PAET Paetec Corp (MM)

Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, has reported third quarter adjusted earnings per share of 19 cents, missing the Zacks Consensus Estimate of 20 cents.

Adjusted earnings excluded $13 million in after-tax merger and integration costs and $13 million in loss from extinguishment of debt, which had a negative impact of 5 cents. Including these costs, earnings per share declined 22.2% to 14 cents from 18 cents in the year-ago quarter.

Pro forma revenue decreased 1% year over year to $1.023 billion, falling short of the Zacks Consensus Estimate of $1.030 billion. On a GAAP basis, revenue dropped 6% year over year.

Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) was down 1% year over year at $507.9 million in the third 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 3.22 million. Windstream lost 37,000 access lines during the reported quarter.

Voice lines declined 5% from the year-ago quarter to $2.9 million. The net loss to advanced data and integrated solutions (providing both voice and data connections) inched up 1% from the year-ago quarter. Special access circuits increased 9% year over year driven by higher wireless backhaul demand.

Windstream added as many as 9,300 new high-speed Internet customers, bringing its total customer base to approximately 1.35 million (up 4% year over year). Video customers rose 4% year over year to 449,500.

Liquidity

Windstream exited the quarter with cash and cash equivalents of $34.3 million, down from $155.2 million in the year-ago quarter. Long-term debt increased to $7.30 billion from $7.19 billion at the end of 2010.

The company generated adjusted free cash flow of $211 million, up 72% from the year-ago quarter. Capital expenditure flared up 57% year over year to $177.5 million in the reported quarter.

Our Analysis

We believe Windstream’s continued focus on expanding its broadband business via acquisitions and investments in fiber-to-the-cell projects and data center expansion will fuel growth going forward. In addition, the company is making several refinancing and deleveraging efforts to alleviate its high debt level that will likely generate some synergies in the form of lower cash taxes and higher profitability over the long term.

However, Windstream remains challenged by sustained erosion in voice access lines due to stiff competition from cable and wireless operators such as AT&T Inc. (T) and Verizon Communication (VZ), and a highly leveraged balance sheet.

The company’s ongoing acquisitions plans like PAETEC Holding Corp. (PAET) have strained its balance sheet as it is predominantly funding most of these with debt.

We are currently maintaining our long-term Neutral recommendation on Windstream. For the short term (1–3 months), the stock retains a Zacks #2 Rank (Buy).

 
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