good morning, and thank you for joining us today.
To begin on slide four I'd like to address our response to the covert 19 pandemic.
And its effect on how we do business into our network performance initiative Windstream has never been more critical as our nation World face a serious public health crisis.
We are a critical infrastructure provider to governments hospitals pharmacies and wireless carriers.
As students transition to online classes and businesses and employees home to work. We are responding quickly to meet our customers' needs first I want to begin by thanking our employees across the company for their dedication flexibility as we enter this unprecedented time.
In February we established a task force of leaders from around the company to monitor revised and manage our response to covert 19, including employee health and hygiene guidance compensation benefits facility cleanings and supply chain management.
Windstream has quickly and efficiently implemented numerous actions across the company to do our part to mitigate the spread of the virus.
We rapidly focused on increasing the number of employees that were able to work from their homes ending March with less than 7% employees working on location and our five largest offices.
To provide seamless service to our customers across the company. We also quickly enable the bulk of our call their employees to work from home with laptops and soft phones.
Given the increased demand for residential broadband connections our field technicians are front and center in our ability to provide new service and repairs to existing service.
Their safety and our customer safety are Paramount during this pandemic.
As a result, we implemented home garage and to limit face to face interactions with technician work groups and acquired and distributed hand, sanitizer gloves and face masks to allow our technicians to continue to work safely with adequate protection.
We also increased our compensation levels temporarily far field technicians, considering the current work environment.
I want to specifically thank them for their efforts over the past weeks as customer demand has never been higher and personal safety concerns have never been greater.
I also want to recognize our procurement team for effectively managing our various supply chains across the company during this global crisis.
Our team managed to definitely avoid any significant supply chain issues through constant communication with our vendors and suppliers, while closely and effectively managing our existing inventory.
As seen on slide five our network has performed seamlessly throughout the past couple of months. Our network is well equipped to handle the expected incremental capacity given our past modernization efforts that migrated windstream to scalable robust IP Ethernet services.
The upper graph illustrates increased demand on our kinetic data networks since the beginning of the pandemic.
While the lower graph highlights the strong increase in demand seen for our office suite HD meetings as demand for video conferencing services continues to grow.
Kinetic network data traffic is increased approximately 30% above pre cobiz levels, while our office, we total meeting minutes have roughly tripled since early March.
We continue to remain focused on our customers and are doing what it takes to deliver essential telecommunications services I'm proud of our teams and thankful for their unwavering dedication during these uncertain times.
The situation continues to evolve and remains very fluid.
But we stand ready to adapt and respond.
Turning to the latest developments regarding our restructuring.
In early March we announced a settlement with unit.
Which allowed both companies to avoid costly litigation, while establishing a new framework for our relationship.
As seen on slide six and as part of the settlement agreement Unity, we'll invest up to 1.75 billion and network investments for Windstream through 2030.
This will support our investment strategy to drive one gigabit speeds to approximately half of our eyelet footprint.
Which represents approximately 2 million homes over the next five years.
In addition, unity agreed to pay Windstream $490 million as part of the settlement agreement and agreed to purchase certain unused and underutilized fiber assets, which currently generate approximately 29 million in annual over dollar for Windstream for an additional $285 million.
As a result of the settlement in the modified lease agreement Windstreams annual payment to unity will be reduced by an average of $294 million per year for the next five years beginning in 2021.
In conjunction with the Unity agreement Windstream also entered into a planned support agreement with our first lien creditors regarding the terms of our financial restructuring.
This plan provides for a reduction of more than $4 billion and windstreams existing debt as well as access to exit financing after emergence from chapter 11.
Slide seven shows our current plan timeline for merges.
Following last Fridays court approval of the settlement. We're now scheduled for confirmation of our plan of reorganization on June 15th and hope to exit chapter 11 in late August of this year subject to regulatory approvals.
As seen on slide eight Windstream delivered solid first quarter results to the new year achieve flat sequential adjusted over 423 million for the third consecutive quarter, notably our kinetic segment achieved sequential revenue growth in the quarter driven by 1.6% sequential growth in high speed Internet revenues.
Our focus on expenses continues to drive higher margins and in the first quarter. Our margin percentage was up 140 basis points year over year to 35.2% driven by consolidated cash expenses that fell by 11% year over year.
And our Windstream Enterprise segment, we continue to see an acceleration in our strategic products with office weak demand increasing sharply in March as more companies across the country began using this technology to optimize engagement while working remotely.
