Frontier rakes in record fiber subs, but build costs are rising, too

Frontier Communications added record fiber subscribers amid its aggressive fiber network upgrades and buildout plan. But, in a bit of a surprise, the company raised anticipated capital expenditures for the year due to a confluence of factors.

Frontier added a record 87,000 fiber subscribers (including 83,000 residential subs) in the first quarter of 2023, up from +54,000 in the year-ago quarter. Those results beat the 76,000 residential fiber subs Frontier was expected to add in the period.

Frontier ended the quarter with 1.76 million fiber customers: 1.65 million residential subs and 110,000 business customers.

Figure 1: Click here for a larger version of this image.
(Source: Frontier Communications Q1 2023 earnings presentation)

Frontier said it built fiber to an additional 339,000 locations in Q1 2023, up 60% from the 211,000 it built in the year-ago period. Frontier's Q1 buildout was better than the 300,000 locations expected by the analysts at New Street Research. Frontier ended the quarter with 5.5 million fiber passings and 15.4 million total passings.

Capex bump

While Frontier's fiber growth engine continues to hum along, the company is dealing with higher costs related to its fiber initiative. The company raised its 2023 capex guidance to a range of $3 billion to $3.2 billion, up from an original outlook of $2.8 billion.

Frontier blamed the increase on a couple of factors – a decision to build inventory opportunistically where it saw supply chains ease a bit in the quarter and higher build costs as it scales its build into new geographies. Frontier is also seeing higher labor costs being driven by general inflation and higher rates as some of its multi-year labor contracts come up for renewal.

The anticipated increase in capex this year concerned investors. Frontier shares were down $2.33 (-10.94%) to $19.13 each in Friday morning trading.

Update: In a note issued after today's conference call, New Street Research analyst Jonathan Chaplin said the increase in Frontier's 2023 anticipated build costs were unexpected. "The magnitude of the increase is surprising; we thought Frontier was more insulated because they are deploying at scale and because they had long-term contracts in place. It seems some of those contracts are coming up for renewal sooner than we had expected," he wrote.

Overall, Frontier expects fiber build costs in 2023 to be in the range of $1,000 to $1,100. But it's confident that total project build costs will remain at about $1,000 per location as it mixes in lower-cost locations in some new-build states and benefits from aerial builds and an increased focus on multiple dwelling units (MDUs), Frontier CFO Scott Beasley said on Friday's earnings call.

The current capex picture isn't expected to impact Frontier's overall fiber buildout/upgrade plan. "We're confident that the 10 million locations is still attractive to build out," Beasley said. Frontier is also continuing to explore an additional 1 million to 2 million additional fiber passings beyond the original 10 million target.

Frontier says it's too early to tell how this year's cost headwinds might impact future opportunities coming by way of the $42.5 billion Broadband Equity, Access and Deployment (BEAD) program. New Street Research estimates that there are 1.2 million BEAD-eligible locations in Frontier's footprint.

Frontier President and CEO Nick Jeffery believes the higher per-location costs being seen in 2023 will be temporary. But he stressed that Frontier is seeing faster fiber service penetrations, improving margins and an emerging lift in average revenue per user (ARPU).

Consumer fiber ARPU in Q1 dropped 1.1%, to $61.44, driven by autopay and gift card incentives launched in the third quarter of 2021. But that picture is starting to change as the company eliminates price locks and cuts down its use of gift cards.

Pricing actions aim to boost ARPU

Additionally, Frontier recently initiated several consumer pricing changes for value-added services that were previously free. Whole-home Wi-Fi, for example, now goes for $10 per month, its Home Shield Elite product is now $6 per month extra and the company is now charging $50 for professional installs. Those actions are driving new fiber customer monthly ARPU to a range of $65 to $70, the company said.

New Street Research expects ARPU pressure at Frontier to ease in the second quarter of the year and return to growth in the third quarter.

On the financial end, Q1 revenues of $1.44 billion were down 0.5% year-over-year, but beat an expected $1.43 billion. EBITDA grew 2% year-over-year, Frontier's first increase in that category in over five years.

Consumer fiber revenues rose 10.1%, to $448 million, but overall consumer revenues dropped 1.9% to $761 million amid ongoing declines in revenues tied to legacy copper broadband and voice services.

Frontier is also beefing up and speeding up its original cost savings target to $500 million by the end of 2024. Its prior target was $400 million by the end of 2024. Frontier is approaching that target through a range of streamlining and simplification initiatives, including improved field operations, self-service capabilities, the consolidation of call centers and an ongoing reduction in copper infrastructure.

Update: New Street's Chaplin found that Frontier's EBIDTA growth is coming from Frontier's cost-cutting efforts. "We would think of the sustainable inflection in EBITDA being when we get to the point where growth in high margin fiber revenue is offsetting declines in lower value copper revenues – we are not quite there yet," he added.

Frontier believes EBIDTA will rise significantly as fiber service penetration climbs in the years following fiber network upgrades. With EBIDTA from its 2020-2022 fiber build at about $6 per passing in the trailing 12 months (with 18% penetration), Frontier expects that to rise to about $120 per passing at 24 months (with 33% penetration), and roughly $350 per passing at "maturity," when service penetration reach an expected 45%.

Related posts:

— Jeff Baumgartner, Senior Editor, Light Reading