Windstream to face continual legacy revenue challenges amid SD-WAN, IP transition, says analyst

Windstream will continue to see near-term revenue pressure from legacy service declines. (Image: Windstream)

Windstream has set an ambitious plan to enhance its next-gen enterprise services revenue base with a growing mix of SD-WAN and related IP-based services, the service provider is not immune to revenue pressures from ongoing legacy declines.

These factors have prompted Fitch to downgrade the Issuer Default Rating (IDR) Windstream from BB to B due to what the financial company say is “continued weakness in the company's operating trends.”

“The rating action reflects Fitch's expectation that Windstream's revenues will decline at a faster pace than previously anticipated, due to continued weak enterprise trends within the company's legacy products and services and the effects of competition in consumer markets,” Fitch said in a report. “Fitch acknowledges the company's efforts in transforming the legacy revenues into higher margin revenues associated with next-gen technologies, particularly SD-WAN in the Enterprise segment may partially mitigate the decline in legacy revenues.”

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For its part, Windstream said during the third quarter that that SD-WAN and UCaaS picked up pace, making up 36% of total Enterprise sales during the quarter.

Despite seeing these results, Fitch said that near-term revenue pressures will continue to be seen in the wholesale and enterprise segments.

Third-quarter enterprise revenues were $554 million and the contribution margin was $106 million or about 19%, an increase of 80 basis points sequentially and 170 basis points over the past two quarters.

Wholesale, meanwhile, generated revenue of $173 million of revenue during the quarter. Windstream noted that the wholesale segment continues to experience revenue pressure from declines in legacy services, which are being offset in part with growth products such as Ethernet and wavelength sales, as well as with sales into new customer verticals.

“Including the EarthLink merger and Broadview Networks acquisition (the transactions), Windstream continued to experience pressure in the wholesale segment, as well as the small/medium business incumbent local exchange carrier (ILEC) segment through the third quarter of 2017 (3Q17). The enterprise segment remains weak due to effects of legacy revenue declines,” Fitch said. “Competitive local exchange (CLEC) consumer and small business has shown stabilization in the 3Q17, benefitting from acquisition related segment revenue.”

Fitch said that while some of the service provider’s “legacy revenues remain pressured, but Windstream's revenues should stabilize gradually as legacy revenues dwindle in the mix.”