Frontier Communications (FTR), a provider of telecommunications services to rural areas, reported its third quarter adjusted earnings per share of 8 cents missing the Zacks Consensus Estimate by 2 cents. The company realized approximately $60 million of synergies from the acquired regional wireline operations of Verizon Communications’ (VZ).
Frontier incurred acquisition and integration costs of $49.1 million or 5 cents per share (after tax) related to its acquisition of the Verizon fixed-line business. Net income, including the acquisition cost, plunged 82.3% year over year to $29 million (or 3 cents per share).
Revenues jumped 166.3% year over year to $1.402 billion, primarily driven by Verizon properties (acquired on July 1, 2010), but missed the Zacks Consensus Estimate of $1.415 billion.
On an annual basis, Other revenues shot up 438% to $67.6 million. Local and long-distance services revenues leaped 194% to $693.5 million and data and Internet services revenues increased a whopping 182% to $452.5 million. Switched access and climbed 78% to $162.0 million and Directory service revenues inched up only 3.2% to $27.3 million.
Customer Trends
Frontier exited the quarter with 5.87 million total access lines, up 173% year over year from 2.15 million lines in the year-ago quarter. Both residential and business segments contributed to the increase in access lines.
Both residential and business customers show a substantial increase of 172% and 175% to 3.7 million and 2.1 million, respectively. Frontier lost approximately 5,000 high-speed Internet customers in the third quarter to reach 1.7 million (up 172% year over year) customers in service. The company added 11,100 video customers, bringing the total number of customers to 0.5 million (up 213% year over year).
Cash Flow, CAPEX & Dividend
Frontier spent $174.6 million in capital expenditure (CAPEX), including $15.6 million related to the integration of Verizon, and generated adjusted free cash flow of $339.1 million, up 182% year over year.
The company paid a total of $186.3 million in dividend in the third quarter, which equates to dividend payout of 55% of free cash flow. Dividend payment in the first nine months of 2010 also equates to a payout of 55% of free cash flow.
Outlook
Frontier has made a strong start with its acquired Verizon properties and is on track to deploy 85% of lines by the end of 2013. The company raised its synergies expectation to $550 million from $500 million.
The company now expects its capital expenditure and free cash flow, excluding acquisition and integration costs, to be in the range of $500–$525.0 million and $830–$860 million, respectively
Our Analysis
Frontier is expanding its high-speed Internet and satellite TV subscriber bases driven by aggressive bundled service offerings and promotional initiatives. Strong free cash flow achieved through cost-cutting measures continues to support a healthy dividend payout. Further, we expect Frontier’s continued access line losses to erode with the acquisition of the rural fixed-line business of Verizon.
On the flip side, we remain concerned about Frontier’s highly leveraged balance sheet due to ongoing expansion efforts primarily related to the broadband network expansion. The company had approximately $8.2 billion of long-term debt compared with $4.8 billion at the end of 2009.Intense competition and regulatory pressure will also restrict operating results going forward.
We are currently maintaining our long-term Neutral recommendation with a Zacks #3 Rank (Hold).
FRONTIER COMMUN (FTR): Free Stock Analysis Report
Zacks Investment Research