Frontier Communications Has A Serious Revenue Problem

INTRODUCTION

In our last article we said Frontier Communications’ (FTR) major challenge is to stop the continuous bleed in revenue.  Frontier Communications released their 2013 first quarter results on May 6.  Based on the revenue challenge ahead of them this article will limit the discussion to the following:

• Revenue trend
• Effects on FCF estimates
• Conclusion

REVENUE TREND

We’ll start with the trends projected from our last article through the period ending December 2012 then compare this to recent results.  The graph measures management’s efforts to bend the curve upward.
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Is Now The Time To Buy Into CenturyLink’s Generous Yield?

INTRODUCTION:

CenturyLink (CTL) surprised the market on February 13 by reducing the quarterly dividend to 54 cents from 72.5 cents per share.  Why? Cash taxes are expected to increase substantially starting in 2015.  The problem is not unique to CTL.  Windstream (WIN) faces a similar problem in 2014 (discussed here). The difference between the two companies is while CTL reduced the dividend, WIN management is adamant they can maintain their dividend in the face of a substantial debt load, high leverage ratio and high FCF (free cash flow) payout ratio.  Was reducing the dividend a sound strategy and if so, is now the time to invest in CTL?  The current yield hovers around 6%. We’ll present an overview of the company in an attempt to provide an answer. The discussion includes:

• Revenue stability
• FCF (Free cash flow) and the new capital allocation strategy
• Debt
• Pension and Post-Retirement Benefits
• Industry Comparison
• Valuation
• Conclusion

Financial data used for this article can be found here.

REVENUE STABILITY:

One problem the wireline industry faces is declining revenues.  We’ll look at the pro forma revenue (includes Qwest and Savvis) and measure management’s performance using a “best fit” regression analysis. The curve reflects management’s efforts going forward based on performance over the last 2 years:
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Is It Time To Buy Into Windstream’s Very High Yield?

INTRODUCTION:

In our last article we concluded that, “Waiting to see how the second half develops may be the prudent path before allocating new or additional cash toward this investment.” The stock was trading at $9.41. Now that the second half is complete here is an update.

Management seems to have gone out of their way in an effort to reassure investors the dividend will not be reduced.  Jeff Gardner – Chief Executive Officer, made this comment on the Q4 conference call:

let me reiterate that it is our expectation to maintain our current dividend practice.

This could be interpreted as a strong statement assuring investors the dividend is safe although expectations usually change as future events unfold for better or worse.  Windstream’s (WIN) dividend yield exceeds 12% at the time of this writing.  The market is sending a clear message; the dividend is not sustainable.  Although the message is clear, is it possible the market has it wrong?

We’ll discuss the following in an attempt to answer the question.

• Revenue stability
• FCF (Free cash flow) and the growing dividend payout
• Debt
• Industry comparisons
• Insider activity
• Conclusion

Financial data used for this article can be found here.

REVENUE STABILITY

One problem the wireline industry faces is declining revenues.  We’ll look at the pro forma service revenue (includes NuVox, Iowa Telecom, Hosted Solutions, Q-Comm and PAETEC) and measure management’s performance using a “best fit” regression analysis. The curve reflects management’s efforts going forward based on performance over the last 3 years:
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How Long Until Frontier Communications Revisits The Dividend Policy?

INTRODUCTION:

In our last article we concluded the near-term dividend is easily sustainable given the cushion between FCF (free cash flow) and the dividend payout and early signs gleaned from customer revenue metrics were encouraging.  Frontier Communications (FTR) major challenge is to stop the continuous bleed in revenue.

FTR announced their 2012 fourth quarter and full year results on February 21, however questions still persist. Are long term revenue trends improving? Is the dividend safe for the foreseeable future? How long does management have to stem the decline in revenues before the safety of the dividend becomes questionable? In an attempt to find answers this discussion includes:

• Performance
• Trends
• FCF Estimates
• Conclusion

PERFORMANCE:

Average monthly revenue per customer has been rising:
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Is Level 3 Communications On The Cusp Of Sustainable Free Cash Flow?

