Frontier Communications: Time to Move On?

MarketsMotley Fool

Since Frontier (NASDAQ: FTR) completed its purchase of Verizon's (NYSE: VZ) wireline business in California, Texas, and Florida in April 2016, the news has mostly been bad for shareholders.

The company paid $10.54 billion for approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million cable subscribers. That move was supposed to elevate the company so it could have the operational synergies required to compete with the big boys.

Continue Reading Below

That happened in a way, as the company has been able to cut costs by over $1 billion annually, with more to come, but that may be the only positive for the company. Frontier has lost subscribers and money in every single quarter since the Verizon deal closed. It has also slashed its dividend and reverse-split its stock to avoid being delisted. In a broad sense, the company has left little reason for investors to be hopeful of a turnaround.

No signs of improvement

In Q2 2016, the first quarter after the CTF deal closed, Frontier CEO Daniel McCarthy delivered optimistic remarks in the company's earnings release. He made it clear that growing the company's subscriber base was one of its goals:

Growth has not happened, and the company has actually lost subscribers in every quarter since the CTF deal. It has also steadily lost money despite increasing its cost-savings from an initial prediction of $700 million to a revised $1.25 billion.

It's all about subscribers

McCarthy has been a master at delivering plausible excuses for the subscriber loss. At first, he blamed it on a lack of marketing, and then he cited a one-time purge of non-paying Verizon customers. The reality is that Frontier's losses mirror industry trends.

In a broad sense, the cable universe has been shrinking, but some providers have been making those losses up with broadband gains. The problem for Frontier, and it's a big one, is that companies that use telephone-based technology to deliver internet have not been making up their cable losses by adding broadband customers.

For example, in Q2 of 2017, phone companies actually lost 233,360 broadband customers, while cable companies gained 461,997, according to data from Leichtman Research Group. That followed a a telco loss of 44,571 broadband customers in Q1, a quarter in which cable companies added just over 1 million internet users.

Those trends are well entrenched. In 2016, telephone companies dropped nearly 600,000 broadband users, while cable added about 3.3 million. These aren't trends Frontier can do much to change. They are rooted in the capabilities telephone companies have to deliver high-speed internet versus what can be done with telephone company technology.

It's a bleak future

McCarthy manages money well, but that can't make up for a slowly eroding customer base. Frontier has little hope of a turnaround because the cable industry is shrinking, and at the same time, fewer customers want telephone-company delivery internet service. That's a one-two punch that's nearly impossible to overcome when selling those services provides the majority of your revenue.

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 September 5, 2017

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.