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Morningstar | Importance of Windstream's Unsurprising 4Q Results Is Overshadowed by Ongoing Bankruptcy Proceedings

After filing for bankruptcy last month and delaying its scheduled fourth-quarter earnings update, Windstream released results on March 15 but did not hold a conference call. Results were consistent with the recent trends that we expect to continue for this no-moat company--overall business is declining, as Windstream's legacy services are uprooted by newer options, but Windstream is finding success with newer offerings of its own, which may one day become meaningful contributors. Nonetheless, because the firm is in bankruptcy, we are keeping the shares Under Review. We believe the potential for any residual value to equityholders is dependent on the bankruptcy court rather than operating results.

Total revenue declined 7% year over year in the fourth quarter and 5% for the full year. Revenue declined in all segments, and the core enterprise and consumer segments each produced at least 3% service revenue declines in 2018. We expect the trend to continue for the foreseeable future, since Windstream is still predominantly composed of businesses that are in long-term secular decline. We expect low-single-digit top-line declines to continue for the next few years.

We think success in SD-WAN and other strategic enterprise services, as well as higher-quality broadband offerings, will eventually be large enough to halt the decline. Windstream continues to make strides with these offerings, but they are not yet big enough to materially affect firmwide fortunes. Annualized strategic product revenue doubled in 2018, as the firm stated that it now has over 1,800 SD-WAN customers and 15,000 SD-WAN endpoint locations, which it says makes it the largest SD-WAN provider in the U.S. However, strategic services still make up only 5% of total enterprise revenue. Windstream also added broadband customers for the first time in several years, but we surmise churn from voice customers again led to a drop in average bundle pricing.

The shift toward newer services is enhancing profitability, however, as they are typically less costly than legacy products. In 2018, consumer margins rose 100 basis points over the prior year, while enterprise margins rose close to 200 basis points. Those gains were offset a bit by slightly worse margins in the Wholesale and CLEC segments (the latter of which the firm sold at the end of 2018) and reduced leverage on other unallocated, firmwide expenses, given the company's revenue decline. Overall, EBITDA margins expanded about 20 basis points compared with 2017. We expect a continued shift toward higher margin offerings will allow Windstream's EBITDA margin to continue expanding throughout much of our forecast.