Windstream Holdings’ (WIN) CEO Tony Thomas Presents at Goldman Sachs Communacopia Conference Call Transcript

Windstream Holdings, Inc. (NASDAQ:WIN)

Goldman Sachs Communacopia Conference Call

September 13, 2017 12:25 PM ET

Executives

Tony Thomas – CEO

Analysts

Brett Feldman – Goldman Sachs

Operator

Brett Feldman

I think everyone had a chance to find their seat. We can get started here with our first afternoon session. It’s always a pleasure to welcome back to Communacopia. Tony Thomas, the President and CEO of Windstream. Tony thanks for being here.

Tony Thomas

My pleasure, Brett. It’s good to be here.

Brett Feldman

So still a little bit of the recap here. You guys have taken a number of steps to reposition the business over the last couple of quarters. You completed the acquisitions of EarthLink and Broadview. You’ve completed Project Excel which was you broadband upgrade. You’ve brought the new management and you’ve also made some changes in your capital allocation. And we’re going to spend some time talking to all these things, but I thought maybe the best way to start would be at a higher level and just that can you talk to some of the key growth opportunities that you position the business to pursue in these acquisitions and these other changes you get in the business?

Tony Thomas

Yes, I think once we might know as we look forward this is my actually — in fact, this is my 20th year in communications, this week actually later this week. And I’ve have spent 20 years in the Windstream and one of its predecessors, and I’ve never thought better about the products portfolio and our differentiation and right to win in the marketplace. When you think about the capabilities, we have now generated in terms of next-generation technologies like software-defined wide-area networking, SD-WAN; voice cloud solutions like Broadview’s OfficeSuite as well as a programmable transport network that’s enabled by software-defined networking.

Look at that and say, we are well positioned to win and we’ve made a lot of other changes to ensure that we achieve that profitable revenue growth and continue to reposition the business. And when I look forward today as opposed to years in the past, we look with the network that — we just go through Project Excel as you alluded to, but a broad-based upgrade of all of our infrastructure whether that was broadband, our transport network, our IT infrastructure, now we sit here in September of 2017 with the right capabilities and now it turns to execution.

Brett Feldman

Do you feel like you are at the point where you have the assets you need and it really is just execution? I mean you don’t need to do another acquisition. You do not need to other restructuring of the management team or network that you are ready to go?

Tony Thomas

We are ready to go. And I think M&A can always be potentially accretive in terms of the products set. In terms of our fiber network, our fiber reach the capabilities have, we don’t see gaps in our portfolio today.

Brett Feldman

Before we dig into some of that, I do want to ask and you do have operations in areas that have been affected by the storms. Is there any update you can give us on the impact and how long that maybe?

Tony Thomas

Yes, I’ll start with Hurricane Harvey. We were minimally impacted by that. The employees and teams did a great job following the mantra first be safe and then move quickly to restoration. Literally, we have a handful of broadband nodes impacting probably less than 300 customers at this point in the Houston, Sugar Land area. On Hurricane Irma, it’s still a little bit early and little more of impact to us there. All the core infrastructure is great. We did not lose power to any of our central offices. We have nothing of a significance was impacted by the flooding.

But the large-scale commercial power loss that hit kind of Northern Florida and much of Georgia. I think it creates some short-term pain for us, but it’s just going to be in the form of overtime, staff augmentation. And if the weather stays good, we should be able to get all along with our customers restored in fairly short order. It will drive several million dollars of probably incremental cost this quarter just in terms of incremental resources to get the network fully back online.

Brett Feldman

And I am presuming, you’ll be able to identify that when you report we can…

Tony Thomas

We will –we’ll be able to call out those cost separately.

Brett Feldman

Okay. Let’s just come back to the acquisition, you closed EarthLink in February. You closed Broadview in July. Where are you in terms of these integrations? What’s left to do?

Tony Thomas

Yes, we closed the EarthLink merger at the end of the February. And we’ve gone through all the corporate integrations we’ve integrated — start the process of integrating the network. We’ve integrated most of the SG&A. And the network access synergies in a piece that’s still coming along. And on the IT side, we’ve wrapped up two billing systems conversions. In the legacy EarthLink network, we’ll do one more this year and then two more next year. And we should be wrapped up with all of our integration whereby June 2016, which for us I think one of the lessons learned type of the questions I get back.

