Windstream 2006 Annual Report Download - page 108

Total revenues and sales increased $109.8 million, or 4 percent, in 2006 and decreased less than 1 percent in 2005.
Service revenues increased by $170.0 million or 7 percent in 2006. The acquisition of Valor accounted for a $222.3
million increase in service revenues in 2006. Eliminations of intercompany service revenues increased by $25.7 million
in 2006, primarily due to the discontinued application of SFAS No. 71 as previously discussed. Wireline local access
service and network access and toll revenues decreased $71.9 million in 2006 and $78.1 million in 2005, primarily as a
result of the loss of wireline access lines due, in part, to fixed-line competition and wireless substitution. In addition,
local service revenues declined $14.1 million in 2006 due to customers migrating from expanded calling area rate plans
to packaged and unlimited long distance plans. Also, during 2006 Universal Service Fund (“USF”) revenues declined
$15.4 million due to an increase in the national average cost per loop, combined with Windstream’s cost control
measures, as further discussed below in “Results of Operations by Business Segment.” Telecommunications
information services revenues also decreased $8.4 million and $24.6 million in 2006 and 2005, respectively, due to the
loss of billings earned from Valor, which represented the Company’s only remaining unaffiliated customer prior to the
merger with Valor, and the loss of one of the Company’s remaining unaffiliated wireline services customers during the
fourth quarter of 2004. Finally, service revenues in 2005 reflected a decrease in advertising revenues earned from
directories published in Windstream’s regulated markets of $12.2 million due to a change in the number and mix of
directories published.
Partially offsetting the decline in service revenues attributable to local access service, network access and toll revenues,
USF revenues and revenues derived from telecommunications information services were increases in revenues derived
from broadband and other data services of $50.6 million in 2006 and $36.8 million in 2005, reflecting the growth in the
Company’s broadband customer base and continued customer demand for these enhanced services. The growth in
service revenues in 2006 was also driven by increased long distance revenues of $22.1 million due primarily to an
increase in customer billing rates in all markets and the introduction of new packaged and unlimited rate plans in
certain markets. Also, during 2006, Windstream received $9.5 million in commission revenues in conjunction with
offering DISH Network digital satellite television service to our residential customers. In addition, during the third
quarter of 2006, Windstream began providing certain network management services to Alltel pursuant to multi-year
contracts, which resulted in the recognition of revenues of $9.8 million during 2006. During 2005, universal service
fund (“USF”) revenues increased $12.5 million as a result of the decline in subscriber access revenues previously
discussed.
Product sales decreased $60.2 million, or 13 percent, in 2006, and increased $59.9 million, or 15 percent, in 2005. The
acquisition of Valor accounted for a $2.4 million increase in product sales in 2006. The decrease in product sales was
primarily driven by the increase in intercompany eliminations due to the discontinuance of the application of SFAS
No. 71 during the third quarter of 2006 as previously discussed. This change in accounting policy resulted in a
reduction in consolidated product sales of approximately $81.6 million in 2006. This decrease was partially offset by
an increase in sales of telecommunications equipment and data products to the Company’s regulated wireline
operations during periods prior to the discontinuance of the application of SFAS No. 71. It was also offset by an
increase in sales to external customers of $10.1 million due primarily to increases in sales to contractors and solid
demand among smaller telecommunications providers. The increase in product sales in 2005 was due primarily to an
increase in sales of telecommunications equipment and data products of $50.4 million related to increased capital
expenditures by Windstreams’s wireline operations.
Cost of services, which represents the cost of provisioning service, as well as business taxes and bad debt expense,
increased $62.3 million, or 8 percent, in 2006, and decreased $17.6 million, or 2 percent, in 2005. The acquisition of
Valor accounted for a $67.8 million increase in cost of services in 2006. During 2006, the Company’s wireline
operations incurred additional costs from other carriers for transport and termination of intrastate traffic in accordance
with the terms of new agreements negotiated with those carriers during 2005, as well as incremental interconnection
expense related to network management services provided to Alltel in periods following the spin-off. Partially
offsetting these increases in cost of services was an increase in intercompany eliminations due to the discontinuance of
the application of SFAS No. 71 during the third quarter of 2006 as previously discussed. In addition, bad debt expense
declined in 2006 by $11.3 million, which was primarily due to the declines in revenue previously discussed,
improvements in our overall collection efforts, and the sale in December 2006 of certain customer receivables of
approximately $3.8 million, previously determined to be uncollectible. The 2005 decrease was driven primarily by a
reduction in costs incurred by the telecommunications information services operations due to the loss of a customer as
discussed herein.
Cost of products sold decreased $93.0 million, or 25 percent in 2006. The decline in cost of products sold is consistent
with the decline in product sales discussed above and was due primarily to the increase in intercompany eliminations
caused by the discontinuance of the application of SFAS No. 71. Cost of products sold increased $41.0 million, or
12 percent, in 2005, consistent with the increase in product sales discussed above.
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