FairPoint Communications, Inc. (FRP) on Friday reported a 33.9% decline in its first-quarter profit, mainly due to a fall in local revenue on increased competition and non-recurring credits. Revenues for the first quarter declined 5.2%. Shares of FRP declined around 8% in the pre-market activity on the NYSE.
FairPoint completed its merger with Northern New England Spinco Inc., or Spinco, an entity that held Verizon Communications Inc.'s (VZ) landline and certain related operations in Maine, New Hampshire and Vermont, on March 31, 2008. The merger was followed by the spin-off of the shares of Spinco to Verizon stockholders, resulting in Verizon stockholders collectively owning about 60% of FairPoint stock.
For the first quarter, the company's GAAP net income, reflecting only the results of Spinco business, was $9.54 million or $0.18 per share, lower than $14.44 million or $0.27 per share for the same period in 2007.
GAAP revenues for the first quarter of 2008 were $282.41 million, down 5.2% from $297.95 million in the first quarter of 2007, mainly due to a decline in local revenue on increased competition, partially offset by increases in intrastate and data and Internet services revenues. Non-recurring credits issued to certain customers also resulted in lower revenues in the quarter.
Income from operations fell to $29.54 million from $40.30 million a year ago.
Commenting on the results, Gene Johnson, FairPoint chairman and CEO, stated, "We believe that Spinco access line losses trended higher in the first quarter than what was reported to us in previous quarters due principally to competitors' marketing and promotional activity around the time of the closing of the merger. We are implementing marketing and operating strategies that are expected to reduce the rate of loss of access lines and increase HSD sales in the Spinco business."
On a pro forma combined basis, reflecting the operations of both Spinco and Legacy FairPoint, as if the merger had occurred as of January 1, 2006, adjusted EBITDA was $162 million, lower than adjusted EBITDA of $179 million in the prior year. Excluding the non-recurring revenue credits in the 2008-first quarter, adjusted EBITDA would have been $164 million. The company noted that the decline was mainly due to lower revenues, particularly in the Northern New England business.
On a pro forma basis, HSD penetration increased to 18.8% of voice access lines as of March 31, 2008 from 15.6% as of March 31, 2007. Voice access lines at the end of the quarter were 1,570,169, down 9.1% from 1,727,954 reported last year.
Total pro forma access line equivalents were 1,865,747 as of March 31, 2008, down 6.6% from the prior year.
Gene Johnson added, "Once again, Legacy FairPoint has delivered strong incremental growth in our high-speed data, or HSD products. Our marketing focus on high margin offerings that provide consistent average revenue per unit, or ARPU, is providing measurable benefits. We are implementing a complementary yet customized strategy for the recently acquired Spinco business."
In an April 18 research note, brokerage firm Lehman Brothers reiterated its rating on Fairpoint at 'Overweight', with $22 price target.
FRP closed Thursday's regular trading session at $9.78, up $0.21, on a volume of 905 thousand shares. In the pre-market activity, shares declined $0.78 or 7.98% to $9.00. In the past 52 weeks, shares traded in a range of $6.61-$19.83.
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