For investors, hey, did you learn the lesson of Paetec, an acquisition that Windstream done before and we have. We have new leadership in place, experienced integrators. And I think with Broadview, you’ll see us be able to even go faster. Again, we’ve already integrated the Broadview corporate systems. We’ll all be finalizing kind of SG&A this quarter and then we’re already moving on the network access synergy. They take a little bit longer especially with EarthLink and Windstream because we develop from around network at capacity and that work will go into next year in 2019, but we feel great, no surprises there.

Brett Feldman

What are the fact complications we’re are getting all done, I mean, obviously capturing the cost synergies that you’ve identified will be a piece of it. You know looking in terms of the market and operations that a bit more efficient once you’ve got these projects behind your?

Tony Thomas

Yes, the biggest thing, it really is about cost structure. And a lot of things we’re doing is being able to take cost out of our business and that’s really whether that’s interconnection cost or you know compensation cost tied to despair billing systems as we consolidate systems, as we move to a single integrated network. All that enables us to take cost out and also enables us to sell more, it’s easier to sell in a unified IT network. And because we will have that unified IT network in unified network, we’ll be able to take the cost out most immediately, but then I think it helps us on the revenue side as well, Brett.

Brett Feldman

Any big surprises so far, good or bad, about both the companies?

Tony Thomas

I think the good surprise for us is EarthLink. We view SD-WAN as a game-changing technology. I can recall the moment in June of 2015 when the architecture team presented to me a very detailed overview of SD-WAN. And it is certainly disrupt the MPLS networks for many carriers. Windstream is uniquely advantaged here because most of our MPLS network relies on another carrier, so it has lower margin business. But what EarthLink gave us with these earnings insights into how you differentiate it and they’ve got out some really great capabilities in terms of automation in the backend as well as their frontend facing portal.

So thus far and Broadview’s OfficeSuite product is just as good as advertise. I mean we were now the third largest unified communications as a service provider in the country. And now that we are able to bring SD-WAN, Windstream’s SD-WAN program with OfficeSuite together, I think it is a disruptive force in the industry. When I took over CEO in December 2014, our product portfolio was frankly kind of an equivalent to have best to our competitors, and we were differentiating on a great customer experience. We could be more nimble. We could be closer to our customers. Today, we are going to disrupt on technology and leverage a great customer experience. And I think the insights we got from EarthLink about how SD-WAN enables that and from Broadview, we certainly got a fantastic IT organization with ownership economics associated with a voice cloud solution.

Brett Feldman

Got it. I want to come back to you just a minute, but I want to wrap up around the integration. You are talking about getting a $180 million of run rate synergies out of both these businesses. Can you give us update on the timing and to what extent as any of that captured in your guidance for this year?

Tony Thomas

Yes, there is a portion of the synergies being captured in our guidance for this year. We plan on exiting this year at a $100 million annualized synergies that’s obviously buildings throughout this year, but we’ll exit at December with a run rate of the $100 million of annualized synergies. And we are well on track there and a lot of that our cost is certainly associated with interconnection and compensation expenses where we have clear line of sight on the actions we to take to choose those synergies. So, we’re confident that we’re on track and confident we’ll achieve our goals for this year and to next year.

Brett Feldman

Do you think the 180 million is conservative?

Tony Thomas

The way I — we did increase our EarthLink guidance of synergies to $125 million to $150 million when we close the deal in the February. And I’m always a little bit reticent because I feel like this synergy gain, as I kind of refer from the IR and can be — has lost of those cache. Everyone, kind of raises their synergy with organic business goes to hell. Like, hey, like that’s not really a better answer as if end of the day, we’re focused on getting the $180 million out. And then leading in on the cost structure and taking a lot more cost out. And whether you call — and part of that off course is enabled by having a bigger sale that came from EarthLink and Broadview. But reality is we think there is still a lot of cost inside of our business, and that’s going to be a significant way which we created value for our equity and fixed income investor.

Brett Feldman

Okay, so you basically alluded this, but it’s a big reason that you did you deals as you want to improve your products suite, your network capabilities and overall your asset mix. And that’s because you’ve acknowledged that there are some headwinds in the market, the market you’ve been operating in. So first of all, can you maybe just give us a view, what all the principal headwinds that you need to overcome in the business that you had going into these acquisitions? And then we start talking about how you’re going to leverage them to sort of grow out of this?

