Frontier Communications (FTR), a provider of telecommunications services to rural areas, reported its fourth quarter adjusted earnings per share of 5 cents missing the Zacks Consensus Estimate of 9 cents. Adjusted earnings also deteriorated from the year-ago earnings 15 cents.
Frontier incurred acquisition and integration costs of $7 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 increased four-fold from a cent in the year-ago quarter.
Fiscal 2010 adjusted earnings were 37 cents, down from 54 cents from the prior year.
Revenue
Revenue soared 160.8% year over year to $1.359 billion primarily driven by Verizon properties (acquired on July 1, 2010), but missed the Zacks Consensus Estimate of $1.386 billion.
On an annual basis, Other revenues shot up 311.1% to $56.9 million. Local and long-distance services revenues leaped 187.9% to $662.1 million and data and Internet services revenues increased a whopping 182.1% to $452.8 million. Switched access climbed 76.5% to $160.4 million and Directory service revenues upped 3.1% to $26.5 million.
Revenue increased 79.3% year over year to $3.798 billion in fiscal 2010.
Customer Trends
Frontier exited the quarter with 5.75 million total access lines, up 171.3% year over year from 2.12 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 174.6% and 144.3% to 3.44 billion and 3.43 million, respectively. Frontier added approximately 5,600 high-speed Internet customers in the fourth quarter to reach 1.7 million (up 166.9% year over year) customers in service. The company added 15,800 video customers, bringing the total number of customers to 0.53 million (up 207% year over year).
Liquidity
Frontier exited the quarter with $251.3 million of cash and cash equivalents compared with $358.7 million in the year-ago quarter. Long-term debt increased to $8 billion at the end of 2010 from $4.8 billion at the end of 2009.
Frontier spent $247.6 million and $577.9 million as capital expenditure in the fourth quarter and 2011, respectively. Free cash flow was $212.9 million in the reported quarter, up from $123.6 million in the year-ago quarter. Fiscal 2010 free cash flow also increased to $838.3 million from $490.8 million in 2009.
Dividend
The company paid a total of $186.3 million in dividend in the fourth quarter, which equates to dividend payout of 88% of free cash flow. Dividend payment in 2010 was $529.4 million that equates to a payout of 63% of free cash flow.
Guidance
For fiscal 2011, the company expects its capital expenditure and free cash flow, excluding acquisition and integration costs, to be in the range of $750–$780 million and $1.15–$1.2 billion, respectively.
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. However, we remain concerned about Frontier’s highly leveraged balance sheet due to ongoing expansion efforts primarily related to the broadband network expansion.
We are currently maintaining our long-term Neutral recommendation with the Zacks #3 Rank (Hold).
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