Market Overview

Frontier Communications Reports Fourth Quarter and Full Year 2017 Results

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Fourth Quarter

  • Total revenue of $2.22 billion
  • Consumer customer churn improved to 1.98% from 2.08% in Q3 2017,
    driven by both CTF FiOS® and Legacy
  • Continued sequential improvement in CTF FiOS® broadband
    gross and net additions
  • Net loss of $1.03 billion, driven by goodwill impairment, partially
    offset by tax benefit
  • Adjusted EBITDA1 of $919 million, in line with guidance
    range
  • Purchased $110 million principal amount of senior unsecured notes
  • Board of Directors suspends the quarterly cash dividend on the
    Company's common stock

Frontier Communications Corporation (NASDAQ:FTR) today reported
financial results for the fourth quarter and full year ended December
31, 2017.

"Our fourth quarter results highlight the ongoing progress on our key
initiatives to improve customer retention, enhance the customer
experience, and align our cost structure," said Dan McCarthy, President
and CEO. "We are pleased with continued improvement in subscriber trends
and churn in our California, Texas and Florida (CTF) markets, and the
continued operating efficiencies achieved in the fourth quarter. As we
implement our strategy, our board regularly evaluates the optimal
long-term capital allocation for the business, and has voted to suspend
the dividend on common shares. The suspension will make available an
additional $250 million annually2 to accelerate debt
reduction. For 2018, we remain committed to enhancing the customer
experience, further improving churn, maintaining strong cash flow, and
strengthening the balance sheet as we pursue further stabilization of
the business and growth longer-term."

_______________

1 See "Non-GAAP Measures" for a description of this
measure and its calculation. See Schedule A for a reconciliation to
net loss.
2 Following conversion of the Frontier Communication
11.125% Mandatory Convertible Preferred Stock into common stock in
June 2018, the common stock dividends would have been approximately
$250 million annually at the dividend rate paid in Q4 2017.
 

Consolidated Results

Consolidated revenues for the fourth quarter 2017 were $2.22 billion.
Within consolidated revenue, consumer revenue was $1.09 billion,
commercial revenue was $941 million and regulatory revenue was $190
million. Consolidated revenues for the full year 2017 were $9.13
billion. Within consolidated revenue, consumer revenue was $4.48
billion, commercial revenue was $3.88 billion and regulatory revenue was
$776 million.

Net loss for the fourth quarter of 2017 was $1.03 billion. Net loss for
the fourth quarter included an $830 million tax benefit resulting from
the reduction in federal tax rates, and a $1.82 billion (after tax)
goodwill impairment. Net loss for the fourth quarter attributable to
common shares was $1.08 billion, for a diluted net loss per common share
of $13.91. Adjusted EBITDA3 totaled $919 million for an
adjusted EBITDA margin4 of 41.5%. For the full year 2017, net
loss was $1.80 billion. Net loss for 2017 included an $830 million tax
benefit resulting from the reduction in federal tax rates and a $2.35
billion (after tax) goodwill impairment. Net loss attributable to common
shares was $2.02 billion, for a diluted net loss per common share of
$25.99. Full year 2017 adjusted EBITDA totaled $3.68 billion, for an
adjusted EBITDA margin of 40.4%.

The Company attained more than $190 million in annualized cost synergies
and remains on track to achieve its target of $350 million in annualized
run-rate cost synergies by mid-2018.

For the fourth quarter of 2017, net cash provided from operating
activities was $665 million and adjusted free cash flow5 was
$228 million. For the full year 2017, net cash provided from operating
activities was $1.85 billion and adjusted free cash flow5 was
$790 million.

Consumer Business Highlights for the Fourth Quarter

  • Revenue was $1.09 billion, a sequential decline of $16 million versus
    the $22 million sequential decline in the third quarter. The improved
    trend was driven by a stronger performance in both Legacy and CTF
    revenue.
  • Customer churn improved to 1.98% (1.83% for Frontier Legacy and 2.22%
    for CTF operations) compared to 2.08% for the third quarter of 2017
    (1.92% for Frontier Legacy and 2.33% for CTF operations), with CTF FiOS®
    and Legacy contributing to the overall improvement.
  • Combined Average Revenue Per Customer (ARPC) of $81.61 ($65.11 for
    Frontier Legacy and $107.35 for CTF operations). Each measure of ARPC
    improved sequentially, despite the benefit to third quarter ARPC
    associated with the Mayweather vs. McGregor fight.