Tony Thomas

Yes, maybe a little history would help. Windstream predominantly had sold a lot of MPLS service, a lot of DIA, dedicated Internet access, those sorts of products, but we used to resell that from other carriers. And what happens is that resell model over the last few years has been getting squeezed. And people have been building up their own fiber ability to have a really effective resell model was getting more challenged with MPLS. And we looked at our enterprise business with the compression we are having and the Chairman of the SEC, Jay and I just had a fundamental disagreement on the competitiveness of switch to Ethernet services across this country.

And the reality is, so we recognize. We just start building our own capabilities both fiber and fixed wireless and we’ve been doing that across 20 plus markets of fiber 44 fixed wireless. But with SD-LAN, you get ability to leverage broadband of an access method. And one of the ironies of this complete very aggressively in our RLEC business with the cable providers. But the CLEC business, that is great enabler of SD-WAN because we ride the public broadband network into our own core MPLS network, and that’s a much more cost effective solution.

So multi location deals with MPLS where we were having trouble weighing the marketplace was pretty challenging, SD-WAN comes around and in the month of July, 20% of our gross sales in the enterprise business unit came from SD-WAN. We launched the product in January, now 20% of what we sold in July came from SD-WAN. It’s the much successful product launch I’ve ever been part of in the Company. And I think and I’m excited by the way another little fact about July sales, 20% of our July sales were off also on our own network facilities.

So we are making progress. The key here is we just have to get more of that momentum into enterprise business units overcome these trends around historically our loss of competitiveness on telecom research and MPLS.

Brett Feldman

To what extent it is cannibalizing even if it is yet. You run MPLS business. And is it always going to be scenario where you weren’t making that much margins in MPLS and anyhow so you’ll take whatever the top line hit is because of the bottom line you still think you’re ultimately winning?

Tony Thomas

Yes, Brett, how will you end with that bias, so SD-WAN was going to be write-down on revenue, but in absolute growth and contribution margins. So revenue will come down, but we would actually make it up because the cost with which the Ethernet from a large lack or cable company for that matter is pretty essential relative to the broadband IP. So we’ve been able to make it up on the margin side. Right now and the safer size isn’t great, but now on all our SD-WAN deals, we cam it a existing customers over the SD-WAN.

And our Broadview’s OfficeSuite solution, we’re growing revenue to the tune of those counts of about 1.5 times. So $1 becomes a %1.50 because we’re actually bringing in more fulsome solution to those customers who are making the transition before. And a portion of our portfolio or we might have a portion of location, but with SD-WAN we can now get to all of their locations across the country cost effectively. And we still have our core Ethernet on net and off net capabilities for large corporate locations.

Brett Feldman

To who you continue with because SD-WAN is not necessarily proprietary technology? And why do you think you’re winning business?

Tony Thomas

One, I think we’re business because when we work further ahead and we actually have better tool and capabilities in terms — we make it easy to do business with a great digital first mindsets. And I was in Silicon Valley a few weeks meeting with the folks who should make you paranoid that you’re missing something like what’s the next thing like. What are we getting on top of? And the reality is we’ve gotten better at Windstream is recognized and what those changes and technology are. And adapting them into our own product set more quickly.

And the beauty of SD-WAN and OfficeSuite together obviously through owned by Windstream, ownership economic. SD-WAN, we have a great partner. But we actually mask it behind our own portal through a robust API process. And then we manage that suits of that, so you get SD-WAN comps here. We’ve also made our SD-WAN solution cloud aware that we can certify cloud applications which increasingly as our customers to do business through cloud, SaaS platform, and were fairly uniquely positioned, it were our capabilities are there.

I think we’re also making this difference is the only and so we do the multi locations SD-WAN deal. But we can bring a true solution to the customer. We can bring managed network security. We can provide DDos, denial service protection to through the Internet. And yes we can also bring you a dual diverse 1 gig pipe into your building fiber or fixed wire line. So when I look at, yes, SD-WAN, I feel very good about how we are differentiated. But when it comes to the complete solution, there is no one out there matching us today.

