Frontier Communications Parent, Inc.

Welcome to the Frontier Communications third quarter 2022 earnings call. My name is Harry and I'll be coordinating your call today. If you'd like to ask a question during the Q&A, you may do so by pressing star one on your telephone keypad. I'd now like to hand you over to your host, Spencer Kern, head of investor relations, to begin.

Good morning and welcome to Frontier Communications third quarter 2022 earnings call. This is Spencer Kern, Frontier's head of investor relations. Joining me on the call today are John Stratton, our chairman, Nick Jeffrey, our president and chief executive officer, and Scott Beasley, our chief financial officer. Today's presentation can be followed within the webcast available in the events and presentation section of our investor relations website. Before we start, please turn to slide two. Here you'll see our safe harbor disclaimer. This is a reminder 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. During the call, we may 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. Thanks, Spencer, and good morning, everyone. Thank you for joining us today. As you saw in our press release, the team delivered another strong quarter of operational results. Our transformation to a fiber-first company is fast becoming our reality. If you turn to slide four, you'll see an updated company overview through the third quarter. Let me run you through a few highlights. By the end of this month, we'll reach the 5 million fiber passing mark, which puts us halfway to our 10 million target. We've also continued to expand our customer reach. We now serve 2.8 million broadband customers across our consumer and business markets. In the last 12 months, we've generated $5.9 billion of revenue, and $2.1 billion of adjusted EBITDA. This represents a 36% adjusted EBITDA margin. Our relentless focus on fiber investment has reaped strong results. Fiber products alone generated $2.7 billion of revenue and $1.1 billion of EBITDA in the last 12 months. And fiber now represents the majority of customers and EBITDA, a crucial benchmark as we build Gigabit America. You can see on slide five, the four levers that anchor our strategy. Build fiber, sell fiber, improve the customer experience, and streamline operations. It's been about a year since we assembled our new leadership team, and I'm proud that we continue to perform against our four levers of value creation. By all accounts, the team has executed extremely well on each lever since we emerged from bankruptcy in April of 2021. Let's run through the details. We've built fiber to a total of 1.4 million locations. That's a 40% increase in our fiber footprint. We've added more than 250,000 fiber broadband customers, driving a nearly 20% increase to our fiber broadband customer base. We've improved our customer experience with a 30-point improvement in our fiber net promoter score. And we've radically streamlined our operations. You'll hear more from Nick and Scott about how we've nearly reached our initial cost savings target more than a year ahead of our plan. The team has consistently set records against our four strategic levers, which is even more impressive given the challenging market. It takes intense operational discipline to win in this environment, and this team continues to put points on the board quarter after quarter. If you turn to slide six, you'll see that the long-term trends in our business remain extremely encouraging. Our industry thesis is based on the view that the significant growth in data consumption that we've seen over the past two decades will continue to ramp up, tripling over the next four years alone. We're confident that fiber is best positioned to meet the long-term demand for data consumption. And there are several reasons for this. First, fiber is a vastly superior product to cable and wireless alternatives. Nick has said it before, it's like comparing a Ferrari to a horse. That's because fiber provides dramatically faster download speeds, exponentially faster upload speeds, and significantly lower latency. Second, fiber has the best economies of scale of any technology, as data throughput and consumption continue to increase across networks. Our core fiber network is already capable of 10 gigabits per second and requires only minimal capital investments to enable faster speeds. And lastly, Fiber is the future proof infrastructure our country needs to compete and to lead. The government has recognized the critical nature of digital infrastructure and earmarked funding to help build it. We've won more than $440 million of grant funding since we started our bill, and we'll continue to apply for funding so we can bring fiber to even more Americans. Within the investable universe of fiber companies, we've achieved a paramount position as an industry leader. We have the second largest fiber build in the country with our plan to reach at least 10 million locations by the end of 2025. Our scale and first mover advantage provides us the advantage of speed and cost benefits. We expect our fiber build to yield IRRs in the mid to high teens, a very attractive return on capital. We have a strong leadership team and a deep bench of operators with a track record of success. And we're well capitalized with a strong balance sheet low leverage, and healthy free cash flow generation that we're reinvesting into our fiber expansion. And before I turn it over to Nick, I want to share an update on our ESG commitment. I'm proud to share that we launched our first ever social impact program, Broadband for Good, a few weeks ago. As part of this program, we'll identify opportunities to connect vital community-loved hubs and the communities we serve to our reliable high-speed fiber broadband technology. The program will demonstrate what's possible with the power of our technology. We're hearing from employees across the country that broadband for good is quickly becoming a source of pride. We're also making good progress on our energy saving and carbon reduction initiatives under our Red Loves Green program. We have a solar pilot running in Connecticut and California, and our first order of electric vehicle transit trucks are being delivered later this year in California. If you haven't had a chance to read our inaugural ESG report that we published back in June, you can find it online in our newsroom. Our ESG journey is just beginning. It's at the heart of our purpose of building Gigabit America. I'm proud of all we're accomplishing as we transform our business. With that, I'll turn the call over to Nick to review our performance in the third quarter. Nick?

