The recent third-quarter results of Windstream Holdings (WIN, Financial) –Â a Fortune 500 and S&P 500 company –Â was disappointing. The company missed meeting the expectations of the analysts on top and bottom line. The dismal performance led to heavy selling pressure and the stock has been trading in the red since the results. In one single day after the results, it lost 8%, with a far greater number of shares changing hands compared to normal trading days.
A weak performance
The revenue in the third quarter came in at $1,455.5 million, representing a 3% year-over-year decline and missing consensus estimates by around $13 million. Total services revenue came in at $1.4 billion, registering a 2.3% year-over-year decline. Also, the product revenues registered a steep decline of 18% year over year.
The decline in consolidated revenue was primarily fueled by reduction in switched access revenues, lower intrastate access rates and fewer usage minutes and also due to decommissioning of legacy circuits by wireless carriers. During the third quarter, the total access lines subscribers decreased 5% year over year to 3.1724 million. The steepest year-over-year decline of 6% was in voice lines whereas digital television and high-speed internet subscriber base declined by 5% and 3%, respectively.
On the back of a weak top-line performance, GAAP net income dropped from $0.05 per share to $0.01 per share, missing the consensus estimate of $0.04 per share. Even adjusted earnings of $0.03 per share were short of the consensus estimate.
What Windstream plans to do
Going forward, Windstream is separating its business into two companies. The company is going to spin off certain network assets into an independent publicly traded REIT. The company is making all the necessary moves to complete the REIT spin-off. This is expected to close in the first quarter of fiscal 2015. As a part of this spin-off transaction, Windstream expects reduced debt by approximately $3.2 billion. The new company will be called Communications Sales and Leasing, Inc (symbol not yet decided)
Windstream is also investing in growth projects, including fiber deployment and broadband expansion. It has completed the first phase of the expansion of 10-100 Gig long-haul network. The company has also deployed fiber to 85 towers during the quarter, taking the tally to 4800 with additional 525 under construction. All this will enable incremental carrier transport revenue and improve enterprise opportunities going forward.
The company also announced the acquisition of an innovative company called broad – Business Only Broadband. This innovative company serves SMB and enterprise customers in four large metropolitan markets. Going forward, this acquisition will help Windstream bolster its SMB and enterprise service revenue, which came in at $752 million in the third-quarter, registering a slight uptick.
In September this year, Windstream Hosted Solutions, a division of Windstream, opened a data center in Chicago. This 20,000-square-foot facility with 15,600 square feet space for data center is equipped to facilitate Windstream's new EMC(R)-powered storage services. Windstream, which currently has 20 data centers across the nation, is investing aggressively in data center business. This is to bolster its managed hosting and cloud computing services, which registered a 21% year-over-year growth during the third quarter.
Conclusion
Windstream reiterated its earlier provided guidance on revenue, adjusted free cash flow and payout ratio. The company expects the fiscal 2014 total revenue to be in the range of 2.5% fall and a 1% rise over the 2013 number. However, the company has consistently posted negative earnings surprise for the past few quarters. Moreover, its trailing P/E of 38 and forward P/E (December 2015) of over 44 look very steep. There are near-term growth and margin concerns. So, it is best to stay away as of now.