We’ve never been in a better position. We have an industry leading set of products especially when I think taken holistically, and we plan on expanding and building on that lease.

Brett Feldman

So where we are going see this show up in your financials when looking at your consumer enterprise segments, are we going to first see it on the margin side because you make better margins? Or when you think we get to the point where the whole P&L enterprises like is responding favorably?

Tony Thomas

I think the whole P&L will respond favorably for different reasons, predominantly interconnection cash cost savings. So let me talk about revenues specifically. I think it takes probably to 2019. As you allude to you, we have some new leaders inside of Windstream. And I think they’ll be able to make their stamp on our revenue very quickly. And I think they’ll do that predominantly through SD-WAN, but it will show up probably more in margin overtime.

But it will be that meaningful now, it would be meaningful on the increment — on the incremental basis, but extension of our business today SD-WAN is modest. Obviously, it’s a little bit larger because obviously, we brought the entire Broadview legacy variance. But I think we can reposition the top line, probably about 2019 we should be positioning to flatten being ready to grow, but near term it’s still for Windstream about contribution margin expansion through the elimination of interconnection.

Brett Feldman

I think you’ve noticed that the enterprise sales volume [indiscernible] and it’s larger and larger deals and more complex solutions. And you were alluding to this a little bit earlier. Can you maybe dig into that little bit? And off course this is sales [indiscernible] opportunities, how you feel like you are doing on the conversion rate and getting actual bookings?

Tony Thomas

I think it will take pretty good some time to understand the rate of conversion and how success would be there, but I can tell you we are having more conversation today than ever before with our customers. At the same time in communications you continually have to sell more, like I said in the 20 years of my life in telecom, everyday you walked into the office. The average revenue you can get from a customer is less than the day before.

It is a deflationary market. It has been — I started my career wireless deflationary every single year, deflationary [indiscernible] deflationary today. And it’s not that different from here, so when I think about it, we’re going to have to continue to be really great SD-WAN obviously knowing that you are going to have some price erosion in the marketplace. That comps as your existing customers come out of contracts, three or five year contracts that you’ll be fighting to overcome. That’s just a nature of the business. We know that and we know multiple levers to drive enterprise contribution margin expansions.

Brett Feldman

I mean do you any example of something that’s big and differentiated in complex that you think you can win now that maybe one position for a year-ago?

Tony Thomas

Yes, in fact, before the Labor Day holiday on a Friday, I was calling a prospect, which we’ll see how good job I do at conversion and closing. And certainly, the sales came low for me, but it was a 150 location southeast geographic company about 50 megs of bandwidth location and in the voice solution. And we wanted a core corporate headquarters to be fully redundant and protected. And we have a pretty clear solution to all diverse connect that effectively can do that.

But that’s example of the solution that is right now like $75,000 monthly recurring charge. The number of deals in our pipeline greater than 50,000 in particular has never been more than they are today. And we saw this EarthLink, EarthLink has really made this pivot whether they got really focused ongoing up market. And really kind of — we’re not going to play in the SMB base. Our enterprise guys will be focused on larger opportunities. And that’s an example of where we’re seeing real momentum in the marketplace where our solution is differentiated.

And when I talk to the CEO of the Company about why Windstream, why us? You know, we’re doing this. I guess they were — we are following, if not the largest supplier of SD-WAB in North America, we’re in the top three. Those numbers are just hard to get to publically now, but we continue to sell 1,000s and 1,000s seats every month. And I don’t see that falling down.

Brett Feldman

I want to talk a bit of margin expansion earlier you alluded to the fact that third-party network connection is really the biggest expense you have. We know that that’s when the primary reasons your enterprise margins are low. I mean enterprise is — your biggest business is 37% of revenue, but only getting 18% margin at that right now, which is the lowest margin segment. You’re targeting 22% I believe by 2020. Can you maybe frame for us just how meaningful your third-party network connection expenses are? And I think you’ve actually established a total for how you can twiddle those down year in year out?