Thanks, John. We delivered another quarter of record-breaking results. which has enabled us to reach a number of critical milestones ahead of schedule. As we build Gigabit America, our strategy is simple, to build fiber, sell fiber, improve the customer experience, and streamline operations, and it's clearly winning in the market. Let's cover the highlights from this quarter. We built fiber at a record pace again, adding 351,000 new fiber locations, And as John shared, we'll hit the halfway point in our initial goal of passing 10 million fiber homes later this month. We also added a record number of new fiber broadband customers this quarter, 66,000 to be exact. For context, that's twice the number we added in Q3 last year. And as we deliver an improved product to small businesses across our footprint, we're seeing record customer growth in the SMB sector too, more than we've seen at any point in the last three years. What's remarkable is that we've been able to materially accelerate our fiber expansion while at the same time delivering significant cost savings. In fact, we're nearly at our $250 million cost saving target, one full year ahead of schedule. And as a result, we're now raising our gross cost saving target to $400 million by the end of 2024. And finally, we continue to generate healthy free cash flow from operations, which we're continually investing back into our fiber expansion. And Scott will cover this in more detail later in his section. Before we get into our quarterly results, let's zoom out and look at how we're doing on our transformation. On slide 10, you can see the inflection points we've already delivered and those we're on target to achieve. First, we scaled our fiber billed in the second quarter of 2021, and we have consistently hit record fiber bills every quarter since. Then, in the third quarter of 2021, we delivered an inflection in fiber broadband net add. That's also the point at which fiber EBITDA surpassed copper EBITDA for the first time. Our acceleration of fiber net ads continued in the fourth quarter of last year. For the first time in more than five years, fiber ads were greater than copper declines, resulting in positive total broadband customer growth. Then last quarter, we accelerated our fiber bills and delivered a sequential increase in EBITDA, the magnitude of which Frontier has not seen since 2015. And as I just shared, At the same time, we achieved our initial total cost-saving target this quarter by radically simplifying our business and maintaining a laser-sharp focus on delivering our strategy. The team is delivering our fiber-first strategy, and it's showing in our results. The success we're having with our operational initiatives gives me great confidence that we'll achieve our financial goals in the fourth quarter and beyond. Now let's turn to slide 11 to dive deeper into our two core strategic initiatives, building fiber and selling fiber. I'll start with our fiber build performance this quarter. As I said earlier, we added a record 351,000 fiber locations. We've now outperformed for eight consecutive quarters and scaled our build sixfold since we began our fiber build pilot in late 2020. This keeps us right on track to hit our target of 10 million fiber locations by the end of 2025. Notably, we're the only company in our sector to have announced an increase in our fiber build this year. As the second largest fiber builder in the country, our scale gives us a competitive advantage in a tight supply chain environment. Early on, we put in place a strategy that has allowed us to attract leading vendors and secure cost-efficient material and labor And as a result, we now have vendors actively choosing us for their scarce capacity because they see that we're well-funded, we're here for the long term, and we deliver. This is why we've thrived, building ahead of plan and within our cost parameters, even with a tough macroeconomic backdrop of inflation and supply chain challenges. Our second strategic initiative is selling fiber. We're transforming the way we sell, the way we price, and the way we're perceived in the market. We're also becoming more digital, which is good for both our customers and our business. Quarter over quarter, we're seeing this work pay off. And now you know the results. We added a record number of fiber broadband customers again this quarter. We continue to outpace our competitors, gaining share against every one of them in every geography in which we operate. And we are now taking this good momentum into the fourth quarter. a time when we'll also have the wind at our back in Florida, one of our largest markets, as snowbirds return to the sunshine state for the winter. On slide 13, we take a closer look at our base and expansion markets to better understand where the growth is coming from and what we can expect. It's no secret that we're taking the majority of our new customers from cable based on a fundamental truth, fiber does what cable can't. Any way you look at it, Fiber is a much better experience, and the proof is in the penetration numbers. In our base fiber footprint, we have 3.2 million homes. These homes are in