Fiber network build-outs are still going strong, even as the pace of those builds slowed a bit in 2022. Our colleague Craig Moffett warns that the fiber future isn’t looking quite as bright due to an emerging set of economic challenges that could reduce the overall rate of return on those build-outs. Rising costs, reflecting labor cost inflation, equipment cost inflation, and higher cost of capital, all point to diminished investment returns for fiber overbuilds. Craig wrote in a note to clients:
Our by-now familiar tally of planned competitive fiber builds for 2022 started the year at to 6M or so homes passed. By early Spring it had climbed to 7M. It currently sits at ~8M. Next year’s number is flirting with 10M. All for an industry that has never built even half that many in a single year. As we approach the end of the year, however, it is clear that the actual number, at least for this year, will fall short. The number is still high, to be sure… but lower.
There does not appear to be a single explanation for the construction shortfall; some operators blame labor supply, some permitting delays. And some, of course, are actually doing just fine. For the industry as a whole, however, notably including AT&T, by far the nation’s largest (fiber) overbuilder, the number will almost certainly end the year meaningfully below plan. Costs appear to be rising, as well. Here again, there is no single explanation. Labor costs are frequently cited, but equipment costs are rising as well. For example, despite construction shortfalls, AT&T’s capital spending show no such shortfall, suggesting higher cost per home passed. Higher cost per home passed, coupled with a higher cost of capital, portend lower returns on invested capital.
If, as we expect, investment returns for fiber overbuilds increasingly prove to be inadequate, the capital markets will eventually withdraw funding. Indeed, this is how all bubbles ultimately pop. There are already signs of growing hesitancy. To be sure, we don’t expect a near-term curtailment; operators’ plans for the next year or two are largely locked in. Our skepticism is instead about longer-term projections that call for as much as 70% of the country to be overbuilt by fiber. We believe those kinds of forecasts are badly overstated.
As recent as its Q3 2022 earnings call, AT&T has reiterated that it’s on track to expand its fiber footprint to more than 30 million locations by 2025. The company deployed fiber to about 2.3 million locations through the third quarter of this year, but appears hard-pressed to meet its guidance to build 3.5 million to 4 million fiber locations per year.
Given that the fourth quarter is typically a slow construction period, AT&T “looks to be well behind its deployment goals,” Moffett wrote. “If the company retains the pace of deployment in Q3, they will end the year 675K homes short of their goal, or an 18% shortfall compared to the midpoint of their target.”
But AT&T isn’t alone. Lumen has also fallen behind its target, as has TDS and altafiber (formerly Cincinnati Bell) and Altice USA. Those on track or ahead of pace include Frontier Communications, Consolidated Communications and Verizon.
The analysts at Wells Fargo recently lowered their fiber buildout forecasts for 2022 and 2023. They cut their 2022 forecast for the US to about 8 million new fiber locations, down from 9 million. For 2023, they expect the industry to build about 10 million locations, cut from a previous expectation of 11 million.
Though overall buildout figures are still relatively high, some operators recently have blamed a blend of reasons for the recent slowdown in pace, including a challenging labor supply, permitting delays and rising costs for capital and equipment.
“Labor costs are frequently cited, but equipment costs are rising as well,” Moffett noted. “For example, despite construction shortfalls, AT&T’s capital spending show no such shortfall, suggesting higher cost per home passed.”
And, like the pace of buildouts, the cost situation is clearly not the same for all operators. While Consolidated is seeing the cost per home passed rising to a range of $600 to $650 (up from $550 to $600), Frontier expects its costs to remain at the expected range of $900 to $1,000.
But more generally, Moffett believes the returns on those investments “will only weaken further as buildouts are necessarily pushed out to less attractive, lower density, markets.”
One takeaway from that, Craig warns, is that fiber overbuilding is poised not only to generate lower returns that originally hoped, but that there also will be upward, not downward, pressure on broadband prices.
With respect to the pace of fiber build-outs, there’s heavy demand for labor for today’s overbuilding plans, and it will only get heavier as the $42.5 billion Broadband Equity, Access and Deployment (BEAD) program gets started.
Remedies are out there, with Moffett pointing to the Fiber Broadband Association’s rollout of its OpTICs Path fiber technician training program earlier this year as one example. ATX Networks, a network tech supplier, is contributing with the recent launch of a Field Personnel Replenishment Program.
But they might not completely bridge the gap. “These efforts may help expand capacity, but they are unlikely to fully meet demand, and they are almost certainly not going to forestall near-term labor cost inflation, in our view,” Moffett wrote.
With rising equipment costs and the cost of capital also factoring in, Moffett views a 20% rise in fiber deployment (for both passing and connecting homes) a “reasonable range” in the coming two to three years.
Moffett wonders if network operators will be forced to raise prices to help restore returns to the levels anticipated when fiber buildout plans were first conceived. While it’s unclear if competitive dynamics will allow for that, “it does appear to us that expectations of falling ARPU [average revenue per user] are misplaced,” Craig wrote.
But the mix of higher cost of capital and deployment for fiber projects, paired with deployment in lower density markets or those with more buried infrastructure, stand to reduce the value of such fiber projects further.
“Capital markets will sniff out this dynamic long before the companies themselves do, and they will withdraw capital. This is, of course, how bubbles are popped,” Moffett warned.
