Frontier (NASDAQ:FTR) has bought its way into being a player (albeit a minor one) in the cable and internet spaces.
The company still has a fraction of the subscribers that the big boys do, but spending $10.54 billion to buy Verizon's (NYSE:VZ) wireline business in California, Texas, and Florida (CTF) at least got it a place at the table. That purchase effectively doubled the size of the company, adding approximately 3.3 million voice connections, 2.1 million broadband customers, and 1.2 million FiOS video subscribers.
At the time the deal closed in April, CEO Daniel McCarthy celebrated its importance. His remarks were strong and set the stage for what he hopes will be the company's next phase.
"This is a transformative acquisition for Frontier that delivers first-rate assets and important new opportunities, given our dramatically expanded scale," said the CEO. "It significantly expands our presence in three high-growth, high-density states, and improves our revenue mix by increasing the percentage of our revenues coming from segments with the most promising growth potential."
That's all true, but in the two quarters the company has reported on since the deal closed, Frontier has been going in the wrong direction. The company has been bleeding subscribers, and it wants investors to focus on anything other than the fact that it spent $10.54 billion on assets it could lose a considerable percentage of.
What is happening to Frontier?
It was reasonable to think that Frontier would lose some subscribers in the immediate aftermath of the Verizon purchase. Some users may not want to move to a new provider, and others were pushed away because of the problems the company had (which were quickly resolved) in the immediate aftermath of the cutover. In addition, during Q2 2016 -- the first period in which Frontier owned the CTF properties -- it had suspended marketing efforts.
That explains why the company's subscriber numbers went in the wrong direction in Q2. It does not answer why in Q3 those trends did not reverse. Instead, the company saw its total residential customer count drop from 5.22 million at the end of Q2 to 5.07 million at the end of Q3. It also lost 12,000 business customers, dropped 92,000 video subscribers, and -- most disturbingly, since its rivals are posting big gains in this area -- lost 99,000 broadband users.
McCarthy alluded to the subscriber numbers in his brief remarks in the earnings release, but it was clearly not his focus. That's because while the company has changed its operational structure to attempt to turn this around, to the public (and investors) it wants to downplay the subscriber loss.
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.
That comment above was as close as the earnings release got to talking about the disappointing subscriber numbers. Instead, the company tried to direct attention to its strong operational management, which it expects to deliver $1.4 billion in annual savings, up from an earlier projection of $1.25 billion.
It's all about growth
McCarthy did talk about the subscriber loss and plans to turn things around during the company's Q3 earnings call. He laid out Frontier's new "customer-focused" operational structure, which he said will "improve our execution and operational effectiveness, increase spans of control in the organization, and make us more nimble, while at the same time eliminating duplicative costs associated with our former structure," according to a transcript of the call by Seeking Alpha (registration required).
He also noted that subscription trends "improved sequentially in the third quarter" in the acquired Verizon territories, though he acknowledged that "it is not yet at the rate we are targeting." The CEO blamed the problems on the timing of Frontier's marketing efforts and said he expected improvements going forward.
What McCarthy did not talk about was the possibility that no turnaround is coming. Frontier is a small player competing in every market with rivals that are pricing aggressively -- not necessarily to compete with it, but to stop cord-cutting. It's possible that Frontier's former niche as an alternative to the big boys that lures customers in with pricing deals is no longer necessary.
It's too early to say that Frontier can't stop its subscriber loss, but it's reasonable to consider that that may be the case. If that's true, then no amount of careful management will bring the company success, and the smartest alternative becomes being acquired by a bigger player.