What Investors Should Watch for When Frontier Communications Reports Q3 Earnings

By Markets Fool.com

Image source: Getty.

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When Frontier Communications (NASDAQ: FTR) reports its third-quarter results on Nov. 1, it will have owned the former Verizon (NYSE: VZ) wireline properties it bought for $10.54 billion for two full quarters. The 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers it acquired in Texas, California, and Florida effectively doubled the size of the company, in theory giving it the heft to compete with the bigger players in pay television and internet service.

The integration of the Verizon customers was not a smooth affair, though that was to be expected given the size of the transaction.

In the second quarter -- the first after the integration -- Frontier turned in mixed results. Average revenue per user (ARPU) increased for residential customers, climbing from $64.43 in Q2 2015 to $83.20. On the negative side the company saw its churn increase from 1.78% a year ago to 1.91%.

Heading into the Q3 earnings report, churn and ARPU remain among the key numbers for shareholders to watch, but there are a number of other things they should focus on as well.

Frontier sells cable televisions, broadband, and phone service. Image source: author.

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Is Frontier cutting expenses?

In the Q2 earnings release, CEO Dan McCarthy explained that the company actually had greater operational savings than it originally anticipated, and was expecting still more synergies ahead. This happened because the addition of the Verizon properties may have doubled the size of the company, but it didn't double all expenses (for example, there is still one CEO).

We are very pleased with the performance of our newly acquired assets and our achievement of annualized cost synergies of $1 billion in the second quarter. We now expect annual cost synergies related to the acquisition of $1.25 billion, up from our original estimate of $700 million.

Buying the Verizon businesses meant adding significant debt for Frontier. If it can actually deliver on the promised increased cost savings, it will give the company an added cushion as it works toward growing its customer base.

It's time for growth

In the quarters leading up to the deal, Frontier had been slowly bleeding video subscribers. That became somewhat irrelevant last quarter as its video numbers exploded thanks to that purchase, and marketing was suspended so it could focus on integrating the acquisition. Now, it's important for the company to show that it can both hold onto the subscribers it paid for, and also grow its base.

"During the cutover period, we temporarily suspended acquisition marketing activities. This resulted in an expected slowing in gross additions," said McCarthy during the company's Q2 earnings call. "We are now back to a typical level of marketing in the new properties and all customer service calls are now being handled domestically."

Because of that, the CEO explained, Frontier returned to what he called "an improvement in gross adds." When it reports Q3 numbers, it will be important for the company to show not only retention, but actual growth.

This is where the rubber meets the road

For the past few quarters, Frontier has been able to push all of its issues off -- first while waiting for the Verizon deal to happen, and then while it was in the process of returning its operations to normality in the aftermath. The company may not be completely done dealing with the ramifications of moving so many customers over, but it's fair to say that most of the problems on that front are in the rearview mirror.

That makes this a very important quarter. The company needs to show that it's actually saving money while keeping ARPU high. It also needs to show only slight declines in pay television subscribership (which would be in line with expected industry norms) along with growth in broadband customers. If it does those things, the Verizon purchase can tentatively be called a success. If it doesn't, or if the company continues to blame the chaos from the transition for falling numbers, then investors may have something to be worried about.

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Daniel Kline has no position in any stocks mentioned. He does not miss the cold weather. 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.