Before the opening bell, rural telecommunications service provider Frontier Communications (FTR) reported third quarter adjusted earnings of 5 cents per share. The quarter’s results were on par with the Zacks Consensus Estimate.
Adjusted earnings exclude acquisition and integration costs of $67.4 million related to the integration of the West Virginia operations acquired from Verizon Communications (VZ) fixed-line business, $3.6 million in severance and early retirement costs and $14 million for discrete tax items (a total of $43.8 million after tax or 4 cents per share). On a GAAP basis, earnings slipped to 2 cents from 3 cents in the year-ago quarter.
Revenue
Revenue fell 8% year over year to $1,290.9 million and missed the Zacks Consensus Estimate of $1,302 million. The decline was due to the loss of residential and business customers as well as lower switched access, video and directory revenue.
On a year-over-year basis, Local and Long-distance services, Data and Internet services, Other, and Switched Access revenues dropped 2%, 0.8%, 6.7% and 6.2%, respectively.
Customer Trends
Frontier exited the quarter with 5.37 million total access lines, down 8.7% year over year from 5.87 million lines in the year-ago quarter.
Both residential and business customers showed substantial declines of 10.3% and 9.8% to 3.17 million and 0.32 million, respectively. Frontier added approximately 16,200 high-speed Internet customers in the third quarter to reach 1.75 million (up 2.5% year over year). The company added 2,300 video customers, bringing the total number of users to 0.56 million (up 7.9% year over year).
Liquidity
Frontier exited the quarter with $205.8 million in cash and cash equivalents compared with $351.1 million in the year-ago quarter. Long-term debt increased to $8.15 billion at the end of the third quarter from $7.983 billion at the end of 2010.
Capital expenditure was $222.5 million in the reported quarter compared to $159 million in the year-ago quarter. Free cash flow was $263.9 million, down from $339.06 million in the year-ago quarter.
Dividend
The company paid a total of $559.8 million in dividends for the first nine months of the year, equating to a dividend payout of 75% of free cash flow. In the third quarter, the dividend represents a payout of 71% of free cash flow.
Our Analysis
Frontier focuses on generating new revenues through customer retention, customer wins, new product deployments, broadband expansion, and profitability and cash flow management through reductions in operating expenses and capital expenditures. In addition, we believe strong free cash flow supports a healthy dividend payout, which is at the high end of the industry. Further, the reduction of access line losses would boost Frontier’s profitability and provide cost synergies going forward.
However, intense competition, a highly leveraged balance sheet, regulatory pressure as well as integration risks in converting the acquired Verizon properties to its own system might limit the earnings potential in the upcoming quarters.
Consequently, we maintain our long-term Neutral recommendation supported by a Zacks #3 Rank (Hold).
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