Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, reported first quarter 2011 adjusted earnings per share of 19 cents, at par with the Zacks Consensus Estimate.
Adjusted earnings exclude $6 million in merger and integration costs and $64 million in loss on extinguishment of debt, which affected earnings by roughly 14 cents a share. Including these costs, earnings per share plunged 71% to 5 cents from 17 cents in the year-ago quarter.
Pro forma revenue dipped 1.8% year over year to $1.023 billion in the reported quarter but inched past the Zacks Consensus Estimate of $1.006 billion. However, on a GAAP basis, revenue climbed 21% year over year.
Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) slid 1% year over year to $512.4 million in the first quarter.
Subscriber Statistics
Total access lines, which include voice lines, special access circuits and advanced data and integrated solutions, fell 4% year over year to 3.3 million at the end of the first quarter. Windstream lost 23,000 access lines, representing the lowest quarterly decline.
Voice lines declined 4% from the year-ago quarter to $3 million. Though net addition to advanced data and integrated solutions (providing both voice and data connections) were nil during the quarter, it grew 3% from the year-ago quarter. Special access circuits increased 7% year over year driven by higher wireless backhaul demand.
Windstream added about 28,800 new high-speed Internet customers, bringing its total customer base to approximately 1.33 million (up 6% year over year).
Liquidity
Windstream exited the first quarter with cash and cash equivalents of $35.8 million, down from $42.3 million at the end of 2010. Long-term debt increased to $7.3 billion from $7.2 billion at the end of 2010.
The company generated $169 million in adjusted free cash flow. Capital expenditure shot up 97% year over year to $159.6 million in the reported quarter.
Dividend
On July 15, Windstream is scheduled to pay a quarterly cash dividend of 25 cents per share to stockholders of record as of June 30.
Guidance
For fiscal 2011, Windstream continues to expect 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 a range of a decline of 1% to a growth of 2% year over year.
Windstream reduced its free cash flow expectation to $845–$965 million from $863–$973 million. However, the company raised its dividend payout ratio to 53–60% from 52–59%. Further, Windstream increased its capital expenditure guidance for 2011 to $570–$630 million from its previous forecast of $520–$580 million owing to higher spending in fiber-to-the-cell projects. This represents an increase of 16–29% over the last year.
The 2011 guidance assumes net cash interest expense of approximately $569 million and cash taxes of $1 million.
Our Analysis
Windstream remains challenged by sustained erosion in voice access lines, due to stiff competition from cable and wireless operators, and a highly leveraged balance sheet.The company’s ongoing acquisitions have strained its balance sheet as it is predominantly funding most of these with debt. Hence, for the short term (1–3 months), we have a Sell rating on Windstream with the Zacks # 4 Rank.
However, we believe the company is making several refinancing and deleveraging efforts to alleviate its high debt level, which will likely generate some synergies in the form of lower cash taxes, increasing profitability in the long-term. Windstream’s healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout that is well above its Tier- 1 peers AT&T Inc. (T) and Verizon Communication (VZ).
Further, Windstream’s high-speed Internet and digital TV businesses are growing rapidly, boosted by aggressive bundled service offerings and promotional initiatives. The company’s focus on expanding its broadband business via acquisitions and investments in fiber-to-the-cell projects and data center expansion are expected to fuel growth going forward.
Hence, we are currently maintaining our long-term Neutral recommendation on Windstream.
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
WINDSTREAM CORP (WIN): Free Stock Analysis Report
Zacks Investment Research
