Telecommunications specialist Frontier Communications (FTR) has made several moves to grow aggressively in recent years, acquiring assets from both AT&T (T 1.17%) and Verizon (VZ 1.11%) in an effort to expand its network and find ways to improve its efficiency and bulk up its scale. In particular, the latest proposed deal with Verizon to buy $10.5 billion in assets throughout Florida, California, and Texas has many investors salivating, even as it means a huge amount of extra debt for Frontier going forward. Earlier this week, Frontier CFO John Jureller presented at the 24th annual Communacopia conference, and he gave some insights into the company's past moves and the impact they'll have on its operations looking forward. Let's look at some of the most important things Jureller said about Frontier and its future.
1. "Prior to the first Verizon transaction, fully one-third of our revenue stream was residential voice revenue. ... The concentration of revenues transformed to from what was a secular declining business, [residential voice], to become a much lesser component of our success going forward."
The landline business is in unquestionable decline, as many customers give them up entirely in favor of mobile service. Frontier saw that trend coming and moved to emphasize broadband Internet service over voice, and that strategy has played out well with its recent acquisitions. By focusing on higher-margin services like businesses and residential broadband, Frontier can squeeze more profit from its growing customer base and forestall negative impacts from departing landline customers.
2. "What happened in Connecticut in Q1 was not a promotion issue. ... It was a philosophy that we had as a company for our existing customers who are off-contract or near the end of the contract, allowing them to get into what is sort of best-market pricing."
The challenge Frontier always faces with acquisitions is retaining existing customers at the same time it attracts new ones. In Connecticut, Frontier offered favorable new-customer pricing to existing customers, which is unusual in the industry, and Jureller explained how Frontier saw the impact of that move and made a shift toward a more consistent approach that offers prices to existing customers that are still good but less favorable than for new customers. Frontier believes it has already seen residential revenue bottom out, and it hopes going forward that it can avoid repeating the mistake for future transactions.
3. "We think our opportunity set is not only in continuing [FiOS] but also in the DSL markets, areas that perhaps [Verizon] hasn't fully maximized where we're going to go in."
The new Verizon acquisition is a huge move for Frontier, with a substantial number of FiOS customers coming on board. But Frontier also thinks it can bulk up the long-neglected DSL business, despite its less favorable reputation, by improving speeds and making it more competitive with other options. Using Connect America program money, Frontier thinks that expanding service will be a focus area across its user base, not just among high-end FiOS users.
4. "We think there is a tremendous opportunity in the small- and medium-size business market."
Frontier sees big potential in the enterprise market, but many industry players focus only on large corporate customers. By contrast, Frontier has gotten a lot of new business from smaller businesses in Connecticut, and serving that niche is something that it sees doing in the three states in the new Verizon deal. With both Verizon and AT&T paying less attention to smaller corporate customers, Frontier thinks it can build a lasting competitive advantage with improved service to those customers.
5. "We have a competitively priced product. We think all-in, we fare as well or better than our cable competitors."
Frontier has to compete against cable companies in about 95% of its market, and so it regularly has to defend its products in comparison to similar cable offerings. To compete, Frontier has emphasized making higher broadband speeds available at attractive price points, and its customers are making the transition as Frontier builds out its infrastructure. That produces more revenue to justify further capital expenditures, building a positive feedback loop that encourages further upgrades in the future.
6. "Having a strong and sustained dividend was an important part of our equity raise that we just did. ... We could not have done that without a strong dividend."
Some criticize Frontier for paying a dividend instead of paying down its substantial debt. But as Jureller pointed out, financing big deals through a combination of equity and debt requires that investors be confident about the stock's prospects, and a big dividend plays a vital role in building that confidence. Frontier is conscious of capital costs and seeks to minimize them, but it also recognizes the several moving pieces that influence its overall prospects.
Frontier has come a long way, and it sees even better things ahead. By keying in on its most important prospects, Frontier believes that it has only begun to unlock the full potential of its fast-growing business.