Tony Thomas

We have Brett, and it is quite meaningful. It is the largest expense beside the Company. Second quarter interconnection expense and this money we pay other providers to provide Windstream network connectivity of some point was 1.6 billion. 40% of that related to legacy, TDM Infrastructure. And I’ll try not to give an engineering 101 lesson here, but there’re effectively two types of major network connectivity in the U.S. There is the older technology called TDM and everybody is moving to the new Ethernet IP world. And Ethernet IP world doesn’t require that level of middle mile architecture. You really simply hand-off that is called the network-to-network interfaces with other carriers.

So back in the old TDM world, you have collocations where you go into a LEC, you put your switch there, you run a bunch of DS3s into that location and you get T1s or something else going the last mile. The 3% of our cost really to TDM kind of infrastructure that going to be migrating down because one nature migration, we have a lot of opportunities uniquely positioned there. One of the best buildings in America here is 401 North Broad Street in Philadelphia. They used to manufacture tanks there during the World War II. Now, it is a carrier hotel. Windstream has eight pieces of separate real estate in that building through the various acquisitions we’ve done.

So, we’re going through their consolidating eight locations down to one, shrinking the rent payment, shrinking the power we’re consuming as well as then the network connectivity. We’re getting rid of a lot of legacy network connectivity that’s no longer needed moving that all with next gen. So when we look forward to taking out this 1.6 billion and our goal was to cut in half over five years, which means next year we have to take out a $116 million interconnection that is what we will do. 30 million that will come through synergies, a 130 million will come primarily from this sort of network access cost take out. Of course, there will be a little bit of loss simply through the decline in the top line, but that’s a strategy.

Brett Feldman

It’s a big number, $160 million a year to $200 million a year of adjusting free cash flow this year. If you can keep doing and presumably that would be a pre-meaningful cash flow tailwind that’s the point, right.

Tony Thomas

That’s what we talk about. Right now, I can get a lot of levers on [indiscernible] share like that is the plan.

Brett Feldman

We’re obviously doing the cost [indiscernible] that’s obviously by the single biggest thing that you can do move to deliver on spending, but you’ve done some other things you’ve been investing in IT [indiscernible]. You think we can see cost savings fourth year P&L?

Tony Thomas

We have about 13,000 to our evidence. We have mentioned on the third quarter call we have — we took an initial step because of some of the IT automation where we are going to be able to take out that $25 million of cost in the back half of the year. But just across to your point, we’ve got to create meaningful free cash flow growth. I mean the fixed income investment community I know this is an equity conference, the fixed income investment community in particular is just hitting over the head with core like hitting, hitting of brick about like I would say, we want more free cash flow generation on your business.

I think the good news is we are well positioned I think to given. Over the last few years we had to make a lot of kid of structural changes in the business those are behind this. We will get linear on capital expenditures, we will do aggressive interaction cost takeout. The down payments that you saw it was in the cost take out that came from the IT integration work were now in the list of automating a lot more of our processes, whether that’s through kind of flow through provisioning enabled by a software defined network whether that’s something robotics than artificial intelligence that we are now employing inside of our business.

I think we have a meaningful opportunity to think if we introduced the compensation related to the paying by the Company as well. Those are two biggest buckets of spend you have that’s why we focused on that coupled with capital expenditures is a key to putting your free cash flow number up that can we think create meaningful value for those fixed income and equity shareholders.

Brett Feldman

And how do we think about CapEx going forward? Are you seeing that as you move through this IT projects the absolute dollar leve…

Tony Thomas

The absolute dollar count, it can go down, it will go down.

Brett Feldman

In that, can you talk about this 13% to 15% of revenue? I mean do you still think we are going to be in that range? Or do you think, if there is an opportunity to upgrade more efficiently than that?

Tony Thomas

I think it will depend a little bit on SD-WAN as a more capital efficient technology. I am definitely a minority view here, but in terms of our need to deploy our own fiber, I think it could be less than in the future in metro markets. I think our ability to deploy SD-WAN first and foremost to avoid the capital out lay associated with fiber, but were clearly focused on exploiting that opportunity. So we went meaningful refined ways to provide great solution to customers. Those solutions are also more capital efficient. And so, we will continue to do deploy fiber to large bandwidth opportunities, but I think today with the products tests we have we can be smarter about how we deploy capital. And we like to have — we need to significantly lower our capital expenditure particularly I get to the lower to that range. I think we have some opportunities to do that.

