PAETEC’s Integration Efforts Pushed Margins Higher in Q2

Fresh off last week’s surprising news that it will be acquired by Windstream, PAETEC (news, filings) offered up its second quarter results.  Revenues were perhaps a tad lighter than analysts had forecast, although that may have to do with the timing of the closing of the XETA deal.  More interestingly, the company saw another solid boost to its EBITDA margins, reflecting the integration synergies they are deriving from the Cavalier deal.  Here’s the usual quick table:

$ in millions	Q2/10	Q3/10	Q4/10	Q1/11	Q2/11	FY2011(guidance)
Revenue	396.1	408.4	429.2	495.5	507.1	$2,025-2,125
EBITDA	65.1	62.2	72.1	91.4	98.6	$375-395
Capex	31.4	34	30.2	46.8	50.2
Free Cash Flow	33.7	28.2	41.9	44.5	45.7
Gross Margin	50.3%	49.5%	50.4%	52.8%	53.0%
EBITDA Margin	16.4%	15.2%	16.8%	18.4%	19.4%	~18% (derived)

Revenues: Core network services were down slightly, mostly compensated by a rise in core carrier services.  The increase in revenues of course came in integrated services from the inclusion of one month of XETA results.  The company’s maintained its current guidance, which looks relatively easy to make at this point.

EBITDA & Margins:  EBITDA of $98.6M was up sharply from the prior quarter, yielding 19.4% margins – pushing up toward the 20% barrier that the company has always been beneath.  The Cavalier business gave them a boost initially, but now they are reaping the benefits of a diet much more concentrated in fiber than in the past.

Cash flows & Capex: Capex was up again during the quarter, now just shy of 10% of revenues.  That reflects both integration spending and the increased emphasis on operating their own fiber in more markets.  Free cash flow was also higher this quarter than recently, at $45.7M.

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Categories: CLEC · Financials · Mergers and Acquisitions