Frontier Communications Parent, Inc.

Welcome to today's Frontier Communications Q2 2022 earnings call. My name is Jordan and I'll be coordinating your call today. If you'd like to register a question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Spencer Kern, Senior Vice President of Investor Relations to begin. Spencer, please go ahead.

Good morning and welcome to Frontier Communications second quarter 2022 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 Jeffrey, 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 events and presentation section of our Investor Relations website. Let me now refer you to slide two, which contains our safe harbor disclaimer and remind you that this conference call may include forward-looking statements that involve risks and uncertainties 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. Let me start with an updated snapshot of where our company is today on slide four. Frontier is well positioned to win in key markets, and we continue to realize our unique opportunity to create significant shareholder value. Our footprint passes a total of 15 million locations across 25 states. 4.4 million of these locations are passed by our superior fiber optic network, and we plan to expand our fiber footprint to at least 10 million locations by 2025. Our reach continues to expand, and we now serve 2.8 million broadband customers across both consumer and commercial businesses. In the last 12 months, we've generated $6 billion of revenue and $2.2 billion of adjusted EBITDA, which represents a 37% adjusted EBITDA margin. As we've said before, fiber is the future of Frontier, This is becoming our reality as fiber products alone generated $2.7 billion of our revenue and $1.1 billion of our EBITDA in the last 12 months. Fiber now represents the majority of customers and EBITDA, and we are relentlessly focused on investing to grow our fiber EBITDA rapidly. Slide five outlines our fundamental industry thesis. that the significant growth in data consumption we've seen over the last two decades will only continue to ramp up, tripling over the next four years alone. We believe fiber is best positioned to meet this long-term demand for data consumption for several reasons. First, fiber is a vastly superior product to cable and wireless alternatives today. It provides faster download speeds, faster upload speeds, and significantly lower latency. Second, the superior nature of fiber is magnified by the usage trends we see in real time. Our average fiber broadband customer consumes nearly one terabyte of data per month, multiples of what cable and wireless customers consume. In an industry where data consumption is expected to triple over the next four years, we believe the market will naturally move towards fiber. Third, Fiber networks have a clear, low-cost path to delivering broadband speeds of up to 10 gigabits per second and beyond, while requiring minimal additional capital investment. Fiber has the best economies of scale of any technology, as data throughput and consumption continue to increase across networks. And lastly, fiber is America's future-proof infrastructure and the ideal recipient of government broadband stimulus. We appreciate the NTIA's recent guidance on the deployment of federal infrastructure funds, which shifts the emphasis from instantly obsolete download and upload speed standards to a more technology-based approach with fiber-preferred network construction. We look forward to actively participating in federal and state subsidy programs to bring fiber to more Americans. And turning to slide six for an update on wave three, As I mentioned at our investor day one year ago, we announced plans to rapidly build fiber to 10 million homes in our footprint, what we have designated as waves one and two. And we said we would assess the value of maximizing our remaining 5 million homes in our footprint, what we refer to as wave three. Over the past year, we've worked hard to execute and scale up our fiber build engine. We've also increased our level of understanding and command of the fundamental levers of the business to a very detailed level. And this has led us to the conclusion that the return profile of Wave 3 is significantly higher than what we had initially modeled one year ago. More specifically, we've identified an additional 1 to 2 million plus locations that are attractive build candidates today without requiring broadband subsidies. This leaves 3 to 4 million remaining locations, which could also meet our return thresholds, dependent upon the distribution of 42 billion in federal infrastructure funding over the next several years. Importantly, our recent capital raise affords us more time to curate our Wave 3 assets. We see an attractive runway for maintaining ownership of these locations and upgrading them to fiber, although we remain open to other strategic options. It is a more attractive footprint and will remain laser-focused on maximizing its value. Turning to slide seven, ESG has always been a critical component of our mission to build Gigabit America, and publishing our inaugural report in June was an important step to share some of the initiatives that go hand-in-hand with our fiber-first transformation. On the environment, We recognize both our opportunity and responsibility to lead out sustainability in the industry and serve as stewards of the environment. Fiber uses less energy than competing technologies like cable. So as we upgrade our copper network to fiber, we're simultaneously on a path to significantly reducing our greenhouse gas footprint. We've also launched frontier green initiatives to decrease energy consumption and reduce waste. including the order of our first ever electric vehicles. On social, valuing diversity, equity, and inclusion is core to our business. This includes our commitment to creating a safe, healthy, and inclusive workplace in which our people can thrive, as well as investing in the communities where our employees live and work. On governance, we are committed to the highest standards. We lead with integrity through diverse board and executive team representation and have direct board oversight of our ESG initiatives. We've also implemented comprehensive compliance and ethics programs and built a pay for performance compensation philosophy into our executive compensation programs. I encourage you to read our report for more detail on how we're applying our ESG initiatives to align our business and practices with our values. We look forward to updating you on our progress. And now on slide eight, Our opportunity demands a relentless focus on our four levers of value creation, fiber deployment, fiber penetration, customer experience, and operational efficiency. Nick and his team have been unwavering in their pursuit of these critical priorities, and we're pleased with the strong momentum we've been able to build in the business. I'll now turn the call over to Nick to review how we've performed in the second quarter.

