Morningstar | We See Windstream as Uninvestable Unless It Wins an Appeal, Resulting in No Debt Covenant Breaches
We see Windstream as very challenged, with a declining business that will constantly require the firm to make staying solvent its priority. We see avenues to accomplish that, but we have a difficult time realistically expecting more. Windstream's enterprise business accounts for more than half the firm's revenue and is undergoing a major evolution. The firm has embraced SD-WAN, software-defined wide area networking, technology to meet customers' networking needs. Though SD-WAN and other strategic services generate lower revenue than the offerings they are replacing, they are higher-margin for Windstream. Windstream's costs on legacy technologies are generally higher than its big competitors because the firm typically only provides the last-mile connections within its historical local footprint, which is relatively small. Elsewhere, Windstream must lease connections from other carriers. With SD-WAN, though, customers can use several low-cost last-mile options, including cable modems. Windstream claims to be the top SD-WAN provider in the U.S., as many competitors are reluctant to cannibalize legacy technology offerings. In our view, competitors can easily provide the same product, and if customers determine SD-WAN is superior, competitors will adapt.The consumer and small business segment, which primarily provides broadband and voice services, makes up most of Windstream's remaining revenue. We see voice services in a state of perpetual decline, but we project the consumer broadband customer base to stabilize after steadily declining recently, as we surmise cable competitors were aggressively taking market share. Windstream is now down to serving only about 25% of the 4 million homes it passes, and we think that constitutes a trough level. With no cable competitor over a quarter of its footprint and an enhanced service that now can provide at least 25 Mbps speeds to about 60% of the households it passes, we think the worst of the cable competition is behind Windstream. Nonetheless, short of engaging in an aggressive price war, we don't see any reason for customers who previously left Windstream to return, so we don't expect much growth from this segment.Windstream Holdings is a holding company. Through its subsidiaries, the company is a provider of network communications and technology solutions for businesses across the U.S. The company also provides broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas. The company's consumer & small business segment provides local and long-distance voice services and high-speed Internet services. The company's enterprise segment provides integrated voice and data services, which deliver voice and broadband services over a single Internet connection. The company's wholesale operations are focused on providing network bandwidth to other telecommunications carriers and content providers.
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