Q2 2022 Frontier Communications Parent Inc Earnings Call
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 a 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 have 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 <unk>.
<unk> 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 months 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 as recent guidance on the deployment of federal infrastructure funds, which shifts the emphasis from instantly obsolete download and upload speeds 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.
Now turning to slide six for an update on <unk> III.
As I mentioned at our Investor Day, one year ago, we announced plans to rapidly build fiber to 10 million homes in our footprint, 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 referred to as <unk> 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 REIT.
<unk> profile of wave three is significantly higher than what we had initially modeled one year ago.
More specifically, we have identified an additional $1 million to $2 million plus locations that are attractive build candidates today without requiring broadband subsidies.
This leaves $3 million to $4 million remaining locations, which could also meet our return thresholds dependent upon the distribution of <unk> $42 billion in federal infrastructure funding over the next several years.
Importantly, our recent capital raise affords us more time to cure rate our wave three 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 we 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 on sustainability in the industry and served 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.
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.
Now on slide eight.
Our opportunity demands a relentless focus on our four levers of value creation.
For deployment.
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 have been able to build in the business.
I'll now turn the call over to Nick to review, how we performed in the second quarter.
Nick.
Thanks, John .
Our team executed extremely well against our strategic priorities in the second quarter.
A few of the highlights.
We built a record 281000, new fiber connections and raised our 2022 bill target to $1 one to one 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 50000 broadband customers in our consumer business.
And achieved another record quarter of customer additions and our SMB business.
Were focused everyday on improving our customer experience and this quarter. Our fiber NPS continues to increase it remained 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 are starting to see the success of our operational initiatives translate into financial growth.
We achieved sequential EBITDA growth ahead of schedule this quarter and have raised the midpoint of our 2022 EBITDA guidance.
Scott will cover this in more detail later in the call.
As we expected our fiber 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 fibre build in the second quarter of 2021, and we've consistently hit record and 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 adds and at that point fibre EBITDA surpassed copper EBITDA.
Our acceleration of fiber net adds continued in the fourth quarter of last year when for the first time in more than five years.
Fiber adds were greater than our copper declines.
This resulted in total broadband customer growth there.
This quarter the operational milestones we achieved in investments we have made began to translate into our financial results delivering healthy sequential EBITDA growth.
Split this into perspective frontier has not produced sequential EBITDA growth of this magnitude since 2015.
This progress gives me greater confidence in achieving almost 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 pumping 281000, new locations with fiber.
I am 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 build target by 10% to 20%.
On slide 13, I want to highlight the foundational steps that biomarker 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 and at least 12 states by the end of the year.
This geographic diversity expands our opportunity to build fiber and provides redundancy and maintaining a build pace.
Secondly, we continually diversifying our supply chain with additional contracts for labor and equipment.
Thirdly, we are 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 50000 consumer fiber broadband customers driving a 14% increase in our customer base to the same period last year.
Although net adds declined modestly from 52000 in the first quarter this year.
Welcome to recognize that our based fiber footprint fluctuates due to seasonal movement in Florida.
We expect the 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 market.
Our base fiber footprint is made up of $3 2 million homes.
<unk> 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.
Right in the middle of our 15% to 20% range that we previously set out.
We expect the 2021 cohorts 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 to slide you can see we grew broadband <unk>, 2% sequentially from a combination of structural price increases and improved mix with an increasing adoption of gigabit per second speeds.
Customer demand for one gig plus speeds have been rising each year and in the second quarter between 45, and 50% of our new fiber customers chose one gig speeds or higher.
Our one gig mix of new Activations is significantly higher than the one gig mix of our entire customer base.
Offered with the customers on the one gig plan tends to be meaningfully higher than for sub one gig plans, we have the potential to grow off of as customers demand part of 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 remained up about 30 points year over year.
Brian the NPS now ranks amongst the highest of all our major competitors.
Broadband churn across both fiber and copper broadband customers also remained at the low end of historical ranges.
This is primarily due to improving voluntary churn and in part due to lower move related Jim.
Copper churn did rise slightly compared to the same period last year, largely because 2020 once churn was artificially low due to COVID-19 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 NPS 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 rollout new capabilities like self installation and new mobile app on 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.
Language processing on our mobile tech portal to better support our customer facing teammates.
Lastly, I want to highlight the good momentum we are building in SMB.
Over the last few quarters, we've made a series of improvements that have revitalized this business with strengthening our product with a two gig offering and a new partnership with ring central.