The MoffettNathanson’s report also provided an update on broadband subscriber metrics. US cable turned in a modest gain of 38,000 broadband subs in Q3 2022, an improvement from cable’s first-ever negative result in Q2. Cable saw broadband subscriber growth of 1.2% in Q3, down from +4.4% in the year-ago quarter. U.S. telcos saw broadband subscriber growth fall to -0.5% in Q3, versus +.06% in the year-ago quarter.
Meanwhile, fixed wireless additions set a new record thanks to continued growth at both Verizon and T-Mobile. However, T-Mobile’s 5G Home business posted 578,000 FWA subscriber adds in Q3, up just 3.2% from the prior quarter.
Frontier Communicatons massive fiber build-out continued in the third quarter (Q3-2022), as the company added record number of fiber subscribers to reach a total of 4.8M fiber locations. Frontier is poised to reach 5 million locations passed with fiber-to-the-premises (FTTP) networks this month, putting it at the halfway point toward a goal to reach at least 10 million locations with fiber by the end of 2025. The company added a record 64,000 fiber subscribers, beating the 57,000 expected by analysts. That helped to offset greater than expected copper subscriber losses of -58,000. Consumer fiber Q3 revenue climbed 14% to $424 million while consumer copper fiber dropped 3% to $361 million.
Frontier built FTTP to a record 351,000 fiber optic premises in Q3-2022, handily beating the 185,000 built out in the year-ago quarter and the 281,000 built in Q2 2022. Frontier ended Q3 with 1.50 million fiber subs, up 16% versus the year-ago quarter.
“We delivered another quarter of record-breaking operational results,” said Nick Jeffery, President and Chief Executive Officer of Frontier. “Our team set a new pace for building and selling fiber this quarter. At the same time, we radically simplified our business and delivered significant cost savings ahead of plan. This is a sign of a successful turnaround.
“Our team has rallied around our purpose of Building Gigabit America and is laser-focused on executing our fiber-first strategy. As the second-largest fiber builder and the largest pure-play fiber provider in the country, we are well-positioned to win.”
Third-quarter 2022 Highlights:
- Built fiber to a record 351,000 locations to reach a total of 4.8 million fiber locations, nearly halfway to our target of 10 million fiber locations
- Added a record 66,000 fiber broadband customers, resulting in fiber broadband customer growth of 15.8% compared with the third quarter of 2021
- Revenue of $1.44 billion, net income of $120 million, and Adjusted EBITDA of $508 million
- Capital expenditures of $772 million, including $18 million of subsidy-related build capital expenditures, $442 million of non-subsidy-related build capital expenditures, and $170 million of customer-acquisition capital expenditures.
- Net cash from operations of $284 million, driven by healthy operating performance and increased focus on working capital management
- Nearly achieved our $250 million gross annual cost savings target more than one year ahead of plan, enabling us to raise our target to $400 million by the end of 2024
In Frontier’s “base” fiber footprint of 3.2 million homes (in more mature areas where fiber’s been available for several years), penetration rose 30 basis points in Q3 to 42.9%. “When we look at the growth over the past year, we see a clear path to achieving our long term target of 45% penetration in our base markets,” Frontier CEO Nick Jeffery said.
Penetration rates in Frontier’s expansion fiber footprint for the 2021 cohort is on target and is exceeding expectations in the 2020 expansion fiber footprint, he said.
Fiber ARPU (average revenue per user) was up 2.6% year-over-year, but came a little short of expectations thanks in part to gift card promotions. Frontier’s consumer fiber ARPU, at $62.97, missed New Street Research’s expectation of $63.67 and a consensus estimate of $64.51. Copper ARPU, however, beat estimates: $49.65 versus an expected $48.57.
Frontier CEO Jeffery said faster speeds remain a top ARPU driver, with 45% to 50% of new fiber subs selecting tiers offering speeds of 1Gbit/s or more. Fiber subs taking speeds of 1Gbit/s or more now make up 15% to 20% of Frontier’s base, up from 10% to 15% last quarter, he said.
Frontier currently has no plans to raise prices due to inflation and other economic pressures, but the company left the door open to such a move.
“We’ll be a rational pricing actor in this market,” Jeffery said. “If those [inflationary pressures] don’t moderate, then of course we maybe consider pricing actions to compensate…just as we’re seeing others doing.”
Frontier also has no immediate plans to strike an MVNO deal that would enable it to use mobile in a bundle to help gain and retain broadband subscribers – a playbook already in use by Comcast, Charter Communications, WideOpenWest and Altice USA.
As churn rates remain stable and low, Jeffery explained, “the argument for using some of that scarce capital to divert into an MVNO to solve a problem that we don’t yet have, I think, would probably not make our shareholders super happy.” Importantly, Frontier has experience in the mobile area from execs who previously worked at Vodafone, Verizon and AT&T.
“We’re watching it very closely and if consumer behavior changes or if the market changes in a material way that impacts us such that moving some of our scarce capital to build or partner with an MVNO would be a smart thing to do, we’ll do it and we’ll do it very quickly,” Jeffery said. “But now isn’t the moment for us.”
Frontier ended the quarter with $3.3 billion of liquidity to fund its fiber build. Beasley said Frontier has additional options if needed, including taking on more debt, selling non-core real estate assets, access to government subsidies and the benefits of a cost-savings plan that has exceeded the target (from an original $250 million to $400 million).
The conference call webcast and presentation materials are accessible through Frontier’s Investor Relations website and will remain archived at that location.
