“Windstream produced strong cash flow in 2014, although total revenues were lower than expected. We also made great progress toward completing the real estate investment trust spinoff within the next several months, which will make Windstream a stronger, more competitive company,” said Tony Thomas, president and chief executive officer, who was appointed to the position on Dec. 11.
“Since my appointment as CEO, we have made a number of significant changes to the business to better serve customers and improve profitability. These changes, combined with planned initiatives, will advance our goals of improving the customer experience, operating a best-in-class network and delivering improved financial results and increased value for shareholders. Overall 2014 results fell short of our expectations, and we are taking the necessary actions to put us on the path for success. We will make significant progress this year on our goals. We have to do many things faster and better, and we will,” Thomas said.
Creating Value Through REIT Spinoff
Windstream announced on July 29 plans to spin off certain telecommunications network assets into an independent publicly traded real estate investment trust. The transaction enhances Windstream’s financial and strategic flexibility, accelerates network investments and creates shareholder value. The transaction is expected to close in the second quarter of this year.
Generating Substantial Free Cash Flow
Windstream generated strong adjusted free cash flow of $794 million for the year and paid $602 million in dividends to shareholders.
Growing Enterprise Customers & ARPU
Enterprise customer locations, which generate $750 or more in revenue per month, grew 3.6 percent and average revenue per business customer grew 9 percent year-over-year.
Improving Consumer Trends
The consumer channel continued to stabilize and delivered strong results with revenues declining less than 2 percent for the year. Consumer broadband revenue increased year-over-year due to continued demand for faster speeds and additional services.
Investing Capital for Growth
Windstream invested approximately $787 million in capital expenditures in 2014, with approximately two-thirds directed to growth initiatives, including fiber deployment and broadband expansion and enhancements.
Pro Forma Financial Results
Total revenues and sales were $1.4 billion in the fourth quarter, a decline of 3 percent from the same period a year ago, and $5.8 billion for the year, a decline of 3 percent year-over-year.
Enterprise and small business service revenues were $747 million in the fourth quarter and $3 billion for the full year, essentially flat year-over-year for both periods. Data and integrated services revenues grew approximately 4 percent in the fourth quarter from the same period a year ago to $427 million led by demand for IP-based solutions and next generation data. Data center and managed services revenues were $34 million in the fourth quarter, an increase of 21 percent year-over-year.
Consumer broadband service revenues in the fourth quarter were $121 million, up 1 percent from the same period in 2013, and $483 million for the year, up 1 percent year-over-year.
Overall consumer service revenues in the fourth quarter were $316 million, essentially unchanged from the same period a year ago, and $1.3 billion for the year, a decrease of 2 percent year-over-year.
Carrier service revenues in the fourth quarter were $181 million, a decline of 7 percent from the same period a year ago, primarily caused by wireless carrier migrations from legacy TDM circuits to newer Ethernet technology. For the year, carrier service revenues were $734 million, a decline of 6 percent year-over-year.
Wholesale revenues in the fourth quarter were $104 million, a decrease of 11 percent from the same period a year ago primarily caused by reductions from intercarrier compensation reform. For the year, wholesale revenues were $433 million, a decrease of 10 percent year-over-year.
Windstream updated its supplemental schedules this quarter to separate carrier service revenues from enterprise and small business service revenues to better align to the way it is now managing the business. In addition, certain resale wholesale service revenues are now included with carrier service revenues.
Adjusted OIBDA was $532 million in the fourth quarter, which was up $7 million sequentially, and $2.1 billion for the year.
Adjusted capital expenditures were $234 million in the fourth quarter. For the year, adjusted capital expenditures were $787 million.
Adjusted free cash flow was $101 million in the fourth quarter and $794 million for the year. The company paid shareholders $602 million in dividends for the year.
