Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, reported third quarter adjusted earnings per share (EPS) of 20 cents which was in line with the Zacks Consensus Estimate. Adjusted earnings rose 11% from 18 cents in the year-ago quarter on improving revenue trends in both business and consumer channels.
Adjusted EPS excludes $7 million (2 cents) in merger and integration costs. Net income, including merger and integration costs, increased 7% year over year to $85.2 million. Revenues dipped 1.5% year over year to $966 million.
However, on a GAAP basis, revenues climbed 32% year over year. Reported revenue was ahead of the Zacks Consensus Estimate of $957 million.
Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) inched up 1% to $482 million from the year-ago quarter. Operating income increased 13% year over year to $282 million.
Subscriber Statistics
Total access lines, which includes voice lines, special access circuits and advanced data and integrated solutions, declined by roughly 30,700 lines reaching 3.3 million at the end of the third quarter.
Windstream added about 15,700 new high-speed Internet customers, bringing its total customer base to approximately 1.29 million (up 8% year over year). A solid momentum for digital TV business continued with roughly 13,000 new customers added during the quarter to reach 433,300 subscribers.
Liquidity
At the end of the third quarter, Windstream had $155.2 million of cash and cash equivalents compared with $290 million in the year-ago quarter. The company’s balance sheet is highly levered with roughly $6.6 billion in long-term debt (up from $6.3 billion at the end of 2009). Capital expenditure leaped 20% year over year to $113 million during the reported quarter.
Dividend
On January 18, 2011, Windstream expects to pay a quarterly cash dividend of 25 cents per share to stockholders of record as of December 31, 2010.
Outlook
Based on the extended bonus depreciation rules and other tax savings, the company updated its outlook for 2010. Windstream now expects adjusted free cash flow of $814–$859 million, resulting in a dividend payout of 54%–57%, compared with the previous outlook of adjusted free cash flow of $770–$810 million, resulting in a dividend payout of 57%–60%. Updated free cash flow guidance assumes expected cash taxes of $105–$120 million and pension contributions of $41 million for 2010.
Our Analysis
Windstream remains challenged by sustained erosion in voice access lines due to stiff competition from cable and wireless operators. However, this has been partly offset by encouraging growth in high-speed Internet and digital TV businesses, boosted by aggressive bundled service offerings and promotional initiatives.
We also remain concerned about the company’shighly leveraged balance sheet. Windstream’s ongoing acquisitions to expand its coverage markets and subscriber count are vital for its survival in an industry that is consolidating. However, the acquisitions have strained the balance sheet as the company is predominantly funding most of them with debt.
We are currently recommending our long-term Underperform rating on Windstream with the Zacks #4 Rank (Sell).
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