Shares of Frontier Communications (FTR +0.00%) have taken quite the beating recently.
The company's stock has steadily moved in the wrong direction since it became clear that its purchase of Verizon's (VZ 1.57%) wireline business in California, Texas, and Florida (CTF) would not unlock a smooth path to growth. That $10.54 billion acquisition 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.
That was supposed to give Frontier the scale it needed to operate efficiently -- and in fact, that aspect of the Verizon purchase worked out. What it hasn't given the company is further growth. Frontier has lost some of the customers it paid for in all four quarters since the CTF deal closed.
CEO Daniel McCarthy has remained upbeat through the entire process. Even though his company has had to cut its dividend, and plans a reverse stock split, he has focused on the light at the end of the tunnel. He shared his thoughts on what's next for the struggling company during its Q1 earnings call, which was transcribed by Seeking Alpha (registration required).
The biggest challenge for Frontier has been holding onto customers. Image source: Getty Images.
There is an economy of scale
As noted above, one of the main goals of buying the Verizon assets was to create a more cost effective operation. That has happened, and the company expects it can even exceed its goals in this regard.
"We're pleased to have met our target of realizing $1.25 billion in annualized synergies," said McCarthy, and the company expects to achieve another incremental $350 million in annual savings by mid-year 2018.
What happens next?
While saving money buys the company more time, it does not address the underlying issue of subscriber cancellations. The CEO addressed that as well, noting that trends have improved in that area for the last two quarters (though they have not turned positive).
"Our focus now is on improving our customer retention, enhancing customer experience, and continuing to improve our cost structure over the coming months," he said. "With these initiatives, we are on path to subscriber and revenue stability and improved EBITDA later this year."
Managing money is key
Cutting the company's dividend may upset shareholders, but the cut from $0.105 to $0.04 per share will free up about $300 million in cash annually, a figure that will rise to $400 million in the second half of 2018, according to McCarthy. That cash will be used to pay down debt at a faster rate.
"We also intend to issue secured debt in the near term to address upcoming maturities and reduce our cash interest expense," the CEO said. "As our board looked at our long-term capital allocation strategy, we believe it was prudent to reduce the dividend now, enabling us to address the larger debt towers in coming years and giving us ample runway to delever."
Better subscriber numbers may be coming
While Q1 was the fourth straight quarter of subscriber losses since the CTF deal closed, McCarthy has had evolving explanations for those drops. For the first two quarters, he blamed a lack of marketing efforts due to complications from moving so many customers over. For the most recent two, he has cited Frontier having to purge its rolls of non-paying former Verizon subscribers. During the Q1 call though, he cited some positive signs.
"This was the third sequential quarter of gross adds improvement in CTF," he said. "This was largely driven by a full quarter of our robust marketing program. We continue to fine-tune our distribution strategies and launched an enhanced digital commerce channel at the very end of the first quarter."
