Frontier Communications (FTR), a provider of telecommunications services to rural areas, has reported lower-than-expected second quarter 2011 adjusted earnings per share. Not only did adjusted earnings of 6 cents miss the Zacks Consensus Estimate by a penny, it also deteriorated from the year-ago earnings 19 cents.
The decline was mainly due increased interest and income tax expenses, mostly offset by a higher operating income from the acquired properties.
Adjusted earnings excluded acquisition and integration costs of $20.3 million related to the integration of West Virginia operations acquired from Verizon Communications’ (VZ) fixed-line business, $11.0 million for severance and early retirement costs and $10.5 million for a discrete tax items (a total of $29.9 million or 3 cents per share). On a GAAP basis, earnings decreased to 3 cents from 11 cents in the year-ago quarter.
Revenue
Revenue soared 156.2% year over year to $1,322.3 million primarily aided by the acquired Verizon properties (acquired on July 1, 2010), but missed the Zacks Consensus Estimate of $1,334 million. The year-over-year increase in revenue was offset by a decline in Frontier legacy operations.
On a year-over-year basis, local and long-distance services revenues leaped 176.7% to $617.17 million and data and Internet services revenues increased a whopping 177.5% to $461.6 million. Other revenues shot up 84.0% to $85.1 million and Switched Access revenue climbed 96.6% to $157.8 million.
Customer Trends
Frontier exited the quarter with 5.49 million total access lines, up 167.5% year over year from 2.05 million lines in the year-ago quarter. Both residential and business segments contributed to the increase.
Both residential and business customers showed substantial increases of 169.5% and 135.9% to 3.25 billion and 3.26 million, respectively. Frontier added approximately 7,400 high-speed Internet customers in the second quarter to reach 1.7 million (up 164.9% year over year) customers in service.
The company added 7,800 video customers (up 208.7% year over year).
Liquidity
Frontier exited the quarter with $232.7 million of cash and cash equivalents compared with $231.6 million in the year-ago quarter. Long-term debt increased to $7.989 billion at the end of second quarter from $7.983 billion at the end of 2010.
Frontier spent $223.9 million in capital expenditure in the second quarter compared to $86.1 million in the year-ago quarter. Free cash flow was $231.4 million, up from $134.0 million in the year-ago quarter.
Dividend
The company paid a total of $186.6 million in dividend in the second quarter that equates to a dividend payout of 77% of free cash flow compared with year-ago dividend payments of $78.4 million, which equated to dividend payout of 58%.
Our Analysis
We believe Verizon’s wireline operations continue to enhance broadband deployment and high speed Internet connections in rural areas that would in turn lead to higher profits and free cash flow. Further, the company will benefit though the cost synergies driven by the combined operations of the acquired businesses.
However, we are concerned about a highly leveraged balance sheet due to ongoing expansion efforts primarily related to the broadband network expansion. Further, the company faces integration risks in converting the acquired Verizon properties to its own system over the next couple of years.
Consequently, we maintain our long-term Neutral recommendation supported by a Zacks #3 Rank (Hold).
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