FairPoint Communications Reports 2016 First Quarter Results

• Unlevered Free Cash Flow¹ of $34.7 million for the quarter
  
• Improving subscriber trends supported revenue of $206.8 million for the quarter
  
• Adjusted EBITDA¹ of $62.0 million for the quarter
  
• Capital expenditures of $25.9 million for the quarter
  
• Net income of $18.6 million for the quarter
  

CHARLOTTE, N.C., May 04, 2016 (GLOBE NEWSWIRE) -- FairPoint Communications, Inc. (Nasdaq:FRP) (“FairPoint” or the “Company”), a leading communications provider, today announced its financial results for the first quarter ended March 31, 2016.  As previously announced, the Company will hold a conference call and simultaneous webcast to discuss its results today at 8:30 a.m. (EDT).

“We delivered another solid quarter that was generally in line with our expectations,” said Paul H. Sunu, Chief Executive Officer.  “I am particularly pleased with improving trends in subscriber counts in the quarter, including slight growth in broadband subscribers, which reflect coordinated efforts to provide excellent customer service across all facets of our business.  I believe our results show we are gaining traction with many of our initiatives to advance our revenue transformation and establish a more stable revenue trajectory.”

Operating Highlights

The Company experienced growth in broadband subscribers and lower churn in residential voice subscribers relative to the fourth quarter of 2015.  A renewed focus on highlighting network investments to improve available broadband speeds as well as the Company's strong focus on providing excellent customer service is expected to yield further improvement in these metrics over time.

Strategic investments in the network continued during the quarter, including network construction related to meeting CAF Phase II commitments.  These strategic investments also further harden the network and improve overall service to customers.

The Company continues to drive growth in advanced services including hosted services revenue.  While still a relatively small part of total revenue, these growth-related revenues provide state of the art services to a growing customer base.

In the first quarter of 2016, Ethernet services contributed $23.6 million of revenue or 11.4% of total revenue as compared to $22.9 million or 10.7% of total revenue in the first quarter of 2015, as Ethernet circuits grew 13.2% year-over-year.  Growth in the Company's Ethernet products is expected to continue based on demand from customers such as regional banks, healthcare networks and wireless carriers.

The Company is focused on driving growth revenue² as a critical component of its continued revenue transformation.  In the first quarter of 2016, growth revenue was 29.7% of total revenue.

As of March 31, 2016, FairPoint had 2,704 employees, a decrease of 290 employees versus a year ago.

Financial Highlights

First Quarter 2016 as compared to Fourth Quarter 2015

Revenue decreased $3.0 million during the first quarter of 2016 to $206.8 million. 

The following strategic revenue categorization² is presented to provide visibility into revenue trends for the Company as a result of product and service evolution within our industry as well as the Company's efforts to continue to transform revenue to more sustainable growth products.  We intend to present this strategic revenue categorization each quarter.

• Growth revenue decreased by $1.0 million, or 1.6%, primarily due to the renewal of certain expiring long-term Ethernet contracts partially offset by Ethernet circuit growth as well as increases in broadband and hosted and advanced services revenue.
  
• Convertible revenue² decreased by $0.3 million as businesses shifted from traditional voice products to VoIP and hosted products.
  
• Legacy revenue² was down $0.3 million resulting from the decline in legacy switched access. 
  
• Regulatory funding revenue² was relatively flat.
  
• Miscellaneous revenue² decreased $1.3 million primarily due to lower customer late payment fees.
  

The following traditional categorization of revenue is presented to provide reporting continuity.

• Voice services revenue decreased $1.5 million primarily due to fewer lines in service.
  
• Access revenue was relatively flat.
  
• Data and Internet services revenue decreased $0.3 million due to the renewal of certain expiring long-term retail Ethernet service contracts partially offset by increased broadband revenue from modest subscriber growth.
  
• Regulatory funding revenue was relatively flat.
  
• Other services revenue decreased $1.0 million primarily due to lower customer late payment fees.
  

Operating expenses, excluding depreciation and amortization, increased $11.2 million to $102.1 million in the first quarter of 2016 compared to $90.9 million in the fourth quarter of 2015 primarily resulting from higher compensated absences expense as well as higher severance expense, partially offset by lower bad debt expense.  The expense for compensated absences for certain employees is accrued in the first quarter and released as paid time off is incurred.

