The telecom industry is a cutthroat business right now, with major players jockeying for position as they try to capture the best growth opportunities in a rapidly changing market.
For Frontier Communications (NASDAQ:FTR), key acquisitions like its currently proposed deal with Verizon Communications (NYSE:VZ) have helped bolster its size, but Frontier has had to work hard to deal with the resulting debt on its balance sheet and consolidate its acquired assets into its existing network. Coming into Tuesday's third-quarter financial report, Frontier investors were bracing for a modest loss but wanted to see further sales growth, yet even though the company managed to post an adjusted profit, shareholders didn't appear satisfied, sending the stock price downward.
Let's look more closely at how Frontier Communications did and why investors seem ambivalent about the results.
How Frontier fared
Frontier's third-quarter results seemed on their face to meet or exceed the expectations shareholders had set for the company. Revenue grew 25% to $1.42 billion, matching the consensus forecast and reflecting the acquisition-driven gains that have pushed Frontier forward recently. GAAP net losses attributable to Frontier shareholders nearly tripled to $81 million, but after allowing for extraordinary items, adjusted earnings of $0.03 per share were better than the $0.01 per share loss most investors expected.
As we've seen in past quarters, Frontier's track record of building up its internal growth had only mixed success. The telecom added 27,200 net broadband customers to bring its total to 2.43 million, with Frontier's strategy focusing hard on that part of the business. Yet total customer revenue was down 1% on a 0.9% decline in the number of residential customers Frontier has, having lost 9,600 video customers and 1.7% of its business customers.
In addition, Frontier had trouble keeping its costs in check. Network-related expenses rose by nearly 6% to $331 million for the quarter, and overall overhead expenses were up 4% to $344 million. Frontier blamed storm-related damage for higher operating costs overall, and an increase in headcount boosted labor costs overall. Acquisition costs related to the Verizon transaction also ballooned higher, hurting the bottom line.
CEO Dan McCarthy repeated the company's overall strategic vision. "We extended our consistent track record of strong broadband net additions," McCarthy said, "achieved another quarter of sequential stability in our Connecticut operations, and grew our Data and Internet services revenue once again."
Why Frontier is squarely looking forward
McCarthy also said that Frontier stands ready to complete its current deal with Verizon, which should bring in millions of customers in the key markets of California, Florida, and Texas. "Our fourth-quarter focus is all about operational execution to improve our customer revenue, lower our costs, and prepare for the successful integration of the Verizon businesses," McCarthy said, and he's confident the deal will produce all of the synergies Frontier expects in the near future.
From a capital standpoint, Frontier Communications did indeed make a huge amount of headway toward getting a deal done. In September, Frontier offered $6.6 billion in 5-year to 10-year notes, with interest rates ranging from 8.875% to 11%. Combined with a new $1.5 billion term loan facility, Frontier has gotten the financing support it needed in order to keep Verizon happy about its ability to close on the deal.
The trouble Frontier is dealing with right now is that even as some aspects of its future look bright, the company hasn't convinced investors that it will be able to maximize the value of its acquired customers even once the latest Verizon deal goes through. Only if the company has truly learned some of the hard-won lessons from the Connecticut transaction can Frontier expect to make the most of another big influx of customers that the company desperately needs to hold onto for the long haul. Otherwise, Frontier may have just lost a lot of key momentum going forward.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.