INTRODUCTION:

Level 3 Communications (LVLT), with few exceptions, has been burning through cash for most of its history. Investors have been waiting a long time for sustainable FCF (free cash flow) to arrive, only to be disappointed when it seemed just around the corner.  Are we rounding that corner and how robust could FCF be?  Why did interest rate swaps suddenly appear as a condition attached to 2013 FCF guidance?  In an attempt to find answers we’ll look at the business outlook presented by management and use this guidance as a framework to project 2013 FCF for each quarter and longer term annual FCF over five years.

OUTLOOK:

LVLT released its fourth-quarter and full-year results on Feb. 12. The market was not pleased with results or comments relating to forward growth.  Here are some highlights (emphasis added):

“For the first quarter 2013, we expect to see a slight decline in CNS revenue on a sequential basis, due to the typical reversal in the seasonally strong fourth quarter revenue. Adjusting for the special items in the fourth quarter, with the expected decline in CNS revenue and increase in payroll taxes, we expect Adjusted EBITDA to be roughly flat in the first quarter 2013 compared to the fourth quarter 2012.”

“We expect low double digit percentage growth in Adjusted EBITDA, compared to full year 2012 reported Adjusted EBITDA of $1.459 billion. We expect to be Free Cash Flow positive for the full year, excluding interest rate swap obligations.
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What Is Wrong With Level 3 Communications?

INTRODUCTION:

Level 3 Communications (LVLT) released its fourth quarter and full year results on February 12. The market was not pleased with results or comments relating to forward growth; pummeling the stock on heavy volume.  The stock closed down 13.6%.

Given guidance it’s reasonable to expect the company to show positive FCF (free cash flow) for the full year but far below the expectations going into their earnings report.  It should be noted that LVLT was FCF positive in 2009 before sinking back into negative territory.

So what is wrong with LVLT? The answer becomes apparent with an understanding of LVLT’s turbulent past and the factors that lead to the creation of LVLT.  Not only financial but how they envisioned the future along with the road taken. Are they at an inflection point or is the past a harbinger of the future. The discussion includes:

• History
• Performance
• Conclusion

HISTORY:

Level 3 emerged within the Kiewit Diversified Group Inc. (“KDG”), a wholly-owned subsidiary of Peter Kiewit Sons, Inc. In 1998, KDG changed its name to Level 3 Communications, Inc. On April 1, 1998, Level 3 common stock started trading on the NASDAQ stock market under the symbol LVLT.

Level 3 raised $14 billion, constructed 19,600 route miles, and built the world’s first continuously upgradeable network optimized for internet protocol.

Level 3 Communications was founded on the principles of the “Silicon Economics”. The CEO laid out four keys to Level 3’s strategy
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Introducing Telular, A Stock With A Generous Yield

INTRODUCTION:

Telular (WRLS) released its first quarter results on January 31. Management exceeded expectations on both top and bottom lines but cash levels fell short due to reasons discussed later.

We have been writing about Telular on SA since August 2010 when the stock was at $2.31.  The stock closed at $10.56 at the time of this writing yielding a generous 4.5% and remains a compelling story not widely followed by analysts.

The goal of this article is to give the reader a basic understanding of Telular’s businesses and potential from an investor’s viewpoint. The discussion includes:

• An overview of each business & market potential.
• Financial trends
• Valuation
• Concerns & known risks
• Conclusion

A complete set of updated detailed financial data and projections reflected in this article is found here.

BUSINESS SEGMENTS:

Telguard: Provides primary and backup alarm communication solutions for residential, small business, financial, commercial and fire system markets. These products transmit data from virtually all security and fire systems to central stations using the cellular network.

Telguard accounts for the bulk of Telular’s revenue (54% in Q1). Telguard’s sales guidance is 30,000 to 40,000 units each quarter during fiscal year 2013. Telular sold approximately 37,300 Telguard units and activated 35,400 new Telguard subscribers in Q1. The unit ASP (average selling price) runs about $137.

Average sales in the 2007 timeframe exceeded 50,000 per quarter as reflected in the steep rise in subscribers shown in the graph below.
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