Within the telecom industry, most investors focus on cutting-edge technology and lightning-fast connection speeds. Yet companies like Frontier Communications (NASDAQ:FTR) have traditionally catered to the lower-end customer, seeking to entice them to upgrade to larger television packages, faster Internet speeds, and more comprehensive packages of services. Coming into Monday morning's second-quarter financial report, Frontier investors still weren't sure whether the company's acquisition-heavy strategy would pay off in the long run. Yet even though the company's results didn't give investors everything they wanted to see, Frontier nevertheless saw its stock soar on hopes that it could push forward and boost its regular cash flow. Let's take a closer look at Frontier Communications' latest results to see what happened to the company.
A new Frontier?
Frontier's second-quarter results showed both the challenges and the opportunities that the telecom company has seen in recent months. Revenue of $1.37 billion was up 19% from year-ago levels, as the impact of recent acquisitions helped boost Frontier's total sales. The number was slightly above the $1.36 billion in sales that most investors had expected. Frontier posted a net loss of $28 million on a GAAP basis, but after making changes to incorporate certain extraordinary items, adjusted net earnings of $0.03 per share matched the consensus estimate among investors.
Frontier saw mixed signs within its core business. On one hand, the telecom company managed to add 29,200 new net broadband customers, raising its total to nearly 2.41 million. Yet more broadly, total residential customer counts fell 0.6% to 3.18 million, and the number of business customers also fell 0.6% to just under 300,000. From a dividend standpoint, Frontier prefers to look at its measure of free cash flow, and a slight increase to $200 million brought Frontier's free-cash-flow payout ratio down a percentage point to 53%.
One big milestone that Frontier pointed to involved its efforts to raise financing for its upcoming purchase of assets in Texas, California, and Florida from Verizon. The company sold about $800 million in common stock and another $1.87 billion in convertible preferred stock, and that money will go toward paying for the assets Frontier is getting in the deal. Even though the preferred stock carries an interest rate of more than 11%, Frontier worked hard to avoid needing to use any more debt financing than it had to in order to move the transaction forward.
CEO Dan McCarthy had strong praise for Frontier's performance. "We continued our track record of strong broadband net additions," McCarthy said, and overall, "These strong revenue results reflect solid execution in both the residential and business segments."
Can Frontier keep looking ahead?
Frontier also made positive changes to its full-year guidance. The company now expects to bring in between $825 million and $865 million in free cash flow for the year, spending between $700 million and $750 million in capital expenditures.
The change in guidance reflects the fact that Frontier choose to accept the support of phase 2 of the FCC's Connect America Fund program. By accepting the full $283 million that the program allocated to the company, Frontier hopes to expand its broadband availability and capability even further. Frontier believes that being part of the program should have a positive impact on shareholders in the long run.
The big issue going forward, though, is the Verizon deal. Getting a bigger customer footprint in three key state markets will be a huge opportunity for Frontier, especially because many of those customers are already using higher-end services. If Frontier can get those existing customers to stick with their products while also luring more people onto those higher-end services, it could produce a nice boost to business results that most Frontier shareholders aren't used to seeing.
Frontier shareholders celebrated the news, sending the stock up nearly 10% as of 12:30 p.m. EDT. Even though some question its business strategy, Frontier Communications has done a good job of generating cash from its assets, and running another huge acquisition through the press could once again help sustain Frontier's ability to pay such attractive dividends to its income-hungry shareholders.