Frontier Communications Parent, Inc.

Hello everyone and welcome to the Frontier Communications Q4 2021 earnings conference call. My name is Bethany and I'll be your operator for today's call. If you would like to register to ask a question during the Q&A session at the end of the presentation, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, you can press star two. I will now hand the call over to Spencer Cairn, Head of Investor Relations. Spencer, over to you.

Good morning, and welcome to Frontier Communications' fourth quarter 2021 earnings call. This is Spencer Kern, Frontier's Head of Investor Relations, and joining me on the call today is John Stratton, Executive Chairman of the Board, Nick Jeffery, President and Chief Executive Officer, and Scott Beasley, Chief Financial Officer. Today's presentation can be followed within the webcast and is available in the webcast and events section of our Investor Relations website. Let me now refer you to slide two, which contains our safe harbor disclaimer and reminds you that this conference call may include forward-looking statements that involve risks and insurgencies that may cause actual results to differ materially from those expressed today. In addition, during this call, we will refer to certain non-GAAP financial measures which are defined and reconciled in our earnings presentation, press release, and trending schedule. With that, I'll 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 we continue to execute on a unique opportunity to create significant shareholder value. We have a strong foundation of fiber assets and infrastructure, a significant customer base, and strong competitive positioning. In the last 12 months, we've generated $6.4 billion of revenue, and $2.5 billion of adjusted EBITDA, which represents a 39% adjusted EBITDA margin. And driving this performance are our 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 by 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 network 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 in-footprint opportunities. On to slide five, and looking back to review 2021, we made significant progress on our transformation of Frontier. It 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 telecom strategy. We emerged from bankruptcy at the end of April and listed on the NASDAQ exchange on May 4th. We refocused the company around a simple but powerful purpose, building Gigabit America, And at our investor day in August, we announced our accelerated build plan to reach 10 million locations with fiber by 2025. The third quarter was the first full quarter at Frontier for most of our executive team. And since that new team has been in place, we've consistently set new records on growing our fiber footprint and our broadband customer base. In addition, just yesterday, we launched two gigabit per second broadband speeds across our entire fiber network. And we believe it's a very compelling offer with a large suite of value-added services, which positions us extremely well to provide the absolute best broadband service to satisfy our customers' growing demand for faster data speeds. There are several inflection points that will be critical to our transformation, and we've discussed these as our key indicators of success throughout the process. The core driver of our business is broadband customer growth, which is ultimately what will drive revenue EBITDA and free cashflow growth. Rapidly expanding our fiber footprint is the first critical step in achieving broadband customer growth. We executed on accelerating the pace of our build in the second quarter of 2021, almost immediately after our new management team began to form. In the third quarter of 2021, We demonstrated that we could accelerate the pace of fiber broadband net ads, and we reached the point where our fiber broadband customers overtook our copper broadband customer base. And then in the fourth quarter of 2021, we grew our fiber broadband net ads in excess of our copper broadband losses, reaching the key inflection point in total broadband customer growth. We expect that these three critical inflection points will soon drive inflection points in our financial metrics. And while we still face headwinds from legacy products, we expect to drive sequential EBITDA growth for the total company in late 2022 and drive year-over-year revenue and EBITDA growth in 2023. We remain encouraged by the long-term secular tailwinds behind our fiber-centric strategy. Demand for high-speed broadband is increasing at an accelerating pace. Between 2020 and 2025, usage is expected to triple And fiber is clearly the best product to meet this rising demand. Fiber's performance is vastly superior to cable today with 34% faster download speeds, roughly 18 times faster upload speeds, and 42% lower latency level than cable. We're seeing the demand in real time across our network. In January of this year, our average fiber broadband customer consumed 828 gigabytes of data on our 500 megabit speed tier and 1.1 terabytes of data on our 1 gigabit speed tier, representing increases of more than 30% since pre-pandemic levels across both speed tiers. We're uniquely positioned to capitalize on these demand trends with a 20% cost advantage in building fiber. and a clear, low-cost path to extending our leadership in broadband to 10 gigabits service and beyond. And we're encouraged that the government is aligned with our purpose of building Gigabit America. 