3 Things to Watch When Frontier Communications Reports Q4 Earnings

By Daniel B. KlineMarketsFool.com

Frontier Communications (NASDAQ: FTR) faces a key moment when it reports fourth-quarter results Feb. 27.

Continue Reading Below

The company has already reported on two quarters since it spent $10.45 billion buying Verizon's (NYSE: VZ) wireline operations in California, Texas and Florida (CTF). That was a risky deal that gave the company 3.3 million new voice connections, 2.1 million more broadband subscribers, and 1.2 million FiOS video customers.

It was a bold bet that so far has not paid off. Frontier more than doubled its size, which has allowed it to save money and bring in more revenue per customer, but that won't mean anything if the company keeps losing the subscribers it spent over $10 billion to acquire. As the company reports Q4 earnings, it's important that it show a reversal of its subscriber-loss pattern, while also maintaining its average revenue per user (ARPU).

Frontier lost about 100,000 video customers in the third quarter. Image source: Getty Images.

More From Fool.com

Subscribers are key

In Q2, the first quarter after the Verizon deal was completed, some subscriber loss was to be expected; moving millions of customers was not a simple matter. While Frontier corrected issues quickly, there were a number of problems, both technical and in customer service, that impacted customer counts negatively.

In Q3, however, the losses continued. The company's residential user base dropped from 5.22 million at the end of Q2 to 5.07 million at the close of Q3. Making matters worse was the fact that Frontier lost users in all categories. The company dropped 12,000 business customers, and lost nearly 100,000 subscribers in both video and broadband.

Making money is important too

One of the key justifications of the Verizon purchase was that being bigger would create cost efficiencies for the company. Essentially doubling in size does not require doubling resources spent on everything from innovation to customer service, billing, and other back-office functions.

That's an area where so far the company has delivered. In its Q3 earnings release, Frontier raised its annualized cost-synergy target to $1.4 billion, up from the $1.25 billion target outlined in the second quarter earnings report. "Yet-to-be attained cost synergies of $400 million are anticipated to be achieved by mid-year 2019, including $250 million anticipated to be achieved by mid-year 2017," the company wrote.

In addition to operating more efficiently, Frontier has also dramatically raised its residential ARPU. In Q1 the company made an average of $64.43 per residential customer. That number increased to $83.20 in Q2, and dipped only slightly to $82.34 in Q3. Keeping ARPU high will likely depend on whether subscriber loss continues in the CTF territories.

It's time to deliver

While Frontier CEO Dan McCarthy was happy about some aspects of his company's Q3 performance, he made it clear in the earnings release that improvement was necessary. Essentially, everything hinges on reversing the subscriber losses in the former Verizon territories:

McCarthy talked a lot during the Q3 earnings call about the subscriber counts. The CEO made it clear that he believed the dips were first related to the switch, and then the problems continued due to the company suspending some marketing efforts. He also noted that the pattern had improved during the latter part of Q3.

If that's true, then the Q4 numbers should show a reverse of the declines, and perhaps some slight gains. If the company can do that, the other numbers -- continued efficiency savings, and strong ARPU -- should fall into line. Further drops, however, would suggest that the company's problems may not be reversible, and eventually, falling subscriber numbers will impact Frontier's ability to gain operational savings.

10 stocks we like better than Frontier CommunicationsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Frontier Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.