Nick. Thanks, John. Our team executed extremely well against our strategic priorities in the second quarter. And here are just a few of the highlights. We built a record 281,000 new fiber connections and raised our 2022 build target to 1.1 to 1.2 million locations. That's up 10 to 20% from our original target of 1 million locations. Additionally, our fiber customer base continued to grow this quarter. We added 50,000 broadband customers in our consumer business and achieved another record quarter of customer additions in our SMB business. We're focused every day on improving our customer experience, and this quarter, our fiber NPS continues to increase. It remains up about 30 points year over year. Finally, we raised $1.2 billion of debt to fund our accelerated fiber build through mid-2024. As you saw in our press release this morning, we're starting to see the success of our operational initiatives translate into financial growth. We achieved sequential EBITDA growth ahead of schedule this quarter and raised the midpoint of our 2022 EBITDA guidance. Scott will cover this in more detail later in the call. As we expected, our fiber-first strategy is transforming our company, and we've reached critical milestones on our path to returning Frontier to profitable growth. Let's review our progress. First, we began by scaling our fiber build in the second quarter of 2021, and we've consistently hit records in building fiber every quarter since. Then we scaled our sales organization. And in the third quarter of 2021, our team drove an inflection in fiber broadband net ads. And at that point, fiber EBITDA surpassed copper EBITDA. Our acceleration of fiber net ads continued in the fourth quarter of last year, when for the first time in more than five years, fiber ads were greater than our copper declines. This resulted in total broadband customer growth. This quarter, the operational milestones we achieved and investments we've made began to translate into our financial results, delivering healthy sequential EBITDA growth. And to put this into perspective, Frontier has not produced sequential EBITDA growth of this magnitude since 2015. This progress gives me greater confidence in achieving our most critical milestone, sustaining year-over-year revenue and EBITDA growth in 2023. Now let's dive deeper into our strategic initiatives, beginning with fiber deployment. As I noted earlier, we've had another record quarter, passing 281,000 new locations with fiber. I'm pleased with our team's strong execution in the face of a challenging supply chain and macroeconomic environment. It's complicated work, and our strong performance this quarter enabled us to build faster than we originally planned. It also gave us the confidence to raise our 2022 fiber bill target by 10 to 20%. On slide 13, I want to highlight the foundational steps that Veronica Bloodworth, our chief network officer, and her team have taken over the past year to give us this confidence. Firstly, we diversified the fiber build into six additional states and plan to be building in at least 12 states by the end of the year. This geographic diversity expands our opportunity to build fiber and provides redundancy for maintaining our build pace. Secondly, we're continually diversifying our supply chain with additional contracts for labor and equipment. And thirdly, we're realizing cost efficiencies with route optimization, improved cluster density, and new construction techniques. This allows us to manage through inflation and labor challenges in order to meet our build and cost per passing targets. Finally, we've significantly improved our permitting process over the past year, which has helped accelerate our build. Our second strategic initiative is fiber penetration, where our strong momentum continued in the second quarter. As I mentioned earlier, we added 50,000 consumer fiber broadband customers, driving a 14% increase in our customer base to the same period last year. Although net ads declined modestly from 52,000 in the first quarter this year, it's important to recognize that our base fiber footprint fluctuates due to seasonal movement in Florida. We expect this seasonality to be a tailwind for the second half of the year. Slide 15 takes a closer look at our fiber penetration in our base and expansion fiber markets. Our base fiber footprint is made up of 3.2 million homes that have had fiber for several years and are in mature market. Penetration in this footprint increased 20 basis points sequentially to 42.6%, even with the seasonal headwinds in Florida. These results demonstrate that we're on the right path towards achieving our long-term target of 45% penetration. And in our expansion footprint, our 2021 cohort reached 17% penetration at the 12-month mark. That's right in the middle of our 15% to 20% range that we previously set out. We expect the 2021 cohort penetration to rise in the second half of this year as the effects of our Q2 2021 initiatives start to show up in our results. Lastly, our 2020 build cohort continues to exceed our expectations, reaching penetration of 44% at the 24-month mark, well above our target range of 25% to 30%. Moving forward a slide, you can see we grew broadband ARPU 2% sequentially from a combination of structural price increases and improved mix with an increasing adoption of gigabit per second speeds. Customer demand for 1 gig plus speeds has been rising each year. And in the second quarter, between 45% and 50% of our new fiber customers chose 1 gig speeds or higher. Our 1 gig mix of new activations is significantly higher than the one gig mix of our entire customer base. And since ARPU for customers on the one gig plan tends to be meaningfully higher than for sub one gig plans, we have the potential to grow ARPU as customers demand faster symmetrical speeds over time. Our third strategic initiative is improving the customer experience, which we measure through net promoter scores and churn, as you can see on slide 17. Our fiber NPS increased sequentially this quarter and remains up about 30 points year over year. Our brand NPS now ranks amongst the highest of all our major competitors. Broadband churn across both fiber and copper broadband customers also remains at the low end of historical ranges. This is primarily due to improving voluntary churn and in part due to lower move-related churns. Copper churn did rise slightly compared to the same period last year, largely because 2021's churn was artificially low due to COVID-related disconnect restrictions. We're putting the customer at the center of everything we do, and I'm encouraged to see these improvements showing up in our MPS and churn data. On slide 18, you'll see the results of the improvements we're systematically making every week to digitize and improve our customer experience. We've deployed a suite of digital self-service tools and are excited about the work we're doing to roll out new capabilities like self-installation, a new mobile app, and all focused on making it easier and faster for customers to work with us. We're also using AI to improve dispatch logic, call center efficiency, and have exciting plans to use telematics, natural language processing, and a mobile tech portal to better support our customer-facing teammates. Lastly, I want to highlight the good momentum we're building in SMB. Over the last few quarters, we've made a series of improvements that have revitalized this business. We're strengthening our product with a two gig offering and a new partnership with RingCentral. We've expanded our sales channel fourfold, adding a new CRM platform and established account management teams focused on cross and upselling opportunities. Together, these actions have resulted in another quarter of record net ads. We have a long runway with SMB, and I'm encouraged by our early process. Now, before I turn over to Scott to walk you through our financial performance, I did just want to say thank you to our team. Turnaround's a really hard work, and I'm so grateful to the whole Frontier team for all the progress we've made together in building Gigabit America. And with that, I'll now hand over to Scott. Scott, over to you.

