Frontier Communications Parent, Inc.

Hello everyone and welcome to the Frontier Communications Q3 2021 earnings conference call. My name is Charlie and I'll be coordinating the call today. You'll have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. And I have the pleasure of handing over to your host, Spencer Kern, Head of Investor Relations to begin. Spencer, please go ahead.

Good morning and welcome to Frontier Communications third quarter 2021 earnings call. This is Spencer Kern, Frontier's Head of Investor Relations. I would like to note that the presentation can be followed within the webcast and is available in the webcast and events section of our Investor Relations website. During this call, we will be making certain forward-looking statements. Forward-looking statements, by their nature, address matters that are uncertain and involve risks, which could cause actual results to be materially different from those expressed in such forward-looking statements. Please review the cautionary language regarding forward-looking statements found on page two of the presentation. On this call, we will discuss certain non-GAAP financial measures. Please refer to the presentation for how management defines these measures and certain shortcomings associated with these measures. Reconciliations of these non-GAAP measures to the closest GAAP measures can be found in the presentation. I'm joined on the call today by John Stratton, the Executive Chairman of the Board,

nick jeffrey president and chief executive officer and scott beasley chief financial officer i will now turn the call over to john good morning everyone and thank you for joining today's discussion our business continues to be well positioned to win in key markets and to execute on a unique opportunity to create significant shareholder value we have a solid foundation of fiber assets and infrastructure a significant customer base and strong competitive positioning. In the last 12 months, we've generated $6.6 billion of revenue and $2.6 billion of adjusted EBITDA, which represents a 39% adjusted EBITDA margin. Driving this performance are 2.8 million broadband customers across both consumer and commercial businesses. As we've said before, fiber is the future of Frontier. $1.1 billion of our EBITDA in the last 12 months has been generated from our fiber products and we're investing to grow our fiber EBITDA rapidly. We have approximately 400,000 businesses within 250 feet of our fiber and over 23,000 towers within one mile of our fiber. As we continue to build out our network, we expect to grow and convert these attractive and footprint opportunities. 2021 has been a pivotal year for Frontier. Our transformation began when Nick Jeffrey joined in March, and we recruited a talented new board of directors with high levels of subject matter expertise across key areas, including digital transformation, brand development, capital investment, operational efficiency, and of course, telecom strategy. We emerged from bankruptcy at the end of April and are listed on the NASDAQ exchange on May 4th. We refocused the company around a simple but powerful purpose, to build gigabit America. and announced our accelerated build plan to reach 10 million locations with Fiverr by 2025 at our investor day in August. Nick has spent a significant amount of time recruiting a world-class executive team, and the team has started to make an immediate impact on the business, even though the third quarter was the first full quarter at Frontier for most of our executive team. Transformations of this magnitude take time, but this team is executing with a sense of urgency that is a new discipline for Frontier. By almost every account, the team is executing extremely well, and Nick will talk in more detail about our key accomplishments for the quarter. We're also increasingly encouraged by the long-term secular tailwind behind our fiber-centric strategy. Demand for high-speed broadband is increasing at an accelerating pace. Between 2020 and 2025, uses is expected to triple, and fiber is the best product to meet this rising demand. First, fiber's performance is vastly superior to cable today, with 34% faster download speeds and roughly 18 times faster upload speeds and 42% lower latency levels than cable. Looking forward, fiber will continue to outpace alternatives, featuring symmetrical download and upload speeds and a clear, low-cost path to 10 gigabit service and beyond. And Frontier is uniquely positioned to capitalize on building fiber. Our incumbent position affords us a roughly 20% cost advantage versus a new entrant, and we are well positioned competitively. In nearly 90% of our footprint, we have one or fewer competitors, giving us a significant opportunity to build upon the strong foundation of our current network. Our company's purpose is to build Gigabit America, and we're encouraged that the government is aligned with this purpose. The digital divide in the United States is enormous, with just 30% of U.S. households passed with fiber versus over 90% at many other developed nations. The government has already passed legislation that will drive an estimated five to six times increase in broadband stimulus over the next few years. We believe government funding should be targeted at the locations that would be uneconomic to pass with private capital alone. We expect to be an active participant in these programs and believe we're strongly positioned to meet this need