We've expanded our sales channels foothold, adding a new CRM platform and established account management team is focused on cross and Upselling opportunities.
Together these actions have resulted in another quarter of record net adds.
We have a long runway with F&B 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 turnarounds are really hard work and I'm. So grateful to the whole frontier team for all the progress we've made together and building gigabit America and with that I'll now hand over to Scott Scott.
Thank you Nick and good morning, everyone.
I have done on the last several calls I will reference pro forma figures that had 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 this.
This 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.
<unk> adjusted EBITDA was also helped by a onetime 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.
Revenue declined 9% versus last year's second quarter, primarily due to the exploration of Caf II subsidy revenue.
Cyber revenue was up roughly 1% year over year, and 2% sequentially as consumer revenue growth more than offset declines in business and wholesale a.
A few key points on our fiber revenue growth.
Excluding video fiber revenue grew 4% year over year, representing an acceleration from 3% growth last quarter.
Our consumer fiber broadband <unk> increased 2% 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 represented 56% of our adjusted EBITDA and we 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 and short term investments and $767 million of.
Bolt revolver capacity.
In addition to the strong liquidity, we also have ample balance sheet flexibility. Our net leverage remained low at two eight 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 provides 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 2000.
'twenty three.
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.
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 days sales outstanding and bad debt continue to be healthy both measures improved versus the second quarter of 2021.
While we see pockets of inflationary pressure on our fiber build we're still confident in our 900 to $1000 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 million to $2 6 billion.
Reflecting our accelerated build of one one 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 <unk> to one 5 billion.
We remain on track to deliver a sustainable EBITDA inflection by the end of the year and year over year revenue and EBITDA growth in 2023.
I'll close today's remarks by reiterating frontiers investment thesis first there are 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 cables capability, a lower cost of ownership driven by fibers passive technology and lower latency levels that enable critical uses like video conferencing and telemedicine.
Third we have a clear strategy and purpose of 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 am 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 on mute when speaking.
Our first question comes from Brett Feldman of Goldman Sachs. Please go ahead.
Yes, Thanks for taking my 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'm just hoping you could maybe walk us through some of the puts and takes including maybe any seasonal factors that that.
Should be taken into consideration.
And then it sounds like you are increasingly constructive on the opportunity to develop some of the passing in your wave III footprint I think you identified $1 million to $2 million during your prepared.
That you could do without subsidy. So I'm curious does that now officially part of the business plan or would you need to do some additional work.
Kind of pull that into wave two and then just the last question here. If you can indulge me a little bit.
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 are starting to see if any from those operators.
Yes sure Brett This is Scott let me take the first question and then pass to John for the second and 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 in EBITDA inflection by Q4, and we're still very confident.
And that.
If we look at the first half we outperformed our own expectations driven by a few factors. One we had consumer outperformance to the cost reduction program was ahead of plan three we had a onetime 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 75 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.
Yes, Hey, Brett Good morning, It's John I'll take the second question will go round Robin here I'll take the second question on wave three yes.
As we declared.
More specifically here this extra 1 million to 2 million households, it looks very solid and so 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 obtaining proper returns.
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 $1 112.
We're talking about a significant uplift from that next year and 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 build will remain as we've described so far. So this $1 six roughly for next year is where we will sit and then we'll see if there's an opportunity to.
Further the financing piece of this is something that we continue to work and so as we think about this.
This is 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 III 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 and local municipal officials to ensure our participation in the subsidy programs, there's $42 billion.
And subsidy for building out broadband networks is something that we are successfully engaging and so.
With this additional time here in the wave three will allow us a chance to even pull further into that total of 5 million households. So you should expect a combination as we go out.
If we do this organically would be a combination of government subsidy.
Pulling cash from operations nonrecurring and recurring cash savings and then lastly debt. If we chose to go there. So stay tuned we have more work to do in terms of Curating those assets, we will be updating sort of as we go.
And if you don't take the piece on cutback. Thanks, John Yeah, just to repeat that the reaction that we're seeing or not from our cable competitors and I think it's clear to see from recent results.
But as we've always said fiber is a superior product to cable.
And.
While the cable and fiber market remains competitive it is 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 were 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 fast speeds.
And of course in its nature symmetrical and therefore that offers a lot of benefit to customers, particularly in this continued era of homeworking.
I want to think about the reaction that cable might have of course cable has a long history of pricing practices that customers really don't like promo prices that then get jacked up later on in the customer journey.
I don'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.
We see customers reacting to that hence the results we have 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 customer.
Thank you.
