Frontier Communications (NYSE: FTR - News) reported a steep 30% fall in third-quarter net income, to $20.4 million, mainly due to a decrease in its subscriber base. Let's take a closer, Foolish look at Frontier's problems.
The numbers
The company's total revenues fell by 8%, to $1.3 billion. The reason for this drop was the fall in the number of subscribers across various segments, including business and residential customers, video, switched access, and directory. The drop in net income came from acquisition expenses and reduced operating incomes that were in part offset by lower taxes.
Local and long distance service revenues fell sequentially and year-over-year, dropping by 12%, to $605 million, from last year's third quarter. Data and Internet service revenues remained relatively flat from the previous year's quarter at $457 million.
The sky is falling!
The previous year saw Frontier virtually triple its revenues after gaining 4.8 million rural landlines from Verizon (NYSE: VZ - News). This reversed the trend of falling revenues as the company saw its top line jump after the acquisition. But that was just temporary.
The company continues to bleed both customers and revenues mainly because of the increasing obsolescence of landline telephones. A look at sequential and year-over-year data shows this trend. Residential customer count fell sequentially by 2.3%, as well as from the previous year's quarter by 10.2%, to 3.1 million subscribers. Business customers also dropped, sequentially by 2.2% and 9.8% from the previous year, to 319,379 subscribers. But Frontier has made sure that it's able to compensate for this and trim costs as much as possible.
Shaving off unprofitability
Some of the subscriber cuts were due to the company's efforts to reduce the number of customers for the unprofitable FiOS offering that was inadvertently acquired through its Verizon acquisition. FiOS is Verizon's bundled fiber optic offering that combines television, Internet, and telephone services.
So far, the company has been successful in shaving off 9,900 FiOS TV subscribers and 3,100 FiOS Internet subscribers. It has also discouraged customers from ordering the new service, using tactics like raising the installation fee to $500 in Oregon. Having done that, the company wants to shift focus to providing telephone and high-speed Internet services in Oregon and other markets that it got hold of through the Verizon deal. Frontier has also entered into tie-ups with Dish Network (Nasdaq: DISH - News) and DIRECTV (Nasdaq: DTV - News) to resell their satellite TV packages to its customers.
Frontier's efforts seem to be paying off, as it has witnessed the strongest broadband growth rate since the acquisition. The company has been able to bring broadband access to 592,000 new homes and has managed a net addition of 16,200 high-speed Internet subscribers while removing almost $500 million in annual costs.
The Foolish bottom line
With the industrywide trend of shrinking landline subscribers, Frontier has not made the mistake of hard-selling the obsolete technology. Instead, it has shifted focus to promoting its high-speed broadband services in order to retain and grow its precious customer base. This could very well be the solution to the company's falling revenues. However, until Frontier begins to show some improvement at least in terms of top-line numbers, I'd rather stay on the sidelines.
To stay up-to-speed with Frontier's progress, feel free to add it to your very own personalized watchlist. It's free and helps you to stay up-to-date with the latest news and analysis for your favorite companies.
Keki Fatakia does not hold shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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