Frontier's McCarthy: We'll migrate more broadband customers to speeds above 6 Mbps

Frontier Communications sees a large opportunity to drive more of its residential broadband users--the majority of which are still on a low-speed 6 Mbps connection--to the higher speeds that it's making available across its network footprint.

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Speaking to financial analysts and press during the first-quarter earnings call, Dan McCarthy, president and CEO of Frontier, said the company saw more of its users sign up for higher speeds during the first quarter.

"Forty-four percent of broadband activity in the first quarter was above the basic speed tier of 6 megabits, which represents another quarter of progress from the 40 percent of activity in Q4, and a dramatic improvement from the mid-teens level of two years ago," McCarthy said during the earnings call, according to a Seeking Alpha transcript. "These results stem from our efforts to make higher-speed options available to customers."

However, McCarthy added that there is a lot of room to encourage more of the broadband base to higher speeds. "Roughly three-quarters of our base of residential broadband customers remain at the basic speed tier," he said. "So, we still have substantial runway to migrate the majority of our customers to higher-speed tiers and to drive higher revenue."

The telco currently provides speeds that range from as low as 6 Mbps to 25 and 40 Mbps on the traditional DSL side in various markets. In a number of select markets such as Beaverton, Ore., and Durham, N.C., it is also offering 500 Mbps and 1 Gbps over its fiber-to-the-premises (FTTP) networks. 

After launching a 100 Mbps speed tier throughout its FiOS footprint last fall, the service provider is now offering symmetrical speed tiers of 30/30, 50/50, 75/75, 100/100 and 150/150 Mbps.

Residential broadband growth continued to be a factor in Frontier's first-quarter results. The telco added 17,100 net broadband customers, ending the period with a total of 2.4 million broadband customers.

"This represents our ninth consecutive quarter of robust broadband growth," McCarthy said. "Our strong execution in broadband continued to be broadly based across our footprint. We took residential broadband share in 77 percent of our markets in Q1."

Although total residential revenue rose year-over-year to $617 million, Frontier reported that its residential customer base declined slightly year-over-year by 0.4 percent. It ended the quarter with a total of 3.2 million residential customers. Meanwhile, average monthly residential revenue per customer was $64.13, up $5.06 from $59.07 in the first quarter of 2014.

On the video side, Frontier lost 7,700 customers, including 3,500 satellite video customers, to end the period with a total of 577,700 video customers.

McCarthy said that a key part of his strategy for the company is to grow broadband market share, including in the rural areas it serves. The service provider was informed by the FCC that it is eligible to receive $283 million in Connect America Fund II support, which McCarthy said will "allow us to invest in underserved as well as unserved areas."

McCarthy added that at this point, the company is reviewing the FCC's proposal and how it can apply it in the states it serves.

"We're reviewing the support on a state-by-state basis and expect to accept the majority of the funds," McCarthy said. "Until we complete that review and determine the deployment schedule for 2015 we are maintaining our current guidance for leverage free cash flow and capex."

But residential broadband service is only one part of McCarthy's broadband growth strategy for Frontier. With first-quarter business revenue growing year-over-year to $616 million, he said that it will grow market share in both the residential and commercial segments.  

"We continue to focus on diversifying distribution channels and utilizing speed, simplicity and choice to differentiate in our markets," he said. "We'll continue to invest in our networks to enable speed and capacity."

In the business segment, the key driver of broadband data growth continues to come from data services such as Ethernet, which grew 20 percent year-over-year. However, the service provider continues to face challenges in wholesale data service revenues, particularly as more of its wireless operator customers migrate off of legacy copper-based T-1 circuits to Ethernet.

John Jureller, CFO of Frontier, said that "we continue to anticipate that Frontier's data services revenue should grow and increase as a percentage of overall mix excluding the wireless backhaul headwinds."

Overall company first-quarter 2015 total revenue was $1.37 billion, while operating income was $163 million. It also reported a net loss of $51 million, or $0.05 per share.

Shares of Frontier closed at $6.74, down 13 cents or 1.89 percent, at the end of Tuesday trading on the Nasdaq stock exchange.

For more:
- see the earnings release
- see the earnings transcript

Special Report: Wireline telecom earnings in the first quarter of 2015

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