Frontier Communications (FTR) reported first quarter results with adjusted (excluding acquisition and integration costs) earnings per share of 16 cents, beating the Zacks Consensus Estimate of 15 cents. The results also represent an improvement from 12 cents a year-ago.
The carrier incurred acquisition and integration costs of $10.4 million in the quarter in connection with its impending acquisition of Verizon Communications’ (VZ) regional wireline operations. Net income leapt 17% year-over-year to $42.6 million (or 14 cents a share) helped by a 10% drop in operating expenses.
Revenues Remain Under Pressure
Revenues declined 3% year-over-year to $519.8 million, however, beating the Zacks Consensus Estimate of $516 million. The decline is attributable to lower local and long-distance services and switched access revenues coupled with a decline in basic access lines, partially offset by increases in data and Internet service revenues.
Local and long-distance services revenues declined 8% year-over-year to $223.6 million, while data and Internet services revenues increased 4% to $163.4 million. Switched access service revenues declined 1% to $88.8 million.
Access Line Losses Continue
Frontier exited the quarter with 2.08 million total access lines, down 6% year-over-year. Access line erosion in both residential and business segments continues with an aggregate decline of 26,600 lines. Frontier contends with loss of legacy fixed telephony business to wireless and Voice over Internet Protocol (VoIP) services from cable TV operators. Approximately 65% of the carrier’s access lines are exposed to cable voice service offerings.
Broadband & Video Grows
Frontier added approximately 8,100 high-speed Internet customers in the quarter to reach 644,060 (up 7% year over year) customers in service. The company added 2,800 video customers in the quarter, bringing the total number of customers to 175,775 (up 20% year-over-year).
Cash Flow, CAPEX & Dividend
Frontier spent $69.6 million in capital expenditure (CAPEX) in the quarter and generated free cash flow of $152 million. Dividend payment in the first quarter equates to a payout of 52% of free cash flow. Frontier remains committed to its aggressive dividend policy as it targets offering 60-70% return to its shareholders in the form of dividend based on healthy free cash flow expectations.
Outlook
Frontier has confirmed its capital expenditure and free cash flow guidance for 2010. The company continues to expect capital expenditure (excluding acquisitions) in the range of $220-$240 million. Free cash flow (excluding acquisition and integration expenses) for the year is projected between $450 million and $475 million.
Frontier is expanding its broadband network in the rural/underprivileged markets in West Virginia. Moreover, the carrier is set to lead the pure-play rural telecom market by acquiring the rural fixed-line business from Verizon in 14 states for approximately $8.6 billion.
The company has already received approvals from California, Nevada, South Carolina, Arizona, Ohio, Oregon , Washington and Illinois for this transaction. Pending approvals from the state authority of West Virginia and the US telecom regulator Federal Communications Commission (FCC), the acquisition is expected to be completed in second-quarter 2010.
The acquisition will offer meaningful cost synergies and opportunities for revenue growth through expanded broadband penetration, attractive bundled service offerings and improved customer retention. However, we remain concerned about continued access-line erosion, lower regulatory-derived revenues and a highly leveraged balance sheet.
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