Fiber fuels growth for Frontier in Q3

Frontier Communications parlayed its focus on fiber into solid results across the board as the telco gathered gains in fiber deployments, fiber subscribers and fiber revenues in the third quarter of 2023.

Starting with subs, Frontier added 75,000 fiber subscribers, improving on a year-ago gain of +64,000 and extending its total to 1.79 million. Analysts were expecting Frontier to add 74,000 fiber subs in the quarter.

Frontier expects fiber net adds to rise again in Q4. Those gains are coming about as Frontier's cable competitors struggle to grow broadband subs amid rising competition and a sluggish housing move market.

When paired with a loss of 58,000 consumer copper customers (equaling copper losses from a year ago), Frontier gained 17,000 total broadband subs in Q3. That improved from a year-ago gain of about 6,000.

Fiber footprint expands to 6.2 million locations

Turning to Frontier's buildout, the company added 332,000 new fiber locations in the quarter, putting it on track to add 1.3 million locations for the full year. Frontier ended the quarter with 6.2 million fiber locations, putting it well beyond the halfway point toward its goal to build fiber to 10 million locations by 2025. Including 9.2 million copper locations, Frontier ended the period with a consolidated footprint of 15.4 million locations.

Related:Frontier hints at out-of-footprint fiber buildout opportunity

On the financial end, residential fiber average revenue per user (ARPU) improved to $64.49 (versus $62.97 a year earlier), handily beating analyst expectations of $63.80. Frontier has been pumping fiber ARPU with faster speed tiers, with more than half of new broadband customers taking 1-Gig or gigabit-plus speeds, according to President and CEO Nick Jeffery. Frontier is also enhancing fiber ARPU via the elimination of promotional gift cards and the unbundling of value-added products such as whole-home Wi-Fi. Fiber ARPU is expected to accelerate in Q4, CFO Scott Beasley said on today's Q3 call.

Fiber revenues climbed to $760 million ($479 million for consumer, $281 million for business) in the quarter, up from $691 million ($424 million consumer, $267 million for business) in the year-ago quarter.

Frontier's "base" fiber penetration stood at 44%, just shy of the company's "terminal" goal of 45% or greater. Jeffery said penetration rates in the fiber expansion cohorts are ahead of expectations at the 12- and 24-month marks. Frontier believes its penetration rate in the expansion markets can match that of its base fiber markets over time.

"Everything important is accelerating" at Frontier, New Street Research analyst Jonathan Chaplin surmised in a research note issued today. "This was the quarter where things were supposed to start moving in the right direction, and they did. Fiber broadband adds accelerated, fiber ARPU accelerated, fiber segment and consolidated EBITDA accelerated."

Related:Other fiber builders exploring Frontier's fresh funding path

Frontier also reiterated full 2023 guidance of adjusted EBITDA of $2.11 billion to $2.16 billion, 1.3 million new fiber locations and capex of $3 billion to $3.2 billion. "No complaints; no complications," Chaplin wrote.

One potential complication looms: Jana Partners reportedly wants Frontier to sell. Jana has taken a stake in Frontier with a partner that some analysts speculate to be T-Mobile.

"We've always engaged in open and regular communications with all of our shareholders and we will continue to do so," Jeffery said, but declined to comment further on the recent report about Jana.

Capex takes a dive

Rising fiber-related metrics were matched by a welcome decline in capital expenses. Frontier's Q3 capex came in at $671 million (including $168 million for fiber) versus $1.05 billion ($454 million for fiber) in the prior quarter.

Beasley attributed that capex decline to a set of reasons – the consumption of "pre-work capital" spent to open new fiber locations for sale, working capital benefits from consuming existing inventory and a higher mix of lower-cost fiber builds. He expects that trend to continue in Q4.

Related:How Frontier is broadening and beefing up its biz services unit

For full 2024, expected to represent Frontier's high-water mark for fiber-related spending, the company is forecasting capex in the range of $3 billion to $3.2 billion. Mirroring 2023 trends, Frontier expects capital spending to be front-loaded in the first half of 2024 and then taper off in the second half.

Frontier ended the quarter with $3.4 billion of liquidity, providing runway for the company to complete its 10 million fiber location upgrade/buildout.

Frontier is still exploring ways to build fiber to an additional 5 million locations in its copper footprint deemed more expensive to build to compared to the company's current tranche. Beasley said Frontier has identified about 1.2 million locations in that group that could be built with private capital, with the rest considered targets for government subsidy programs.

"We'll be an active participant in BEAD," Beasley said in reference to the $42.45 billion Broadband Equity Access and Deployment program.

Investors still not convinced

Still, investors aren't giving Frontier much credit for its recent, fiber-fueled results. Frontier shares were down $1.15 (-6.42%) to $16.77 in morning trading Wednesday.

Some of that malaise could be tied to Frontier Q3 revenues of $1.44 billion that fell just shy of expectations. But Chaplin believes that Frontier's spending profile is a prime culprit.

"Investors have shunned this stock because it sports high leverage, is burning cash, and will continue to do so until 2026. That is all true, and none of it is about to change," Chaplin explained.

But he does like the value Frontier is building with its fiber strategy. Chaplin values fiber assets at $3,500 per location, versus just $250 per location for copper assets.

"We get to a nearly three-fold increase in the stock, based on the assets Frontier has today. If we assume they deploy fiber to 10MM locations, we get to a six-fold increase in value," he said.

Frontier's recent securitization of fiber assets in the Dallas area, to the tune of $2.1 billion of additional committed capital, "should remove most of the doubts about the Company's ability to get to 10MM [fiber] locations," Chaplin reckoned.