Frontier subscriber levels will improve in Verizon properties in Q3, says Wells Fargo

Source: Frontier Communications

Frontier may have struggled to activate more FiOS and DSL customers due to integration problems stemming from its purchase of Verizon's assets, but Wall Street research firm Wells Fargo said it expects Frontier's subscriber figures to gain steam in the third quarter.

Jennifer Fritzsche, senior analyst for Wells Fargo, said in a research note that while Wells Fargo is taking a “conservative stance” on Frontier’s third quarter outlook by lowering its EBITDA estimate to $1 billion, the firm said Frontier could enjoy gains from its new business in California, Florida and Texas, where it purchased assets from Verizon.

“Driving this more conservative outlook is higher costs related to the ramp of marketing in Q3 as it continues to integrate the VZ properties,” Fritzsche said. “We believe customer trends will continue to show improvement in Q3 from Q2 levels in these properties.”

One of the chief concerns for Frontier that emerged during the integration process was the acquisition of new broadband customers. Dan McCarthy, CEO of Frontier Communications, revealed the telco lost 40,000 potential new customers during its problematic switchover of Verizon's wireline assets to its own systems in three states. 

"Where we did probably lose some customers, who really weren't our customers yet, was as we came out of conversion we had 40,000 service orders in the backlog," McCarthy said.

Despite not being able to fulfill new service orders in the second quarter, the telco still added nearly 25,500 new broadband subscribers in its existing markets.

One way the telco hopes to attract new customers in its new and existing markets is upgrading network speeds on its traditional copper plans. Specifically, Frontier plans to upgrade its copper plant to provide up to 50 Mbps-capable or higher speeds to additional homes. This includes its existing markets and those it entered through the Verizon acquisition where FiOS is not currently available. 

As part of this upgrade plan, Frontier will upgrade customers from 7 Mbps to 50 Mbps and 100 Mbps. Being a copper-based technology, the availability of specific speeds will depend on the condition of the copper loops and the distance between where customers reside and the nearest central office (CO) or remote terminal (RT) cabinet.

While upgrading copper plant and ramping up FiOS marketing plans in the newly acquired Verizon territories could eventually pay off, it will be challenging for Frontier to win back customers that churned to a cable operator competitor. This is because these customers have likely entered into multi-year contracts.

Besides ramping up its subscriber base, Wells Fargo said that Frontier will look for ways to keep its costs in check. The service provider recently named Perley McBride as its new EVP and CFO, a move that illustrates the telco’s efforts to sharpen its focus on operations and cost cutting as it integrates the Verizon properties into its own fold.  

“Even if revenue was challenged, we believe FTR will continue to be aggressive in its cost containment,” Fritzsche said. “We believe there is much opportunity to lower FTR's annual $6.2B in operating costs - perhaps even higher than its stated expense synergy target goal of $1.25B.”

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