Q4 2022 Frontier Communications Parent Inc Earnings Call
Hello, and welcome to the Frontier Communications fourth quarter 2022 earnings call.
Harry there'll be operates today to ask a question during Q&A. Please press star one on your telephone keypad and I would now like to hand over to expense accounts again Spencer. Please go ahead when you're ready.
Good morning, and welcome to Frontier Communications fourth quarter 2022 earnings call.
This is Spencer kurn frontiers head of Investor Relations and.
Joining me on the call today are John <unk>, our chairman, Nick Jeffery, our president and CEO and Scott Beasley our CFO .
Today's presentation can be followed within the webcast available in the events and presentations section of our Investor Relations website.
Before we start please turn to slide two.
Here, you will 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 also 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.
As you saw in our press release the team delivered another strong quarter of operational results.
Frontier's transformation into a growing digital infrastructure company is fast becoming a reality.
If you turn to slide four Youll see an updated company overview through the fourth quarter.
Let me run you through a few highlights.
We ended 2022 with $5 2 million fiber passing.
<unk>, the halfway mark to our target of $10 million passing.
We've also continued to expand our customer reach we now serve $2 8 million broadband customers.
In 2022, we generated $5 $8 billion of revenue and $2 $1 billion of adjusted EBITDA.
This represents a 36% adjusted EBITDA margin.
Our acute focus on our fiber investments and the teams consistent execution have delivered strong results in.
In 2022 fiber products alone generated $2 $8 billion in revenue and $1 2 billion of EBITDA, that's a 42% EBITDA margin.
As of the fourth quarter fiber represents the majority of our customers revenue and EBITDA.
And importantly, our fiber growth engine is beginning to drive growth for the overall company.
At the end of the year is always a good time to step back and review what we've accomplished it was nearly two years ago, when Nick joined the company as CEO , and we announced our new fiber first strategy.
2022 was our first full year of transformation with a new leadership team in place.
Youll see a familiar chart when you turn to slide five.
This is our simple strategy, which is anchored by four key levers of value creation.
Build fiber.
Sell fiber improve the customer experience and our operational efficiency.
In 2022, we met and exceeded our goals in each of these areas delivering more high speed fiber broadband to more people across the country.
After than expected and within our budget.
And it's all powered by our purpose building Gigabit America.
Purpose around which our entire workforce has now rallied.
Our primary focus is our fiber build.
Many of you will remember our Investor day in 2021, when we committed to building fiber to cover 10 million locations and we remain on track to do just that.
In fact with $5 2 million fiber locations today, we're more than halfway to our goal.
This is a terrific use of capital we continue to expect our fiber build to deliver very attractive IRR in the mid to high teens with a direct cost to pass of 900 to $1000 per location.
Our committed build stands to create substantial shareholder value and remains our most critical point of focus.
And beyond that we're exploring a significant opportunity to create even more value.
As we highlighted in Q2 of 2022 beyond our initial $10 million committed build we've identified another one to 2 million copper locations, which we can organically upgrade to fiber with very attractive returns.
There remains another three to 4 million locations that also could be attractive to upgrade with the aid of government subsidies.
And while they.
Our own footprint comes with meaningful cost and marketing advantages, we won't necessarily be confined to the strict limits of our current geography.
Our fiber build capability is the envy of our industry. We have developed one of the best teams for building fiber anywhere in the world and our purpose is clear where it can be economically built and profitably penetrated we want to bring fiber broadband to as many Americans as possible.
And with fiber penetration in America is significantly lower than that of other developed nations, we see a meaningful opportunity to expand our ambition.
Let's turn to slide seven where youll see our critical to do down the left column and.
These are the goals, we set for ourselves to deliver on our strategy.
And to the right you see all that we've accomplished so let me run through them.
We built a world class management team and board.
Expanded our fiber footprint by 60%.
We increased our fiber broadband customers by 25%.
We surpassed our initial cost savings goal and streamlined our operations and.
And we've improved our brand and reputation you can see this in our record high fiber NPS scores and our improvement in churn.
We did everything we said, we would do and faster than expected.
