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ILEC 3Q11 Quarterly Results: Frontier Communications

Residential Customers Fall 10% in 3Q11

While the popular strategy amongst the ILECs of late has been to shift focus away from residential service to the business community, Frontier (NYSE:FTR) has chosen a different path.  As other LECs have transitioned into managed services and data center operations through M&A, Frontier put its stake in the ground when it acquired 4.8m access lines from Verizon (NYSE:VZ). As such, given the industry-wide trend of access line losses, Frontier’s sizable subscriber losses and revenue declines in 3Q11 did not come as a surprise.

Frontier lost 10% of its residential customer base YoY in 3Q11, ending the quarter with 3.1m subscribers. A small portion of the sub losses was associated Frontier’s effort to shake some of the unprofitable FiOS customers it acquired from Verizon. While the decline in residential access lines was predictable for Frontier, its loss of 31,000 business customers YoY, or 9.8% of its customer base, is more discouraging.

Frontier ceo Mary Agnes Wilderotter spoke to the $6m decline in commercial/business revenues on the earnings call. “The revenue decline in commercial was really one-time items. And it was clean-up of settlements and disputes that have been out there for a very long time. So we wanted to put all that behind us. That's a one-time issue.”

Donald Chaisson, Frontier cfo, later clarified the “one-time” items amounted for $4.5m-$5m of the $6m YoY decline in business revenues, which indicates the overall trend for commercial revenues was still downward in 3Q11.

Overall the access line losses led to revenue declines of 8% to $1.3b in the third quarter, and net income also dropped 30% to $20.4m. Frontier’s operating results however were not all negative. The company appears to have been successful thus far in realizing the cost synergies it projected when purchasing its Verizon properties. 

Wilderotter provided analysts with an update on the Verizon integration on the earnings call. “We generated $18m of incremental cost synergies (from the Verizon acquisition) in 3Q11. Our total is now $496m, putting us 83% of the way toward our $600m 2012 goal. The largest contributor to the synergies in 3Q11 was the full impact of traffic migration to our own national backbone. We will realize additional synergies as we convert the remaining acquired property systems onto Frontier's legacy system. In 3Q11, our cumulative synergies helped Frontier generate a 47% EBITDA margin.”

Frontier is also in the process of expanding broadband services to its acquired properties. It reached an additional 126k homes in 3Q11 with broadband access, bringing its year to date total to 352k homes. The upgrades to the former Verizon lines should improve monthly ARPU, as Frontier’s legacy access lines generate $85 a month, while ARPU inclusive of the Verizon lines was only $79.22 during 3Q11.

In addition to its broadband expansion efforts, Frontier has inked some reseller agreements in hope of giving its top and bottom lines a boost going forward. The telco has entered into agreements with both of the leading satellite providers, DirecTV (Nasdaq:DTV) and Dish Networks (Nasdaq:DISH), to resell their satellite TV packages and in November it signed a deal with AT&T (NYSE:T) that will allow the ILEC to provide wireless voice and data services to its customers.  Frontier plans to bundle wireless with its satellite TV, DSL and traditional wireline voice services. 

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