Frontier (FTR) reported disappointing fourth-quarter results as its broadband customer base continues to shrink at a rapid pace, although management attributed some lost customers to management’s initiatives to close aging or overdue accounts. Since the firm took over the Verizon assets and customer base in second-quarter 2016, the firm has lost between 20% and 25% of customers acquired. We believe a good portion of these accounts are organic loss to competitors instead of idle accounts. Even if we take management’s explanations at face value, this would mean that the firm overpaid for profitless accounts.
Despite gloomy guidance, we continue to believe that the competitive strength of the firm mostly rests in its fixed-line assets, including the acquired fiber assets that were well maintained by Verizon. We are maintaining our narrow moat rating, reflecting our belief that if Frontier could sail past recent self-inflicted troubles, it could draw on its network assets to regain market share. We plan to reduce our fair value estimate to $5 a share, from $5.50, while raising uncertainty rating to very high from high. Despite trading in four-star territory, we believe there is significant risk to Frontier’s business that could create further downside in the shares, and we would wait for an even wider margin of safety before investing.
During the quarter, total revenue declined 5% sequentially, while the legacy Frontier operations declined by 9% year over year, excluding acquisitions. The firm lost 133,000 DSL Internet access connections, 107,000 video connections, and 182,000 residential phonelines, all on par with or worse than recent experiences. By our estimates, the firm saw its household penetration decline by 2 to 3 percentage points over three quarters, quite a steep pace in the residential business. The firm did not fare any better with business accounts as it suffered a loss of 14,000 business customers.
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