FTR: Frontier Communications Analysis and Research Report

2018-03-04 - by Asif , Contributing Analyst - 344 views

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Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 4.9 million customers, 3.9 million broadband subscribers and 22,700 employees, operating in 29 states. In recent years, Frontier has completed multiple acquisitions. On April 1, 2016, the company acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida for a purchase price of $10,540 million in cash and assumed debt.

The company conduct business with both consumer and commercial customers.

Consumer. The company provide broadband, video, voice and other services and products to its consumer customers. The company deliver these services generally over a combination of fiber and copper-based networks.

Commercial (small, medium and large enterprise business (SME) as well as wholesale customers).

Commercial. The company provide a broad range of services to its SME customers, including broadband service, Ethernet service, traditional circuit-based services (TDM services) and voice services. The company also offer advanced hardware and network solutions and services.

  • Larger Enterprise: Fortune 1000, multi-location companies, large government entities, large educational institutions, and non-profits.
  • Medium Business: Single or multi-location companies and mid-sized government entities, educational institutions and non-profits.
  • Small Business: Mostly single-location businesses, the smaller of which have purchase patterns similar to consumer customers.
  • Wholesale: Wholesale customers are often referred to as carriers or service providers and include national operators such as AT&T and Verizon; Local Exchange Companies that need to access locations within Frontier’s footprint to offer local services; and wireless carriers and integrated carriers that offer a variety of services across all of these categories. Wholesale customers buy both voice and data services to supplement their own network infrastructure.

Services and Products

The company offer a broad portfolio of communications services for consumer and commercial customers. These services are offered on either a standalone basis or in a bundled package, depending on each customer’s needs.

Data and Internet services. The company offer a comprehensive range of broadband and networking services. The principal consumer service the company provide is broadband internet service. Commercial services include a complete portfolio of Ethernet services, dedicated internet, software defined wide area network (SDWAN), multiprotocol label switching (MPLS), time division multiplexing (TDM) data transport services and optical transport services. These services are all supported by 24/7 technical support and an advanced network operations center. The company also offer wireless broadband services (using unlicensed spectrum) in select markets utilizing networks that the company own or operate.

Video services. The company offer video services under FiOS® brand in portions of California, Texas, Florida, Indiana, Oregon and Washington, and the VantageTM brand in portions of Connecticut, North Carolina, South Carolina, Minnesota, Illinois, New York, and Ohio. The company also offer satellite TV video service to its customers under an agency relationship with DISH® in all of its markets.

Voice services. The company provide voice services, including data-based VoIP, long-distance and voice messaging services, to consumer and commercial customers in all of its markets. These services are billed monthly in advance. Long-distance service to and from points outside its operating properties are provided by interconnection with the facilities of interexchange carriers. The company's long-distance services are billed in advance for unlimited use service, and billed in arrears for services on a per minute-of-use basis.

The company also offer packages of communications services. These packages permit customers to bundle their products and services, including voice service, video and Internet services, and other product offerings.

Access services. The company offer a range of access services. The company's switched access services allow other carriers to use its facilities to originate and terminate their local and long-distance voice traffic. These services are generally offered on a month-to-month basis and the service is billed primarily on a minutes-of-use basis. Switched access charges are based on access rates filed with the Federal Communications Commission (FCC) for interstate services and with the respective state regulatory agency for intrastate services. See “Regulatory Environment” below.

Advanced Hardware and Network Solutions. The company offer its SME customers various hardware and network solutions utilizing cloud functionality and Customer Premise Equipment (CPE). The company offer third-party communications equipment tailored to their specific business needs by partnering with Mitel, Cisco, Ingram Micro, Airbus, Avaya, Hewlett Packard, Adtran and other equipment manufacturers. CPE is typically sold in conjunction with voice, data and Internet services, and may also be sold on a standalone basis.

Frontier Operating Strategies

Consumer Business

Improve Customer Experience and Retention. The company provide multiple service and product options to its consumer customers. The company's strategy is to foster relationships and loyalty throughout the customer lifecycle in order to improve experiences, reduce churn and grow revenue. The company's plan to retain customers includes providing easier access to account services and trouble-shooting options through online portals and user interfaces. The company incorporate and utilize customer feedback to improve its product offerings with the goal of improving the overall customer experience for its subscribers. The company focus and refine its marketing strategy for sales and retention to drive further improvement in the business.

