FYBR - Frontier Communications Parent: Stepping On The Sidelines For This One

Summary

• Frontier expects to have 1.3 million fiber homes in 2023 (a 6% y/y increase), which is lower than the 1.6 million homes it had previously projected (a 30% y/y increase).
• Management remains optimistic about meeting its 45% terminal penetration goal, and its NPS index has been steadily rising.
• FYBR may face the challenge of funding its fiber expansion goal in a rising rates environment.

Overview

Frontier Communications Parent ( FYBR ) has reduced its fiber build goal by 300,000 homes after reporting mixed results for 4Q22 and guiding toward better financials in 2023. While, FYBR increased its fiber deployment to a record 581,100 residences, management now expects to have 1.3 million fiber homes in 2023 (a 6% y/y increase), which is lower than the 1.6 million homes it had previously projected. All in all, I believe the market clearly did not like the guidance provided (as can be seen from the share price movement). In essence, I believe the inability to increase market share in fiber broadband and business services, as well as increased competition, inflation, and ongoing supply constraints are the key bear thesis that investors are debating – which are not going to clear within the short-term. Moreover, the rising rates environment is certainly not helping FYBR needs to raise capital to fund their fiber expansion goal. I think it is best to sit this one out until all these headwinds are cleared.

Results

Higher contributions from data and internet services offset lower revenues from voice and video to leave FYBR's total revenues flat at $1.437 billion. Adj EBITDA came in at $528 million, just ahead of expectations, a y/y decline of 9.7% but a quarterly growth of 3.9%. FYBR is confidently on track to meet its recently stated cost savings target of $400 million by year's end 2024 (currently at $336 million, with $90 million delivered in 4Q22). Adj. EBITDA growth was primarily revenue driven but did benefit from so far successful cost reduction efforts and improved efficiencies. Margin shrank by 117 basis points y/y to 36.7%, and capital expenditures of $878 million exceeded projections.

FYBR reported 76,000 fiber broadband net adds last month, representing a year-over-year increase of 100% and a net gain of 17% in fiber broadband customers by the end of 2022 vs the end of 2021. Management is optimistic that they will meet their 45% terminal penetration goal despite rising competition in the fiber-building market. This optimism is based on the rapid adoption of the expansion fiber footprint and the fact that this goal has previously been met. The NPS index has also been steadily rising since the beginning of 2021, and is now 46 points higher. What is important to note here is that the majority of the firm's new fiber customers are still coming from cable, rather than movers from copper conversion – which means these are new subscribers/customers indicating FYBR is gaining share. The 1.32% churn rate for consumer fiber broadband was below consensus, and the 1.88% churn rate for consumer copper broadband was better than expectations. The good news was both numbers were lower sequentially. Fiber consumer ARPU of $61.20 was below consensus forecasts by 3% and declined -1.6% y/y, while copper consumer ARPU of $48.70 was in line with consensus forecasts and grew +7.4% y/y.

Guidance

The range of $2.11 billion to $2.16 billion that FYBR projected for adjusted EBITDA represents growth of low to mid single digits compared to 2022. This is in line with management's previous comments regarding an increase in EBITDA for the FYBR in 2023 (as opposed to a decrease of -16%). In spite of this, management has also stated that they anticipate FYBR to achieve revenue growth in 2023. They reduced their projected deaths in 2023 from 1.6 million to 1.3 million. More on that in a bit.

Updated Build Plan

As previously mentioned, the trajectory of fiber construction for the year 2023 has been reduced from 1.6 million locations to 1.3 million, that said management still reiterates the progress it has made toward its 10 million goal, with 5.2 million passings by the end of 2022. Management believes that the smaller cohort will result in greater returns, and they have restated an asking price of $900–$1,000 per house. Additionally, management has stated that so a smaller build will help alleviate supply chain and pressure on resources issues. I am leaning towards being positive about management strategy on this, for a few reasons. First, there are fewer low-cost locations for passing than management had hoped for, so they are prioritizing those before moving on to more expensive locations with the possibility of assistance from other partners or resources. Second, the business is running at near capacity in many departments (including installation, sales, and marketing), so keeping the same penetration level will require much more efforts and resources.

On the call, management stated that spending on capital expenditures would be heavier in the first quarter of the year than in the fourth ($878 million). This will leave $582million in cash at the end of the year. When asked about funding during Q&A, management said it is considering a variety of debt funding mechanisms due to its substantial capacity under covenants. Future needs for liquidity could necessitate FYBR's involvement with the capital markets.

Conclusion

FYBR reduced fiber build goal, mixed results for 4Q22, and guidance for better financials in 2023 have left me uncertain about the near-term. While the company has made progress toward its 10 million goal, increased competition, inflation, ongoing supply constraints, and the rising rates environment are all headwinds that investors are debating. Given these factors, it may be best to wait and see how FYBR navigates these challenges before investing.

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