Vermont Business Magazine FairPoint Communications, Inc (Nasdaq: FRP), Vermont's largest communications provider, today announced its financial results for the third quarter ended September 30, 2015. “Our financial results in the quarter were in line with our expectations reflecting the progress in our business, the acceptance of CAF Phase II related funding as well as the completion of our headcount reduction plan initiated in May,” said Paul H Sunu, Chief Executive Officer. Shares were up modestly Tuesday following the news at $16.88 (52-week range: $13.30 - $20.98), despite posting a profit against losses last year. Net revenue also was positive in the second quarter.
“The successful execution of our “four pillar” strategy has created a set of leveragable assets and competitive advantages,” Sunu continued. “We believe that our superior network assets, outstanding operating platform and proven ability to develop
and deploy relevant new products are of value in generating new revenue and sustaining existing revenue. We intend to continue to enhance our network, enable more effective and secure communication technologies and provide excellent customer service while maintaining a sharp focus on managing costs and generating sustainable free cash flow.”
Operating Highlights
• Unlevered Free Cash Flow minus Estimated Avoided Costs1 of $33.1 million for the quarter and $96.7
million year-to-date
• Management maintains its guidance range for Unlevered Free Cash Flow minus Estimated Avoided
Costs1 and expects $115 million to $125 million for fiscal 2015
• Revenue of $221.6 million for the quarter and $649.6 million year-to-date
• Adjusted EBITDA minus Estimated Avoided Costs1 of $66.7 million for the quarter and $192.0
million year-to-date
• Capital expenditures of $28.2 million for the quarter and $82.9 million year-to-date
• Net income of $53.1 million for the quarter and $48.1 million year-to-date
The Company completed the next-generation emergency 9-1-1 system for the state of Vermont, an example of our continued
focus on advanced services for customers and our success installing complex projects.
Ethernet services revenue momentum continued in the third quarter of 2015 as circuit growth continued to more than offset
bandwidth pricing pressure. Ethernet services contributed $24.8 million of revenue or 11.2% of total revenue as compared to
$20.7 million or 9.1% of total revenue a year ago, as Ethernet circuits grew 21.0% year-over-year. Growth in the Company's
Ethernet products is expected to continue based on demand from customers like regional banks, healthcare networks and
wireless carriers.
On August 18, 2015, we announced our acceptance of $37.4 million in annual CAF Phase II support, which is effective
retroactive to January 1, 2015. This includes support in all our operating states except Colorado and Kansas where we declined
the offered CAF Phase II support. In addition, there is a transition for price cap carriers that choose to accept model-based
support in states where the accepted support is less than the CAF Phase I frozen support. The determination of transition
funding is made at the state level.
As prescribed by the FCC’s transitional plan and the transitional funding calculation, we have recognized or expect to recognize
transitional funding, in addition to the $37.4 million annual funding, based on the following schedule:
• January 1, 2015 - July 31, 2015: $824,000 per month (100% of calculated transitional funding)
• August 1, 2015 - July 31, 2016: $618,000 per month (75% of calculated transitional funding)
• August 1, 2016 - July 31, 2017: $412,000 per month (50% of calculated transitional funding)
• August 1, 2017 - July 31, 2018: $206,000 per month (25% of calculated transitional funding)
• August 1, 2018 and after: no transitional funding
Following acceptance in August 2015 and as a result of the prescribed transition plan, we recognized $7.0 million of transitional
funding in the third quarter of 2015 for the period from January 1, 2015 through September 30, 2015.
As of September 30, 2015, FairPoint had 2,728 employees, a decrease of 360 employees versus a year ago.
Financial Highlights
Third Quarter 2015 as compared to Second Quarter 2015
Revenue increased $7.5 million during the third quarter of 2015 to $221.6 million.
In addition to our traditional presentation, we are providing strategic revenue categorization2 information. Management believes
that providing this additional revenue information will afford better visibility into revenue trends for the Company as a result of
product and service evolution within our industry. In addition, during the third quarter of 2015, we reclassified regulatory funding
revenue from voice services and access revenue for the prior periods to be consistent with our current period presentation.
• Voice services revenue decreased $0.2 million primarily due to fewer lines in service partially offset by seasonal reconnects.
• Access revenue decreased $1.4 million primarily due to the continued loss and conversion of legacy transport circuits to
next generation fiber-based services and the annual NECA cost study true-up in the third quarter of 2015.
• Data and Internet services revenue increased $1.6 million due to seasonal reconnects, rate increases and speed upgrades
partially offset by broadband subscriber losses.
• Regulatory funding revenue2 grew $6.6 million due to our acceptance of CAF Phase II and the corresponding transitional
revenue of $7.0 million associated with that program.