Clearwave Fiber [1.] continues its construction of a state-of-the art, all-Fiber Internet network in the “Coastal Empire.” This latest expansion for the Savannah-based operation marks a continuation of almost 6,000 route miles of Fiber in the Southeast and Midwest. The company’s goal is to bring the most advanced and fastest Internet available to more than 500,000 homes and businesses across the United States by the end of 2026.
Note 1. Clearwave Fiber was formed in January of 2022 as a rebranding of Hargray Fiber, which has been serving the Southeast for 70+ years. Senior leadership and operations management have a long history with Hargray and now lead Clearwave Fiber during this rapid expansion.
“Clearwave Fiber is excited to contribute to the continual growth in Southeast Georgia and provide such a crucial resource to residents and commercial operations,” said Clearwave Fiber General Manager John Robertson. “We’re committed to providing communities with the high-speed connectivity that is essential for families, businesses and local economies.”
“We’re ingrained in the fabric of Savannah and its surrounding communities,” said Clearwave Fiber Chief Operating Officer Gwynne Lastinger. “Our sales and technical support staff live and work in the Coastal Empire and we continue to add to our team of more than 500 throughout the Southeast and Midwest.”
With gigabit download and upload speeds, Clearwave Fiber will bring 10 times more speed to consumer doorsteps at a time when fast, reliable Internet is becoming increasingly critical to modern households and businesses. Remote work, streaming, gaming, smart home technology and multiple device connectivity all require robust, reliable connections. Clearwave Fiber is committed to providing hassle-free, high-quality Fiber data connection to every location of its growing footprint.
“We’re seeing an increase in households where multiple online activities are occurring at the same time. Many Internet connections aren’t up to the task of keeping it all running at top speeds,” said Robertson. “Clearwave Fiber solves the problem of the bandwidth issues that happen when everyone in the house is connected. We also have solutions for businesses that keep them operating on a fast, reliable network.”
For many consumers, Internet touches every facet of daily life. Remote work, telehealth, and virtual learning all require robust, reliable connections. A 2022 study by Deloitte indicated that 45 percent of surveyed households include one or more remote workers, and 23 percent include at least one or more household member attending school from home. Additionally, 49 percent of U.S. adults had virtual medical appointments in the past year.
In addition, the Deloitte report noted that the average U.S. household now utilizes a total of 22 connected devices, including laptops, tablets, smartphones, smart TVs, game consoles, home concierge systems like Amazon Echo and Google Nest, fitness trackers, camera and security systems, and smart home devices such as connected exercise machines and thermostats.
Supporting this burgeoning ecosystem of household devices can challenge companies serving customers over DSL or cable systems. “Older copper wire and coaxial networks worked just fine for the technologies they were built for. Copper lines are great for telephone calls and coax worked well for cable TV, but those networks struggle to deliver the kind of bandwidth possible with fiber,” noted Lastinger. “Fiber optic technology is the future. Fiber networks are more durable, more consistent, and they move data at the speed of light. Best of all, our network easily keeps pace with technology innovations, exponentially increasing demands for bandwidth, and evolving customer needs. The options are almost limitless.”
Fiber networks are currently being installed on Wilmington and Whitemarsh Islands, Windsor Forest, Hinesville, Rincon, Pooler and Richmond Hill. Clearwave Fiber is scheduled to complete these projects by the end of November and will continue working in other areas in the region into 2023 and beyond.
For more information, visit ClearwaveFiber.com
Dexter Goei, Altice USA’s outgoing CEO, continues to strongly defend the company’s decision to upgrade large portions of its network to fiber, stating that the product and business performance of the move make dollars and sense. Altice USA’s current plan is to upgrade about 6.5 million passings to fiber-to-the-premises (FTTP) by 2025 and back that up with multi-gigabit speeds, which Altice USA has begun to soft-launch in parts of its fiber upgrade areas.
At the Goldman Sachs Communacopia + Technology conference in San Francisco, Goei said while the company has made strides in deploying its fiber network — it expects to finish 2022 with up to 2.3 million homes passed with the technology — it is still seeing customer declines in its former Cablevision and Suddenlink footprints.
In Altice’s former Cablevision systems in metropolitan New York City, gross additions are lower, there is less move activity and churn levels are low, but the company also is competing against a telco — Verizon Communications — that has been extremely aggressive on price. In its Suddenlink markets mainly in the Midwest, gross addition activity is high but churn is high, especially in markets where it is being overbuilt.
“We’re still losing subs in both markets but for different reasons,” Goei said. “We feel good about the fourth quarter turning around and looking better next year.”
Altice USA lost about 3,000 subscribers in 2021 — the only major cable operator to do so — and shed more than 50,000 broadband customers in the first half of this year.
Altice began accelerating its fiber rollout last year, with a goal of passing 6.5 million homes by 2025. At the Goldman conference, Goei said the company expects to end 2022 with 2.2 million to 2.3 million homes passed with fiber (an increase of about 1 million homes), and should add another 1.6 million to 1.8 million households by the end of 2023.
While other cable operators have seen an increase in competition from fixed wireless access providers from telcos, Goei said most of Altice USA’s telco competition is replacing slower DSL lines with fiber, hence the acceleration of its own fiber buildout plans. But he shared his peers’ disdain for fixed wireless access (FWA), agreeing with some pundit predictions that the technology will reach a performance and penetration plateau in the next two or three years.
