Deutsche Bank Cuts Windstream (WIN) Bonds to Sell on 'Dividend Fatigue'

Windstream Reports Fourth-Quarter Results, Reaffirms Commitment to $1 Annual Dividend

Business service revenues were $917 million, a 3 percent increase year-over-year Consumer broadband service revenues were $116 million, a 5 percent increase year-over-year Total business and consumer broadband revenues now represent 70 percent of total revenues Total revenues and sales were $1.54 billion, a decline of 2 percent year-over-year Adjusted OIBDA was $619 million, an increase of 2 percent year-over-year

LITTLE ROCK, Ark., Feb. 19, 2013 (GLOBE NEWSWIRE) -- Windstream Corp. (Nasdaq: WIN) grew total business and consumer broadband revenues while delivering improved profitability in the fourth quarter. Total business and consumer broadband revenues now represent 70 percent of the company's total revenues.

"Windstream continues to produce substantial free cash flow that enables us to invest in our business and reduce our debt while continuing to pay our $1 annual dividend," said Jeff Gardner, president and CEO. "Our management team and the board of directors unanimously support continuing the dividend at its current rate because we believe it is the best way to create value for our shareholders.

"We made significant progress on key initiatives in 2012 that will further strengthen our business going forward. I am particularly proud of our team's accomplishments in navigating the multi-year impact of regulatory reform and evolving consumer preferences while maintaining solid operating cash flow."

2012 Accomplishments

Windstream accomplished important objectives in 2012 as it continued its transformation to an enterprise-focused provider of communications and technology services. During the year, the company achieved significant milestones in integrating PAETEC, strengthening its balance sheet and improving its cost structure while investing in strategic capital initiatives and growing strategic revenue.

Reflecting the successful shift in Windstream's focus, business service revenues were $917 million in the fourth quarter on a pro forma basis and $3.6 billion for the year, an increase of 3 percent year-over-year for both the fourth quarter and the year.

Total enterprise customers, who generate $750 or more in revenue per month, grew 6 percent in the fourth quarter year-over-year. Average service revenue per business customer per month was approximately $390, a 7 percent increase from the same period a year ago, underscoring Windstream's ability to build profitable relationships with clients who have complex communications and information technology needs.

2013 Priorities

Windstream's goal remains to produce substantial and sustainable free cash flow to provide long-term support for its dividend. To that end, in 2013, the company is focused on investing in the business channel to increase revenue and profitability, completing the fiber-to-the-tower and broadband stimulus initiatives and further deleveraging the balance sheet.

"We plan to make targeted investments in the business channel this year to drive sales, profitability and improve the customer experience," Gardner said. "We expect to substantially complete our capital investments related to our fiber-to-the-tower projects and broadband stimulus initiatives. We also expect to further improve our balance sheet by directing excess free cash flow after our dividend to debt repayment."

2012 Accounting Revision

The company has revised its accounting treatment for a consumer promotion credit that was designed to help residential customers with the upfront cost of switching their service to Windstream. The company initially had amortized the credit over the two-year commitment period obtained from the customer. During management's year-end audit process, the company concluded the entire credit should be recognized when it occurs. The effect was to accelerate the full amount of the promotional credits given to customers, resulting in a $17 million reduction in consumer revenue, mostly in product sales, and a $23 million reduction in Adjusted OIBDA for the nine month period ended Sept. 30, 2012. During the fourth quarter, this revision resulted in a $2 million reduction of previously estimated consumer revenue and a $5 million reduction of Adjusted OIBDA. The change has no effect on the company's GAAP cash flows.

Pro Forma Financial Results

Total revenues and sales were $1.54 billion in the fourth quarter, a decline of 2 percent from the same period a year ago, and $6.16 billion for the year, a decline of 1 percent year-over-year.

Adjusted OIBDA was $619 million in the fourth quarter, an increase of 2 percent year-over-year. Adjusted OIBDA improved sequentially by $27 million as a result of cost management initiatives. For the full year, Adjusted OIBDA was $2.389 billion, a decrease of 2 percent year-over-year. Excluding the non-cash accounting revision related to the consumer promotional credits, Adjusted OIBDA would have been $2.417 billion.  Adjusted OIBDA removes the impact of restructuring charges, pension expense and stock-based compensation.

Business demand for IP, next-generation data and data-center services continued to drive growth in business service revenue. Data and integrated services revenues were $398 million in the fourth quarter, an increase of 9.5 percent from the same period a year ago. For the year, data and integrated services revenues were $1.54 billion, up 9 percent year-over-year.

Carrier service revenues in the fourth quarter were $165 million, an increase of 2 percent year-over-year, and $653 million for the year, up 4 percent year-over-year, largely related to fiber-to-the-tower installations.

Consumer broadband service revenues in the fourth quarter were $116 million, up 5 percent from the same period in 2011, and $457 million for the year, up 4 percent year-over-year.

Overall consumer service revenues in the fourth quarter were $334 million, a decrease of 1.5 percent from the same period a year ago, and $1.34 billion for the year, a decrease of 3 percent year-over-year.

Total business and consumer broadband revenues represented approximately 70 percent of Windstream's total revenues and sales in the fourth quarter and collectively grew 2 percent year-over-year.

Wholesale revenues in the fourth quarter were $169 million, a decline of 17 percent from the same period a year ago due to lower intrastate access rates as part of intercarrier compensation reform implemented in July 2012 and lower switched access revenue from declining consumer voice lines. For the year, wholesale revenues were $708 million, a decrease of 14 percent year-over-year.

Adjusted capital expenditures were $270 million in the fourth quarter, excluding $21 million in integration capital related to PAETEC network optimization opportunities. For the year, adjusted capital expenditures were $1.05 billion, excluding $51 million in integration capital related to PAETEC.

GAAP Financial Results

In the fourth quarter under Generally Accepted Accounting Principles (GAAP), Windstream reported total revenues and sales of $1.54 billion, operating income of $172 million and net income of $10 million, or 2 cents per share. That compares to total revenues and sales of $1.21 billion, operating income of $96 million and a net loss of $35 million, or 7 cents per share, during the same period in 2011.

GAAP results include a non-cash charge of 7 cents per share related to the company's pension plan. The charge is primarily due to a reduction in the plan's discount rate from 4.5 percent last year to 3.9 percent this year. In addition, GAAP results include approximately 2 cents in after-tax merger and integration and restructuring expense. Excluding all of these items, adjusted earnings per share would have been 11 cents for the fourth quarter.

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