• Other services revenue increased $1.0 million primarily due to higher special purpose construction projects in the third
quarter of 2015 and higher late payment fees received from customers.
The following strategic revenue categorization2 will continue to be presented each quarter:
• Growth revenue2 increased by $3.1 million, or 5.1%, as we experienced growth in Ethernet while price increases for
broadband services, seasonal reconnects and speed upgrades helped offset a decline in broadband subscribers.
• Convertible revenue2 declined by $2.7 million as customers continued to migrate from non-Ethernet circuits and businesses
shifted from traditional voice products to more modern VoIP and hosted products.
• Legacy revenue2 was down $1.0 million. While seasonality moderated the decline, consumer trends away from traditional
voice related products continued to negatively impact legacy revenue.
• Regulatory funding revenue2 grew $6.6 million due to our acceptance of CAF Phase II and the corresponding transitional
revenue of $7.0 million associated with that program.
• Miscellaneous revenue2 increased $1.5 million primarily due to higher special purpose construction projects in the third
quarter of 2015 and higher late payment fees received from customers.
Operating expenses, excluding depreciation and amortization, decreased $6.1 million to $92.8 million in the third quarter of 2015
compared to $98.9 million in the second quarter of 2015 primarily due to lower pension expense as a result of the curtailment gain recognized in the third quarter of 2015 and an operating tax settlement. However, pension expense is excluded from the Company's
definition of adjusted operating expenses and Adjusted EBITDA.
Adjusted operating expenses were $154.9 million in the third quarter of 2015 compared to $150.4 million in the second quarter
of 2015. The increase was primarily due to higher network expenses, increased overtime, increased utilities, a higher bonus accrual
and lower capitalized labor partially offset by decreased benefits and salaries due to fewer headcount and an operating tax settlement.
Adjusted EBITDA increased $3.0 million to $66.7 million in the third quarter of 2015 compared to $63.7 million in the second
quarter of 2015. The increase was primarily driven by higher revenue partially offset by higher adjusted operating expenses.
Capital expenditures were $28.2 million in the third quarter of 2015 compared to $28.3 million in the second quarter of 2015.
Unlevered Free Cash Flow, which measures Adjusted EBITDA less capital expenditures, cash contributions towards our pension
plans and cash payments for OPEB, was $33.1 million in the third quarter of 2015 compared to $30.7 million in the second quarter
of 2015. Unlevered Free Cash Flow was higher in the third quarter of 2015 primarily due to higher Adjusted EBITDA partially
offset by higher cash pension contributions.
Net income was $53.1 million in the third quarter of 2015 compared to $40.3 million in the second quarter of 2015. The change
was primarily due to an increase in revenue and decreased operating expenses, excluding depreciation and amortization as described
above.
Cash was $17.0 million as of September 30, 2015 compared to $9.1 million as of June 30, 2015. Total gross debt outstanding was
$924.0 million as of September 30, 2015, after the regularly scheduled principal payments of $1.6 million on the term loan made
during the third quarter of 2015, as compared to $925.6 million as of June 30, 2015. The Company's $75.0 million revolving credit
facility was undrawn, with $58.8 million available for borrowing after applying $16.2 million of outstanding letters of credit.
Third Quarter 2015 as compared to Third Quarter 2014 Revenue was $221.6 million in the third quarter of 2015 compared to $228.1 million a year earlier.
As mentioned above, in addition to our traditional presentation, we are providing strategic revenue categorization2 information.
Management believes that providing this additional revenue information will afford better visibility into revenue trends for the
Company as a result of product and service evolution within our industry. In addition, during the third quarter of 2015, we
reclassified regulatory funding revenue from voice services and access revenue for the prior periods to be consistent with our
current period presentation.
• Voice services revenue declined $10.2 million resulting from the loss of voice access lines versus a year ago combined
with lower long distance usage.
• Access revenue declined $4.8 million due to the continued loss and conversion of legacy transport circuits to next
generation fiber-based services and an unfavorable year-over-year NECA cost study true-up, partially offset by an increase
in wholesale Ethernet revenue from higher circuits partially offset by pricing pressures.
• Data and Internet services revenue increased $1.2 million reflecting strength in retail Ethernet services and the mitigating
impact of speed upgrades and price increases on residential broadband products offsetting subscriber declines.
• Regulatory funding revenue 2 grew $6.5 million due to our acceptance of CAF Phase II and the corresponding transitional
revenue of $7.0 million associated with that program.
• Other services revenue increased $0.7 million primarily due to higher special purpose construction projects in the third
quarter of 2015.
