Frontier 1Q Earnings a Penny Short

Zacks

Frontier Communications (FTR), a provider of telecommunication services to rural areas, reported adjusted earnings per share of 5 cents in first quarter 2013, unchanged from the prior-year quarter figure. The result, however, lagged the Zacks Consensus Estimate of 6 cents.

Quarterly revenues of $1,205.4 million failed to meet the Zacks Consensus Estimate of $1,219.0 million and also dropped 4.9% from the year-ago quarter. Lower voice revenues along with less of switched access and subsidiary impacted the quarterly performance.

On a year-over-year basis, local and long-distance service revenues fell 8.7% to $525.9 million, while data and Internet services revenues improved 2.5% to $454.8 million. Other revenues fell 9.4% to $82.4 million.

Operating Income

Adjusted operating income in the first quarter improved 1.2% year over year to $253.2 million. Operating margin was 21.4% compared with 20.7% in the year-ago period.

Customer Trends

At the end of the first quarter, the number of residential customers was 2,859,229 while business subscribers totaled 281,052. Customer churn was 1.64% versus 1.58% in comparable period last year.

Frontier added approximately 28,200 broadband users in the first quarter to reach 1,782,600 (up 2.3% year over year). As of Mar 31, 2013, video subscribers were 365,000, with the addition of 18,300 customers.

Liquidity

Frontier exited the first quarter with $875.9 million in cash and cash equivalents compared with $1,326.5 million at year-end 2012. Long-term debt decreased to $8,368.7 million in the quarter from $8,381.9 million at the end of 2012.

The company incurred capital expenditure of $189.0 million for business operation, while free cash flow was $206.2 million.

Dividend

The company paid a total of $99.8 million in dividends in the quarter, equal to a dividend payout of 48% of free cash flow.

Guidance

For 2013, Frontier guides capital expenditures and free cash flow in the bands of $625–$675 million and $825–$925 million, respectively. The company also expects cash taxes expense in the range of $125–$150 million.

Outlook

We appreciate the various strategic initiatives of Frontier that include market share gains, new product deployments, broadband expansion, new pricing plans and lucrative collaborations.

Early April, the company announced the disposition of its one-third stake in regional telecom carrier – Mohave Wireless – to Verizon Wireless, a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (VOD).

However, we remain on the sidelines considering the regulatory and competitive pressures along with high expenses due to promotional activities plus access line losses that are straining the company’s performance level.

Frontier – which inked an agreement with AT&T Inc. (T) in late 2012 – currently carries a Zacks Rank #3 (Hold).
 

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