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TheStreet Open House

Frontier Communications Reports 2012 Fourth Quarter And Full Year Results

Frontier Communications Corporation (NASDAQ: FTR) today reported fourth quarter 2012 revenue of $1,232.6 million, operating income of $235.7 million and net income attributable to common shareholders of Frontier of $24.9 million, or $0.02 per share. Excluding severance costs of $17.2 million, integration costs of $13.5 million, losses on the early extinguishment of debt of $19.3 million and discrete tax items of $0.4 million (combined impact of $33.0 million or $0.04 per share after tax), non-GAAP adjusted net income attributable to common shareholders of Frontier for the fourth quarter of 2012 would be $57.9 million, or $0.06 per share.

“During 2012, we successfully completed the integration of our July 2010 acquisition which tripled the size of the Company,” said Maggie Wilderotter, Chairman and CEO of Frontier Communications. “We completed all of the system conversions, achieved cost savings of over $650 million, dramatically improved our network’s speed and capacity and have identified additional cost reductions of $140 million for achievement in 2013 related to continuing operational streamlining which will be partially offset by investments in growth initiatives.

“Our fourth quarter revenue was slightly lower than anticipated; mostly attributable to a decline in voice revenues as customers chose unlimited residential voice packages and standalone Simply Broadband options. Positives for the quarter versus third quarter of 2012 included continued improvement in both consumer customer retention and average revenue per business customer. Our Q4 Apple gift card promotion gained traction in December which has carried over into January 2013. Cash operating expenses also improved quarter over quarter when the one time expenses for storm costs and gift card promotion costs are factored out.”

Revenue for the fourth quarter of 2012 was $1,232.6 million as compared to $1,252.5 million in the third quarter of 2012 and $1,283.2 million in the fourth quarter of 2011. The decrease in revenue for the fourth quarter of 2012 as compared to the fourth quarter of 2011 is attributable to decreases in the number of residential and business customers, and lower switched and nonswitched revenue.

At December 31, 2012, the Company had 2,887,100 residential customers and 286,100 business customers. During the three months ended December 31, 2012, we lost approximately 50,400 customers as compared to 51,800 customers in the three months ended September 30, 2012 and 65,700 customers in the three months ended June 30, 2012. Also, during the most recent quarter, the average monthly total revenue per customer remained consistent with the third quarter of 2012 and increased $4.63, or 4%, as compared with the fourth quarter of 2011.

The Company’s broadband customer net additions were approximately 5,300 during the fourth quarter of 2012. The Company had 1,787,600 broadband customers at December 31, 2012. The Company added 20,900 satellite TV customers and lost 2,800 FiOS video customers during the fourth quarter of 2012. The Company had 346,600 video customers at December 31, 2012.

Network access expenses for the fourth quarter of 2012 were $108.5 million as compared to $102.1 million in the third quarter of 2012 and $120.8 million in the fourth quarter of 2011. The Company incurred promotion costs of $5.5 million in the fourth quarter of 2012 related to its Apple gift card promotion.

Other operating expenses for the fourth quarter of 2012 were $570.7 million as compared to $572.3 million in the third quarter of 2012 and $548.6 million in the fourth quarter of 2011. The Company incurred storm related expenses of approximately $6.8 million in the fourth quarter of 2012 and $15 million in the third quarter of 2012. Included in other operating expenses were severance costs of $17.2 million in the fourth quarter of 2012, $6.8 million in the third quarter of 2012 and $1.1 million in the fourth quarter of 2011. The fourth quarter of 2012 severance cost relates to 537 employees leaving the business in connection with the Company’s plan to reduce both wage and non-wage costs following the completion of its integration activities. In the fourth quarter 2012, other operating expenses were less than the third quarter of 2012, excluding severance costs in both periods, by $12.0 million primarily due to decreased compensation costs resulting from reduced headcount and lower storm related costs.

Depreciation and amortization for the fourth quarter of 2012 was $304.0 million as compared to $298.4 million in the third quarter of 2012 and $341.0 million in the fourth quarter of 2011. Amortization expense decreased by $42.5 million in the fourth quarter of 2012 as compared to the fourth quarter of 2011, primarily due to the accelerated amortization in the fourth quarter of 2011 of certain software licenses no longer required for operations and the amortization associated with certain Frontier legacy properties that were fully amortized in March 2012.

Integration costs of approximately $13.5 million ($0.01 per share after tax) were incurred during the fourth quarter of 2012, as compared to approximately $4.5 million in the third quarter of 2012 and $42.2 million ($0.03 per share after tax) in the fourth quarter of 2011, in connection with our integration of the acquired properties. These non-recurring costs in the fourth quarter of 2012 were principally incurred in connection with final network and operations integration work and the consolidation of certain facilities. Our integration costs and related capital expenditures were completed as of December 31, 2012.

Operating income for the fourth quarter of 2012 was $235.7 million (reflecting lower depreciation and amortization, integration costs and network access expenses as compared to the fourth quarter of 2011) and operating income margin was 19.1 percent as compared to operating income of $275.2 million and operating income margin of 22.0 percent in the third quarter of 2012 and operating income of $230.5 million and operating income margin of 18.0 percent in the fourth quarter of 2011.

Excluding integration costs and severance costs, operating income and operating income margin for the three months ended December 31, 2012 would have been $266.5 million and 21.6 percent, respectively. Excluding the comparable adjustments in each period, operating income and operating income margin for the three months ended September 30, 2012 would have been $286.5 million and 22.9 percent, respectively, and for the three months ended December 31, 2011 would have been $273.8 million and 21.3 percent, respectively. Operating income, excluding integration costs and severance costs, decreased $20.0 million in the fourth quarter of 2012 as compared to the third quarter of 2012 principally due to lower revenue.

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