Betting the ranch on turning copper into gold. What was a sleepy old DSL provider is now a fiber first company with 1.7M fiber broadband subscribers generating $1B in EBITDA from fiber alone. Does this growth company deserve to be valued at 6x?
I wonder how many homes using copper based providers eventually move to 5G solutions vs Fiber solutions. There are a fair number of moderate bandwidth users who would be quite happy with lower cost and trivial to install FWA from t mobile and Verizon. This isn’t just a Frontier issue but for all fiber buildouts. It makes me suspect that adoption numbers will be lower than targeted for everyone.
I'd be careful in taking management's word at what is "fiber" EBITDA... There is a big piece of data and internet services revenue that is "network access services" or a shrinking B2B/wholesale business, which along with the legacy voice business will be a big drag on the business... I think there is a lot included in fiber EBITDA that is not very high quality... This also makes looking at EBITDA per customer on the broadband business unhelpful... I find it curious that management has not give consolidated EBITDA targets that align with their broadband sub targets and that their compensation plans are largely based on fiber passings not ROIC/profit targets. I think the returns on these fiber builds are still very much up in the air and would not be surprised if they are lower then their 8-9% cost of debt. Lumen's pause and reevaluation of its build plans suggests they might not be so compelling...
This is something I have been thinking about a lot since publishing the post. Obviously I still have plenty of learning to do and the points you bring up are definitely ones owners should keep in mind.
I agree that if they are fluffing up the EBITDA numbers with lesser quality services then it throws off the entire valuation one a per subscriber basis. When I look at their latest tending schedule, the fiber wholesale and business revenue was up YoY? Am I missing something?
I think passings is the incentives right now because of where they are in the build/ the comp plan comes to an end this year and it will be interesting to see if they add a return profile component to the comp plan. Count me as someone who hopes so.
If they are not able to achieve higher IRRs than COC, this would have been a complete failure. However, I am not sure we have seen enough data to come to that conclusion just yet, so I still think they can do it. This thought will need to be reevaluated after new numbers come through. I think the answer will come much quicker than the end of their wave 2 build in 2025.
I wonder how many homes using copper based providers eventually move to 5G solutions vs Fiber solutions. There are a fair number of moderate bandwidth users who would be quite happy with lower cost and trivial to install FWA from t mobile and Verizon. This isn’t just a Frontier issue but for all fiber buildouts. It makes me suspect that adoption numbers will be lower than targeted for everyone.
I'd be careful in taking management's word at what is "fiber" EBITDA... There is a big piece of data and internet services revenue that is "network access services" or a shrinking B2B/wholesale business, which along with the legacy voice business will be a big drag on the business... I think there is a lot included in fiber EBITDA that is not very high quality... This also makes looking at EBITDA per customer on the broadband business unhelpful... I find it curious that management has not give consolidated EBITDA targets that align with their broadband sub targets and that their compensation plans are largely based on fiber passings not ROIC/profit targets. I think the returns on these fiber builds are still very much up in the air and would not be surprised if they are lower then their 8-9% cost of debt. Lumen's pause and reevaluation of its build plans suggests they might not be so compelling...
Kevin, thank you for the comment.
This is something I have been thinking about a lot since publishing the post. Obviously I still have plenty of learning to do and the points you bring up are definitely ones owners should keep in mind.
I agree that if they are fluffing up the EBITDA numbers with lesser quality services then it throws off the entire valuation one a per subscriber basis. When I look at their latest tending schedule, the fiber wholesale and business revenue was up YoY? Am I missing something?
I think passings is the incentives right now because of where they are in the build/ the comp plan comes to an end this year and it will be interesting to see if they add a return profile component to the comp plan. Count me as someone who hopes so.
If they are not able to achieve higher IRRs than COC, this would have been a complete failure. However, I am not sure we have seen enough data to come to that conclusion just yet, so I still think they can do it. This thought will need to be reevaluated after new numbers come through. I think the answer will come much quicker than the end of their wave 2 build in 2025.
I appreciate the thoughts, please keep in touch.