Thank you, Nick, and good morning, everyone. As I've done on the last several calls, I will reference pro forma figures that have been adjusted for Fresh Start accounting changes in order to more clearly describe the performance of our business versus previous periods. Turning to results on slide 21, second quarter revenue was $1.46 billion and increased $12 million sequentially. We earned $101 million of net income and $535 million of adjusted EBITDA. $292 million of our adjusted EBITDA came from fiber products. This was up 6% year over year due to strong consumer fiber broadband growth and cost savings initiatives. Additionally, we generated $229 million of net cash from operations, bringing the first half total to $757 million. These healthy cash flow results demonstrate the underlying cash generation potential of our business, as well as our increased focus on liquidity and working capital management. The quarter's adjusted EBITDA was also helped by a one-time sales tax refund of $8 million. Moving to slide 22, our primary growth engine of consumer fiber broadband drove a sequential increase to consumer revenue in the quarter. Total revenue declined 9% versus last year's second quarter, primarily due to the expiration of CAF II subsidy revenue. Fiber revenue was up roughly 1 percent year-over-year and 2 percent sequentially, as consumer revenue growth more than offset declines in business and wholesale. A few key points on our fiber revenue growth. Excluding video, fiber revenue grew 4 percent year-over-year, representing an acceleration from 3 percent growth last quarter. Our consumer fiber broadband ARPU increased 2 percent sequentially, driven by underlying price increases and a higher one gig or above speed mix. Copper revenue declined 9% year over year, consistent with prior quarters, as both consumer and business faced expected headwinds. Turning to slide 23, fiber EBITDA grew 6% year over year, an acceleration from 2% growth last quarter, as strong consumer fiber broadband growth and margin improvements offset EBITDA headwinds from video products. It's clear that Frontier today is a fiber-first company. Fiber products represent 56 percent of our adjusted EBITDA and will increasingly drive the growth trajectory of the overall company. Slide 24 shows the $3.7 billion of liquidity to fund our fiber build. We ended the second quarter with roughly $3 billion of cash in short-term investments and $767 million of available revolver capacity. In addition to this strong liquidity, we also have ample balance sheet flexibility. Our net leverage remained low at 2.8 times at the end of the quarter, giving us healthy headroom under our net leverage target. Following our $1.2 billion debt raise in May, approximately 84% of our debt is now at fixed rates, and we do not have any significant maturities earlier than 2027. This capital structure and maturity timeline provide us a clear runway to continue accelerating our fiber build. Next, we'll move to capital allocation on slide 25. We made great strides on our business simplification initiatives this quarter. We continued to attack fit for the future cost savings. And through the end of Q2, we had realized roughly $200 million of gross annual cost savings. This puts us about one year ahead of schedule and on track to exceed our initial goal of $250 million by the end of 2023. Additionally, the underlying cash flow generation of our business remains strong. We generated $757 million of cash from operations in the first half of the year, which we invested in our high-return fiber build. Slide 27 describes our strong positioning in the current macroeconomic environment. The services we provide are critical to our customers. And we offer a wide range of products and services to meet specific needs, including the government's affordable connectivity program. The customer payment metrics that we track closely, like day sales outstanding and bad debt, continue to be healthy. Both measures improve versus the second quarter of 2021. While we see pockets of inflationary pressure in our fiber build, we are still confident in our $900 to $1,000 cost per location. We have multi-year agreements in place with key labor and material suppliers and are continually finding ways to become more efficient in our supply chain and construction techniques. Finally, as I noted before, our capital structure is well insulated from rising interest rates, with 84% of our debt at fixed rates and no significant maturities until 2027. Turning to slide 27, we are updating our guidance to reflect our improved position at the halfway point of the year. We now expect capital expenditures of $2.5 to $2.6 billion, reflecting our accelerated build of 1.1 to 1.2 million fiber locations. Finally, due to the acceleration of our consumer revenue growth and cost savings initiatives, we are raising the midpoint of EBITDA guidance and tightening our range. Our new range is $2.05 to $2.15 billion. We remain on track to deliver a sustainable EBITDA inflection by the end of the year and year-over-year revenue in EBITDA growth in 2023. I'll close today's remarks by reiterating Frontier's investment thesis. First, there is strong and growing demand for fiber, driven by expanding household data consumption. Second, fiber is a superior product for a number of reasons. including symmetrical upload and download speeds that far exceed cable's capability, a lower cost of ownership driven by fiber's passive technology, and lower latency levels that enable critical uses like video conferencing and telemedicine. Third, we have a clear strategy and purpose at Frontier. We are building Gigabit America to connect Americans to the digital economy. Fourth, we have ample liquidity and a strong balance sheet, providing us with access to capital to fund our strategy. And last, I'm proud to be part of a strong and experienced leadership team. We have executed well for four straight quarters and are excited to continue building on this operational and financial momentum. I'll now turn the call back over to Spencer to open up the line for questions.

