Frontier Communications (FTR) announced fourth quarter results with adjusted (excluding acquisition and integration costs) earnings per share of 15 cents, matching the Zacks Consensus Estimate. The result represents an improvement from 11 cents a share reported a year-ago.

For full year 2009, adjusted EPS of 56 cents beat the Zacks Consensus Estimate by a penny. The current Zacks Consensus Estimate for 2010 EPS is 60 cents per share.

The company incurred acquisition and integration costs of roughly $13.9 million in the fourth quarter in connection with its impending acquisition of Verizon Communications’ (VZ) regional wireline operations.

Reported net income for the quarter plunged 87% year-over-year to $4.4 million or 1 cent a share. For full year 2009, reported net profit dipped 34% year-over-year to $120.8 million or 38 cents a share.

Revenues Remain Under Pressure 

Revenue for the quarter declined 4.8% year-over-year to $521 million, coming below the Zacks Consensus Estimate of $523 million. The decline is attributable to lower local service, long-distance and switched access revenues coupled with a decline in basic access lines. However, this was partially offset by increases in data and Internet service revenues.

Local services revenue declined 8% year over year to $188.6 million, while data and Internet services revenue increased 4% to $160 million. Switched access service revenues declined 6% year over year to $90.9 million, while revenues from long-distance services fell 3% from the year-ago quarter to $41.4 million.

For full year 2009, revenue fell 5% year-over-year to $2.12 billion, mostly in line with the Zacks Consensus Estimate. The current Zacks Consensus Estimate for 2010 revenue is $2.04 billion.
 
Access Line Losses Persist

Frontier lost 34,200 voice-access lines in the quarter (a sequential decline) and closed at 2.12 million access lines, down 6% year over year. Access line erosion in both residential and business segments continues. The company contends with loss of legacy fixed telephony business to wireless and other competitive offerings including Voice over Internet Protocol (VoIP) services from cable TV operators. Approximately 65% of Frontier’s access lines are exposed to cable voice service offerings.
 
Broadband & Video Expands

Frontier added approximately 14,600 high-speed Internet customers in the quarter, and ended 2009 with 635,947 (up 10% year over year) total high-speed Internet customers. As a result of low customer acquisition costs and declining capital expenses, broadband remains more profitable than the company’s traditional local and long-distance services. The company added 8,400 video customers in the quarter, bringing the total number of customers to 172,961 (up 44% year-over-year).

Free Cash Flow & CAPEX

Capital expenditure (CAPEX) for the fourth quarter and full year 2009 were $91.5 million and $256.0 million, respectively. Free cash flow for the quarter and full year came in at $123.6 million and $490.8 million, respectively.

Dividend

Dividend payment for the fourth quarter and full year 2009 equates to a payout of 63% and 64% of free cash flow, respectively. The company recently declared a first-quarter 2010 dividend of 25 cents per share payable on March 31, 2010. Frontier remains committed to its aggressive dividend policy as the company targets to offer 60-70% return to its shareholders in the form of dividend based on healthy free cash flow expectations.
 
Outlook

Frontier has released its capital expenditure and free cash flow guidance for 2010. The company expects 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. The company has applied for federal funding of $55 million to deploy and connect fiber-optic cable from its central office to key public facilities, which will allow broadband speeds of up to 100 Meg. 
 
Moreover, Frontier 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, Ohio and Arizona for this transaction.

The acquisition (expected to be completed in second-quarter 2010) 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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