Our next question operator.
Question. Please.
Our next question comes from Phil Cusick of J P. Morgan fill the line is yours.
I understand up thanks, guys.
So a follow up on wave three does it look like no longer any outside equity capital to come in on a wave three it 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.
<unk> at almost every company this quarter, thanks very much.
Hey, Bill This is Scott, let me take the first one and I'll pass to Nick for the second one so on wave three of the Big point today is to show that and we think it is worth more than we thought it was an emergence and then be give you guys. A specific dimensionalize Asian, and we think there is $1 million to $2 million incremental homes passed there.
Are there going to be positive to fiberize.
In terms of funding where were we.
We have a range of options, which 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.
We have a solid range of options there that will 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.
Yes, Phil.
I'll pick up the.
Right.
I was just going to say on that I didn't hear raising outside equity is 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 have.
Yes, listen I think we hold our powder dry on this.
Phil as we said, we've kind of come through the period.
What I can say declaratively is that when we first started looking at this last 5 million it was kind of marginal.
Across the whole expanse and you'd see pockets, where you would say alright, I could build this out and 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 affirmatively declared the first $10 million total households.
That made sense for us to work at a bit more now with what we've been able to build and determined it is really clear that that million to 2 million homes must be built I mean, it is very very clear and very compelling financially.
Our bias is to do that organically.
If there was a really interesting a proposal for us to do with some level of outside equity might we consider a JV structure something that we'll look at it.
But this is no longer kind of hanging back now.
Now are pretty encouraged that this is going to make very nice economic sense, great returns and then the means by which will be funded as Scott described we have several different options and the timeframe here as we talk about government subsidies, it's quite a process I mean, there are like thousands with an S. At the end of thousands of applications that need to be pulled together.
The very many jurisdictions the methodologies are different in every state and there is a significant flush of funding that will come through principally sort of middle of the second half of 2023 in a material way that will be right sort of in the heart of these territories that were describing so more work to do in terms of the specifics of how it gets done but I think the takeaway.
From this is $1 million to $2 million 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.
Yes, so let's kick off with the question on <unk> and its impact on copper churn I'm just on FW I first of all we've said on previous calls of course, that's going to exist.
We expect at some point it will begin to nibble at the edges of our copper base, perhaps more in rural areas and so on.
But also we have very serious questions.
About how for fixed wireless access can scale well.
Other it's actually for the fixed wireless operators and 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.
Our last question is for off more questions.
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 with 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 nonpaying or lower quality customers, whereas during COVID-19, we couldnt.
Now if we 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 we do of course see high levels of.
Broadband net adds in the fixed from the fixed wireless players.
We're actually not seeing a significant impact in a couple of days.
Thanks, guys.
Thanks, Phil Operator, we'll take our next question please.
Our next question comes from Greg Williams of Cowen Greg The line is yours.
Great. Thanks. Another question on wave three here in that $1 million to $2 million Bill John you noted youll make trickled them in over on top of the way.
To build up but does it does move youre not to build as fast as possible I was wonder if you million homes, because if they are attractive and youre seeing an influx of PE and infrastructure capital in the space there could be some encroachment on on fiber to the home in your areas and maybe that's my second question is are you seeing any encroachment as as a third provider.
In your footprint.
Yeah, great. Thank you.
To your second question first is a really difficult time to be an overbuild or.
I mean, if I think about like lifelong ambitions one of them would not be to be in that position right. I think it's gotten really hard for those guys.
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 our presence.
Has not been a factor that we've seen in any meaningful way across our footprint and candidly I'm a little surprised that that's the case I'm less surprised now because it's gotten harder, but even before the markets tightened up a bit.
We werent really seeing a significant level of presence and we watch that pretty closely in terms of permitting applications and the like so that still remains at a pretty low level rigor.
Regarding acceleration.
Should probably.
Theres two sides to this one is what is financially viable where do we see great return opportunities in the other side is how fast can we built like what is the capacity of the organization have built and we are jamming on that site Veronica bloodworth and her team are cranking, the build significantly and when Scott Nick describe a 10% to 20% increase in our build for this year and then carrying forward.
With another really significant increase in next year's build.
This is kind of hair on fire run as fast as you can get it done.
Kind of orientation that the build team brings to the game here. So look we're going to in every case look to accelerate the build where we can doing it well doing it.
With the right kind of approach in all jurisdictions, but.
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 $2 million in wave three but will 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 color guys.
Okay.
Thanks, Craig Operator, we will take our next question. Please.