Thanks, Scott. Operator, we're now ready for Q&A.

Thank you. As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. And please ensure you're unmuted when speaking. Our first question comes from Brett Feldman of Goldman Sachs. Brett, please go ahead.

Yeah, thanks for taking the question and great to see the EBITDA results. In the quarter, if we look at your updated EBITDA guidance, it implies at the midpoint that your EBITDA in the second half of the year would be reasonably comparable to what you did in the first half. So I was just hoping you could maybe walk us through some of the puts and takes, including maybe any seasonal factors that we should be taking into consideration. And then it sounds like you are increasingly constructive on the opportunity to develop some of the passings in your Wave 3 footprint. I think you identified one to two million during your preparedness. that you could do without subsidies. So I'm curious, is that now officially part of the business plan? Or would you still need to do some additional work to kind of pull that into way? And then just the last question here, if you can indulge me a little bit, you know, the cable companies have clearly been impacted by rising competition from you and from others. And I'm just curious, what level of competitive response you're starting to see, if any, from those operators? Thanks.

Yeah, sure, Brett. This is Scott. Let me take the first question, then pass to John for the second, then Nick for the third. So first question on kind of first half versus second half. Coming into the year, we knew that the most important financial milestone would be an EBITDA inflection by Q4, and we're still very confident in that. If we look at the first half, we outperformed our own expectations driven by a few factors. One, we had consumer outperformance. Two, the cost reduction program was ahead of plan. Three, we had the one-time sales tax benefit. And then four, we executed extremely well in Q2 and a really solid quarter of execution. So that first half outperformance led us to raise the midpoint of our guidance from 2.075 to 2.1 billion. And we're still confident in that sustained inflection for Q4. Q3 is the highest energy cost quarter of the year just due to seasonality trends. So that'll be a bit of a headwind. But we're highly confident that Q4 will be that sustained inflection point heading into year-over-year revenue and EBITDA growth in 2023. Yeah.

Hey, Brett. Good morning. It's John. I'll take the second question. We'll go around Robin here. I'll take the second question on wave three. Yeah. So we, as we declared, you know, sort of more specifically here, this extra million to 2 million households looks very solid. And so, you know, we've, We've gotten a bit sharper here in terms of our methods and process and efficiency with which we build. We have a pretty high level of clarity on how best to generate demand against the build and to ensure we're attaining proper returns. So as we look ahead, what we expect to see happen is this. First, the pace of our build is something that we are accelerating still. And so you saw us bring it up to 1.1, 1.2. You know, we've talked about a significant uplift from that next year in the in the drive to the 10 million by 2025. You may see some of those wave three properties filtering into a sooner period, but the overall pace of the bill will remain as we've described so far. So this one point six roughly for next year is where we'll sit and then we'll see if there's an opportunity to go further. The financing piece of this is something that we continue to work. And so as we think about this, there's a combination of opportunities. Because of the raise we did a few months ago, it allows us now to have pushed out the goalposts in terms of demand for capital. This actually is super important to Wave 3 because one of the things that we want to make sure we're doing really well is preparing the business and then moving and working with the regulators, federal, state, local, municipal officials to ensure our participation in the subsidy programs, this $42 billion in subsidy for building out broadband networks. is something that we're successfully engaging and so uh... but with this additional time here in the wave three will allow us a chance to even pull further into that total of five million households so you should expect a combination as we go out uh... you know if we do this organically be a combination of government subsidy uh... pulling cash from operations non-recurring and recurring cash savings and then lastly debt uh... if we chose to go there so Stay tuned. We have more work to do in terms of curating those assets. We'll be updating, you know, sort of as we go. Nick, do you want to take the piece on?

Thanks, John. Yeah, just to repeat the reaction that we're seeing or not from our cable competitors. And I think it's clear to see from recent results that, as we've always said, fiber is a superior product to cable. And whilst the cable and fiber market remains competitive, it's also worth reminding ourselves that in our specific footprint, we have 84% of that where we have one or fewer competitors today. That said, in this quarter, we gained share against every competitor in every geography we operate in. And that's the second quarter where external data suggests that that's true. I think if we sort of take a step back, it's very clear that customers do want fiber. It's a superior product. And we continue to make it better with better service, faster speeds. And of course, in its nature, it's symmetrical. And therefore, that offers a lot of benefit to customers, particularly in this continued era of home working. Now, when I think about the reaction that cable might have, Of course, Cable has a long history of pricing practices that customers really don't like, you know, promo prices that then get jacked up later on in the customer journey. And we won't do that, to be very clear. We will remain a rational pricing player and focus all our energies on providing the best value and the best product. And we see customers reacting to that, hence the results we have today. Now, of course, occasionally, we will use promotional pricing in targeted geographies because we need to remain relevant to our customers in all the markets in which we compete in, both geographically and demographically. But that is always going to be within the framework of rational pricing discipline and transparency and predictability for our customers. Thank you.