Over the last two years, we've built a strong foundation.
And while this work is never done we can confidently say that we've reached the end of the beginning.
Our business is now ready to enter its next phase our growth phase and with that I'll turn the call over to Nick to further describe this next stage in our evolution and to review our performance in the fourth quarter.
Nick.
Thanks, John let's talk about our transition to growth beginning on slide nine.
I really love this slide.
We're moving fast on two of our key value drivers building and selling fiber and it's translating into financial growth.
Look at the left hand side, you will see that our fiber path things are up 31% year over year.
And customer growth for the quarter is up 17%.
With data consumption is expected to triple by 2025, it's a great time to be in the fiber business.
And I am pleased to see these results convert to revenue in the fourth quarter.
Moving to slide 10, we expect to deliver revenue and EBITDA growth this year.
And we'll do it by pushing on the three key levers outlined here.
We will accelerate our fiber build.
We will command premium pricing for our premium products.
And we will grow our b to B businesses.
We will talk later about these in greater detail first let's look at our Q4 results.
On slide 11, Youll see our fourth quarter highlights importantly in Q4, we reached a critical milestone that we set during our 2021 investor day, a sequential inflection in EBITDA.
This is driven by our outperformance in building and selling fiber.
In the quarter, we built a record 381000, new fiber locations and added a record 76000 broadband customers. The context that two times more than we achieved in the fourth quarter of last year.
Sure.
We had another first.
We delivered fiber revenue growth across all of our businesses.
One last call out you'll see that we continued to generate healthy free cash flow from operations, which we are continuing to invest back in our fiber expansion Scott will share more about this later in the call.
Let's move onto slide 12, and take a deep dive into the fundamentals of our fiber build.
Since we began our fiber pilot in late 2020, we scaled up six fold and I'm very pleased with the fiber building engine we've created.
So how do we do it well.
Well first we have assembled what I view as the best team in the business.
Secondly, we designed a sophisticated model that calculates the returns are building fiber down to every single household in our footprint.
And our model is dynamic so it continuously updates based on our experience in the field.
This is how we prioritize our build to the areas that deliver the highest returns.
Thirdly, we were the first scale I'll build and we are already seeing the benefit of being an early mover with record customer growth and some of our key markets.
Lastly, we used our scale as the second largest fiber builder in the country to our advantage.
Looking at multi year contracts or equipment fiber and labor and this has helped us navigate the supply chain challenges in 2022, and if you turn to the next slide you'll see that we plan to go even faster this year.
Our plan is to accelerate our build to one 3 million homes in 2023.
And the year with approximately $6 5 million fiber locations right on track with our initial plan that we shared with you at our Investor day in 2021.
Given we built 20% faster than we planned in 2022, we now have more flexibility with how we will use our capital in 2023.
And as we have repeatedly said, we will be tightly disciplined in our use of capital. It has always been and will always be fundamental to our build plan on the way we operate this business.
One 3 million target allows us to accelerate the build efficiently and balance this with our ability to sell and install fiber.
This helps keep us within our target cost envelope of 900 to $1000 per location path.
Chasing builds this year above a $1 3 million goal, we've put unnecessary pressure on our supply chain and labor environment as well as our sales and installation teams.
Our build is central to our strategy are you must convert these pumps things into loyal customers to transform our company as efficiently as possible.
Let's move on from building fiber to selling it and talk about <unk>.
So our sales organization 2021, and 2022, we're about overhauling, our consumer offering and go to market strategy to stimulate customer growth.
We simplified our pricing model and launched value added services. We also used promotional tools like gift cards to sweeten the deal for new customers, while our brand repaired.
The result was strong broadband revenue growth.
That is exactly what we needed during this foundational stage of our turnaround.
It also sets the table for us to grow our two by our target of 3% to 4% in 2023, and we have already put in place the actions needed to deliver this objective.
In January we updated our pricing model to more fully match our value proposition.
Part of this we remain charging for value added services and incentivizing customers to adopt higher speeds, coupled with new programs to build loyalty.
We're also at the point, where we can take the training wheels or price promotions.
The results of delivering exactly what we expected.