with the lowest cost. And importantly, I want to reaffirm our commitment to ESG as we build a future backbone of our nation's connectivity infrastructure. This commitment aligns well with growing pools of capital directed at ESG investments. We continue to invest in products that connect underserved communities and rural areas in our footprint, helping to bridge the digital divide. We are committed to creating a safe, healthy, and inclusive workplace in which our people can thrive. We're also committed to investing in the communities where our employees live and work. We recognize our responsibility as stewards of the environment and our opportunity to lead on sustainability in the industry. Fiber is a passive technology and uses less energy than competing technologies like cable. As we upgrade our copper network to fiber, we'll be on a path to reduce our greenhouse gas emissions and footprint significantly. And lastly, we're committed to modeling the highest standards of governance. We have a board with diverse backgrounds and relevant experiences and skills with a separate chairman and CEO role. We have implemented comprehensive compliance and ethics programs and have built a pay for performance compensation philosophy into our executive compensation programs. We look forward to providing more details on our ESG commitments as we continue to make progress on our ESG journey. We've built our strategy around four key levers of value creation. Expanding our fiber footprint is at the core of our strategy. We plan to accelerate our fiber deployment to be able to reach over 10 million homes by the end of 2025. Along with growing our footprint, we'll be launching new best in market products to meet customer demands and increase penetration in our fiber footprint. Of course, it's not all just about winning customers, but also how we engage with customers. Our goal is to deliver an exceptional experience throughout the customer journey. And lastly, we've looked across all parts of our company to identify opportunities to simplify how we operate and to focus our operations. And through this process, we've identified significant potential to reduce our operating expenses and simplify the business. I'll now turn the call over to Nick to review how we performed against these initiatives in the third quarter. Nick? Thanks, John. Frontier is in the early stages of its transformation. Most of the new executive committee has been here for just one full quarter, so I'm really pleased with the significant progress made in executing our strategic priorities in this very short period of time. During Q3, we built a record 185,000 new fiber locations, bringing our year-to-date new passings to nearly 450,000. We added a record 29,000 new fiber broadband customers, nearly a five-fold increase over the same period a year ago. We have signed multi-year agreements with key labor and materials partners to secure important parts of our supply chain. Although supply chain concerns persist across the economy, we feel as well positioned as possible given our risk mitigation actions. In October, we raised $1 billion of debt, which secures funding for our Wave 2 build through to the middle of 2023 at our already announced build rate. And we continue to round out our world-class executive team with two important new hires. Melissa Pint joined Frontier as our Chief Digital Information Officer. Melissa was most recently the Head of Technology at JCPenney, where she designed and implemented a digital strategy to accelerate the company's turnaround. And Charlon McIntosh joined Frontier as our chief customer operations officer. Charlon joins us from Humana, where she was head of customer experience and used digital technology to modernize their customer processes. Charlon also has deep experience in the communications industry with previous leadership roles at both Charter Communications and Time Warner Cable. Moving to the next slide, we take a closer look at our first strategic initiative. we have built fiber to a record 185,000 locations this quarter. Our network team continues to steadily ramp our build and our target of 4 million total fiber passings by the end of the year is well within reach. We're excited to continue to accelerate our build and execute on our plan to reach a total of 5 million fiber locations by the end of 2022 and 10 million locations by the end of 2025. Simply put, our network team has executed well this quarter, and our fiber build plan remains on pace and on budget. Turning to fiber broadband customers on the following slide, we added a record 29,000 consumer fiber broadband customers this quarter, driving an acceleration in our year-over-year fiber broadband customer growth to just over 5%. The overwhelming majority of our fiber broadband at this quarter were new to Frontier, demonstrating our ability to win new customers. And we grew customers while growing ARPU 10% year over year. Part of this growth has come from customers choosing faster speed tiers than they have historically, and we continue to see increasing demand for our 1 gigabit per second product. The changes to our pricing and marketing that we implemented in Q3 are clearly resonating with customers and the market. At the core of our offering, we have a superior product to our competitors at a competitive price with no activation or other hidden fees. And we put the customer experience at the center of everything we do. This strategy worked