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Thursday, August 7, 2014

Windstream Missed Badly: What it means for telco

Windstream (WIN) today reported second-quarter results, highlighted by continued growth in business data and integrated services and improvements in the consumer channel.

"Total revenue was up slightly from the first quarter, reflecting better results in our consumer business and the diminishing impact from intercarrier compensation reform," said Jeff Gardner, president and CEO. "Enterprise and small-business revenues also slightly increased sequentially and year-over-year, and we continued to achieve solid enterprise sales.

"Overall results were solid and largely in-line with our expectations. Importantly, the progress made during the first half of 2014 has positioned us well to reach our goals for the year. In addition, our plans to spin off certain assets will allow Windstream to accelerate network investments, provide enhanced services to customers and maximize shareholder value," Gardner said.

Windstream announced on July 29 plans to spin off certain telecommunications network assets into an independent, publicly traded real estate investment trust. Windstream will control and maintain the assets for the exclusive use of Windstream and continue to have sole responsibility for meeting its existing regulatory obligations. The tax-free spinoff will enable Windstream to realize significant financial flexibility by lowering debt by approximately $3.2 billion and increasing free cash flow to accelerate broadband investments, transition faster to an IP network and pursue additional growth opportunities to better serve customers. The transaction is expected to close in the first quarter of 2015, pending customary regulatory approval.

Pro Forma Financial Results

Total revenues and sales were $1.5 billion in the second quarter, a decline of 2 percent from the same period a year ago. On a sequential basis, total revenues increased slightly driven by improvements in the consumer channel along with growth in business product sales.

Enterprise and small-business service revenue was $749 million, a slight increase sequentially and year-over-year. Data and integrated services grew 3 percent in the second quarter from the same period a year ago to $418 million due to sales of IP-based solutions and next generation data. Data center and managed services revenues, which total approximately $31 million, increased 20 percent from the same period a year ago.

Enterprise customer locations grew 3 percent from the same period a year ago, and average revenue per business customer increased 9 percent year-over-year.

"We are successfully executing on our key priorities this year to accelerate growth opportunities and strengthen our position as a leading provider of enterprise communications services. We have expanded our business marketing programs to strengthen sales and are seeing continued solid sales momentum and positive trends supporting our efforts to move up-market," Gardner said.

Carrier revenue was $155 million, down 6 percent from the same period a year ago, pressured by wireless carriers decommissioning legacy circuits and other transport related network grooming.

Consumer broadband service revenues in the second quarter were $121 million, up 0.4 percent from the same period in 2013. Overall consumer service revenues in the second quarter were $317 million, an increase of 1.2 percent sequentially and a decrease of 2.8 percent from the same period a year ago.

"We are making solid progress in the consumer channel with an increased focus on marketing and sales, as well as network enhancements and expansion and new pricing initiatives," Gardner said.

Wholesale revenues in the second quarter were $141 million, a decrease of 6 percent from the same period a year ago primarily due to a decline in switched access revenue from lower intrastate access rates and fewer minutes of use.

In the second quarter, adjusted OIBDA was $543 million and adjusted capital expenditures were $206 million.

For the first six months of 2014, Windstream generated adjusted free cash flow of $440 million, an increase of 6 percent year-over-year due to declining fiber-to-the-tower investments and lower cash interest. The company returned more than $300 million to shareholders in the form of dividends during this period.

Windstream also affirmed its previously provided financial guidance for 2014. Guidance includes total revenue for the year within a range of a 2.5 percent decline to a 1 percent increase as compared to 2013 revenue; adjusted capital expenditures ranging from $800 million to $850 million, and adjusted free cash flow of $775 million to $885 million, resulting in a dividend payout ratio ranging from 68 percent to 78 percent for the year.

GAAP Financial Results

In the second quarter under Generally Accepted Accounting Principles (GAAP), Windstream reported total revenues and sales of $1.47 billion and net income of $14 million, or 2 cents per share. That compares to total revenues and sales of $1.50 billion and net income of $40 million, or 6 cents per share, during the same period in 2013.

GAAP results include approximately 2 cents in after-tax merger and integration, restructuring and other expense. Excluding these items, adjusted earnings per share would have been 4 cents for the second quarter.

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