Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, reported fourth quarter 2010 adjusted earnings per share of 19 cents missing the Zacks Consensus Estimate by a penny.
Adjusted earnings excluded $16 million in merger and integration costs, and $4 million in restructuring charges, which impacted earnings by roughly 4 cents a share. Including these costs, earnings per share plunged 12% to 15 cents from 17 cents in the year-ago quarter.
In fiscal 2010, earnings declined 13% to 66 cents from 76 cents in the prior year.
Pro forma revenue dipped 2% year over year to $1,030.2 million in the reported quarter but was ahead of the Zacks Consensus Estimate of $968 million. However, on a GAAP basis, revenue climbed 30% to $981 million from the year-ago quarter.
In fiscal 2010, Windstream reported pro forma revenue of $4.1 billion, down 2% year over year.
Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) slid 1% year over year to $523 million in the fourth quarter. It remained flat year over year at $2.1 billion in 2010.
Subscriber Statistics
Total access lines, which includes voice lines, special access circuits and advanced data and integrated solutions, declined by roughly 36,000 lines to 3.3 million at the end of the fourth quarter.
Windstream added about 12,200 new high-speed Internet customers, bringing its total customer base to approximately 1.3 million (up 6% year over year). Advanced data and integrated solutions (providing both voice and data connections) added 4,200 customers during the reported quarter, reaching 0.17 million subscribers.
A solid momentum for digital TV business continued reaching 433,500 subscribers at the end of fourth quarter. Special access circuits increased 5% year over year driven by higher wireless backhaul demand.
Liquidity
Windstream’s cash and cash equivalents plummeted to $42.3 million at the end of 2010 from $1,062.9 million at the end of 2009. The company’s balance sheet is highly levered with roughly $7.2 billion in long-term debt (up from $6.3 billion at the end of 2009).
In 2010, Windstream generated $818 million in adjusted free cash flow, resulting in a dividend payout ratio of 57%. Capital expenditure leaped 20% year over year to $159 million in the reported quarter and inched up 1% to $490 million in fiscal 2010.
Dividend
On April 15, 2011, Windstream is scheduled to pay a quarterly cash dividend of 25 cents per share to stockholders of record as of March 31, 2011.
Guidance
For fiscal 2011, Windstream expects total revenue to decline 3% or remain flat at $4.015–$4.140 billion. Adjusted OBITDA is expected to be $2.045–$2.105 billion, representing the range of a decline of 1% to the growth of 2% year over year.
Windstream expects adjusted free cash flow of $863–$973 million, resulting in a dividend payout of 52–59%. Capital expenditure is expected to increase 6–18% year over year to $520–$580 million.
The 2011 guidance assumes net cash interest expense of approximately $552 million and cash taxes of $50–$60 million.
Our Analysis
Windstream’shigh-speed Internet and digital TV businesses are growing rapidly, boosted by aggressive bundled service offerings and promotional initiatives. The company’s focus on expanding broadband business via acquisuitions andinvesting in fiber-to-the-cell projects and data center expansions are expected to fuel growth going forward.
Further, Windstream’s healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout at least over the near term that is well above its Tier- 1 peers AT&T Inc. (T) and Verizon Communication (VZ). This substantiates the short-term (1-3 months) Buy rating and the Zacks #2 Rank.
However, we remain on the sidelines due to competitive pressures, a highly leveraged balance sheet as well as continued access-line erosion, partially offset by high dividend yield and broadband opportunities. Hence, we are currently maintaining our long-term Neutral recommendation on Windstream.
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