Frontier Communications (FTR) announced third quarter results with adjusted (excluding acquisition and integration costs) earnings per share of 18 cents, exceeding the Zacks Consensus Estimate of 16 cents. Net income increased 11% year over year to $52.2 million, primarily due to gain on debt repurchases and higher operating income that increased 5% year over year to $172.5 million.
Revenues Remains under Pressure
The company reported revenues of $526.8 million, reflecting a 6% decrease over the year-ago quarter. The year-over-year decline is attributable to lower local, long-distance and switched access revenues coupled with decline in basic access lines. However, this was partially offset by increases in data and Internet service revenues.
Revenues for local services declined 8% year over year to $193.6 million while data and Internet services revenue increased 4% to $160 million. Switched access service revenues declined 8% year over year to $91.2 million while revenues from long-distance services fell 9% from the year-ago quarter to $42.4 million.
Access Line Losses Persist
Frontier lost 37,400 voice-access lines in the quarter (a sequential increase) and had 2.15 million access lines, down 6% year over year. Access line erosion in both residential and business segments continues. The company contends with loss of legacy fixed telephony business to wireless and other competitive offerings including Voice over Internet Protocol (VoIP) services by cable TV operators. Approximately 65% of Frontier’s access lines are exposed to cable voice service offerings.
Broadband & Video Continue to Expand
Frontier added approximately 7,500 high-speed Internet customers and registered 621,331 (up 9% year over year) total high-speed Internet customers at the end of the quarter. As a result of low customer acquisition costs and declining capital expenses, broadband remains more profitable than the company’s traditional local and long-distance services. The company added 7,200 video customers during the quarter, bringing the total number of customers to 164,535 (up 46% year over year).
Dividend & Guidance
Dividend payment for the third quarter equates to a payout of 65% of the free cash flow for the quarter. The company recently declared a fourth quarter dividend of 25 cents per share payable on Dec 31, 2009. Frontier remains committed to its aggressive dividend policy as the company targets to offer 60-70% return to its shareholders in the form of dividend in 2009 based on healthy free cash flow expectations.
Frontier has revised its capital expenditure and free cash flow guidance for 2009. The company now expects capital expenditure (excluding acquisition) of $240-$250 million, down from its previous forecast of $250-$270 million. Free cash flow (excluding acquisition and integration expenses) for 2009 is projected in the range of $470 million to $485 million, an improvement from the previous expectation of $460-$485 million.
Recent Key Developments
Frontier is expanding its broadband network in rural/underprivileged markets in West Virginia. The company has applied for federal funding of $55 million to deploy and connect fiber-optic cable from its central office to key public facilities, which will allow broadband speeds of up to 100 Meg.
Moreover, Frontier is set to lead the pure-play rural telecom market by acquiring the rural fixed-line business of Verizon Communications (VZ) in 14 states for approximately $8.6 billion. The company recently received shareholders approval as well as approvals from the states of California, Nevada and South Carolina for this transaction.
The acquisition, which is expected to complete in second-quarter 2010, will offer meaningful cost synergies and opportunities for revenue growth through expanded broadband penetration, attractive bundled service offerings and improved customer retention.
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