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Broadband services

Investors Flee US Rural Incumbents

Windstream management's decision to eliminate its quarterly dividend, effective immediately, has prompted that company's stock to lose 27% of its value, continuing a trend of tough financial times for incumbent US telcos with large rural coverage areas.

Another incumbent telco, Frontier Communications Corp. (NYSE: FTR), had already lowered its dividend, and its stock is also suffering. And CenturyLink Inc. (NYSE: CTL) stock continues to slide after its lackluster quarter results were reported yesterday. (See Frontier Cuts Dividend, Seeks Salvation and CenturyLink Posts Lackluster Q2.)

Against that backdrop, CenturyLink merger partner Level 3 Communications Inc. (NYSE: LVLT)'s results look better, even though the company's earnings fell to $154 million or 42 cents per share, down from $156 million and 43 cents per share a year ago, on revenue of $2.06 billion that was essentially flat year-over-year. That was still above consensus analysts' predictions of $42 per share, as reported by Yahoo Finance. (See CenturyLink Splashes $34B on Level 3 Buy.)

But Level 3 shares were also falling slightly, down 4% after its earnings announcement.

The Windstream Communications Inc. (Nasdaq: WIN) management decision to cancel the company dividend comes after its stock price has been in steady decline since early March, falling from $7.50 a share to $3.72 yesterday. That prompted Windstream to announce it would re-allocate its capital to repurchase up to $90 million of its common stock, buying shares "opportunistically" through the first quarter of 2019 and paying down debt as well.

"Our equity is undervalued especially given our improved strategic direction with enhanced product capabilities, management talent additions and anticipated acquisition synergies of $180 million," Tony Thomas president and CEO said in a statement. "The elimination of the dividend along with the $90 million buyback program and delivering that will also occur and will create value for all our stakeholders. This is the right path for our company."

Windstream posted a $68 million second-quarter loss despite increased revenues of $1.49 billion, an increase of 10% year-over-year.

As noted in this Fierce Telecom story, financial research firm Cowen issued a report this month calling the last three consecutive quarters "the worst consecutive quarters in industry history" for CenturyLink, Frontier and Windstream, with share prices falling between 20% and 24% each quarter.

All three face the issues CenturyLink noted in its earnings call yesterday, namely that while they have launched newer "strategic" services such as SD-WANs, sales of those offerings aren't keeping up with declines in traditional service revenues.

And while CenturyLink is getting some cover from the impending Level 3 merger, the other two companies continue to take a Wall Street beating. Frontier is also coming under pressure from the difficulties its facing in integrating the Verizon properties it acquired and retaining those customers in the process.

Cowen isn't predicting recovery any time soon, and is already projecting a 5% decrease in share prices for the third quarter of 2017, which it may revise in light of today's news.

— Carol Wilson, Editor-at-Large, Light Reading

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mendyk 8/3/2017 | 4:19:42 PM
Safety last Utility stocks generally attract safety investors because of their dividend payouts. Cut the dividend, and you cut the incentive for holding. It's hard to see how this strategy can work.
Carol Wilson 8/3/2017 | 4:27:10 PM
Re: Safety last I wondered about that myself. Windstream doesn't own its network any longer and they clearly want to move away from the utility mold. This may be a step in that direction and given where their stock was headed anyway....
mendyk 8/3/2017 | 4:40:51 PM
Re: Safety last Well, yeah -- then this becomes sort of a paste-some-wings-on-a-horse-and-see-if-it-will-fly kind of thing. At least by chasing away investors Windstream will be able to buy back a lot more of its stock.
brooks7 8/3/2017 | 4:57:32 PM
Mired in History Seems to me that the basic problem is that all 3 firms seem somewhere between 5 and 15 years too late in thinking about this changing world.  They are all primarily wireline telecoms when the world is heading wireless.  They are primarily rural, when the Enterprise world is dominated by the NFL cities.

For as much as we criticize Verizon and AT&T, both of them just seem about a whole category sharper in terms of strategy and execution.

Let me give you an example.  So, Carol - you posted an article about Small Business and VoIP quoting CenturyTel.  As I said, I suspect those numbers are low...but here is the thing....there are an entire class of VoIP carriers that call on that market already from RingCentral to Ooma to Vonage to (add in here about 100 or so others).  Heck even MagicJack is trying to penetrate this space.  Forgive me if it seems like Century looked up and said "Hot Damn if MagicJack is doin it by golly we better too!" (said with a twang from Monroe).

If these carriers want to compete for the long term, then they need to rethink things entirely.  Windstream has at least tried.  We shall see if they have failed or not.

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Carol Wilson 8/3/2017 | 5:11:50 PM
Re: Mired in History I get what you are saying, but I don't think it's entirely fair to CenturyLink, which may not have been as early to the virtualization party as AT&T, but has done a pretty strong job of revamping its business and business model in the last several years. 

The wireless point is well-taken, although ultimately, there may be more profits to be made in backhauling wireless services than in delivering them, if the current service pricing models hold. 

The real measure of CenturyLink will be how it handles the Level 3 integration and what that company looks like on the other side. Also, how quickly it moves to software-defined access. 

Frontier and Windstream each face their own unique challenges - I lumped these three together because that's what the investment community is doing, but they really are three separate players with different challenges. 

 
James_B_Crawshaw 8/3/2017 | 6:25:48 PM
Re: Mired in History I believe CTL's stock is down 5% year to date while AT&T and VZ's are down about 10%. The one year comparison is less favorable for CTL (-25% compared with -10% for T and VZ) because it includes the sell off last October when it announced the Level 3 deal. Gearing up to buy a backbone provider did not sit well with CTL's shareholders.

This most recent set of results seem to be largely in line with market expectations but they have trimmed their full year guidance for revenue and EBITDA. They still seem to be promising to maintain the dividend but with an implied yield of over 9% it does not look like the market believes them. T and VZ both yield 5%. 
KBode 8/3/2017 | 7:40:46 PM
Re: Mired in History "Seems to me that the basic problem is that all 3 firms seem somewhere between 5 and 15 years too late in thinking about this changing world."

Exactly. Also, several of themselves saddled themselves with so much debt to acquire fleeing landline customers they lack the funding to upgrade to next-generation broadband networks, resulting in DOCSIS 3.1 gigabit employments driving consistent losses.
KBode 8/3/2017 | 7:41:59 PM
Re: Mired in History "Frontier and Windstream each face their own unique challenges - I lumped these three together because that's what the investment community is doing, but they really are three separate players with different challenges. "

Morale at Frontier has been at an all time low for much of the last several years. Both suffer from some of the same diseases, but I see greater leadership competency at CenturyLink. 
brooks7 8/3/2017 | 10:43:20 PM
Re: Mired in History Carol,

My only comment on Century is that they are stuttering around this stuff.  They have bought LOTS of things.  What I don't see is a concerted statement of what they are going to be.  Right now they are in catch up mode with AT&T and Verizon who bought their Level 3 equivalents over a decade ago (think MCI as an example).  Both of those companies are moving on to content oriented strategies (and we can debate their effectiveness at some point).  So, when is Century going to stop buying network assets and maybe buy Netflix...see where I am headed?  And that is just an example in a specific direction.  Right now, Century is still building the network.  I agree that Frontier and Windstream (add Fairpoint into that mix) act like they are in a dark room with a blindfold on.

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Carol Wilson 8/4/2017 | 10:58:51 AM
Re: Mired in History Frontier certainly took on a significant challenge in buying the wireline properties that Verizon wanted to sell off, and I don't envy any of their frontline employees the difficult job of handling - and trying to retain - angry customers. 

 
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