Frontier Communications Reports Fourth Quarter and Full Year 2018 Results

  • Total fourth quarter revenue of $2.12 billion, stable sequentially
  • Net loss of $219 million in the fourth quarter, with loss driven by
    goodwill impairment
  • Adjusted EBITDA1 of $895 million, a sequential increase
    driven by improved Consumer revenue performance, continued strong
    expense management, and early benefits from the company’s
    transformation program
  • Transformation program initiatives expanded further in the fourth
    quarter, and the program enters 2019 with strong momentum

NORWALK, Conn.–(BUSINESS WIRE)–Frontier Communications Corporation (NASDAQ:FTR) today reported
financial results for the fourth quarter and full year ended December
31, 2018.

I am very pleased that fourth quarter results reflect our improving
execution as well as initial benefits from our transformation program,”
said Dan McCarthy, President and CEO. “A robust result in Consumer,
together with strong expense management, drove a sequential increase in
fourth quarter Adjusted EBITDA,” McCarthy added. “We continued to expand
the scope of initiatives underway in our transformation program in the
fourth quarter, and multiple teams are now scaling a range of solutions
that were developed through transformation initiatives. I look forward
to continued progress and expansion of the program over the course of
2019 and 2020 as we advance toward our targeted $500 million EBITDA
benefit.”

Consolidated Results

Consolidated revenue for the fourth quarter of 2018 was $2.12 billion.
Within consolidated revenue, Consumer revenue was $1.09 billion,
Commercial revenue was $942 million, and subsidy and other regulatory
revenue was $94 million.

Net loss for the fourth quarter of 2018 was $219 million, representing a
net loss per common share of $2.12. Net loss included a goodwill
impairment of $241 million ($214 million net of tax). Fourth quarter
Adjusted EBITDA was $895 million, for an Adjusted EBITDA margin2
of 42.1%.

Net cash provided from operating activities for the fourth quarter of
2018 was $603 million and operating free cash flow3 was $358
million. For the full year 2018, net cash provided from operating
activities was $1,812 million and operating free cash flow was $620
million.

Consumer Business Highlights

  • Revenue of $1.09 billion.
  • Customer churn of 1.94% (1.79% for Legacy markets and 2.17% for CTF
    markets), with each measure improving both sequentially and relative
    to the fourth quarter of 2017.
  • Average Revenue Per Customer (ARPC) of $88.37; excluding adoption of
    ASC 606, ARPC was $86.05, an increase both sequentially and relative
    to the fourth quarter 2017.

Commercial Business Highlights

  • Revenue of $942 million.
  • Total commercial customers of 411,000 compared with 422,000 during the
    third quarter of 2018.
  • Commercial wholesale revenue declined sequentially, driven by wireless
    backhaul and voice revenue, and Commercial SME revenue was stable
    sequentially.

Capital Structure and Capital Allocation

  • As of December 31, 2018, Frontier’s leverage ratio was 4.72:1.
  • Frontier remains committed to reducing debt and improving its
    financial leverage profile.

    • Retired the $431 million principal amount outstanding of its
      senior unsecured notes maturing October 1, 2018, as scheduled.
    • Purchased $56 million principal amount of its March 15, 2019
      senior unsecured notes in the open market during the fourth
      quarter of 2018.
  • In January 2019 Frontier closed the sale of wireless towers for $76
    million. The transaction is expected to be immaterial to revenue,
    earnings, and Adjusted EBITDA.

Guidance

Frontier is issuing the following financial guidance for 2019:

  • Adjusted EBITDA – $3.45 billion to $3.55 billion
  • Capital expenditures – Approximately $1.15 billion
  • Cash taxes – Less than $25 million
  • Cash pension/OPEB – Approximately $175 million
  • Cash interest expense – Approximately $1.475 billion
  • Operating free cash flow – $575 million to $675 million

Non-GAAP Financial Measures

Frontier uses certain non-GAAP financial measures in evaluating its
performance, including EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted
EBITDA margin, operating free cash flow, and adjusted operating
expenses, each of which is described below. Management uses these
non-GAAP financial measures internally to (i) assist in analyzing
Frontier’s underlying financial performance from period to period, (ii)
analyze and evaluate strategic and operational decisions, (iii)
establish criteria for compensation decisions, and (iv) assist in the
understanding of Frontier’s ability to generate cash flow and, as a
result, to plan for future capital and operational decisions. Management
believes that the presentation of these non-GAAP financial measures
provides useful information to investors regarding Frontier’s financial
condition and results of operations because these measures, when used in
conjunction with related GAAP financial measures (i) provide a more
comprehensive view of Frontier’s core operations and ability to generate
cash flow, (ii) provide investors with the financial analytical
framework upon which management bases financial, operational,
compensation, and planning decisions and (iii) present measurements that
investors and rating agencies have indicated to management are useful to
them in assessing Frontier and its results of operations.