more mature markets that have had fiber for several years. Penetration in this footprint in Q3 increased 30 basis points sequentially to 42.9%. And when we look at the growth over the past year, we see a clear path to achieving our long-term target of 45% penetration in our base market. If you look at our expansion fiber footprint, our 2021 cohort is right on target, and our 2020 cohort is exceeding expectations. Sales is part art and part science, and every quarter since the new leadership team came on board, we've improved our go-to-market strategy. We're becoming smarter in the way we operate, and increasingly efficient. And now it's showing in the numbers. Moving forward a slide, you can see that the actions we are taking are beginning to support our long-term ARPU growth. This includes our structural price increases and rising gig plus speed adoption. ARPU growth is up 2% year over year if we adjust for short-term promotion. And in the third quarter of last year, we implemented gift car promotions, which is slightly disguising the year-over-year ARPU growth trend. One of our largest drivers of ARPU growth is customer demand for faster speeds. 45% to 50% of our new fiber customers continue to choose 1 gig speeds or above. And in fact, customers on 1 gig plus speeds now make up 15% to 20% of our base, And that's up from 10% to 15% last quarter. As the mix of the base on 1 gig plus speeds catches up to the mix of activations, our ARPU should naturally rise over time. As a specific example of how we're strengthening our pricing power, let's look at what we're doing in the SMB sector. First, we enhanced our product by launching 2 gigabit per second speeds network-wide. Secondly, we simplified our pricing structure to enable broadband-only pricing with flexible add-ons. And thirdly, we introduced value-added services like RingCentral, which perfectly complement our lightning-fast fiber broadband. These added services create greater value for our customers, increase ARPU, and reduce churn. And now we've structured our pricing ladder to incentivize customers to adopt higher gigabit-plus speeds. And the net result of these changes has been a 10% increase in acquisition. And this is a strong model that we've already begun to put in place in our consumer business too. Now I want to take a moment to talk about our copper footprint as these customers play a critical role in our transformation to a fiber first company. The best way to keep these customers happy and improve their lives is to bring fiber to their homes and businesses as quickly as possible. We expect that by the end of 2025, fiber will be available in at least two-thirds of our copper footprint. In the meantime, we are seeing churn. This quarter specifically, we saw an increase in copper churn for two main reasons. The first one is a good trend. We continue to see our copper customers migrate to fiber. The second is actually bad weather. Some of our markets were impacted by bad weather and the outages that come with it. As you'll remember, copper is negatively impacted by weather in a way that fiber is not. Until we can bring fiber to our copper customers, we're focused on improving their experience. We've invested in our customer care operations, we've improved customer communication with a more personalized approach, and we've added retention specialists to our call center operations. And as a result, our expectation is that copper churn will stabilize in the fourth quarter. Finally, and with great pleasure, I'd like to talk about the positive momentum we're seeing in our commercial businesses. A few months ago, we welcomed new world-class leadership to advance our Fiber First strategy for the benefit of our business customers, and the early results are encouraging. Across all three business units, we're seeing a sharp increase in order volume and a more favorable sales mix, which is leading to higher pricing. As I shared earlier, SMB achieved a 10% increase in acquisition ARPU and Enterprise had record high bookings in the month of September. And wholesale is making great progress on our Fiber to the Tower initiative. And it really is excellent to see this momentum building in areas that were previously ignored by the old frontier. We're confident that we can achieve year-over-year revenue growth in our commercial businesses and look forward to sharing our progress with you over the coming quarters. Now, before I turn it over to Scott, I want to take just a moment to recognize the incredible dedication and commitment of our people. When Hurricane Ian hit Florida, our employees kept our customers connected to our critical services and to each other, despite the extraordinary challenges they faced personally. To ensure we have a way to support our employees and their families during this and any future natural disasters, we've set up our very first employee relief fund. The fund will provide financial assistance to employees who've been impacted by a natural disaster just like Hurricane Ian. We're building Gigabit America, and I am so proud that we're taking good care of our customers and each other as we do it. So, Scott, over to you.