Dead Stock Walking: Frontier Communications Has Nowhere to Go but Down

With Frontier Communications (NASDAQ: FTR), it has become a question of when, not if, the company runs out of money. The internet, phone, and cable provider has been steadily sinking since it spent $10.5 billion on Verizon's (NYSE: VZ) wireline businesses in California, Texas, and Florida (CTF).

That deal was an attempt by the company to gain the scale it needed to compete with its bigger rivals. The problem is that Frontier's purchase has coincided with a general decline in the cable business as cord cutting accelerated. Making matters worse is that telco or wireline providers have not been compensating for their pay-television losses with broadband gains.

What's happening to Frontier?

Since its Verizon deal closed in April 2016, Frontier has lost subscribers in every quarter. These losses have been in both cable and internet, and they show no signs of stopping -- nor even slowing down.

Frontier made the CTF purchase in order to give it the size it needed to operate efficiently -- and in that respect, the deal delivered; the company has slashed its operating costs by over $1 billion annually, and more savings are expected. The problem is the steady decline in subscribers.

That has left the company in a cash crunch, which it has met partly by creatively restructuring debt and partly by slashing its dividend. Frontier's fiscal woes also sank its share price so low it was forced to engage in a reverse stock split to avoid being delisted.

How bad is the decline?

On the positive side, Frontier has slowed its losses in both customer count and dollars. CEO Daniel McCarthy celebrated that in the company's third-quarter earnings release.

"Our third quarter results highlight the ongoing stabilization across our business as we focus on executing our strategy," he said. "During the quarter, we were pleased with the continued improvement in subscriber trends and churn in our California, Texas and Florida markets, ongoing stabilization in our commercial business, and continued operating efficiencies."

Quarter Net Loss Customers Lost
Q3 2106 ($134 million) (67,000)
Q4 2016 ($133 million) (158,000)
Q1 2017 ($129 million) (155,000)
Q2 2017 ($715 million)* (151,000)
Q3 2107 ($38 million) (99,000)

It does look as though the numbers are improving, but Frontier is fighting two negative trends. Cord cutting has sped up, with major pay-TV providers losing a total of around 1.4 million paying customers through the first three quarters of 2017, after dropping 795,000 in all of 2016. Second, as noted above, while broadband has been growing, that growth has gone to cable providers, not telephone companies, which is the technology Frontier uses.

What's next for Frontier?

McCarthy may manage to hold off the end. He has proven adept when it comes to cutting costs and managing obligations. It's even possible that there is a bottom for cord cutting, and that perhaps Frontier may stabilize.

The problem is that the company can't grow. A stable Frontier may find some companies willing to acquire it, but not at much of a premium, if any. This isn't a potential growth stock: It's a survival play. McCarthy may deliver survival -- and that's certainly better than bankruptcy -- but he can't change the nature of this market, and that puts a pretty hard cap on Frontier's upside.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool has a disclosure policy.