Telecommunications is becoming increasingly important in a world without boundaries and the relentless advance of technology. Previously stand-alone electronic devices now work together smoothly, allowing us to use mobile phones to produce photographs and videos, watch TV via the Internet, and use TV sets to browse the Internet. Telecommunications also tie together offerings from various industries such as movies and music from the entertainment industry and payment processing and fund transfers from the financial services industry. As a result, the market for telecommunications is growing rapidly and the Telecommunications Industry Association (TIA) estimates that telecommunications spending was $3.34 trillion in 2011 and is expected to reach $4.4 trillion by 2015. This has resulted in a major battle between wired and wireless technologies, and TIA is of the opinion that future growth will be driven by wireless, even though there is plenty of potential for wired technology in sectors such as cloud computing.
Windstream (WIN) is a wireline telephone and DSL Internet service provider. Windstream provides consumers in predominantly rural areas with phone, Internet broadband and digital TV services as well as a range of IP-based voice and data services. It also provides businesses and government agencies with advanced phone services. The company has been aggressive when it comes to making acquisitions and, following the acquisition of CT Communications in 2007 and Lexcom and D&E Communications in 2009, the pace of inorganic growth has accelerated. In 2010, it acquired KDL, Norlight, Hosted Solutions, Iowa Telecommunications Services, and NuVox and PAETEC in 2011. These acquisitions have allowed Windstream to broaden the range of its service offerings and adjust its mix of revenues to focus on services that are growing faster. Now it provides services for over 3 million access lines in 29 states and its annual revenues of more than $6 billion make it part of the S&P 500. After the acquisition of PAETEC, its fiber-optic network in the United States totals more than 100,000 route miles and it numbers 80% of the Fortune 500 companies among its customers.
Windstream has focused in particular on broadband and cloud computing services and has shifted from older and more traditional technologies to the latest state of the art technology. Cloud computing is undoubtedly a growth area because it can reduce IT labor costs by as much as half. Moreover, there is a competitive advantage because, when a major enterprise implements a cloud computing system, the responsibility of IT services is redistributed among service providers with one provider generally getting the lion's share of the business. Small businesses are increasingly expected to use cloud computing by outsourcing to a data center and thus getting the benefits of professional and cost-effective services. According to Forrester Research, a technology research firm, the cloud computing market is expected to grow from approximately $40 billion in 2010 to $240 billion in 2020.
Let us consider some of the other investments for the future that the company is making.
Windstream has ventured into data recovery as a service. This may not seem particularly exciting until you notice that many of its competitors are beginning to see the potential and follow suit. Each of these companies is developing data infrastructure, though Windstream is ahead. We will likely see the potential for revenue soon, but there's a good chance that Windstream is tapping into a market with large potential. It has recently been active in Las Vegas, offering local businesses a wide range of services based on VoIP and broadband Internet, and Jackson Group has already chosen Windstream to host its services and reduce its old data centers.
Meanwhile, Windstream's competitors have not been sitting on their hands. Cbeyond (CBEY) has announced that it will have a beta release of the Microsoft Windows Server 2012 which will be the first cloud ready server in the industry. CenturyLink (CTL) continues to be respected in the industry has a solid and credible performer. Primus Telecommunications (PTGI) has made an impressive start in upgrading its NBN Co in Tasmania and successfully hooking up its first customer dislocated well away from other saturated markets. The three giant US telecommunications companies AT&T (T), Sprint Nextel (S), and Verizon (VZ), as well as the largest Canadian company, BCE (BCE), are all working hard at developing their technologies and honing their strategies.
In considering Windstream as a potential investment, one key area to address is whether or not the company can sustain its huge dividend yield, currently in excess of 10%. In contrast, AT&T has a yield of just over 5%, while Vodaphone (VOD) yields just over 7%. The reason the dividend yield is under pressure is that the company has steadily increased its leverage to finance its capital expenditure as well as its acquisition spree. The company's bottom line is also vulnerable because of its dependence on fixed line services and its lack of wireless capabilities.
If you view Windstream as an income investment, you must factor in the doubts about the sustainability of its dividend. If you are looking for capital appreciation, it is too early to tell whether the company's strategy and its acquisitions will pay off. I would not recommend buying Windstream at this point. I urge investors to wait until there is more concrete evidence of future growth potential. If you have an existing investment, I would recommend holding onto it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.