WIN Misses on Merger Costs – Analyst Blog

Windstream Corp. (WIN) reported first quarter 2010 results with adjusted earnings per share (EPS) of 20 cents, missing the Zacks Consensus Estimate by a penny while falling short of the year-ago adjusted EPS of 24 cents. Adjusted EPS excludes $14 million (3 cents per share) in merger and integration costs. Net income dipped 16% year over year to $74 million (17 cents a share) on account of the merger-related charges.

 

 

Revenues rose 12% year over year to $847.9 million on the back of higher service revenues. However, revenues missed the Zacks Consensus Estimate of $879 million. Service revenues climbed 15% year over year to $828.4 million while product revenues dipped 43% to $19.5 million. Operating income declined 2% year over year to $246.8 million on account of a 20% hike in total cost and expenses.

 

 

Windstream continues to experience a steady decline in its fixed-line business given the rapid customer migration to cellular services from Tier-1 carriers such as Verizon (VZ) and AT&T (T). Total access lines declined by roughly 23,000 lines reaching 3.1 million at the end of the quarter, down 3.9% year over year.

 

This was, however, partly offset by the net addition of 35,800 high-speed Internet customers, bringing the total broadband customer base to approximately 1.17 million (up 16% year over year). Momentum for digital TV business continued with roughly 12,000 new customers added during the quarter. Windstream’s video subscriber base reached roughly 381,800, representing a 21% penetration rate in primary residential lines.

 

 

The company generated $173.5 million cash from operations in the quarter and spent $60.5 million in capital expenditure (CAPEX), resulting in a free cash flow of $113 million (down 26% year over year).

 

 

The board of directors declared a quarterly dividend of 25 cents per share, payable on July 25, 2010, to shareholders of record on June 30, 2010. Dividend payout ratio for the first quarter was 51% with a target to achieve between 59% and 65% in 2010.

 

 

Windstream has not released its second quarter outlook. For 2010, the carrier expects pro forma (including full-year results from acquisitions) revenues in the range of $3.540 billion to $3.685 billion (down 4% to flat year over year) and adjusted operating income before depreciation and amortization of $1.770 billion to $1.845 billion. CAPEX for the year has been projected between $360 million and $390 million. Free cash flow for 2010 expected between $690 million and $765 million.

 

Windstream is buying smaller rural carriers to expand its customer base and boost revenues. The company acquired rural phone and Internet service operator D&E Communications in November 2009. Moreover, Windstream subsequently purchased privately-held small telecom carriers Lexcom and NuVox and is expected to acquire local exchange carrier Iowa Telecom (IWA) in the second quarter of 2010.

 

To boost customer retention and fend off competition, Windstream is offering attractive bundled services (wireline voice, video and broadband Internet) to its customers. To strengthen its presence in the enterprise communication space, the carrier has launched a next-generation VoIP solution that bundles voice, data and broadband Internet over a single IP connection.  

 

Moreover, to expand its opportunities in wireless backhaul, Windstream will invest $20 million in 2010 to broaden its fiber-optic network to support its wholesale business to wireless carriers. Apart from delivering faster data speeds, the network expansion will allow the company to cater more bandwidth to mobile operators and support Ethernet and next-generation technologies for business customers.