GAAP Financial Results
In the fourth quarter under Generally Accepted Accounting Principles (GAAP), Windstream reported total revenues and sales of $1.4 billion and a net loss of $77.5 million, or a loss of 13 cents per share. That compares to total revenues and sales of $1.5 billion and net income of $118 million, or 20 cents per share, during the same period in 2013.
GAAP results include a pre-tax expense of $128 million, or 13 cents per share, related to the company’s pension plan. This non-cash charge resulted from a decrease in the discount rate used to measure the company’s pension obligations and changes to mortality assumptions reflecting longer life expectancies of plan participants. Results also include approximately 3 cents in after-tax merger and integration and restructuring expense. Excluding these items, adjusted earnings per share would have been 3 cents for the fourth quarter.
For all of 2014 under GAAP, Windstream reported total revenues and sales of $5.8 billion and a net loss of $39.5 million, or a loss of 7 cents per share. That compares to total revenues of $6 billion and net income of $241 million for 2013. For the full year, adjusted earnings per share was 14 cents.
Financial Outlook for 2015
Windstream expects improved revenue trends in 2015 in enterprise, consumer and small business and continuation of some revenue pressure in the carrier business. The company expects total service revenue for the year within a range of a 4 percent decline to flat as compared to 2014 service revenue.
The company expects Adjusted OIBDA margins, as a percentage of total revenue, to be in the range of 34 percent to 34.5 percent for the year. The decrease relative to 2014 is largely due to the loss of high-margin carrier, switched access and universal service fund revenues.
Capital expenditures are expected to range from $825 million to $875 million, which excludes investments related to the second phase of the FCC’s Connect America Fund. The company will provide an update on its plans once the FCC program is finalized.
Due to various tax initiatives and the extension of bonus depreciation in 2014, the company expects cash taxes to total approximately $20 million in 2015.
Windstream will hold a conference call at 7:30 a.m. CST today to review the company's fourth-quarter and full-year 2014 results.
To access the call:
Interested parties can access the call by dialing 1-877-374-3977, conference ID 60178219.
To access the call replay:
A replay of the call will be available beginning at 10:30 a.m. CST today and ending at midnight on March 3. The replay can be accessed by dialing 1-855-859-2056, conference ID 60178219.
The conference call also will be streamed live over the company's website at www.windstream.com/investors. Financial, statistical and other information related to the call will be posted on the site. A replay of the webcast will be available on the website beginning at 10:30 a.m. CST today.
Windstream, a FORTUNE 500 and S&P 500 company, is a leading provider of advanced network communications and technology solutions, including cloud computing and managed services, to businesses nationwide. The company also offers broadband, phone and digital TV services to consumers primarily in rural areas. For more information, visit the company’s online newsroom at news.windstream.com or follow on Twitter at @WindstreamNews.
Pro forma results adjust results of operations under GAAP to exclude all merger and integration costs related to strategic transactions. A reconciliation of pro forma results to the comparable GAAP measures is available on the company’s Web site at www.windstream.com/investors.
OIBDA is operating income before depreciation and amortization. Adjusted OIBDA adjusts OIBDA for the impact of merger and integration costs, restructuring charges, pension expense and stock-based compensation. Adjusted capital expenditures exclude the impact of integration-related capital expenditures. Adjusted free cash flow is adjusted OIBDA, minus cash interest, cash taxes and adjusted capital expenditures.
Windstream claims the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to uncertainties that could cause actual future events and results to differ materially from those expressed in the forward-looking statements. Forward-looking statements include, but are not limited to, Windstream’s 2015 guidance for service revenue, adjusted OBIDA margins, net capital expenditures, cash tax payments, expectations for improved revenue trends and higher margin sales, expectations regarding the success of Windstream’s product offerings and network improvements, and expectations concerning the timing and implementation of, and amount of funding available under, the FCC’s Connect America Fund. These and other forward-looking statements regarding Windstream’s business outlook are based on estimates, projections, beliefs, and assumptions that Windstream believes are reasonable but are not guarantees of future events and results. Actual future events and results of Windstream may differ materially from those expressed in these forward-looking statements as a result of a number of important factors.
