Frontier Communications Corporation's Most Disappointing Business Segment in 2016 So Far

By Markets Fool.com

The telecom industry has changed dramatically in recent years, and Frontier Communications (NASDAQ: FTR) has worked hard to make its presence in the space known. With groundbreaking acquisitions, Frontier has bought its way into the upper tier of providers of broadband, voice, and video services to millions of residential customers across the nation. Yet throughout the industry, telecom companies have noted how important it is to bring more business customers into the fold. Unfortunately, Frontier's track record with respect to its business customers hasn't been stellar, and in fact, the company's business-oriented segment has been one of its worst performers so far in 2016. Let's look more closely at this disappointing portion of Frontier's business to see what's going on and how the company can improve.

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Image source: Frontier Communications.

Frontier's strategy for business customers

Business customers are a key target for telecom services providers like Frontier. Businesses tend to be stickier than residential customers in terms of remaining loyal to the providers with whom they've established a relationship, and they also tend to focus on higher-margin services and more intensive needs that can provide disproportionate revenue and profit for the companies that serve them.

In the past, Frontier has made it clear that capturing business customers is part of its overall strategy. Yet there are challenges in dealing with making product offerings attractive to businesses. One issue is that small businesses and home offices look almost identical to residential customers from Frontier's perspective, and so the company can't count on more than a minimal relationship with those smaller business customers. At the other end of the spectrum, Frontier has seen a lot of growth in providing Ethernet service to medium-sized and larger enterprise customers, and that has promise to be lucrative for Frontier.

Going forward, Frontier also expects business customers to play a key role. As CEO Dan McCarthy recently noted, "We will continue expanding our capabilities for business customers, particularly in the newly acquired California, Texas, and Florida markets. This includes developing direct and indirect channels to service the opportunities we see in these markets."

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Dealing with falling business customer counts

Yet Frontier's track record in making the most of the business opportunity in serving enterprise customers is mixed at best. In its full-year 2015 results announced in February, Frontier had 289,200 business customers, down almost 2% during the fourth quarter of 2015. The company managed to increase the amount of revenue it received per customer, but the 0.9% gain wasn't enough to offset falling customer counts. Frontier said that a drop in small business customers helped on the average revenue metric, but overall, business revenue fell by $4 million compared to the previous quarter. For the full year, all of Frontier's business gains came from Connecticut operations acquired from AT&T (NYSE: T), and legacy Frontier business revenue dropped 4% in 2015 compared to 2014.

Those trends continued into the 2016 fiscal year. In the first quarter, Frontier saw business customer counts decline to 284,400, and again, average monthly revenue per customer didn't climb by enough to offset the falling number of customers. That sent business revenue down about 1.5% on a year-over-year basis to $606 million for the quarter.

In the second quarter, Frontier saw an influx of new business customers from its acquisition of assets from Verizon Communications(NYSE: VZ). Business customer counts soared to 528,000, although average revenue fell, reflecting the mix of customers Frontier acquired from Verizon. When you take out the impact of the acquisition, however, business customer revenue continued to fall for Frontier, posting a 5% year-over-year drop. With 250,000 business customers coming from Verizon, the remaining 278,000 legacy business customers continued the downward trend.

Doing better business with business customers

Frontier's track record in growing its share of revenue and profit from business customers hasn't been as strong as most investors would have liked. Although the recent Verizon acquisition gives Frontier another chance to work closely with business customers in three key states, the company will have to overcome downward trends in its legacy territories in order to take full advantage of the growth opportunities from serving large enterprises. With competitors like AT&T and Verizon working hard to woo those customers, Frontier has to do better if it wants to keep up.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and 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.