Consequently, our strategic enterprise revenues increased 20% year over year.
We also saw a notable increase in consumer broadband demand in March as families began attending school performing work and managing essential functions of everyday life from their homes to lessen the impact of the coven 19 pandemic.
Turning to slide nine Windstream added 18000 net subscribers during the quarter, the highest quarterly subscriber growth in our history.
Our broadband subscriber growth increased 58% year over year and accelerated throughout the quarter as we added almost 10000 subscribers in the month of March alone.
This market share growth has been driven by our continued improvement in broadband speed capability across our kinetic ILEC footprint as shown on slide 10.
As of the end of the first quarter, 70% of our ILEC households, now have access to speeds of 25, Meg or greater.
Up 900 basis points from the year end 2018 levels.
In addition, we almost tripled our availability of 100 Mega greater speed with 43% our kinetic households, now capable of receiving those speeds up from 15% at the end of 2018.
On slide 11, 54% of our kinetic customer base now enjoying speeds of 25, Meg or greater up from 44% fee year ago.
While impressive year over year growth, we still have tremendous opportunity in front of is to increase the number of customers that enjoy these faster broadband speed tiers.
Slide 12 illustrates that opportunity.
Only 36% of our ILEC households, capable of receiving 25, Meg or greater are enjoying those speeds.
That metric falls to 15% for our idyllic households have access to one gigabit speeds driving greater penetration of faster speeds across our customer base remains a key priority for us to continue to drive subscriber growth and higher arpus.
Turning to our enterprise results on slide 13, our emphasis on our strategic revenue product set continues to help offset some of the underlying pressures from our core and legacy products.
Which remains a nations largest sq and service provider with over 3200, SD Wayne customers under contract representing over 29000 endpoint locations.
Office weak demand also remained strong as we have approximately 540000 ucas seats installed.
Windstreams total annualized strategic product revenue reached 322 million in the first quarter, representing 28% year over year growth and now represents 14% of our total enterprise service revenue.
Now, let me turn it over to Bob to discuss our first quarter financial results.
Thank you Tony and good morning, everyone.
Turning to slide 14, we show our first quarter financial results during the quarter Windstream generated total revenues of 1.2 billion and adjusted over the last 423 million, our third consecutive quarter at that level.
Consolidated margin of 35.2% during the quarter represents an increase of 140 basis points year over year.
Driven by our strong expense management initiatives.
Notably our total cash cost improved by 94 million or 11% year over year. The kinetic segment delivered solid results.
For the quarter service revenue was 505 million up sequentially, driven by 1.6% sequential increase and an approximate 1% year over year increase and consumer Internet revenues.
The Internet revenue increase was driven by both higher net subscribers and a sequentially higher ARPU in the quarter.
Contribution margin was 302 million or approximately 58%.
12 million and 190 basis points sequentially.
Consumer broadband units increased by 18000 during the quarter, representing our eight straight quarter of broadband subscriber growth.
In the Enterprise segment service revenue was $590 million and contribution margin was 113 million.
8 million sequentially.
The segment, delivering approximately 19% margin up 10 basis points year over year.
Notably, while some enterprise customers are clearly filling the macroeconomic pressure caused by the Corona biased and then that.
We estimate that only 13% of our current monthly recurring revenue is coming from what we would consider to be harvest segments, such as the retail hospitality and leisure industries.
In the wholesale segment service revenue was 85 million up sequentially and contribution margin was $62 million with margins of approximately 73%.
One modeling note regarding our wholesale segment due to the unity settlement and the pending sale of under utilized and Unutilized fiber assets, we experienced lower fiber sales then seen in previous quarters.
On slide 15, I wanted to provide an update on our continued interconnect an expense reduction results.
Our total annualized interconnection expenses fell by almost 20% on a year over year basis during the first quarter.
We reduced interconnection expenses on an annualized basis by 242 million quarter, our 20.6%.
Notably, we still have over 900 million of annualized interconnection expense over 459 of which is legacy tdm related.
These expenses comprise almost half of our total interconnection expenses and are falling by almost 25% annually.
We also have an additional 343 million and annualize expenses associated with network real estate Colocation and fiber expenses, we're focused on reducing overtime. This represents another material cost reduction opportunity.
We continue to believe that we will see greater than 10% annual reductions over the next several years.
In addition to the significant reductions in costs already achieved we anticipate exiting 2020 with a run rate improvement of approximately 75 million an incremental annual cash cost through targeted cost reductions versus 2019 levels.