Brett Feldman

Talking about your consumer business a little bit, we noted earlier that you completed Project Excel that was your broadband upgrade projects. And as a result of that you can now deliver at least 25 megs speeds to over half of your customer locations and yet only about18% of your customers are thinking 25 megs. And so it was seen that there is huge up selling opportunity, can you walk us through how you’re going to prosecute that game plan over the next few quarters?

Tony Thomas

It’s not really complicated. Our customers will say, hey, you have 12 you could have 50 or 100. Doesn’t that sound better? And like $10 or $20, it’s very compelling which is just the reason you’re seeing the lower adoptions. We had to build out capabilities in the network, which we’ve now down and wrapped up in June. Now we have to do the aggressive migration of customers to the faster speeds, and I don’t think it will be a difficult conversion process. And thus far what we’re seeing is customers are more than willing especially in areas of probably where ARPUs are slightly lower, they will spend the $10 or $20 to get much faster speeds. And since we’re in more competitive areas, we are providing some of that incremental speed with the same ARPU, but we’ll see that benefit in broadband units.

Brett Feldman

Overall, when we’re looking at your reported results for the next few quarters, we think we should be looking to see the value of the broadband upgrade. Do you think it’s primarily going to show up in better subscriber net additions? Or do you think ARPU is the area where we might see the most immediate response?

Tony Thomas

I think there will be the most immediate response in broadband units. As we alluded to in the August call, July was a better month. We now have August results and they were clearly trending much, much better than we did in the second quarter. And that’s partly because we’ve responded more aggressively to spectrum’s price points to the marketplace and we’re more probably appropriately priced on an acquisition perspective. But it’s also because we’re just getting better now. We have more of the network complete, more times for customers to get migrated and that word of mouth spread. Now 18% of our network now on faster speeds, when people talk to the neighbors and say hey, I have Windstream and for everyone — when I took over CEO, as a matter of the fact that TV sold 12 max.

Yes today we have almost 90,000 customers in 1 gig and that’s growing every single day. But the broad majority of our speed profile vastly enhanced in terms of 100 meg, 50 meg and 25 meg capabilities. As the word, I think the word of mouth spread in terms of getting faster speeds could be very beneficial. I think we can be relatively — look fairly relatively low market share. We compare Windstream to the table companies specially the competitive area. We have teens market share. We have teens market share so I mean that gives you like, yes, you can go back to kind of economic textbook and think about insurgent pricing models and additional things that can be disruptive.

Brett Feldman

Thinking about your targets for the year, you see the consumer business having pretty similar revenue trends the last year, which is modestly down essentially. As you move ahead and you think about taking greater advantage of higher speed broadband network. What’s your long-term view on this business? Do you think that you can get it to sustainable growth? Or is it more about creating cash flow for the Company?

Tony Thomas

Well, it needs to be both. I think it can — we can create sustainable growth. I think now that we have relative speed in the marketplace and I think with the adoption of streaming services, I think one thing that we’ll be able to go out and we can talk to customers. Come to Windstream, get a 50 meg pipe, get a great streaming service and probably cut your cable bill at half. I think that’s going to be a compelling value proposition to a lot of customer.

And we’re going to be out marketing that aggressively and I think that along with various expansions of our network enabled by some government funded money for unserved and underserved areas in the country. I think we’re going to be able to grow. I mean I think we’re in a good spot. The technology continues to evolve to get better. And the great thing about having Project Excel, we now have a ubiquitous single architecture across our entire plant meaning that we again now for next sets of incremental changes I think we will be able to go faster and have a bigger impact in terms of speed and do that in a much more capital expenditures efficient way.

Brett Feldman

You alluded to the Connect America Fund II or CAF II funding, which is the rural underserved homes. Can you give us an update where you in terms of upgrading speed to those comps? When does it become a real customer acquisition opportunities for you?

Tony Thomas

Fourth quarter I think we’ll turn on most meaningful number of subscribers. We’re ramping up our fiber build in Iowa. The fiber build we’ve done in Iowa at this point and Nebraska, two largest states. And with the process of turning on that network capability, so I think you’ll start to see those benefits created to the business in the fourth quarter.

Brett Feldman

And you also had the ILEC, small business ILEC, so I think in leverage some of the investments you’ve made in the broadband networking well. So what’s the right way to thinking about the outlook for that business going forward?