Our next question comes from Phil Cusick of JP Morgan. Phil, the line is yours.

I understand. I'm up. Thanks, guys. So a follow-up on Wave 3. Does it look like no longer any outside equity capital to come in on Wave 3? Sounds like you had looked at that in a bunch of different ways over the last year. Is that now dead? And then second of all, I understand the seasonal fiber headwinds from Florida completely, but the copper departures really accelerated this quarter. Were those from seasonal areas or is that more widespread? And could that be blamed on fixed wireless competition? We've seen copper acceleration departures at almost every company this quarter. Thanks very much.

Hey, Bill, this is Scott. Let me take the first one. I'll pass to Nick for the second one. So on wave three, the big point today is to show that, A, we think it is worth more than we thought it was at emergence, and then, B, give you guys a specific dimensionalization. We think there's one to two million incremental homes to pass there that are going to be positive to fiberize. In terms of funding, we have a range of options. John talked about it. We think the business will be able to take on additional leverage as we continue to transform it into a much more fiber-centric company We could pursue partnership or JV options. Government subsidies will likely be in the mix for a portion of that. So we have a solid range of options there that we'll work through. And importantly, the capital raise that we did buys us time there to continue transforming the business and figure out the best way to go build wave three.

Yeah, Phil, I'll pick up the...

I'm just going to say that on that, I didn't hear raising outside equity as one of the options. And I know that's one of the things that has been looked at in the past. It sounds like that's not going to happen.

Yeah, listen, I think we hold our powder dry on this. You know, Phil, as we said, we've kind of come through the period. What I can say declaratively is that, you know, when we first started looking at this last $5 million, it was kind of marginal income. across the whole expansive you'd see pockets where you'd say all right i could build this out and in this small pocket of that but it didn't scale and so the notion of kind of holding it aside as we announced wave two and very uh... affirmatively declared the first ten million total households uh... that made sense for us to work at a bit more now with what we've been able to build and and determined it is really clear that that million to two million homes you know must be built i mean it is very very clear and very compelling financially so you know our bias is to do that organically uh... if there was a really interesting a proposal for up to do with some level of outside equity might we consider a jv structure something that will look at it uh... but this is no longer kind of hanging back uh... we now are pretty encouraged that this is going to make a very nice economic sense great returns and then the means by which will be funded as scott described we have you know several different options and you know the time frames here as we talk about government subsidies it's quite a proper i mean they're like thousands uh... with an f at the end thousands of applications that need to be uh... pulled together across the very many jurisdictions the methodologies are different every state and there is a significant uh... flush of funding that will come through principally sort of uh... middle of second half of twenty twenty three in in a material way uh... that will be right sort of in the heart of these territories that were describing so uh... more work to do in terms of the specific how it gets done But I think the takeaway from this is one to two million, you know, sort of very reliably can, will, and should be built. And then the balance of that, the other three, will largely depend on sort of those external factors, principally subsidization. Yeah, Phil, Nick here.

I'll pick up the question on FWA and its impact on copper churn. Just on FWA, first of all, we've said on previous calls, of course, it's going to exist. we expect at some point it will begin to nibble at the edges of our copper bays, perhaps more in rural areas and so on. But also we have very serious questions about how far fixed wireless access can scale, whether it's actually for the fixed wireless operators an efficient use of capital and spectrum, and indeed over time as usage grows, whether those customers will remain profitable or not. And I think those are Less questions for us, more questions for the industry. And of course, fixed wireless access is a very fundamentally different proposition to our core fiber proposition. And so we don't see it really overlapping in that area. But if we take a step back and just dig a little deeper into copper churn, the year over year increase in churn we saw was mostly in fact driven by a 12 basis point increase in non-pay churn. And of course, this year, we've been able to disconnect non-paying or lower quality customers, whereas during COVID, we couldn't. Now, if you look at voluntary churn, it actually declined six basis points year over year, which is really an encouraging sign that many of the changes we're making every single week to improve our customer experience, customer communications, customer engagement, and so on, is leading to better retention. And so whilst we do, of course, see high levels of broadband net ads from the fixed wireless players, we're actually not seeing a significant impact in our copper base. Thanks, Gus.

Thanks, Phil. Operator, we'll take our next question, please.

Our next question comes from Greg Williams of Cohen. Greg, the line is yours.

Great, thanks. Another question on Wave 3 here, and that 1 to 2 million builds. John, you noted you might trickle them in over on top of the Wave 2 builds. But does it behoove you not to build as fast as possible on those 1 to 2 million homes? Because if they are attractive and you're seeing an influx of PE and infrastructure capital in the space, there could be some encroachment on private of the home in your areas. Maybe that's my second question, is are you seeing any encroachment as a third provider in your footprint. Thanks.

