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Frontier Communications Reports 2014 First Quarter Results

Wednesday 07. May 2014 - Frontier Communications Corporation (NASDAQ: FTR) today reported first quarter 2014 revenue of $1,154.0 million, operating income of $226.0 million and net income attributable to common shareholders of $39.3 million, or $0.04 per share. Excluding acquisition and integration costs of $10.6 million, acquisition-related interest expense of $7.5 million and severance costs of $0.4 million, partially offset by discrete tax items of $2.9 million (combined impact of $9.1 million after tax), non-GAAP adjusted net income attributable to common shareholders for the first quarter of 2014 is $48.4 million, or $0.05 per share.

“We are extremely pleased to report that the strong momentum we experienced in all four quarters of 2013 continued in the first quarter of 2014,” said Maggie Wilderotter, Frontier’s Chairman and Chief Executive Officer. “First quarter broadband net additions of more than 37,000 established yet another new quarterly record for Frontier, growing share in 91% of our markets. In addition, our first quarter go-to-market and retention efforts saw the lowest drop in residential customers in over five years with fewer than 10,000 customers lost in the quarter. Our monthly customer recurring revenue continues to stabilize and our new Frontier Secure Broadband bundles have had strong sales out of the gate. Small business bundles have gained traction and we are excited about our new Internet of Things (IoT) product rollout in the second quarter based on our agreement to market the Dropcam portfolio. First quarter results also strengthened our dividend sustainability with a low 43% payout ratio.”
Dan McCarthy, Frontier’s President and Chief Operating Officer added, “In addition to achieving another strong quarter operationally, we have been making headway in laying the groundwork for integration of the AT&T Connecticut properties we are acquiring. Major conversion activities are under way and on schedule. In addition, we are focused on securing the necessary regulatory approvals, and we believe the acquisition will still close in the fourth quarter of 2014.”
Revenue for the first quarter of 2014 was $1,154.0 million as compared to $1,180.4 million in the fourth quarter of 2013 and $1,205.4 million in the first quarter of 2013. Total revenue for the first quarter of 2014 declined sequentially by $26.3 million, or 2.2%, from the fourth quarter of 2013 and by $51.4 million, or 4.3%, from the first quarter of 2013.
Customer revenue for the first quarter of 2014 of $1,020.9 million declined 2.3% sequentially as compared to $1,044.9 million in the fourth quarter of 2013 primarily due to lower voice revenue, partially offset by the increase in data services revenue, certain carrier dispute settlements that occurred in the fourth quarter of 2013, timing on certain CPE sales and lower non-switched access revenue due to the expected decline in wireless backhaul. Total residential revenue was $496.0 million for the first quarter of 2014 as compared to $501.6 million in the fourth quarter of 2013, a 1.1% sequential decrease in the quarter. Total business revenue was $525.0 million for the first quarter of 2014 as compared to $543.3 million in the fourth quarter of 2013, a 3.4% decline in the quarter.
At March 31, 2014, the Company had 2,793,900 residential customers and 266,400 business customers. The first quarter of 2014 resulted in a 49% sequential quarterly improvement, reflecting a loss of 9,600 customers as compared to 18,700 customers in the three months ended December 31, 2013 and 27,800 customers in the three months ended March 31, 2013. For the three months ended March 31, 2014, the Company improved the rate of decline in residential customers by 66% as compared to the three months ended March 31, 2013. The average monthly residential revenue per customer was $59.07 in the first quarter of 2014, an improvement of $0.28 as compared to $58.79 in the first quarter of 2013 and a decline of $0.37 as compared to $59.44 in the fourth quarter of 2013. The sequential quarterly decline in average monthly residential revenue per customer includes the impact of a November 2013 through January 2014 promotion with a bundled Frontier Secure offering.
During the three months ended March 31, 2014, the Company improved the rate of decline in business customers by 12% as compared to the three months ended March 31, 2013, losing approximately 4,400 customers as compared to 3,900 customers in the three months ended December 31, 2013 and 5,100 customers in the three months ended March 31, 2013. During the most recent quarter, the average monthly business revenue per customer was $651.53, or 1.0% higher than the first quarter of 2013 and 1.9% lower than the fourth quarter of 2013. The sequential quarterly decline in average monthly business revenue per customer is primarily due to lower business revenue from the decline in non-switched access revenue.
The Company’s broadband customer net additions were 37,200 during the first quarter of 2014. The Company had 1,903,800 broadband customers at March 31, 2014. The Company added 5,000 net video customers during the first quarter of 2014. The Company had 390,300 video customers at March 31, 2014.
Network access expenses for the first quarter of 2014 were $107.1 million as compared to $110.6 million in the fourth quarter of 2013 and $109.4 million in the first quarter of 2013.
Other operating expenses for the first quarter of 2014 were $528.9 million as compared to $516.4 million in the fourth quarter of 2013 and $541.5 million in the first quarter of 2013, with the sequential increase from the fourth quarter of 2013 primarily due to the seasonally higher payroll taxes. Included in other operating expenses were severance costs of $0.4 million, $2.1 million and $2.4 million in the first quarter of 2014, the fourth quarter of 2013 and the first quarter of 2013, respectively. Other operating expenses, excluding severance costs, in the first quarter of 2014 were lower than in the first quarter of 2013 by $10.5 million, primarily due to decreased compensation and benefit costs resulting from reduced headcount and lower outside service costs, partially offset by an increase in certain litigation reserves.
