Windstream Corp (WIN), a leading rural telecom carrier, reported operating results for the fourth quarter with adjusted earnings per share (EPS) of 25 cents, exceeding the Zacks Consensus Estimate of 20 cents while matching the year-ago adjusted EPS.
Adjusted EPS excludes one-time items such as restructuring charges, merger and integration costs and a non-cash pension expense. For full-year 2009, adjusted EPS of 95 cents also beat the Zacks Consensus Estimate of 83 cents.
Reported net income of $75.5 million (17 cents a share) represents a 7% year-over-year decline on account of lower revenues, which declined 3% year-over-year to $754.4 million. However, revenue for the quarter came above the Zacks Consensus Estimate of $739 million. For full year 2009, revenue decreased 6% year-over-year to $3 billion while reported net income of $335 million (76 cents a share) represents a 19% decline.
Service revenues for the quarter fell 0.2% year-over-year to $732.6 million, while product revenues dipped 50% to $21.8 million. Average monthly service revenue per customer increased 3% year-over-year to $83.21. Operating income declined 15% year-over-year to $235 million.
Subscriber Trends
Windstream continues to experience 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 35,000 lines in the quarter to reach approximately 3.03 million lines, down 1% year-over-year.
This was, however, partly offset by a net addition of more than 27,000 high-speed Internet customers, bringing the total broadband customer base to approximately 1.13 million (up 10% year-over-year). Momentum for digital TV business continues with roughly 10,000 new customers added during the quarter. Windstream’s video subscriber base reached roughly 369,000, representing 20% penetration of primary residential lines.
Cash Flow & CAPEX
The company generated $379 million cash from operation in the quarter and spent $91 million in capital expenditure (CAPEX), resulting in a free cash flow of $288 million (up 14% year-over-year). Free cash flow for full year 2009 was $823 million, up 8% year-over-year.
Windstream remains committed to its share repurchase initiatives leveraging healthy free cash flow generated through its ongoing cost-cutting measures. The company repurchased 7.8 million shares in the fourth quarter, returning roughly $78 million to shareholders.
The carrier repurchased 29 million shares in aggregate for $322 million under the $400 million share buyback authorization (approved in February 2008) which expired at the end of 2009. Windstream returned roughly $560 million or 68% of its free cash flow to shareholders in the form of dividends and share repurchases in 2009.
Outlook
Windstream released pro forma (includes full year results from acquisitions) financial guidance for 2010. The company expects revenue in the range of $3.540 billion to $3.685 billion (down 4% to unchanged year-over-year) and adjusted OIBDA of $1.770 billion to $1.845 billion. CAPEX for the year has been forecasted between $360 million and $390 million. Projected free cash flow for 2010 is between $690 million and $765 million and the dividend payout ratio is 59%-65%.
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, which has strengthened its foothold in Pennsylvania. Moreover, Windstream purchased privately-held small telecom carriers Lexcom and NuVox.
To boost customer retention and fend off competition, Windstream is offering attractive bundled services (wireline voice, video and broadband Internet) to its customers. The carrier recently launched a next-generation VoIP solution that bundles voice, data and broadband Internet over a single IP connection. The service further strengthens Windstream’s presence in the enterprise communication space.
Moreover, to expand its opportunities in wireless backhaul, Windstream will invest $20 million in 2010 on expansion of its fiber-optic network to support its wholesale business to wireless carriers. Besides 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.
We believe acquisitions and expanding broadband business to spur growth moving forward. However, we remain concerned about the sustained access-line erosion due to competition and the company’s high debt exposure ($6.3 billion in total debt), which has been exacerbated by its acquisition binge.
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