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Frontier Communications Corporation (FTR - Analyst Report), a provider of telecommunication services to rural areas, reported adjusted earnings per share of 6 cents in second-quarter 2013, down 25% from the prior-year figure. The result was in line with the Zacks Consensus Estimate.

Quarterly revenues of $1,190.5 million failed to meet the Zacks Consensus Estimate of $1,196.0 million and also dropped 5.4% from the year-ago quarter. Lower voice revenues along with reduced switched and non-switched access revenues impacted the quarterly performance, partially offset by increased data service revenues.

On a year-over-year basis, local and long-distance service revenues fell 8.7% to $513.8 million, while data and Internet services revenues improved 3.4% to $467.4 million. Other revenues fell 19.8% to $70.6 million.

Operating Income

Adjusted operating income in the second quarter improved 0.61% year over year to $266.2 million. Operating margin was 21.8% compared with 24.9% in the year-ago period.

Customer Trends

At the end of the second quarter, the number of residential customers was 2,842,883 while business subscribers totalled 278,131. Customer churn was 1.64%, flat in comparison to the last year comparable quarter.

Frontier added approximately 29,511 broadband users in the second quarter to reach 1,812,110 (up 3.6% year over year). As of Jun 30, 2013, video subscribers were 380,180, with the addition of 15,219 customers.

Liquidity

Frontier exited the second quarter with $548.6 million in cash and cash equivalents compared with $1,326.5 million at 2012 end. Long-term debt decreased to $7,900.9 million from $8,381.9 million at the end of 2012.

The company incurred capital expenditure of $137.5 million for business operation, while free cash flow was $175.9 million.

Dividend

The company paid $100.0 million in dividends in the second quarter, equal to a dividend payout of 57% of free cash flow.

Guidance

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

Other Stocks

Another telecom company, Century Link Inc. (CTL - Analyst Report), reported second-quarter results on Aug 7, 2013, after the market closed. The company’s adjusted earnings of 69 cents surpassed the Zacks Consensus Estimate of 67 cents.

Outlook

We appreciate the various strategic initiatives taken by Frontier, which 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 - Analyst Report) and Vodafone Group Plc. (VOD - Analyst Report).

However, we prefer to remain on the sidelines based on strong competition in the telecommunication market, regulatory issues and the effects of high promotional costs as well as customer loss in certain segments, which continue to pose major threats to Frontier.

Frontier currently carries a Zacks Rank #3 (Hold).

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