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Windstream Q3 2012 Results: Business Revenues Up 3% - Consumer Broadband Revenue Up 4%

November 12, 2012

Windstream generated sequential growth in revenue and Adjusted Operating Income Before Depreciation and Amortization (OIBDA) in the third-quarter, driven by increased business sales.

“Our business continues to perform well, and I am confident in our ability to deliver strong free cash flow long-term to support our dividend,” said Jeff Gardner, president and CEO of Windstream. “The dividend is a key component of our investment thesis, and we believe it is the best way to provide returns to our shareholders.”

Pro Forma Financial Results

Total revenues and sales were $1.55 billion in the third quarter, a decline of less than 1 percent from the same period a year ago. Total revenues increased by $15 million from the second quarter, which was the largest sequential improvement recorded to date.

Adjusted OIBDA was $603 million, a decrease of 1 percent year-over-year. Adjusted OIBDA improved sequentially by $7 million as a result of cost management initiatives. Adjusted OIBDA removes the impact of restructuring charges, pension expense and stock-based compensation.

Business service revenues were $906 million, up 3 percent from the same period a year ago. Data and integrated services revenues were $388 million, an increase of 9 percent from the same period a year ago, driven by growth in IP, next generation data and data center services. Carrier service revenues were $162 million, an increase of 3 percent year-over-year, largely due to fiber-to-the-tower installations.

Consumer broadband service revenues were $115 million, up 4 percent from the same period in 2011. Overall consumer service revenues were $335 million, essentially unchanged from the second quarter of 2012 and a decrease of 3 percent from the same period a year ago.

Business and consumer broadband revenues represented approximately 69 percent of Windstream’s total revenues and sales in the quarter and collectively grew 2.7 percent year-over-year.

Wholesale revenues were $220 million, a decline of 10 percent from the same period a year ago and in line with expectations.

Adjusted capital expenditures were $289 million in the quarter, excluding $18 million in integration capital related to PAETEC network optimization opportunities.

Pro Forma Operating Results

Windstream this quarter released consolidated operating metrics to include PAETEC, which was acquired on Dec. 1. Enterprise customers, who generate $750 or more in revenue per month, grew 7 percent year-over-year. Total business customers at the end of the quarter were approximately 650,000.

Carrier special access circuits increased 3 percent year-over-year primarily due to fiber-to-the-tower installations. Carrier special access circuits also include dedicated circuits purchased by telecommunications carriers to transport traffic between points on their network or from their network to a customer location.

In the consumer channel, Windstream added approximately 6,000 new high-speed Internet customers in the third quarter, bringing its penetration of primary voice lines to 70 percent. Consumer voice lines declined 4 percent year-over-year. Windstream had approximately 1.87 million consumer voice lines at the end of the quarter.

GAAP Financial Results

In the third quarter under Generally Accepted Accounting Principles (GAAP), Windstream reported total revenues and sales of $1.55 billion, operating income of $248 million and net income of $54 million, or 9 cents per share. That compares to net income of $78 million, or 15 cents per share, on total revenues of approximately $1 billion during the same period in 2011.

GAAP results include approximately $7.8 million in after-tax merger and integration expense and $7.5 million in restructuring costs. Excluding these items, adjusted earnings per share would have been 12 cents for the third quarter.

Adjusted Free Cash Flow

Adjusted free cash flow was $182 million during the third quarter. For the first nine months of 2012, Windstream generated $669 million in adjusted free cash flow and paid out $441 million in dividends, representing a dividend payout ratio of 66 percent. Adjusted free cash flow is adjusted OIBDA, excluding merger and integration expense, minus cash interest, cash taxes and adjusted capital expenditures.

Cost Management Initiatives

Windstream completed a restructuring of its management organization in the third quarter, simplifying its operating model to better serve customers. The reorganization will result in annualized savings of approximately $40 million.

Additionally, the company has achieved a run rate of $60 million in operating synergies through the third quarter and is on track to achieve $100 million in total by the end of 2014 related to the acquisition of PAETEC.

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