More than 10% increase in new customer offer with more than 50% of new customers choosing gig plus speeds.
As our customer experience improves so does our reputation in earning customer loyalty becomes more of a fund them or not.
Let me run through just a few examples of how we improve the customer experience on slide 15.
We launched our reinvigorated brand last year, an important moment in our transformation to become a growth oriented digital infrastructure company.
We showed industry leadership as the first Internet service provider to launch two gigabit per second fiber broadband speeds network wide.
And we did it again just a few weeks ago with the launch of our five gigabit service again net worldwide.
And when you pass are blazing fast fiber broadband speeds with unparalleled reliability, it's clear that we have the best offer in the market at the best price.
And over the last two years, we've put the customer back at the center of our business everyday we hunt the customer pain points, and then work hard to fix them.
<unk>, we rebuilt our app based on customer feedback and then introduced our first ever chatbot to make it much easier for customers to find the answer the simple questions quickly.
And I'm pleased to report that our investment in the customer experience really is working.
Since our new leadership team came on board, our fiber broadband customer churn is down 33 basis points.
Fiber net promoter score is up 46 points.
And we're being recognized as the market leader in the areas that matter most of our customers like latency and speed.
On the next slide you can see that we're gaining momentum in our commercial businesses.
For the first time since I've been CEO , we saw a positive business and wholesale fiber revenue growth in the fourth quarter, let me break that down a bit by business.
In SMB, we had record of fiber broadband customer growth.
Our new customer <unk> is up double digits.
Thanks to newly introduced value added services and the quick adoption of our gigabit plus network speeds.
Enterprise is developing a stronger partnership approach with our largest customers, which has driven record breaking fiber sales in the quarter.
In wholesale we have now signed all three major wireless carriers as fiber to the tower customers and we've expanded our relationship with AT&T using our infrastructure to host their mobile edge computing capability. So.
So I'm pleased with our progress in these businesses and excited to share more with you in the coming quarters.
It's now almost exactly two years since I joined frontier and I am extremely proud of the progress we've made to transform this company into a growing digital infrastructure business.
For nine consecutive quarters, our team has consistently delivered record breaking results and relentlessly executed against our strategy.
We have rallied around our purpose of building Gigabit America, and we've created a culture, where everyone at the company contributes to our success and what's really cool is that our progress is starting to be recognized.
Really we were awarded best place to work for working parents best place to work in Dallas.
Aimed a military friendly employer.
We are building an extraordinary company that is creating long term value for the people who work here our customers and our shareholders.
And before I turn it over to Scott.
Just wanted to say a huge thank you to what I believe really is the best team in the business.
By all accounts 2022 was a remarkable year in our transformation.
We overcame challenges delivered for our customers and paved the way for us to become a better company.
I'm excited we're starting 2023 with such great momentum now Scott over to you.
Thank you Nick and good morning, everyone.
I'll start with our fourth quarter financial results revenue was $144 billion a slight decline.
Declined sequentially as higher data and Internet services revenue was offset by lower voice and video revenue.
We earned $155 million of net income and $528 million of adjusted EBITDA.
$326 million of our adjusted EBITDA came from fiber products. This was up sequentially and year over year as we combine strong revenue growth with lower network and marketing costs.
Additionally, we generated $360 million of net cash from operations, bringing our full year total to one 4 billion our healthy cash flow demonstrates the underlying cash generation potential of our business and as a result of our increased focus on liquidity and working capital management.
On slide 20, we show the strength of our fiber customer growth across both base and expansion markets as.
As Nick noted our fourth quarter net additions of 76000 customers set a new record we grew twice as fast as we did in the fourth quarter of 2021.
At the end of 2022, we had 17% more fiber broadband customers and at the end of 2021 and 26% more customers than at the end of 2020.
We are making solid progress on our path to an eventual a $4 5 million fiber broadband customers and are committed build of 10 million homes and businesses and this success is coming from both our base and expansion markets.
And the base fiber footprint, where we have roughly $3 2 million homes, our penetration serves as a guidepost for the eventual penetration of our overall footprint.
