September 18, 2017

Loss of landline customers gives Frontier early headaches in CT

Image | Brian A Jackson,
Image | Brian A Jackson,
Mark Nielsen, General Counsel and Executive Vice President, Frontier Communications

Frontier Communications spent $2 billion in 2014 to purchase AT&T's Connecticut wireline business, hoping to stem a longtime cord-cutting trend and gain customers in the competitive internet and cable TV market.

So far, things haven't gone exactly as planned.

Frontier's Connecticut operation has lost several hundred million dollars in the last few years and shed 22 percent of its telephone landline customer base. Its overall revenues in the state have also declined.

Frontier's Connecticut telephone, internet and cable TV businesses lost a combined $248 million in 2015 and 2016, the first two full years Frontier owned them, according to regulatory reports the company filed with the state Public Utilities Regulatory Authority (PURA).

Revenue, which totaled $1.3 billion just four years ago under AT&T's flag, fell to $980.6 million in 2015 and $901.9 million last year.

Prior to selling the business to Frontier, AT&T experienced profit swings, raking in $223 million and $79 million in net income in 2013 and 2011, respectively, and losses in 2012 and 2010.

The financial disclosures shed light on the early performance of Frontier's Connecticut operation, which the company — a national, publicly traded telecommunications firm with operations in 29 states — doesn't break out in its U.S. Securities & Exchange Commission filings.

Despite the rough financial start, Mark Nielsen, Frontier's general counsel and executive vice president, said the company remains committed to its nearly three-year-old business in the state.

"We are very committed to the Connecticut operation, we see great potential in it," Nielsen said.

Cord-cutting trend

It's not clear exactly how Frontier's Connecticut revenue declines and losses are spread across its core service lines — it doesn't break out financial information specific to its internet and cable TV offerings and is not required to report it to PURA.

But there is one clear, perhaps unsurprising trend in the publicly available data: Connecticut customers continue to shed landline telephone service.

Frontier's reports to PURA, the most recent of which was filed in mid-July, show that between the end of 2014 and the end of 2016, the company shed nearly 154,000 Connecticut landline customers, a drop of more than 22 percent.

Frontier had just under 522,000 landlines at the end of 2016, down from 675,000 around the time of its AT&T acquisition, and down from more than 1 million lines in 2011, PURA records show.

Nielsen said landline telephone service has seen a decline across the industry, not just for Frontier.

Indeed, last year it was found that for the first time ever more than 50 percent of Americans had only wireless telephones, according to the Centers for Disease Control's semi-annual survey, a trend that is likely to continue as more people find wireless mobile and smartphone services more convenient.

Meantime, in Illinois, AT&T recently received legislative approval allowing it to stop offering landline service to its Prairie State customers, of which only 10 percent, or 1.2 million people, use it. Instead the company said it wants to invest more in its wireless and internet-based services.

"It's a surprise to no one that we have voiceline declines in Connecticut," Nielsen said. "The challenge is to build our internet and video business so as to offset the declines in voice."

In the internet and cable space, Frontier's main Connecticut competitors are Comcast, Charter and Cox. All of them offer some form of "triple play" package involving telephone, cable and internet services. It's been a common industry selling strategy to include phone services with TV and internet as companies attempt to stem landline losses and boost revenue.

Nielsen points to modernization efforts that will make Frontier more attractive to customers, including offering internet speeds greater than 100 megabits per second in some parts of the state — speeds he said were simply unavailable a few years ago.

"We are visibly modernizing the network in Connecticut," he said.

Frontier declined to disclose how many customers it has in Connecticut and whether it has lost or gained customers overall since the AT&T acquisition.

Nielsen also contends that investors care more about Frontier's positive cash flow in Connecticut than its profitability, because the latter includes amortization and depreciation expenses, which are non-cash hits to net income.

"Cash is what's available to make investments and to return capital to shareholders," he said.

Big picture

Connecticut isn't the only place Frontier is having issues of late.

The company's Nutmeg State wireline deal with AT&T set the stage for a much bigger three-state deal with Verizon a year later, for $10.5 billion.

The switchover from Verizon's systems to Fronter's in California, Texas and Florida was fraught with technical difficulties, similar to what Frontier experienced in Connecticut on a smaller scale. Frontier has shed net customers nationwide every quarter since the three-state deal, according to U.S. Securities & Exchange Commission filings.

To put it in context, Frontier's Connecticut $134.1 million loss last year accounted for 36 percent of a $373 million loss the Norwalk-based company experienced for its entire operations, which spans 29 states.

David Burks, a financial analyst at Hilliard Lyons, who follows Frontier, said the Connecticut results fit into a larger picture of a company that's struggling.

"From our perspective the biggest challenge has been to stem revenue erosion," said Burks, who downgraded Frontier last month after it reported a second-quarter net loss of $662 million, amid a $305 million revenue decline.

How much is customer dissatisfaction versus cord cutting is tough to tell, he said.

"I'm assuming it's probably a combination of both," he said.

Burks' recent report, which downgraded Frontier to "underperform" from "neutral," noted "disturbing trends," such as an 11.5 percent year-over-year decline in total customers across Frontier's entire operation.

"Each and every quarter their revenues decline, and each and every quarter their customer totals decline," Burks said.

Even a relative bright spot for Frontier — its broadband customer count — saw a 2 percent drop in the recent quarter.

Burks gives Frontier's management credit for cutting costs, but he said that alone likely won't be enough to stem the headwinds it faces.

"Steadily falling revenue is the biggest challenge," he said.

Correction: Due to a typographical error, a statement attributed to Frontier's Mark Nielsen was unclear. It has been corrected to read: "Cash is what's available to make investments and to return capital to shareholders."

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