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Frontier Communications (FTR - Analyst Report), a provider of telecommunication services to rural areas, reported fourth quarter 2012 adjusted earnings per share of 6 cents, missing the Zacks Consensus Estimate by a penny. Comparing year over year, the results decreased 14.3% from 7 cents.

Quarterly revenue of $1,232.5 million failed to meet the Zacks Consensus Estimate of $1,238.0 million and also dropped 3.9% from the year-ago quarter. Lower customer revenue along with less of switched access and subsidiary impacted the quarterly performance.

On a year-over-year basis, local and long-distance service revenues fell 8.5% to $542.5 million and data and Internet services revenues fell 1.0% to $456.4 million. Other revenues registered an improvement of 17.9% to $92.4 million.

For full-year 2012, Frontier posted earnings per share of 26 cents (beating both our projection and last year’s figure by a penny), on revenues of $5,011.9 million (down 4.4% year over year).

Operating Income

Adjusted operating income in the fourth quarter dropped 1.8% year over year to $270.3 million. Operating margin was 21.9% compared with 21.4% in the year-ago period.

Customer Trends

At the end of 2012, the number of residential customers was 2,887,063, while business subscribers totaled 286,106. Customer churn was 1.62% versus 1.69% in 2011.

Frontier added approximately 5,300 broadband users in the fourth quarter to reach 1,787,561 (up 1.3% year over year). While the company added 20,900 satellite TV customers, it lost 2,800 FiOS video customers. As of December 31, 2012, video subscribers netted 346,627.


Frontier exited 2012 with $1,326.5 million of cash and cash equivalents compared with $326.1 million at year-end 2011. Long-term debt increased to $8,381.9 million at the end of the year from $8,224.4 billion at the end of 2011.

In 2012, the company incurred capital expenditure of $748.4 million for business operation, almost the same as last year. Free cash flow was $975.3 million against $1,121.5 million a year ago.


The company paid a total of $399.4 million in dividend in 2012, equal to a dividend payout of 41% of free cash flow compared with dividend payments of $746.4 million, which was equal to a dividend payout of 67% in the prior year.


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


We are optimistic about several initiatives taken by Frontier to reduce its revenue losses. The enhancement of broadband deployments to rural areas and the conversion of Verizon Communications (VZ - Analyst Report) lines would lead to higher profits and free cash flows.

Apart from new product deployments, broadband expansion and cash flow management, the company is collaborating with other firms to offer differentiated products to complement customer requirements. These actions will provide a competitive advantage to Frontier’s performance over other industry players such as Cbeyond Inc. and Consolidated Communications Holdings Inc. (CNSL - Snapshot Report).

Frontier currently carries a Zacks Rank #4 (Sell).

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