New Customer Acquisition. The company focus on broadband as the core growth component of its service offerings, either bundled with its voice and/or video services, or on a standalone basis. The company seek to attract and retain a greater number of customers and increase average revenue per customer (ARPC). Frontier Communications is committed togrowing its customer base through providing higher broadband speeds and capacity that will enable it to reach new markets, target new customers, and grow the business while maximizing its full footprint.

Improve Revenue Trends. As the company expand the range of services the company offer customers, increase the capabilities of its networks, and increase the penetration of its services, the company increase its revenue opportunity and are better positioned to increase the average amount of revenue the company can receive from a customer.

Commercial Business

Improve Revenue Trends. The company's strategy is to achieve revenue growth in its Commercial business through the acquisition of new customers, increasing the penetration of services with existing customers, and improved retention of existing customers.

Offer a Competitive Product Portfolio. The company offer both traditional services as well as an expanding range of advanced, packet-based services, such as Ethernet, SDWAN, Unified Communication as a Service (UCaaS) cloud-based connectivity for its large enterprise customers, and more cost-effective integrated voice and data services for its medium and small business customers.

New Customer Acquisition. Frontier Communications has increased its sales force with an emphasis on adding new customers and increasing penetration of existing customers, particularly in areas where Frontier Communications has a robust fiber network.

Improve Customer Experience and Retention. The company plan to grow its revenues in the commercial sector through increased retention and deepening of existing customer relationships. The proper alignment of its sales force, service personnel, and resources will enable it to provide excellent service to its existing enterprise, medium and small business customers, while obtaining the greatest opportunities for revenue growth and expansion.


Invest in its Network through Capital Expenditures. The company's investment focus is the enhancement of its existing network and the expansion of fiber-based infrastructure in its network. The company continue to upgrade network hardware, expand transport capacity of its middle-mile and data backbone, and enhance its video capabilities. Similarly, Frontier Communications is focused on enhancing its premium Ethernet service offerings across its network for its commercial customers.

Improve Productivity and Operational Efficiency. The company continuously engage in productivity initiatives with a focus on simplifying its processes, eliminating redundancies and further reducing its cost structure while improving its customer service capabilities. The company continue to migrate its network and systems to common operating platforms in order to increase efficiency and Frontier Communications has been migrating traffic to a common architecture to eliminate duplication.

Network Architecture and Technology

The company's local exchange carrier networks consist of host central office and remote sites, primarily equipped with digital and Internet Protocol switches. The outside plant consists of transport and distribution delivery networks connecting its host central office with remote central offices and ultimately with its customers. The company own fiber optic and copper cable, which have been deployed in its networks and are the primary transport technologies between its host and remote central offices and interconnection points with other incumbent carriers.

Frontier Communications has expanded and enhanced its fiber optic and copper transport systems to support increasing demand for high bandwidth transport services. The company routinely enhance its network and upgrade with the latest Internet Protocol Transport and routing equipment, Reconfigurable Optical Add/Drop Multiplexers (ROADM) transport systems, Very High Bit-Rate Digital Subscriber Line (VDSL) broadband equipment, and VoIP switches. These systems support advanced services such as Ethernet, Dedicated Internet, Multiprotocol Label Switching (MPLS) transport, VoIP, and SDWAN. The network is designed with redundancy and auto-failover capability on its major circuits.

The company connect to households and business locations in its service territory using a combination of fiber optic and copper technologies. In some cases the company provide direct fiber into a residence or a business premises. In other cases a location is served with a hybrid combination of fiber and copper. Residences in its service territory are served by fiber-to-the-home (FTTH) and by fiber-to-the-node (FTTN), meaning fiber carries the traffic to an intermediate location where the signals are converted to copper wire for the final delivery to the household. The company provide data, video, and voice services to customers over both of these architectures. Additionally, fixed wireless broadband (FWB) will play an important part of its future broadband strategy and could be deployed for some business Ethernet services. FWB is delivered by the use of an antenna on a Frontier base location and another antenna at the customer location. 

Rapid and significant changes in technology are occurring in the communications industry. The company's success will depend, in part, on its ability to anticipate and adapt to technological changes. The company believe that its next generation network architecture strategy will enable it to respond to these ongoing technological changes efficiently. In addition, the company anticipate reducing costs through the sharing of best practices across operations, centralization or standardization of functions and processes, and deployment of technologies and systems that provide for greater efficiencies and profitability. The company will continue to make strategic enhancements to its network, with a focus on higher return investments.

