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This report was generated using published research from our Communications team led by Sector Head Andrew Freedman.
Investment Summary:
Frontier Communications (FYBR) stands out as a compelling investment within the telecom sector, primarily driven by its aggressive fiber expansion strategy and operational turnaround. With the transition towards high-speed fiber internet, FYBR is positioning itself as a key beneficiary of the growing demand for reliable and fast internet services. This report delves into the strategic initiatives and financial metrics that make FYBR a potentially lucrative long position.
The Bull Case
Aggressive Fiber Expansion: FYBR's management has embarked on an ambitious plan to pass 10M locations with fiber by 2030, aiming for a 50% penetration rate. This significant expansion is set to almost double the previous targets, with a total cost estimated between 1000 and 1,100 per location. With 6.5M fiber passings already achieved by 4Q23 and a substantial build in the last two years (1.3M in 2023 vs. 1.18M in 2022), the company is well on its way to accelerating broadband net additions.
Fiber Growth vs. Copper Decline: The company has seen continuous double-digit growth in its fiber subscribers every quarter since 2022, offsetting the decline in copper services. Despite losing about 60,000 copper customers quarterly over the past year, efforts to stabilize these losses have been successful. By mid-2022, the growth in fiber customers surpassed the losses in copper, leading to a net increase in broadband subscribers. This trend continued throughout 2023, making fiber the main driver of growth against the decline in copper.
Free Cash Flow and Deleveraging Outlook: FYBR's financial strategy anticipates a free cash flow inflection point in 2027/2028, followed by rapid deleveraging, underpinning the company's long-term growth potential and financial stability.
Growth Acceleration and Strategic Optionality: With fiber revenue now constituting over half of FYBR's total revenue, the company is on a path to accelerated EBITDA growth and potential multiple expansion. The strategic value of FYBR in the fiber consolidation landscape further underscores its investment appeal.
The Bear Case
Challenges in Fiber Penetration: The competition, pricing strategies, and potential brand perception issues in certain markets may hinder penetration rates and overall growth trajectory.
Economic and Cost Pressures: Rising build costs and inflationary pressures could challenge the economics of the fiber expansion, impacting the projected internal rate of return.
Legacy Business and Leverage Concerns: The faster-than-expected decline in legacy voice services and the associated leverage could pose risks to FYBR's financial health and operational execution.
Corporate Milestones:
FYBR has made significant strides since its acquisition of Verizon's rural wireline business in 2010 and further expansion into the Northeast. Furthermore, the company filed for bankruptcy in 2020, and emerged in 2021 before going public once again. These strategic moves, combined with an aggressive fiber buildout and operational restructuring under new management, mark the transformation of FYBR into a forward-looking telecom player.
Conclusion
Frontier Communications (FYBR) presents a compelling case for investors willing to bet on the company's fiber expansion strategy and operational turnaround. Despite the inherent risks associated with such a transformation, the long-term outlook for FYBR appears promising as it aims to solidify its position in the competitive telecom landscape.
Appendix: Glossary of Key Financial Terms
- Fiber Expansion: The process of extending fiber-optic networks to new areas or increasing coverage within existing regions. Fiber-optic networks provide high-speed internet access, which is faster and more reliable than traditional broadband services.
- Fiber Passing: A location that can be connected to fiber running along a main road.
- Penetration Rate: The percentage of potential customers in a service area who are subscribing to the service. It is a key metric in evaluating the success of service expansion efforts, such as FYBR's fiber-optic network roll-out.
- Free Cash Flow: A financial performance measure that represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It is an important indicator of a company's financial health and its ability to repay debt, pay dividends, and invest in growth.
- Deleveraging: The process of reducing the level of a company's leverage (debt). Deleveraging typically involves paying down debt from cash flows or through the sale of assets, leading to a stronger balance sheet.
- EBITDA: Stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances. EBITDA highlights the profitability of a company's operations by focusing on the income generated from core business activities before the impact of financial and accounting decisions.
- Multiple Expansion: Refers to an increase in the valuation multiple of a company, such as the price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, or EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization). It generally indicates that the market is valuing the company more highly, possibly due to growth prospects, improved profitability, or decreased risk.
- Internal Rate of Return: A metric used in capital budgeting to estimate the profitability of potential investments. IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
- Legacy Business: Refers to services or products that a company has been offering for a long time, often facing decline due to technological advancements, changing market preferences, or competition. In FYBR's context, it mainly relates to traditional voice services.