Goei announced his intention to step down as CEO earlier this month, and will become executive chairman of Altice USA on October 3. In his place the company named Comcast executive Dennis Mathew as CEO, also effective October 3. Mathew has 17 years of experience with Comcast, most recently as senior VP of its Freedom Region (Southeast Pennsylvania, New Jersey and Northern Delaware). He earlier served as senior VP for its Western New England Region (Connecticut, Vermont, Western Massachusetts and areas of New York and New Hampshire) and has extensive experience in running cable businesses.
Goei said at the Goldman conference that his main motivation for stepping down was a desire to return to Europe, where he spent his childhood and most of his professional career, with his family. He added that he notified the Altice USA board of his decision about a year ago, starting the search process for a replacement about six months ago. He believes he’s leaving Altice USA in capable hands.
“I interviewed many, many people during the process; Dennis fits the bill across the board,” Goei said, adding that Mathew has a proven track record in operations, running one of Comcast’s most high-profile regions (the Freedom Region) and will fit in well with the Altice team. “He’s just a great guy, a team player, will focus on the prize and is someone who would do very well with the executive team at Altice USA.”
The average revenues per user (ARPU) on Altice USA’s fiber-based products are 7% to 8% higher than ARPU on cable-based services, he said. Additionally, churn rates on fiber services are also coming in about 6% to 8% lower than on HFC, and the NPS (net promoter score) for the fiber product is also coming in higher.
“Every single metric that you can imagine – that you would anticipate – are better” on the fiber product, Goei said. He acknowledged, however, that the installation process for fiber customers getting a triple-play bundle that includes pay-TV and voice could be better.
As for Altice USA’s fiber network build update, the company finished almost 270,000 new homes in the second quarter of 2022, a record the company expects to beat in Q3 and, weather permitting, in Q4.
For 2022, Altice USA expects to complete an additional 1 million fiber passings, with 1.2 million as its “stretch target.” That will put Altice USA in a position to end the year with 2.2 million to 2.3 million homes passed with fiber.
In 2023, Goei said Altice USA expects to ratchet up the build to 1.6 million to 1.8 million homes passed as the operator starts to push fiber upgrades into the Suddenlink footprint.
Altice USA is also doing edge-out builds to areas adjacent to existing facilities and pursuing grants for fiber builds in underserved and unserved areas. Altice USA has won grants or subsidies covering 40,000 to 45,000 homes, a number that Goei predicts could rise to about 200,000 in the next 12 to 24 months.
Altice USA, which has been fielding M&A inquiries about the Suddenlink properties, believes its fiber focus will set the stage for a return to broadband subscriber growth as early as Q4 2022, and certainly by sometime in 2023.
Goei said 80% of gross broadband subscriber adds in fiber areas take a fiber-based service. Though Altice USA is trying to convert HFC customers to fiber proactively, exceptions include customers who want to keep their existing setup or who are in homes and locations where a landlord won’t allow a new fiber drop.
Altice USA has been building a fiber broadband network in its Optimum territory in the New York tri-state area (New York, New Jersey, Connecticut) with 1.2 million fiber passings available for sales as of December 31, 2021. For Suddenlink, construction is expected to begin this year in areas of Texas. Additional states in the Suddenlink footprint that will benefit from this fiber expansion plan include areas of Arizona, California, Louisiana, Missouri, North Carolina, New Mexico, Oklahoma, and West Virginia.
“Altice USA is proud to announce plans to invest further in our fiber deployment strategy by accelerating the build of a 100% fiber broadband network capable of delivering multi-gig speeds across our Optimum and Suddenlink footprint,” said Dexter Goei, Altice USA Chief Executive Officer. “Fiber is the future and given the progress we have made at Optimum with our fiber expansion, we’re excited to build on that success and break ground later this year at Suddenlink to bring our advanced network to more customers and communities.”
Goei touched briefly on Altice USA’s Optimum Mobile product, which is supported by an MVNO deal with T-Mobile. He agreed that there are benefits to bundling mobile with home broadband but lamented that mobile EBIDTA is challenged by “thin margins” being driven by a mobile marketplace that’s seeing falling ARPU and rising levels of promotions.
With that backdrop, Altice USA expects to market fiber more aggressively than mobile this year and into 2023. “For the balance of this year, I don’t think you should expect real big waves in the mobile product,” Goei said.
Goei also offered some additional commentary on the recent announcement that he will be stepping down as CEO to become executive chairman of the board. Comcast exec Dennis Mathew has been tapped to take the CEO slot effective October 3.
Goei reiterated that he is shifting gears for personal reasons, as he and his family want to return to Europe. He said he informed the board of his decision about a year ago. Altice USA started its CEO search roughly six months ago.
In his new role, Goei said he will focus on “large strategic stuff” and external elements such as government affairs and conversations with the financial community, so that Mathew can focus squarely on operations.
Dark Fiber network operator Neos Networks has announced a new partnership with Giganet, aiming to support the ISP’s burgeoning FTTP rollout with backhaul and data centre services.
Giganet currently offers customers access to its gigabit services through a variety of network providers, including Openreach and CityFibre, reaching millions of homes across the UK. In fact, earlier this year, Giganet announced that they had extended their partnership with CityFibre, thereby making their services available to customers across the entirety of CityFibre’s UK network.