A reconciliation of these measures to the most comparable financial
measures calculated and presented in accordance with GAAP is included in
the accompanying tables. These non-GAAP financial measures are not
measures of financial performance or liquidity under GAAP, nor are they
alternatives to GAAP measures and they may not be comparable to
similarly titled measures of other companies.

EBITDA is defined as net income (loss) less income tax expense
(benefit), interest expense, investment and other income, pension
settlement costs, gains/losses on extinguishment of debt, and
depreciation and amortization. EBITDA margin is calculated by dividing
EBITDA by total revenue.

Adjusted EBITDA is defined as EBITDA, as described above, adjusted to
exclude acquisition and integration costs, certain pension/OPEB
expenses, restructuring costs and other charges, stock-based
compensation expense, goodwill impairment charges, and certain other
non-recurring items. Adjusted EBITDA margin is calculated by dividing
adjusted EBITDA by total revenue.

Management uses EBITDA, EBITDA margin, adjusted EBITDA and adjusted
EBITDA margin to assist it in comparing performance from period to
period and as measures of operational performance. Management believes
that these non-GAAP measures provide useful information for investors in
evaluating Frontier’s operational performance from period to period
because they exclude depreciation and amortization expenses related to
investments made in prior periods and are determined without regard to
capital structure or investment activities. By excluding capital
expenditures, debt repayments and dividends, among other factors, these
non-GAAP financial measures have certain shortcomings. Management
compensates for these shortcomings by utilizing these non-GAAP financial
measures in conjunction with the comparable GAAP financial measures.

Adjusted net income (loss) attributable to Frontier common shareholders
is defined as net income (loss) attributable to Frontier common
shareholders and excludes acquisition and integration costs,
restructuring costs and other charges, pension settlement costs,
goodwill impairment charges, certain income tax items and the income tax
effect of these items, and certain other non-recurring items. Adjusting
for these items allows investors to better understand and analyze
Frontier’s financial performance over the periods presented.

Management defines operating free cash flow, a non-GAAP measure, as net
cash provided from operating activities less capital expenditures.
Management uses operating free cash flow to assist it in comparing
liquidity from period to period and to obtain a more comprehensive view
of Frontier’s core operations and ability to generate cash flow.
Management believes that this non-GAAP measure is useful to investors in
evaluating cash available to service debt and pay dividends. This
non-GAAP financial measure has certain shortcomings; it does not
represent the residual cash flow available for discretionary
expenditures, as items such as debt repayments and preferred stock
dividends are not deducted in determining such measure. Management
compensates for these shortcomings by utilizing this non-GAAP financial
measure in conjunction with the comparable GAAP financial measure.

Adjusted operating expenses is defined as operating expenses adjusted to
exclude depreciation and amortization, acquisition and integration
costs, restructuring and other charges, goodwill impairment charges,
certain pension/OPEB expenses, stock-based compensation expense, and
certain other non-recurring items. Investors have indicated that this
non-GAAP measure is useful in evaluating Frontier’s performance.

The information in this press release should be read in conjunction with
the financial statements and footnotes contained in Frontier’s documents
filed with the U.S. Securities and Exchange Commission. 

Conference Call and Webcast

Frontier will host a conference call today at 4:30 P.M. Eastern time. In
connection with the conference call and as a convenience to investors,
Frontier furnished today, under cover of a Current Report on Form 8-K,
additional materials regarding fourth quarter 2018 results. The
conference call will be webcast and may be accessed in the Webcasts
& Presentations
 section of Frontier’s Investor Relations website
at www.frontier.com/ir.