_______________

3 See Note 1, above.
4 See Note 1, above. Adjusted EBITDA margin is a non-GAAP
measure of performance, calculated as adjusted EBITDA, divided by
total revenue. See "Non-GAAP Measures" for a description of this
measure and its calculation. See Schedule A for a reconciliation to
net loss.

5 Adjusted free cash flow is a non-GAAP measure of
liquidity derived from net cash provided from operating
activities. See "Non-GAAP Measures" for a description of this
measure and its calculation and Schedule A for a reconciliation to
net cash provided from operating activities.

 

Commercial Business Highlights for the Fourth Quarter

  • Revenue of $941 million, a sequential decline of $17 million versus
    the $24 million sequential decline in the third quarter. The decline
    was predominantly driven by carrier/wholesale revenue.
  • Total commercial customers of 453,000 compared to 463,000 during the
    third quarter of 2017.
  • SME (Small, Medium, & Enterprise) revenue was roughly stable
    sequentially.

Capital Structure and Capital Allocation

  • Frontier purchased $110 million principal amount of its 2018 and 2019
    senior unsecured notes on the open market during the fourth quarter of
    2017.
  • As of December 31, 2017, Frontier's leverage ratio (as calculated in
    accordance with its credit agreements) was 4.59:1, which complied with
    its obligations under its credit agreements. The leverage ratio was
    4.39:1 as of September 30, 2017.
  • Frontier remains committed to reducing debt and improving its
    financial leverage profile.
    • Subsequent to the quarter, on January 25, 2018, Frontier amended
      its credit facilities to provide increased flexibility in managing
      its capital structure.
    • The Board of Directors has suspended the quarterly cash dividend
      on the Company's common stock beginning with the first quarter of
      2018. This change allows for a reallocation of approximately $250
      million annually, following the conversion of Frontier's 11.125%
      Mandatory Convertible Series A Preferred Stock (Convertible
      Preferred) to common stock in June 2018.
  • The Board of Directors has declared a regular quarterly dividend on
    the Convertible Preferred of $2.78125 per share, payable in cash
    on March 30, 2018 to holders of record at the close of business
    on March 15, 2018.

Guidance

Our full year 2018 guidance includes a new metric, operating free cash
flow. Operating free cash flow, a non-GAAP measure, is defined as net
cash provided from operating activities less capital expenditures.
Operating free cash flow is directly calculable from our GAAP financial
statements and is a more appropriate free cash flow metric for the
Company now that the integration of the CTF properties, with its
associated integration and acquisition costs, is complete.

For the full year 2018, Frontier's guidance is the following:

  • Adjusted EBITDA6 – Approximately $3.6 billion
  • Capital expenditures – $1.0 billion to $1.15 billion
  • Cash taxes – Less than $25 million
  • Cash pension/OPEB – Approximately $150 million
  • Interest expense – Approximately $1.5 billion
  • Operating free cash flow7 – Approximately $800 million

_______________

6 See Note 1, above.
7 Operating free cash flow is a non-GAAP measure of
liquidity derived from net cash provided from operating activities.
See "Non-GAAP Measures" for a description of this measure and its
calculation and Schedule D for a reconciliation to net cash provided
from operating activities and to our prior cash flow metric,
adjusted free cash flow.
 

Non-GAAP Measures

Frontier uses certain non-GAAP financial measures in evaluating its
performance, including EBITDA, EBITDA margin, adjusted EBITDA, adjusted
EBITDA margin, free cash flow, adjusted free cash flow, operating free
cash flow, adjusted operating expenses, and dividend payout ratio, each
of which is described below. Management uses these non-GAAP financial
measures internally to (i) assist in analyzing Frontier's underlying
financial performance from period to period, (ii) analyze and evaluate
strategic and operational decisions, (iii) establish criteria for
compensation decisions, and (iv) assist in the understanding of
Frontier's ability to generate cash flow and, as a result, to plan for
future capital and operational decisions. Management believes that the
presentation of these non-GAAP financial measures provides useful
information to investors regarding Frontier's financial condition and
results of operations because these measures, when used in conjunction
with related GAAP financial measures (i) provide a more comprehensive
view of Frontier's core operations and ability to generate cash flow,
(ii) provide investors with the financial analytical framework upon
which management bases financial, operational, compensation, and
planning decisions and (iii) present measurements that investors and
rating agencies have indicated to management are useful to them in
assessing Frontier and its results of operations.