Factors that could cause actual results to differ materially from those contemplated in Windstream’s forward-looking statements include, among others:
• further adverse changes in economic conditions in the markets served by Windstream;
• the extent, timing and overall effects of competition in the communications business;
• the impact of new, emerging or competing technologies;
• for certain operations where Windstream leases facilities from other carriers, adverse effects on the availability, quality of service and price of facilities and services provided by other carriers on which Windstream’s services depend;
• the uncertainty regarding the implementation of Federal Communications Commission ("FCC") universal service and intercarrier compensation reforms, as well as state-level universal service reform, and the potential for additional federal or state government reforms regarding universal service or intercarrier compensation that result in significant loss of revenue to Windstream;
• unfavorable rulings by state public service commissions in proceedings regarding universal service funds, intercarrier compensation or other matters that could reduce revenues or increase expenses;
• material changes in the communications industry that could adversely affect vendor relationships with equipment and network suppliers and customer relationships with wholesale customers;
• earnings on pension plan investments significantly below Windstream’s expected long-term rate of return for plan assets or a significant change in the discount rate or other actuarial assumptions;
• unfavorable results of litigation or intellectual property infringement claims asserted against Windstream;
• the company’s ability to continue to pay dividends, which may be affected by changes in the company’s cash requirements, capital spending plan, cash tax payment obligations, or financial position, and which is subject to the company’s capital allocation policy and may be changed at any time by the discretion of Windstream’s board of directors;
• unanticipated increases or other changes in the company’s future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in pension funding requirements, or otherwise;
• the availability and cost of financing in the corporate debt markets;
• the potential for adverse changes in the ratings given to Windstream’s debt securities by nationally accredited ratings organizations;
• the risks associated with non-compliance by Windstream with regulations or statutes applicable to government programs under which Windstream receives material amounts of end user revenue and government subsidies, or non-compliance by Windstream, its partners, or its subcontractors with any terms of its government contracts;
• the effects of federal and state legislation, and rules and regulations governing the communications industry;
• continued loss of consumer voice lines and consumer high-speed Internet customers;
• the impact of equipment failure, natural disasters or terrorist acts;
• the effects of work stoppages by Windstream employees or employees of other communications companies on whom Windstream relies for service; and
• those additional factors under "Risk Factors" in Windstream’s Form 10-K for the year ended December 31, 2014, and in subsequent filings with the Securities and Exchange Commission at www.sec.gov.
Additional forward-looking statements specific to the proposed REIT spinoff, include, but are not limited to, statements regarding the completion and timing of the proposed transaction, the expected benefits of the proposed spinoff to Windstream, including an expected improved financial position and reduction in overall debt of Windstream, the success and opportunities for growth of the REIT company, the expected financial attributes of Windstream and the REIT company, and each company’s ability to operate their businesses after the anticipated closing of the proposed transaction. Such statements are based on estimates, projections, beliefs and assumptions that Windstream believes are reasonable but are not guarantees of future events and results. Actual future events and results may differ materially from those expressed in the forward-looking statements as a result of a number of important factors. Factors that could cause actual results to differ materially from those contemplated in the company’s forward-looking statements include, among others:
• the timing of the closing of the proposed spinoff;
• the expected tax treatment of the pending transaction and proposed spinoff;
• the ability of Windstream and the REIT company to conduct and expand their respective businesses following the proposed spinoff; and
• the satisfaction of customary conditions and final approval of the Windstream board of directors of the proposed spinoff.
In addition to these factors, actual future performance, outcomes and results may differ materially because of more general factors including, among others, general industry and market conditions and growth rates, economic conditions, and governmental and public policy changes.
Windstream undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause Windstream’s actual results to differ materially from those contemplated in the forward-looking statements should be considered in connection with information regarding risks and uncertainties that may affect Windstream’s future results included in other filings by Windstream with the Securities and Exchange Commission at www.sec.gov.