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Windstream Corporation (WIN - Analyst Report) has reported third quarter 2012 adjusted earnings per share of 12 cents, missing the Zacks Consensus Estimate by a penny. Adjusted earnings for the quarter were down 20% from the year-ago earnings of 15 cents.

Adjusted earnings excluded negative impacts of $7.8 million in after-tax merger and integration expense and $7.5 million in restructuring costs.

Including these costs, the company reported GAAP earnings per share of 9 cents, down 40% year over year.

Pro forma revenue decreased 1.2% year over year to $1,552.4 million in the third quarter but remained ahead of our expectation of $1,541 million.

Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) was down to $603.1 million in the third quarter from $610.3 million in the year ago quarter.

Subscriber Statistics

During the third quarter, total access lines, which include voice lines, high-speed Internet and digital television customers dropped 2% year over year to 3.52 million. Windstream lost 71,900 access lines year over year. Voice lines declined 4% year over year to $1.87 million.

Windstream added as many as 6,000 new high-speed Internet customers, bringing its total customer base to 1.36 million (up 1.9% year over year). Video customers decreased to 442,700 from 444,800.

Liquidity

Windstream exited the third quarter with cash and cash equivalents of $114.8 million, compared to $34.3 million in the prior-year quarter. Long-term debt and capital lease obligations were $7,848.3 million compared to $8,936.7 million at the year-end 2011.

The company generated adjusted free cash flow of $182.4 million. Capital expenditure was $307.3 million in the third quarter compared to $222.7 million in the year-ago quarter.

Our Analysis

We believe Windstream remains poised to gain from high-speed Internet services that are benefiting from increased market traction. Additionally, the company’s latest acquisition of PAETEC, a leading broadband service provider will also be aided by expanding service offerings, increasing wireless data backhaul services and offering managed services and cloud computing. Further, Windstream’s deleveraging initiatives and refinancing activities are expected to generate healthy cash flows, subsequently attracting investors through a high dividend payout.

However, we remain on the sidelines due to competitive pressure from peers like Frontier Communications (FTR - Analyst Report), a highly leveraged balance sheet as well as continued access-line erosion, which could partially be offset by a high dividend yield and broadband opportunities.

We are currently maintaining our long-term Neutral recommendation on Windstream supported by a Zacks #3 Rank (Hold).

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