Windstream 2007 Annual Report Download - page 2

Windstream delivered a
strong fi nancial performance
in its fi rst full fi scal year as a
public company in 2007. We
grew revenue and operating
cash fl ow, on a pro forma
basis, and met the fi nancial
guidance we provided in
early 2007. Strategically,
we nearly doubled our
presence in North Carolina
with the acquisition of
CT Communications (CTC)
and successfully split off
our directory publishing
business so that we could
focus entirely on our core
communications and entertainment business. We also adequately
invested in our network while reducing capital expenditures
and positioned the business to continue generating sustainable
cash fl ows.
Financial Highlights
Under Generally Accepted Accounting Principles, Windstream
achieved diluted earnings per share of $1.94, revenues of $3.26
billion and operating income of $1.15 billion in 2007. Among the
pro forma highlights for the year from current businesses, which
include results for CTC prior to the merger and exclude results for
the directory publishing business, revenues were $3.26 billion,
a one percent increase from a year ago, and operating income
before depreciation and amortization was $1.66 billion, a one
percent increase year-over-year.
Free cash fl ow, defi ned as net cash provided from operations less
capital expenditures, was $668 million for the year, equating to
a dividend payout ratio of 71 percent. Capital expenditures were
$397 million for the year on a pro forma basis.
Strategic Accomplishments
We strengthened our position in 2007 as the leading
communications and entertainment service provider focused
on rural America with the acquisition of CT Communications,
based in Concord, N.C., adding approximately 132,000 access lines
and 31,000 broadband customers. This acquisition provides an
opportunity to generate signifi cant operating effi ciencies with
our contiguous markets and expand free cash fl ow.
We also completed the split-off of our directory publishing
business in a tax-free transaction to affi liates of Welsh, Carson,
Anderson & Stowe, a private equity investment fi rm. We
repurchased approximately 19.6 million shares of Windstream
stock held by Welsh Carson and retired $210 million of debt as
part of the transaction. We also received approximately $40
million in cash, which was used to repurchase an additional 3
million shares of Windstream stock during the fourth quarter.
This transaction was important strategically because it
positioned us to focus entirely on our core products: broadband,
voice and digital TV.
Operating Highlights
Windstream continued to lead the rural local exchange industry
in many key operating metrics in 2007. In spite of gradually
increasing competition, we were able to keep access line losses
stable while continuing to add more broadband customers.
The fourth quarter of 2007 marked the twelfth consecutive
quarter of growth in our customer connections as net broadband
additions again outpaced access line declines. Windstream had
more than 871,000 broadband customers at the end of the year,
a 28 percent increase year-over-year and a penetration rate of
27 percent of total access lines.
We also continued to expand our digital TV customer base, ending
the year with approximately 196,000 total customers or 10 percent
of primary residential lines.
During 2007, cable voice competition increased to roughly
50 percent of our total access lines from 40 percent, and we
expect a continued gradual increase in 2008. Given our increased
penetration of bundled services and proactive marketing plans,
however, we are in a better competitive position to succeed.
Our business segment, which makes up nearly a third of our
overall revenue stream, continues to perform well. We are pleased
with the success that we have seen with the launch of a small
business bundle as well as selling additional data services. We
also have experienced good growth in equipment sales, allowing
us to extend contracts and strengthen our existing business
relationships.
Going Forward
Near the end of 2007, we made several organizational changes
to enhance coordination and improve consistency between
our network and operations teams to provide a better overall
customer experience. We also created a new consumer sales
group to focus on expanding our distribution channels and
improve our competitiveness.
We upgraded our network in 2007 to double our broadband
speeds across most of our footprint and will deploy a 10-12 Mbps
speed product in certain markets in 2008. We will continue to
focus on selling faster speeds and developing new products and
services to leverage our broadband infrastructure. Expanding
broadband revenue opportunities is an important part of our
strategy to transform this business to a broadband-centric model.
We remain confi dent in the ability of our business to generate
signifi cant cash fl ows over a sustained period of time. Accordingly,
our board of directors in February of this year adopted a plan to
buy back $400 million, or roughly 8 percent, of shares by the end of
2009. This will increase the ownership value for shareholders and
improve cash fl ows by reducing the dividend payout ratio.
Finally, the rural local exchange industry has experienced
signifi cant consolidation over the past two years, which we
believe is very healthy because it creates opportunities to achieve
economies of scale. With declining access lines, this is a business
that demands scale, and we expect to see consolidation continue
over the next few years. We will stay focused on improving sales
and service levels and achieving our fi nancial goals to remain
optimally positioned for any strategic opportunities that are in
the best interests of our shareholders.
Jeffery R. Gardner
President and Chief Executive Offi cer
March 31, 2008
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