Entries in ILECs (3)

Monday
Nov282011

ILEC 3Q11 Quarterly Results: Alaska Communications

ACS Revenue Flat Despite Wireless Gains

From a financial perspective, Alaska Communication’s (Nasdaq:ALSK) 3Q11 was relatively non-eventful.  Revenue ticked up $500k YoY or 0.6%, as its wireless revenue rose $2m or 5.2% and its enterprise segment grew by $1.1m or 8.9% YoY. Business growth and wireless gains offset a $2.6m decline from its legacy wireline segment, which was down $2.6m or 6.5% in 3Q11, after losing 5.2% of its access lines. Overall, ACS’ net loss in 3Q11 was $0.8m, or $0.02 per share, compared to net loss of $3.0m, or $0.07 per share in 3Q10.

ACS added 817 wireless subs in 3Q11, increasing its total wireless connections to 117.5k, but it has lost nearly 6k subs since 3Q10. Its wireless revenue growth in 3Q11 was fueled by an increase in demand for mobile data and a jump in roaming fees. Data ARPU from postpaid subs was $16.86 in 3Q11, up 4.6% QoQ and 43% YoY, while roaming charges from non-ACS customers were up $3.9m or 15.2% from 3Q10.

With wireless providing ACS with the slight growth it has reported in recent quarters, the success of its ongoing $20m 4G LTE network build is critical to the company’s future. ACS however is not the only wireless provider investing in 4G in Alaska. In September, General Communications (Nasdaq:GNCMA) launched 4G wireless service in Anchorage and plans to rollout 4G in other Alaskan communities later this year and in 2012. And a new potential entrant onto the Alaskan wireless scene was the subject of ACS’ focus during its 3Q11 earnings call: Verizon (NYSE:VZ).

The leading wireless provider in the U.S. has made moves to enter the Alaskan wireless market, and ACS ceo Anand Vadapalli spoke to this fact on the call. “It certainly appears that Verizon is taking more action to enter the market. We had several parcels of surplus land. We sold one of those to Verizon, and we certainly see them doing some ground work. We also understand that they have feet out on the street for both backhaul and cell towers.” Vadapalli added that ACS expects to see a decline in roaming revenues starting in 2013, when it will begin losing fees associated with Verizon customers.

Roaming fees may be the least of ACS’ worries with Verizon moving into Alaska. While Vadapalli would not speculate on what Verizon’s intentions were in expanding up north, one would be safe in assuming that Verizon is not looking to be the #2 or #3 wireless provider in the state. In addition to trimming its roaming revenues, ACS stands to lose subs with Verizon jumping into the competitive mix, adversely impacting ACS’ most profitable segment. Wireless currently accounts for 45% of ACS’ revenue, and has generated $12.5m in net income through 3Q11, while all other ACS segments have lost a combined $13.2m during the first nine months of the year.

With ACS currently operating at a loss, and wireless competition ramping up, the viability of company’s $0.86 dividend has come into question. On the earnings call, cfo Wayne Graham put to rest the idea of borrowing more cash to finance the dividend, but Vadapalli was non-committal when asked about cutting the dividend. “With regard to your question on the dividend guidance; clearly, this is one where we’d like to take one step at a time and not get ahead of ourselves. If and when the Board takes any action in this regard; clearly, that action will be in the context of a longer range business plan and we’ll be able to share more when we are ready with that,” commented Vadapalli. Not exactly a ringing endorsement for the long term safety of its dividend.

Meanwhile, shareholders have taken notice of ACS’ troubled outlook and have traded its stock price down to the $5 range, 55% off its recent 52-week high of $11.65 a share. At these current trading levels, ACS is paying around a 16% dividend. But based on Vadapalli’s comments, whether that dividend will exist a year from now is far from certain.    

Monday
Nov142011

ILEC 3Q11 Results Summary: Windstream

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. 

Wednesday
Aug242011

Linear Obiter Dictum 2011: Access Line Trends by Company Size

Smaller ILECs See Improved Access Line Trends in 2010

While we weren’t surprised by the 11.5% decline in total U.S. access lines in 2010—in fact we predicted it with startling accuracy in our annual forecast last year—there were some intriguing data points to be found when we broke down the percentage losses in access lines by company size. And the news is good! Or at least, less bad than it might be…

Last year for the first time we examined the access line trends broken down by company size, using verified data for the 269 companies that either responded to our survey or that are publicly traded. In other words, no estimates were included. Not surprisingly, we found that the smaller companies lost access lines at a much slower pace than the RBOCs did in 2009. 

But what did come as something of a surprise this year was that when we examined the same data for 2010 (for 271 companies with verified line counts), we actually found that for all of the categories of ILECs with less than 1m access lines, their line losses, on a percentage basis, were less in 2010 than in 2009. So while the RBOCs may be bleeding wireline customers at an accelerating pace, in general, RLECs did an better job in 2010 of stanching the flow.

Here are the specifics: First, the top seven companies, which served a million or more lines at the beginning of the period measured, lost lines at a nearly 12% rate on a weighted basis. In 2009 the companies with more than one million lines suffered a decline of 10.5% on a weighted basis.

Virtually all of the remaining categories, however, lost the equivalent percentage or even less of their access line base in 2010 than in 2009. And like before, the very smallest companies suffered lower declines compared with the larger companies.

For example, the 50 companies with less than 1,000 access lines which responded to our survey lost 3.8% of their access lines in 2010.  The year before our sample for that size category included 46 companies, and their losses were also 3.8% in 2009.

In 2010 the companies with between 1,000 and 4,999 lines lost 3.9% of their access lines; in 2009, that category fell by 4.6%.

And those with between 5,000 and 9,999 lines lost 3.9% in 2010 compared with a 5.4% loss in 2009. And so on…Only one category saw a slight uptick in the pace of access line losses in 2010.  The surveyed companies with between 20,000 and 49,999 lines lost 4.8% of their lines in 2010 compared with a 4.5% drop in 2009.

I see this as a net positive, but don't get overly excited. A negative trend is still a negative trend and it's unlikely that these slower rates of change will persist indefinitely, especially with new technologies evolving so rapidly.