Frontier Communications (NASDAQ:FTR) saw a slight loss in customers during 2015, which really served only as a holding pattern before the company changes dramatically.
Even though it should trouble investors that the company saw its number of customers fall from 3.51 million paying subscribers at the end of 2014 to 3.41 million at the end of 2015, not much the cable and Internet provider did in the past year matters much. That's because in 2016, probably as soon as April, the company will complete a transaction to buy Verizon's (NYSE:VZ) wireline operations in California, Florida, and Texas, for $10.54 billion in cash.
That deal, which has received all needed regulatory approvals, will more than double Frontier's size, adding 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million video connections, according to a press release. It's a transformative move which will change the company from a tiny player to a mid-size one.
The Verizon deal loomed large over everything Frontier did in 2015. It's worth noting that the company lost customers, but equally relevant that it increased revenue from business and residential customers, but it's hard to project that those trends will continue with the new, much bigger company in 2016. CEO Dan McCarthy and other executives addressed investors and analysts in a conference call after it reported its Q4 earnings. Let's look at some of what they had to say.
Broadband is going well
While Frontier lost cable customers and saw its overall residential and business user base shrink, it did add broadband customers.
"The fourth quarter represented our 12th consecutive quarter of strong broadband net additions with net additions of 28,500," he said. "This extends our continuing trend of very strong progress in broadband with cumulative net additions totaling nearly 350,000 since the beginning of 2012. Our progress continues to be broad-based across our footprint." [Conference call transcript via Seeking Alpha.]
That's encouraging, but it's not unique to Frontier as industrywide cable companies and Internet service providers reported small losses for the year in pay-TV while adding broadband users. That makes sense given the slow cord-cutting trend and the need for high-quality Internet for people who want to use streaming video services.
The company plans to grow its network
Frontier's growth started with the company's 2014 acquisition of AT&T's wireline business in Connecticut. Like the Verizon customers it will soon add, these systems are not current top-of-the-line technology. To deal with that, McCarthy said his company will continue to invest in upgrades, specifically to the broadband network and its customer service operation.
"In Connecticut and other markets, we are in the process of introducing speeds in excess of 100 megabits over copper, fed by our fiber-to-the-node infrastructure," he said. "We had been investing to transform our operating support systems, our customer self-service capabilities and our provisioning platforms. We believe these investments will position us well to lower operating expenses from our existing business as we deploy these enhancements and customers begin to adopt the new functionality."
These are very important upgrades given that Frontier competes directly with other cable and Internet providers in all of its markets.
The company expects voice declines
McCarthy explained that in looking back at 2015, his executive team reviewed areas where Frontier can improve its performance. In doing that, they uncovered one particular problem.
"One significant ongoing pressure we have in our business is the decline of voice, particularly in residential," he said. "In fact, this was the reason our customer revenue is slightly short of our expectations in the fourth quarter. While this secular headwind will continue, the relative impact on total revenue will decline. We estimate our residential voice revenue run rate will be approaching 15% of revenue pro forma for California, Texas and Florida acquisition."
Realistically, it would have been hard to not see this one coming given that landlines are increasingly becoming a relic only used by old people who enjoy ribbon candy and the "good old days," before the "Internets."
The plan for the Verizon acquisition
Of course, the biggest thing for Frontier going forward is the Verizon deal, McCarthy said he expected the transaction to conclude by April 1 and noted that both companies were working together on the transition. He shared Frontier's plan for the properties once the deal closes.
"As we have previously discussed, our plan is to maintain the existing service plans and go-to-market approach that currently exist in the Verizon markets," he said. "We have already adopted them within our systems in our existing FiOS markets. We're in the final stages of our conversion plans. The system conversions are on track, and we are seeing conversion metrics at or above our expectations for this point in the conversion process. We are executing our training plans, including a segment of the incoming work force. All indications are very positive with less than 40 days until the cutover."
The challenge for the company -- and it's one it bungled a bit when it took over its Connecticut properties -- is smoothly managing the changeover in order to minimize customer loss. Hopefully for investors Frontier should benefit from having done this before. Even though the Verizon transaction is a larger one than any previous deal, you can consider the Connecticut integration a sort of trial run for this handover. That at least gives hope that this will go smoothly and Frontier will move easily from small-time to midsize player.