Frontier Is Set To Grow

Jun. 3.14 | About: Frontier Communications (FTR)

Summary

Frontier has been one of the best performers in the sector with a gain of 23% year-to-date on the back of improved business metrics.

Despite falling customer base, the average revenue per customer is increasing for the company.

Growth in key business segments will continue for the company due to the focus on the high-growth areas.

The dynamics of the telecom industry has changed over the last few years - companies like Frontier Communications (NASDAQ:FTR) have had to change the business model in order to survive in the industry. Frontier remains one of the highest yielding stocks in the sector with a dividend yield of 6.9%; however, the concerns about the revenue growth have hindered dividend growth. In fact, some businesses in the sector have decreased the dividends over the last few years. The telecom companies are now focusing on long-term growth by retaining their customers through competitive pricing and latest technological advancements in their offerings. Frontier Communications has performed well since the start of the year and the stock is up about 23%. We will focus on the long-term growth potential of the company in this article.

Business & Operational Overview

Frontier provides services to around 3 million residential as well as business customers. Over the last year, the company reported revenue of $4.21 billion, including residential revenue of $2.03 billion and business revenue of $2.18 billion. The changing industry dynamics have enabled the customers to switch easily between telecom companies, presenting a sharp decline in their revenues. Frontier also reported a revenue shortfall in the last year. Frontier completed network speed enhancements in many of its markets, which will further enhance the revenues of the company. The average monthly residential revenue per customer [APRC] has increased to $59.3 from $58.33, showing an uptrend of 1.66% over the last year. Similarly, the average monthly business revenue per customer [business APRC] has also increased to $653.26 from $639.13, up 2.2% compared to 2012.

Click to enlarge

Source: SEC Filings

The company continues to lose customers; however, it has been able to increase its revenue per customer - the trend is consistent in the business customers as well. Moreover, Broadband services remain the nucleus of growth for Frontier in the long run. The company reported approximately 112,250 net broadband customers during the last year, up 6.4% compared to 2012, and substantially expanded its broadband availability to households throughout its territory. Frontier increased its broadband availability by 167,000 new households in the last year and is now able to offer broadband services to around 6.4 million households during the current year. This has also been made possible by the Federal Communications Commission's (FCC) Connect America Fund (CAF) in order to support broadband deployment in unserved and underserved areas in the U.S. The image below shows the increased broadband service offerings over the last two years.

Click to enlarge

Source: SEC Filings

Future Growth

The first quarter results of Frontier displayed a weak picture of its financial position during the period with a decline of 4.3% in revenues and a substantial decrease of 18% in earnings year-over-year. However, the company has been taking steps to accelerate its growth in the long run by making sizable investments in new offerings. The broadband service, Frontier's core growth area, added 37,200 net customers in the first quarter, enabling the company to gain 91% of the total market share in the areas Frontier operates. Moreover, the company managed to improve its residential customer loss rate by 50% compared to 2013, recording the company's lowest customer loss over the last five years.

Cyber threats have now become a serious problem for many businesses. The vulnerability of customers' data requires businesses to use secure portals in order to conduct their transactions. Frontier also offers a computer security service under its data and internet services offerings. This service aimed at protecting key aspects of digital life including computer security, cloud backup, identity protection for individual and small businesses. The company had a total of 465,000 Frontier Secure customers in the last year, up 24% compared to 2012.

Frontier Secure services contributed greatly in the APRC during the last year and holds significant potential to increase company revenues over the next few quarters. Moreover, the company announced the launch of its Frontier Secure's Computer Security Pro for PCs and mobile devices to protect small and medium businesses {SMBs} from cyber threats. Further, the new Frontier Secure Pro platform is upgraded with Internet of Things [IoT] along with Dropcam feature. Dropcam is a cloud-based Wi-Fi video monitoring service with live streaming and remote viewing that makes it easy to stay connected to people at any remote location. Also, the company is expecting considerable benefits from its new Frontier "Anywhere Hosted Business Telephone System" services introduced in the last quarter and recorded robust success during the period.

Conclusion

Stocks in the telecom sector are usually attractive for income investors due to the hefty dividend yields - Frontier is one of these stocks. However, since the start of the year, the stock has also shown strong price performance due to the growth made by the company in its business segments. The average revenue per customer is increasing despite a fall in overall customer base, which shows that the company is monetizing its customer base well. In our opinion, Frontier is a set to grow over the next few quarters as the growth in the business segments will continue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.