Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Frontier Communications third quarter 2019 earnings Conference call.

Please be advised to today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today look shock. Thank you. Please go ahead Sir.

Thank you TV.

Good afternoon, and welcome to the Frontier Communications third quarter earnings call.

My name is Luke Szymczak, Vice President of Investor Relations.

With me today, or Dan Mccarthy, President and CEO .

In Sheldon Bruce.

Executive Vice President and CFO .

The press release.

Earnings presentation, and supplemental financials are available in the Investor Relations section of our website, which can be found that frontier dot com slashed or.

During this call we will be making certain forward looking statements.

Forward looking statements by their nature addressed 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 in our earnings press release and other FCC filings.

On this call, we will discuss certain non-GAAP financial measures.

Please refer to our earnings press release for Hillman has been to find these measures.

Certain shortcomings associated with these measures.

And reconciliations to the closest GAAP measure.

I will now turn the call over to Dan.

Thank you Linda.

Good afternoon, and thank you for joining us.

Please turn to slide three.

Third quarter revenue of 1.997 billion declined 3.4% sequentially.

Consumer revenue of 1.2 billion declined 2.5% sequentially, driven primarily by customer losses.

Commercial revenue of 882 million declined 4.3% sequentially.

With a $17 million sequential increase in reserves for wholesale billing disputes contributing to this decline.

The increase in consumer customer churn to 2.24% reflects in part less favorable seasonality in Q3 relative to Q2.

Consumer ARPU of $88.45 declined slightly sequentially.

Adjusted EBITDA 804 million declined 8.8% sequentially.

Several factors contributed to this performance, including $70 million decline in revenue and an 8 million dollar increase adjusted operating expenses.

Within the $70 million decline in revenue was the increase in accounts receivable reserves related to our commercial wholesale business and there were normal third quarter seasonal impacts related to storm activity such as such as increased overtime.

As previously announced we have entered into a definitive agreements to sell our operations and assets in Washington, Oregon, Idaho, and Montana for 1.352 billion.

We continue to anticipate closing by the second quarter up 2020.

Please turn to slide four.

Total broadband and losses were 71000 in the third quarter.

We achieved the sequential improvement in Fibernet losses, with only 1000 in the third quarter. However, consumer copper losses of 52000 were worse than the second quarter.

In copper, although we experienced a sequential increase in gross additions. This was offset by some good sequential increase in churn.

And we continue to manage this business for decline.

Fiber broadband gross additions increased sequentially in the third quarter and we also had a slight sequential improvement in fiber broadband churn.

With the completion of the upgrades of the fiber network to be 10 gigabit capable we have increased our emphasis on selling at higher speed tiers.

As a result of the 500 megabits offerings that I discussed in our second quarter call over half of the fiber broadband gross additions in Q3, we're at speeds in excess of 250 megawatts.

In contrast, the majority of the fiber gross additions in the third quarter of 2018, we're in a 100 to 250 Megabits range.

And with the completion of our network upgrade we're also seeing an increasing number of existing fiber customers moving to higher speeds.

In the fourth quarter, we have introduced a more aggressive promotion for 500 Megabit service with an easy upgrade path to gigabit broadband.

As a result, we anticipate further upwards be migrations in the fiber base of customers.

Please turn to slide five.

Customer churn and consumer continues to be at an elevated level.

Got it increased sequentially and over the prior year.

The third quarter can have higher seasonal pressure than the second quarter any comparison with 2018, we had a larger number of customers rolling off acquisition related promotions this year.

The number of customers scheduled to roll off these promotions in the fourth quarter is less than the third so we anticipate less pressure in Q4 as we discussed on the second quarter earnings call.

Turning for a moment to commercial and commercial SMB, we continue to see pressure invoice, which represents approximately half of this revenue.

We also have continued further expansions of our SP when products.

In wholesale in addition to the impact of the $17 million increase and accounts receivable reserves for wholesale Boeing disputes, we had pressure concentrated in tdm wireline products and to a lesser extent Ethernet products as well as a decline in switched access.

We enabled 18000 additional caf two locations in the third quarter.

As I mentioned in the second quarter call in August the FCC release, the notice of proposed rulemaking for the successor to cap two which is called the rural digital opportunity fund.

This would dedicate over $20 billion over the course of becoming decade for broadband at up to gigabit speeds in rural areas.

We have submitted our comments in the proceeding as have other parties.

While it remains premature to speculate on the potential economics of the New program Frontier will continue to participate in the proceeding and we expect to participate in the our adopt auction.

I will now turn the call over to Sheldon.

Thank you Dan good afternoon, everyone.

I will update you on acute our third quarter financial performance.

Let's turn to slide seven.

Our third quarter revenue was $1.997 billion down, 3.4% sequentially and down 6.1% year over year.

We had losses third quarter of $345 million.

Included in this loss for the following.