Depreciation and amortization for the first quarter of 2014 was $281.4 million as compared to $282.3 million in the fourth quarter of 2013 and $303.7 million in the first quarter of 2013. Amortization expense decreased by $11.1 million in the first quarter of 2014 as compared to the first quarter of 2013 due to lower amortization related to the customer base that is amortized on an accelerated method.
Acquisition and integration costs for the first quarter of 2014 were $10.6 million ($0.01 per share after tax) as compared to $9.7 million ($0.01 per share after tax) in the fourth quarter of 2013 in connection with the pending AT&T Connecticut transaction, as previously announced on December 17, 2013.
Operating income for the first quarter of 2014 was $226.0 million and operating income margin was 19.6 percent as compared to operating income of $257.6 million and operating income margin of 21.8 percent in the fourth quarter of 2013 and operating income of $250.8 million and operating income margin of 20.8 percent in the first quarter of 2013.
Interest expense for the first quarter of 2014 was $171.0 million as compared to $165.6 million in the fourth quarter of 2013 and $171.4 million in the first quarter of 2013. Interest expense remained relatively flat, as compared to the first quarter of 2013, primarily due to the $7.5 million recognized during the first quarter of 2014 related to commitment fees on the bridge loan facility in connection with the pending AT&T Connecticut transaction, offset by lower average debt levels resulting from the debt refinancing activities and debt retirements during 2013.
Income tax expense for the first quarter of 2014 was $17.2 million as compared to $24.3 million in the fourth quarter of 2013 and $33.3 million in the first quarter of 2013. Income tax expense decreased by $16.1 million in the first quarter of 2014 as compared to the first quarter of 2013 principally due to lower pretax income resulting from decreased operating income. The Company had an effective tax rate for the first quarter of 2014 and 2013 of 30.4% and 39.6%, respectively. The first quarter of 2014 includes discrete tax items arising from changes in state tax laws with an impact of $2.9 million in reduced income tax expense.
Net income attributable to common shareholders of Frontier was $39.3 million, or $0.04 per share, in the first quarter of 2014, as compared to $67.8 million, or $0.07 per share, in the fourth quarter of 2013 and $48.1 million, or $0.05 per share, in the first quarter of 2013. The first quarter of 2014 includes acquisition and integration costs of $10.6 million, acquisition related interest expense of $7.5 million and severance costs of $0.4 million, partially offset by discrete tax items of $2.9 million (combined impact of $9.1 million after tax). Excluding the impact of the aforementioned items, non-GAAP adjusted net income attributable to common shareholders of Frontier for the first quarter of 2014 would be $48.4 million, or $0.05 per share, as compared to $72.2 million, or $0.07 per share, in the fourth quarter of 2013 and $48.8 million, or $0.05 per share, in the first quarter of 2013.
Capital expenditures for Frontier business operations were $135.1 million for the first quarter of 2014 as compared to $189.0 million for the first quarter of 2013. The Company also incurred $10.3 million in capital expenditures during the first quarter of 2014 related to integration activities in connection with the pending AT&T Connecticut transaction. In the first quarter of 2014, the Company also used $6.4 million of the previously received Connect America Fund funding, as compared to $1.8 million in the first quarter of 2013.
Operating cash flow, as adjusted and defined by the Company in the attached Schedule A, was $521.5 million for the first quarter of 2014 resulting in an operating cash flow margin of 45.2%. Operating cash flow, as reported, of $507.4 million has been adjusted to exclude $10.6 million of acquisition and integration costs, $3.1 million of non-cash pension and other postretirement benefit costs and $0.4 million of severance costs.
Free cash flow, as defined by the Company in the attached Schedule A, was $235.2 million for the first quarter of 2014. The Company’s dividend represents a payout of 43% of free cash flow for the first quarter of 2014.
Working Capital
At March 31, 2014, the Company had a working capital surplus of $267.5 million, which includes the classification of certain debt maturing in the second quarter of 2014 of $215.1 million as a current liability.
Pension Contributions
The Company made total cash contributions to its pension plan of $11.6 million during the first quarter of 2014. We expect that we will make contributions of cash and/or other assets to our pension plan of approximately $100 million in 2014.
2014 Guidance Remains Unchanged
For the full year of 2014, the Company’s expectations for capital expenditures and free cash flow for Frontier business operations remain unchanged and are within a range of $575 million to $625 million and $725 million to $775 million, respectively. Acquisition and integration costs for the pending AT&T Connecticut transaction are excluded from this guidance. The Company expects that absent any further legislative changes in 2014, its cash taxes guidance remains unchanged and will be in the range of $130 million to $160 million for 2014 for our current business operations and our estimated pre-close integration expenditures. Our expectations to incur additional operating expenses of $140 million to $170 million and capital expenditures of $85 million to $105 million in 2014 related to integration activities in connection with the pending AT&T Connecticut transaction also remains unchanged.