Rural telecommunications firm and Motley Fool Income Investor recommendation Citizens Communications (NYSE:CZN) provided an early morning wake-up call with first-quarter earnings yesterday. The company reported a 10% jump in revenues to $556 million and a whopping 40% increase in earnings to $0.21 per share. Normally, that type of growth from a rural telco would have investors popping corks and giving high-fives, but there are some subtleties beneath the surface worth reviewing.
A few extraordinary items impacted Citizens' results this quarter. First, the acquisition of Commonwealth Telephone closed March 8 -- about four months before anticipated -- so 23 days' worth of results from Commonwealth is included in reported numbers. Also, a favorable settlement in a dispute with a carrier over access charges added $38.7 million to reported access revenue. This one-time settlement is a large contributor to Citizens' growth in revenue, earnings and free cash flow this quarter.
When looking at Citizens' performance without the extraordinary items, the results are much less exciting, though still respectable for a company in the competitive telecommunications market. Fortunately, the company has very up-front and detailed reporting that backs out the results from Commonwealth and the settlement to see how the core business operations performed. Without these two items, Citizens revenue would have dipped to $496.8 million. This would have resulted in $154.7 million in operating income, slightly below $157.3 million in the same quarter in 2006.
The core business languished largely because of the 3% decline in local services revenue as customers continue to leave for wireless or digital phone alternatives from competitors such as Verizon Communications (NYSE:VZ), AT&T (NYSE: T), and Comcast (NASDAQ:CMCSA). A few bright spots are that revenue from data and Internet services showed solid growth of 13.8%, and the average monthly revenue per average access line was $78.29, 3% higher than last year's $75.90.
So while the core operations at Citizens didn't knock my socks off, the early closing of the merger and other operational efficiencies helped boost the cash flow outlook for 2007 from $425 million to $450 million up to $500 million to $520 million. Additionally, progress in launching new products like municipal wireless networks with Motorola (NYSE:MOT) and bundled service packages is reason to believe Citizens can still grow in a tough market.
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Fool contributor Dave Mock factors in his age as an extraordinary item when competing against his son. He owns shares of Motorola. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.