However, last year Giganet announced they would also be rolling out their own FTTP network directly, investing £250 million to cover underserved areas of Hampshire, Dorset, Wiltshire, and West Sussex.
In total, the company hopes to reach 300,000 premises with full fibre over the next four years, with its core network and first four exchange rings set to be live by the end of 2022.
As this new network grows, it will need additional backhaul capacity and support – something that Neos, with its 550 unbundled exchange network, is well positioned to provide.
“Neos Networks rose to the challenge of providing us with resilient and high capacity backhaul circuits across a wide range of exchanges as well as our core data centres,” explained Matthew Skipsey, Chief Technology Officer at Giganet. “Using Neos Networks, we have been able to secure connectivity to our points of presence faster than expected, initially enabling each of our first four regional rings with resilient 100Gb/s backhaul. This means our south coast roll-out is progressing at pace.”
This network expansion project will see Neos support Giganet to deliver a more than tenfold capacity increase.
“Both Neos Networks and Giganet have adopted a collaborative approach to this relationship. This has resulted not only in solutions being delivered faster than ever, as the Giganet network grows, it also gives us the ability to transition connectivity between points of presence without any disruption,” explained Sarah Mills, Chief Revenue Officer at Neos Networks. “There is no doubt that by working in partnership with alternative network providers, like Giganet, UK residents will benefit from a better, faster, and more resilient connectivity.”
Matthew Skipsey added: “The ready availability of high-quality resilient connections to our points of presence, undoubtedly enabled us to quickly roll-out hyperfast, full broadband to a marketplace hungry for improved connectivity.”
Frontier Communications added a record 54,000 fiber broadband customers in the first quarter of 2022, a 20% gain over the previous record set in Q4 2021 and somewhat higher than expectations coming in to the quarter. These fiber customer adds are coming from both new and existing fiber markets. Frontier’s data continues to track nicely: 22% penetration at the 12-month mark for its 2020 cohort and 18% for its larger 2021 cohort, and 44% at the 24-month mark for its (admittedly small and probably not broadly representative) 2020 cohort. Base market penetration was up 50 basis points in the quarter and 90 basis points over the past two quarters.
Frontier’s aggressive fiber network buildout and a record low churn of 1.19%, enabled the telco to offset copper losses and add 20,000 net broadband subs for Q1 2021. That’s a record nearly two times higher than that set in the prior quarter. Frontier ended the quarter with 1.38 million residential fiber broadband subs, up 11% YoY.
Frontier plans to expand its fiber-to-the-premises (FTTP) footprint to 10 million locations by 2025 – a figure that includes the company’s “Wave 1” and “Wave 2” builds. Frontier built fiber out to another 211,000 locations in the first quarter of 2022, and says it’s on track to add more than 1 million FTTP locations for all of 2022, and another 1.6 million in 2023.
Frontier passed another 211K locations with fiber in the quarter, up from the ~190K level of the prior two quarters, a nice accomplishment in light of the disruptions associated with Omicron early in the quarter (100K of the 211K passings were achieved in March alone). Management continues to expect to add at least 1M fiber locations in 2022, and it seems on track to meet or exceed that target.
“Positive net adds is the new normal,” Nick Jeffery, Frontier’s president and CEO, declared on Friday’s earnings call. The CEO continued:
“We gained momentum in business and wholesale, reaching a key inflection point in SMB and we made progress improving our employee engagement. And last week, we unveiled our new Frontier brand. A year ago, we said we will take a long and hard look at our brand and its future and after a thorough data-driven evaluation I am delighted with the results. Our new brand is modern, more relevant, more tech-oriented, and reflects our commitment to relentlessly being better in our business and for our customers. We also gained customers in our mature fiber market, what we refer to as our base fiber footprint. In our base fiber footprint, penetration increased 50 basis points sequentially to 42.4%. And our base fiber footprint serves as a target for where we expect to drive penetration in our expansion fiber footprint and we expect to steadily grow penetration to at least 45% over time.
In our expansion fiber footprint, we are also making excellent progress. At the 12-month mark, our 2021 build cohort reached penetration of 18%, consistent with our target range of 15% to 20%. And at the 24-month mark, our 2020 build cohort reached penetration of 44%, significantly outperforming our target range of 25% to 30%. As larger builds are pulled into our 2020 cohort throughout the year, we continue to expect penetration of 25% to 30% at the 24-month mark.”
Indeed, Frontier’s operations and service levels have improved dramatically over the past two years. Our colleague Nick Del Deo at MoffettNathanson wrote in a research note to clients:
By some measures, Frontier is now operating at as high a level as key competitor Charter in the California market. And this is having an effect on its customer perceptions and market traction. Its American Consumer Satisfaction Index scores are slowly moving up, while its net promoter score has surged, especially where it has rolled out FTTH. Churn has fallen, as have customer care call volumes.
Frontier’s post-emergence management team has taken a data-driven approach to running the business and making key decisions. Put simply, the choice to refresh the company’s font and logo rather than totally rebrand is further evidence that changes to the business are working.”
To reiterate, 1Q-2022 fiber penetration rates rose to 42.45% in the company’s base fiber footprint. Frontier expects to reach penetration rates of at least 45% over time.
In the expansion areas, Frontier realized a penetration rate of 12% at the 12-month mark in its 2021 fiber build cohort – within its target range of 15%-20%. In the 2020 FTTP build cohort, Frontier is seeing a 44% penetration rate at the 24-month mark, outperforming its target range of 25%-30%.