A reconciliation of these measures to the most comparable financial
measures calculated and presented in accordance with GAAP is included in
the accompanying tables. These non-GAAP financial measures are not
measures of financial performance or liquidity under GAAP, nor are they
alternatives to GAAP measures and they may not be comparable to
similarly titled measures of other companies.

EBITDA is defined as net income (loss) less income tax expense
(benefit), interest expense, investment and other income, gains/losses
on extinguishment of debt, and depreciation and amortization. EBITDA
margin is calculated by dividing EBITDA by total revenues.

Adjusted EBITDA is defined as EBITDA, as described above, adjusted to
exclude acquisition and integration costs, GAAP pension/OPEB expense
(including pension settlement costs), restructuring costs and other
charges, stock-based compensation expense, goodwill impairment charges,
and certain other non-recurring items (e.g. storm-related costs in the
fourth quarter of 2017). Adjusted EBITDA margin is calculated by
dividing adjusted EBITDA by total revenues.

Management uses EBITDA, EBITDA margin, adjusted EBITDA and adjusted
EBITDA margin to assist it in comparing performance from period to
period and as measures of operational performance. Management believes
that these non-GAAP measures provide useful information for investors in
evaluating Frontier's operational performance from period to period
because they exclude depreciation and amortization expenses related to
investments made in prior periods and are determined without regard to
capital structure or investment activities. By excluding capital
expenditures, debt repayments and dividends, among other factors, these
non-GAAP financial measures have certain shortcomings. Management
compensates for these shortcomings by utilizing these non-GAAP financial
measures in conjunction with the comparable GAAP financial measures.

Adjusted net income (loss) attributable to Frontier common shareholders
is defined as net income (loss) attributable to Frontier common
shareholders and excludes acquisition and integration costs,
restructuring costs and other charges, pension settlement costs,
goodwill impairment charges, certain income tax items and the income tax
effect of these items, and one-time storm-related costs in Q3 2017 (and
which, owing to the timing of the storms, also will be excluded in Q4 of
2017). Adjustments have also been made to exclude the financing costs
and related income tax effects associated with the April 1, 2016 Verizon
Transaction, including interest expense on debt raised to finance the
transaction and preferred dividends paid, in each case prior to
Frontier's ownership of the CTF Operations. Adjusting for these items
allows investors to better understand and analyze Frontier's financial
performance over the periods presented.

Management defines free cash flow as net cash provided from operating
activities less capital expenditures for business operations and
preferred dividends. In determining free cash flow, further adjustments
are made to exclude acquisition and integration expense, income taxes,
restructuring costs, one-time storm-related costs and associated capital
expenditures, and interest expense on commitment fees, which provides a
better comparison of core operations from period to period. Changes in
working capital accounts are excluded from this calculation due to
seasonality and specific timing of cash receipts and disbursements
between various reporting periods.

Adjusted free cash flow is defined as free cash flow, as described
above, adjusted by excluding interest expense, prior to Frontier's April
1, 2016 ownership of the CTF Operations, on debt Frontier incurred to
finance the Verizon Transaction, and preferred stock dividends paid
prior to April 1, 2016.

In 2018, the Company is introducing a more traditional and simplified
measurement for free cash flow: operating free cash flow. Management
defines operating free cash flow, a non-GAAP measure, as net cash
provided from operating activities less capital expenditures.

Management uses free cash flow, adjusted free cash flow, and operating
free cash flow to assist it in comparing liquidity from period to period
and to obtain a more comprehensive view of Frontier's core operations
and ability to generate cash flow. Management believes that these
non-GAAP measures are useful to investors in evaluating cash available
to service debt and pay dividends. These non-GAAP financial measures
have certain shortcomings; they do not represent the residual cash flow
available for discretionary expenditures, as items such as debt
repayments and common stock dividends are not deducted in determining
such measures. Management compensates for these shortcomings by
utilizing these non-GAAP financial measures in conjunction with the
comparable GAAP financial measures.

Dividend payout ratio is calculated by dividing the dividends paid on
common stock (as adjusted) by adjusted free cash flow. Dividends paid on
common stock has been adjusted to exclude dividends paid on common stock
issued in June 2015, from the date of issuance until April 1, 2016, when
the proceeds of the issuance were used in the Verizon Transaction that
generated adjusted free cash flow from that date. Management uses the
dividend payout ratio as a metric to indicate the proportion of
Frontier's adjusted free cash flow that is used to pay dividends to its
common shareholders. Management has made adjustments to exclude the
impact of financing raised in connection with the Verizon Transaction
during periods prior to Frontier's ownership of the CTF Operations,
which management believes provides a useful comparison from period to
period.

