Frontier Communications: 5 Keys to Its Future Success

Frontier Communications takes pride in its network but hopes to expand it soon. Image source: Frontier Communications.

Many investors are familiar with telecom's biggest companies, but some of the smaller telecoms can lurk beneath the radar. Frontier Communications has a history of focusing on rural areas, but it has made dramatic progress in building up a nationwide network, and a big acquisition could put it into some of the most lucrative markets in the country. In order to get some insight into Frontier's next steps, let's take a look at five things that its management team recently identified as key aspects for implementing a winning strategy.

"We made substantial progress [on the Verizon acquisition]. ... We continue to estimate that completion of the Verizon transaction will provide over 30% accretion to leveraged free cash flow per share in the first full year and will result in a solid improvement to our dividend payout ratio."-- CEO Dan McCarthy

Frontier Communications has its full attention on its deal to purchase assets in the key markets of Florida, Texas, and California from Verizon . McCarthy said that by completing its equity offering to raise $2.75 billion to go toward the acquisition and by working toward approval from the FCC and state regulators in the three states in question, Frontier hopes to close the Verizon deal by March 2016.

McCarthy explained the immense impact that the Verizon deal will have on Frontier's business. Going forward, Frontier will get less than a fifth of its revenue from residential voice, and the larger FiOS footprint will boost the telecom's growth potential. Handling the transition smoothly will take a lot of effort, but Frontier has plenty of experience getting its customer-service personnel ready to deal with a flood of new customers. McCarthy is optimistic that it can learn from mistakes it has made in previous acquisitions and squeeze as much profit from the deal as possible.

"We continue to see more customers choose higher-speed broadband products. ... [W]e have a substantial opportunity to improve our average revenue per customer as they upgrade their Internet service to higher speeds over time." -- McCarthy

One of the challenges that Frontier Communications has always had is to persuade its existing subscriber base to upgrade to more lucrative services. One of the most important drivers for future growth at Frontier is its broadband Internet service, and with trends clearly pointing toward the need for more bandwidth, the telecom company has a chance to upsell customers to get higher-quality service. Moreover, broadband Internet can form the backbone of broader packages that incorporate voice and video content as well, with the corresponding opportunities to boost margins in those areas. By investing in ways that will boost speed and capacity, Frontier can stay ahead of the curve and meet rising customer demand.

"From a pricing perspective, probably the single biggest area that we made changes in was the Connecticut market. ... [W]e will continue to pass through content price hikes ... on our legacy FiOS markets as well as Connecticut."-- McCarthy

One balancing act Frontier Communications always has to walk in making acquisitions is ensuring that it doesn't raise prices so dramatically that its new customers immediately leave. When Frontier bought landline assets in Connecticut, it made promotional pricing available at first, but it set the stage for regular pricing to kick in a year down the road. McCarthy sees the slow migration to higher pricing helping average revenue per customer and also encouraging its customers to look for value-adding packages that should enhance Frontier's overall business health going forward. If it can use the same strategy for its latest acquisition, it should pay off in the long run.

"In July, we accepted $283 million in annual CAF II funding. ... [W]e see opportunity as we upgrade some of the markets with the CAF II funds to improve retention as we offer higher speeds and capacities in the legacy market."-- McCarthy

The federal government has subsidized rural telecom coverage for a long time, and after considering its options, Frontier Communications chose to take the full amount of Connect America Fund II money it was entitled to receive. By helping to drive investment in more network assets in areas that have less service capability than cutting-edge urban markets, the CAF II funding should help Frontier build out better offerings that in turn will give customers more reason to stick with the company for their telecom needs. In particular, CAF II fits well with customer demand for broadband Internet, and Frontier hopes to use that money constructively to keep up with faster-moving parts of the nation.

"We have the ability per our purchase and sale agreement to use the FiOS brand as well as the technology for an additional five years in all of our legacy markets as well as all the acquired markets."-- McCarthy

In some ways, multiple transactions with Verizon over time have tied the fortunes of the two companies together. Frontier sees its latest buy as a chance to refresh its FiOS offerings to existing customers, and the deal contemplates further parallel development going forward. Frontier intends to move forward with its own set of products, but by taking advantage of its deal to get some valuable intellectual property from Verizon, the offerings that Frontier will give to its customers over the long run could get a nice boost.

Frontier Communications stock hasn't performed as well as investors would prefer, with the speed of innovation in the business making it harder for investors to follow Frontier's moves in relation to those of its competitors. Nevertheless, Frontier's executives have a solid strategy vision, and if it pans out, shareholders should see dividend increases and hopeful share-price gains in the future.

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