Yeah, great. Thank you. I think to your second question first, this is a really difficult time to be an overbuilder. I mean, if I think about lifelong ambitions, one of them would not be to be in that position. I think it's gotten really hard for those guys. The access to availability and cost of capital is really, really problematic, I think, for many of them. And I think we've seen that in terms of a lessening of of the president's you know it has not been uh... factor that we've seen in any meaningful way across our footprint candidly i'm a little surprised uh... that that's the case i'm left the price now because it's gotten harder but even before uh... the markets tighten up a bit uh... you know we were really seeing a significant the level of president we watch this pretty closely at terms of uh... permitting applications in the like so that still remains at a pretty low level regarding acceleration i should probably you know there's two sides to this one is what is financially viable where do we see great return opportunities and the other side of how fast can we build you know like what is the capacity of the organization to build and we are jamming on that side uh... veronica bloodworth and her team are cranking the bill significantly and when scott nick described a ten to twenty percent increase in our bill for this year and then carrying forward with another really significant increase in next year's bill you know are you know this is kind of hair on fire run as fast as you can get it done uh... kind of orientation that the build team brings to the game here so look we're gonna in every case look to accelerate the build where we can doing it well doing it you know with the right kind of approach in all jurisdictions but I would tell you that we have more work to do here to see how much further and faster we can go with regards to specifically that million or two million in wave three but you know we'll inform that as we go forward you'll hear us sort of adjusting our targets as we go to encompass more and more of that opportunity set. Got it. Thanks for the call.

Got it. Thanks for the call.

Okay. Thanks, Greg. Operator, we'll take our next question, please.

Our next question comes from Vikash Harlalkar of New Street Research. Vikash, please go ahead.

Hi. This is Vikash Harlalkar for Jonathan Chaplin. Thanks for taking the question. Two, if I could. First, you have more insight into returns that give you confidence in deploying 1 to 2 million homes within Wave 3. What does this mean for returns in Wave 2? Is the expected return still mid-teens or higher? And if it's higher, is it because expectations for penetration are up or cost to deploy are down or is it something else? And second, there are stories that Southern Link may sell to private equity at a value of close to $5,000 per line. If private equity players are willing to pay that for broadband infrastructure, would it make sense to consider a sale of some of your wave one assets? Thank you.

Yeah, sure. Thanks, Vikesh. This is Scott. Let me take both of those. On your first question on wave three modeling, I'd say that the detailed modeling we did on wave three fortifies our conviction around our mid to high teens IRR on wave two. It gives us increased confidence in our $900 to $1,000 cost per passing, increased confidence in our penetration and ARPU assumptions that we've met or exceeded in the past four quarters. So again, the first priority will be completing Wave 2, and our Wave 3 analysis gives us even more conviction around Wave 2. On your second question about different potential transactions in the market, I'd say in our investor day last year, we showed a view of valuation that fiber passing should be valued at between $3,000 and $4,000 per passing at least. And so if there are data points in the market that would suggest other assets out there worth $5,000 per passing, I think that only strengthens our conviction that $3,000 to $4,000 is reasonable, maybe even conservative, and then gives us increasing confidence to accelerate the build, convert copper to fiber as rapidly as we can.

Thank you. Thanks, Akash. Operator, we'll take our next question, please.

Our next question comes from Frank Lufan of Raymond James. Frank, please go ahead.

Great, thank you. Looking at the Resi subs, can you give us an idea of what percentage of those subscribers you're getting from some of your newer builds? versus the legacy California, Texas, Florida markets where you're winning back customers and cutting down churn? Thanks.

Yeah, sure. This is Scott Frank. If you note in the presentation, we show base fiber penetration and expansion fiber penetration, and we've really had great success in both. So base fiber penetration has crept up into the mid 42% and has been a nice tailwind for our overall customer growth. Expansion has become an even bigger part of that as we layer more builds into the expansion markets. And we've always kind of described base will be the baseline from which we grow. Then we'll layer on more and more expansion ads per quarter. And that's really what showed up in Q2, which is typically a seasonally slow quarter given our Florida footprint. And still we were able to manage very healthy growth.

All right, great. And I apologize if you mentioned this earlier, but did you take up any of your bad debt reserves? And can you compare where you're running bad debt today versus in 2019? Yeah.

You know, it's really a question around the financial health of the customer. And it's something we keep a close eye on, particularly in this challenging macroeconomic environment. And we have not seen an impact on payments. I said in the prepared remarks that our day sales outstanding and bad debt expense were actually better at the end of Q2 this year than they were at the end of Q2 last year. So part of that is due to operational improvements we've made. We've incentivized people to get on auto pay, which helps reduce bad debt expense and reduce day sales outstanding. And part of it is our customer base has remained healthy. All right, great. Thank you.

Thanks, Frank. Operator, we'll take our next question, please.

Our next question comes from Nick Del Dio of Moffitt Nathanson. Nick, please go ahead.