Tony Thomas

Yes, I think I like ILEC business or SMB business probably has been the one of the biggest disappointments for us in terms of performance just to be transparent. I think the combination of our broadband capability with SD-WAN and OfficeSuite, I think we are going to be able to do much better. Netback some of our early wins with Broadview’s officeSuite products actually can’t believe ILEC SMB business. It’s a completely different conversation we’ll have with customers about cloud solutions and connectivity.

And frankly many instances, our customers are getting both their cable and a Windstream broadband pipe. That’s the beauty of SD-WAN. It’s access, aggregation and resiliency with application prioritization. So you can actually get a highly resilient and a fantastic cloud voice and collaboration tool for incredibly cost effective price. And by the way we don’t have any of that in the ILEC SMB business and so August 1st is when we are able to roll all of that out through that business. So it really they really only had SD-WAN and OfficeSuites as A1. So I’m really excited to see what that change can do with these new capabilities. On top of the investments we made in broadband infrastructure.

Brett Feldman

And are the cable guys to be able to offer the same thing? Or do you feel this is a real changer for your competitive position?

Tony Thomas

We think it’s a game changer. They can obviously I think match parts of that, but we are — we’re pretty far ahead in terms of our abilities, how seamless it is. Broadview literally can turn up our customers, Broadview’s OfficeSuite, we can turn up customers on their platform, I think they can do within minutes with a support the number and might take a day or two. And in that effect, we are actually installing OfficeSuite in advance of turning out the access. It’s an over the top technology that has a virtualized kind of network element, meaning if you go over the top and in terms of where there is a network force. That’s very disruptive.

Brett Feldman

Now to speak of the takeaway here that you see an opportunity for both the consumer and the SMB ILEC with your new capabilities and your enhanced network to openly go back to the growth businesses. You also have a consumer [indiscernible]. So, I don’t think that growth is probably what you’re managing the business to what’s the right way for investors to accept how well that business is performing as it goes through its life cycle?

Tony Thomas

Yes and actually that was the view I had. I took over as a CEO in December 2014. I really thought the SMBC like business was just could be managed for cash. My view has changed. I can tell you we did a deep inspection of Broadview’s financial statements when we acquired then. They predominantly are in what I would put in kind of the mid-market SMB space and they had top line a substantially growing margin. And how are they able to do that? They were able to a cloud solution and then sell access. Really, we’re going to exit the SMB space be an access provider. We have the acquired solutions provider.

We’re going to run a virtual network and people can bring their own broadband, but we’re going to move is some ways and to just a complete cloud company on the SMB mid-market side. We’ll still access but it will be part of the cloud solutions we’re bringing, which were the virtualized networks solutions of SD-WAN in OfficeSuite. And we think of that’s a pretty fundamental change, so in fact that business went through much of the telecom re-sell business? And now we’re going to completely reposition it to be a cloud business by the way? We are exactly a playbook to run because rather we accomplish that mission in the last few years.

Brett Feldman

And you think you can apply in the CLEC as well? Or is that just going to have been managed for cash?

Tony Thomas

We’re going to apply in the SMB business. I think the biggest surprise of the Windstream over the next three years will be the performance of our SMB business our CLEC SMB business.

Brett Feldman

So let’s talk about the balance sheet and some of capital allocation decisions you’ve made. If we look at where you’ve exited the second quarter, net debt to EBITDA was just over four churns, which is on the higher end of where Telco operate. And ultimately decided as the Board decided that you are going to eliminate the dividend and put in place a buyback program. And so the question is now as okay this is the capital allocation choice you’ve made. How should we expect you to allocate the cash that you’re generating going forward? Meaning, how does the debt repayment factor in? You talked a little bit about CapEx maybe temple around buyback because those are the things investors are trying to figure out?

Tony Thomas

I think obviously we want to have a balanced approach like we had historically between capital investments, returning cash to shareholders and paying down debt. And right now on the capital investment study you alluded to I think we’ve made the necessary capital investments. So I don’t think that’s really a significant factor in our current perspective and from a capital allocation policy. There is a talk about, we’re going to take a balanced approach talking half the money we are freeing after the dividend, a $180 million and half the buying back stock and half the paying down debt. We felt that was kind of consistent with our past approach, it will create the most value for all of our constituencies. And obviously, if we’re wrong about that we’ll revisit and make the necessary adjustments.

