Frontier revenue dips to $1.41B, but hopes are high for acquired Verizon territories

Frontier Communications saw a 1 percent revenue decline in the fourth quarter of 2015 to $1.41 billion, as well as a 1 percent decrease in customer revenue to $1.207 million due to continued declines in residential voice and video subscriptions. However, the carrier's bottom line was boosted by CAF-II funding, and it expects to see positive results from the new territories it's acquiring from Verizon (NYSE: VZ) in California, Florida and Texas.

Frontier Q4 2015 revenue mix

(Source: Frontier)

The service provider also announced that it launched its IPTV video product in Durham, N.C., in the fourth quarter with plans to launch in 40 additional markets to reach over 3 million customers in its footprint over a three- to four-year period. It's a strategy that Frontier believes will attract more subscribers to its triple-play bundles, increasing its overall broadband connections across its markets.

"For Frontier, 2015 represented a year of substantial accomplishments in ongoing operations, the successful integration of the State of Connecticut, including delivering synergies in excess of our targets, and the preparation for the acquisition of the Verizon California, Texas, and Florida properties," said President and CEO Dan McCarthy.

McCarthy said the acquisition remains on track and is expected to close on April 1. Hopes are high for this deal: unlike its turbulent transition into AT&T's Connecticut footprint in 2015, Frontier's executives anticipate that its "day one" synergy for the three territories will be around $600 million. McCarthy said on the company's earnings call that Frontier is applying lessons learned from the Connecticut cutover to its planned transition into California, Florida and Texas.

"In Connecticut, a key issue is we changed our pricing structures and marketing plan to be more Frontier-like on day one. In this case we've decided to be more Verizon-like in our bundles and pricing. There is no chance there will be a sudden migration of customers to a different bundle structure, which had a significant impact (in Connecticut)," McCarthy said. Furthermore, unlike the day-one cutover that Frontier tried in Connecticut, "Verizon's video cutover will take a number of days so we can back out of a step at any point."

Broadband continues to be a strong point in Frontier's portfolio. The service provider recorded its twelfth consecutive quarter of net broadband additions, adding 28,500 new subscribers in the fourth quarter and bringing its net adds for 2015 to 102,000. Frontier also recorded 18,000 FiOS data connections in the fourth quarter, compared to 17,000 in the third quarter of 2015.

Frontier plans to connect 100,000 properties to broadband under the CAF-II program this year.

For the quarter, Frontier posted a net loss of $103 million, or 9 cents per share, on operating income of $182 million. Heading into the first quarter, Frontier predicted that operating expenses will increase

Frontier did not provide a full year guidance due to the pending acquisition of Verizon's properties. Chief Financial Officer John Jureller said that the company would provide that guidance in May.

However, Jureller said that the company is forecasting some full-year impact, particularly a revenue decline of $6.4 million due to a falloff in CAF-II revenues along with a $20 to $25 million increase in cash operating expenses as its payroll taxes increase with the absorption of Verizon employees in its new territories. Jureller said those operating expenses due to payroll taxes will "begin to reverse" in the second quarter.

Frontier shares rose 8.50 percent in mid-morning trading on the Nasdaq to around $4.91 following the earnings announcement.

For more:
- see the earnings release

Earnings summary: From Adtran to Zayo: Tracking wireline telecom earnings in Q4 2015

Related articles:
Verizon, Frontier may face service disruption due to Florida pole attachment dispute
Wireline network performance: How CenturyLink, Consolidated and Verizon compared in Q4 2015
Frontier says it costs over $1B for carriers to provide rural voice services