Entries in Windstream:WIN (7)


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. 


Six Degrees of Separation: Winners, Losers and Movers

CenturyLink Edges Out Windstream for First Place

In the first two years of our “Six Degrees of Separation” analysis, there was little movement at the top of the ranks. NTELOS (Nasdaq:NTLS) edged out Shenandoah Communications (Nasdaq:SHEN) in 2008 for the victory, while Shenandoah

returned the favor in 2009, flip-flopping ranks with NTELOS. This year we crown both a new winner and a new runner up. Envelope please. And the winner of the third annual “ILEC Six Degrees of Separation” is… CenturyLink (NYSE:CTL)!

Over the past three years, CenturyLink has steadily improved its performance in our Six Degrees tests, moving up in rank from 10th place in 2008, to 4th last year, to 1st in 2010. Aided by its acquisition of Embarq, CenturyLink finished on top of the growth and return to shareholders categories in this year’s analysis. Its sample best weighted average rank of 4.48 is slightly stronger than Shenandoah’s winning rank of 4.8 a year ago. Right on CenturyLink’s heels was runner-up Windstream (Nasdaq:WIN) with a weighted average rank of 5.23. Both LECs were awarded A’s for their overall performance.

The only downside to winning: when you’re at the top, there’s no place to go but down. Just ask the 2008 and 2009 Six Degrees champs. Last year’s winner, Shenandoah, dropped twelve spots overall, while NTELOS fell nine spots. We documented Shenandoah’s fall from grace throughout this year’s analysis as its efficiency, growth and profitability metrics all deteriorated in 2010 and its stock price (and long-term performance rank) paid the price. NTELOS’ declines were also widespread, as it went from A’s to C’s in growth, financial condition and efficiency.

The upside movers were less dramatic. Otelco (Nasdaq:OTT) was the biggest gainer, thanks to its first place finish in long-term performance.  It moved up from 9th place to 3rd overall, earning an A- for its efforts. Frontier (NYSE:FTR) also jumped up six spots from a year ago, driven by an improved growth performance after it acquired 4m access lines from Verizon (NYSE:VZ).

While there was a shakeup at the top, the F students remained the same. Fairpoint (Nasdaq:FRP) finished in the basement for a third consecutive year, its average rank improving slightly only because there was one less public LEC (Iowa Telecom) compared to 2009’s sample. New Ulm Telecom (OTC:NULM) also repeated its second-to-last place finish from last year after earning a D- and an F in the most heavily weighted categories (return to shareholders and long-term performance).

In total, the bell curve produced a final grade tally of two A’s, one A-, two B+’s, one B, two B-‘s, one C+, one C, three C-‘s, two D+’s, one D, zero D-‘s, and two F’s. 


Six Degrees of Separation: Public ILECs Tested on Financial Condition

TDS Makes the Grade While Windstream’s Financial Condition Falters

The first three categories in the “ILEC Six Degrees of Separation” provide a perfect example of why a diverse range of factors are taken into account before crowning the Six Degrees of Separation analysis winner. Windstream (Nasdaq:WIN) got off to a great start, topping Profitability for the public ILECs, while Telephone and Data Systems (NYSE:TDS) stumbled out of the gate, earning an F in Growth. In today’s category, financial condition, the two LECs reversed roles, with TDS finishing on top and Windstream taking last place.

TDS' Financial Condition ratios were essentially unchanged from last year—unhurt by the declines in revenues, cash flow and connections that impacted its Growth rank. TDS’ quick and current ratios, while strong, actually decreased slightly YoY, while its low level of debt financing earned it a first place finish in terms of its debt-to-cash flow ratio. Last year's A+ recipient in Financial Condition, Warwick Valley Telephone (Nasdaq:WWVY), once again topped the tangible common equity ratio test, but was the only LEC to report a negative debt to OIBDA ratio, dropping it to third place.

Otelco (Nasdaq:OTT) rounded out the individual test winners, posting the top quick and current ratios (3.3 and 2.9). It was also the biggest gainer in terms of overall Financial Condition, shooting up twelve spots to sixth place. A year ago we gave Otelco an F for its Financial Position after it ranked last in three of four tests, but its improved short term liquidity earned it a B in 2010. Building on this year’s grade however could prove difficult for Otelco. Goodwill and intangible assets remain a large majority of its asset base, deflating its sample worst tangible common equity ratio.

Along with Otelco, CenturyLink (NYSE:CTL) also showed marked improvement in financial condition, jumping 11 spots to continue its strong Six Degrees showing this year. Most notably, it doubled its quick ratio and reduced its Debt-to-OCF ratio by nearly 40%.

The largest mover to the downside was Windstream, sinking from an A to an F as its Financial Condition rank plummeted to dead last. Windstream drained its cash position from $1b to $50m in 2010, leading to significant drops in its quick and current ratios, from 2 to well below 1. The draw down of cash was intended-Windstream spent more than $3b in acquisitions during the year-but its liquidity measures paid the price. Similarly, Frontier (NYSE:FTR) tested poorly on liquidity, dropping ten spots in Financial Condition overall. Frontier ended 2010 with a working capital deficiency of $311m.

Halfway through the Six Degrees of Separation analysis, we have seen unique winners in all three categories. Stay tuned for the second half, in what promises to be a battle to the finish.


Six Degrees of Separation: Windstream and CenturyLink Top Profitability

Windstream and CenturyLink Grade Out as Most Profitable ILECs

On a daily basis we at JSI Capital Advisors monitor the public ILECs on a real-time basis, keeping tabs on business and growth strategies, industry trends and developments, and LEC mergers and acquisitions. Once a year however, we like to take a step back and analyze the public LECs based on a series of their financial ratios in an analysis we call “Six Degrees of Separation.” The series of measurements in Six Degrees evolved from the once-annual “Ten Part Test” which we created in 2002.

