Frontier's McCarthy: Verizon asset integration could have impact on Q2 subscriber adds

Frontier Communications is moving ahead with its integration of the Verizon (NYSE: VZ) properties it purchased in California, Florida and Texas, but that process will result in some near-term dips in broadband additions.

Dan McCarthy Frontier Communications


Speaking to investors during the first quarter earnings call, CEO Dan McCarthy said that the company sees broadband additions taking a hit in the second quarter as it continues to train new employees that came over from Verizon while minimizing marketing spending.

"I expect the second quarter to be impacted by integration in a few ways," McCarthy said. "As part of the integration plans we minimized marketing efforts to allow our teams to gain proficiency in utilization of the Frontier systems to operate the business and this will impact the gross additions in these new operations."

McCarthy added that "this was planned and necessary to ensure we were capable of meeting higher activity level and as a result we anticipate that the customer metrics for the second quarter will be negative as we begin to build our marketing campaigns over the coming weeks."

Regardless of the near-term subscriber declines, McCarthy said he sees potential to expand broadband and video over its existing copper and FiOS facilities.

"We will continue to be focused on increasing our broadband opportunities both in FiOS and copper markets," McCarthy said. "We're building out increased speed capabilities across our network using both our own funds as well as CAF II funds in rural areas."

Broadband service continued to be a factor in Frontier's first quarter as it added 24,600 new subscribers. However, this was from down sequentially from the 28,500 net additions in the fourth quarter of 2015.

Video was a different story. The service provider lost 10,300 video customers, including 6,700 satellite video customers. This loss was wider than the fourth quarter net reduction of 5,800 video customers, including a reduction of 5,400 satellite video customers. Frontier ended the quarter with a total of 543,400 video customers.

Regardless of the near-term losses, Frontier has set an aggressive timeline to expand its video capabilities. Leveraging a mix of its existing fiber-to-the-node (FTTN) and FTTH facilities, the service provider plans to ultimately provide IPTV service u to 7 million customers across its network territory. 

"We are at the beginning of a multi-year program to offer video to an increasing portion of our footprint," McCarthy said. "We can service over slightly over 30 percent of our 14.5 million households in our footprint with video today and we anticipate that we'll grow that to well in excess of half in the coming years."

McCarthy said that expanding video could potentially lure more customers to purchase broadband and video service bundles.

Due to a decline in POTS voice revenues, Frontier's customer revenue was $1.2 billion, down $18 million or 1 percent from the $1.21 billion in the fourth quarter of 2015.

Frontier also reported declines in residential and business revenue. Total residential revenue was $583 million for the first quarter of 2016, compared to $594 million in the fourth quarter of 2015. Business revenue was $606 million for the first quarter of 2016, compared to $613 million in the fourth quarter of 2015.

"Within business SME revenue was stable sequentially," said John Jureller, CFO of Frontier. "Approximately one-half of the quarterly declines were due to the reduction in wireless backhaul revenue."

Frontier reported total first quarter revenue of $1.35 billion, down $58 million or 4 percent from the fourth quarter of 2015. The telco attributed the drop to an anticipated sequential decline of $40 million related to regulatory revenue, as well as a decline in voice services revenue.

The majority of Frontier's CAF II revenue was only recognized in the third and fourth quarters of 2015, the company said.

Shares of Frontier were trading at $5.25, down nearly 4 percent in late-morning trading on the Nasdaq.

For more:
- see the earnings release

Special Report: Verizon, Frontier transition: Wireline earnings in Q1 2016

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