Windstream 2011 Annual Report Download - page 2

TO OUR STOCKHOLDERS:
2011 was a year of significant accomplishments for
Windstream. For the first time, we grew revenue and
Adjusted OIBDA (operating income before depreciation and
amortization) during the year. We became a nationwide
provider of advanced communications and technology
solutions to businesses with the acquisition of PAETEC. And we significantly
increased our investment in the growth areas of our business, while maintaining our
disciplined focus on expense management.
Taken together, these advances give us great momentum heading into 2012 and
provide our stockholders a uniquely attractive opportunity to combine growth with a
very strong dividend.
At a time of such significant transitions, it’s worthwhile to step back for a moment
and consider how we got here. Management and the board set out a vision for
transforming Windstream from a rural, voice-oriented telephone company into a next-
generation communications and technology solutions provider focused on growth.
The entire Windstream team embraced this strategy, and our employees have done
a tremendous job of executing this transformation while delivering industry-leading
operating metrics, financial results and shareholder returns along the way. In fact,
Windstream returned approximately $510 million in dividends to stockholders in 2011.
When our company was formed in 2006, we operated in just 16 states with less than
24,000 miles of fiber, a modest business sales organization, and only a handful of
lower-tier data centers. Today, we have operations in 48 states and the District of
Columbia, a local and long-haul fiber network spanning approximately 115,000 miles,
a robust business sales division and 21 data centers offering managed services and
cloud computing.
We’ve come a long way, as the old saying goes, and I have never felt better about our
position in the marketplace or the opportunities before us.
Financial Highlights
Our financial results for the year reflect our progress in transforming Windstream.
Under Generally Accepted Accounting Principles (GAAP), Windstream generated total
revenues of $4.3 billion and operating income of $968 million in 2011. On a pro forma
basis that includes PAETEC for the full year, total revenue was $6.2 billion, a decline
of 0.3 percent year-over-year, while Adjusted OIBDA was $2.4 billion, an increase of
1.2 percent. Business service revenue was $3.5 billion, an increase of 1.8 percent
year-over-year, while consumer broadband revenue was $464 million, up 9.4 percent.
These numbers point to our remarkable success in improving the company’s financial
trajectory and positioning us for future growth.
Strategic Highlights
In 2011, we integrated several acquisitions announced in 2010 and added a key
business to our portfolio with the acquisition of PAETEC. This transaction gave us a
nationwide footprint and dramatically enhanced our capabilities in strategic growth
areas, including Internet protocol-based services, cloud computing and managed
services, and, importantly, it enabled us to better serve multi-location enterprise
customers.
As a result of these strategic activities, our revenue mix has shifted toward the growth
areas of our industry. Revenues from business services and consumer broadband
were approximately 61 percent of total revenue for 2011, as compared to just 42
percent in 2008. With the addition of PAETEC, we expect approximately 69 percent of
our 2012 revenues to be generated by business services and consumer broadband.
On the regulatory front, Windstream was a leading partner in an industry coalition
assembled to help the Federal Communications Commission modernize its inter-
carrier compensation and universal service policies. The FCC adopted a plan late in
2011 that was largely consistent with our expectations. We anticipate the financial
impact will be manageable and believe the steps we have taken to diversify our
revenue streams and focus on growth opportunities will help us navigate through this
transition.
Operating Highlights
While we remained incredibly focused on managing expenses, 2011 was the year in
which we pivoted toward investing for growth. We are always careful stewards of our
stockholders’ money, and we made this change in the conviction that it is essential to
growing top-line revenue.
There were several key opportunities last year. First, soaring consumer demand for
wireless data drove wireless carriers to seek more bandwidth on the wireline transport
network, creating intense competition among transport providers. The Windstream
team did tremendous work winning long-term contracts to supply fiber optic
connections to cell towers. We spent approximately $130 million on fiber-to-the-tower
projects and believe these contracts and the continuing growth in wireless bandwidth
needs will provide attractive returns on our capital outlay.
Second, we invested approximately $40 million in our data centers to broaden
the technology-based services we offer, including cloud computing and managed
services. At year end, we were constructing two new centers to accommodate the
increasing needs of businesses and government agencies.
Third, we continued to invest in our local network to expand broadband availability
and improve capacity in response to residential customers’ demands for faster
Internet speeds to accommodate streaming video and other Internet-based services.
We completed about $30 million in federal broadband stimulus projects in 2011.
Windstream’s share of that amount was $8 million, with the rest being covered by
federal grants. In all, Windstream received more than $181 million in grants and will
invest $60 million of our own capital. We anticipate completing a substantial portion of
the stimulus work in 2012.
2012 Outlook
As we look forward, we will be squarely focused on integrating PAETEC and
executing on our growth strategy.
In our business channel, we will leverage our expanded network and service offerings
to drive new multi-location sales in 2012. In addition, we will improve the cross-
selling opportunities related to our cloud and managed services offerings to target
existing customers and drive incremental revenue. For small business customers,
we will focus on aggressive bundling, up-selling Windstream services and improving
retention.
In the residential channel, we are rebranding our high-speed Internet bundle to
differentiate our offering and address consumers’ changing video consumption
patterns to over-the-top alternatives. We will provide an integrated Internet and
entertainment bundle that will leverage Internet services with a Roku box that
aggregates entertainment applications and enables customers to augment their pay
TV experience with on-demand TV and movie options. At the end of 2011, roughly
seven out of every 10 primary residential customer lines subscribed to our high-speed
Internet service, which positions us to focus on accelerating revenue growth per user
by selling incremental broadband services and faster speeds.
In conclusion, as we celebrate this year of strategic accomplishments, I am more
excited than ever about the future. We have consistently pursued a path that I
believe positions Windstream to be successful over the long-run and enables us to
maximize total investor returns. Targeted acquisitions combined with solid execution
have transformed Windstream into a leading provider of telecommunications and
technology services nationwide with the ability to grow revenue and free cash flow
while maintaining an attractive dividend. The entire team looks forward to the work
before us, and we remain grateful for the confidence our stockholders have placed in
this enterprise.
Jeffery R. Gardner
President and Chief Executive Officer
March 27, 2012