well in the third quarter and it continues to drive strong customer momentum into the fourth quarter. Our competitive advantage is clear today, and we're excited to launch our symmetric 2 gigabit per second offering early next year, which will extend our competitive advantage even further. Even since our August announcement that we'd be the first large fiber player to offer 2 gigabit per second services in the United States, several other fiber providers have followed with similar announcements about 2 gigabit per second services and I'm delighted that others are following our lead in building Gigabit America. We take this as early evidence of our desire to innovate and lead, and of the fundamental superiority of fiber over alternatives. Customers will continue to want the fastest service possible, and we will continue pushing the industries for these faster and better offers. On the next slide, we look more deeply into our fiber broadband customer base, We're committed to providing transparency on our penetration in both our base fiber footprint and penetration of each fiber expansion cohort as it reaches its 12-month anniversary. In our base fiber network, penetration increased 30 basis points since last quarter, and the progress made this quarter by our new team demonstrates the impact of a more rational offering, an agile marketing strategy, and an improved customer experience. Our base fiber footprint serves as a template for where we expect to drive penetration in our expansion footprint. And we expect to steadily grow penetration to at least 45% over time. Our 2020 expansion cohort continues to show strong penetration of 30% at the 12-month mark. And as we said last quarter, while this 12-month penetration is encouraging, it represents a relatively small sample of just 26,000 locations. For the overall bill plan, we continue to expect a 15 to 20% penetration rate at the 12-month mark, and with penetration continuing to rise in subsequent years towards a terminal penetration of 45%. Whilst our initial focus today has been on the consumer segment, we also have significant opportunities to grow our commercial business. Our addressable commercial market is over $8 billion, with more than $5 billion coming from small and medium or SMB-sized businesses. The first step in addressing this really is to get the basics right with a compelling business-to-business offering. In a short space of time, we've taken three major actions to reset our strategy in the SMB segment. Firstly, we simplified our SMB offer into three speed tiers and introduced a more rational market-based pricing structure. Next, we renewed our channel strategy and introduced an improved set of channel partners with much stronger digital capabilities. And lastly, we have done a full set of our lead generation activities to improve the quality of our marketing. And taken together, these actions are already showing early signs of improvement. But we really have a long way still to go to further differentiate our business with best in class products, value added services, and industry-leading partnerships to provide services such as business identity theft protection, office productivity tools, managed Wi-Fi, and gateway services. So please stay tuned for more updates here, which we'll cover in future earnings calls. Turning to our wholesale business on slide 14, we reached an important milestone by signing a multi-year strategic partnership with AT&T. AT&T is our largest wholesale customer, And we've previously talked about our strategic decision to reset pricing for our wholesale customers in return for future volume growth. This agreement positions us as a strategic partner for AT&T as they build their 5G mobile network, boosting connectivity between cell towers and their core network using our fiber infrastructure. As John mentioned, there are 23,000 cell towers within one mile of our fiber footprint, but we only penetrate a low percentage of these. There's an opportunity to grow our fiber to the tower business, and our new network agreement with AT&T is an important catalyst for this growth. Additionally, AT&T will use Frontier's fiber network to connect its large enterprise customers where they have locations on our footprint. And despite its short-term pricing headwinds, this agreement vastly improves the stability of our wholesale segment and positioned it for a return to growth in late 2022 and beyond. Stepping forward the slide, our customer engagement starts with providing market-leading products and really the best sales experience. We are also committed to providing great service throughout the customer journey to create much deeper relationships and earn our customers' loyalty. In July, we assembled an agile team dedicated to improving the customer journey and we've already completed many actions and identified areas for further improvement. And as we've often said, there really is no single silver bullet to improve the customer experience, but that it requires hundreds and even thousands of small changes rooted in the attention to detail and a determination across the business to quickly improve and remove these pain points. This team is systematically working through these improvements, and we list just a small sample of them here. We've made simple yet powerful changes to our app, for example, items like Remember Me for card payments and Remember Me for viewing their balance queue. We've launched updated billing and payment