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 that government funding should be targeted at the locations that would be uneconomic to pass with private capital alone. We've been active in existing government programs within our footprint and will remain active as funds related to the Broadband Infrastructure Bill are released. And importantly, I'd like to reaffirm our commitment to ESG as we build the 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're 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 it 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 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 separate chairman and CEO roles. We have implemented comprehensive compliance and ethics programs, and we 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. How we engage with customers is also critical to our success. Our goal is to deliver an exceptional experience throughout all of our interactions with customers. And lastly, we continue to identify opportunities to simplify how we operate and focus our operations across all parts of the company. I'll now turn the call over to Nick to review how we performed against these initiatives in the third quarter. Nick? Thanks, John. Before I get started, I want to acknowledge that many analysts and investors have said the frontier is an execution story. So on this call, we're going to go deeper into the key actions that are competitive to our strong results. In Q4, our team executed extremely well against our strategic priorities. We built a record of 192,000 new fiber locations, reaching our target of 4 million total fiber locations at the end of 2021. We added a record 45,000 fiber broadband customer net additions, which is nearly a five-fold increase over the same period a year ago, and a 50% increase compared with our previous record from last quarter. Our fiber net ads this quarter were greater than our copper losses, resulting in positive total broadband net ads for the first time in more than five years. We earned record high net promoter scores and record low churn both across fiber and copper. And importantly, our fiber NPS turned positive for the first time ever this quarter. And just yesterday, we launched the first and only network-wide 2 gigabit per second symmetrical fiber service, which further extends our leadership in offering the best possible broadband products in our markets. Moving to our first strategic initiative, fibre deployment. On slide 12, our fibre deployment continues to increase, and we built fibre to a record 192,000 locations this quarter. To put the year into perspective, we passed six times the number of locations in 2021 that we passed in 2020. Our team has demonstrated our ability to accelerate our fiber build and to do so within our established cost targets, while also navigating global supply chain and COVID-related disruptions. We're excited to continue accelerating our build to reach 1 million plus locations in 2022. This will put us at 5 million fiber locations by the end of 2022, and on pace to reach our previously announced target of 10 billion fiber locations by the end of 2025. With all the disruption that I just mentioned, I'd like to reflect on the foundation that we've established throughout 2021, which gives us conviction in our ability to accelerate our fiber build and enhance network performance over the coming years. We expanded our pool of suppliers for both labor and materials, providing us with redundancy if any particular supplier is issued at a given point in time. We secured multi-year agreements with key partners to secure supply while meeting cost targets. And we've improved our permitting processes to reduce our time to market. And we continue to push the boundaries on fiber technology with our industry-leading trial of 25 gigabits per second broadband speed. With our fiber build humming, I'd like to touch on our second strategic initiative, fiber penetration. We've made incredible progress in consumer broadband this year, simply by focusing on getting the basics right. We've streamlined our offers to three cleanly defined price tiers designed to provide the fastest speed, best value, and best performance, all while eliminating organizational complexity and customer confusion. We enhanced our industry-leading broadband product with value-added services like Eero, YouTube TV, and Direct TV Streams to relieve critical pain points for our customers. We established digital customer acquisition capabilities through our partnership with Red Ventures. Not only do these capabilities open a previously untapped channel through which we can acquire customers, But also, our consumer e-card, A-powered A-B testing, and mixed optimization analytics enable more effective customer targeting, resulting in higher customer additions at a lower cost. And lastly, our brand was arguably tarnished before we began implementing our new strategies. And we've already seen a sharp increase in net promoter scores, with fiber NPS up 33 points since January of 2021 and turning positive for the first time ever this quarter. All of these improvements have driven a sharp increase in fiber broadband customer net activation. We added a record 44,000 