Frontier Communications Q1 Profit Rises; Adj. EPS Tops Estimate - Update

Frontier FTR 050610

Telecommunications services provider Frontier Communications Corp. (FTR) on Thursday reported a 17% growth in first-quarter profit, reflecting lower operating expenses, despite a 3% decline in revenues. On a per share basis, adjusted earnings beat Street view by a penny.

For the first quarter, net earnings attributable to the company's shareholders were $42.57 million or $0.14 per basic share as compared with $36.30 million or $0.12 per basic share in the prior-year period. Excluding acquisition and integration cost of $10.4 million, attributable net earnings for the 2010 first quarter would have been $49.1 million or $0.16 per basic share.

On average, 13 analysts polled by Thomson Reuters expected Frontier to report earnings of $0.15 per share for the quarter. Analysts' estimates typically exclude special items.

The 2010 first quarter includes acquisition and integration costs of $10.4 million. The group noted that the increase in first quarter 2010 was primarily the result of improvement in operating income, partially offset by increased income tax expense and interest expense.

Revenues for the quarter dropped 3% to $519.85 million from $537.96 million in the comparable period. Frontier attributed the decline in revenues to decreases in the number of residential and business customers, and in switched access revenues and directory revenues, partially offset by a 4% growth in data and internet services revenues. Analysts expected the company to generate revenues of $516.85 million for the quarter.

In the sequential fourth quarter, the Stamford, Connecticut-based company reported attributable net earnings of $4.4 million or $0.01 per basic share on revenues of $520.98 million.

Quarterly revenues from local and long distance services were $223.58 million versus $242.31 million last year, and switched access and subsidy revenues dropped to $88.78 million from $90.07 million in the 2009-year period. Revenues for the period from directory services totaled $24.62 million, down 11% from $27.71 million in the prior year, and other revenues fell to $19.50 million from $21.15 million in the year-earlier quarter. Meanwhile, revenues from data and internet services grew 4% to $163.37 million from $156.73 million a year ago.

Frontier's monthly customer revenue per access line increased nearly 2% year-on-year, and monthly total revenue per access line were up 3% from the prior year, as the company has continued to "successfully" sell additional products and services, partially offset by reductions in regulatory revenues.

Commenting on the results chairman and chief executive officer Maggie Wilderotter said, "Frontier's first quarter 2010 results show the consistency of our sound financial performance, which was a driving factor in the successful $3.2 billion financing last month for the Verizon transaction."

Operating income for the fourth quarter rose 16% to $161.86 million from $139.51 million in the year-ago quarter. Operating income margin improved to 31.1% from 25.9% in the prior year. On an adjusted basis, operating income margin was 34.6% versus 27.9% in the previous year.

During the three-month period, total operating expenses decreased 10% $357.99 million from $398.45 million in the same quarter last year. Income tax expense for the quarter were up to $32.06 million from $22.05 million in the previous-year quarter, and interest expense totaled $93.79 million, up from $88.75 million in the prior year.

In the first quarter of 2010, the company incurred one-time acquisition and integration costs of $10.37 million with regard to its previously announced pending acquisition of about 4.1 million access lines from Verizon Communications Inc.

During the 2010 first quarter, Frontier's residential and business customers declined by about 26.60 thousand. At March 31, 2010, the company had 1.23 million and 138.20 thousand residential and business customers, respectively. The group said it added approximately 8,100 net High-Speed Internet customers and nearly 2,800 video customers during the quarter.

Additionally, Wilderotter said, "The market continues to show confidence in Frontier and our transformational transaction with Verizon, a sentiment that was echoed recently in the approvals from the states of Oregon, Washington and Illinois. We expect to close the transaction at the end of this quarter, and look forward to bringing increased broadband to our new communities."

On April 12, 2010, Frontier announced that New Communications Holdings Inc. or Spinco, a subsidiary of Verizon Communications, had completed its private placement of $3.2 billion aggregate principal amount of Senior Notes. The gross proceeds of the offering were deposited into an escrow account.

Spinco intends to use the net proceeds from the offering to fund the entire required special cash payment to Verizon in relation to the spin-off of Spinco to Verizon's shareholders and subsequent merger of Spinco with and into Frontier. Eight of the nine required state regulatory approvals for the Verizon transaction have been obtained, noted Frontier.

Later, on April 16, 2010, Verizon delivered a notification to Frontier that the segregation of the Spinco business, other than the portion conducted in West Virginia, from Verizon's other businesses had been completed.

Among peers, AT&T, Inc. (T) on April 21 reported a 21% decline in first-quarter profit, hurt by a charge related to the new federal health-care law. First-quarter net income attributable to AT&T declined to $2.48 billion or $0.42 per share from $3.13 billion or $0.53 per share last year. Quarterly operating revenues edged up 0.3% to $30.65 billion from $30.57 billion in the same quarter a year earlier.

Another competitor, Qwest Communications International Inc. (Q) yesterday reported a sharp decline in its first-quarter profit, hurt by health care charges and lower revenues. The Denver, Colorado-based company's first-quarter net income was $38 million or $0.02 per share compared to $206 million or $0.12 per share in the previous year. Qwest's revenues for the quarter reached $2.97 billion, down 6.5% from $3.17 billion in the prior-year quarter.

FTR is currently trading on the New York Stock Exchange at $7.81 per share, down $0.07 or 0.89%, on a volume of 264,958 shares. In the past 52-week period, the stock traded in a range of $6.43 to $8.57.

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