Frontier Misses Q1 Earnings on Lower Revenues - Analyst Blog

Frontier Communications Corporation FTR, a provider of telecommunication services to rural areas, reported its first-quarter 2014 adjusted earnings per share of 5 cents, missing the Zacks Consensus Estimate by a penny. The bottom line, however, remained flat on a year-over-year basis. A decline in revenues primarily impacted earnings in the quarter.

Quarterly revenue of $1,154.0 million missed the Zacks Consensus Estimate of $1,165.0 million and dropped 4.3% from the year-ago quarter. Lower voice revenues, less of non-switched access revenues along with expenses on dispute settlement and unfavorable timing on CPE sales impacted the quarterly performance, partially offset by increased data service and subsidy revenues.

On a year-over-year basis, voice revenues fell 8.3% to $482.3 million while data and Internet services revenues increased 1.5% to $461.5 million. Other revenues registered a decline of 6.4% to $77.1 million.

Operating Income

Adjusted operating income in the first quarter declined 9.9% year over year to $226 million. Adjusted operating margin was 20.8% compared with 21.4% in the year-ago period.

Customer Trends

At the end of first-quarter 2014, the number of residential customers was 2,793,900, while business subscribers totaled 266,400. Customer churn was 1.63% versus 1.64% in the first quarter of 2013.

Frontier added approximately 37,200 broadband users in the first quarter to reach 1,903,800 (up 6.8% year over year). As of Mar 31, 2014, video subscribers reached 390,300 (up 7.0% year over year).

Liquidity

Frontier exited the first quarter with $954.2 million of cash and cash equivalents compared with $880.0 million at year-end 2013. Long-term debt decreased to $7,762.7 million at the end of the quarter from $7,873.7 billion at the end of 2013.

In the first quarter, the company incurred capital expenditure of $135.1 million for business operations, as against $189.0 million in the year-ago quarter. Free cash flow was $235.2 million against $206.2 million in the year-ago quarter.

Dividend

The company paid a total of $100.2 million in dividends in the quarter, equal to a dividend payout of 43% of free cash flow compared with dividend payments of $99.8 million in the first quarter of 2013, which was equal to a dividend payout of 48%.

Guidance

For 2014, Frontier reaffirmed its financial guidance.

The company expects capital expenditures and free cash flow in the bands of $575–$625 million and $725–$775 million, respectively. The company also expects cash tax expense in the range of $130–$160 million.

The company expects an additional operating expense of $140–$170 million and capital expenditure of $85–$105 million in relation to its acquisition and integration activities of AT&T Inc.'s T Connecticut business.

AT&T Connecticut Transaction

Frontier expects to close the acquisition of AT&T's business in Connecticut in the fourth quarter of 2014 and believes that it will improve its free cash flow and dividend payout ratio.

Outlook

We appreciate the various strategic initiatives taken by Frontier, which include market share gains, new product deployment, broadband expansion, new pricing plans and lucrative collaborations. We also remain encouraged by the strong performance of its broadband division and expect the momentum to continue in 2014 based on the company's various initiatives.

However, we prefer to remain on the sidelines at present on account of strong competition in the telecommunication market, regulatory issues and the effects of high promotional costs as well as access line loss, which continue to pose major threats to Frontier.

Frontier carries a Zacks Rank #3 (Hold).

Other Stocks

Better-ranked stocks in the telecom sector include Level 3 Communications, Inc. LVLT and Nippon Telegraph and Telephone Corp. NTT. While, Level 3 Communications has a Zacks Rank #1 (Stong Buy), Nippon Telegraph holds a Zacks Rank #2 (Buy).