consumer fibre broadband customers this quarter, driving an acceleration in our fibre broadband customer growth to nearly 8% year over year. To put this into perspective, we are the only fixed broadband provider in our footprint to have higher net ads this quarter than last quarter, which truly underscores our ability to gain market share as we continue to improve on all of the initiatives that I described on the prior slide. On slide 17, we looked more deeply into our fiber broadband customer base, and we showed that we didn't just gain customers from deploying fiber into low-penetrating markets, but we also gained customers in our mature fiber markets, or what we refer to as our base fiber footprint. In our base fiber footprint, penetration increased 40 basis points sequentially to nearly 42%. Again, this represents a sequential increase in net ads. whereas all of our competitors showed decline. Our base fibre footprint serves as a target for where we expect to drive penetration in our expansion fibre footprint, and we expect to steadily grow penetration to at least 45% over time. Our 2020 expansion cohort continues to outperform our expectations, with penetration of 22% at the 12-month mark, Last quarter, this metric was 30%, but we cautioned that it represented a small sample size of just 26,000 locations. Bringing in another 60,000 locations this quarter, which is more representative of a scaled build, penetration for our 2020 build cohort reached 22% at the 12-month mark, which outperformed our target penetration of 15% to 20%. We continue to expect penetration of 25% to 30% at the 24-month mark and to rise further from there towards our terminal penetration of 45%. Our existing 500 Mbps and 1 Gbps consumer offerings with symmetrical upload and download speed and lower latency were already superior to cable. And our recent launch of 2 gigabit per second speeds across our entire fiber network further extends our network advantage. With 2 gigabit per second services, we will enable next-generation experiences such as augmented and virtual reality, cloud-based gaming, and multiple 8K TV streams. And we're including a suite of value-added services to customers that opt into our 2 gig service, such as MyPremiumTech and multi-device security. Our 2 gigabits per second launch is a big step forward for Frontier, and we plan to continue rolling out faster speeds over time, and already in advanced planning to launch a 5 to 10 gigabit per second ultra-high speed offering. Our 10 gig speeds will revolutionize how broadband can be used, including advanced digital healthcare procedures such as tele-surgical operations, and supporting the widespread use of hologram-like 3D video conferencing. At the same time as we improve our consumer segments, we're also making significant progress in turning around our business and wholesale segments. In SMB, we took a complex offer with generic marketing campaigns and limited ways to engage with customers to a simple three-tier attractively priced offer with specific tailored marketing campaigns which expanded channels to reach more customers that are likely to engage with us. and a proactive strategy to migrate fiber-eligible copper customers to fiber. In enterprise, we took an undefined coverage model with outdated products and fragmented sales operations to a refined segmentation and coverage model to focus on the highest potential value customers, a simplified portfolio focused on strategic products, and a robust CRM platform to optimize sales operations and customer management. In wholesale, we took a declining business that lacked key relationships to a multi-year strategic agreement with AT&T to improve our wind share in enterprise and fiber for the power customers. Taken together, these actions are already showing early signs of improvement as we aim to take share of an estimated $8 billion market opportunity within our footprint. Now, we still have a long way to go to further differentiate our business with best-in-class products, value-added services, and industry-leading partnerships. So please stay tuned for more updates here, which we'll cover in future earnings calls. Now I'd like to move on to our next strategic initiative, the customer experience. I've often said that there's no single silver bullet to improve the customer experience. and that it requires hundreds and even thousands of small changes rooted in attention to detail and a determined execution across the business to quickly remove these pain points. We've made enormous progress on transforming the customer experience this year. We took inconsistent paper bills and have radically simplified them, making them paperless and introducing autopay, which significantly improves the customer lifetime value. We took our manual customer communications operations and streamlined our IVR, automated and simplified our SMS and email communications, and introduced a whole range of custom install across our footprint to reduce cancellations arising from long installation times. And we simplified the process for equipment return. Instead of requiring technicians to pick up or our customers to drop off equipment, we simplified and automated the return process with a mailing option and a simple QR code.

The improvements made in 2020... ...results, which I'll speak to in just a minute.