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Windstream Corporation (WIN) is a wireline telephone and DSL Internet provider that serves rural areas in the southern and southwestern U.S. Based on the number of telephone lines it manages, it is the fifth largest local telephone company in the country.[1] Like many other telecommunication and cable companies, Windstream has "bundled" a range of services that use its connection into a home, including local and long distance phone service, and Internet access to over 3.2 million rural households; it also offers cable television but 2006 income from this segment was insignificant. In total, fees for these services constituted about 85% of its 2006 revenue of over $3 billion against a [2] net profit margin of 14.69%.[3]
Traditional landline companies face stiff competition from a range of substitution technologies that could undermine its core landline telephone and Internet access businesses. In particular, voice-over-internet-protocol (or VoIP) and wireless are gaining as alternatives to long-distance calling. In addition, cable companies--including Comcast (CMCSA), Time Warner Cable (TWC), Charter Communications (CHTR)--are competing with telephone providers (that use DSL) to provide broadband Internet access (via cable). As a provider to mostly rural areas, which have lower adoption rates for these technologies, Windstream has been relatively sheltered from these trends.
In July 2006 Alltel spun off its fixed line division which then merged with Valor Communications Group, Inc to form Windstream. The company incurred around $5.5 billion of long-term debt due to the merger.[4] Servicing this debt may become costly in the face of rising interest rates.
[edit] Business Overview
Windstream earns revenue primarily through its local wireline services and network access and interconnections, which include fees to connect to long distance providers and broadband and data services. Over the last three years, these two areas comprised on average 82% of its revenue.[5] A much smaller but increasing percentage of revenue comes from fees for its own long distance services and miscellaneous revenues from charges for advertising, equipment sales and rentals, billing services for long distance companies, and commissions from digital satellite TV service activations.[6] As of the end of 2006 Windstream had about 3.2 million residential and business customers in mostly rural areas.
[edit] Business Financials
Windstream's 2006 revenue was $3.0 billion, of which over $2.6 billion was driven by service revenues such as monthly fees. Operating expenses also decreased by $155 million, primarily due to a decrease in royalty expense to Alltel. Net income was $545.3 million, up 46% from 2005.[7] Windstream added about 500,000 access lines in four states due to the Alltel spin-off's merger with Valor. This, combined with an additional 258,000 broadband subscribers, drove its revenue increase of $109.8 million.[8] The merger with Valor also contributed to a 42% increase in operating income.[9]
[edit] Merger with Valor
In July 2006 Alltel spun off its wireline division, which then merged with Valor to form Windstream. About $222 million of the 2006 service revenue increase, $2 million increase of product sales was due to the merger with Valor. The merger also the cost of services by $68 million,[13] as well as a $22 million increase in selling, administrative, and other expenses, and a $56 million increase in depreciation and amortization expense.[14] It also contributed to a 12% increase in customer access lines, and an additional 67,000 broadband customers.[15]
Of wireline operations revenue increases, the merger with Valor accounted for $68.5 million of the local service revenue increase, $120 million of the network access revenue increase, $39 million of the long distance revenue increase, and $18 million of the miscellaneous revenue increase[16]
[edit] Trends and Forces
[edit] Triple-Play Bundling
Many cable provider companies like Comcast and Time Warner package a combination of cable services like cable television, phone access, and Internet access. Windstream and other wireline providers have moved towards similar offerings, and in 2006 77% of its lines were broadband-capable, compared to 73% in 2005, and the company had a DSL penetration rate of about 13% in 2005.[17] This is significant since triple play requires some sort of broadband connection; normal phone lines are not enough.
- Broadband Growth: Similar to the importance of triple-play packages, the growth of broadband is another trend that could affect the future performance of Windstream. The company's $20.5 million growth in broadband revenue was driven mostly by an increased number of broadband customers, which growth also contributed to a 4% increased in average revenue per customer.[18]
As this graph shows, from 2003 to 2005, the growth in number of wireline access lines and long distance customers was actually decreasing, and increased in 2006 only because of the merger. Although broadband customer growth decreased in 2004, the magnitude of growth is still bigger than the magnitude of the growth for the other two major service revenue segments.
- Fixed-line telecommunication: As wireless phones are gaining an increasingly larger share of the phone market, it becomes more important for wirelines to develop in other areas, such as data services and cable. Windstream already provides data services and broadband, but has barely moved into another potential area, cable television. As a relatively new company in this area, it will face stiff competition from existing larger companies like Verizon.