Hey, good morning. You know, first, just to expand on some of the preceding questions, you know, on the one to two million wave three homes you're going to say look appealing. How would you characterize the return profile in those locations? You know, are they comparable to wave two or are they a notch lower? And, you know, it might be hard to generalize, but are these typically locations that are, you know,

part of wave one wave two geographic clusters or are they new cities that you would be hitting on if you if you go down this route yeah nick thanks for the question um let me answer the second part first so the the one to two million are really a combination of two things one it's incremental locations in the states where we're already building rapidly california texas florida connecticut are examples where as we've refined our uh construction estimates and also our penetration estimates, now those become economic to build. And we're excited to do that because of all the advantages of adjacency with marketing and operations. The one to two million also includes some states where we don't have as much scale in our base, but we still have very attractive copper assets that can be converted to fiber because of the cost and the customer dynamics there. So it's a bit of both. In terms of the Overall return profile, it's lower than Wave 2 just by virtue of some of the higher cost per passing, but it's still attractive. So I'd call it mid-teens versus mid-to-high teens. But we'll continue to get better at construction. I think we'll get better at penetration, and we're excited to eventually reach those with fiber.

Okay. Okay. Understood. And then a question on copper ARPU. which jumped pretty noticeably versus Q1. I think it was up about $2.50 sequentially. To what degree is that a function of non-paying customers turning out versus a like-for-like increase? And then maybe more generally, just talk a bit about how you think about the tradeoff between pushing price on legacy broadband versus keeping price down a bit to try to hang on to subscribers for longer.

Yeah, Nick, this is Scott too. So most of the copper ARPU growth was driven by price increases. We have just normal price increases built into the relationship with customers. And so that was most of the ARPU growth. And a lot of that was passing on inflationary pressures as our input costs went up of fuel, electricity, and other things. And then your second question of what's the right trade-off between pricing. We, as Nick mentioned, most of the increase in churn in copper was driven by non-pay disconnects that weren't allowed last year. So we haven't seen price increases drive a big increase in churn because I think in general, customers understand that price input prices have gone up across the economy and the cost to serve them is higher.

Yeah, Scott, if I can just build on that and again, take a step back on pricing. We do fundamentally believe we have the winning product in the market here. We have a superior product. It's a better product than cable. And we believe that the price that that product should command over time should also be superior because we're not comparing apples with apples here. We're comparing a horse with a car. They're fundamentally different things that should command different prices in the market. Now, of course, we also recognize that in Frontier's case, we're rebuilding the company as it comes out of Chapter 11. We're improving our customer offer. We're making ourselves easier to deal with, building a stronger brand, and so on. And over time, those things should lead to a greater bifurcation of our price compared to kind of the legacy cable offers in the market. Okay.

Great. Thank you.

Thanks, Nick. Operator, we'll take our next question, please.

Our next question comes from Simon Flannery of Morgan Stanley. Simon, please go ahead.

Great. Thank you. Good morning. Staying on the ARPU topic, you had a nice fiber ARPU improvement. I think you've said in the past you expected the growth to accelerate in the second half as you lapped some of the promotions from last year. Could you just update us on what we should be expecting to see there? And have you changed your expectations on gig mix going forward? And then we've talked about SMB a little bit. We haven't really touched on enterprise. Any updates on what you're seeing there? Some of your peers talked about slower decision-making, any macro impacts on that side of your business. Thanks.

Sure. Simon, this is Scott. Let me take the first one, and I'll pass to Nick for the second one. ARPU, our expectation is still the same, that we'll have 3% to 4% year-over-year ARPU growth from the end of 21 until 22. We did have the mid-year headwinds. related to the auto pay discount and promotional gift card pricing. But we seem to have lapped most of that in Q2. It'll get a little easier in Q3 and Q4 because those were in place in the second half of last year. So that's one dynamic. The other dynamic is we are seeing a healthy increase in the percentage of our customers who take our gig or above service. And so as we continue to build our expansion customer base, and they're increasingly taking it. And we showed today in the slides between 45% and 50% of those customers are taking a gig or above. That will drive an increase in our underlying ARPU.

Yeah, thanks, Scott. And just on the enterprise question, if we kind of take a step back and reflect on progress over the last year, year and a half or whatever, one of the things that I am very determined to drive in this company is focus. And we've really been disciplined, I think, on this, starting with the build and firing up the whole build machine, which is now working on all cylinders and accelerating as per our increased guidance. Then service, which you've seen begin to flow through into improved MPS scores and a lot of work still to do there, but that's now going. This quarter, you see that flowing through in consumer, where we see sequential consumer revenue growth. And I'm very pleased with the Early progress we're seeing now on SMB, which we called out early on as a natural area of focus for us. And where we went through the same process of re-evaluating our pricing, improving our go-to-market, improving our customer offers and so on. And that's now flowing through into growth as well. I think when we think about the next kind of engines of growth, you think about enterprise and wholesale. So your question was on enterprise. So let's just call that out. Firstly, I remain very confident in our ability to hit our targets for this year for kind of fiber business and wholesale. We actually saw some early signs of stability this quarter with revenue trends roughly flat sequentially. But we can't get away from the fact that we are exposed to the kind of secular shift in enterprise customers from legacy services to more modern ones. But I want to call out that our business differs very materially from the results that AT&T and Verizon and Lumen have recently shared, in that we're actually in the enterprise market a very small part of the overall industry. So in a way, we are insulated from macro industry trends because we're not the industry, we're a small part of it. We're also much less exposed to large enterprise accounts than some of our competitors. And we all know that those large enterprise accounts have complicated needs, on-footprint, off-footprint economics. They're very demanding in the way that they buy, and they're very expert in the services that they want to buy from operators like us, and so they have strong bargaining power. But we have far fewer of those customers than our competitors. Now, if we look at our own revenue mix, the enterprise segment's about 15% of our revenue. But it's also true it's been under-managed for many, many years, and I think there's a lot of potential to improve our performance in that segment. And I'm super excited. We've got new leadership starting later this month, in fact, that I think is going to revitalize our efforts in this market and, I hope, turn it into an engine of growth over time, just as we've done in consumer as we're starting to do in SMB.

