Windstream profit falls 10%, misses projections
Posted on Saturday, November 8, 2008
Windstream Corp. reported a 10 percent drop in third-quarter profit Friday, citing higher fuel and storm-damage costs as well as reduced income from a government program and some discontinued services.
Net income of $ 105. 9 million fell short of $ 117. 7 million a year earlier, while revenue of $ 794. 1 million was down 3 percent compared with $ 818. 8 million a year ago. Earnings of 24 cents a share fell short of Wall Street projections of 26. 5 cents a share, according to analysts tracked by Bloomberg News, and was down a penny from last year.
Yet Windstream shares rose 67 cents Friday to close at $ 8. 55 on the New York Stock Exchange — apparently driven by a lower rate of access-line losses than other landline carriers, as well as a general rise in stock prices for the day.
Although the Little Rockbased company lost 38, 000 lines in its third quarter, it was 8, 000 fewer than the same period a year ago, resulting in a 4. 8 percent decline. Overland Park, Kan.-based Embarq Corp. saw an 8. 6 percent loss in lines during its third quarter, while Charlotte, N. C.-based FairPoint Communications saw losses of 9. 2 percent. Monroe, La.-based CenturyTel Inc. — which plans to buy Embarq through a $ 5. 8 billion stock swap while assuming $ 5. 8 billion in debt — experienced losses of 6 percent in its third quarter. “We never believed that it’s inevitable that we’re going to see increasing access line losses,” Windstream President and Chief Executive Officer Jeff Gardner said in a conference call Friday. “It’s not going to get any easier. But we think it’s something we can improve on over time.”
Windstream continued to add high-speed Internet customers — more than 28, 000 during its third quarter, a 16- percent gain that pushed its total Internet customers to 963, 000. It also added 21, 000 digital-television subscribers, up 14 percent to a total of 252, 000.
“We have a continued opportunity to grow through offering faster Internet speeds,” Gardner said. “Offering our Dish Network product in bundles is also important to customer retention.”
Morgan Stanley analyst Simon Flannery queried Gardner on the latest developments in the Federal Communication Commission’s push to change intercarrier compensation rules that have become outdated since their introduction in the mid-1980 s.
Last month, Windstream and other carriers lobbied strongly to delay a Nov. 4 vote by the FCC that they argued would drastically increase rates for rural customers. The FCC heeded those concerns and agreed to a comment period prior to its Dec. 18 meeting.
Gardner said Windstream supports uniform rates for all telecom traffic, so long as it’s done in an “orderly and rational” way that provides “clarity and cash flows” that support its rural-based business.
Windstream serves primarily rural markets through 3. 1 million access lines in 16 states.
“It’s unclear whether this will be resolved by Dec. 18 or not,” he said. ‘ The great news is that the right thing was done to put it out for comment. It’s clear to everyone that something needs to be done in a way that provides stability throughout the industry. ”
Flannery also asked whether the recent credit crisis altered Windstream’s strategy to grow its business through acquisitions.
Gardner said Windstream still believes that industry consolidation makes sense — but only under conditions that will not increase its leverage — and that Windstream is capable of growing without a major acquisition.
“We probably could ask for leverage in a way that does not hurt our credit rating. But we’re looking to maintain our leverage at its current level,” he said. “We’re not interested in getting bigger just for the sake of getting bigger.”
Goldman Sachs analyst Jason Armstrong asked what kept Windstream out of making a bid for Embarq — the former landline division of Sprint-Nextel.
“I was fairly surprised by the timing of the deal,” Gardner said. “Embarq decided to sell during one of the most volatile markets in 75 years. But that’s about all I have to say about it.”
Part of Windstream’s dip in net profit came from a $ 3 million drop in Universal Service Fund income, Chief Financial Officer Brent Whittington said. The fund is a surcharge paid by telecom companies and their customers to provide services to schools, libraries, rural healthcare providers and low-income consumers.
Higher fuel prices for its service fleet, damage from Hurricane Ike and related increases in employee overtime were also factors, he said. Network-management services that Windstream once provided for Alltel Corp. have also been terminated, Whittington said.
The company took a noncash accounting charge of $ 6. 5 million to adjust the value of wireless spectrum holdings gained with last year’s $ 585 million acquisition of North Carolina-based CT Communications.
Windstream also announced its $ 60 million sale of those properties to AT&T has been approved by the FCC. The deal is expected to close by year’s end.
Based on current business, operating income before taxes and depreciation was $ 400. 9 million, down 4 percent compared with last year. Revenue from current business was $ 794. 1 million, down 2 percent from last year.
Many companies contend that such numbers — also known as pro forma results — offer a more accurate gauge of their financial performance. But they are not accepted measures under Generally Accepted Accounting Principles, the common standard for objective financial reporting.
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