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More accurately, it is all about the declining revenue. Frontier Communications (NASDAQ:FTR) has had sequentially declining revenue each quarter since the company acquired a large portion of the Verizon Communications (NYSE:VZ) rural business in 2010. As a result of the ongoing decline in revenue, last month the company slashed the annual dividend more than 46% from $0.75 to $0.40. At the current prices the dividend yield is about 9%.

At the time of the acquisition the plans were to upgrade the infrastructure in the 14 states acquired from Verizon, slash costs, reduce churn, and increase sales of High Speed Internet (HSI) access. Obviously, the plan to maintain the dividend has ended despite the ongoing management and board statements about sustaining the $0.75 payout level. So, where does Frontier stand with respect to the rest of its plans?

Reducing Costs
Slashing costs - or more euphemistically referred to as merger related synergies - has been an area where Frontier has demonstrated some success. On November 8, 2012, during the first earnings conference call following the completion of the merger, CEO Maggie Wilderotter stated:

In Q3 2010, Frontier realized synergies of $63 million in the acquired properties. This is a $252 million annualized rate and was achieved from the elimination of corporate overhead costs and other wage and non-wage synergies.

Looking forward, this permanent reduction along with continued synergy realization, gives us confidence to raise our 2013 synergy run rate estimate by 10% to $550 million.

Not only have the synergy related savings been increased, but they have also been achieved sooner than expected. On February 16, the company released fourth-quarter results and Wilderotter was quoted as follows:

We also finished a successful 4 state conversion, started the prep work for the additional 9 states to convert in March 2012, and delivered annualized synergies of $552 million enabling us to increase our guidance for 2012 to $650 million.

The company has noted that there are additional cost saving opportunities, but acknowledges that it will become more difficult to separate normal cost cutting from merger related synergies. Also, note Wilderotter's reference to the completion of the "four state conversion" and the start of the "nine state conversion."

Conversions - A Critical Step
Converting - or migrating - the acquired properties to Frontier's legacy systems has always been listed as extremely important to Frontier's ability to cut costs and increase revenue. Moving everything to the Frontier legacy systems allows the company to cut costs, run a single billing system, gives management more timely information, improves local sales engagement and unifies call center activities.

The company repeatedly brings up the performance of West Virginia, the first of the 14 states to be converted, as the model of what can be expected in the remaining 13 states once conversion is completed. In early November Chief Operating Officer Dan McCarthy discussed the successes that took place there.

Broadband availability in West Virginia was 78% at the end of September, up from 62% at closing. Our capital spending to improve the network and expand broadband in the last mile and middle mile, plus the ability to sell with local engagement on our own systems has driven a strong turnaround in the state.

The 9-month period ending September 30, 2011, compared to the 9-month period ending September 30, 2010, we've seen residential customer losses decrease by 25%, with churn falling 60 basis points. High-speed net additions turned from a net loss of 1,600 to a net gain of 6,800. Video net additions increased from 5,200 to 15,342 and commercial competitive win-backs of 1,000 customers.

Frontier's high-speed penetration of newly available homes was 18% at the end of Q3 2011, which is 4 points higher than we reported to you last quarter. We expect increasing broadband penetration to continue, improving customer metrics as we sold double and triple play bundles.

Beyond the improvements in revenue-related metrics, the company reported improvements in service response times and reductions in customer complaints. Frontier also invested heavily in capital improvements to the network to increase broadband capacity "more than 100-fold." He concluded his remarks:

I look forward to reporting other state metrics to you as we replicate the West Virginia experience across the remaining 13 acquired states.

These were reasons to feel positive about an investment in Frontier. And, during the fourth quarter/year end conference call the improvements in West Virginia continued. Frontier CFO Don Shassian reported:

In Q4 2011, broadband availability in West Virginia was up to 81%. You may recall that West Virginia broadband availability was 68% at closing. The penetration of available homes in West Virginia was 21% at year-end versus 18% at the end of Q3.