First we had a goodwill impairment of $276 million, both pre and post tax.

As a result of this charge our net goodwill balance as of the ended the third quarter has been written down to zero.

Second.

We recognized an additional 30 million dollar loss on the anticipated sale of our operations and assets in Washington, Oregon, Idaho in Montana, which was largely attributed to the business as usual capex for the four states during the period and the lack of any associated depreciation in the period given their designation as assets held for sale.

This will continue to occur quarterly until closing.

And third we had restructuring and other expenses of $27 million, which compares to $31 million into second quarter.

Net cash from operating activities in the third quarter was $246 million.

The decline from the second quarter level of $575 million was primarily result of the cyclicality of cash interest payments.

This reflects our normal quarterly pattern of our semi annual coupons.

Cash interest payments are significantly higher in Q1 in Q3 and lower in Q2 and Q4.

We have sequential increase in operating expenses in the third quarter.

Operating adjusted operating expenses were $1.193 billion.

Your 0.7% sequential increase.

Among the drivers were 10 million dollar higher U.S. up expense from an increase in the FCC mandated USLF contribution rate as well as other seasonal and onetime items.

Nonetheless, we continue to achieve sequential improvements another important areas such as content expenses.

We maintain an intense focus on expense management balanced with selective investments.

For example, we anticipate further investments in marketing spend in the last quarter of the year.

Third quarter, adjusted EBITDA was $804 million.

The sequential decline of 8.8%.

The adjusted EBITDA margin of 40.3% decline sequentially.

And finally.

The trailing four quarter operating free cash flow was $563 million.

Please turn to slide eight.

Looking at the components of revenue.

Adam Internet services revenue was down $35 million sequentially, driven by declines in commercial wholesale which I'll discuss in a moment.

Voice and video services revenue also each declined sequentially.

This revenue had an 11 million dollar benefit from USS given by the higher U.S. the billing rates that I mentioned earlier.

The decline in video revenue reflects the impact of our strategy to deemphasize video sales, which contributed to approximately 40000 net video subscriber losses in Q3 and 46000 in Q2.

Looking at the view revenue by customer type.

Consumer revenue declined 2.5% sequentially with data voice and video contributing to the decline.

The consumer data declines were primarily due to lower copper broadband units, which decreased by 52000 in the quarter.

Commercial revenue was down 4.3% sequentially.

The pressures were higher in wholesale in part due to the additional $17 million of account receivable reserves for billing dispute.

Other factors were continued declines in tdm circuits and a decline of Ethernet sales.

Regulatory revenues declined by 4.2% sequentially.

Please turn to slide nine.

Mostly consumer our pick was $88.45 a sequential decline of 23 cents.

We continued to focus on base management as customers migrate off promotional packages.

Offsetting this or the mix changes from ongoing declines and the number of video customers.

Please turn to slide 10.

Capital spending in the third quarter was $318 million.

The focus areas of our capital spending remained consistent with our prior quarters.

As Dan mentioned, we completed the deployment of our 10 gigabit capability across our fiber footprint.

This will support our commercial activities by enabling and even more robust portfolio of Ethernet services, and providing a roadmap for fiveg balco.

It also upgrades or consumer base fiber based broadband service capabilities.

We have begun to market higher speed broadband services more aggressively and fiber subscriber trends have begun to benefit from that.

We continue our build outs for the connect America fund or Caf with builds completed two 526000 locations as of the third quarter.

We're also building fiber to the home uncertain rural markets to a total of 19000 locations and we're leveraging state funding programs for these bills.

In addition, we're on track to build fiber to more than 30000 Greenfield locations. This year as normal on as a normal ongoing element of our capital spend.

And finally in the third quarter, we spent approximately $3 million in capital for preparations for the sale of the northwest operation.

In conclusion I'd like to reiterate that the finance committee of the board of directors continues to evaluate frontier's capital structure.

This includes considering evaluating in negotiating capital markets.

Financing transactions and other strategic alternative.

Frontier remains committed to reducing debt and improving its leverage profile importantly, as of September Thirtyth. The company had total liquidity of $683 million.

Which represents the unrestricted cash balance at the end of the quarter and include the draw of approximately $500 million on the revolving credit facility during the quarter.

I will now turn the call back over to Dan for concluding remarks.

Thank you gentlemen, revenue declines and mature products remain a challenge. However, we made some progress in the third quarter, most notably with the fiber portion of consumer.

Our objective continues to be optimize our business and leverage our best assets for future growth, while managing the elements of our business and secular decline.

We're focused on executing on cost efficiency programs and on selective capital investments.

We also remain focused on meeting the needs of our customers. We have strong capabilities and are committed to innovation and the development of new solutions, such as we had to living with the new emphasis on higher broadband speeds and on new SD wind products.

Thank you for joining the call today, and we look forward to updating you fall in Q4.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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