Frontier Communications (NASDAQ:FTR) wants to become one of the major players in cable and broadband, and the company has invested heavily to get there.
Not only did it spend 2015 fully integrating the Connecticut wireline business it bought from AT&T (NYSE:T), but Frontier also closed a deal to buy Verizon's (NYSE:VZ) wireline operations that provide services to customers in California, Florida, and Texas, for $10.54 billion in cash. Once that deal, which has received all needed regulatory approvals, closes later this year, the company will double in size, adding 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS video connections.
But while the closing of the deal, which is expected to happen in March, will transform Frontier into a bigger player than it is now, even if not a huge one, it has no real impact on the company's Q4 2015 results, which should be not that far off its Q3 numbers, where it lost $14 million, or $0.01 per share. If you exclude an acquisition-related interest expense of $52 million as well as acquisition and integration costs of $58 million (combined after-tax impact of $49 million, or $0.04 per share), non-GAAP adjusted net income was $35 million, or $0.03 per share in Q3, according to the earnings release.
For Q4, which the company will report on Feb. 23, analysts expect the company to post a loss of $0.03 per share, according to The Wall Street Journal's analyst estimate.
A look inside the numbers
In some ways, where Frontier is now hardly matters because the company becomes something entirely different once it takes over the Verizon properties. But big questions remain as to how quickly Frontier will be able to do that, since it stumbled in its initial efforts to integrate the Connecticut customers it bought from AT&T, according to The Hartford Courant.
Even though the company did solve its initial execution problems relatively quickly, it's still operating in a space where pay-television has slowly been shrinking while broadband has been growing. Mostly due to cord cutting the top cable companies lost about 650,000 customers through the first nine months of 2015, 190,000 of those in Q3, according to Leichtman Research Group (LRG).
Frontier was in line with industry averages in 2015, losing 9,600 cable customers in Q3. It also performed in a similar fashion to its rival broadband providers, which overall added 645,000 customers in Q3, according to LRG, picking up 27,200 new Internet subscribers.
And while much of the industry has yet to report Q4 numbers, there's every reason to believe that companies will lose pay-television customers to cord cutting but pick up broadband users because those people need good Internet to make up for not having cable. Frontier has done nothing in Q3 to break out from the pack beyond making an effort to grow its small business user base by offering them a set price for as long as they keep the service. That might tweak numbers in a positive direction, but given that Frontier entered the quarter with under 300,000 corporate customers, that promotion is really about building a bigger long-term base rather than popping one quarter.
It's a waiting game
For investors, Frontier is either a long-term investment because you believe in its growth strategy or a company to avoid. I'd lean toward "avoid" only because the gulf between Frontier and the largest cable companies remains huge and acquisition targets are becoming scarcer and more expensive.
Frontier's short-term results simply don't matter that much beyond what light they might shed on how the company will integrate the Verizon purchase. It's likely that in Q4 Frontier lost cable subscribers while gaining broadband users because for the foreseeable future that's how the industry will operate.
For investors, however, the real story won't even begin to unfold until the end of Q1 2016 or, more realistically, Q2, or even Q3 when the impact of the new system begins to hit. Of course, the efficiencies gained by doubling in size will realistically take much longer than that to play out making this quarter really just a footnote that's part of a much larger story.