Frontier Communications (NASDAQ: FTR) has been suffering since April 2016 when it spent $10.54 billion to buy Verizon's wireline business in California, Texas, and Florida (CTF). That deal doubled the size of the company and helped it achieve over $1 billion in cost-saving synergies. Unfortunately, an increase in cord cutting and customers wanting higher-end, cable-based internet, not phone-line based service, has seen Frontier lose customers in every quarter since the CTF purchase.
These two factors have forced Frontier to drop its dividend and conduct a reverse stock split to avoid being delisted from Nasdaq. Both of those were moves that extended the company's runway, but so far, the result could simply be a drawn out death rather than a quick one.
How bad is the subscriber loss?
When the CTF deal closed, Frontier had 5.24 million residential customers and 528,000 business customers. At the close of the second quarter of 2018, the company claimed 4.67 million residential subscribers and 430,000 business customers. It has also seen its total revenue drop to $2.16 billion from $2.6 billion in Q2 2016.
The company has managed to slow the losses, but again, it's lost customers in every quarter since the Verizon deal was completed. CEO Dan McCarthy seemed encouraged by the slower loss trend in his remarks in the company's Q2 2018 earnings release, but he has made similarly optimistic remarks most quarters.
"We are pleased to have maintained good subscriber momentum despite facing typical second-quarter seasonal headwinds," McCarthy said. "Underlying trends should continue improving in the latter half of this year, once summer seasonality is behind us."
What happens next?
Frontier has steadily lost money, but at least in the last year, it's avoided taking on more debt, and has worked on refinancing its borrowings. The company closed the second quarter with $1.42 billion in cash, cash equivalents, receivables, and other liquid assets. That's actually up from $1.32 billion in the same period a year ago, although current liabilities have also increased during the period. The company's current ratio declined from an already weak 0.53 in Q2 2017 to 0.46 in the second quarter of 2018.
Basically, Frontier's management has done an good job controlling its expenses and has worked with its lenders to buy time. That's commendable, but it does not change how the story ends. There are three plausible scenarios.
The first and the most likely one is that Frontier eventually loses enough customers that it can't support its infrastructure. At some point, there's nothing left to cut, and no way to eek out more cost savings.
The second scenario is that a bigger company will purchase Frontier. That seems unlikely because while the company does have assets, it's hard to see why most players in this space would want a brand that's in decline.
The least likely scenario is that the company halts its subscriber loss and slowly starts to add customers. That's not plausible because industry trends are moving in different directions and competition will only increase.
In five years, it's very likely Frontier Communications does not exist. It's possible the brand will live on under a new parent company, but Frontier as we know it now is shrinking its way to its end.
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