Our next question comes from the cash <unk> of New Street research. The cash. Please go ahead.
Hi, just pick off rollout for Jonathan Chaplin. Thanks for taking the question two if I could.
You have more insight into returns that give you confidence in deploying one to 2 million homes within wait.
What does this mean for wave two is the expected return still mid teens, Ohio.
Is it because the expectations, both penetration or cost to deploy all down or was it something else and second.
But as soon as that suddenly felt private equity value close to $5000 per line.
Private equity players are willing to pay that for broadband infrastructure, what it makes sense too.
They'll have some fewer wave one assets. Thank you.
Yes sure. Thanks Kash. This is Scott let me take both of those.
And 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.
We're gives us increased confidence in our 900 to $1000 cost per passing.
<unk> confidence in our penetration in <unk> assumptions that we have.
We've met or exceeded in the past four quarters. So again, the first priority will be completing wave two and our wave three analysis gives us even more conviction around wave two.
On your second question about different potential transactions in the market I would say at our Investor day last year, which showed a view of evaluation that fiber passing should be valued at between 3000 $4000 per passing at least and so if there are data points in the market that would suggest.
Other assets out there worth $5000 per passing I think that only strengthens our conviction that $3 to 4000.
As 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 for cash operator, we'll take our next question. Please.
Our next question comes from Frank Louthan 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 the subscribers you're getting from some of your newer builds versus the legacy, California, Texas, Florida markets, where youre, winning back customers and cutting down churn. Thanks.
Yes sure this is Scott Frank.
You noted in the presentation, we show based fiber penetration and expansion fiber penetration, we've really had great success in both so based fiber penetration has crept up into the mid 42% and it's 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 subscriber described based will be the baseline from which we grow then we'll layer on more and more expansion adds per quarter and Thats really whats.
<unk> 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.
Alright, great and I apologize if you mentioned this earlier, but did you take any of your bad debt reserves and can you compare what youre, where youre running bad debt today versus in 2019.
Yes.
Yes, 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 days 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 Autopay, which helps reduce bad debt expense and reduced days sales outstanding.
Part of it is our customer base has remained healthy.
Alright, great. Thank you.
Thanks, Frank Operator, we'll take our next question please.
Our next question comes from Nick del Deo of Moffett Nathan Nick. Please go ahead.
Hey, good morning.
First just to expand on some of the preceding questions on the one to 2 million wave three homes, you're now saying look appealing.
How would you characterize the return profile on those locations are they comparable to wave two where they are much lower and it might be hard to generalize, but are these typically locations that are.
Part of wave, one and wave two geographic clusters or are they new cities that you would be hitting on if you. If you go down this route.
Yes, Nick Thanks for the question.
Let me answer the second part first so the.
The $1 million to $2 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, or examples, whereas we've refined our construction.
Estimated and also our penetration estimates now those become economic to to build and we're excited to do that because of all the advantages of adjacency with marketing and operations.
The one to 2 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 two just by virtue of some of the higher cost per passing but its still attractive so I'd call it mid teens versus mid to high teens.
But we will continue to get better construction I think we'll get better penetration and we're excited to eventually reach those with fiber.
Okay. Okay understood and then a question on copper RP, which jumped pretty noticeably versus Q1, I think it was up about $2 five bucks sequentially.
To what degree is that a function of nonpaying customers churning out versus a like for like increase.
And then maybe more generally just talk a bit about how you think about the trade off between pushing price on legacy broadband versus.
Keeping price down a bit to try to hang onto subscribers for longer.
Yes, Nick this is Scott too so most of the copper ARPA growth was driven by price increases we have just normal price increases built into our.
Built into the relationship with customers and so that was most of the <unk> growth and.
A lot of that was passing on inflationary pressures as our input cost went up a 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 and copper was driven by non pay disconnects that werent 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.
The cost to serve them is higher yes, Scott if I can just build on that I didn't get it.
Take a step back on pricing.
I mean look we do fundamentally believe we have the winning product in the market, we have a superior product the better product and cable.
And we believe that the price that product should come on over time should also be superior because we're not comparing apples with apples here we're comparing.
Our horse with a car, they're fundamentally different things that should come on different prices in the market now of course, we also recognize that in frontier 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.
<unk> 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.
Alright. Thank you good morning, staying on the <unk> topic, you had nice fiber <unk> improvement I think you've said in the past you expected the growth to accelerate in the second half as you lap some of the promotions from last year could you just update us on what we should be expecting to see there.
