Frontier will gain revenue benefits from CAF-II program, says Jefferies

Frontier, a telco that's focused on serving Tier 2 and Tier 3 markets, may see a large revenue gain in the next year by expanding broadband services through the second phase of the Connect America Fund (CAF-II).

Financial analyst firm Jefferies said in a research report that out of all of the telcos that accepted CAF-II funding, Frontier should benefit the most with "2016 revenue/EBITDA up +2.8 percent /+6.8 percent relative to the prior support mechanism."

The telco accepted $283 million in CAF-II support from the FCC, which it says will enable it to build out broadband service to over 650,000 rural locations that it could not economically reach before.

In addition, Frontier will also get CAF-II funding from Verizon in California and Texas, two markets it will enter into when it completes the acquisition of the telcos assets in those two states.

Verizon itself turned down the $144 million in CAF-II funding it was eligible for in the rest of the states where it operates wireline networks.

At the end of August, 10 service providers that were eligible for CAF-II support elected to receive roughly $1.5 billion per year for the next 6 years in order to provide broadband service to more than 3.6 million unserved and underserved homes across the U.S.

Although Frontier and other telcos may gain some eventual benefits from the program, Jefferies said that, overall, service providers that accepted CAF-II funds won't see an immediate benefit.

"We are reluctant to adjust our operating forecasts (i.e., broadband adds) at this time, predominantly given the lengthy investment cycle (100 percent build of elected areas by 2020)," said Mike McCormack, equity analyst for Jefferies. "Nevertheless, we see potential for modest churn reduction, while minimal competition in eligible locations should provide a largely captive audience to pursue new connections."

Related articles:
Frontier takes $283M in Connect America Funding to bring broadband to 650,000 unserved sites
Does Verizon's CAF-II refusal mean another wireline asset sale is coming?
Dycom could benefit from AT&T, CenturyLink, Frontier's upcoming CAF-II broadband builds
 AT&T takes $427M in CAF II funding, sets plan to bring wireline, wireless broadband to 18 states

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