Windstream Posts a Mixed Bag 4Q

Zacks

Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, has reported fourth quarter 2011 adjusted earnings per share of 19 cents, missing the Zacks Consensus Estimate of 20 cents. Adjusted earnings for the quarter shot up 47.4% from the year-ago earnings of 10 cents.

Adjusted earnings excluded $103 million in pension charges after-tax given changes in the company's pension accounting method. Moreover, the results exclude $23 million in merger and integration costs and $7 million in loss from the termination of debt.

Including these costs, the company reported loss per share of 6 cents, down 160% year over year.

Adjusted earnings for fiscal 2011 were 33 cents, down 50% year over year. 

Pro forma revenue inched up 1% year over year to $1,568 million in the fourth quarter, surpassing the Zacks Consensus Estimate of $1,049 million. On a GAAP basis, revenue grew 22% year over year. For the full year, pro forma revenue was flat year over year at $6,243.6 million.

Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) remained flat year over year at $611.8 million in the fourth quarter. For fiscal 2011, adjusted OIBDA nudged up 1% year over year to $2,434.3 million.

Subscriber Statistics

During the fourth quarter, total access lines, which include voice lines, high-speed Internet and Digital television customers, dropped 0.4% year over year to 3.58 million. Windstream lost 15,800 access lines. Voice lines declined 4% year over year to $1.9 million.

Windstream added as many as 8,300 new high-speed Internet customers, bringing its total customer base to approximately 1.2 million (up 4% year over year). Video customers increased 4% year over year to 445,800.

Liquidity

Windstream exited fiscal 2011 with cash and cash equivalents of $227.0 million, up from $42.3 million in the prior year. Long-term debt increased to $8.9 billion from $7.2 billion at the end of 2010.

The company generated adjusted free cash flow of $784 million although capital expenditure flared up 70% year over year to $702 million in fiscal 2011.

Guidance

For 2012, the company expects adjusted revenues between $6.180–$6.305 billion and adjusted OIBDA in the range of $2.392–$2.462 billion. Free cash flow and capital expenditures are expected in the bands of $840–$950 million and $950–$1.050 billion, respectively.

In addition, Windstream expects dividend payout ratio (as a percentage of estimated free cash flow) between 62–70% in 2012. Depreciation and amortization expense is estimated at approximately $1.305 billion for the year.

Windstream is hopeful of receiving $55 million in proceeds from the Federal Communications Commission approved spectrum sale this year.

Our Analysis

We believe Windstream remains poised to gain from high-speed Internet services that are benefiting from increased market traction. Additionally, the company’s latest acquisition, PAETEC, a leading broadband service provider will also be aided by expanding service offerings, increasing wireless data backhaul services and offering managed services and cloud computing. Further, Windstream’s deleveraging initiatives and refinancing activities are expected to generate healthy cash flows, subsequently attracting investors through high dividend payout.

However, we remain on the sidelines due to competitive pressures from peers like such as AT&T Inc. (T) and Verizon Communication (VZ), a highly leveraged balance sheet as well as continued access-line erosion, which would partially be offset by a high dividend yield and broadband opportunities.

We are currently maintaining our long-term Neutral recommendation on Windstream supported by a Zacks #3 (Hold) Rank.

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