2 Things Frontier Communications Does Right

3/16/17

By Daniel B. Kline, MotleyFool

For the past three quarters, Frontier Communications (NASDAQ:FTR) has produced disappointing results. In fact, since the company purchased Verizon's wireline business in California, Texas, and Florida (CTF), customer counts have steadily dropped for the internet and cable company. That $10.54 billion deal more or less doubled the size of the company, giving it not only, 3.3 million voice connections, 2.1 million broadband subscribers, and 1.2 million FiOS video customers, but also the size needed to operate more efficiently.

Parts of the deal have worked out, but Frontier has been bleeding subscribers for all three quarters since the purchase closed, losing 144,000 residential customers and 14,000 business subscribers in Q4 alone. The company's stated reason for that continued decline keeps changing.

In Q2 and Q3, CEO Daniel McCarthy blamed suspended marketing efforts, due to the company's desire to solve problems for its existing customers before attracting new ones. In Q4, he said that getting rid of subscribers who had not been paying caused the drops.

In the Q3 earnings release, McCarthy said he expected a return to normal, and the company wrote that it "anticipates improved customer additions in the fourth quarter." In the Q4 release, McCarthy talked about dropping non-paying customers, something that had not been mentioned in previous releases or earnings calls.

"Results for the fourth quarter were impacted by our intensified efforts to resolve acquired accounts in California, Texas and Florida that we have determined to be non-paying," he said, promising that improvements would come. "This process is almost complete, and we expect to return to a normalized trend by the start of the second quarter."

Aside from losing subscribers though, McCarthy and Frontier are doing many things right. But this doesn't mean investors should ignore this glaring problem.

A cable remote points at a TV.

FRONTIER HAS LOST CABLE, ALONG WITH BROADBAND CUSTOMERS. IMAGE SOURCE: FRONTIER.

Here's what Frontier is doing right

The company knows how to be efficient. One of the goals of the Verizon purchase was to allow the company to spread its expenses out over more customers, and lower its overall operating costs. That part of the deal has worked out perfectly.

"We now expect annualized cost synergies of $1.6 billion to be achieved by mid-year 2018, up from the $1.4 billion target outlined in the 2016 third quarter earnings report, and a full year earlier than anticipated," McCarthy said in the Q4 earnings release. "We expect $1.25 billion of the $1.6 billion in synergies will be achieved by the end of the first quarter of 2017, which is a quarter earlier than previously announced."

The second thing Frontier does well is manage its financial obligations. Despite the large debt the company incurred buying the CTF properties, its lenders clearly believe it will eventually get things back on track. In Q4, the company announced that it had amended its revolving credit agreements, including a term loan due in 2021, merging them into a single agreement. That new deal not only simplified things, it also pushed the 2021 obligation back to 2022 and extended the term of its revolving credit line from 2018 to 2022.

"These amendments significantly improve and solidify Frontier's finance picture, and provide us with additional flexibility as we transition to normalized operations in the acquired CTF properties over the coming quarters," said CFO Perley McBride in the Q4 earnings release.

This only matters if...

Being well-managed only will get Frontier so far. Cutting expenses and convincing creditors to give you longer terms only works if, at some point, the company stops losing subscribers, and turns its loss into profit.

Frontier lost $587 million in 2016, almost twice the $316 million it lost the previous year. That loss comes despite all the savings the company has managed to deliver in operating expenses because of the expanded size it gained in the Verizon CTF deal. If the company has any hopes of a future, its CEO needs to stop finding excuses for losing customers, and show that Frontier can stabilize, and eventually return to growth.

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