Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, has reported second quarter adjusted earnings per share (EPS) of 19 cents, at par with the Zacks Consensus Estimate.
Adjusted earnings excluded $3 million in merger and integration costs and $2 million in loss on extinguishment of debt, which had a negative impact of a penny. Including these costs, earnings per share rose 6% to 18 cents from 17 cents in the year-ago quarter.
Pro forma revenue increased slightly to $1.030 billion from $1.029 billion in the year-ago quarter. Revenue was ahead of the Zacks Consensus Estimate of $1.021 billion. On a GAAP basis, revenue climbed 12% year over year.
Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) inched up 1% year over year to $512.7 million in the second 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 3.26 million. Windstream lost 30,100 access lines during the reported quarter.
Voice lines declined 4% from the year-ago quarter to $3 million. The net addition to advanced data and integrated solutions (providing both voice and data connections) were 1,700 during the reported quarter and increased 2% from the year-ago quarter. Special access circuits increased 9% year over year driven by higher wireless backhaul demand.
Windstream added about 4,800 new high-speed Internet customers, bringing its total customer base to approximately 1.34 million (up 5% year over year). Video customers rose 5% year over year to 443,500.
Liquidity
Windstream exited the quarter with cash and cash equivalents of $52.1 million, down from $53.5 million in the year-ago quarter. Long-term debt increased slightly to $7.22 billion from $7.19 billion at the end of 2010.
The company generated adjusted free cash flow of $227 million, up 15% from the year-ago quarter. Capital expenditure flared up 40% year over year to $172 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 in 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 have strained its balance sheet as it is predominantly funding most of these with debt. Early in the week, Windstream announced its intention to acquire PAETEC Holding Corp. (PAET) for approximately $2.3 billion.
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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