Windstream profit dips, revenue soars

Merger, interest costs higher in quarter

— Little Rock-based Windstream Corp. on Friday reported $72.4 million in profit for the fourth quarter, down 4 percent from a year earlier, partly because of higher merger and integration costs and higher interest expense.

Revenue at the rural telephone and broadband provider grew to $981 million, a 30 percent jump.

But expenses, not including interest and taxes, were up 39 percent to $722 million from a year earlier. Merger related costs were up about $6 million compared to a year earlier, and interest costs rose almost $28 million.

During the fourth quarter, Windstream finished buyingQ-Comm Corp. and Hosted Solutions. Hosted Solutions was a provider of data centers, which essentially are centralized locations where businesses can keep equipment, including computer servers, in an environment with tight controls over climate and other conditions. The Q-Comm purchase included a fiber services provider for wireless carriers and a local exchange carrier.

Windstream’s chief executive, Jeff Gardner, in a news release praised the company for executing its business plan while integrating four companies bought during 2010.

Gardner added in a conference call with analysts that the company’s purchases lastyear helped shift revenue toward business and broadband customers and ultimately will produce more than $90 million in savings.

The company has been focusing on broadband and business offerings as customers drop traditional phone service in favor of mobile phones.

Earnings per share were 15 cents, or 19 cents excluding unusual items. Zacks Investment Research said analysts expected 20 cents. Earnings per share in the comparable 2009 period were 17 cents.

Shares of Windstream on Friday closed at $12.57 on the Nasdaq Stock Exchange, down 66 cents, or about 5 percent.

During the fourth quarter, Windstream added more than 12,000 broadband customers. Compared with a year earlier, the company had 6 percent more broadband customers. Windstream executives said in the conference call that the growth in broadband is slowing because penetration has grown among the company’s customers.

The company’s number of traditional phone lines fell by 3.6 percent compared with a year earlier, to 3.3 million.

With help from the federal stimulus act, Windstream this year is expanding its broadband network. In the news release, Gardner said that effort and other initiatives will help boost Windstream’s revenue growth in the future.

“No one would have predicted this, that we would have this opportunity, back in 2006,” Gardner said in the conference call, alluding to Windstream’s origin as a traditional phone company, a business model that is declining.

Windstream will invest about $240 million over the next few years in its broadband network, he said.

Morgan Stanley analysts, including Simon Flannery, said in a research note Friday that they were disappointed by the drop in telephone lines, which was larger than they expected. Moreover, the number of high speed Internet customers added was below their forecasts. However, Windstream lost fewer business lines than the analysts expected and had better margins.

Michael Nelson, an analyst for Mizuho Securities USA Inc., said in a research note that he believes investors are underestimating the opportunities created by Windstream’s recent acquisitions. He has a price target on the stock of $15.50.

Nelson expects Windstream to look for more acquisitions that will add to the firm’s scale and free cash. Targeting and integrating such companies are core skills of the company, he wrote.

For the full year, Windstream reported a profit of $310.7 million, down 4 percent from $334.5 million a year earlier. Revenue was $3.71 billion, up 24 percent from $2.99 billion a year earlier.

Business, Pages 27 on 02/19/2011

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