Windstream Earnings Clipped By Intercarrier Charges

Revenue and net income slipped for Windstream Corp. as the Little Rock-based communications firm reported its third quarter results.

Windstream posted quarterly net income of $30.6 million on revenue of $1.503 billion. One year ago, the firm showed profits of $46.8 million on revenue of $1.545 billion.

While Windstream saw consistent growth in its new business channels, it was dinged by regulatory changes in intercarrier compensation rates, which are the charges that one carrier pays to another carrier to originate, transport, or terminate telecommunications traffic.

In 2011, the Federal Communications Commission outlined new rules for the rates, which cap compensation and attempt to move the industry to a “bill and keep” process.

“Growth in the business channel combined with steady consumer results helped to offset greater wholesale declines due to a second step-down in intercarrier compensation rates during the third quarter,” the company said in its earnings release. “Wholesale revenues in the third quarter were $148 million, a decline of 19 percent from the same period a year ago due to lower intrastate access rates as part of intercarrier compensation reform implemented in July 2012 and fewer minutes of use.”

Amortization and depreciation costs were also higher for Windstream during the quarter.

Windstream saw a big improvement in its adjusted free cash flow, which rose to $264 million, a 54% increase year-over-year. Free cash flow measures a company’s ability to pay its necessary (not discretionary) operating expenses. Stronger free cash flow allows a business to make acquisitions, develop new products, pay dividends and reduce debt.

“Growth in business and consumer broadband revenues, combined with declining capital expenditures and lower cash interest expense, produced strong free cash flow during the quarter,” said Windstream President and CEO Jeff Gardner. “We are confident that our strategy to transform Windstream into an enterprise-focused company enhances our growth opportunities and positions us for continued success. Windstream generates substantial free cash flow which supports our dividend. As we look forward, we will remain focused on creating and returning value to our shareholders.”

Other financial highlights included:

• Business service revenues were $916 million in the third quarter, an increase of $10 million or 1 percent year-over-year.
• Data and integrated services revenues were $407 million, an increase of 5 percent from the same period a year ago.
• Carrier service revenues were $169 million, an increase of 4 percent year-over-year due to fiber-to-the-tower installations.
• Enterprise customers, who generate $750 or more in revenue per month, grew 6 percent year-over-year.
• Consumer broadband service revenues were $119 million, up 4 percent from the same period in 2012.
• Overall consumer service revenues were $324 million, a decrease of 3 percent from the same period a year ago.

On Wednesday, Windstream’s board of directors declared a quarterly dividend of 25-cents per share on the company’s common stock. The dividend is payable Jan. 15, 2014, to stockholders of record as of Dec. 31, 2013.

Windstream’s stock (NASDAQ: WIN) closed trading on Wednesday at $8.65 per share. The company’s shares have traded in the range of $7.50 to $10.00 during the past 52 weeks.