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How Frontier Communications Corporation Makes Most of Its Money

Frontier Communications (NASDAQ: FTR) has a major problem, as its chief -- and basically only -- source of revenue has been slipping.

The company has been shedding subscribers at an alarming rate. That's true not just in television, where most cable and satellite companies are moving backwards, but also in broadband, where most are gaining.

That's a problem compounded by the fact that the company spent $10.54 billion to buy Verizon Communications(NYSE: VZ) wireline business in California, Texas, and Florida (CTF). Frontier got approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers.

Unfortunately, since making that deal, not much has gone right for the company when it comes to holding onto customers. In Q2 2016 -- Frontier's first owning the Verizon territories -- it closed the quarter with 5.24 million residential customers and 528,000 business subscribers. Those numbers have fallen steadily since then: The company ended Q1 2017 with 4.73 million residential users and 484,000 business customers. 

Frontier has been losing subscribers since it bought Verizon's California, Texas, and Florida wireline business. Image source: Getty Images.

Where does Frontier's money come from?

The good news for Frontier is that the CTF purchase did produce the cost-saving synergies CEO Daniel McCarthy said it would. In the year since the Verizon deal closed, the company has reached its target of "$1.25 billion in total annualized synergies by end of Q1 2017, and remain[s] on track to deliver an additional $350 million by end of Q2 2018," according to the first-quarter earnings release.

That's good news, as is the fact that average revenue per user (ARPU) spiked when the Verizon deal closed, jumping from $64.32 in Q2 2015 to $83.20 during the same period in 2016. That number fell to $80.62 in Q1 2017, but it's still well up.

The problem is that increasing ARPU and spending less money can only cover up so much subscriber loss. Frontier makes the vast majority of its money selling video, broadband, and phone services to consumers and businesses. In fact, of its $2.35 billion in Q1 revenue, $993 million came from data and internet services, $751 million came from voice services, and $347 million came from video services.

That's $2.09 billion of the $2.35 billion total coming directly from subscribers. The rest includes $69 million for "other" and $197 million from "switched access and subsidy," which are not directly related to customer counts but are still vulnerable to potential declines of their own.

What's next for Frontier?

McCarthy has said in each of the last four earnings releases that he expects subscriber counts to turn around. He did note some positive trends in the Q1 release: "During the quarter, we continued to realize our targeted efficiencies and synergies, and I am also pleased to have achieved our third consecutive quarter of improved FiOS gross additions in the California, Texas and Florida (CTF) markets. We are executing on a number of initiatives with the goal of enhancing customer experience, reducing churn, stabilizing revenues and generating cash flow."

That's good news, but time is running out for a company that has already cut its dividend and conducted a reverse split of its stock. McCarthy has cut expenses and reworked some of the company's debt. That buys him time, but Frontier's future hangs on its ability to stop losing and start adding subscribers -- a very tall order given recent trends.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool has a disclosure policy.