A telephonic replay of the conference call will be available from 7:30
P.M. Eastern Time on Tuesday, February 26, 2019, through 7:30 P.M.
Eastern Time on Sunday, March 3, 2019 at 719-457-0820 or 888-203-1112.
Use the passcode 3377896 to access the replay. A webcast replay of the
call will be available at www.frontier.com/ir.

About Frontier Communications

Frontier Communications Corporation (NASDAQ: FTR) is a leader in
providing communications services to urban, suburban, and rural
communities in 29 states. Frontier offers a variety of services to
residential customers over its fiber-optic and copper networks,
including video, high-speed internet, advanced voice, and Frontier Secure®
digital protection solutions. Frontier Business offers communications
solutions to small, medium, and enterprise businesses. More information
about Frontier is available at www.frontier.com.

Forward-Looking Statements

This earnings release contains “forward-looking statements,” related to
future events. Forward-looking statements address Frontier’s expected
future business, financial performance, and financial condition, and
contain words such as “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “see,” “may,” “will,” “would,” or “target.”
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain. For Frontier, particular uncertainties
that could cause actual results to be materially different than those
expressed in such forward-looking statements include: declines in
revenue from Frontier’s voice services, switched and non-switched access
and video and data services that it cannot stabilize or offset with
increases in revenue from other products and services; Frontier’s
ability to successfully implement strategic initiatives, including
opportunities to enhance revenue and realize operational improvements;
competition from cable, wireless and wireline carriers, satellite, and
OTT companies, and the risk that Frontier will not respond on a timely
or profitable basis; Frontier’s ability to successfully adjust to
changes in the communications industry, including the effects of
technological changes and competition on its capital expenditures,
products and service offerings; risks related to disruptions in
Frontier’s networks, infrastructure and information technology that may
result in customer loss and/or incurrence of additional expenses; the
impact of potential information technology or data security breaches or
other cyber attacks or other disruptions; Frontier’s ability to retain
or attract new customers and to maintain relationships with customers,
employees or suppliers; Frontier’s ability to hire or retain key
personnel; Frontier’s ability to realize anticipated benefits from
recent acquisitions; Frontier’s ability to dispose of certain assets or
asset groups on terms that are attractive to it, or at all; Frontier’s
ability to effectively manage its operations, operating expenses,
capital expenditures, debt service requirements and cash paid for income
taxes and liquidity; Frontier’s ability to defend against litigation and
potentially unfavorable results from current pending and future
litigation; adverse changes in the credit markets, which could impact
the availability and cost of financing; Frontier’s ability to repay or
refinance its debt through, among other things, accessing the capital
markets, notes repurchases and/or redemptions, tender offers and
exchange offers; adverse changes in the ratings given to Frontier’s debt
securities by nationally accredited ratings organizations; covenants in
Frontier’s indentures and credit agreements that may limit Frontier’s
operational and financial flexibility as well as its ability to access
the capital markets in the future; the effects of state regulatory
requirements that could limit Frontier’s ability to transfer cash among
its subsidiaries or dividend funds up to the parent company; the effects
of governmental legislation and regulation on Frontier’s business; the
impact of regulatory, investigative and legal proceedings and legal
compliance risks; government infrastructure projects that impact capital
expenditures; continued reductions in switched access revenue as a
result of regulation, competition or technology substitutions; the
effects of changes in the availability of federal and state universal
service funding or other subsidies to Frontier and its competitors;
Frontier’s ability to meet its remaining CAF II funding obligations and
the risk of penalties or obligations to return certain CAF II funds;
Frontier’s ability to effectively manage service quality and meet
mandated service quality metrics; the effects of changes in accounting
policies or practices, including potential future impairment charges
with respect to intangible assets; the effects of changes in income tax
rates, tax laws, regulations or rulings, or federal or state tax
assessments, including the risk that such changes may benefit Frontier’s
competitors more than it, as wells potential future decreases in the
value of Frontier’s deferred tax assets; the effects of increased
medical expenses and pension and postemployment expenses; Frontier’s
ability to successfully renegotiate union contracts; changes in pension
plan assumptions, interest rates, discount rates, regulatory rules
and/or the value of Frontier’s pension plan assets, which could require
Frontier to make increased contributions to its pension plans; the
effects of changes in both general and local economic conditions in the
markets that Frontier serves; the effects of severe weather events or
other natural or man-made disasters, which may increase operating and
capital expenses or adversely impact customer revenue; and the risks and
other factors contained in Frontier’s filings with the U.S. Securities
and Exchange Commission, including its reports on Forms 10-K and 10-Q.
These risks and uncertainties may cause actual future results to be
materially different than those expressed in such forward-looking
statements. Frontier has no obligation to update or revise these
forward-looking statements and does not undertake to do so.