We look forward to emerging from bankruptcy later this summer with greatly improved financial flexibility with over $4 billion and reduce debt compared to our current debt levels.
As well as the economic benefits of our new agreement with unity.
Now I'll turn the call back over to Tony for some closing comments.
Thank you Bob in addition to our strong quarterly results I wanted to highlight several of our new product announcements as shown on slide 16 first in mid March we announced a new weaken Nic partners portal for our channel partners, which give our partners the ability easily manage and configure and user services.
Gain critical analytical insights in real time access support whenever and wherever they need it.
Windstream wholesale announced the successful trial in conjunction with Infinera to commercially offer 400 gigabit wave services to support our customers high bandwidth needs and firmly places windstream wholesale as an industry leader in optical infrastructure.
Kinetic also announced a partnership with you to TV during the quarter. This arrangement allows kinetic customers access an affordable and innovative streaming solution for both live and on demand content from over 70 plus top networks.
Membership comes with free unlimited cloud DVR storage and can be accessed on any screen.
I want to wrap up by reiterating our 2020 priorities as seen on slide 17, we're off to a strong start achieving our five primary priorities for Windstream first are focused on growth.
Last week's court approval of our settlement agreement with unity hazards honest scheduled to emerge from restructuring later this summer in conjunction with our plan support agreement with certain creditors.
Upon emerges we will have a significantly de levered balance sheet with plans to reinvest significant capital into our kinetic ILEC footprint.
East Capex plans, partially funded by use cash contribution of 1.75 billion over the next 10 years will allow us to pass approximately half of our I ILEC footprint with speeds of one gig or greater.
Given this investment strategy, our record breaking first quarter broadband net adds and the revenue growth seen in kinetic during the first quarter have us well positioned to capitalize on the kinetic network investment plans going forward.
In addition, we will continue to maintain our leadership positions in telecom products. The software. Our 2020 focus will be on continue to expand our broadband speed capabilities continuing to enhance our SD when a new cast products expanding metro fiber in long haul network services and enhancing our customer facing digital experience through.
Our customer portals interfaces.
In addition to the upcoming rural digital opportunity fund significant attention in Washington is being devoted to the digital divide in Rural America.
This is an important issue that has come to the forefront quickly given the pandemic.
Whether it's the need for expanded tele health efforts or broadband availability for employees for students are now being forced to work from home Rural broadband deployment has never been more important for the country Windstream looks forward to continuing to be interval and vital part of these efforts in the coming years.
All of these objectives are part of our third priority to consistently deliver excellent customer experiences.
This will be achieved through enhanced network visibility and design as well as continued expansion of software tools and automation efforts to better and more efficiently serve our customers.
We have continued to deliver consistently high levels of customer service, despite having to migrate many of our customer service representatives from physical call centers. The individual remote locations as result of the code 19 pandemic.
Our final two priorities for 2020 have been multi year priorities for several years now.
Our fourth priority is to drive adoption of our strategic product set leading with our best in class SD when you cash product lineups.
We expect to see solid growth in our strategic revenues. This year and we will continue to work tirelessly to cover existing customers from legacy to strategic products.
This conversion is not only beneficial for windstream in terms of its long term financial profile, but more importantly, it benefits our customers by providing state of the our products.
Help customers grow their own businesses, while also providing many operational efficiencies at generally lower price points.
Lastly, we continue to manage our costs aggressively as evidenced by 11% reduction in cash operating expenses year over year achieved into first quarter.
We continue to expect to see costs come down across the company once again this year.
In summary, we strings operations continued to perform well in spite of the significant impacts seeing due to the croda virus pandemic.
Our flat sequential first quarter adjusted open our level demonstrate now holding our continued focus on expense reduction efforts, but also strong and increasing demand for our consumer broadband products, which drove sequential revenue improvement and our kinetic business.
We continue to stand alone among major years Telecom service providers with two years or consumer broadband subscriber growth.
As well as positive net adds for eight consecutive quarters coming on the back of ongoing strategic investments in our network.
The transformation is also being seen in our enterprise business, which is focusing on strategic products such as SD when new cast to write a better more robust customer experience.
As I mentioned earlier the mission to Windstream has never been more critical weaken net people and empower business and we will rise to the challenge I want to thank our windstream team for continuing to remain focused on our customers and worked tirelessly providing essential communication services.
Thank you for joining us this morning have a great day.