5 Things Investors Need to Hear From Windstream Holdings Inc's Management

By Markets Fool.com

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Image source: Windstream.

Windstream reported solid first-quarter resultsearlier this month. The regional telecom had a relatively simple slate of raw numbers to report, but investors craved a much deeper discussion of a rapidly changing business model.

Management obliged, spilling a ton of fresh beans in a conference call with Wall Street analysts. I'm here to distill that call into its five most salient points. So let's get started.

Consumer growth ahead?
Windstream's consumer business has been shrinking in recent years as customers disconnect their landline phones and go looking for faster broadband connections than DSL lines can deliver. The company is turning the negative trend around, and it's all based on next-generation DSL networking that squeezes more performance out of those aging twisted-pair copper lines.

Here's how Windstream CEO Tony Thomas described the opportunity:

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In consumer, we are focused on driving stability and ultimately growth within this attractive high-margin unit. Through the deployment of VDSL2+, we can deliver faster speeds to more households which will drive ARPU growth through advanced speed sales, and better position Windstream against the competition.

Note that Thomas speaks in the future tense. Consumer sales were flat year over year, while the number of subscribers in this segment decreased overall. This means another quarter of negative revenues per user. You should consider this more of an aspiration than an achievement.

How Windstream sees its consumer Internet service speeds evolving. Image source: Windstream.

What's with the VDSL2+ mumbo jumbo?
Glad you asked. VDSL2+ is a vastly upgraded type of DSL connection. It relies on high-speed fiber optics to get data from the Internet backbone to your local neighborhood, and then pairs up copper-wire lines in clever ways to squeeze more speed out of the final connection.

VDSL2+ is a very new technology, and Windstream is among the first telecoms to install it anywhere in the world. The platform is a key ingredient in the plans for revenue growth in the consumer division, as Thomas explained above. Windstream CFO Bob Gunderman provided an overview of how much faster the company's consumer connections will get when the VDSL2+ upgrade is complete:

Today, Windstream can offer 10 megabits' Internet speed to almost 60% and 24 meg to 18% of addressable households, which is competitive given our very rural consumer footprint with 14 access lines per square mile.

Based on existing loop lengths, VDSL2 bonding will enable Internet speeds of 10 meg to 83% and 24 meg and above to over 50% of addressable households. We will also shorten loop lengths further through the CAF I and II programs, which will provide additional opportunities to increase broadband speed capabilities.

Aren't these network upgrades expensive?
Well, yes. Installing VDSL2+ to the majority of Windstream's rural customers won't come cheap -- but it helps that the company can tap into government subsidies along the way.

Here's Gunderman again, laying out Windstream's capital expense plans for the coming year:

Our CapEx guidance for 2015 is $825 million to $875 million. In terms of where we expect to direct our investments, while not being very specific on the numbers, what I'll tell you is that we do expect to spend a substantial portion of our CapEx budget this year on our CAF I program. That CapEx project will more directly benefit our consumer and small business customers.

Most directly we've also begun plans to start to deploy our VDSL technology more broadly. Again, that has a bias toward helping the consumer and small business customers most directly.

Windstream CEO Tony Thomas. Image source: Windstream.

Did Windstream dodge a bullet?
One analyst asked if Windstream's business was affected by regulators choking the life out of the proposed merger between Comcast and Time Warner Cable . In many of Windstream's markets, one of these cable giants forms the only competition for landline phone, cable TV, and broadband Internet services.

Thomas tactfully turned that potential zinger into a softball:

When you think about the competition we see from Comcast and Time Warner Cable, they're obviously both competitors and partners, in various aspects of the business. But at this point, we're focused on what we can control. It's about our execution. It's about our ability to drive the business.

We remain mindful of the context and seeing the gargantuan competitor that would've come from the Comcast, Time Warner merger was concerning. So, the actions that were taken, frankly, alleviate some of that concern in the near term. But we control our own destiny and we need to be focused on execution.

So Thomas avoided saying anything to upset these massive frenemies. He took the invitation to wipe some sweat off his brow, but then redirected the question to focus on Windstream's own execution.

Well played, Mr. Thomas.

Speaking of executions...
On that note, Windstream very recently made a very big move under its own power. In the form of a tax-free dividend payment, the company spun off its networking assets into a real estate investment trust known as Communications Sales & Leasing . It was a closely watched event that might inspire other telecoms to follow in Windstream's footsteps.

With the benefit of hindsight, Thomas explained how the REIT spinoff added value for Windstream investors:

The REIT spinoff creates value for shareholders in several ways.

First, it enhances Windstream's financial profile by enabling over $4 billion in debt repayment, or almost half the debt outstanding prior to the transaction. Following the spin-off, Windstream will invest more in the network to drive incremental cash flows and provide attractive returns for shareholders.

At the same time, investors now own shares in CS&L, which will pay an attractive dividend while also pursuing growth and expansion opportunities. As the first REIT of its kind, CS&L is uniquely positioned to grow and diversify by expanding their tenant base with other carriers focused on unlocking and redeploying value from network assets.

Windstream itself paid out $151 million in dividends in the first quarter out of $232 million in total free cash flows. That works out to a cash payout ratio of just 65% -- the lowest ratio Windstream has recorded since 2010.

Going forward, CS&L plans to pay annual dividends of $2.40 per share, while Windstream slows down to $0.60 per share. At current share prices, that works out to effective dividend yields of 9% and 7.2%, respectively.

If the relatively small difference between these yields comes as a surprise, I'd like to remind you that CS&L has the far larger market cap of the two. The REIT's share count is also much larger. Windstream will spend only $60 million on dividends this year, while CS&L pulls $360 million out of its own cash flows to support its payouts.

CS&L actually provides a lot more dividend muscle than its operations-minded corporate sibling.

The article 5 Things Investors Need to Hear From Windstream Holdings Inc's Management originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.