Source: Frontier Communications Q1 2022 earnings presentation
CEO Jeffery said Frontier’s fiber-powered services are taking share from incumbent cable operators, but didn’t elaborate on how much damage Frontier is inflicting. He also acknowledged that fixed wireless access (FWA) could present an attractive option in rural areas where fiber isn’t present. Jeffery also believes fiber represents “a fundamentally different proposition” over FWA, given current data usage trends. In March, the average Frontier fiber subscriber consumed about 900 gigabytes of data, up 30% from pre-pandemic levels, with a portion consistently consuming more than 1 terabyte per month.
Significantly, Frontier gained new customers in areas where fiber is being built out. “This is critical because we know our future is fiber and fiber customers are the ones that will drive our growth in the years to come,” said Jeffery, a former Vodafone UK exec who took the helm of Frontier in March 2021.
For the full 2022 year, Frontier is targeting adjusted EBIDTA of $2 billion to $2.15 billion, and capital expenditures in the range of $2.4 billion to $2.5 billion, the same as guidance issued last quarter. This implies $2,003M for the remainder of the year at the midpoint. Management continues to target FTTH builds in 2022 of at least 1,000K vs. 638K built in 2021.
According to a new comprehensive, market research report from MoffettNathanson (written by our colleague Craig Moffett), Q4 2021 broadband growth, at +3.3%, “remains relatively robust,” and above pre-pandemic levels of about +2.8%.
Meanwhile, the U.S. fixed wireless access (FWA market) captured ~ 38% share of broadband industry net adds in the fourth quarter of 2021. Approximately half of Verizon’s FWA customers are coming from commercial accounts, T-Mobile has indicated that about half its FWA customers are coming from former cable Internet subscribers. FWA’s strong Q4 showing left cable’s flow share at just 66%, about the same as cable’s share of installed US broadband households. “In other words, Cable likely neither gained nor lost share during the quarter, and instead merely treaded water,” Moffett noted. FWA “has gone from low-level background noise to suddenly a major force, with Verizon and T-Mobile alone capturing more than 300K FWA subscribers in the fourth quarter,” Craig noted. However, he isn’t sure that wireless network operators will allocate enough total bandwidth capacity for FWA to fully scale.
In 2020, a year that witnessed a surge in broadband subs as millions worked and schooled from home, the growth rate spiked to 5%. Here’s a snapshot of the broadband subscriber metrics per sector for Q4 2021:
|Q4 2021 Gain/Loss
|Q4 2020 Gain/Loss
|Year-on-Year Growth %
|* Verizon and T-Mobile only
U.S. broadband ended 2021 with a penetration of 84% among all occupied households. According to US Census Bureau data, new household formation, a vital growth driver for broadband, added just 104,000 to the occupied housing stock in Q4 2021, versus +427,000 in the year-ago period. Moffett said the “inescapable conclusion” is that growth rates will continue to slow, and that over time virtually all growth will have to stem from new household formation.
Factoring in competition and other elements impacting the broadband market, MoffettNathanson also adjusted its subscriber forecasts for several cable operators and telcos out to 2026. Here’s how those adjustments, which do not include any potential incremental growth from participation in government subsidy programs, look like for 2022:
- Comcast: Adding 948,000 subs, versus prior forecast of +1.25 million
- Charter: Adding 958,000 subs, versus prior forecast of +1.22 million
- Cable One: Adding 39,000, versus prior forecast of +48,000
- Verizon: Adding 241,000, versus prior forecast of +302,000
- AT&T: Adding 136,000, versus prior forecast of +60,000
Are we witnessing a fiber bubble?
“The market’s embrace of long-dated fiber projects rests on four critical assumptions. First, that the cost-per-home to deploy fiber will remain low. Second, that fiber’s eventual penetration rates will be high. Third, that these penetration gains can be achieved even at relatively high ARPUs. And fourth, that the capital to fund these projects remains cheap and plentiful.
None of these assumptions are clear cut. For example, there is an obvious risk that all the jostling for fiber deployment labor and equipment will push labor and construction costs higher. More pointedly, we think there is a sorely underappreciated risk that the pool of attractive deployment geographies – sufficiently dense communities, preferably with aerial infrastructure – will be exhausted long before promised buildouts have been completed.
Revenue assumptions, too, demand scrutiny. Cable operators are increasingly relying on bundled discounts of broadband-plus-wireless to protect their market share. What if the strategy works, even a little bit? And curiously, the market’s infatuation with fiber overbuilds comes at a time when cable investors are growing increasingly cautious about the impact of fixed wireless. Won’t fixed wireless dent the prospects of new overbuilds just as much (or more) as those of the incumbents.”
Moffet estimates that about 30% of the U.S. population has been overbuilt by fiber over the past 20 years, and that the number is poised to rise as high as 60% over the next five years. But the big question is whether there’s enough labor and equipment to support this magnitude of expansion. “Our skepticism about the prospects for all of the fiber plans currently on the drawing board is not born of doubt that there is enough labor to build it all so much as it is that the cost of building will be driven higher by excess demand,” Moffett explained. “There are already widespread reports of labor shortages and attendant higher labor costs,” he added.
