Frontier Communications (FTR), a provider of telecommunications services to rural areas, reported first quarter 2011 adjusted earnings per share of 6 cents, which were at par with the Zacks Consensus Estimate. However, adjusted earnings deteriorated from the year-ago earnings 16 cents.
Frontier incurred acquisition and integration costs of $8.3 million or a penny per share (after tax) related to the integration of West Virginia operations acquired from Verizon Communications’ (VZ) fixed-line business. On a GAAP basis, earnings decreased to 5 cents from 14 cents in the year-ago quarter.
Revenue
Revenue soared 159.1% year over year to $1,347 million primarily driven by Verizon properties (acquired on July 1, 2010), but missed the Zacks Consensus Estimate of $1,351 million.
On a year-over-year basis, local and long-distance services revenues leaped 184.1% to $635.1 million and data and Internet services revenues soared 180.7% to $458.5 million. Other revenues shot up 96.8% to $86.8 million and Switched access climbed 87.2% to $166.2 million.
Customer Trends
Frontier exited the quarter with 5.61 million total access lines, up 169.7% year over year from 2.08 million lines in the year-ago quarter. Both residential and business segments contributed to the increase in access lines.
Both residential and business customers showed substantial increases of 171.5% and 141.3% to 3.34 billion and 0.33 billion, respectively. Frontier added approximately 10,500 high-speed Internet customers in the first quarter to reach 1.7 billion (up 165.1% year over year) customers in service. The company added 15,000 video customers, bringing the total number of customers to 54.6 million (up 210.9% year over year).
Liquidity
Frontier exited the first quarter with $359.4 million of cash and cash equivalents compared with $331.1 million in the year-ago quarter. Long-term debt increased to $7.986 billion from $7.983 billion at the end of 2010.
Frontier spent $209.1 million as capital expenditure in the first quarter compared to $69.6 million in the year-ago quarter. Free cash flow was $252.8 million, up from $152.0 million in the year-ago quarter.
Dividend
The company paid a total of $186.6 million in dividend in the first quarter, which equates to payout of 74% of free cash flow compared with dividend payments of $78.4 million in the year-earlier quarter that equated to payout of 52%.
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. Frontier faces integration risks in converting the acquired Verizon properties to its own system over the next couple of years. The company transformed only its West Virginia operations in 2010.
Additionally, we remain concerned about Frontier’s highly leveraged balance sheet due to ongoing expansion efforts primarily related to the broadband network expansion.
Consequently, we maintain our long-term Neutral recommendation supported by a Zacks #3 Rank (Hold).
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