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4 Things Frontier Communications' Management Wants Investors to Know

By Daniel B. Kline – Updated Nov 8, 2016 at 8:13AM

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The third quarter was not what CEO Dan McCarthy hoped for, but he has a plan.

Frontier Communications (FTR) had a mediocre quarter, but the company insists its plans remain on track. The cable and internet company saw an overall drop in subscribers in Q3, losing about 150,000 overall customers. That's a discouraging number for the company in its second full quarter since spending $10.54 billion buying Verizon's (VZ -0.07%) wireline business in California, Texas, and Florida (CTF). 

Those numbers would be less troubling if Frontier had only lost pay-television customers, because that has been an industrywide problem. Unfortunately, the company also saw its broadband base fall from 4.5 million in Q2 to 4.4 million in Q3. 

Despite the declining numbers, CEO Dan McCarthy's comments on the earnings release paint a positive picture by focusing on numbers other than the subscriber losses:

I am pleased that we achieved third-quarter adjusted EBITDA of $1 billion. We are reaffirming our adjusted EBITDA guidance for the fourth quarter and outlook for 2017. We are on course to improve our revenue performance, principally by returning to normal customer trends in the CTF market over the coming quarters.

McCarthy expanded on how the company intends to move forward and shared his thoughts on how it has executed in a conference call after earnings were released. These are the four most important areas he touched on.

Frontier has lost cable subscribers. Image source: Author.

He does not have blinders on

While McCarthy has expressed faith in where his company is going, he doesn't sugarcoat the Q3 results. He noted that revenue declined $52 million in Q3, and took direct responsibility for calling the result "unacceptable" in the call that was transcribed by Seeking Alpha (registration required).

"I wanted to assure you that I'm focused on addressing and resolving the issues hindering our performance," he said. "I'm fully aware that the third-quarter results underscore the urgent need for our expanded business to perform at the higher level, where I know it can and should. And you have my personal commitment that we will do so."

The company is changing its structure

McCarthy recognizes that customer retention and acquisition need to be approached in a different way. During the call, he announced a new customer-focused organizational structure and the creation of commercial and consumer business units.

According to McCarthy, "This change is designed to improve our execution and operational effectiveness, increases spans of control in the organization, and makes us more nimble, while at the same time eliminating duplicative costs associated with our former structure." He also explained that it became apparent after Frontier's first month operating the former Verizon properties that the change was needed.

The CTF numbers are getting better

"CTF subscriber trends improved sequentially in the third quarter, although it is not yet at the rate we are targeting," the CEO said. McCarthy explained that the slower rate of acquisition happened, in part, because the company turned its marketing efforts back on during a traditionally slow part of the year. Frontier had previously shut down its marketing efforts as it integrated the Verizon territories beginning April 1.

Cost efficiencies remain a target

Part of the logic behind buying the CTF properties was that it would be cost-effective for Frontier. That has proven to be the case. While subscriber numbers have been disappointing, the company has over performed when it comes to wringing out cost savings from the deal.

"In September, we raised our synergy target to $1.4 billion per year, up from $1.25 billion target outlined in the second-quarter earnings report," McCarthy said. "Yet-to-be attained cost synergies of $250 million are anticipated to be achieved by mid-year of 2017 with the incremental $150 million anticipated to be achieved by mid-year of 2019."

That does not cover up the company's other problems, but it does buy the CEO time to fix them. You can't build a long-term, sustainable business by cutting costs and losing revenue, but managing expenses will give McCarthy time to fully execute his vision.

It has not been proven that the company will be able to return to growth -- in fact, the last two quarters suggest otherwise. But controlling the financial bleeding reduces the impact of the decline in paying customers.

Daniel Kline has no position in any stocks mentioned. He does not care for Thanksgiving. The Motley Fool recommends Verizon Communications. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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