Windstream's Q2 revenue drops as it continues to negotiate Chapter 11 waters

Windstream wants to change its master agreement with Uniti Group as part of its Chapter 11 restructuring effort. (Windstream)

While Windstream Holdings is continuing its battle against former spinoff Uniti Group, the company's second quarter revenue was down.

In February, Windstream lost a legal battle with New York hedge fund Aurelius Capital Management over whether Windstream had defaulted on bonds by spinning off the Uniti Group four years ago. As part of that spinoff, Windstream transferred copper-based network assets to Uniti, which Windstream leased back from Uniti to serve its 1.4 million residential and business customers across its 18-state footprint.

After the February ruling, Windstream filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York that same month.

Windstream is paying $54 million per month to Uniti for access to Uniti's network assets. The master lease with Uniti is set to expire in 2030, and has an annual rent of approximately $659 million.

Windstream filed a complaint against Uniti on July 25 that sought to re-characterize its relationship with Uniti from a lease to a financing arrangement.

Resolving the lease is key to Windstream's restructuring efforts, while an outright rejection of the lease by Windstream would cast doubt on Uniti's solvency, according to a previous statement by Uniti CEO Kenny Gunderman.

"To increase the likelihood of an optimal result, Windstream is pursuing both litigation against and negotiations with Uniti," said Windstream CEO Tony Thomas, according to a Seeking Alpha transcript. "Our complaint asserts that’s approximately $650 million. Windstream pays Uniti each year was intended to finance the 2015 spin off of the network assets that created Uniti and was not a true lease."

RELATED: Windstream and Uniti drill down on settling lease terms—Bloomberg

Further complicating matters for Windstream, in early July two of its creditors asked a judge to order Windstream to stop making lease payments to Uniti.

UMB Bank and U.S. Bank made the motion that Windstream stop making payments to Uniti. The banks contend that the payments are not lease arrangements, but rather a financing agreement, the latter of which would be barred under bankruptcy proceedings.

The banks said that Windstream shouldn't be making rent payments to Uniti while it's under Chapter 11 protection, but should instead keep that cash on hand to pay its creditors. Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York held a hearing July 26 hearing to consider the motion by UMB Bank.

"Most recently on July 26, 2019 Judge Drain approved mediation with Uniti and a number of other key creditor constituencies," Thomas said. "We are hopeful this process will lead to a mutually satisfactory agreement between Windstream, Uniti and our other key stakeholders.

"Absent an acceptable negotiated resolution, Windstream is prepared to pursue its litigation claim to conclusion. Specifically after a lengthy and thorough investigation, Windstream filed a complaint against Uniti on July 25, asking Judge Drain to among other things re-characterize our relationship with Uniti from a lease to a financing arrangement."

In addition to agreeing on mediation, Windstream and Uniti also agreed to extend the assumption deadline for the master lease through December 6 of this year.

Windstream's 2Q numbers

After earning $1.4 billion in the second quarter of 2018, Windstream posted $1.29 billion in total revenue and sales during its Thursday earnings report. Windstream Holdings had reported a $2.3 billion loss in the preceding first quarter. Little Rock, Ark.-based Windstream's adjusted capital expenditures were up slightly to $215 million, compared to $181 million a year ago.

During a historically slow quarter, Windstream's Kintetic broadband service added 1,900 new subscribers in the second quarter. The broadband segment reported revenues of $509 million, which was down 4% from the same quarter a year ago. For the fifth consecutive quarter, and now 16 consecutive months through June 2019, Windstream has recorded consumer broadband growth.

Windstream Enteprise's service revenues were $673 million, which was a 10% decrease year over year. In the second quarter, Windstream grew its SD-WAN, unified communications-as-a-service (UCaaS) and Office Suite sales 43% compared to last year.

"We remain the largest SD-WAN service provider in the country in terms of customers and locations served, and continue to add approximately 600 new locations every single month," Thomas said. "Our UCaaS leadership position, driven by our proprietary OfficeSuite product, remains strong as we've reached over 535,000 UCaaS seats installed at quarter end."

Windstream CFO Bob Gunderman, who is the brother of Uniti CEO Ken Gunderman, said his company expected to drive growth in its enterprise strategic revenues by approximately 30% in 2019 as Windstream's SD-WAN and UCaaS sales continue to accelerate.

"These strategic revenues have increased 43% in the first half of the year." Gunderman said. "We anticipate our enterprise contribution margin to increase by more than 200 basis points year-over-year."