Frontier's Q3 revenue decline eased by gains in residential, business

Frontier Communications' slight gains in residential and business service segments helped the service provider offset its overall revenue decline during the third quarter.

Residential revenue was $498 million, up 0.2 percent sequentially from $497 million in the second quarter of 2014, while total business revenue rose 0.5 sequentially to $518.6 million from $516.3 million in the second quarter of 2014. The service provider also narrowed its residential losses to 21,800 customers, compared with 31,800 customers in the three months ended June 30, 2014.  

In the residential segment, broadband held onto its starring role. During the quarter, the telco added 21,900 net new broadband customers. As of the end of September, the service provider had a total of 1.95 million broadband customers.

Out of Frontier's broadband subscriber base, 34 percent purchased above the basic speed tier and increased its broadband market share in 81 percent of markets year-to-date.

Frontier also made continual progress with its Connect America Fund (CAF) projects, completing its buildout to 33,000 households. This included 7,900 homes being equipped with broadband and 25,100 existing homes being upgraded to higher speeds.

Daniel McCarthy, president and COO of Frontier, said during the earnings call that it plans on participating in the CAF II "program for as many markets as possible," according to a Seeking Alpha transcript.

While it's only available in two markets thus far, Frontier recently introduced a 500 Mbps and 1 Gbps fiber-to-the-home (FTTH) service in both Beaverton, Ore., and Durham, N.C..

"Durham is an attractive market where we can leverage our previous network investments to facilitate the ultra-high speed products without adversely impacting our capital expenditure trends," McCarthy said. "Following completion of these investments, we will be able to offer an expanded product suite from basic speed to one gigabit services.

McCarthy added that "we'll expand our current fiber-to-the-home footprint, which is already a healthy 10 percent of homes passed as of the end of Q3."

Video additions were a bit slow. Frontier only added 2,000 net video customers, ending the period with a total of 395,000 customers.

Frontier also reported that it increased monthly residential revenue per customer by 70 cents sequentially to $60.34 in the third quarter of 2014 as more customers purchased more service bundles.

Although business service revenues rose during the quarter, the service provider still lost 3,400 customers in the three months ended Sept. 30, 2014. At the same time, Frontier did see that monthly business ARPU was $658.56, up 1.5 sequentially over the second quarter of 2014.

John Jureller, CFO of Frontier, said that the increase in business average revenue per customer (ARPC) "was primarily a result of a declining number of home office business customers that carry a low ARPC and with increased revenue for our small and large business customer."

Key growth contributors in the business segment were the expansion of Gigabit Ethernet services and Wi-Fi service contracts.

"We continue to deliver very strong sales of Ethernet services with growth of 30 percent over last year," McCarthy said. "Customers continue to request more bandwidth and flexibility of network configurations. Our investments and operating processes enable us to meet those needs."

The third quarter was a time of transition for Frontier, particularly as it completed its $2 billion acquisition of AT&T's (NYSE: T) Connecticut assets. Frontier said that it "realized $150 million of day one synergies on an annualized basis."

While the service provider did complete the acquisition and the cutover to its systems on time, a number of U-verse customers did report issues during the first few days during the initial conversion.

"We experienced some issues during the first several days on some services and those have largely been rectified," McCarthy said. "We are still in the integration stage of this transaction, but I am very comfortable with the initial synergies we have seen during the early integration efforts and we have immediately implemented our proven distribution strategies."

Despite the initial customer issues, Frontier has laid out an aggressive plan to expand the U-verse footprint and enhance the existing middle mile network in Connecticut. Earlier this year, a report emerged that it would extend U-verse service initially to an additional 100,000 customers. This service expansion would take place in cities and towns that already have U-verse subscribers and others where it is not available today.

"Our plans include upgrades to the existing fiber transport systems to ROADM Architecture in all markets," McCarthy said. "We have already begun to pursue a low cost approach to extend the U-verse footprint in our Connecticut markets. These areas represent low hanging fruit in terms of deployment costs and are great opportunity to take market share while meeting our commitments on broadband deployment to Connecticut state regulators."

Overall Frontier's third-quarter 2014 revenues were $1.14 billion, down 6 percent year-over-year from $1.18 billion in the third quarter of 2013.

Shares of Frontier closed at $6.49, down 5 percent or 0.76 percent, at the end of Monday trading on the Nasdaq stock exchange.

For more:
- see the earnings release
- and the earnings transcript (sub. req.)

Special report: Wireline telecom earnings in the third quarter of 2014

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