- VoIP: Another aspect of fixed-line telecom that can affect Windstream is VoIP. Windstream acknowledges that one source of competition it will face will be in VoIP.[20] The low cost of VoIP, as well as its offering in combination bundles, is a threat to the high prices that Windstream charges. However, it is also making plans to allow for VoIP support on their data lines,[21] to tap into a potential market.
[edit] Focus on rural penetration
Over 80% of Windstream's revenue comes from its wireline services. As such, it is highly susceptible to changes in demand for such services. Since Windstream operates in rural communities, it faces relatively fewer competitors but also historically lower adoption rates. The main source of competition for the company in rural areas come from cable companies like Time Warner, Charter Communications (CHTR) and Comcast (CMCSA) , as well as wireless phone providers.
Windstream's Coverage
[edit] Government Regulations
As a telecommunications company, Windstream has to follow national rules set by the FCC, as well as state regulations. Such rules affect prices and rates that Windstream can charge. This limits how easily Windstream can react to changing market conditions by preventing the company from changing its rates to optimally respond to such changes.[22] Government regulations can also affect other returns that Windstream may have. Around 8% of Windstream's 2006 revenue came from Universal Service Funds, and future policy regarding such funds and eligibility may affect Windstream's profit level.
[edit] Competition
As a wireline phone and Internet access services company, Windstream competes with a range of telecommunication companies, including other mobile telephone services such as Verizon and cable companies such as Time Warner, Inc, its parent company Alltel, Verizon, and AT&T. The table below shows some comparative metrics.
| Company Name | 2006 Revenue | 2006 Operating Margin | 2006 Subscriptions | 2006 ARPU[23] | Notes |
|---|---|---|---|---|---|
| Windstream Corporation | $3.0 billion | 30% | 5.0 million | $75.29 [24] | Of the revenue, $2,759 million are from wireline operations |
| Alltel (AT) | $7.9 billion | 17% [25] | 11.8 million | $52.68 [26] | Of the revenue, about $7,030 million are from services revenue |
| Verizon Communications (VZ) | $88.1 billion [27] | 15% [28] | 51 million[29] | $49.80 [30] | The ARPU is actually for the data wireless division. Since an exact value for wireline ARPU is not given, this can only be used as an approximation. Of the revenue, about $50 million come from wireline services. |
| AT&T (T) | $63.1 billion | 16% [31] | 50 million [32] | N/A | An exact number for wired ARPU was not given. Only wireless ARPU was given. |
| Time Warner Cable (TWC) | $7.9 billion | 33% [33] | 13.2 million | $19.18 [34] | Of the revenue, only $5,784 million are from subscriptions |
[edit] References
- ↑ 2006 10-k, page 2
- ↑ 2006 10-k, page 5
- ↑ 2006 10-k, page F-6
- ↑ 2006 10-k, page 3
- ↑ 2006 10-k, page F-11
- ↑ 2006 10-k, pages F-12 to F-13
- ↑ 2006 10-k, page F-6
- ↑ 2006 10-k, page F-2
- ↑ 2006 10-k, page F-3.
- ↑ Data from 2006 10-k, page F-28
- ↑ Data from 2006 10-k, pages, F-11 and F-16
- ↑ Data from 2006 10-k, page F-28
- ↑ 2006 10-k, page F-7
- ↑ 2006 10-k, page F-8
- ↑ 2006 10-k, page F-11
- ↑ 2006 10-k, page F-11 to F-12
- ↑ 2006 10-k, page F-11
- ↑ 2006 10-k, page F-13
- ↑ 2006 10-k, page F-28
- ↑ 2006 10-k, page F-47
- ↑ 2006 10-k, page 6
- ↑ 2006 10-k, page 17
- ↑ Average Revenue per User
- ↑ Data from 2006 10-k, page F-11
- ↑ Data from Alltel 2006 10-k, page F-7
- ↑ Data from Alltel 2006 10-k, page F-5
- ↑ Data from Verizon 2006 10-k, page 50
- ↑ Data from Verizon 2006 10-k, page 46
- ↑ http://investor.verizon.com/business/wireline.aspx
- ↑ Data from Verizon 2006 10-k, page 50
- ↑ Data from AT&T 2006 10-k, page 82
- ↑ Data from AT&T 2006 Growth profile, page 13
- ↑ Data from Time Warner 2006 10-k, page 96
- ↑ Data from Time Warner 2006 10-k, page 97
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