Adjusted Operating Expenses¹ were $144.9 million in the first quarter of 2016 compared to $145.9 million in the fourth quarter of 2015.  The decrease was primarily due to lower bad debt expense arising from nonrecurring write-off recoveries in the first quarter of 2016 as well as lower operating taxes partially offset by higher building expenses and payroll taxes.

Adjusted EBITDA decreased $1.9 million to $62.0 million in the first quarter of 2016 compared to $63.9 million in the fourth quarter of 2015.  The decrease was driven by lower revenue which was somewhat offset by favorable operating expenses.

Capital expenditures were $25.9 million in the first quarter of 2016 compared to $33.2 million in the fourth quarter of 2015.  The decrease was primarily due to the timing of planned capital projects as well as higher motor vehicle and CAF Phase II spending in the fourth quarter of 2015.

Unlevered Free Cash Flow was $34.7 million in the first quarter of 2016 compared to $23.3 million in the fourth quarter of 2015.  Unlevered Free Cash Flow was higher in the first quarter of 2016 primarily due to lower capital spending and lower cash contributions towards our pension plans and OPEB payments, partially offset by lower Adjusted EBITDA.  

Net income was $18.6 million in the first quarter of 2016 compared to $42.3 million in the fourth quarter of 2015.  The change was primarily due to income tax expense, higher operating expenses and lower revenue.

Cash was $23.1 million as of March 31, 2016 compared to $26.6 million as of December 31, 2015. The decrease is primarily due to the scheduled semi-annual interest payment towards the Company's senior notes and payment of employee bonuses in the first quarter.  Total gross debt outstanding was $920.8 million as of March 31, 2016, after the regularly scheduled principal payment of $1.6 million on the term loan made during the first quarter of 2016, as compared to $922.4 million as of December 31, 2015.  The Company's $75.0 million revolving credit facility was undrawn, with $61.1 million available for borrowing after applying $13.9 million of outstanding letters of credit.

First Quarter 2016 as compared to First Quarter 2015

Revenue was $206.8 million in the first quarter of 2016 compared to $214.0 million a year earlier.

Strategic revenue categorization:

• Growth revenue increased by $2.4 million as we experienced growth in broadband revenue and Ethernet revenue, as well as hosted and advanced services revenue, compared to the prior year.
  
• Convertible revenue decreased by $6.7 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
  
• Legacy revenue decreased by $5.6 million resulting from a decline in voice access lines and legacy switched access revenue versus a year ago. 
  
• Regulatory funding revenue grew by $1.7 million primarily due to CAF Phase II transitional revenue in 2016.
  
• Miscellaneous revenue increased $1.0 million due to higher service quality credits in the first quarter of 2015 during the strike.
  

The following traditional categorization of revenue is presented to provide reporting continuity.

• Voice services revenue declined $7.4 million resulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
  
• Access revenue declined $2.6 million due to the continued loss and conversion of legacy transport circuits to Ethernet services.  That impact was partially offset by an increase in wholesale Ethernet revenue, as a higher number of circuits more than offset the impact of the renewal of certain expiring long-term Ethernet contracts and lower service quality credits.
  
• Data and Internet services revenue increased $1.3 million as speed upgrades and price increases on broadband products more than fully offset subscriber declines. 
  
• Regulatory funding revenue grew $1.7 million primarily due to CAF Phase II transitional revenue in 2016.
  
• Other services revenue decreased $0.2 million.
  

Operating expenses, excluding depreciation and amortization, decreased $81.2 million to $102.1 million in the first quarter of 2016 compared to $183.3 million in the first quarter of 2015 primarily due to $49.5 million in lower labor negotiation related expenses, lower OPEB expense and lower bad debt expense partially offset by higher employee expenses in the first quarter of 2016 due to the strike in the first quarter of 2015.  However, OPEB and labor negotiation related expenses are excluded from the Company's definition of Adjusted Operating Expenses and Adjusted EBITDA.

