Windstream’s Search for Growth Continues
In its recent 3Q11 earnings call, Windstream (Nasdaq:WIN) ceo, Jeff Gardner commented that Windstream’s goals over the past few years have been to transform its business to achieve revenue and cash flow growth. Through a heavy dose of M&A and an increase in capital expenditures, Windstream has targeted its expansion efforts in two specific areas: business and broadband. As of 3Q11, Windstream’s efforts to achieve growth have produced mixed results.
In 3Q11, Windstream’s GAAP revenue rose 6% YoY, to $1.02b, but on a pro forma basis, revenues were actually down 1% YoY. Voice and long distance service revenues accounted for a majority of the decline, dropping $27m YoY, or 7%, in 3Q11, while wholesale revenues fell $17m, or 10% YoY. To the upside, revenue from business services rose $79.5m YoY in 3Q11, or 19%, thanks largely in part to Windstream’s 4Q10 purchase of Hosted Solutions, while pro forma growth in business services was just 2% in the quarter.
The two areas that provided real growth for Windstream in 3Q11 were its special access services and its data/integrated solutions. Special access revenues increased $7m YoY, or 5%, thanks to circuit growth from increased demand for wireless backhaul, while data/integrated solutions increased $21 million or 7% YoY, driven by growth in IP, and data center services.
The company has made what it calls “success-based capital investments” over recent quarters to expand its business services’ top line. Capital expenditures rose 56.7% YoY in 3Q11, as Windstream spent $178m on a variety of growth initiatives: fiber-to-the-tower projects, data center expansions, and broadband enhancements. By the end of 2011, Windstream will have spent $125m on its fiber investments, and is projected to spend an additional $200m-$250m in 2012, completing its fiber rollout to 90% of the wireless towers in its territories.
Set to close in 1Q12, Windstream’s $2.3b acquisition of Paetec will have the most dramatic impact in shifting its revenue mix towards business customers. Following the deal’s close, roughly 70% of Windstream’s top line will come from business and broadband services.
The question remains, will Windstream’s capital investments and deals lead to improved operating income and margin growth?
Following the close of Windstream's acquisition of Hosted Solution’s and Q-Comm in 4Q10, operating income actually declined slightly YoY in 3Q11, to $266.5m. OIBDA margins fell about 1% to 46% during the same period. Looking ahead, any improvements are likely to be derived from cost cutting measures associated with the integration of PAETEC. Windstream projects $110 million in annual operating and capital synergies with the deal, but those savings are three years out. In the meantime, you can expect more merger related costs, like the $20m charge in 3Q11 related to four of its completed deals (NuVox, Iowa Telecom, Q-Comm and Hosted Solutions) and its pending PAETEC buy.
The market is not yet sold on Windstream’s future growth prospects: as of 3Q11’s close, Windstream’s stock price had lost about 10% on the year, falling to $11.65. This is not to say that the shift towards a business-centric model is the wrong move for Windstream—investors are simply waiting to see the revenue and cash flow growth that Windstream has promised.