flows to simplify our billing and payment experience and make it much simpler for our customers. And we've improved and refined our interactive voice response system with artificial intelligence-powered call routing optimizations. And we've eliminated customer pain points with items like removing transfer fees and the process for returning equipment. Every single week, the executive team meets for two hours to review all aspects of the customer journey and build a clear plan with strong actions to improve this experience. Turning to slide 16, we're also focused on partnering with great companies to improve our customer experience. We've announced several important partnerships over the last few months, and I'm really excited about the improvements and innovations these bring. We've partnered with Red Ventures and expanded our digital channels to provide customers with more options on how they want to engage with us, including more self-serve capabilities and chat functionality within our website and app. We've partnered with Eero, an Amazon company, to provide customers with the best in-home Wi-Fi experience. Advanced Wi-Fi analytics from Eero enables customer reps to provide faster, better care, or in many cases, the ability for customers to diagnose any issues and eliminate these without the need to call service at all. And lastly, we have a partnership with Nokia to connect homes to XGS PON technology, which boosts network capability to give customers the best experience for high bandwidth applications like video conferencing, gaming, and virtual reality. And as I said at the beginning, our new executive committee has only been in place for a few months and has just begun to implement all of these improvements. So I'm really encouraged to see a number of early indications that our actions are starting to bear fruit. First and foremost, broadband churn across both fiber and copper customers continues to fall, each down 20 to 25 basis points versus the third quarter last year. Churn tends to be higher in the first 90 days of a customer's lifecycle than it is across the total base of customers. So early churn is an important metric that we track internally to measure customer satisfaction, particularly as we implement all of the improvements we've just discussed. 90-day churn is down 30% since the same period last year and down 22% since March of this year. which indicates the changes we're making to the customer experience are driving real results. Touchpoint NPS, which measures the work of our customer care team, improved 13 points since March of this year and is now at an all-time high for the company. And we've delivered improved customer care whilst simultaneously rationalizing two call centers during the quarter. And since we launched next day install, that has resulted in a 15% reduction in cancellations between order and installation. So I'll now turn the call over to Scott to run through our third quarter financial performance and our performance against our fourth strategic pillar of operational efficiency. Scott, over to you. Thank you, Nick, and good morning, everyone. Before discussing our results, Let me point out that in order to more clearly describe the performance of our business versus previous time periods, I will reference pro forma numbers in 2020 as if the fresh start accounting changes that we enacted when emerging from bankruptcy in 2021 had been implemented in January of 2020. I also encourage listeners to review our new supplemental package that is posted to the quarterly results page on our investor relations website, part of our effort at improved transparency for our stakeholders. Turning to results on slide 19, revenue was $1.58 billion in the quarter, driven by roughly flat sequential data revenue, but lower voice revenue. We earned $126 million of net income and $587 million of adjusted EBITDA. $278 million of our adjusted EBITDA came from fiber products, which grew nearly 7% year-over-year, driven by strong consumer fiber broadband performance. We generated $603 million of cash from operations in the quarter, helping to add to our strong liquidity. Moving to slide 20, our broadband customer performance was strong this quarter. Consumer fiber customers grew roughly 5% year over year, with a sharp acceleration during Q3. Business customer growth was flat year over year. SMB emerged as a key growth opportunity during our strategic review this summer, and early signs from the new initiatives that Nick described point to improved customer performance in the fourth quarter. Turning to slide 21, our total revenue declined 6% this quarter, a modest improvement in trend from the first two quarters of the year. Fiber revenue growth was flat year over year, an improvement versus last quarter's 3% decline. Consumer fiber revenue growth was roughly 1% year-to-year, an improvement of 50 basis points versus last quarter, as broadband revenue growth of 15% was roughly offset by declines in video and voice. Business fiber revenue growth was flat year-to-year, also an improvement versus last quarter, as our wholesale business gained stability as a result of the strategic partnerships that we have developed. It is important to note that while video generates significant revenue, it generates only minimal profit due to high content costs. We made the decision to stop marketing video to new customers earlier this year. While video declines will continue to be a headwind to revenue, we