As our team sold [ph] into these available homes, total 2011 broadband additions in West Virginia were solidly positive compared to a loss in 2010. Video net additions doubled year-over-year, and customer disconnects were down 27% year-over-year.

Overall, total access line losses in West Virginia were just 6.7% in 2011, which is nearly 3 percentage points better than the acquired properties overall and very close to legacy levels. Our residential customer churn in West Virginia is 1.5%, a full 1 percentage point improvement since closing and very close to our legacy Frontier customer churn. And lastly, we have seen a very strong commercial sales growth in the State over the past 4 quarters.

On the recent conference call Wilderotter stated:

I also want to reiterate that once we convert systems and get the Frontier go-to-market implemented consistently over several quarters, we accelerate the improvements in both revenue and cash flow. West Virginia is a great example of what we can expect in all of our markets. The turnaround in 18 months has been very successful with customer churn now approaching our legacy property level, steady net growth and high-speed and video sales, and strong incremental revenues in the commercial segment.

...I wanted you to know that this is a case study of the improved business fundamentals that we will see in all of the acquired properties several quarters after conversion. These West Virginia and Q4 results clearly show that our business continues to improve.

These figures certainly indicate dramatic improvement, and as noted above, the company promotes this performance as the model for success moving forward. An investor must decide if it is reasonable to assume that the remaining 13 states will demonstrate similar improvements. Based on some of the data presented, the results are likely to be mixed.

West Virginia grew broadband availability to 81% from a base of 68%. The other 13 states are already at 81%. West Virginia improved churn from 2.49% to 1.50%. The other 13 states are already at 1.62%. These compare with Frontier's legacy customer churn rates of 1.4%. The real benefit may come in the area of access line loss rates. West Virginia has improved from 9.7% to 6.7% ("very close to legacy levels") while the remaining 13 states are at 9.9% and the Frontier company-wide access line loss rate is at 8.3%.

Upgrading the Infrastructure
Frontier continues to invest heavily in upgrading the infrastructure to support broadband activities. Every quarter the company reports the incremental number of homes passed, each one representing an opportunity to sell HSI services. During 2011 the company reached 415,000 additional homes.

In 2011 the company spent nearly $750 million on cap-ex and expects to spend a similar amount in 2012 as it invests in increased broadband expansion and speed, fiber-to-the-cell, and other strategic initiatives.

It's All About The Revenue
The major problem with Frontier is the declining revenue. While the company reports that this is the best quarter since the merger, it is, at best, a Pyrrhic victory as the revenue continues to show declines. The company boasts about how business revenue is now 52% of customer revenue. The reason is that residential revenue has fallen while business revenue has remained relatively flat:

2011 Quarterly Customer Revenue (000's)





















Source: Frontier 2-16-2012 Conference Call Presentation

The company has been showing growth in the sale of broadband and television services. However, customers are migrating to cable or wireless alternatives for residential phone service faster than the company can replace that lost revenue with HSI or television services.

Late last year Frontier also announced plans to market AT&T (NYSE:T) wireless services. The goal is to become the single point of contact for all of their customers' communication needs.

There are positives coming out of Frontier. The company has been able to control costs and reduce cash operating expenses. The cap-ex programs required to upgrade the infrastructure should begin to taper off in 2013. There have been improvements in the rate of line losses. Despite these positives, investors in Frontier must exercise caution until the company can demonstrate that the revenue declines are over.

The dividend was the reason I originally bought this stock, and that dividend was cut because the revenue declined. The new lower dividend looks secure at the current time, but this observation is based partly on company guidance and management statements, and management statements have not been particularly reliable of late. The company continues to lose access lines and revenue continues to decline each quarter. Any future capital I intend to commit to Frontier will be using a covered call strategy.

The bottom line: While selling bundled offerings should help to reduce customer churn and access line losses, the company has not proven that it can stop the decline in revenue. (There are other issues not addressed in this article, including pension costs and potential changes to the regulatory fee structure. )

Disclosure: I am long Frontier and Verizon. I day trade Frontier, especially with the increase in volatility. I also have several covered call positions in Frontier and may close or initiate a covered call strategy at any time.