Adjusted operating expenses is defined as operating expenses adjusted to
exclude depreciation and amortization, acquisition and integration
costs, goodwill impairment charges, GAAP pension/OPEB expense (including
pension settlement costs), stock-based compensation expense, one-time
storm-related costs, and restructuring costs and other charges.
Investors have indicated that this non-GAAP measure is useful in
evaluating Frontier's performance.

The information in this press release should be read in conjunction
with the financial statements and footnotes contained in Frontier's
documents filed with the U.S. Securities and Exchange Commission.

Conference Call and Webcast

Frontier will host a conference call today at 4:30 P.M. Eastern time. In
connection with the conference call and as a convenience to investors,
Frontier furnished today, under cover of a Current Report on Form 8-K,
additional materials regarding fourth quarter 2017 results. The
conference call will be webcast and may be accessed in the Webcasts
& Presentations
 section of Frontier's Investor Relations website
at www.frontier.com/ir.

A telephonic replay of the conference call will be available from 8:00
P.M. Eastern Time on February 27, 2018, through 8:00 P.M. Eastern
Time on March 4, 2018, at 888-203-1112 for callers dialing from
the U.S. or Canada, and at 719-457-0820 for those dialing from outside
the U.S. or Canada. Use the passcode 7023822 to access the replay. A
webcast replay of the call will be available at www.frontier.com/ir.

About Frontier Communications

Frontier Communications Corporation (NASDAQ:FTR) is a leader in
providing communications services to urban, suburban, and rural
communities in 29 states. Frontier offers a variety of services to
residential customers over its fiber-optic and copper networks,
including video, high-speed internet, advanced voice, and Frontier Secure®
digital protection solutions. Frontier Business offers communications
solutions to small, medium, and enterprise businesses. More information
about Frontier is available at www.frontier.com.

Forward-Looking Statements

This earnings release contains "forward-looking statements," related to
future, not past, events. Forward-looking statements express
management's expectations regarding Frontier's future business,
financial performance, and financial condition, and contain words such
as "expect," "anticipate," "intend," "plan," "believe," "seek," "see,"
"may," "will," "would," or "target." Forward-looking statements by their
nature address matters that are, to different degrees, uncertain. For
Frontier, particular uncertainties that could cause actual results to be
materially different than those expressed in such forward-looking
statements include: competition from cable, wireless and wireline
carriers, satellite, and OTT companies, and the risk that Frontier will
not respond on a timely or profitable basis; Frontier's ability to
successfully adjust to changes in the communications industry, including
the effects of technological changes and competition on its capital
expenditures, products and service offerings; Frontier's ability to
implement organizational structure changes; risks related to the
operation of Frontier's properties, including Frontier's ability to
retain or obtain customers in Frontier's legacy markets and those
acquired from Verizon; Frontier's ability to realize anticipated cost
savings, and ability to meet commitments made in connection with the
Verizon acquisition; reductions in revenue from voice customers that
Frontier cannot offset with increases in revenue from broadband and
video subscribers and sales of other products and services; Frontier's
ability to maintain relationships with customers, employees or
suppliers; Frontier's ability to attract/retain key talent; the effects
of governmental legislation and regulation on Frontier's business; the
impact of regulatory, investigative and legal proceedings and legal
compliance risks; government infrastructure projects that impact capital
expenditures; continued reductions in switched access revenues as a
result of regulation, competition or technology substitutions; the
effects of changes in the availability of federal and state universal
service funding or other subsidies to Frontier and its competitors;
Frontier's ability to meet its remaining CAF II broadband buildout
obligations on a timely basis; Frontier's ability to effectively manage
service quality and meet mandated service quality metrics; Frontier's
ability to successfully introduce new product offerings; the effects of
changes in accounting policies or practices, including potential future
impairment charges with respect to intangible assets; Frontier's ability
to effectively manage its operations, operating expenses, capital
expenditures, debt service requirements and cash paid for income taxes
and liquidity; the effects of changes in both general and local economic
conditions in the markets that Frontier serves; the effects of increased
medical expenses and pe

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