Windstream's CEO says that now that the company has completed its acquisitions of EarthLink, and Broadview Networks, the telco has the solutions it needs to prevent customer defections and ramp business revenues.
Tony Thomas, CEO of Windstream, told investors during the second-quarter earnings call that the company's immediate goal is to sign up more small and large business customers for SD-WAN and cloud-based OfficeSuite services.
“The synergies that both those transactions allow us, enable us to extend the opportunity to create free cash flow, but it will also give us the opportunity to bring these new applications, whether that's SD-WAN and OfficeSuite to as many of our customers as possible,” Thomas said during the earnings call, according to a Seeking Alpha transcript. “I think the benefits of getting customers on these products as quickly as possible is going to be reducing churn and improving revenue trends, but also in time enabling, I think, just a completely new type of industry provider.”
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While Windstream had developed its own SD-WAN product, the service provider trailed EarthLink by a few months.
Since it completed the EarthLink deal, Windstream has wasted no time to introduce new elements for the SD-WAN offering that leverage the strengths of both service providers’ offerings.
Just this past week, Windstream introduced a set of improved customer experience and network connectivity options for business customers. Some of these improvements include additional broadband flexibility, improved self-service monitoring and control options, and a new SD-WAN Concierge managed service that automatically optimizes application performance, lowers costs and simplifies network management.
The SD-WAN Concierge solution offers customers a number of what Windstream says are proprietary benefits, including a dedicated concierge service, a proprietary robust portal, flexible connectivity and dynamic routing of traffic to minimize downtime and prioritize mission-critical applications.
“We recently launched our proprietary SD-WAN Concierge offering, which is a unique customizable high-touch service across our entire footprint. A combination with OfficeSuite, which we began selling company-wide on August 1st, this access-agnostic solution will dramatically improve our competitive positioning in our Enterprise and SMB segments,” Thomas said. “The expansion of OfficeSuite and SD-WAN Concierge is a strategic imperative for our company. These two technologies together are the solution of the future.”
Ramping SD-WAN sales
While Windstream is ramping up the capabilities of its SD-WAN portfolio, the reality is SD-WAN overall is still a relatively new service.
This means it will take time until Windstream will see meaningful SD-WAN sales.
Thomas said that the full run rate of SD-WAN sales will likely not come about until 2018.
He noted that there “were several significant sales in the second quarter and I think in the third quarter, you're going to see substantial amount of sales.”
“When we look at our sales pipeline today, it is weighted heavily towards SD-WAN and OfficeSuite or UCaaS solutions, along with our other product capabilities, whether that's MPLS, Managed Network Securities, leveraging our network capabilities both fiber and fixed wireless,” Thomas said. “So I think you will start to see meaningful impact of SD-WAN in 2018, but it will really start -- it will be ramping kind of literally from here.”
Migrating revenues
SD-WAN may represent the future for Windstream, but like the introduction of Ethernet over a decade ago, the service will face similar growing revenue migration pains carriers see as customers migrated from copper-based T-1s.
Similar to other service providers, Windstream also sees SD-WAN being a replacement for MPLS.
However, Bob Gunderman, CFO of Windstream noted that a large portion of its MPLS revenues are carried over third-party special access circuits Windstream rents from wholesale partners to deliver services to its multi-site business customers.
Gunderman said since these customers are on off-net MPLS connections, “they have a lower margin profile.”
“When we convert those customers to SD-WAN, we may in fact see a revenue write-down, but we will see an absolute margin expansion,” Gunderman said. While SD-WAN will hinder some of the growth we would like to see in revenue in terms of absolute contribution margins combined with our on-net capabilities, we're confident with the interconnection cost reduction, we're going to make significant advancements.”
But Windstream isn’t just selling SD-WAN as a standalone product. The service provider points out that one of its SD-WAN customers also is purchasing Ethernet services as well as managed security.
“When you look at the holistic product, we actually are going to provide a complete solution to that customer,” Thomas said. “SD-WAN will show up as a $200,000 sale in product sales, but the reality is it brought along another $300,000 of monthly revenue.”
Here’s a breakdown of Windstream’s key metrics:
ILEC consumer and small business: Segment service revenues were $387 million, down 2% from the same period a year ago, and the contribution margin was $212 million compared to $221 million year-over-year.
Wholesale: Wholesale service revenues were $176 million, up 10% year-over-year, and contribution margin remained flat at $116 million from the same period a year ago.
Enterprise: Enterprise service revenues were $564 million, up 15% from the same period a year ago, and contribution margin was $103 million compared to $88 million year-over-year.
CLEC consumer and small business: This segment’s revenues were $189 million, a 51% increase year-over-year, and contribution margin was $72 million compared to $41 million in the same period a year ago.
Financials: Total revenues and sales were $1.49 billion and total service revenues were $1.47 billion in the second quarter, an increase of 10 percent respectively year-over-year. Operating income was $107 million compared to $155 million in the same period a year ago. The company reported a net loss of $68 million, or a loss of 37 cents per share, compared to net income of $1.5 million, or 1 cent per share, a year ago.