Have you changed your expectations on cake mix going forward.
And then we've talked about SMB, a little bit Havent really touched on enterprise any updates on what youre seeing there some of your peers talked about slower decision, making any any macro impacts on that side of your business. Thanks.
Yeah.
Sure Simon This is Scott, let me take the first one and I'll pass to Nick for the second one <unk>.
<unk> our expectation is still the same that we will have 3% to 4% year over year ARPA growth from the end of 'twenty one until 'twenty. Two we did have the mid year headwinds related to the Autopay discount.
And gift card promotional gift card pricing, but we seem to have lapped most of that in Q2, it will get a little easier in Q3 and four 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.
Take our gig or above service and so as we continue to build our expansion customer base and they are increasingly taking it and we showed today in the slides between 45% to 50% of those customers are taking a gig or above that will drive an increase in our underlying ARPA.
Yes, Thanks Scott.
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 the 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.
And then service, which you've seen begin to flow through into improved NPS schools 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 I'm very pleased with.
Early progress, we're seeing now on SMB, which we called out early on is a natural area of focus for us and what we went through the same process of reevaluating our pricing improve.
Improving our go to market improving customer offers and so on and that is 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.
On enterprise, so, let's just call that out I mean, firstly I remain very confident in our ability to hit our targets for this year kind of fibre 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 wanted to call out that our business was very materially.
The result.
<unk> and Verizon the lumen have.
The shed in the.
Really 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 don't 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 of footprint economics.
Demanding in the way that they buy and they are very expert in the services.
They want to buy from operators like us and say they have strong bargaining power, but we have far fewer of those customers than our competitors.
Now if we look at our revenue mix the enterprise segments 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 am 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.
Alright, Thanks, Mike.
Thanks, Simon operator, we'll take our next question please.
Our next question comes from Anthony Noto of city, Anthony the lawn issues.
Great. Thanks for taking my questions.
Because it seemed to run ahead of targets for the cost savings program any update on how we should think about how much is reinvested versus flowing to the bottom line and then could you unpack how much of your fiber gross adds came from your own DSL convergence. 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 expect it to be able to take out $250 million of cost savings by the end of 2023 we've.
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.
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 and reinvesting it in some of these digitization opportunities we're investing in.
Things to improve the customer experience, but 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.
Build on that first part.
That's question <unk>.
I wanted to be really clear for everyone on the call that whilst we are making fantastic progress on becoming more efficient in taking cost out we are not taking cost out across the whole of the business.
Important point, what we are doing is doubling down on it.
Vesting in improving the key areas of our strategy to improve customer service.
Improved automation improved customer offers improved marketing stronger brand, we are doubling down in those areas, but what we are being ruthless about stopping everything out.
Strong execution strong investment behind our strategy.
Terrific and everywhere else and I think that's hopefully something that.
Great value for our customers and our shareholders.
And stopped falling into into the cost outs traps that we've seen elsewhere in the industry.
Scott.
Yes.
Anthony on your second question on gross adds the vast majority of our gross adds.
From new customers, so our copper to fiber migrators are healthy.
Portion, but the vast majority of our new to frontier.
Got it thanks.
Thanks, Anthony operator, we have time for one more question. So we'll take our final question now.
Our final question comes from Matthew Harrigan Benchmark Matthew Please go ahead.
Thank you.
On the cost it feels like almost whatever happens with inflation youre going to get some labor cost escalation you have and everything happening.
Demographics does that.
Tweak your long term margin potential and something.
And L. P. I know you don't want to talk too much about that.
That was fairly dysfunctional for 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 will be a continued upward trend in labor. Thank you.
Yes, Matthew this is Scott let me 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 basis.
Wave of retirements in the next several years that will likely drive it 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 to automate and become more efficient.
Yes, just I'll add to the yen I mean listen I think Nick said it.
This is this.
This is a journey and where we are right now.
I think as Nick and I talked about the business. There is a notion a year ago. We came in and say okay. This business has been in bankruptcy, they've probably strip this thing down to the bare walls not the case, there is tremendous opportunity for us to improve the efficiency and effectiveness of our work because much of it requires investment in the matter that Nick describe.
And those areas that are really important to us.
Plowing those dollars back into the business to ensure we can automate digitize and improve the efficiency and effectiveness of our delivery. So.
We as we look out the road here it gets hard for our 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 are things that we can do to improve the way we deliver service.
The efficiency with which it has 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.
So I think I think that's right. Thank you that wraps itself.
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 lines.
Okay.
[noise].