The following strategic revenue categorization2 will continue to be presented each quarter:
• Growth revenue2 increased by $4.0 million as we experienced growth in Ethernet while price increases for broadband
services and speed upgrades helped offset a decline in broadband subscribers.
• Convertible revenue2 declined by $7.6 million as customers continued to migrate from non-Ethernet circuits and businesses
shifted from traditional voice products to more modern VoIP and hosted products.
• Legacy revenue2 was down $9.7 million resulting from the loss of voice access lines versus a year ago combined with
lower long distance usage.
• Regulatory funding revenue2 grew $6.5 million due to our acceptance of CAF Phase II and the corresponding transitional
revenue of $7.0 million associated with that program.
• Miscellaneous revenue2 increased $0.3 million due to higher special purpose construction projects in the third quarter of
2015.
Operating expenses, excluding depreciation and amortization, decreased $107.6 million to $92.8 million in the third quarter of
2015 compared to $200.4 million in the third quarter of 2014 primarily due to $70.6 million lower OPEB expense, $16.9 million
lower labor negotiation related expenses, $6.8 million lower pension expense, $6.1 million lower employee expenses from fewer
headcount and an operating tax settlement. However, OPEB and pension expenses and labor negotiation related expenses are
excluded from the Company's definition of adjusted operating expenses and Adjusted EBITDA.
Adjusted operating expenses were $154.9 million in the third quarter of 2015 compared to $166.4 million a year earlier. The
decrease was primarily the result of lower employee costs, lower direct operating expenses and an operating tax settlement. Lower
employee costs primarily resulted from decreased benefits and salaries due to fewer headcount partially offset by a higher bonus
accrual.
Adjusted EBITDA was $66.7 million in the third quarter of 2015 compared to $61.7 million a year earlier. The increase is due to
operating expense savings partially offset by lower revenue.
Capital expenditures were $28.2 million in the third quarter of 2015 compared to $28.8 million a year earlier.
Unlevered Free Cash Flow of $33.1 million in the third quarter of 2015 increased $8.6 million compared to $24.5 million a year
earlier. The increase was due to higher Adjusted EBITDA and lower cash contributions towards our pension plans.
Net income was $53.1 million in the third quarter of 2015 compared to a net loss of $37.8 million in the third quarter of 2014.
The change was primarily due to a decrease in operating expenses, excluding depreciation and amortization, partially offset by
lower revenue, as described above, as well as a lower income tax benefit. Net income is positive in the third quarter of 2015 largely
due to the non-cash GAAP treatment for the change in the liability of the OPEB plan due to the elimination of post-employment
health benefits for active represented employees. The impact of this treatment will continue for the remainder of 2015 and all of
2016, but we do not expect that it will impact our cash income taxes or change our accumulated federal net operating loss
carryforwards.
2015 Guidance
For full year 2015, the Company expects to generate $115 million to $125 million of Unlevered Free Cash Flow adjusted for
Estimated Avoided Costs in the first quarter. Unlevered Free Cash Flow refers to Adjusted EBITDA minus capital expenditures,
pension contributions and cash payments for OPEB. In addition, Adjusted EBITDA is expected to be $250 million to $255 million,
annual capital expenditures are expected to be $110 million to $115 million and aggregate annual pension contributions and OPEB
payments are expected to be approximately $20 million for 2015.
Aggregate cash pension contributions and cash OPEB payments are expected to be approximately $20 million for 2016.
Quarterly Report
The information in this press release should be read in conjunction with the financial statements and footnotes contained in the
Company's quarterly report on Form 10-Q for the quarter ended September 30, 2015, which will be filed with the SEC no later
than November 9, 2015. The Company's results for the quarter ended September 30, 2015 are subject to the completion of such
quarterly report.
Conference Call Information
As previously announced, FairPoint will hold a conference call and simultaneous webcast to discuss its third quarter 2015 results
today at 8:30 a.m. (EST). A live broadcast of the earnings conference call will be available online at www.fairpoint.com/investors. An online replay will be
available shortly thereafter.
As an alternative to the webcast, participants can also call (800) 884-5695 (US/Canada) or (617) 786-2960 (international) and
enter passcode 58008591 when prompted. The title of the call is the Third Quarter 2015 FairPoint Communications, Inc. Earnings
Conference Call.
A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (888) 286-8010
(US/Canada) or (617) 801-6888 (international) and enter the passcode 56773103 when prompted. The recording will be available
from Tuesday, November 3, 2015, at 12:30 p.m. (EST) through Tuesday, November 10, 2015, at 11:59 p.m. (EST).
Source: Charlotte, N.C. (November 3, 2015) - FairPoint Communications, Inc