While Frontier Communications (OTC:FTR) continues to lose total subscribers and it's cutting its dividend, its first-quarter results may finally give investors reason for very cautious optimism.
During the quarter, the company saw its overall residential subscriber base drop from 4.89 million at the close of fiscal 2016 to 4.73 million at the end of Q1. Its business customer base also dropped from 502,000 to 484,000, and revenue fell to $2.35 billion from $2.40 billion. But the company claims that the worst is finally behind it.
Where does Frontier stand?
This was the fourth quarter since the company bought Verizon's (NYSE:VZ) former wireline operations in California, Texas, and Florida (CTF). That deal more than 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.
In the first two quarters after the deal closed, Frontier CEO Dan McCarthy blamed subscriber loss in the CTF markets on the switchover from Verizon, and a slowdown of marketing efforts. In the the third quarter after the acquisition (Q4 of 2016), he said attributed losses to the company clearing its books of customers whose accounts it had purchased, but who had been choosing to not pay their bills.
Now, with four quarters in the rear-view mirror since the deal closed, Frontier Communications said it has completed resolving the unpaid accounts issue, and while it's still losing customers, the tide appears to be turning -- or at least the losses have slowed.
"During the quarter, we continued to realize our targeted efficiencies and synergies, and I am also pleased to have achieved our third consecutive quarter of improved FiOS gross additions in the California, Texas and Florida markets," said McCarthy. "We are executing on a number of initiatives with the goal of enhancing customer experience, reducing churn, stabilizing revenues and generating cash flow."
Frontier did acknowledge that its residential churn has increased to 2.37% from 2.08% in the previous quarter, and said it plans to take a number of steps to fix that, including upgrading its back-office systems in ways that will help it to improve its customer service. In addition, the company has expanded its network capacity to relieve congestion -- hopefully eliminating another pain point for customers that might have led some to leave.
What about the dividend?
In a move that many shareholders will not like, at least in the short term, Frontier has cut its dividend from $0.105 per share, where it has been for over two years, to $0.04 per share. McCarthy explained the move in the earnings release.
Our board regularly reviews the company's long-term capital allocation strategy, and it has determined to reduce the dividend at this time to provide additional financial flexibility, while still returning a meaningful cash dividend to shareholders. As we continue to execute on our strategy to deliver on the full potential of our strong assets and generate additional cash flow, we will optimize our capital allocation to ensure we strike a balance between investing in the business, paying down debt and returning capital to shareholders.
Shareholders may face a double blow when it comes to the dividend because the company also intends to do a 15-1 reverse split of its shares. That action still requires a shareholder vote of approval, and it's possible that after that vote, the company will adjust its dividend again to account for having fewer shares outstanding.
What's next for Frontier?
Ever since the Verizon deal closed, McCarthy has regularly promised that subscriber numbers would improve. That has not happened, but in Q1, there were some signs that that bleeding may be at least slowing down.
A small victory after a whole bunch of losses does not guarantee that Frontier is back on track. McCarthy and his team have done a good job in managing expenses, cutting $1.25 billion in annual costs, but they need to show they can meaningfully grow their business. The company still lost $129 million in Q1, but that's actually an improvement from a $240 million loss the same quarter a year ago.
Frontier Communications has a big hill to climb, but perhaps it has taken its first steps. Now we'll have to want and see if the company can move its subscriber numbers from smaller losses to actual gains.