expect minimal impact on EBITDA. Copper revenue declined 100 basis points sequentially to negative 9% as both consumer and business face continuing but expected pressures. Turning to slide 22, total EBITDA declined 12% this quarter, again as fiber growth was offset by declines in copper, subsidies, and other. Fiber EBITDA accelerated 800 basis points sequentially to 6.9% this quarter, driven by strong consumer fiber broadband growth and margin improvements that offset video, voice, and business declines. Frontier is a fiber-first company. Fiber now represents 55% of our adjusted EBITDA, excluding subsidies and other, but will increasingly drive the growth trajectory of the overall company. Copper EBITDA declined consistent with our expectations, and we expect sequential declines to moderate over the next several quarters as our customer experience initiatives pay off. Our EBITDA has been pressured this year due to copper declines and our wholesale repricing actions. Next year, our subsidy revenue will fall roughly $300 million as the CAF II subsidies are retired. Even with this headwind next year, we expect growth in consumer fiber EBITDA and stability across our other businesses to drive a sequential acceleration in EBITDA by late 2022. We'll move to capital allocation on slide 23. The underlying cash flow generation of the business remains strong. Excluding the capex associated with building fiber and reorganization and restructuring items, we generated approximately $400 million in free cash flow this quarter and $1.1 billion in free cash flow over the trailing 12 months. Our Fit for the Future program remains on track to deliver $250 million in gross annual cost savings by 2023. We've already implemented several initiatives, such as closing two call centers while improving call center productivity, prioritizing and rationalizing IT spend, and optimizing our trouble ticket routing and field operations. Last quarter, we announced that we were targeting $25 million of realized cost savings just this year, 2021, and I'm pleased to announce that we've already surpassed that number and are on track to capture more than $30 million of cost savings this year. We're committed to managing our balance sheet in a disciplined manner, and we plan to maintain a net debt-to-EBITDA ratio in the mid-threes, in line with our peers. Finally, we are committed to rigorous capital allocation decision making. Our fiber bills will be the primary focus of capital allocation over the next several years. And the bill costs that we communicated to you last quarter of roughly $900 to $1,000 per location for 2022 to 2025 remain unchanged. Including the roughly $1 billion of debt that we raised in October, we ended Q3 with $2.2 billion in cash and $535 million of available capacity on our revolver, representing roughly $2.7 billion of liquidity to fund our build plan as well as normal operations. In addition to this strong liquidity, we also have ample balance sheet flexibility. Our net leverage remained low at 2.2 times at the end of the quarter, giving us ample headroom under our mid-threes net leverage targets. We do not have any significant maturities earlier than 2027. This maturity timeline provides us a clear runway during our Wave 2 Fiber bill. Additionally, as a result of the CapEx in our bill plan, we do not expect to be a significant federal cash taxpayer throughout Wave 2. As I stated before, we will pursue a disciplined financial policy that will enable us to manage the range of economic scenarios. We are also reiterating our 2021 guidance today. We continue to expect capital expenditures of roughly $1.8 billion, although we may come in slightly below that level due to build costs at the low end of our Wave 2 range. We are also maintaining our full-year EBITDA guidance of $2.4 to $2.5 billion. We expect results to fall within the upper half of the range due to stronger than expected broadband performance and cost savings generated in the third quarter. I'll close by bringing the frontier investment thesis all together. First, there is strong and growing demand for fiber, driven by expanding household data consumption. As new use cases emerge, these trends will only accelerate. Fiber is the superior product for a number of reasons, including symmetrical upload and download speeds that far exceed cable's capability, lower cost of ownership driven by fiber's passive technologies, and lower latency levels that enable important uses like video conferencing and gaming. We operate within a favorable market structure. As you recall, we only have one or no competitor in 86% of our markets. As you think about fair share penetration, we believe that 45% to 50% with a superior product is well within reach. We have a clear strategy and purpose. We are building Gigabit America to connect Americans to the digital economy. We have ample liquidity and a strong balance sheet, providing us with access to capital to fund our strategy. Lastly, we've attracted a strong and experienced leadership team who are singularly focused on executing our four-part strategic plan. Spencer, please open up the line for questions. Thanks, Scott. Operator, we're now ready for Q&A. Ladies and gentlemen, if you wish to submit a question, please press star followed by one on your telephone keypad. If you join us online, please hit the request to speak flag icon. Our first question comes from Britt Feldman of Goldman Sachs. Britt, your line is now open.