Frontier Communications Corporation (NASDAQ:FTR) just reported Q4 earnings and while the quarter better than we expected in some regards, the stock is taking another absolute beating, mostly because the dividend has gone the way of the dinosaurs.
While we hate to see anyone lose money, we have been warning you for over a year to stay away from this name. Finally, it came to a pass in August. We had enough of the back and forth. We said “get out while you can.” Bottom line, we opined for about the fifth time in a year that this stock was to be avoided. But the obscene dividend and hope kept so many in. We said the dividend was IN DANGER and WOULD be cut to next to nothing. Few listened.
We told you to get out after shares spiked following Q2 earnings. After today’s 25% decline, you have lost another 75% if you stayed. What we said back in fall 2016 remains true today. The loss of customers is simply and absolutely unsustainable. Let us discuss.
Frontier reported revenue of $2.21 billion and saw an operating loss of $1.75 billion. Revenues were down quarter-over-quarter once again. Revenue is also 8.3% lower than last year’s thanks to the loss of customers which we will discuss in a moment. This is simply worrisome.
The results were however slightly better than our projections for $2.20 billion. We were overly bearish, but not by much. The company surpassed our estimates by $10 million. This was a positive result, but let us investigate the customer loss issue.
Customer turnover has been the death of the company. On this front, there has been some slight reason to be positive. Customer churn slowed in the quarter to 1.98%, and improved from 2.08% last quarter. This also is down from the 2.28% before that. This was better than our projections for 2.0%. However, that still means customers are leaving. Let us look deeper into where the losses are stemming from.
At the end of the quarter, Frontier had 4,397,000 residential customers, down from 4,486,000 residential customers in Q2 and down from 4,585,000 at the end of Q1. Coming into the year, there were 4,891,000 residential customers. This is sad. Continued declines are a fundamental weakness in this name. You simply cannot invest in a name like this when such losses are happening.
The company has played with pricing to try and offset these losses. Total residential revenue was $1.09 billion for Q4 2017, compared to $1.10 billion last quarter. The average monthly residential revenue per customer has fallen too in many quarters, however this was one positive piece of news. Average monthly revenue per residential customer rose from $80.91 last quarter to $81.61. While the increase is welcomed, keep in mind that this is still down from the mid $80s almost a year ago.
The business client side of the company continues to suffer as well. At the end of the quarter, Frontier lost another net 10,000 customers. It is now down to just 453,000 business-based customers. This is down from 463,000 business-based customers to start the quarter. The company entered the year at 502,000 business customers.
We believed that business customer loss would decline, but we were wrong in this regard as the churn rate expanded. With this loss of customers, business revenues were down once again. This is another negative trend that should be a flag to you. Total revenue from business-based customers was $941 million in Q4 2017, vs. $ 958 million last quarter. Average monthly revenue per business customers also continued to fall.
Broadband used to be a source of strength for Frontier, but the pain continues here. The company buries these results in tables now, rather than discussing them outright. After the Verizon deal the company gained many broadband customers vs. last year. However, for now the fifth time since we have been covering the name, the company lost broadband subscribers. At the end of the quarter, the company had 3,938,000 broadband customers. This is a decline of another 62,000 subscribers from the 4,000,000 at the start of the quarter. This was also down from 4,271,000 broadband customers to start the year. This is just another reason to avoid the name.
Bottom line? Customer loss is crippling the company and it has weighed on sales with no signs of slowing down. The customer losses are across the board, in all segments.
With overall operating expenses of $3.98 billion, the company managed to saw a significant loss on a GAAP basis. Net loss attributable to common shareholders was $1.03 billion, driven in large part to goodwill impairment and a tax benefit.
After making adjustments, the company lost far less per share than we had anticipated. We were expecting a loss per share of $1.00. Instead, the company lost $0.59 per share, surpassing our estimates by $0.41. This was in large part thanks to adjusted operational expense controls and recognized synergies.
Dividend is gone
The primary reason that investors stayed with this losing investment was the dividend. We warned time and again it would be cut, and in our last warning, we said plainly, its going to be eliminated. Well sure enough, that time has come. It is actually good news for the health of the company. As the company takes time to implement its strategy, it voted to suspend the dividend on common shares to save money. The suspension will make available an additional $250 million annually, which will go a long way. That said, why did it not happen sooner?
Our take on the stock
We still see no reason to buy the stock. The dividend is gone. There are so many better places to park your money. When would we buy? When the company stops losing customers and continue to demonstrably improve its balance sheet. Until then, we are out.
Take home? We STILL see an investment here as indefensible. Maybe this time we will be wrong.
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