‘Expectations are low’ as Frontier prepares to release Q2 results

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Frontier is continuing to turn itself into a junior version of what Verizon was five years ago—a company reliant on wireline operations. The company’s pitch has been that if it focuses on wireline, it can improve operations, where a company distracted by wireless might not. Since Frontier began growing largely by buying Verizon wireline assets, the question the market has had for has been: how much improvement can it eke out of synergies and efficiencies in a business that Verizon is unenthusiastic about?

The market doesn’t feel it has a definitive answer yet, but it’s beginning to believe the answer is going to be “not enough.”

Heading into Frontier’s second-quarter earnings announcement, Jefferies analysts said, “Expectations are low as management highlighted seasonally softer volumes in 2Q while also noting that synergies should take a pause before resuming in 3Q, resulting in sequentially lower [adjusted] EBITDA. Given the trends, merely hitting tempered expectations may not be enough. In our view, until results actually turn, investor enthusiasm for forward looking commentary will not materialize.”

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The good news, according to Jefferies, is collateral to some bad news. Loss of subscribers might, perversely, help the bottom line a bit. Jefferies analysts said they expect cash costs to decline by roughly $20 million driven by lower headcount, lower content costs given video subscriber declines; and lower seasonal costs, among other savings.

On the other hand, he said, “Such cost savings are likely to be partially offset by continued investment in marketing as the company looks to regain gross add share despite the seasonality which slows 2Q volumes.”

Given all that, Jefferies lowered its earnings expectations a bit.

Analysts at Wells Fargo Securities wrote that while Frontier’s focus on operations and the integration of networks acquired from Verizon has resulted in cost reductions, those reductions are “pacing a little slower than we had originally expected.”

Frontier executives have promised updates on guidance as their efforts to achieve efficiencies progress, but Wells Fargo is skeptical. “We would not be surprised if there was downward revision to its 2017 guide as early as the Q2 2017 results on 8/1.”

With Frontier slowly losing customers through churn, Wells Fargo doesn’t see that the company has many levers to pull other than measures that would basically be juggling debt. The firm consequently lowered its second-quarter earnings expectations marginally.

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