Windstream 2006 Annual Report Download - page 114

companies and commissions earned from activations of digital satellite television service. Miscellaneous revenues
increased $51.4 million, or 20 percent, in 2006 and decreased slightly in 2005. The acquisition of Valor accounted for a
$17.6 million increase in miscellaneous revenues in 2006. Primarily driven by growth in broadband customers,
revenues from broadband services increased $20.5 million in 2006 and $10.8 million in 2005. In addition, sales and
rentals of customer premise equipment increased $3.4 million in 2005, reflecting continued customer demand for these
products. In 2006, sales and rentals of customer premise equipment also included $1.5 million related to sales of
broadband modems. During October 2006, Windstream began selling broadband modems to customers subject to a
rebate offer. The rebate offer is for a fixed amount per modem and expires after 45 days if not claimed by the customer.
Modem sales revenues recognized during 2006 pursuant to the rebate program have been reduced by the portion of
rebates expected to be claimed by customers. Also, we generated $9.5 million and $1.1 million in commissions revenue
in 2006 and 2005, respectively, in conjunction with offering DISH Network digital satellite television service to our
residential customers as discussed above. In addition, during the third quarter of 2006, Windstream began providing
certain network management services to Alltel pursuant to multi-year contracts entered into as part of the separation,
which resulted in the recognition of revenues of $9.8 million during 2006. Offsetting these increases in miscellaneous
revenues in 2005 were decreases in directory advertising revenues of $12.2 million, primarily due to a change in the
number and mix of directories published during the period.
Primarily due to the broadband customer growth and increased long distance revenues, average revenue per customer
per month increased 4 percent in 2006. The growth in broadband customers and increased sales of enhanced features in
2005 resulted in growth in average revenue per customer per month of 2 percent compared to the corresponding prior
year period. Future growth in average revenue per customer per month will depend on our success in sustaining growth
in sales of broadband and other enhanced services to new and existing customers.
Cost of services increased $68.3 million, or 8 percent, in 2006 and increased slightly in 2005. The acquisition of Valor
accounted for a $67.8 million increase in cost of services in 2006. Cost of services in 2006 included a decrease in bad
debt expense of $7.5 million consistent with the decline in revenues discussed above and improvements in the
collection rates. In addition, during December 2006, Windstream sold certain customer receivables that had been
deemed uncollectible to a third party collection agency for $3.8 million, which was reflected as a reduction in bad debt
expense. Also, cost of services declined in 2006 due to decreases in costs associated with providing broadband-capable
modems to new broadband customers driven by volume discounts earned by the Company. In addition, because the
Company began selling broadband modems to its customers, subject to a rebate offer as discussed above, during
October 2006, Windstream began classifying costs associated with broadband-capable modems as costs of products
sold. Conversely, interconnection expenses increased $15.4 million in 2006. These increases were primarily due to
additional costs charged by other carriers for transport and termination of intrastate traffic in accordance with the terms
of new agreements negotiated with these carriers that took effect during 2005, as well as increased transport costs
associated with the growth in broadband customers and long distance minutes of use due to increases in package rate
plans previously discussed. In addition, interconnection expenses increased $5.6 million in 2006 due to incremental
expenses incurred in the provision of network management services to Alltel as previously discussed.
Cost of services for 2005 included approximately $3.2 million of incremental costs incurred during the first quarter of
2005 related to work force reductions in our wireline business, as well as higher overtime and maintenance costs due to
inclement weather. Cost of services in 2005 also included $4.4 million of additional customer service expenses
attributable to the growth in broadband customers, specifically the costs associated with subsidizing broadband-capable
modems to new broadband customers. In addition, cost of services in 2005 included increased regulatory fees of $5.6
million related to an increase in the contribution factor applicable to universal service funding, which was collected
from our customers. Offsetting the increase in overtime expense, customer service costs and regulatory fees in 2005
was a decrease in business taxes of $6.3 million and a decrease in bad debt expense of $4.4 million, both consistent
with the decline in revenues discussed above.
Cost of products sold increased $5.0 million, or 16 percent, in 2006 and increased $2.3 million, or 8 percent, in 2005.
The increase in 2006 primarily resulted from the classification of costs associated with sales of broadband-capable
modems as cost of products sold beginning in October 2006, as previously discussed, and the acquisition of Valor. The
increase in 2005 was consistent with the increase in sales and rentals of customer premise equipment discussed above.
F-13