Adjusted Operating Expenses were $144.9 million in the first quarter of 2016 compared to Adjusted Operating Expenses plus Estimated Avoided Costs¹ of $152.3 million a year earlier.  The decrease was primarily the result of lower employee costs and lower bad debt expense driven by nonrecurring write-off recoveries. Lower employee costs primarily resulted from lower salary and benefit costs due to fewer headcount and lower overtime partially offset by a higher bonus accrual.

Adjusted EBITDA was $62.0 million in the first quarter of 2016 compared to Adjusted EBITDA minus Estimated Avoided Costs¹ of $61.7 million a year earlier.  The increase is due to operating expense savings partially offset by lower revenue.

Capital expenditures were $25.9 million in the first quarter of 2016 compared to $26.4 million a year earlier.

Unlevered Free Cash Flow of $34.7 million in the first quarter of 2016 increased $1.8 million compared to Unlevered Free Cash Flow minus Estimated Avoided Costs¹ of $32.9 million a year earlier.  The increase was due to lower cash contributions towards our pension plans, lower capital expenditures and higher Adjusted EBITDA.

Net income was $18.6 million in the first quarter of 2016 compared to a net loss of $45.2 million in the first quarter of 2015.  The change was primarily due to a decrease in operating expenses partially offset by lower revenue, as described above, as well as additional income tax expense.  Net income is positive in the first quarter of 2016 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 through 2016, but we do not expect that it will impact our cash income taxes or change our accumulated federal net operating loss carryforwards. 
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¹ Unlevered Free Cash Flow minus Estimated Avoided Costs, Adjusted EBITDA minus Estimated Avoided Costs, Adjusted Operating Expenses plus Estimated Avoided Costs, Unlevered Free Cash Flow, Adjusted EBITDA and Adjusted Operating Expenses are non-GAAP financial measures.  Additional information regarding the calculation of these non-GAAP measures and a reconciliation to net income (loss) are contained under "Use of Non-GAAP Financial Measures" and in the attachments to this press release.
² Additional information and definitions for regulatory funding revenue and strategic revenue categorization and its components are contained in the attachments to this press release.

2016 Guidance

For full year 2016, the Company expects to generate $105 million to $120 million of Unlevered Free Cash Flow. In addition, Adjusted EBITDA is expected to be $245 million to $255 million, annual capital expenditures are expected to be $115 million to $120 million and aggregate annual 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 period ended March 31, 2016, which will be filed with the SEC no later than May 10, 2016. The Company's results for the quarter ended March 31, 2016 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 first quarter 2016 results today at 8:30 a.m. (EDT).

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 (877) 527-1570 (US/Canada) or (615) 247-0090 (international) and enter passcode 96032352 when prompted.  The title of the call is the First Quarter 2016 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 (855) 859-2056 (US/Canada) or (404) 537-3406 (international) and enter the passcode 96032352 when prompted.  The recording will be available from Wednesday, May 4, 2016, at 12:30 p.m. (EDT) through Wednesday, May 11, 2016, at 11:59 p.m. (EDT).

Use of Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including but not limited to Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs, Adjusted Operating Expenses, Adjusted Operating Expenses plus Estimated Avoided Costs and the adjustments to the most directly comparable GAAP measure used to determine the non-GAAP measures. Management believes Adjusted EBITDA provides a useful measure of covenant compliance, Unlevered Free Cash Flow may be useful to investors in assessing the Company's ability to generate cash and meet its debt service requirements and Adjusted Operating Expenses may be useful to investors in understanding period-to-period operating performance.  The maintenance covenants contained in the Company's credit facility are based on Consolidated EBITDA, which is consistent with the calculation of Adjusted EBITDA included in the attachments to this press release.

