Windstream changes focus of leadership

New CEO restructures top to raise firm’s profitability

3/18/15
Arkansas Democrat-Gazette/STEPHEN B. THORNTON
Windstream CEO Tony Thomas at their offices in Little Rock Wednesday.
3/18/15 Arkansas Democrat-Gazette/STEPHEN B. THORNTON Windstream CEO Tony Thomas at their offices in Little Rock Wednesday.

Windstream Holdings Inc. changed leaders in December -- and a period of change isn't over yet for the telecom company.

Tony Thomas has held the chief executive officer's position now for 102 days, taking control of the company from the man who led Windstream since it was founded eight years ago.

Thomas quickly changed Windstream's leadership team and started a restructuring of the company's divisions with the goal of increasing the telecom's profitability.

"What we're focused on at Windstream right now is just providing a world-class experience for our customers," Thomas said. "We're driving improvements in our network -- both its capabilities as well as its reliability."

On a recent Friday morning in his office at Windstream's headquarters in Little Rock, Thomas, 43, appeared confident in his new role.

Dressed casually in dark jeans and a deep purple sweater over a lighter plaid shirt, Thomas relaxed in his chair, leaning forward a few times to explain how the company's value will increase when it spins off some of its assets into a new company.

The appointment of Thomas came as a shock to some analysts because of the timing.

Windstream announced last year it was forming a new company, Communications Sales & Leasing Inc., also known as CS&L. The new company will be comprised of Windstream's copper and fiber networks, along with other assets, that will be moved into an independent, publicly traded real estate investment trust. The spinoff is set to be completed later this year.

Up until Dec. 11, when his appointment was announced, Thomas was busy with CS&L, serving as chief executive and president.

He had to move quickly in the transition.

"I had a couple of weeks to kind of think about how I would want to lead Windstream and the changes I would make as CEO," he said.

Thomas replaced Jeff Gardner, who had led Windstream since its founding and spinoff from Alltel in 2006.

Gardner's resignation was unexpected, analysts said.

It was "a very big surprise," said Barry McCarver, an analyst with Stephens Inc., which has been an adviser to Windstream. "There was no indication to me that there was any reason for him to depart."

The company gave no specific reason for Gardner's resignation, saying only that he and Windstream's board agreed a change was needed. Gardner could not be reached for comment.

"The board and [Gardner] reached an agreement that it was necessary for Windstream to have change," Thomas said.

"We needed ... a fresh perspective on how we can position Windstream in the best way to meet the changing needs of our customers," Thomas said. "And Jeff had been, as I think Jeff would tell you, doing the role for nearly a decade. I think anytime you get a fresh perspective you're going to get insights."

Under Gardner's leadership, Windstream became known for actively spending billions of dollars on acquiring new companies, a move Gardner previously said was done to grow the company beyond that of a traditional rural telephone business, particularly by expanding its business services.

After separating from Alltel and merging with Valor Communications Group in 2006, Windstream acquired eight companies for a total of $6.3 billion.

Of those acquisitions, the $2.3 billion purchase of Paetec Holding Corp. in 2011, is noted by analysts as being crucial to the expansion of Windstream's business division and its fiber-optic network to new markets.

Windstream had been offering phone and Internet connections for small-and medium-size businesses. With the Paetec purchase, Windstream added the ability to manage and host client data.

Windstream's profit margins slumped as a result of the capital expenditures -- leading investors and analysts to question the company's ability to consistently pay a dividend, increase revenue and even turn a profit.

Investors began to fret about Windstream's dividend more than two years ago when the company began reporting declines in quarterly profit. As questions arose about the dividend, Gardner repeatedly said Windstream was committed to paying and keeping the annual dividend at $1 per share.

But when Windstream announced plans to create the real estate trust, the company said its dividend would shrink, a move that the company said would help it reduce debt.

When the deal creating Communications Sales & Leasing Inc. closes, Windstream shareholders will keep their current shares and receive one share of the new company for every five shares held of Windstream. The new company plans to pay a $2.40 per share annual dividend to shareholders while Windstream will undergo a 1-for-6 reverse stock split and pay a 60 cent annual dividend.

The formation of the trust helped ease concerns over Windstream's dividend. As one analyst note put it, the trust "should allow [Windstream] to transfer into more of a growth story -- with a more favorable and nimble capital structure."

While concerns over Windstream's dividend have abated, the company's profit margins have tightened further in the past year with the company reporting large declines in net income during its first three quarters of 2014.

"I think those investments -- those were good investments," McCarver said about the deals during Gardner's tenure.

He said the company has been able to grow its enterprise business unit and revenue, but the growth has "been very small."

This is the challenge Thomas faces in his role as CEO: a diminishing profitability and stagnant revenue.

The company maintained a profit in the first three quarters of 2014 but recorded a loss for the fourth quarter -- $77.5 million -- which led to a loss for its entire fiscal 2014 of $39.5 million.

Revenue softened to $1.44 billion during the fourth quarter from $1.49 billion for the same quarter in 2013. For the year, Windstream reported revenue of $5.8 billion, down from $6 billion in the previous year.

"We expected a messy quarter," said McCarver, noting the change in leadership and the previous three quarters.

Windstream executives said Thomas sought to confront Windstream's financial struggles on the first day in his new role during a conference call with about 900 company mangers and executives. During the 8:30 a.m. call he explained how the company would focus on customer experience and would collaborate internally to reshape Windstream.

"I think each CEO has their own view of what they want to focus on and what's relevant at the time," Thomas said months later. "And right now, what I think is going to make the biggest difference for Windstream shareholders over the long term is me focusing on driving an excellent customer experience through a world class network."

To do that, Thomas reorganized Windstream's three core business units, which handle the range of services the company offers, including network communications and cloud computing services for businesses, and broadband and phone services for rural customers. Thomas said he also shifted the company's focus more evenly among them.

"We've seen fabulous performance in terms of improving the capabilities of our network but also in terms of being able then to generate revenues from those changes and improvements in the network," he said. "Their improved performance, frankly, led me to kind of rethink some of the previous investment decisions we've been making on the consumer side."

To help him reorganize the company, Thomas also appointed new leadership members soon after taking charge.

"I have a network of past colleagues that I have stayed in touch with," he said. "So some of the appointments I have made are seasoned telecom professionals that I've worked with over the past two decades."

They include Kevin Halpin, now senior vice president of process development and improvement for Windstream, and Lewis Langston, chief information officer.

Both worked with Thomas at Alltel, and said they hope to use the experience gained during that company's restructuring in 2004 to transform Windstream.

"We were a pretty darn good company but we weren't number one in our markets," said Halpin about Alltel.

For that to happen, Halpin said, "the leadership has to come from the top down."

Halpin said the company's recent leadership change was like a baseball game when the starting pitcher takes his team to the seventh inning, but once there "the collective team" hands the ball to another teammate to finish the game.

"As Windstream went through those acquisitions it created great opportunities ... but the nature of the business has gotten more complex and work remains to be done to fully integrate these acquisitions," he said.

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