Frontier Communications Corp. Earnings: Is Growth Sustainable?

On Tuesday, Frontier Communications (FTR) will release its quarterly report, and investors have been exceedingly optimistic about the rural telecom's prospects once it closes on its acquisition of one of AT&T's regional markets. Yet the bigger question Frontier faces is whether it can turn the short-term bump the acquisition will give it into a longer-term competitive advantage against Windstream (WINMQ), CenturyLink (LUMN -5.15%), and other players in the industry.

Frontier Communications offers the same phone and broadband Internet services that AT&T and other larger telecoms give their customers, but like Windstream and CenturyLink, Frontier focuses on less urban areas that aren't as well served by the bigger players in the industry. With fewer choices, Frontier's customers can be more loyal than those in urban areas, but competition from cable providers and other players poses a substantial threat, especially as rural customers get more comfortable relying solely on wireless phone service and give up their landlines. Let's take an early look at what's been happening with Frontier Communications over the past quarter and what we're likely to see in its report.

Stats on Frontier Communications

Source: Yahoo! Finance.

Will Frontier earnings keep gaining ground?
Analysts have had mixed views on Frontier earnings in recent months. They've boosted their first-quarter estimates by a penny per share, but they've reduced their full-year 2014 projections by the same amount. The stock has soared, though, rising 26% since late January.

Frontier's fourth-quarter earnings report was a big contributor to bullishness in its stock. The company managed to raise its earnings by a penny per share from year-ago levels. Although revenue fell by about 4% year over year, that's not inconsistent with the general deterioration in the rural telecom's revenue figures over the longer term. Frontier Communications did a good job of replacing falling customer counts for landlines, adding 28,000 broadband customers during the quarter.

Source: Chas Redmond, via Wikimedia Commons.

Still, the concern that many have about Frontier Communications is that falling revenue could eventually make it extremely difficult for the company to grow earnings. CenturyLink in particular has done a better job of keeping revenue up, and most investors expect Frontier Communications to have a hard time avoiding a drop in earnings as well. Other important metrics, such as switched-access minutes, have also declined at a faster rate than what CenturyLink has seen.

At the same time, Frontier Communications' free cash flow will suffer as a result of acquisition costs tied to the AT&T Connecticut buyout. If that happens, some investors fear that Frontier will have to cut its dividend for a third time in four years, although Windstream has thus far avoided a dividend cut despite arguably being just as extended financially. CenturyLink, by contrast, also cut its dividend, but its cash-flow picture looks a lot more attractive as a result of that voluntary reduction.

But Frontier has had some success with its broadband offerings. In March, the company presented at an industry conference and said that its low-cost broadband service had managed to retain customers at a 77% rate, with some customers choosing to upgrade to even faster speeds once they got a taste of Frontier's service. As Frontier gets new customers from the AT&T Connecticut acquisition, it will want to sell them similar broadband service in order to keep and build revenue.

In the Frontier Communications earnings report, watch to see how the acquisition is going, and be ready to compare Frontier's growth metrics against those of Windstream and CenturyLink once all three have reported. If Frontier can become less of a landline company and more of an Internet service provider, then it could eventually manage to grow even as its legacy business segments fades away.

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