Brett Feldman

Do you have a leverage target and timeframe that you’re trying to achieve a certain level of leverage?

Tony Thomas

We don’t have a specific leverage target, but obviously we know a healthy balance sheet is important as is access to the capital market. And we’ll make sure we talk all the actions necessary for data [indiscernible]. We’ve seen five assts trade at very high valuation recently and while you did transfer a lot of the network, you didn’t transfer all of it. You also accumulated some fibers as a result of the EarthLink transaction. So as you think about you assets that you’re using solely for yourself, you think that there are opportunities to accelerate you deleveraging maybe carving out for some choice fiber properties so you can get real value?

Tony Thomas

Absolutely, I think for the biggest opportunities we have inside the Company right now the asset monetization of our fiber asset. We have — Bob talked about the bank, but we still retained ownership for about 56% of the fiber mile. I have some questions this morning, while you say they transferred 80% of your network to Uniti, well, that includes the copper infrastructure and a portion of fiber structure. So that’s why you have that disparity just clarifying that for the audience. Just a meaning amount of fiber and obviously some of its metros, some it’s long-haul. All those have given value characteristics. We need to go out to the market place and understand what that value is. And I think we can get what is appropriate price we’re willing to monetize of the assets and use that cash to pay down debt.

Brett Feldman

Can you maybe frame out how realistically to seem like you might be able to get this done, I only have to bring excuse me — Uniti is really not as interested in doing another transaction. They are focused on the two other priorities right now, so where you see the potential if we get those types of things done?

Tony Thomas

I would think I would — when you think about the — I think this depends — there is Mark Wallace in the back, if he has any interest in fiber assets. I here that could be attractive to that guide, but — when you talk about fiber assets and the valuations and you are staying across the country, we are not talking I think about a sale lease back here. We’re talking about fiber assets and who is best positioned to take both assets where we have cash flows on them and assets that are effectively dormant and get the most value out of that. That’s really what we’re trying to assess through this exercise as we go as — as we taken into the marketplace.

Brett Feldman

Do you have any timelines in mind?

Tony Thomas

Yes, where it goes as possible and but we will be patient. I mean it’s about and I say that because this is in prior cell. Its value of the [indiscernible] it’s a value to be. We are not going to transact, but if the value is there I don’t see. I think valuation prepared and we should go quickly. And I think being able to take that could become a catalyst as well and to our investors.

Brett Feldman

The objective that you were able to find attractive deals as you accelerate the repayment of your debt that would be these incremental source as well.

Tony Thomas

It would be, if you look at our ’20 and ’21 were — if investors are telling what they are thinking and then lying to me, right. They think pain down 20 o 21 and taking cares of those near term maturities could unlock a significant amount value and our equity.

Brett Feldman

Have you considered me just to repositioning the buyback towards the repayments as well as that we have about more meaningful impact on your equity?

Tony Thomas

Yes, I think for this quarter we’re very comfortable with the approach we outlined, but we’ll revisit it periodically to make sure it’s still the best way to create value for our equity holders.

Brett Feldman

Well I am on — go to my last question, we’re almost out of time here. I mean you know next year we’re spending up here, you’ve outlined a lot of things that you think are big opportunity. What was your hope would the biggest one or two success that you would have that you say when you look back on the last year and think about your positioning into ’19 and you can point to that show that you are competing against the same plan.

Tony Thomas

I think the biggest priorities for us as once again as the big given multiple paths for success, and I think that includes asset monetization. I think it also includes more aggressive free cash flow growth. Can we, through CapEx reductions and more of us in cost take out, but more to free cash flow into the system? I think those are the two very positive signs that could really help repositioning the business in the minds of investors and it’s been operationally, it’s pretty simple. We’re going to be taking advantage of the new capabilities we have and putting those into the hands of our customers as quickly as possible because we know that will create the revenue stability we need to win in the marketplace.

Brett Feldman

Great, we’re out of time. Tony thanks so much. Appreciate it.

Tony Thomas

Thank you, Brett. Appreciate your interest, everyone. Have a great day.

Question-and-Answer Session

End of Q&A

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