Frontier Disappoints in 1Q

Frontier Communications (FTR - Analyst Report), a provider of telecommunication services to rural areas, reported its first quarter adjusted earnings per share of 5 cents that missed the Zacks Consensus Estimate by a penny. Adjusted earnings remained flat with the year-ago level.

Adjusted earnings for the quarter exclude the negative impacts of $35.1 million in integration charges and $6.5 million in severance and early retirement charges.

Revenue

Revenue of $1,268.1 million surpassed of the Zacks Consensus Estimate of $1,260 million but dropped 5.8% year over year. The decline from the year ago quarter was due to lower residential and business customers, switched access, data services and video revenue.

On a year-over-year basis, local and long-distance services revenues dropped 9.9% to $572.2 million, while data and Internet services revenues declined 1.7% to $450.7 million. However, other revenues registered an improvement of 11.6% to $96.9 million.

Customer Trends

Frontier exited the quarter with 5.16 million total access lines, down 7.9% year over year from 5.61 million lines in the year-ago quarter. Both residential and business segments registered a year-over-year decline – of 9.2% and 5.7% respectively.

Frontier added approximately 11,693 broadband customers in the first quarter to reach 1.8 million (up 2.6% year over year) customers in service. The company added 4,351 video customers, bringing the total number of customers to 561,878 (up 2.8% year over year).

Liquidity

Frontier exited the quarter with $365.8 million of cash and cash equivalents compared with $326.1 million at year-end 2011. Long-term debt decreased to $7.6 billion at the end of first quarter from $8.2 billion at the end of 2011.

Frontier spent $$224.2 million as capital expenditure (including business operations and integration activities) in the first quarter compared to $209.1 million in the year-ago quarter. Free cash flow was $253.2 million compared to $252.9 million in the year-ago quarter.

Dividend

The company paid a total of $99.9 million in dividend in the first quarter, which equates to a dividend payout of 39% of free cash flow compared with dividend payments of $186.6 million, which equated to dividend payout of 74% in the year ago quarter

Guidance

For fiscal 2012, the company’s guidance remains unchanged. Capital expenditures and free cash flow, excluding integration expenses and integration capital expenditures, in the bands of $725-$775 million and $0.9–$1 billion, respectively. The company expects integration expenses and integration capital expenditures of approximately $80 million and $40 million, respectively.

Outlook

Frontier focuses on generating new revenues through customer retention, customer wins, new product deployments, broadband expansion, and profitability and cash flow management through reductions in operating expenses and capital expenditures. In addition, the reduction of access line losses would boost Frontier’s profitability and provide cost synergies going forward.

However, intense competition, a highly leveraged balance sheet, regulatory pressure as well as integration risks in converting the acquired Verizon (VZ - Analyst Report) properties into its own system might limit the earnings potential in the upcoming quarters.

Consequently, we maintain our long-term Neutral recommendation supported by a Zacks #3 Rank (Hold).