Frontier Communications (NASDAQ:FTR) faces a key moment when it reports fourth-quarter results Feb. 27.
The company has already reported on two quarters since it spent $10.45 billion buying Verizon's (NYSE:VZ) wireline operations in California, Texas and Florida (CTF). That was a risky deal that gave the company 3.3 million new voice connections, 2.1 million more broadband subscribers, and 1.2 million FiOS video customers.
It was a bold bet that so far has not paid off. Frontier more than doubled its size, which has allowed it to save money and bring in more revenue per customer, but that won't mean anything if the company keeps losing the subscribers it spent over $10 billion to acquire. As the company reports Q4 earnings, it's important that it show a reversal of its subscriber-loss pattern, while also maintaining its average revenue per user (ARPU).
Subscribers are key
In Q2, the first quarter after the Verizon deal was completed, some subscriber loss was to be expected; moving millions of customers was not a simple matter. While Frontier corrected issues quickly, there were a number of problems, both technical and in customer service, that impacted customer counts negatively.
In Q3, however, the losses continued. The company's residential user base dropped from 5.22 million at the end of Q2 to 5.07 million at the close of Q3. Making matters worse was the fact that Frontier lost users in all categories. The company dropped 12,000 business customers, and lost nearly 100,000 subscribers in both video and broadband.
Making money is important too
One of the key justifications of the Verizon purchase was that being bigger would create cost efficiencies for the company. Essentially doubling in size does not require doubling resources spent on everything from innovation to customer service, billing, and other back-office functions.
That's an area where so far the company has delivered. In its Q3 earnings release, Frontier raised its annualized cost-synergy target to $1.4 billion, up from the $1.25 billion target outlined in the second quarter earnings report. "Yet-to-be attained cost synergies of $400 million are anticipated to be achieved by mid-year 2019, including $250 million anticipated to be achieved by mid-year 2017," the company wrote.
In addition to operating more efficiently, Frontier has also dramatically raised its residential ARPU. In Q1 the company made an average of $64.43 per residential customer. That number increased to $83.20 in Q2, and dipped only slightly to $82.34 in Q3. Keeping ARPU high will likely depend on whether subscriber loss continues in the CTF territories.
It's time to deliver
While Frontier CEO Dan McCarthy was happy about some aspects of his company's Q3 performance, he made it clear in the earnings release that improvement was necessary. Essentially, everything hinges on reversing the subscriber losses in the former Verizon territories:
I am pleased that we achieved third quarter adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] of $1 billion. We are reaffirming our adjusted EBITDA guidance for the 4th 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 talked a lot during the Q3 earnings call about the subscriber counts. The CEO made it clear that he believed the dips were first related to the switch, and then the problems continued due to the company suspending some marketing efforts. He also noted that the pattern had improved during the latter part of Q3.
If that's true, then the Q4 numbers should show a reverse of the declines, and perhaps some slight gains. If the company can do that, the other numbers -- continued efficiency savings, and strong ARPU -- should fall into line. Further drops, however, would suggest that the company's problems may not be reversible, and eventually, falling subscriber numbers will impact Frontier's ability to gain operational savings.