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Portfolio Update

Setting the Stage for a Strong 2014

By Roger S. Conrad, on Feb. 28, 2014

Although Consolidated Communications’ stock price wavered after the rural telecommunications outfit posted fourth-quarter results, the company’s earnings contained few surprises.

The firm’s revenue suffered a one-time hit of $2.2 million after the former SureWest, which Consolidated Communications acquired in 2012, missed a filing with the Federal Communications Commission.

Despite this hit, the company’s free cash flow comfortably covered the dividend.

Meanwhile, the company’s operating metrics fell within the ranges forecast by management.

Consolidated Communications’ grew the number of broadband subscribers by 3.4 percent from year-ago levels, with Ethernet connections surging by 47.3 percent.

The company also installed fiber connections to another 1,913 homes, bringing the penetration rate for this service to 29 percent. Management estimates that 20.5 percent of the residences eligible for fiber connections in its markets have subscribed to video services, while 30.3 percent have purchased Internet and data services.

The rural telecommunications provider took advantage of favorable borrowing conditions to term out all of its maturing debt to 2018 and beyond while slashing its annual interest expense by $5 million.

In the fourth quarter, the company realized another $760,000 in annual cost reductions from the integration of SureWest’s assets. These savings came on the heels of $25 million worth of synergies that Consolidated Communications achieved nine months ahead of management’s projections.

Over the long term, Consolidated Communications must attract enough broadband business to offset attrition rates in its traditional wireline business, reduced government subsidies and higher taxes.

Although the company continues to make all the right moves, fourth-quarter revenue (adjusted for one-time charges) still slipped 2.3 percent from year-ago levels.

Management attributed this weakness to lost subsidies, intense competition from cable companies in the consumer broadband market, sluggish spending by small to midsized businesses and a shrinking customer base for its legacy phone services.

On the bright side, the company grew its data subscriber base by 3.1 percent and its video customers by 4.2 percent, offsetting a 4.4 percent decline in wireline connections.

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