It's very hard to come back from a huge mistake. Frontier Communications (FTR) has shown that making one giant error can send a company down a dangerous road toward bankruptcy that's very to break away from.
Frontier didn't have a bad marketing campaign or a poorly received price increase, though. It spent billions of dollars on a bet to double the size of the company that simply did not pay off and has little hope of ever paying off.
What went wrong?
It was arguably a smart move at the time. Frontier spent $10.54 billion to purchase Verizon's (VZ 1.26%) wireline business in California, Texas, and Florida (CTF), doubling the size of the company in a bold move to compete with bigger players in the cable and internet space.
The problem is the deal, which closed in April 2016, happened right around the time that cord cutting began to accelerate. Basically, Frontier bought a declining asset at peak prices. The CTF deal closed as consumers began to not only leave cable, but move to cable-based internet service instead of the phone-based product Frontier had purchased.
Owning the former Verizon properties did allow Frontier to implement over $1 billion in synergy-based cost savings. That's encouraging, but the company has steadily lost money and subscribers in every quarter since the deal closed.
What is Frontier doing?
CEO Daniel McCarthy has been relentlessly upbeat when it comes to his efforts to stem the losses. His biggest focuses have been slowing the subscriber declines and very aggressively controlling expenses. He tried to make the case that things were moving in the right direction in the company's fourth-quarter earnings call.
Total broadband net losses were 67,000 as compared to a loss of 61,000 in the third quarter. These results reflect the benefit of improved churn, offset by a more disciplined approach to gross additions. Our transformation program is focused on both improving churn, as well as a more efficient approach to demand generation and attracting new customers to our platform.
The CEO explained that "acquiring customers who are less likely to churn will over time result in further churn improvement while reducing the cost associated with adding customers that have higher propensity to churn." That, he added, led to stronger Q4 EBITDA, and he expects those numbers to keep getting better.
"Over the course of calendar year 2019, our target is to realize between $50 million and $100 million of benefit with this being back end loaded to the second half, and particularly the fourth quarter," he said. "We are targeting to exit 2019 with benefits at roughly a $200 million run rate and we continue to target a $500 million run rate EBITDA opportunity as we exit 2020."
Does Frontier have a future?
McCarthy has managed his company's dwindling finances well, but if you keep losing customers each quarter it doesn't matter how efficient you are. And it's hard to see a scenario where Frontier does not keep losing customers, which makes its prospects bleak even if it handles its money well.
This is a company that's too small to compete in cable with an internet product that's mostly not what consumers want. There's no simple way to manage out of that, and the best case may be a bigger company acquiring Frontier. Even that seems unlikely, though, because shrinking, money-losing companies generally don't garner premium prices.