For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in our credit agreement), costs, expenses and charges related to the renegotiation of labor contracts including, but not limited to, expenses for third-party vendors and losses related to disruption of operations (including any associated penalties under service level agreements and regulatory performance plans) are permitted to be excluded from the calculation.  We believe this includes, among others, the costs paid to third-parties for the contingent workforce and service quality penalties due to the disruption of operations.  On October 17, 2014, two of our labor unions in northern New England initiated a work stoppage and returned to work on February 25, 2015.  As a result, significant union employee and vehicle and other related expenses related to northern New England were not incurred between October 17, 2014 and February 24, 2015 (the "work stoppage period").  Therefore, to assist in the evaluation of the Company's operating performance without the impact of the work stoppage, we estimated the union employee and vehicle and other related expenses using historical data for the work stoppage period by quarter that we believe would have been incurred absent the work stoppage ("Estimated Avoided Costs").  Estimated Avoided Costs is a pro forma estimate only.  Actual costs absent the strike may have been different.  In the first quarter of 2015, had our incumbent workforce been in place, actual labor costs during the work stoppage period may have been higher than the $27 million recorded as Estimated Avoided Costs due to significant winter storm activity that increased our service demands; however, those incremental storm-related costs would have been an allowed add back to Adjusted EBITDA under the credit agreement. Estimated employee expenses avoided during the work stoppage period include salaries and wages, bonus, overtime, capitalized labor, benefits, payroll taxes, travel expenses and other employee related costs based on a trailing 12-month average calculated per striking employee per day during the work stoppage period less any actual expense incurred.  Estimated vehicle fuel and maintenance expense savings, which resulted from the contingent workforce utilizing their own vehicles, for the work stoppage period were estimated based on a trailing 12-month average of historical costs less actual expense incurred.  "Adjusted EBITDA minus Estimated Avoided Costs", "Unlevered Free Cash Flow minus Estimated Avoided Costs" and "Adjusted Operating Expenses plus Estimated Avoided Costs" may be useful to investors in understanding our operating performance without the impact of the two unions' work stoppage.

The Company believes that the non-GAAP measures may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends that may not otherwise be apparent when relying solely on GAAP financial measures.  In addition, the non-GAAP measures are useful for investors because they enable them to view performance in a manner similar to the method used by the Company’s management.

However, the non-GAAP financial measures, as used herein, are not necessarily comparable to similarly titled measures of other companies. Furthermore, these non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income or loss, operating income, cash flow or other combined income or cash flow data prepared in accordance with GAAP. Because of these limitations, Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow, Unlevered Free Cash Flow minus Estimated Avoided Costs, Adjusted Operating Expenses, Adjusted Operating Expenses plus Estimated Avoided Costs and related ratios should not be considered as measures of discretionary cash available to invest in business growth or reduce indebtedness. The Company compensates for these limitations by relying primarily on its GAAP results and using the non-GAAP measures only supplementally.  A reconciliation of these measures to net income (loss) are contained in the attachments to this press release.

About FairPoint Communications, Inc.

FairPoint Communications, Inc. (Nasdaq:FRP) provides advanced data, voice and video technologies to single and multi-site businesses, public and private institutions, consumers, wireless companies and wholesale re-sellers in 17 states. Leveraging an owned, fiber-based Ethernet network — with more than 21,000 route miles of fiber, including approximately 17,000 route miles of fiber in northern New England — FairPoint has the network coverage, scalable bandwidth and transport capacity to support enhanced applications, including the next generation of mobile and cloud-based communications, such as small cell wireless backhaul technology, voice over IP, data center colocation services, managed services and disaster recovery.  For more information, visit www.FairPoint.com. 

Cautionary Note Regarding Forward-looking Statements

Some statements herein or discussed on our earnings conference call are known as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, expectations and intentions and other statements contained herein that are not historical facts. When used herein, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”, "should", "could", "may", "will" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including the Company's plans, objectives, expectations and intentions and other factors, including the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and the factors discussed in our Quarterly Report on Form 10-Q for the period ended March 31, 2016. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date hereof. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in expectations or otherwise.  However, your attention is directed to any further disclosures made on related subjects in the Company's subsequent reports filed with the SEC.

Certain information contained herein or discussed on our earnings conference call may constitute guidance as to projected financial results and the Company's future performance that represent management's estimates as of the date hereof. This guidance, which consists of forward-looking statements, is prepared by the Company's management and is qualified by, and subject to, certain assumptions. Guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither the Company's independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and are based upon specific assumptions with respect to future business decisions, some of which will change. Management generally states possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent actual results, which could fall outside of the suggested ranges. The principal reason that the Company releases this data is to provide a basis for management to discuss the Company's business outlook with analysts and investors. The Company does not accept any responsibility for any projections or reports published by any such outside analysts or investors. Guidance is necessarily speculative in nature and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, the Company's guidance is only an estimate of what management believes is realizable as of the date hereof. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.