Frontier Communications
(
FTR
), a provider of telecommunication services to rural areas,
reported third quarter 2012 adjusted earnings per share of 7
cents, in line with the Zacks Consensus Estimate. Adjusted
earnings increased 40% from 5 cents earned in the year-ago
quarter.
Adjusted earnings for the quarter excluded the impacts of
severance costs of $6.8 million, integration costs of $4.5
million and losses on the early debt retirement of $0.2 million
and impact of reversal of uncertain tax positions of $7.8
million.
Revenues
Revenue of $1,252.5 million surpassed the Zacks Consensus
Estimate of $1,238.0 million but dropped 3% from $1,290.9 million
in the year-ago quarter. The decline was due to lower residential
and business customers and switched access revenues.
On a year-over-year basis,
local and long-distance
services revenues dropped 8.1% to $556.4 million, while
data and Internet services
revenues grew 0.7% to $461.2 million.
Other
revenues registered an improvement of 19.6% to $94.9 million.
Operating Income & Expenses
Operating income in the third quarter increased 52.6% year
over year to $275.2 million, driven by lower depreciation and
amortization, integration costs and network access expenses.
Operating margin improved 800 basis points to 22%. Operating
expenses decreased 12.0% year over year to $977.3 million.
Customer
Trends
Frontier exited the quarter with 4.9 million total access
lines, down 8% year over year from 5.4 million lines in the
year-ago quarter. Residential and business segments registered
year-over-year decreases of 9.5% and 5.5%, respectively.
Frontier added approximately 983 broadband customers in the
third quarter to reach 1,782,278 (up 1.7% year over year). The
company lost 179,897 video customers, bringing the total number
of customers to 388,257 (plunged 30.2% year over year). The steep
decline was due to the loss of 203,100 DirecTV subscribers in the
reported quarter as Frontier discontinued DirecTV services from
its bundled packages.
Liquidity
Frontier exited the quarter with $1,099.5 million of cash and
cash equivalents compared with $326.1 million at year-end 2011.
Long-term debt increased to $8.5 billion at the end of the third
quarter from $8.2 billion at the end of 2011. Free cash flow was
$215.3 million compared to $267.5 million in the year-ago
quarter.
Dividend
The company paid a total of $99.8 million in dividend in the
third quarter, being equal to a dividend payout of 46% of free
cash flow compared with dividend payments of $186.6 million,
which was equal to a dividend payout of 70% in the year-ago
quarter.
Guidance
For fiscal 2012, the company maintained its estimates on
capital expenditures and free cash flow, excluding integration
expenses and integration capital expenditures, in the bands of
$750-$775 million and $0.9-$1 billion, respectively.
The company expects operating expenses and capital
expenditures on integration activities of approximately $80
million and $50 million, respectively.
The company also incorporated guidance for 2013, which
includes capital expenditure estimates in the range of $625 -
$675 million. It also expects cash taxes expense in the range of
$125-$150 million.
Outlook
Frontier focuses on generating new revenues through customer
retention, customer wins, new product deployments, tiered
pricing, broadband expansion, and profitability and cash flow
management through reductions in operating expenses and capital
expenditures. In addition, the reduction of access line losses
would boost Frontier's profitability and provide cost synergies
going forward.
However, intense competition from the company's peers like
Windstream Corporation
(
WIN
), a highly leveraged balance sheet, regulatory pressure as well
as integration risks in converting the acquired properties into
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 (short-term Hold).
FRONTIER COMMUN (FTR): Free Stock Analysis
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WINDSTREAM CORP (WIN): Free Stock Analysis
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