In the previous article on Frontier Communications, I offered a simplified model for estimating future Frontier Communications financial performance based only on Revenue, EBITDA, Interest Expense, Capex and net additions or reductions in debt (assuming or adjusted for changes in current assets and liabilities other than long-term debt becoming current). All remaining costs are small relative to the total; in addition, because some of those small changes are positive and some negative, they cancel each other out to make those items included represent historically 99% of the contribution to Frontier Communications financial performance.
From this work, the following key metrics are forecasted to be delivered in the upcoming Q3'2018 report:
Revenue: $2,140M (down 1% from last quarter's $2.163M revenue)
This revenue would be consistent with the revenue decline trend apparent after the consummation of the CTF acquisition in early 2016:
with the blue dots showing actual result, the blue line indicating the regression line through the actual results and orange dots reflecting my forecast for earnings declines going forward. The least squares regression indicates a 1% revenue decline for Q3 and the revenue forecasted is based upon that trend.
EBITDA: $846M (39.5% EBITDA margin on revenue)
--Note: This represents true EBITDA, not the "adjusted" EBITDA as provided by Frontier.
Interest Expense: $385M
Change to cash position (1): $161M addition to cash position.
Cash Position at Q3 End (1): $545M
Note that the expected cash level is sufficient to redeem the debt tranche of $443M due on the day after Q3 end (October 1st, 2018), so I am expecting this tranche to have been redeemed by internally generated cash, leaving $102M in the treasury as of October 2nd, 2018.
(1) The Change to Cash Position excludes any changes in current assets and liabilities (which cancel out over multiple quarters) and the impact of creating or using cash through an increase of or a reduction of liabilities.
We may get an update on the debt tranche maturing earlier in the Q4 time frame. Even as this debt tranche did not mature in Q3, the report will be coming a month after the tranche will have hit maturity and we may get an update on the disposition of the debt tranche as well as how the company chose to finance the redemption. In my view, this will provide some key information about how Frontier is likely to be managed going forward.
What is interesting about this earnings report is that short interest has again increased going into this report. This suggests general pessimism about the report. Short interest over time (also reported by Business Quant in his recent article, "Frontier Communications: Short Attack Continues") has begun to increase as you can see in this table:
Even after the conversion of the preferred to common shares, at which time I expected significant short interest to be outstanding, short interest has climbed again about 10% after the conversion. There is no obvious reason other than an expectation of a re-organization process (which I have argued and used the model to show is years off, with no obvious catalyst until late 2022) or that the next earnings report will (again in the view of bears) be a bad one.
With a short interest of 33.7M shares on 105.9M outstanding shares, yielding 31.8% short interest, the short interest level remains high and appears headed even higher. The last four short interest reports over the past two months have all represented increases in the intervening half-month period.
It will be interesting to look at short interest at month-end October and again at mid-November (just before and after the earnings report) to see the impact of Q3 earnings on that level, if at all.
I will be writing up a summary after the 10Q is published, including a comparison of actual results versus the results modeled by this author as given above.
Disclosure: I am/we are long FTR, PIY.