CFO: Windstream CAF Impact Could be $40 Million Annually

Windstream expects to see a “halo effect” from the rural broadband deployments it plans to make using Connect America funding, said Windstream Chief Financial Officer Bob Gunderman at the Bank of America Merrill Lynch 2015 Media Communications and Entertainment Conference in Beverly Hills, California yesterday, which was also webcast. Gunderman made his remarks during a question and answer session.

The CAF program will have “ancillary benefits,” he said, pointing to the hypothetical example of a remote location to which Windstream might have to deploy “10 miles of fiber down to the end of a dusty road in rural America.” The fiber route might well pass some businesses or other Windstream facilities that could be upgraded as well, he said.

Windstream CAF Impact
Windstream recently accepted $175 million annually in CAF funding in the seven-year program, which will go toward bringing broadband to 400,000 locations where deploying service at the target broadband speed would not otherwise be economically feasible. The company apparently expects the CAF funding to virtually cover the full capital expense of bringing broadband to the target areas.

“The capital expenditure requirements of this program are funded by the incremental receipts,” said Gunderman.

“Once we complete these projects . . . the incremental revenues coming from these . . . customers will all be incremental revenues for the business,” he added, also noting that the program will enable the company to get “more wallet share of our existing customer base” and to address “new households where we can’t really offer broadband services today.”

Windstream may collect the entire $96 million in CAF funding available to it this year, according to Gunderman. “We’re going to get started immediately in using those funds to improve out network,” he said, also noting that “We’re optimistic that these could be high-performing capital projects so we’re incented to get going on that pretty quickly.”

The first step he said will be to upgrade Windstream’s core optical backbone in rural areas. The company may not be able to deploy much fiber initially because of impending weather conditions, he said. With winter approaching it is likely that the ground will soon freeze solid in the northern parts of Windstream’s territory.

The $40 Million Estimate
The Bank of America Merrill Lynch analyst questioning Gunderman estimated that Windstream could net an additional $40 million in revenue annually, assuming it signs up 50% of the 400,000 homes targeted at average incremental monthly revenues of $20 with an 80% profit margin, to which Gunderman said “Your numbers aren’t that far off.”

Gunderman noted that Windstream believes that over time it can get take rates in the 40% to 50% range in the CAF-funded areas.

“It’s true that the incremental margins in the consumer business are quite high,” he added. “We would not expect to add a significant amount of cost to address those markets in terms of technicians or call center resources or anything like that. And so the project [cost] is the capital to deploy it.”

Accordingly the company anticipates margins “north of 80%,” he said.

And when the “halo effect” is taken into account, perhaps the net impact could be even greater than Bank of America Merrill Lynch’s estimate would suggest.