_________________

1 See “Non-GAAP Measures” for a description of this
measure and its calculation. See Schedule A for a reconciliation to
net income/(loss).
 
2 Adjusted EBITDA margin is a non-GAAP measure of
performance, calculated as Adjusted EBITDA, divided by total
revenue. See “Non-GAAP Measures” for a description of this measure
and its calculation. See Schedule A for a reconciliation of EBITDA
to net loss.
 
3 Operating free cash flow is a non-GAAP measure of
liquidity derived from net cash provided from operating activities.
See “Non-GAAP Measures” for a description of this measure and its
calculation and Schedule A for a reconciliation to net cash provided
from operating activities.
 
 
Frontier Communications Corporation
Consolidated Financial Data
             
For the quarter ended For the year ended
($ in millions and shares in thousands, except per share amounts) December 31, 2018 (1) September 30, 2018 (1) December 31, 2017 December 31, 2018 (1) December 31, 2017
 
Statement of Operations Data
Revenue $ 2,124 $ 2,126 $ 2,217 $ 8,611 $ 9,128
 
Operating expenses:
Network access expenses 347 353 388 1,441 1,597
Network related expenses 461 476 490 (2) 1,898 1,958

(2)

Selling, general and administrative expenses 441 445 457 (2) 1,815 2,017

(2)

Depreciation and amortization 492 471 514 1,954 2,184
Goodwill impairment 241 400 2,078 641 2,748
Acquisition and integration costs 10 25
Restructuring costs and other charges   15   14   27   35   82
Total operating expenses   1,997   2,159   3,964 (2)   7,784   10,611

(2)

 

 

Operating income (loss) 127 (33) (1,747) (2) 827 (1,483)

(2)

 

Investment and other income (loss), net (3) 3 (3) (2) 13 1

(2)

Pension settlement costs 7 9 6 41 83
Gain (Loss) on early extinguishment of debt and debt exchanges 1 (2) 1 32 (88)
Interest expense   388   389   377   1,536   1,534
 
Loss before income taxes (270) (430) (2,132) (705) (3,187)
Income tax benefit   (51)   (4)   (1,103)   (62)   (1,383)
 
Net loss (219) (426) (1,029) (643) (1,804)
 
Less: Dividends on preferred stock       53   107   214
Net loss attributable to Frontier
common shareholders $ (219) $ (426) $ (1,082) $ (750) $ (2,018)
 
Weighted average shares outstanding – basic and diluted(3) 103,680 103,665 77,805 89,683 77,736
 
Basic and diluted net loss per common share $ (2.12) $ (4.11) $ (13.91) $ (8.37) $ (25.99)
 
Other Financial Data:
Capital expenditures – Business operations $ 245 $ 329 $ 308 $ 1,192 $ 1,154
Capital expenditures – Integration activities $ $ $ 15 $ $ 34
Dividends declared – Common stock $ $ $ 47 $ $ 266
Dividends declared – Preferred stock $ $ $ 53 $ 107 $ 214
 
(1) We adopted Accounting Standard Update 2014-09,
Revenue from Contracts with Customers (ASC 606)” on January 1,
2018, using the modified retrospective application. This method does
not impact the prior periods, which continue to reflect the
accounting treatment prior to the adoption of ASC 606. As a result,
for items that were affected by our adoption of ASC 606, financial
results of periods prior to January 1, 2018 are not comparable to
the current period financial results. To provide comparability to
our results, we provide a supplemental schedule (see Schedule D)
which contains certain financial information on a pre adoption of
ASC 606 basis.
 
(2) Effective January 1, 2018, Frontier adopted ASU
2017-07, “Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost.” The standard requires
certain benefit costs to be reclassified from operating expenses to
non-operating expenses. This change in policy was applied using a
retrospective approach and accordingly we have reclassified $1 and
$2 million of net operating expenses as non-operating expense for
the quarter and year ended December 31, 2017, respectively.
Additional pension settlement costs of $6 million and $83 million
for the quarter and year ended December 31, 2017, respectively, were
reclassified from operating expense to non-operating expense.
 
