Windstream's (NAS: WIN) PAETEC acquisition last year set the stage for the best part of its first quarter earnings statement -- and also its worst.
Business service revenues were up 3.2% year over year, a large part of that coming from PAETEC's business penetration. On the other hand, wholesale revenues fell 6.3%, mostly because the FCC disputed PAETEC's billing practices in some of its wholesale lines. Windstream inherited that problem but chose not to fight the accusations and instead decided to modify some of those business lines and get out of others altogether.
Like many telecoms over the past decade, Windstream has been losing fixed-line phone customers. However, it's been making up for it by growing its Internet access business. Internet now is around two-thirds the size of its phone business, and 68% of the company's total revenues in the quarter came from its business and consumer broadband segments.
Another downer that came along with the PAETEC deal was an increase in Windstream's debt load. The $2.3 billion stock-swap and debt-assumption deal that paid for PAETEC also increased Windstream's leverage to significantly by the end of 2011. That ratio slightly improved in the first quarter, and the company says it is committed to getting that down further.
Even though that debt leverage is fairly high, the company's dividend -- one that currently yields around 10% -- is safe, according to Windstream CEO Jeffery Gardner. "We feel so good about our ability to pay dividend for a long time," he said during the company's conference call.
I calculated that the company had $212.7 million in free cash flow for the quarter. That would make the dividend to free cash flow payout ratio 69%. That's a less nerve-wracking ratio than Windstream's 96.7% at the end of the last quarter.
Windstream's net profit came in at the lower end of analysts' best guesses for the quarter, mainly because of the wholesale problems I mentioned. Unfortunately, the company believes that its wholesale business will continue to decline throughout the year and will be the reason revenues won't be as high as it had forecasted at the end of the last quarter.
"To be clear, our adjustment to the low end of the guidance is related exclusively to this wholesale product," said CFO Anthony Thomas during the conference call.
If Windstream can minimize that downside to the PAETEC acquisition and maximize its enterprise business and its Internet access, then the coming quarters promise to be more profitable than the one just past.
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At the time thisarticle was published Fool contributorDan Radovskyhas no financial interest in the above-mentioned companies. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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