Frontier Communications suffered a setback in signing new broadband subscribers during the second quarter due to issues with integrating the Verizon (NYSE: VZ) properties it purchased in April, but the telco could turn things around with a plan to extend higher speeds over its existing copper network to more of its customer base.
CEO Dan McCarthy told investors during the second quarter earnings call that Frontier plans to upgrade its copper plant to provide up to 50 Mbps-capable or higher speeds to additional homes. This included its existing markets and those it entered through the Verizon acquisition where FiOS is not currently available.
Specifically, 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.
“We have also continued to execute our broadband network upgrade program in both existing and new markets,” McCarthy said during the earnings call, according to a Seeking Alpha transcript. “This program will result in the expansion of 50 megabits or higher broadband capability to 2 million homes over the next year.”
By extending higher speed services outside of the FiOS FTTH market, McCarthy said that it will be able to more effectively compete with cable providers like Charter Communications (NASDAQ: CHTR) and Comcast (NASDAQ: CMCSA) -- two cable MSOs that can already deliver speeds of 100 Mbps and above.
Now that the telco has completed the integration of the Verizon assets in California, Florida and Texas, Frontier has redirected its efforts to upgrading COs and RTs with necessary DSLAM and related next-gen DSL equipment. In the copper-based markets, the service provider previously said that it would use a mix of technologies, including VDSL2 with bonding and vectoring and G.fast to target multi-dwelling units (MDUs).
“In many of the non-FiOS areas, this will be first-time customers will have the ability to choose a competitive internet service product, and we expect to see strong demand for these new capabilities,” McCarthy said. “Our primary focus will be increasing broadband penetration and offering customers opportunities to access the new speeds and capabilities we will introduce.”
In tandem with the speed upgrade, Frontier is also moving ahead with plans to bring its Vantage TV product to more homes outside of the FTTH footprint.
Frontier told investors during its fourth quarter earnings call in February that it plans to deliver IPTV service to 7 million customers across its network territory, which is inclusive of the Verizon wireline properties.
“As we upgrade different markets in the new territories, we expect to introduce our Vantage TV product,” McCarthy said. “This means that many non-FiOS areas in the new markets will become Vantage TV enabled. As a result, our expansion of video will ultimately exceed the initial three million households previously announced.”
Additionally, the network upgrades Frontier makes to its copper markets will benefit other communities it will reach through the Connect America Fund Phase II program. These technologies could enable it to deliver above the 10 Mbps requirement set by the FCC to qualify for CAF-II funding.
Previously, Frontier accepted $283 million annually in CAF-II support from the FCC to deploy broadband to more than 650,000 high-cost rural locations throughout its current 28-state service area.
The service provider will also be able to tap into additional CAF-II funds, including $32 million in California and $17 million in Texas, which were set aside by Verizon on behalf of Frontier. Verizon itself turned down $144 million in CAF-II funding.
“Our CAF-II build remains underway and we are on track to bring higher speed capabilities to an additional 750,000 households over the coming years,” McCarthy said. “Although the minimum speed in CAF-II markets will be 10 megabits, many of these households will be served with higher speeds as we deploy the same leading-edge technology that is allowing us to improve the speed in our existing footprint.”
Broadband overall continued to be a factor in the second quarter as the telco added nearly 25,500 new broadband subscribers in its existing markets.
By completing the Verizon deal, Frontier gained 2.16 million additional broadband subscribers and 1.2 million video subscribers. However, when taking out the gains from Verizon, Frontier lost a total of 20,000 video subscribers during the quarter in its existing markets.
Frontier said that its broadband and video unit results were affected by its decision to suspend marketing in order to focus its efforts on customer support. However, in the new markets where the telco entered as a result of the Verizon transaction, the telco reported a 14 percent rise in FiOS disconnects and a 5 percent increase in non-FiOS broadband disconnects.
John Jureller, EVP and CFO of Frontier, said that while it saw a higher level of customer disconnects they were in line with the same trends Verizon saw in the same quarter a year ago. Now that it can turn its attention to customer acquisition, Frontier expects to start adding more FiOS and traditional copper-based customers throughout the rest of 2016.
“With the transition behind us, we have begun our marketing programs in Q3 and would expect a return to normal levels of FiOS gross adds over the course of the second half of the year,” Jureller said. “Our disconnect rate in Q2 was elevated slightly, which is to be expected during such a transition but was not materially above the level experienced by Verizon in these markets in Q2 2015. This reinforces that the net customer add result in Q2 was the result of fewer gross adds and not an elevated level of churn among existing customers.”
Jureller added that now that the transition is behind them, the service provider’s effort to upgrade copper-based markets with higher speeds will increase broadband subscriber additions.
“We expect this trend to continue until we get the upgraded non-FiOS equipment into the field enabling service,” Jureller said. “Over time, we anticipate that our non-FiOS net adds will turn positive as a result of our planned broadband upgrades.”
From an overall financial perspective, Frontier reported total revenue of $2.61 billion. The telco noted that revenues nearly doubled with the California, Texas and Florida regions it acquired from Verizon. When excluding those operations, Frontier’s revenues fell about 3.1 percent compared to Frontier legacy operations.
Shares of Frontier were listed at $5.08, down 12 cents or 2.31 percent in Tuesday morning trading on the Nasdaq stock exchange.
For more:
- see the earnings release
- listen to the earnings call (reg. req.)
- read the Seeking Alpha earnings transcript (sub. req.)
Special report: Tracking wireline telecom earnings in Q2 2016
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