(3) As of December 31, 2018 and September 30, 2018, there
were approximately 106 million of common shares outstanding and 0
shares of preferred stock.
 
Frontier Communications Corporation
Consolidated Financial Data
           
For the quarter ended For the year ended
December 31, 2018 (1) September 30, 2018 (1) December 31, 2017 December 31, 2018 (1) December 31, 2017

($ in millions)

 
Selected Statement of Operations Data
Revenue:
Data and Internet services $ 959 $ 961 $ 939 $ 3,878 $ 3,862 (2)
Voice services 668 669 687 2,721 2,864
Video services 275 260 310 1,085 1,304
Other   128   141   91   544   322
Customer revenue 2,030 2,031 2,027 8,228 8,352 (2)
Subsidy and other regulatory revenue   94   95   190   383   776
Total revenue $ 2,124 $ 2,126 $ 2,217 $ 8,611 $ 9,128 (2)
 
Other Financial Data
Revenue:
Consumer $ 1,088 $ 1,069 $ 1,086 $ 4,380 $ 4,476
Commercial   942   962   941   3,848   3,876 (2)
Customer revenue 2,030 2,031 2,027 8,228 8,352 (2)
Subsidy and other regulatory revenue   94   95   190   383   776
Total revenue $ 2,124 $ 2,126 $ 2,217 $ 8,611 $ 9,128 (2)
 
(1) We adopted Accounting Standard Update 2014-09,
Revenue from Contracts with Customers (ASC 606)” on January 1,
2018, using the modified retrospective application. This method does
not impact the prior periods, which continue to reflect the
accounting treatment prior to the adoption of ASC 606. As a result,
for items that were affected by our adoption of ASC 606, financial
results of periods prior to January 1, 2018 are not comparable to
the current period financial results. To provide comparability to
our results, we provide a supplemental schedule (see Schedule D)
which contains certain financial information on a pre adoption of
ASC 606 basis.
 
(2) Includes revenue from Frontier Secure Strategic Partnerships
business, which was sold in May of 2017, $40 million for the year
ended December 31, 2017.
 
   
Frontier Communications Corporation
Consolidated Financial and Operating Data
           
 
For the quarter ended For the year ended
December 31, 2018 September 30, 2018 December 31, 2017 December 31, 2018 December 31, 2017
 
Customers (in thousands) 4,471 4,574 4,850 4,471 4,850
 
Consumer customer metrics
Customers (in thousands) 4,060 4,152 4,397 4,060 4,397
Net customer additions (losses) (92) (86) (89) (337) (494)
Average monthly consumer
revenue per customer $ 88.37 (1) $ 84.92 (1) $ 81.61 $ 86.26 (1) $ 80.96
Customer monthly churn 1.94% 2.03% 1.98% 1.97% 2.17%
 
Commercial customer metrics
Customers (in thousands) 411 422 453 411 453
Broadband subscriber metrics (in thousands)
Broadband subscribers 3,735 3,802 3,938 3,735 3,938
Net subscriber additions (losses) (67) (61) (63) (203) (333)
 
Video (excl. DISH) subscriber metrics (in thousands)
Video subscribers 838 873 961 838 961
Net subscriber additions (losses) (35) (29) (20) (123) (184)
 
Video – DISH subscriber metrics (in thousands)
DISH subscribers 205 211 235 205 235
Net subscriber additions (losses) (6) (8) (9) (30) (39)
 
Employees 21,173 21,375 22,736 21,173 22,736
 
(1) We adopted Accounting Standard Update 2014-09,
Revenue from Contracts with Customers (ASC 606)” on January 1,
2018, using the modified retrospective application. This method does
not impact the prior periods, which continue to reflect the
accounting treatment prior to the adoption of ASC 606. As a result,
for items that were affected by our adoption of ASC 606, financial
results of periods prior to January 1, 2018 are not comparable to
the current period financial results. To provide comparability to
our results, we provide a supplemental schedule (see Schedule D)
which contains certain financial information on a pre adoption of
ASC 606 basis.
 

Contacts

INVESTORS:
Luke Szymczak
Vice
President
(203) 614-5044
[email protected]

MEDIA:
Brigid
Smith
Assistant Vice President
(203) 614-5042
[email protected]

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