Cracks in Frontier’s business model widen

by Steve Blum • , ,

Competition and a botched takeover of Verizon wireline systems in California, Texas and Florida are pushing Frontier Communications deeper into the red, as its customers cancel service. According to an article in the Wall Street Journal, via Morningstar.com, company executives have backed away from predictions that falling subscriber revenue would soon be on the way up…

Revenue has instead declined companywide for the past year. Frontier’s 2016 loss widened to $373 million from $196 million a year earlier. The company plans to devote at least $1 billion this year on capital spending to keep its network humming.

“Cable companies are beating the pants off Frontier,” said Jonathan Chaplin, an analyst for New Street Research, noting that companies like Charter Communications Inc. have invested more heavily in marketing, network equipment and customer service in the past three years.

The stiffened competition came just as Frontier faced pressure to cut costs, partly so it could pay for the networks it bought. The result was a series of network failures and complaints about customer service.

Frontier’s share price has been in free fall, dropping 69% this year according to the article. It went so low that the company had to do a reverse split, giving shareholders 1 share for every 15 they previously owned, to keep the share price from dropping below the $1 mark and risking being kicked off of the NASDAQ exchange.

Bankruptcy doesn’t appear to be an immediate threat, although the article pointedly notes that two other companies that bought systems from Verizon – FairPoint Communications and Hawaiian Telcom – did file for Chapter 11 protection. The longer term outlook is more uncertain. Frontier has $17 billion in debt and has to make a $2.4 billion payment in three years. To do that, it’ll have to look to the bond market for refinancing.

If it doesn’t start gaining subscribers, it won’t “demonstrate sustainability to the bond market” and could hit a brick wall. That’s something to keep in mind as Frontier scrambles after California broadband subsidy money and tries to fend off competition with promises of future upgrades.