Using twenty-one financial tests, which we group into six broader categories, we compare the investment, financial, management and stock market performance of the publics LECs as of calendar year end. For each test, we rank the companies from 1 to 18 (1 being the best, 18 the worst) then calculate an average ranking in each category (Profitability, Growth, Financial Condition, Efficiency, Return to Shareholders, and Long-Term Performance). Based on these averages, we assign corresponding letter grades for each of the six categories based on a bell curve. After the companies are evaluated across the six degrees, a weighted composite score is generated, overall grades are assigned, and the Six Degrees of Separation winner is crowned.

This year in the third annual "ILEC Six Degrees of Separation," we will breakdown each of the six categories individually in Phone Numbers, revealing the top rated ILEC once all six degrees have been vetted. As a reminder, we are not suggesting that you go out and purchase the "ILEC Six Degrees of Separation" winner and short the loser, but the results should tell you that a closer look at the companies is warranted.

Without further ado, let’s crunch some numbers. First up: profitability. The four tests we use to measure profitability are return on equity, return on assets, OIBDA margin and free cash flow margin.

This year, two LECs—Windstream (Nasdaq:WIN) and CenturyLink (NYSE:CTL)—finished in a dead heat for first place in profitability, averaging a rank of 3.5 out of 18 in the four tests. Windstream posted the strongest ROE at 57%, while CenturyLink’s 50% OIBDA margin topped all ILECs. Rounding out the individual test winners were Otelco (Nasdaq:OTT) in free cash flow margin, and AT&T (NYSE:T) in return on assets. Using Windstream’s top three placements in 3 of 4 categories as a tiebreaker, we ranked it slightly higher than CenturyLink, good for first place and an A+ grade. 

A year ago, Windstream also graded out best in profitability with an identical score of 3.5, while CenturyLink improved on its average test rank of 7.0 in 2009. CenturyLink’s most notable improvement was in the OIBDA margin test, as its 2010 results included a full year of Embarq operations and the related cost synergies it gained after acquiring Embarq in 3Q09.

On the opposite end of the spectrum, Fairpoint (Nasdaq:FRP) and SureWest Communications (Nasdaq:SURW) both received F’s. Fairpoint—in bankruptcy throughout 2010—repeated its 2009 last place showing after finishing in the basement of the ROE and ROA tests. SureWest earned its F with consistency, finishing in the bottom third in all four profitability measures.

Last year’s overall Six Degrees winner, Shenandoah Communications (Nasdaq:SHEN), fell six spots in profitability rank this year, as its OIBDA margins eroded from 47% to 38% YoY. The decline was related to cash spent on upgrades to its acquired cable systems, and an amendment to its wireless agreement with Sprint that increased its payments from 8.8% of postpaid revenues in 2009, to 12% in 2010 (note: in 2011 the Sprint agreement updated Shenandoah’s payment to 20% of wireless revenues, further cutting into its margins).

On the upside, Consolidated Communications (Nasdaq:CNSL) jumped from ninth to third place in profitability YoY, as it improved its rank in all four tests and earned itself an A. Consolidated successfully trimmed expenses in 2010, reducing its number of customer care centers from six to two, which more than offset revenue declines.

While Windstream and CenturyLink tested as the most profitable public LECs in 2010, a shakeup in the category can be expected next year. Most notably, CenturyLink completed its acquisition of Qwest (#14 in profitability) in 2011 and has watched its OIBDA margins contract 20% in six months.

In closing, a few notes on the return on equity test: Qwest, Alaska Communications (Nasdaq:ALSK) and Fairpoint had negative net income in 2010 and were ranked below Otelco and Cincinnati Bell (NYSE:CBB) which had negative equity balances, but positive net income in 2010. Consistent with our historical methodology, negative net income was penalized more than negative equity.


1Q11 Connections: ILEC Penetration

Broadband and Video Penetration Levels Rise for Most

Broadband and video penetration of voice connections have steadily increased for six quarters now, and as more customers opt for bundled services this trend shows no sign of slowing down.  For the average ILEC, broadband penetration of voice connections reached nearly 42% in 1Q11, while video penetration was over 28%.

The average video penetration figure is, however, skewed by Shenandoah Telecommunication’s (Nasdaq:SHEN) 218% penetration.  After factoring out SHEN, video penetration was around 15% for 1Q11, up slightly from 4Q10. SHEN’s video subs have far exceeded voice subs the past three quarters, attributable to the poor penetration of its cable voice offering, and its acquisition of cable provider JetBroadband. Among homes passed in SHEN’s cable segment, 38% were SHEN video customers while only 5% were voice customers during 1Q11.

Verizon (NYSE:VZ) in 1Q11 achieved better penetration with its video services YoY thanks to a pair of factors.  VZ shed 8m voice connections after selling off a large chunk of its wireline assets, and it increased its FiOS television customer base 17% YoY. 

SHEN was also at the high end of broadband penetration in 1Q11 at 148.5% of voice connections, followed by SureWest (Nasdaq:SURW) at 56%, and Windstream (Nasdaq:WIN) at 49%.  At the low end, NTELOS (Nasdaq:NTLS) and Cincinnati Bell (NYSE:CBB) reported only 1.8% and 4.6% broadband penetration.

A closer look at the ILECs that lack a video offering suggests that bundling all three services can positively influence broadband penetration.  The four ILECs without video service reported broadband penetration levels at or below the mean and median levels of the survey.