FairPoint loses $43M in Q4 due to weather, labor strike

FairPoint Communications reported that a spate of inclement weather events combined with a four-month labor strike impacted residential broadband installations as the company was forced to curtail near-term marketing plans to focus on customer support.  

Speaking to investors during the fourth-quarter earnings call, Paul Sunu, CEO of FairPoint, said the strike had an impact on new business and residential broadband service orders.

Net loss for the quarter was $43 million. On a sequential basis, company revenue decreased $11 million during the fourth quarter of 2014, to $217.1 million.

In anticipation of a potential strike, FairPoint had curtailed its residential broadband marketing efforts before the Aug. 2 labor contract expiration date. On Feb. 19, FairPoint and union workers represented by the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW) reached a tentative new labor agreement.

"We saw the reduction of in-flows of residential broadband due to the lack of marketing," Sunu said.

During the quarter, the service provider's total broadband subscriber base was 321,624, down sequentially from 329,494 in the third quarter of 2014.

While its sales team did not stop selling services, Sunu added that the strike also impacted the amount of business services sales during the strike period.

"Strikes are meant to be disruptive, and we did see an impact in the in-flow of orders as there were those that sympathized with the unions that showed hesitation in buying due to the strike and concerns over delivery dates," Sunu said.

Besides the strike, FairPoint said that the recent spate of winter storms in northern New England increased its repair backlog.

"We have averaged about 1 major snowstorm a week," Sunu said. "The trouble and repairs related to the storms increased our backlog and took us nearly two months to work these down and reach our objective of providing reasonable service during the strike."

Driven by a 32.8 percent year-over-year uptick in retail and wholesale circuits, Ethernet service revenues contributed about $21.5 million of revenue or 9.9 percent of total revenue in the fourth quarter of 2014, up from $18.9 million or 8.9 percent of total revenue in 2013. As of the end of the quarter, FairPoint had a total of 12,638 Ethernet circuits, up from 11,681 in the third quarter of 2014, with retail and wholesale Ethernet circuits rising to 5,611 and 7,027, respectively.While residential broadband subscribers declined, the service provider did see revenue growth in the business segment, particularly from Ethernet and other IP-based services.

The service provider said it expects growth of its Ethernet products to continue based on demand from its regional bank, healthcare and wireless operator customers.

It currently has 2,600 on-net buildings connected to its fiber network and it is growing that number as demand for its Ethernet services continues to rise as customers look to migrate off of legacy copper and TDM-based services like T-1 and ATM.

"One of the things that we have been able to do is convert a lot of the services that were copper-based and TDM-based to more of an IP-based type of services. That transformation is valuable one because it gives us longevity in that revenue stream and is easily scalable."

Today, FairPoint has about 25 percent market share in the business market. Sunu said they think they can "make headway in increasing our business share with this labor agreement behind us."

On the wholesale Ethernet front, FairPoint also made progress with its fiber-to-the-tower (FTTT) initiative for its wireless operator customers, ending the year with 1,100 sites connected to its fiber network.

"We continued to add to our fiber to the tower accounts, ending the year with nearly 1,100 sites connected with fiber and over 1,700 connections," Sunu said.

However compelling these gains were, overall revenues were also impacted by voice service and access revenue declines. Voice services revenue decreased $4.4 million primarily due to fewer lines in service, lower long-distance minutes of use and seasonality. Likewise, access revenue decreased $5.8 million primarily due to higher service quality penalties in the fourth quarter, the annual NECA cost study true-up which boosted revenue in the third quarter, the continued loss and conversion of legacy transport circuits and lower revenue assurance activity, which was partially offset by wholesale Ethernet growth.

Finally, data and Internet services revenue decreased $0.6 million due to fewer broadband subscribers, but that decline was partially offset by growth in retail Ethernet revenue.

Looking toward the rest of 2015, FairPoint said it expects to generate $105 million to $125 million of Unlevered Free Cash Flow adjusted for Estimated Avoided Costs in the first quarter. What's more, FairPoint forecast that annual capital expenditures are expected to be less than $120 million and aggregate annual pension contributions and OPEB payments are expected to be approximately $20 million.

Shares of FairPoint were listed at $16.78, down 44 cents or 2.56 percent, in Wednesday morning trading on the Nasdaq stock exchange.

For more:
- see the earnings release
- hear the webcast (reg. req.)

Special report: Wireline telecom earnings in the fourth quarter of 2014

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