Like a kid who seems smart but always has an excuse for not doing his homework, Frontier Communications (NASDAQ:FTR) has posted another drop in customers but has a reason for it.
In the first two quarters of the year, the company blamed various factors caused by its $10.54 billion purchase of Verizon's (NYSE:VZ) wireline customers in California, Texas, and Florida (CTF) as the reason its subscriber base moved in the wrong direction. At first, the company said falling customer counts were due to problems during the cutover, and after that CEO Dan McCarthy blamed a slowdown in marketing efforts while Frontier normalized operations in the former Verizon territories.
During the Q3 earnings call, transcribed by Seeking Alpha (registration required), the CEO said that "CTF subscriber trends improved sequentially in the third quarter, although it is not yet at the rate we are targeting." He also made it clear that in Q4, the company expected improved results.
"As we ramp marketing and adjust our offers, we expect continued improvements in net subscriber performance in the fourth quarter," McCarthy said. "We anticipate exiting the year at or close to normal levels of customer activity that would support a more stable revenue performance in CTF."
At no point did McCarthy mention that the company faced an issue with customers who didn't pay their bills in the territories acquired from Verizon. In the Q4 earnings release, however, Frontier again lost subscribers and placed the blame at least party on the "resolution of non-paying acquired CTF accounts." The company added that it has experienced an "improved trend in broadband in both legacy and CTF markets, excluding impact of non-paying account resolution."
This may not be McCarthy saying the dog ate his homework, but it does sound like an excuse. Subscriber counts were down in Q4, and the company posted a net loss of $80 million, but there was some good news in the earnings report as well.
Frontier's subscriber base
In Q4 Frontier saw its total residential customer base drop from 5.03 million at the end of Q3 to 4.89 million to close the year. That's a drop of 144,000 subscribers, not appreciably different from the 155,000 lost in Q3. In addition, Frontier's business customer base dropped by 16,000, and it lost 96,000 broadband customers, as well as 84,000 video subscribers. That compares with a loss of 12,000 business customers, 99,000 broadband homes, and 92,000 video subscribers in the previous quarter.
On top of that, residential average revenue per user (ARPU) dropped by even more than it did from Q2 to Q3, falling from $82.34 to $80.33. In the previous quarter, ARPU fell to $82.24 from $83.20. Business ARPU, which had climbed in Q3 by a little over $10, dropped slightly, losing $3.26 to come in at $6.65.04.
Revenue also dropped in Q4, from $2.52 billion in Q3 to $2.40 billion in the year's final quarter. The company blamed $45 million of that dip on "resolution of CTF accounts that were determined to be non-paying following an intensified effort to address overdue accounts." Frontier expects the impact of the resolution process to decline to $25 million in Q1 2017 and said the "initiative is nearly complete" and that the company "expects to be processing overdue accounts in a normal manner before the end of the first quarter."
It's not all bad news
In theory, the non-paying-accounts issue should be a one-time problem, and while it's hard to put a lot of faith in the company's ability to gain or hold customers, it does do a good job managing costs. McCarthy, in his remarks in the earnings release, said the company has made significant progress in its efforts to position "our company to deliver a better customer experience and improved financial performance, with greater financial flexibility."
He specifically cited Frontier's reorganization into separate commercial and consumer business units, and the earnings release mentioned that the company has reorganized its credit facilities. Under the new terms, all of its agreements are now combined into one, while payment terms have been extended from 2018 to 2022. In addition, as its customer base shrinks, Frontier has once again found new ways to save money.
"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. "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."
What happens next?
Frontier has run out of excuses for its troubling loss of subscribers. It paid Verizon $10.54 billion for 3.3 million voice connections, 2.1 million broadband customers, and 1.2 million FiOS video subscribers, and it's slowly watching them walk out the door.
The company appears to be well managed, and it has done a good job maximizing cost savings, but at some point you have to wonder if maybe those savings are costing Frontier subscribers. Going forward, McCarthy needs to show the needle moving in the right direction, or at least that there's a bottom to these drops.