Frontier Communications (NASDAQ:FTR) has seen its stock price decline steadily since it completed its $10.54 billion purchase of Verizon's former wireline business in California, Texas, and Florida.
That deal, which closed on April 1, 2016 was supposed to catapult the regional internet, phone, and cable provider into the big leagues. The purchase gave Frontier approximately 3.3 million new voice connections, 2.1 million added broadband connections, and 1.2 million FiOS video subscribers. That was supposed to be enough to help the company gain cost-savings from operating at a larger scale, while also helping it compete against its much-bigger telecom rivals.
So far, only the cost-saving part has worked. CEO Daniel McCarthy explained just how much money the company has saved, in the company's Q4 earnings release.
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. 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.
That's good news for shareholders, but perhaps the only good news. Most of the rest of what McCarthy and his company reported was fairly bleak.
Subscribers are fleeing
Since closing the Verizon deal, in each quarter's earnings report and call, McCarthy has explained the temporary reason numbers were down. In Q2 and Q3 the drops were attributed to a slowdown in marketing efforts during the switch-over of the customers it acquired from Verizon. In the Q4 call, the CEO blamed yet another drop on purging customers who have not paid their bills since the transition. In reality, that revelation meant that the losses actually should have been worse in the previous two quarters, since some people recorded as subscribers were not paying their bills.
In Q4, the company lost 144,000 more residential customers as well as 14,000 business customers. McCarthy, as he has for the past three quarters, told investors in his earnings release remarks that the non-paying customer issue in its California, Texas, and Florida (CTF) territories has nearly been solved.
"This process is almost complete, and we expect to return to a normalized trend by the start of the second quarter," he said. "I am pleased that underlying CTF customer trends improved in Q4 and continue to improve in Q1."
That's the CEO's optimistic view, but whether he can deliver on it grows more questionable considering that he made similar promises at the end of the previous two quarters.
The company has no streaming or skinny plan
While many of its larger rivals have launched skinny bundles or streaming services as a hedge against cord-cutting, Frontier has yet to create a similar product. Those services have only so far been mildly successful, but could someday be key to attracting younger customers looking for broadband who are unwilling to pay for a full cable package.
The existence of these services has also taken away what was once a marketing edge for Frontier. The company, which competes with more-established carriers in all its markets, used to be able to win customers by offering lower introductory prices that eventually turned into full-price deals. In many markets, Frontier was the only ground-based alternative to the entrenched carriers that could offer internet and pay-TV service.
Today, with multiple national streaming services across a wide set of price ranges, Frontier is no longer the only low-cost alternative in town when it comes to cable. And with some full-price carriers getting clever with their skinny bundles, it may not be the best package deal either. This is a problem Frontier could fix by negotiating with the various channel owners it buys content from to build its own skinny bundle, but its smaller size gives it less leverage than its rivals.
The dividend is in question
One of the major things that has kept some investors holding onto Frontier stock as its price has fallen is its dividend. The company paid its Q1 dividend at the end of March, but as its board seeks a reverse stock split, it's possible the chain will either lessen the payout, eliminate it, or keep it at the same number, but pay it on a per-share basis. Since the board is seeking a split ratio of between 1-for-10 and 1-for-25, that would greatly impact the return for shareholders.
CEO Daniel McCarthy tried to assuage the concerns during the company's Q4 earnings call, which was transcribed by Seeking Alpha (registration required). He noted that the board had discussed the issue, but if you look at his remarks carefully, they offer only short-term reassurances.
"They obviously look at the allocation of capital and resources for us," he said. "They reviewed the complete plan that we presented on 2017, as well as the cash flows and all the initiatives that we're undertaking right now and they were comfortable declaring the dividend. So there has been no change in our policy on that perspective and they will just continue to evaluate that going forward."
Basically, McCarthy left the door open for the company to make a change to its dividend if its financial situation does not improve. Frontier lost $80 million in Q4 and $373 million for the year, before paying the dividend. After the payments are factored in, the full-year loss jumps to $587 million.
Justifying that payout becomes increasingly hard if the losses and subscriber drops continue. If Frontier can reverse them, or at least stabilize, shareholders can exhale, and the company's stock should begin to recover. It if it can't, then it's probably going to have to cut its dividend in order to preserve cash while it tries to find a buyer or strategic partner.