PAETEC’s Finds Q3 Growth, Windstream Awaits

November 4th, 2011 by · Leave a Comment

Soon-to-be part of Windstream, PAETEC (news, filings) today announced their Q3 earnings report - the last time we will probably hear from CEO Arunas Chesonis in this format.  The company has been busy integrating the assets it purchased last year, including the Cavalier/Intellifiber footprint and its more recent purchase of XETA.  But the story this quarter was actually one of organic growth.  Here's a quick table:

$ in millions Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 FY2011

(guidance)

Revenue 408.4 429.2 495.5 507.1  536.3 $2,025-2,125
EBITDA 62.2 72.1 91.4 98.6  102.3 $375-395
Capex 34 30.2 46.8 50.2 45.6
Free Cash Flow 28.2 41.9 44.5 45.7  56.7
Gross Margin 49.5% 50.4% 52.8% 53.0% 52.1%
EBITDA Margin 15.2% 16.8% 18.4% 19.4%  19.1% ~18% (derived)

Revenues:  Revenues jumped mostly due to a full quarter of XETA's revenues.  However, the company also saw 2.6% sequential growth in core Network Services revenue, which makes up the majority of the total.  That rare organic burst of growth helped to bring total revenues in well above composite analyst projections of $527M

EBITDA:  EBITDA rose to $102.3, while EBITDA margins fell sequentially due to the inclusion of a full quarter of lower margin revenues from XETA.  With synergies still on the way, it seems likely that PAETEC would have ended 2011 with EBITDA margins of around 20% for the first time.

Earnings & Cash flow: PAETEC lost $17.1M during the quarter, which I think works out to $0.12 or so per share.  That was worse than analysts projected, mostly due to higher integration costs.  Free cash flow checked in at $56.7M, higher than average, while capital expenditures were $45.6M.

Merger thoughts:  I expect that the Windstream (NYSE:WIN, news, filings) deal will close sometime after Thanksgiving.  While PAETEC had yet to truly succeed in transforming its scale into sustainable positive momentum, I still can't help but feel that Windstream is getting a bargain here.  The rumors of a pending higher bid that didn't come true reflect a similar belief on the part of the analyst community.  If they had waited six months or a year, they could have put the business up for sale with the integration largely complete and other potential bidders in a position to compete - a recipe for a better price.  Now the question will soon become, just what will Windstream do with the business and its people?

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Categories: CLEC · Financials · Metro fiber

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