Why Did Frontier Communications Corp. Shares Drop 12% in September?

10/5/17

By Daniel B. Kline, MotleyFool

Frontier Communications (NASDAQ:FTR) made a huge bet in April 2016 when it spent $10.54 billion buying Verizon's former business in California, Texas, and Florida (CTF). At the time, the purchase seemed to make sense as it gave the company operational scale that would allow it to cut overall expenses.

That part of the purchase actually panned out with Frontier saving over $1 billion annually due to cost synergies. The problem is that the company bought a wireline business -- internet, phone, and pay television delivered over aging telephone company technology -- and consumers don't want that type of connection.

A cable remote is pointed at a TV

FRONTIER HAS STEADILY BEEN LOSING CABLE AND INTERNET CUSTOMERS. IMAGE SOURCE: GETTY IMAGES.

What happened

The CTF deal gave Frontier an added 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers, more than doubling its size. Unfortunately, in every quarter since the deal closed, the company has lost some of the subscriber base it paid so dearly for.

At first, that seemed like it might be related to problems caused by the transition. Once that no longer seemed plausible, CEO Daniel McCarthy blamed the drops on a suspension of marketing efforts. Finally, and most recently, he has said that a one-time purge of former Verizon customers who never paid was to blame.

So what

The reality is that Frontier is not alone in losing internet and cable subscribers. Nearly all pay-television companies have lost customers to cord-cutting, the practice of dropping cable for streaming options. Frontier's problem is that it's not making up for those losses by adding broadband customers. Again, that pattern is not unique to Frontier as all the phone-based providers, or telcos, have experienced similar losses.

In the second quarter 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 telco loss of 44,571 broadband customers in Q1, a quarter in which cable companies added just over 1 million internet users.

It's bad, and it's probably not going to get better for Frontier. Consequently, shares in the company have fallen steadily since it reported Q2 results on August 1. After closing August at $13.47, shares dropped to $11.79 when markets closed on the last trading day of September, a 12% drop, according to data provided by S&P Global Market Intelligence.

Now what

Frontier faces very bleak prospects. Its customer losses are not likely to reverse, and they may get worse. Add that to the fact that the company cut its dividend and did a reverse split of its stock to avoid delisitng, and you can see why there are doubts about the company's future.

McCarthy has managed money well, and that gives Frontier more time. The problem is that cord-cutting should only accelerate -- and consumers aren't going to stop preferring newer internet technology from cable companies. Aside from a buyout, which remains possible, it's hard to see Frontier turning things around.

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