And the base penetration increased to 43, 2% up from 41, 9% at the end of 2021 and up from 41, 2% at the end of 2020.
These 200 basis points of improvement in the last two years put us on track to achieve our target penetration rate of at least 45% in next two to three years.
And our expansion footprint, we expect 15% to 20% penetration after 12 months and 25% to 30% penetration after 24 months.
Our 2020 cohort continues to exceed expectations above the top end of our 12 and 24 month guidance.
Additionally, our 2021 cohort ended the year right on target at 18% after 12 months, despite getting off to a slow start in the first six months of 2021 prior to the current management team being fully assembled.
These results give us great confidence in our ability to achieve our penetration targets and we expect continued acceleration in fiber broadband customer growth in 2023.
Moving to slide 21 fiber revenue growth accelerated to 7% year over year consumer.
Consumer fiber broadband revenue grew 15% year over year, driving our overall consumer business to 8% growth.
This mid teens growth rate sets the stage for our overall return to revenue growth in 2023.
Additionally, fiber revenue from business and wholesale grew 6% year over year as the positive leading indicators that we have talked about the past few quarters has started to drive financial results.
As expected copper revenue declined roughly 10% year over year consistent with prior quarters as both consumer and business faced legacy product headwinds.
Turning to slide 22 in the fourth quarter, we achieved the sequential EBITDA inflection that we've been targeting since our 2021 Investor day.
Back in 2021, we set an ambitious goal of achieving a sequential increase in EBITDA by the fourth quarter of 2022.
Not only did we deliver that milestone, but we also achieve year over year EBITDA growth in Q4, excluding subsidies.
We have combined fiber revenue growth with a relentless cost reduction program that continues to be ahead of plan and these two factors drove our sequential EBITDA inflection.
Our momentum in both revenue and cost reduction gives us confidence that we will deliver year over year EBITDA growth in 2023.
I will now turn to capital structure on slide 23.
At the end of 2022, we had approximately $2 8 billion of liquidity to fund the fiber build.
We ended the fourth quarter with $2 $1 billion of cash and short term investments and $683 million.
Of available capacity on our revolver.
In addition to the strong liquidity, we also have healthy balance sheet flexibility.
Our net leverage was three four times at the end of the quarter.
Approximately 84% of our debt is at fixed rates and we do not have any significant maturities earlier than 2027.
Our capital structure and maturity timeline provide us with a clear runway to continue accelerating our fiber build.
Moving to slide 24, I'll give some additional color on our progress in simplifying our business and delivering strong returns on invested capital.
We delivered approximately $90 million of additional cost savings this quarter, bringing our cumulative cost savings to $340 million.
We recently increased our cost savings target to $400 million by the end of 2024, and we remain confident in achieving this goal.
Additionally, the underlying cash flow generation of our business remains strong we generated $1 4 billion of net cash from operations in 2022, which we invested in our high return fiber build.
Our fiber build will continue to be the primary focus of capital allocation over the next several years and I want to reinforce Nick's earlier comments about rigorous discipline of capital deployment.
Our fiber build plan is informed by our detailed dynamic build model, which gives us great conviction that we will earn attractive mid teens, IRR and areas, where we build.
Lastly, we are committed to prudent balance sheet management, our long term net leverage target remains in the mid threes, but as we have said before we may be comfortable going slightly above this range for a period of time to continue accelerating our fiber build with a path back to the mid threes at the end of our build.
I'll now turn to our 2023 guidance.
For 2023, we expect adjusted EBITDA of $2, one one to $2 $1 6 billion.
Representing low to mid single digit growth versus 2022.
We also expect full year revenue growth to be positive as well.
While EBITDA may not grow sequentially in every quarter of the year due to seasonality, we do expect to deliver positive year over year growth in every quarter.
Next we expect capital expenditures of approximately $2 8 billion rub.
Roughly flat year over year, even with the acceleration of our fiber build.
For additional color, we expect roughly $500 million to $600 million of maintenance capex with the balance coming from growth oriented fiber build and customer acquisition Capex.
We remain confident in our projected direct bill cost of 900 to $1000 per location, although as I've said before inflationary pressures are moving us towards the top end of that range.