Competitive Positioning

Competition for consumer customers comes from cable operators, wireless carriers and online video providers, among others.

  • Cable operators: In a majority of its markets, cable operators offer high speed Internet, video and voice services similar to its own, and compete with it aggressively on speed and price by marketing their offerings with significant promotional period pricing.
  • Wireless carriers: Wireless operators primarily compete with it for broadband, video, and voice services in its markets by offering increasingly larger data packages to mobile customers. The percentage of homes with a landline telephone has been declining, a trend the company expect will continue.
  • Online video providers: Many consumers are opting for internet-delivered video services (Over the Top, or OTT) through online service providers rather than traditional, multi-channel video. In response, Frontier Communications has made investments in its network to deliver OTT video content to consumers who might not opt for traditional video services. The percentage of homes with a video product has been declining, a trend the company expect will continue.

Many consumer customers prefer to bundle their voice, data, Internet and video services with a single provider. In areas where the company do not directly offer a network-based video service, the company offer satellite TV video service through DISH. This can positively impact acquisition of new customers and retention of existing customers, representing a critical factor for the attachment of video, broadband and voice products. As of December 31, 2017, 50% of its consumer customers subscribed to at least two service offerings, and 17% subscribed to at least three service offerings.

Competition for commercial customers comes from telecommunications providers, cable operators, Competitive Local Exchange Companies and other enterprises, some of which are substantially larger than it. As compared to its consumer customers, these customers often require more sophisticated and more data-centered solutions (e.g., IP PBX, E911 networks, Ethernet and SIP trunking).

In order to remain competitive, the company continue to evolve its product offerings to stay current with the changing needs of the market, to provide strong customer service and support, to invest in its network so the company maintain adequate capacity and can deliver new capabilities as needed, and to package its offerings to make them attractive to customers.


As of December 31, 2017, the company had approximately 22,700 employees, as compared to approximately 28,300 employees as of December 31, 2016. During 2017, reduction in workforce activities resulted in the severance of approximately 1,300 employees. Approximately 16,000 of its total employees are represented by unions as of December 31, 2017. The number of employees covered by a collective bargaining agreement that expired in 2017, but have been extended and are still effective for 2018, is approximately 1,400. The number of employees covered by collective bargaining agreements that expire in 2018 is approximately 4,300. The company consider its relations with its employees to be good.

Recent developments

Mar. 4, 2018-- Frontier Communications Corporation announced the company’s contract with CWA Local 142, covering approximately 1,400 employees in West Virginia and Ashburn, Virginia expired at midnight on March 3, 2018. The company and the CWA have not been able to reach an agreement. Frontier will continue to provide the company’s West Virginia customers with quality customer service. Frontier’s goal is an agreement that is fair to all; one that enables employees to continue enjoying very generous wages and benefits while providing outstanding service to the company’s customers.

Frontier Communications Reports Fourth Quarter and Full Year 2017 Results

Fourth Quarter

  • Total revenue of $2.22 billion
  • Consumer customer churn improved to 1.98% from 2.08% in Q3 2017, driven by both CTF FiOS® and Legacy
  • Continued sequential improvement in CTF FiOS® broadband gross and net additions
  • Net loss of $1.03 billion, driven by goodwill impairment, partially offset by tax benefit
  • Adjusted EBITDA1 of $919 million, in line with guidance range
  • Purchased $110 million principal amount of senior unsecured notes
  • Board of Directors suspends the quarterly cash dividend on the Company’s common stock

“The company's fourth quarter results highlight the ongoing progress on its key initiatives to improve customer retention, enhance the customer experience, and align its cost structure,” said Dan McCarthy, President and CEO. “Frontier Communications is pleased with continued improvement in subscriber trends and churn in its California, Texas and Florida (CTF) markets, and the continued operating efficiencies achieved in the fourth quarter. As the company implement its strategy, its board regularly evaluates the optimal long-term capital allocation for the business, and has voted to suspend the dividend on common shares. The suspension will make available an additional $250 million annually2 to accelerate debt reduction. For 2018, the company remain committed to enhancing the customer experience, further improving churn, maintaining strong cash flow, and strengthening the balance sheet as the company pursue further stabilization of the business and growth longer-term.”

Consolidated Results

Consolidated revenues for the fourth quarter 2017 were $2.22 billion. Within consolidated revenue, consumer revenue was $1.09 billion, commercial revenue was $941 million and regulatory revenue was $190 million. Consolidated revenues for the full year 2017 were $9.13 billion. Within consolidated revenue, consumer revenue was $4.48 billion, commercial revenue was $3.88 billion and regulatory revenue was $776 million.

