I reiterate my neutral stance on Windstream Holdings (NASDAQ:WIN). Although the company stabilized its total revenue decline in 2Q14 by implementing price increases, the latter weighed on its broadband subscriber base. WIN's broadband subscriber base remains weak as compared to its competitors. Moreover, the drop in top-line numbers and broadband subscriber losses is pressurizing the company's bottom-line results. Furthermore, a possible spin-off of WIN's assets to a REIT structure holds hope for growing its FCF base in the long run. The current dividends offered by the company seem to be unsustainable, mainly due to its highly-levered balance sheet and soft financial performance; therefore, I believe the company might announce a dividend cut in the near future.
Struggle to Grow = Work-in-progress
Over the past few quarters, WIN's performance is consistently challenged by its major competitors, Frontier Communications (NASDAQ:FTR) and Century Link (NYSE:CTL). In an attempt to survive the competition, the company raised prices for its business and consumer service offerings, expanded fiber to new markets and also accelerated Enterprise sales by fully integrating the acquired networks. As a result of these efforts, the company's 2Q14 reported revenue for consumer and business service segments modestly increased quarter-over-quarter. But WIN's total YoY revenue decline of 2% in 2Q14 reflects that the company needs consistent efforts to grow its top-line numbers. The price increases undertaken by the company were at the end of 2Q14, which will positively affect its top-line numbers in the coming quarters. However, the price increases could adversely affect the company's churn rate.
Moreover, in the highly saturated market of broadband service providers, WIN's position remains weak as compared to its peers. In 2Q14, the company lost a record high number of broadband subscribers, due to competition and the recent price increases. WIN reported 16,600 broadband subscriber losses for 2Q14. The following chart shows the broadband net add (in %) comparison between WIN, FTR and CTL for the first two quarters of 2014.
Source: Companies Quarterly Earnings Report
The company is aggressively pursuing fiber deployment, broadband expansion and other growth opportunities to address competition to grow its broadband subscriber base and fuel its top-line numbers. As part of the expansion plan, WIN carved out its broadband stimulus project to increase the access of its broadband network; up till now, 38,000 homes have been reached under the broadband stimulus project. The company expects to cover almost 75,000 more homes by the end of FY14, which will portend well to grow the broadband subscriber base and fuel the company's top-line.
Furthermore, the company is shifting to IP network to serve broadband content and data needs of both business and consumer segment customers. With the transition to IP network, the company expects to provide 10Mbps internet services to almost 80% of consumers by 2018. Moreover, the company has ramped up its marketing initiatives to keep its consumers informed about its recent service improvement and expansion initiatives. I believe the combined effect of the recent price increases, improved network capabilities and increase in marketing activities will portend well for the company's performance in the long term.
Dividend Sustainability Issue
The company needs to reconsider its dividend policy; the company currently offers a high dividend yield of 9.90%, while its cash flows are dropping mainly due to ongoing capital expenditures. The company recently declared another quarterly dividend of $0.25 per share, payable on 15th October 2014. I believe that along with the company's current financial performance and capital expenditures on ongoing expansion projects, it needs to cut its dividends and preserve cash for growth projects. Capital expenditures incurred on available growth opportunities remain critical for WIN to improve its operational performance and regain its financial strength, as competition in the industry remains tough. The following chart shows the free cash flows (FCF) and dividend comparison for WIN for recent quarters.
Source: Company's Quarterly Earnings Report
Moreover, WIN has a highly leveraged balance sheet, which remains a concern for investors. The company's debt-to-equity of 14.72x is very high as compared to FTR's and CTL's debt-to-equity of 2.01x and 1.26x, respectively.
Furthermore, the company has notable debt maturities in the coming years, which would pressurize its cash flows. Therefore, I believe the company needs to re-size its dividends and preserve cash flows for future capital expenditures and debt repayments. The following chart shows the debt-maturity profile of WIN.
Source: 10-Q Fillings
REIT Status = A Long Term Positive
Owing to the pressure building up on its cash flow base, the company has looked into an intelligent strategic opportunity that would serve to expand its cash flow base in the long run. The company plans to spin-off some of its assets, mainly fiber and copper transmission facilities, poles, central office buildings, conduits and other assets that qualify for REIT structure. After the spin-off, WIN will enter in to a long-term lease contract with the REIT. While WIN will retain the operational control of the assets, the lease payments under the contract will benefit the company's FCF base. The company anticipates the REIT structure process to start in the first half of 2015 after customary approvals by regulatory authorities. I believe the REIT structure will positively affect the company's cash flows, enabling it to invest in growth opportunities and also support debt repayments.
The company's investments in expanding its broadband network will add to its subscriber base and revenues in the future. However, WIN's weak operational performance, struggling top line, pressurized broadband subscriber base and weak cash flows are likely to keep the stock price pressurized in the near term. Also, as the cash flows of the company remain weak and it has been undertaking capital expenditures to cater to available growth opportunities, I believe the company needs to re-size its dividends. Going forward, the REIT status will portend well to support its cash flows in the long run. Due to the above-mentioned factors, I have a neutral stance on WIN.
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