Frontier Communications (NASDAQ: FTR) has been hanging by a thread. The company has been losing customers each quarter, and its $10.54 billion deal to acquire Verizon's wireline business in California, Texas, and Florida (CTF) has so far been a bust.
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The company does have strong management, and it has made moves to conserve cash to give it more time to reverse course. It has also gained significant cash savings -- about $1.25 billion annually so far, with another $350 million projected.
Still, the company has lost customers for four straight quarters. It has also slashed its dividend and conducted a reverse split of its stock, and the losses have still been piling up. Frontier lost $587 million in 2016, almost twice the $316 million it lost the previous year. Those losses come despite all the savings the company has managed to deliver in operating expenses because of the expanded size it gained in the Verizon CTF deal.
CEO Daniel McCarthy has a plan, and he's been ever-optimistic in the face of the negative news that's piled up. What he can't account for is worsening conditions for the company.
What is Frontier's market?
The company sells three products: legacy landline phones, cable television, and broadband internet. Two of those markets -- phones and cable -- have been contracting industrywide. The third, broadband, has been a source of growth, albeit not for Frontier.
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The company faces significant challenges in the cable space, where the market could take a significant downturn. That could happen in a number of ways. Consumers may decide that enough is enough with cable prices and cut the cord. They could also opt to keep service but scale down their plans. It's also possible that increased competition could cause the entire industry to lose pricing power, which is what has happened in the wireless phone market.
It's unlikely that the market for broadband will contract as the traditional pay-television business done for the past few years. What could happen is that increased competition will keep prices flat or even drive them down in that space, which would hurt Frontier with existing customers and in its ability to attract new ones.
A company on the edge
Frontier's shares have been steadily sinking and now trade barely above $1. To deal with that problem, the company's board has authorized both a 15-for-1 reverse stock split and a cut in its dividend from $0.105 to $0.04 per share, beginning with the dividend payable on June 30.
Investors are unlikely to be happy, but in his remarks in the company's Q1 earnings release, McCarthy tried to justify the moves:
"Our board regularly reviews the company's long-term capital allocation strategy, and it has determined to reduce the dividend at this time to provide additional financial flexibility, while still returning a meaningful cash dividend to shareholders. As we continue to execute on our strategy to deliver on the full potential of our strong assets and generate additional cash flow, we will optimize our capital allocation to ensure we strike a balance between investing in the business, paying down debt, and returning capital to shareholders."
That's a really nice way to say that Frontier is running out of money while it's still losing cash each quarter. Cutting the dividend frees up cash to pay off debt while giving the company a longer runway.
Can Frontier be fixed?
McCarthy has a plan, and under current market conditions, he may be able to turn things around. He noted in the Q1 earnings release that subscriber trends on the former Verizon territories have improved for three straight quarters.
The problem is that if things don't turn around, then shares in the company -- which the reverse split will prop up for now -- could sink back to their current depths. That could happen if, despite the company's best efforts, a market downturn in the cable space undercuts its efforts.
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