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Frontier Eyes Second Half Rebound

It was definitely not a spring to remember for Frontier.

Suffering through its second straight down quarter, Frontier Communications Corp. (NYSE: FTR) reported lower revenue and troubling subscriber losses across its legacy footprint during Q2. In its first earnings report since picking up three large properties from Verizon Communications Inc. (NYSE: VZ) in Florida, Texas and California, and thereby doubling in size, the US telco recorded $1.33 billion in revenue for its legacy markets in the quarter, down from $1.37 billion in the year-ago period and $1.26 billion in Q1. At the same time, it shed about 100,000 residential subscribers in its existing markets and another 100,000 broadband customers in the three new markets during the quarter. (See Frontier: Nose to Grindstone After Q1 Declines.)

Due in large part to these trends, Frontier racked up a net loss of $80 million, or 7 cents per share, in the spring period. That's a big improvement from its $240 million net loss in Q1 but a deterioration from its $28 million net loss a year earlier. Overall, Frontier reported $2.6 billion in consolidated revenue and $311 million in operating income for the quarter.

Frontier executives blamed the lackluster results in the new Verizon territories on their previously announced decision to focus on retaining voice subscribers in their legacy markets and upgrading their customer service teams during the quarter. They insisted that the broadband subscriber numbers should start rising in the new markets as they ramp up marketing efforts there over the summer and start boosting data transmission speeds to at least 50 Mbit/s and offering IPTV service to hundreds of thousands more homes.

Specifically, Frontier's plans call for offering broadband speeds of 50 Mbit/s or 100 Mbit/s to at least 2 million additional households over the next year, bringing its total coverage to more than 40% of its footprint. With the addition of the Verizon properties, Frontier now has nearly 4.6 million broadband customers, up from 2.5 million before.

The telco also plans to extend its IPTV service, Vantage TV, to another 500,000 households over the next year as it continue to pivot away from its legacy voice business, which has been steadily losing subscribers. With the pickup of Fios TV subscribers, it now has more than 1.6 million video customers, up from 543,000 before the Verizon deal kicked in. By the end of the decade, Frontier aims to offer IPTV service to more than 7 million homes across its sprawling, mainly rural footprint. (See Video: Frontier's Final Frontier .)

In addition, Frontier intends to build up its commercial services business by rolling out more advanced products to commercial customers. The telco, which lost about 5,000 business customers in its legacy markets during the second quarter, now has 528,000 commercial subscribers, up from 284,000 before the Verizon acquisition closed.

"With the doubling of our size, we now have the scale to realize significant opportunities across our footprint," Frontier President and CEO Daniel McCarthy told analysts on the company's earnings call late Monday. "We expect to see strong demand for these new capabilities."

On their earnings call, Frontier execs also touted their greater than anticipated cost-savings synergies from the Verizon deal. Boasting that they have already achieved $1 billion in annualized cost synergies from the Verizon acquisition, up from an initial target of $700 million, they said they are now shooting for $1.25 billion in annual cost savings.

Unimpressed by the results, however, many investors are now selling the company's shares. Frontier's stock price plunged nearly 10% to $4.70 per share in afterhours trading yesterday and early morning trading today before starting to recover. As of time of publication, the stock was down about 6% over the past 24 hours to $4.78 a share.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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brooks7 8/4/2016 | 6:13:15 PM
Re: Difficult position I was AFC's CTO...I know the IOCs and Frontier extremely well.

 

seven
KBode 8/4/2016 | 5:13:36 PM
Re: Difficult position You might be surprised by how non-rural a lot of these areas are. There's a lot of second and third tier cities nobody much wants to spend money on upgrading either, especially in lower income blue collar cities where ROI is lower. But yes, given the experience many companies have had with Verizon and Reverse Morris Trusts, there's quite a bit of wreckage in the wake of these kinds of deals.
brooks7 8/4/2016 | 4:36:19 PM
Re: Difficult position The thing is that the 50% of the footprint is really rural and does not have as much competition as noted here.  So, you are talking about the competition in Orange County and talking about Elk Grove.  Apples and Oranges.

Is buying footprint from Verizon the best idea?  Well, it hasn't worked for anyone so far.

seven

 
KBode 8/4/2016 | 1:34:04 PM
Re: Difficult position I know that, but that wasn't really my point. The overwhelming majority of the footprint is not FiOS, and will never be upgraded to pure FTTH. They're in a horrible position to compete with cable across more than 50% of their market, and are now saddled with debt from these acquisition deals. 
brooks7 8/4/2016 | 1:30:36 PM
Re: Difficult position The FiOS properties can do well past 50 and have as part of Verizon for years.

seven

 
KBode 8/4/2016 | 9:55:01 AM
Re: Difficult position They're a mix of fiber and DSL. And the company's recent 50 Mbps announcement covers both recently acquired and older territories. But even at 50 Mbps (probably 25 Mbps or less in the field) cable still outperforms. Fortunately for Frontier, there is no viable fixed-line alternative across a huge swath of its network.
brooks7 8/3/2016 | 5:29:07 PM
Re: Difficult position The urban properties that they just acquired are FiOS based and are not limited to 50 Mb/s.  The more rural properties would be very happy to see anything near that.

seven

 
KBode 8/3/2016 | 3:55:43 PM
Re: Difficult position The key problem remains that these Verizon deals saddle the acquiring telco with so much debt, they can't fund much needed upgrades. 50 Mbps (much less depending on loop length) to 2 million homes just isn't going to cut it if Frontier wants to seriously compete with cable. I always like it when investors get bullish on these second tier telcos with the ugly realities facing most of them. 
Mitch Wagner 8/2/2016 | 8:37:06 PM
Re: Difficult position Longer term view is fine -- if the stockholders wil hang in there for it. 
alanbreznick 8/2/2016 | 8:36:40 PM
Re: broadband Hi, Mike. They're using both fiber and copper to raise speeds level. But I'm not sure which technology they're using on those architectures. they don't say. I'm assuming it's some version of PON 
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