Windstream 2008 Annual Report Download - page 100

Product sales increased in 2008 primarily due to computer sales to qualifying residential high-speed Internet customers.
These computers were sold at a loss to customers that signed a multi-year contract. Also contributing to the increase in
product sales was the acquisition of CTC.
The product sales increase in 2007 was due primarily to the increase in customer premise equipment sales to business
customers, with the remaining increases due primarily to high-speed Internet modem sales and the acquisition of Valor.
During the fourth quarter of 2006, Windstream began selling high-speed Internet modems to customers subject to a
rebate offer. Previously, modems had been provided at no charge to the Company’s high-speed Internet customers with
the related expense reported in cost of services expense. The rebate offer is for a fixed amount per modem and expires
after 45 days if not claimed by the customer. Modem sales recognized pursuant to the rebate program have been
reduced by the portion of rebates expected to be claimed by customers.
Average Revenue per Customer
Average revenue per customer per month increased 2 percent and 7 percent in 2008 and 2007, respectively, primarily
due to high-speed Internet customer growth and pricing increases on long distance services as discussed above. Future
growth in average revenue per customer per month will depend on the Company’s success in sustaining growth in sales
of high-speed Internet and other enhanced services to new and existing customers.
Cost of Services
Cost of services primarily consist of network operations costs, including salaries and wages, employee benefits,
materials, contract services and information technology costs to support the network. Cost of services also include
interconnection expense, bad debt expense and business taxes. The following table reflects the primary drivers of year-
over-year changes in cost of services:
Cost of services
Twelve months ended
December 31, 2008
Twelve months ended
December 31, 2007
(Millions)
Increase
(Decrease) %
Increase
(Decrease) %
Due to Valor acquisition $ - $ 75.7
Due to CTC acquisition 38.3 18.6
Due to increases in interconnection expense 7.0 12.2
Due to increases in bad debt expense 10.0 11.3
Due to decreases in high-speed Internet modem costs - (9.9)
Due to decreases in directory publishing expense (12.1) (0.1)
Due to changes in business taxes (14.9) 4.4
Due to changes in employee benefits (15.7) 1.0
Due to changes in network operations expense (13.8) 30.8
Other (1.1) (8.1)
Total cost of services $ (2.3) (-)% $ 135.9 15%
Cost of services for 2008 and 2007 were significantly impacted by the acquisitions of CTC and Valor. Increases in
interconnection costs, or costs incurred by the company to access the public switched network and to transport traffic to
the Internet, were primarily attributable to increases in Internet customers and increases in the volume of long distance
traffic resulting from the increases in customers on packaged minutes and unlimited usage rate plans, as previously
discussed. Increases in bad debt expense in both periods are primarily due to non-pay disconnects and other account
write-offs.
Cost of services for 2008 was positively impacted by decreases in directory publishing expense resulting from the split
off of the Company’s directory publishing business completed on November 30, 2007, decreases in employee benefit
costs relative to postretirement and pension expense, as further discussed below in “Liquidity and Capital Resources”,
and decreases in business taxes and network operations expenses. The decrease in business taxes in 2008 was due to a
decline in property taxes as well as the recognition in the second quarter of 2007 of a retroactive excise tax liability,
while lower contract labor costs drove the decline in network operations costs.
In addition to the items discussed above, cost of services increased in 2007 due to an increase in network operations
expense resulting from increased costs necessary to support desired service levels and to facilitate the increase in high-
speed Internet customers, as discussed above. Conversely, because the Company began selling high-speed Internet
modems to its customers, subject to a rebate offer as discussed above, Windstream began classifying costs associated
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