Incumbent local exchange carriers (ILECs) like CenturyLink and Frontier have a serious problem, according to Jeffries analysts: broadband.
“In our view the secular challenges among this group have been underestimated for far too long,” the analysts write.
The firm pinpoints broadband as a key weakness, with ILECs often offering inferior speeds and fewer bundled offerings than cable companies. While corrective action earlier on might have helped, “the time to play catch up has passed,” Jeffries analysts report.
A major red flag, the Jeffries report indicates, was when broadband adds for these providers went negative. In early August, CenturyLink reported the loss of 77,000 broadband subscribers between the first and second quarters. The operator’s total of 5.87 million customers was also down by 120,000 subscribers from the year ago period.
Similarly, Frontier Communications lost 33,000 legacy broadband customers in the second quarter of 2017, compared to 26,000 net adds in the same quarter last year.
The report indicates that decreases in broadband subscribers, mixed with the now non-essential wireline phone, “spelled trouble for both revenue and EBITDA for these carriers.” The squeeze is especially felt in the enterprise and business segments, as high margin legacy products are replaced with Ethernet/IP, or lost to larger competitors, the analysts note.
While CenturyLink noted in its second quarter report that it has accelerated its capital investment spending in high-bandwidth services and broadband infrastructure, Jeffries indicates the damage has already been done. Cable companies, the analysts say, will continue to put pressure on ILECs and RLECs as the deployment of DOCSIS 3.1 widens the speed gap.
“In our view, it is far too late for the ILECs to ramp spend to compete, particularly given high leverage and the significant cost required to expeditiously play catch up,” the analysts write.
While a lack of bundling options and often slower speeds than cable company offerings are of “utmost concern” for this group, the analysts see business trends as an added pressure as well. Part of the problem, the report indicates, is companies focusing on paying out dividends at the cost of the long term health of the company.
“We are not suggesting that cutting dividends would have changed the eventual domination by cable, but putting that cash to use in rapid network improvement would have been a more sound business decision,” the analysts comment.
At the beginning of August, Windstream’s shares dropped more than 18 percent after the company declared a $68 million net loss and announced plans to eliminate its quarterly dividend altogether.
Jeffries analysts conclude that Frontier is better positioned than its peers as it has a more robust broadband platform, though performance in the second half of 2017 will be critical, they say.
