Frontier Communications Corporation (FTR) a provider of telecommunication services to rural areas, reported fourth quarter 2013 adjusted earnings per share of 7 cents, beating the Zacks Consensus Estimate by a penny. Comparing year over year, the bottom line increased 16.7% from 6 cents. Shareholders reacted positively to the news with the stock ending 2.61% in the green on Monday trade on Nasdaq.
Quarterly revenue of $1,180.4 million beat the Zacks Consensus Estimate of $1,178.0 million but dropped 0.4% from the year-ago quarter. Lower voice revenues along with less of switched and non-switched access revenues impacted the quarterly performance, partially offset by increased data service and subsidy revenues.
On a year-over-year basis, local and long-distance service revenues fell 8.8% to $494.8 million while data and Internet services revenues increased 4.3% to $473.0 million. Other revenues registered a decline of 14.8% to $77.1 million.
For full-year 2013, Frontier posted earnings per share of 24 cents (beating our projection by a penny), which was lower than last-year figure of 26 cents. Revenues came in at $4,761.6 million (down 5.0% year over year).
Operating Income
Adjusted operating income in the fourth quarter improved 9.3% year over year to $235.7 million. Operating margin was 21.8% compared with 19.1% in the year-ago period owing to reduction in operating expenses.
Customer Trends
At the end of 2013, the number of residential customers was 2,803,481, while business subscribers totaled 270,799. Customer churn was 1.67% versus 1.62% in 2012.
Frontier added approximately 27,800 broadband users in the fourth quarter to reach 1,866,670 (up 6.4% year over year). Satellite TV customer additions totaled 7,438. As of December 31, 2013, video subscribers netted 385,400.
Liquidity
Frontier exited 2013 with $880.0 million of cash and cash equivalents compared with $1,326.5 million at year-end 2012. Long-term debt decreased to $7,873.7 million at the end of the year from $8,381.9 billion at the end of 2012.
In 2013, the company incurred capital expenditure of $634.7 million for business operation, as compared to $748.4 million last year. Free cash flow was $862.5 million against $975.3 million a year ago.
Dividend
The company paid a total of $399.76 million in dividend in 2013, equal to a dividend payout of 46% of free cash flow compared with dividend payments of $399.39 million, which was equal to a dividend payout of 41% in the prior year.
Guidance
For 2014, Frontier guides 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.
AT&T Connecticut Transaction
Frontier expects to close the acquisition of AT&T’s business in Connecticut in the second half of 2014 and believes that it will improve its free cash flow and dividend payout ratio.
Other Stocks
Another telecom company, United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS), will report its fourth quarter 2013 earnings on Feb 26, 2014 before the market opens.
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 based on its various steps.
However, we prefer to remain on the sidelines based on 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 carries a Zacks Rank #3 (Hold).
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