Frontier (FTR) Posts In-line Q2 Earnings, Revenues Drop Y/Y

Quarterly revenues of $1,147.3 million edged past the Zacks Consensus Estimate of $1,146 million but dropped 3.6% from the year-ago quarter. Lower voice revenues and less of non-switched access revenues along with expenses on dispute settlement and unfavorable timing on CPE sales impacted the quarterly performance, partially offset by increased data service and subsidy revenues.

On a year-over-year basis, voice revenues fell 8.2% to $471.6 million while data and Internet services revenues inched up 1% to $462.7 million. Other revenues registered growth of 11.8% to $79 million.

Operating Income

Adjusted operating income in the second quarter declined 15.7% year over year to $224.3 million. Adjusted operating margin was 21.1% compared with 21.8% in the year-ago period.

Customer Trends

At the end of second-quarter 2014, the number of residential customers was 2,762,100, while business subscribers totaled 264,200. Customer churn was 1.80% versus 1.64% in the second quarter of 2013.

Frontier added approximately 27,700 broadband users in the second quarter to reach 1,931,500 (up 6.6% year over year). As of Jun 30, 2014, video subscribers totaled 390,900 (up 3.6% year over year).

Liquidity

Frontier exited the second quarter with $802 million of cash and cash equivalents compared with $880.0 million at year-end 2013. Long-term debt decreased to $7,650.8 million at the end of the quarter from $7,873.7 billion at the end of 2013.

In the second quarter, the company incurred capital expenditure of $125.5 million for business operations, as against $137.5 million in the year-ago quarter. The company also spent $31.2 million during the reported quarter related to integration activities in connection with the pending AT&T Connecticut transaction. Free cash flow was $216 million against $176 million in the year-ago quarter.

Dividend

The company has paid a total of $200.4 million in dividends to date this year, equal to a dividend payout of 44% of free cash flow. This includes dividend payments of $100.2 million in the second quarter alone, which is equal to a dividend payout of 46%.

Guidance

For 2014, Frontier reaffirmed its financial guidance.

The company expects capital expenditures and free cash flow in the bands of $575–$625 million and $725–$775 million, respectively. The company also expects cash tax expense in the range of $130–$160 million.

The company expects an additional operating expense of $140–$170 million and capital expenditure of $85–$105 million in relation to its acquisition and integration activities of AT&T, Inc.’s (T) Connecticut business.

Outlook

We appreciate the various strategic initiatives taken by Frontier, which include market share gains, new product deployment, broadband expansion, new pricing plans and lucrative collaborations. We also remain encouraged by the strong performance of its broadband division and expect the momentum to continue in 2014 buoyed by the company’s various initiatives.

However, we prefer to remain on the sidelines at present on account of strong competition in the telecommunication market, regulatory issues and the effects of high promotional costs as well as access line loss, which continue to pose major threats to Frontier.

Frontier presently carries a Zacks Rank #4 (Sell).

Other Stocks

Other stocks like Shenandoah Telecommunications Co. (SHEN) with a Zacks Rank #1 (Strong Buy) andCincinnati Bell Inc. (CBB) with a Zacks Rank #2 (Buy) are worth considering within this sector.

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