“The outlook for broadband growth for all the companies in our coverage, particularly the cable operators, is more uncertain than at any time in memory. IMarket share trends are also more uncertain that they have been in the past. Cable continues to take share from the telcos, but fixed wireless, as a new entrant, is now taking share from all players. Share shifts between the TelCos and cable operators are suppressed by low move rates, likely due in part to supply chain disruptions in the housing market. This is likely dampening cable growth rates. In at least some markets, returns will likely be well below the cost of capital,” Moffett forecasts.
U.S. Broadband: Are We Witnessing a Fiber Bubble? MoffetNathanson research note (clients and accredited journalists)
Frontier Communications says it’s on track with a plan to add 1 million fiber-to-the-premises (FTTP) locations in 2022. Under the plan, Frontier expects to expand its FTTP footprint to 10 million locations by 2025, up from about 4 million today. However, fiber-related revenue growth has yet to match up to recent fiber subscriber and NPS gains. Frontier reported Q4 2021 fiber revenues of $675 million, down from $684 million in the year-ago period.
“We’ve got good supply resilience. We’ve expanded the number of vendors in every category, and we’ve got good forward cost visibility as well,” Nick Jeffery, Frontier’s president and CEO, said Wednesday on the company’s 4th quarter 2021 earnings call.
But he acknowledged that Frontier, which has taken on a “fiber first” posture, was “lucky,” in that the company started to accelerate its fiber build ahead of many other telcos and cable operators.
“We’re in relatively good and insulated position because, frankly, we got there first and we signed up the terms before anyone else had a chance to do so,” Jeffery said.
Supply chain constraints didn’t slow Frontier’s fiber build in Q4 2021, as the company added a record 192,000 FTTP passings in the quarter, improving on the 185,000 new fiber passings built in Q3 2021. Last month Frontier announced that it added a record 45,000 fiber broadband subscribers in the fourth quarter of 2021, beating its prior record in Q3 2021 by more than 50%. That was also enough to overtake subscriber losses from Frontier’s legacy copper broadband business, as the company posted a Q4 net gain of 14,000 consumer broadband subs. Frontier ended 2021 with 1.33 million fiber broadband customers, up 8% year-over-year. About half of Frontier’s consumer broadband sub base is now served by fiber.
Frontier, which launched a symmetrical 2-Gig fiber service on February 22nd, is seeing solid penetration in its existing “base” FTTP markets and positive signs in newer fiber buildout areas. Penetration in Frontier’s relatively mature base-fiber footprint rose to nearly 42%, and the company expects that to eventually increase to 45%.
In its FTTP expansion effort, Frontier is seeing penetrations of 22% at the 12-month mark, expecting that to rise to 25% to 30% at 24 months. In later years, the company expects the percentage to jump to a terminal penetration of 45%.
“We’re now, I believe, gaining market share in all of our fiber markets against every single one of our competitors,” Jeffery said. “That is not a moment in time or an aberration. That’s the result of strong operational execution across many different dimensions, and I think we’ll see that carry forward into the future.”
Frontier said its fiber-related net promoter score (NPS) went positive for the first time in November 2021, while fiber churn dropped to 1.32% in Q4 2021, improved from 1.56% in the year-ago quarter.
Scott Beasley, Frontier’s CFO, said Frontier expects fiber revenues to reach positive territory as 2022 progresses, driven by the growth of its consumer fiber segment and a stabilization of the company’s business and wholesale units.
MoffetNathanson analyst Nick Del Dio had this to say in a research note to clients:
“Large scale network upgrade projects take years to complete. Achieving targeted levels of penetration once the network in a given geography has been upgraded takes years, too. By our estimates, it will be about a decade before Frontier’s potential will be fully realized.”
“Frontier’s operating metrics continue to move in the right direction. Total consumer broadband net adds were positive for the first time in many, many years; copper losses were stable, while the company gained fiber subscribers in both new and existing markets. Fiber gross adds and churn both improved in Q2. Frontier’s fiber NPS scores have improved dramatically over the past year, going from -24 in January 2021 to +9 in December 2021, a 33 point swing, with NPS scores associated with new customers better than those associated with old customers. The company expects continued strength in fiber and better churn in copper in coming periods. Consumer fiber broadband ARPU declined about $1 sequentially, which management attributed to promoting autopay adoption and giving gift cards for new customers.”
Frontier’s plan to bring FTTP to 10 million locations by 2025 includes what the company calls Wave 1 and Wave 2 builds. Wave 3 includes another 5 million locations that might be built out using supplemental government funding and partnerships, or could be tied to potential divestments or system swaps. Frontier’s analysis of the Wave 3 section continues, and the company should have some specific guidance in the coming months, said John Stratton, Frontier’s executive chairman of the board.
Q4 2021 was the last quarter in which Frontier received subsidy revenues from the Connect America Fund (CAF) II program. Yet they hope President Biden’s infrastructure bill passes and directs revenues to telcos to help them build out their networks.
“It’s complicated,” Stratton said with respect to government stimulus funding, noting that Frontier expects to be an active participant in the new infrastructure bill. “The rules of engagement, both at the federal and state level, are still being worked… Our thought process is that this a 2023 and onward in terms of it becoming something that starts to scale.”
Lumen Technologies is one of a large and growing number of telecom companies counting on a broad expansion of its fiber network. The Fiber Broadband Association (FBA) recently reported that the fiber industry is entering its “largest investment cycle ever” thanks to the efforts of companies like AT&T, Verizon and Lumen.