Great. Thanks, Nick.

Thanks, Simon. Operator, we'll take our next question, please.

Our next question comes from Anthony Nemoto of Citi. Anthony, the line is yours.

Great. Thanks for taking the questions. So you're continuing to run ahead of targets for the cost savings program. Any update on how we should think about how much is reinvested versus falling to the bottom line? And then could you unpack how much of your fiber gross ads came from your own DSL conversions? Thank you.

Anthony, this is Scott. On cost savings, I think the key message is we're about a year ahead of plan. So we expected to be able to take out $250 million of cost savings by the end of 2023. We've already taken out $200 million. So we expect to be at that $250 million number by the end of this year and then hopefully find additional savings as we continue to be very focused on being more efficient, doing fewer things, digitizing and automating. and then making structural improvements to the business. The part of how much of that is reinvested versus falls to the bottom line, most of it is falling to the bottom line now. We are being selective in reinvesting it in some of these digitization opportunities. We're investing in a number of things to improve the customer experience, but most of it will fall to the bottom line. And that's one of the things that drove our EBITDA growth in Q2, significantly ahead of the plan that we had set out. On your second question.

Nick, can I just build on that, the first part of that question? I want to be really clear for everyone on the call that whilst we're making fantastic progress on becoming more efficient and taking cost out, we are not taking cost out across the whole of the business. It's a very important point. What we are doing is doubling down on investing and improving the key areas of our strategy, improve customer service, improved automation, improved customer offers, improved marketing, stronger brand. We are doubling down in those areas. But what we're being ruthless about is stopping everything else. So strong execution, strong investment behind our strategy, ultra-efficient everywhere else. And I think that's hopefully something that creates value for our customers and our shareholders and stops us falling into the cost-out traps that we've seen elsewhere in the industry.

Yeah, and Anthony, on your second question on gross ads, the vast majority of our gross ads are still coming from new customers. So our copper to fiber migrators are a healthy portion, but the vast majority are new to Frontier.

Got it. Thanks. Thanks, Anthony. Operator, we have time for one more question, so we'll take our final question now.

A final question comes from Matthew Harrigan of Benchmark. Matthew, please go ahead.

Thank you. Continuing on the cost theme, it feels like almost whatever happens with inflation, you're going to get some labor cost escalation given everything happening with demographics. Does that tweak your long-term margin potential? And something like NLP, I know you don't want to talk too much about that. I mean, that was fairly dysfunctional for a long, long time, and now it actually works decently well. I mean, do you think you'll be able to use things like that to offset what's likely to be a continued upward trend in labor? Thank you.

Matthew, this is Scott. Let me start on that. The answer is yes, we do see some labor cost inflation, and that is really highlighting the need to automate and make sure we're being as efficient as possible. The whole U.S. workforce faces a wave of retirements in the next several years that will likely drive, make it harder to find people and wage inflation will go up. But we are investing now to automate as many processes as we can so that our people can be focused on the most high value added activities. And so some of the customer service opportunities where we want to make it easier for customers to self-serve so they don't have to call and talk to somebody make it easier for our technicians to do their job with AI routing and telematics versus having to call somebody individually to figure out the next place to be dispatched to. So really across our operation, we are looking at ways to automate and become more efficient.

Yeah, just I'll add to the end. I mean, listen, I think Nick said it. This is a journey. And, you know, where we are right now, you know, I think as Nick and I talk about the business, there is a a notion a year ago we came in it's okay this business has been in in bankruptcy they've probably you know strip this thing down to the to the bare walls not the case there's tremendous opportunity uh... for us to improve the efficiency and effectiveness of our work because much of it requires investment in the matter that nick described in those areas that are really important to us uh... we're plowing those dollars back into the business to ensure we can automate digitize and improve the efficiency and effectiveness of our delivery so you know we we as we look out the road here It gets hard for a business when you run out of ideas, when you run out of ways to sort of turn it up to the right. And we are not at all in that place. This remains sort of a target-rich environment of things that we can do to improve the way we deliver service and the efficiency with which it's done. So we are less concerned about those kinds of factors creating the long-term pressure on the business as we are just simple execution, just focusing on the fundamentals here. So I think that wraps this up. Thank you.

Yep. Thanks, Matt. And that concludes our second quarter 2022 earnings call. Thanks everyone for joining us.

This concludes today's call. Thank you for joining. You may now disconnect your