Net loss for the fourth quarter of 2017 was $1.03 billion. Net loss for the fourth quarter included an $830 million tax benefit resulting from the reduction in federal tax rates, and a $1.82 billion (after tax) goodwill impairment. Net loss for the fourth quarter attributable to common shares was $1.08 billion, for a diluted net loss per common share of $13.91. Adjusted EBITDA3 totaled $919 million for an adjusted EBITDA margin4 of 41.5%. For the full year 2017, net loss was $1.80 billion. Net loss for 2017 included an $830 million tax benefit resulting from the reduction in federal tax rates and a $2.35 billion (after tax) goodwill impairment. Net loss attributable to common shares was $2.02 billion, for a diluted net loss per common share of $25.99. Full year 2017 adjusted EBITDA totaled $3.68 billion, for an adjusted EBITDA margin of 40.4%.

The Company attained more than $190 million in annualized cost synergies and remains on track to achieve its target of $350 million in annualized run-rate cost synergies by mid-2018.

For the fourth quarter of 2017, net cash provided from operating activities was $665 million and adjusted free cash flow5 was $228 million. For the full year 2017, net cash provided from operating activities was $1.85 billion and adjusted free cash flow5 was $790 million.

Consumer Business Highlights for the Fourth Quarter

  • Revenue was $1.09 billion, a sequential decline of $16 million versus the $22 million sequential decline in the third quarter. The improved trend was driven by a stronger performance in both Legacy and CTF revenue.
  • Customer churn improved to 1.98% (1.83% for Frontier Legacy and 2.22% for CTF operations) compared to 2.08% for the third quarter of 2017 (1.92% for Frontier Legacy and 2.33% for CTF operations), with CTF FiOS® and Legacy contributing to the overall improvement.
  • Combined Average Revenue Per Customer (ARPC) of $81.61 ($65.11 for Frontier Legacy and $107.35 for CTF operations). Each measure of ARPC improved sequentially, despite the benefit to third quarter ARPC associated with the Mayweather vs. McGregor fight.

Commercial Business Highlights for the Fourth Quarter

  • Revenue of $941 million, a sequential decline of $17 million versus the $24 million sequential decline in the third quarter. The decline was predominantly driven by carrier/wholesale revenue.
  • Total commercial customers of 453,000 compared to 463,000 during the third quarter of 2017.
  • SME (Small, Medium, & Enterprise) revenue was roughly stable sequentially.

Capital Structure and Capital Allocation

  • Frontier purchased $110 million principal amount of its 2018 and 2019 senior unsecured notes on the open market during the fourth quarter of 2017.
  • As of December 31, 2017, Frontier’s leverage ratio (as calculated in accordance with its credit agreements) was 4.59:1, which complied with its obligations under its credit agreements. The leverage ratio was 4.39:1 as of September 30, 2017.
  • Frontier remains committed to reducing debt and improving its financial leverage profile.
  • Subsequent to the quarter, on January 25, 2018, Frontier amended its credit facilities to provide increased flexibility in managing its capital structure.
  • The Board of Directors has suspended the quarterly cash dividend on the Company’s common stock beginning with the first quarter of 2018. This change allows for a reallocation of approximately $250 million annually, following the conversion of Frontier’s 11.125% Mandatory Convertible Series A Preferred Stock (Convertible Preferred) to common stock in June 2018.
  • The Board of Directors has declared a regular quarterly dividend on the Convertible Preferred of $2.78125 per share, payable in cash on March 30, 2018 to holders of record at the close of business on March 15, 2018.


The company's full year 2018 guidance includes a new metric, operating free cash flow. Operating free cash flow, a non-GAAP measure, is defined as net cash provided from operating activities less capital expenditures. Operating free cash flow is directly calculable from its GAAP financial statements and is a more appropriate free cash flow metric for the Company now that the integration of the CTF properties, with its associated integration and acquisition costs, is complete.

For the full year 2018, Frontier’s guidance is the following:

  • Adjusted EBITDA6 – Approximately $3.6 billion
  • Capital expenditures – $1.0 billion to $1.15 billion
  • Cash taxes – Less than $25 million
  • Cash pension/OPEB – Approximately $150 million
  • Interest expense – Approximately $1.5 billion
  • Operating free cash flow7 – Approximately $800 million


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