Frontier Communications has said it expects its cost per passing to fall in the $1,000 to $1,100 range in 2023. Though that number is higher than expected, CFO Scott Beasley argued cost per passing is “not the most important value driver” of building fiber, pointing instead to ARPU and penetration.
Speaking at the MoffettNathanson Technology, Media and Telecom Conference, Beasley explained how some of Frontier’s deployment locations have higher build costs due to terrain, but noted penetration rates are “better than expected.” For example, a location west of the Dallas-Fort Worth area reached penetration rates of “60% plus in less than two years,” despite rocky terrain increasing the build cost.
“We've actually had to go back and add equipment there because our sales have far exceeded any penetration targets we've had and that's a really strong IRR (internal rate of return),” Beasley said.
He went on to say penetration is “relatively predictable” across different geographies and Frontier is getting better at penetrating its expansion markets.
“Which means when we go build fiber, we can have a lot of confidence that here’s going to be the penetration curve, let’s set up our sales installation capacity for that, let’s set up our workforce for that,” Beasley explained. “That gives us a lot of confidence that we will earn the kind of returns we expect because penetration is falling within a relatively tight bandwidth.”
Copper penetration rates lie in the 10 to 12% range, and most of those markets have a cable provider, he noted. With fiber, Frontier is aiming for at least 45% penetration “when we get [to those markets] with fiber.”
As for ARPU, Frontier earlier this year began charging for “value-added services,” such as whole-home Wi-Fi and the eero Secure VPN – services that were previously included in broadband plans. The operator also decided to cut back on its use of gift card promotions.
Despite these changes, Beasley said Frontier didn’t see customer growth slow in Q1, as it added 87,000 fiber subscribers.
“Eventually, the third phase of this is a premium product at a premium price,” he said. “We think as we continue rebuilding our reputation, we’ll be able to get at least industry level ARPU and industry level growth rates of ARPU, which tend to be at least in the 3-4% range.”
In terms of installation costs, Frontier’s long-term goal is to reach a cost to connect of roughly $600 per customer, though Beasley noted the company is “above that now” for a few reasons.
“We’re still becoming more efficient in our installation capacity,” he said, pointing out how Frontier’s technician workforce is being retrained from repairing copper to installing fiber. So, the operator is “still getting up the learning curve, particularly in new geographies.”
Additionally, Frontier has had to rely on some external contractors to “compress intervals” between installations. Self-installation is another big value driver for the company, said Beasley.
“We're far behind a lot of peers in terms of our ability, both in our network and in our IT systems, to be able to do self-install, but we're getting up the curve there,” he added. “As we get closer to the peer benchmarks of self-install, we should come back down to that $600 per passing range.”
Frontier this year is targeting 1.3 million locations with fiber, an acceleration from its 2022 build pace but lower than the 1.6 million passings it initially planned for 2023.
Beasley said Frontier continues to undertake a mix of aerial and underground fiber deployments. That falls in line with the company’s “super cluster” approach, in which service is deployed to all locations in a geographic area, rather than only the lower cost areas.
Commenting more broadly on competition, Beasley said, “I think we've been successful in that we've seen very little overbuilding activity in our footprint in the last two and a half years. I think that had a lot to do with us getting out of the gate so fast, building territories that were the most attractive for overbuilders to potentially build.”