Frontier CEO Says FCC Special Access Fallout Unclear, Calls Productivity Factor Key
It's unclear how potential FCC special access actions will affect Frontier Communications, CEO Daniel McCarthy said on an earnings call Monday. FCC Chairman Tom Wheeler "desires to have something done on his watch" and "he'll push to do that," McCarthy…
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said, responding to an analyst question. "It’s a little too early to tell. We haven’t baked any impact in until we get a better feel for if and when there might be some productivity factor changes that get implemented, and we should have a better feel for that as we get into reporting our next quarter." ILEC competitors and critics want the FCC to use a productivity "X-Factor" to drive down incumbent business data service rates under price-cap regulation in areas deemed uncompetitive. McCarthy said Frontier is "essentially done" with cutting over customers from wireline systems in California, Florida and Texas that it acquired from Verizon. While there are some "lingering" small issues, he said, there's nothing like the "noise" of the early days of the transition when customers complained about service problems (see 1605060058 and 1607080045). In its first quarterly report consolidating the Frontier and Verizon system performance, Frontier said it achieved initial annualized cost synergies of $1 billion from the acquisition, and now expects to increase annual synergies to $1.25 billion by year three, up from an original $700 million projection. "Revenues fell light of our estimates but many of the headwinds it saw in Q2 should get better in Q3 and beyond (less integration expenses, less promotional credits and a more focused marketing effort), and dividend coverage (with a payout of 49%) remains the best of the RLEC group," said a Wells Fargo analysts' note giving Frontier an "outperform" rating. "Nothing in this quarter we saw as a 'cliffing' moment for the company, as we knew the first quarter out of the box would be messy." Macquarie Securities analysts said they "remain cautious on what could be an extended rocky integration period," with "choppy" execution on the former Verizon Fios systems. "Although a [dividend] yield of ~8.3% is certainly appealing and secured, it's not enough, given the lingering impact of integration," said their note, which rates the company "underperform." The company's stock closed down 4.5 percent at $4.85 Tuesday.