3 Things Frontier Communications Wants Investors to Know

5/10/17

By Daniel B. Kline, MotleyFool

Frontier Communications (NASDAQ:FTR) may have finally turned a corner -- or at least, that's what its CEO wants investors to believe.

The company still lost subscribers in the first quarter of 2017, but it has finally stopped the bleeding in the California, Texas, and Florida (CTF) properties it bought from Verizon. This quarter marks a full year since the company completed that deal. CEO Dan McCarthy laid out what he sees as the progress his company has made in the Q1 earnings release.

"During the quarter, we continued to realize our targeted efficiencies and synergies, and I am also pleased to have achieved our third consecutive quarter of improved FiOS gross additions in the California, Texas and Florida (CTF) markets," he said. "We are executing on a number of initiatives with the goal of enhancing customer experience, reducing churn, stabilizing revenues and generating cash flow."

McCarthy detailed a number of those initiatives during the earnings call, which was transcribed by Seeking Alpha (registration required).

A cable remote control

FRONTIER HAS LOST CABLE SUBSCRIBERS AS HAVE MOST OF ITS RIVALS. IMAGE SOURCE: GETTY IMAGES.

There is a reason for the dividend cut

Frontier slashed its quarterly dividend from $0.105 to $0.04. That's likely to outrage some of its shareholders, who are already facing a 15-1 reverse stock split. McCarthy tried to explain why the board of directors made the decision.

"As you have seen, we have reduced our quarterly dividend to $0.04 per share, which will make available approximately $300 million of additional cash annually, increasing to $400 million annually in the second half of 2018,"he said. "We'll use this to reduce debt at a faster rate, and we are now targeting a leverage ratio of 3.5 times over the next few years."

The slashed dividend reduces the short-term incentive to own the stock, but it gives the company a better chance of long-term survival. This was likely a tough move for the board to make, but it was almost certainly the right one.

The capital situation is being addressed

Frontier spent $10.54 billion buying the CTF properties from Verizon, which left it with a challenging debt load. The dividend cut will help it manage that, but it's not the only thing the company has done in that regard, according to McCarthy.

"We also intend to issue secured debt in the near term to address upcoming maturities and reduce our cash interest expense," he said.

The CEO also explained that the company and the board were continually evaluating "capital allocation to ensure we strike the right balance between investing in the business, paying down debt, and returning capital to shareholders."

Subscriber loss is being addressed

While the numbers trended better in Q1, Frontier still had a net loss of 155,000 residential customers and 18,000 business subscribers, McCarthy made it clear the company recognizes that's a problem and plans to address it.

He explained that the positive changes happened because the company has amped up its marketing. He also noted that the company has finished purging its books of former Verizon customers whom it acquired in the switch-over, but who never actually paid their bills.

"Our field operations in the CTF markets have made significant progress in Florida and Texas as a result of standardization of processes, enhancements of support systems, and improvement in all facets of the service assurance team," he said. Weather impacted the company's Q1 efforts in California, but McCarthy expects its improvements in that state will soon mirror those in Texas and Florida.

Frontier has also improved its technology, launching a revamped e-commerce platform in April "that creates an additional sales channel and will improve the customer experience and reduce call center volumes," the CEO said. In addition, the company has added a self-serve installation system for FiOS video.

"This will improve customer satisfaction by providing customers the ability to complete FiOS installations on their own schedule," McCarhy said. "The introduction of this system will also increase efficiency and improve internal resource utilization by reducing reliance on contractors."

Cautious optimism?

While McCarthy sounded optimistic about his company's efforts, investors should take his words with at least a little skepticism. He has done a very good job managing costs, but he has also regularly promised a return to subscriber growth, only to later offer up valid-sounding excuses when it failed to happen.

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