A Lot of "Ifs" for Frontier

I'm getting dizzy from all the spin Frontier Communications (NAS: FTR) has put on its first-quarter earnings release.

The reality: A 51% drop in earnings compared to the same period last year.

And the twist, from chairman and CEO Maggie Wilderotter: "Frontier's successful systems conversion of the remaining nine states in March [referring to the telecom resources it acquired from Verizon (NYS: VZ) in a 2010 deal] has enabled us to turn the page from acquisition integration to a focus on revenue growth, broadband penetration, and operational excellence."

Many stockholders did not buy Wilderotter's perspective. The share price dropped more than 7% on Monday after the company filed its earnings with the SEC. Then it dropped another 9% the following day.

Freestyle cash-flow reporting
Disingenuousness abounded in the company's presentation of its free cash flow. By Frontier's calculations, it had $253 million in FCF in the first quarter. But by the typically accepted method of calculating free cash flow -- i.e., net cash from operating activities minus capital expenditures -- that figure should be $158 million.

Mommy, where do dividends come from?
Dividends come out of free cash flow, and the payout ratio of dividends to free cash flow is an important data point for income-hungry investors concerned with the viability of those dividends. Using Frontier's free cash flow number produces a dividend/FCF figure of 39%. Using my calculated FCF number, that ratio becomes 63% -- not so reassuring.

The company has been growing its cash reserves, though. Actual cash and equivalents did increase to $365.8 million from last quarter's 326.1 million. Frontier CFO Donald Shassian said during the company's conference call: "Cash will continue to build. This is generating a lot of cash above our dividend, and that cash will be used to pay down the debt."

And speaking of debt, the company has long-term debt of $7.6 billion, with $674.7 million due within one year. But don't worry, said Shassian: "With cash on hand and our undrawn $750 million revolving-credit facility, our liquidity is a strong $1.3 billion." Is debt not yet accessed really the best source of liquidity?

Where have all the customers gone?
There has been a sizable attrition of Frontier's customer base from a year ago. Residential subscribers are down 9% versus last year. Business customers have disappeared at approximately the same rate. Total access lines have decreased by 8% from last year.

Bright spots include an increase of broadband subscribers by 2.6% and video subscribers by 2.8%. Video increased despite a net loss of 4,800 FiOS video customers in the quarter. That slack was taken up and increased by a net addition of 4,400 video customers, which included 9,200 subscribers to the DISH satellite TV network through Frontier.

A synergistic surprise
As one would expect with any acquisition, there will be a number of redundant personnel positions. So one of the analysts' questions during Frontier's conference call was "[W]hen do we expect employee count to begin to track the synergies that you are getting out of integrating the two firms?"

CEO Wilderotter's response was somewhat surprising: "On the IT side, and also in the call centers ... it's actually cheaper for us to convert contractors and outsourcers to employees. While our headcount goes up, our actual expenses go down substantially." Verizon, she said, had used up to 70% contractors at its call centers, and Frontier's goal was to get that figure down between 10% and 15%.

"We think it's a competitive advantage for our employees to take great care of customers and deliver that customer experience," she continued. "It's also cheaper for us to do that."

Looking at the bright side
If the Verizon properties conversion has indeed been completed satisfactorily, all the billing operations mismatches have in fact been worked out, and "synergy" is more than just a three-syllable word, then maybe Frontier will have a more encouraging bottom line in the coming quarters.

As one of those income-hungry dividend investors, I'm going to keep close watch on what's going on with Frontier. But there are other companies that consistently produce strong quarterly dividend payments. Check out the Fool's special report on nine companies that offer rock-solid dividends. Get this report while it's still available -- and free!

At the time thisarticle was published Fool contributorDan Radovskyowns shares of Frontier. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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