Lumen hopes to build its fiber network to 12 million new locations over the coming years. But it won’t be easy, according to Lumen CEO Jeff Storey.
“Supply chains are stressed, and we continue working very closely with our diverse and valued suppliers to mitigate risk as we execute on our growth objectives,” Storey said this week during his company’s quarterly conference call, according to a Seeking Alpha transcript. Others have issued similar warnings.
“I don’t want to overstate the issue, but it’s something that we are really paying attention to and working with vendors. We are starting to see some companies hold off on taking new orders. And as we see that, then we are working to put in our mitigation plans to make sure it’s factored into our build plan. But it is an issue that I will highlight as a real one that we have to mitigate.”
Lumen Technologies reported fourth-quarter results and 2022 expectations that generally fell below the forecasts of some financial analysts.
“Lumen’s 2022 guidance will fuel concerns that the company will have no choice but to eventually let leverage rise to inappropriate levels, dial back on investment, cut the dividend, or choose some combination thereof,” wrote the financial analysts at MoffettNathanson. “In particular, 2022 EBITDA [earnings before interest, taxes, depreciation, and amortization] guidance was noticeably below expectations at a time when capex will be elevated.”
“Results at this stage don’t give investors confidence in the company’s ability to earn an adequate return,” wrote the financial analysts at New Street Research.
Lumen and other fiber providers like Frontier Communications and AT&T are moving forward with their fiber buildout plans. Some, like AT&T and Frontier, are reporting big gains in the number of their new fiber customers. But others, like Lumen, are not.
“The past few quarters have been relatively weak for broadband net additions for Lumen, even for its higher-speed fiber offering,” MoffettNathanson said of Lumen’s consumer broadband business. “This quarter’s broadband net adds were at the low end of what the company has reported over the past few years and were shy of consensus estimates.”
The financial analysts at Evercore wrote that Lumen’s business segment drives three-quarters of the company’s revenue, and that too remains stressed. “The jury remains very much out on the company’s prospects in this sector,” they wrote, noting that sales in the company’s business segment declined slightly in the fourth quarter when compared with the third quarter of last year.
New Street analysts say a key metric for Lumen will be the percentage of customers in a given area who opt to purchase its new fiber optic access. If Lumen gets 40% of potential customers to sign up, the company likely will generate profits. “At 30%, the company would likely destroy value,” they warned.
Lumen CEO Storey stated that the company has already managed to get an average of around 29% of customers in its new fiber markets to sign up for its service. And that, he said, is with relatively little marketing.
He expects that number to be above 40% in the months and years to come. “If you look at the quality of the product that we have, we have a very effective competitive product and even with the limited marketing, we are doubling our penetration rates in our traditional copper areas,” Storey said.
New findings from the financial analysts at Cowen are supportive of Lumen’s fiber optic build out plans. The Cowen analysts recently conducted a nationwide survey of more than 1,000 respondents and found that fiber-to-the-home (FTTH) “take rates” reached 56% among those surveyed.
“Take rate, or more specifically, market penetration, is a key driver of the FTTH business case,” they wrote. “We have previously noted that a penetration rate of 30-35% is the typical minimum break-even threshold when underwriting FTTH projects. When there is one broadband competitor, fiber penetration can approach high-50s and even 60% penetration levels in mature markets.”
Lumen CMO Shaun Andrews said: “One of the things that really differentiates us right now is our focus on fiber as part of the core infrastructure to an edge experience versus a distraction with 5G or content. And being able to look an enterprise in the eye and say ‘Not only do we have these capabilities, but we will build the fiber to you where you are.’ That resonates with customers, and I think that’s a differentiator.”
Last month, Lumen reported that they secured a massive $1.2 billion contract with the U.S. Department of Agriculture (USDA), setting it up to give one of the biggest government agency networks a major makeover.
Under the contract, Lumen will “completely transform” the USDA’s network covering 9,500 locations across the country. It will provide a range of services, including SD-WAN, managed trusted internet protocol, zero-trust networking, edge computing, remote access, virtual private networking, cloud connectivity, unified communications and collaboration, contact center, voice-over-internet protocol, ethernet transport, optical wavelength, and equipment and engineering.
Deutsche Telekom said it has expanded its fiber optic network for almost 7,000 companies in 78 cities and communities. Telekom is providing the companies with up to 1 Gbps speeds. The German based telco has connected industrial parks in the municipalities of Ahrensburg, Deggendorf, Lastrup, Lauf, Mainz and Mannheim among others.
Telekom is laying 560 km of fiber-optic networks to carry out the project and to connect the companies. It is using a trenching process to expand its fiber network.
“Telekom is Germany’s digital engine. That is why we are building our network seven days a week, 24 hours a day. In the city as well as in the countryside. We are massively accelerating our roll-out. In the coming year, we will go one better and invest around six billion euros in Germany. By 2030, every household and every company in Germany should have a fiber-optic connection. We will build a large part of this. But our competitors are also in demand,” said Srini Gopalan, Member of the Board of Management of Telekom Deutschland.
He also commented on the new German government’s plans in terms of digitization: “The new coalition is focusing on FTTH as THE technology of digitization. We explicitly welcome this. Faster processes – including for applications and approvals – will also help us to speed up fiber roll-out. We support the digital set off in our country. Digital networks should bring people together. Their roll-out should no longer be stuck in paper files.”