Frontier Communications (FTR) reported second-quarter adjusted earnings per share of 19 cents, which was ahead of the Zacks Consensus Estimate of 15 cents. The result also represents an improvement from 9 cents in the year-ago quarter.
Frontier incurred acquisition and integration costs of $23.1 million or 8 cents per share (after tax) related to its acquisition of Verizon Communications‘ (VZ) regional wireline operations. Net income, including the acquisition cost, plunged 25.8% year over year to $35.1 million (or 11 cents per share).
Revenues declined 3% year over year to $516.1 million, but surpassed the Zacks Consensus Estimate of $512 million. The decline can be credited to lower revenues from local and long-distance, switched access as well as directory services. This was partially offset by increases in data and Internet service revenues.
Revenues for local and long-distance services dropped 7% year over year to $223.3 million, while revenues for data and Internet services advanced 3% to $166.3 million. Revenues for switched access and directory services fell 8% and 11% year over year to $80.3 million and $24.3 million, respectively.
Customer Trends
Frontier exited the quarter with 2.05 million total access lines, down 6% year over year. Both residential and business segments contributed to the reduction in access lines.
Total Residential customers fell 7% to 1.2 million, while business customers fell 6% to 138,500. Frontier added approximately 3,400 high-speed Internet customers in the quarter to reach 647,500 (up 5% year over year). The company added 3,800 video customers, bringing the total number of customers to 179,600 (up 14% year over year).
Cash Flow, CAPEX & Dividend
Frontier spent $86.1 million in capital expenditure (CAPEX), including $32.7 million related to the integration of Verizon, and generated adjusted free cash flow of $134.2 million, up 33% year over year.
The company paid a total of $78.3 million in dividend during the second quarter, which equates to a dividend payout of 58% of free cash flow. Dividend payment in the first half of 2010 equates to a payout of 55% of free cash flow.
Outlook
Frontier reiterated its capital expenditure and free cash flow guidance for its Frontier legacy business operations for 2010. The company continues to expect capital expenditure (excluding acquisitions and integration expenses) in the range of $220–$240 million. Free cash flow for the year (excluding acquisition and integration expenses) is projected between $450 million and $475 million.
Our Analysis
Frontier is expanding its high-speed Internet and satellite TV subscriber bases through aggressive bundled service offerings and promotional initiatives. Strong free cash flow achieved through cost-cutting measures continues to support a healthy dividend payout. However, we believe that intense competition, continued access line losses and regulatory pressure will restrict operating results going forward.
We are currently maintaining our Neutral recommendation with Zacks #3 (‘Hold’) Rank.
FRONTIER COMMUN (FTR): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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