The 1 Thing Frontier Has to Prove in 2017

By Daniel B. Kline Markets Fool.com

Frontier Communications (NASDAQ: FTR) went through a major transformation in 2016, spending $10.54 billion to buy Verizon's (NYSE: VZ) wireline operations in California, Texas, and Florida (CTF).

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That purchase more or less doubled the size of the company, giving it the scale to be more competitive in the cable and broadband markets. At least, that was the theory behind the purchase -- while in reality, early returns on the deal have not been good.

Since closing the Verizon deal, Frontier has had a bumpy ride. Perhaps that was to be expected early, given the complexity of switching approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers from one company to the other.

The problem is that even after the early cutover problems were solved, Frontier steadily lost customers. Going into 2017, it's important that the company shows that beyond simply holding onto the customers it paid for, it can also grow its user base.

It's all about subscriber growth for Frontier in 2017. Image source: Getty Images.

Frontier has been bleeding customers

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The cable, internet, and phone company closed the CTF deal on April 1. That meant that in its second quarter, which opened that same day, the company saw big gains in its subscriber counts as a result of the purchase. Unfortunately, in Q3, when the company reported its first comparable results since acquiring the Verizon territories, it went in the wrong direction across all customer categories.

Frontier saw its residential customer base drop from 5.22 million at the close of Q2 to 5.07 million. It also saw business subscribers drop from 528,000 to 516,000. In addition, the company saw its pay-television subscribers fall from 1.61 million in Q2 2016 to 1.52 million in Q3 and its broadband base drop from 4.5 million to 4.4 million during the same time period.

CEO Daniel McCarthy acknowledged that the numbers in Q3 were not good in the company's earnings release, but he also noted that he expected that to change.

"We are on course to improve our revenue performance, principally by returning to normal customer trends in the CTF market over the coming quarters," he said.

There are positive signs

While subscribers have been lost, the CTF deal has not been all bad for Frontier. Buying the Verizon properties allowed the company to save a considerable amount of money through added efficiencies. The company has raised its annualized cost synergy target to $1.4 billion, up from the $1.25 billion target outlined in the second-quarter earnings report.

That's a very strong positive, but it means nothing if the company can't change its subscriber trajectory. Cost-saving only goes so far, and at some point subscriber losses will cut into the efficiency gains Frontier made by getting bigger.

Frontier has a plan

While McCarthy's remarks were upbeat and limited in the earnings release, he elaborated extensively during the company's Q3 earnings call, which was transcribed by Seeking Alpha (registration required). The CEO made it clear that he understood that the post-acquisition results have so far been unacceptable.

"I wanted to assure you that I'm focused on addressing and resolving the issues hindering our performance," he said. "I'm fully aware that the third-quarter results underscore the urgent need for our expanded business to perform at the higher level, where I know it can and should. And you have my personal commitment that we will do so."

To make this happen, McCarthy laid out what he called "a new customer-focused organizational structure," as well as the creation of commercial and consumer business units. He said the change would "improve our execution and operational effectiveness, increase spans of control in the organization, and make us more nimble."

The CEO also shared that while subscriber counts ended the quarter down, the numbers did trend up at the end of the quarter. He blamed some of the slow numbers on the fact that the company had suspended marketing efforts during the transition and turned them back on during the seasonally slowest sales period.

Frontier needs to grow

McCarthy has done a good job managing through these problems, and his disciplined leadership has helped minimize financial losses, despite the subscriber drops. Now, however, the company needs to show that it can stop the bleeding.

Given industry trends, that means minimizing its cable losses while adding overall subscribers by increasing its broadband user base. That's going to be a difficult challenge because Frontier faces competition in all its markets, and in some cases it must deal with multiple competitors. That puts the odds against the company, because while it's bigger than it was, it's still a small player in cable and broadband.

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Daniel Kline has no position in any stocks mentioned. He does not care for capers. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.