Additionally, due to inventory management and timing related factors.
Capex to be front end loaded in 2023 with the first quarter higher than the fourth quarter of 2022, and then stepping down in the second half of the year.
I'll close by reiterating our investment thesis on Slide 26, first there is strong and growing demand for fiber driven by expanding household data consumption.
Second fiber is a superior product fiber has symmetrical upload and download speeds that far exceed cables capability, a lower cost of ownership and lowered latency levels that enabled popular uses like video conferencing and gaming.
Third we have a clear strategy and purpose, we have rallied around our purpose of building gigabit America as we build fiber, we're making it possible for millions of consumers and businesses to connect to reliable high speed broadband.
Fourth we have ample liquidity and a strong balance sheet, providing us with access to capital to fund our strategy.
Lastly, I am proud to be part of a strong and experienced leadership team that has consistently delivered on our commitments every quarter.
These results Mark our ninth consecutive quarter of record fiber builds and our sixth consecutive quarter of record fiber broadband net additions.
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.
Q&A.
Thank you very much as a reminder, if you'd like to ask a question. Please docile one now.
And our first question is from the line of Brett Feldman with Goldman Sachs.
Is open now if you'd like to proceed.
Great. Thanks for taking the question and its something of a I guess a broad based question around partnerships. So during your scripted remarks, you noted that Youre also beginning to look at out of region fiber deployment opportunities some of the your telco peers.
Started to explore out of region opportunities had been doing that through joint ventures, and I'm curious if you think that that would be the most appropriate format for doing that and maybe.
If there are ways you might even consider partnering in region to mitigate some of the inflationary pressures, you're seeing and maybe just to move a bit faster.
That's just part of the funding strategy you have in mind and then extending this question a little bit you've extended your relationship with AT&T now involves mobile infrastructure. So I'm wondering if you're increasingly seeing opportunities to partner more closely with other wireless carriers and potentially getting to the point, where you'd be offering their wireless services in your broadband packages.
Thank you.
Yes.
Hey, Brad it's John .
So thanks, that's a loaded question. So why don't we do this I'll take maybe I'll take the first half and then I'll ask Nick to cover the.
Second so you raised the point that we highlighted on the front end of the call regarding opportunities beyond the original $10 million committed build which we think is really important and I do believe it makes sense for us to reemphasize. The 10 million that we identified is by far our largest opportunity to create.
Value and it's really important for our management team and everyone in the organization to remain sort of crucially focussed on execution there.
And of course that that's what we'll continue to work towards and continue to do but with that said in the course of scaling our business and improving our operational performance.
We've created a set of core competencies that we think are really critical and particularly could allow us to unlock further value even beyond that $10 million and so for US. The first question then as well what are those other opportunities and as we identified in the middle of 2022 right in front of our own Frac.
<unk> inside of our own existing footprint, we identified somewhere between $1 million and 2 million households that we see with a clear path opportunity to create sort of that same mid to high teens type of IRR, So thats sort of bucket number one.
Bucket number two is the <unk>.
Balance of our franchise footprint and its roughly call it $3 million to $4 million, which on its own.
It doesn't lend itself to.
Profitable built but if we anticipate the introduction of federal state local subsidies it could make those more economic and indeed unlock our opportunity to create value. There and then lastly in areas that are not strictly within our franchise, whether they're near or somewhat near adjacencies to our current foot.
Where are the places that we may pass through to get to other areas that we may cover could also unlock what could be a meaningful opportunity for us. So we're working now inside the business to further refine first and foremost that target opportunity set and once we have made a determination on where we might build then of course. The next question is how would we source.
The capital that would be required to execute it and to that end. There are a number of options that we could pursue this may well be an initiative that is best accomplished via a joint venture. So we've certainly started to talk about that as well internally, but candidly we have more work to do inside before we make any definitive decisions.
<unk>.
The way I close out I would just say we remain maniacally focused on the committed build the first 10, but by leveraging those capabilities that I referenced we do think we have the opportunity to drive fiber expansion, both in and out of our footprint. So more to follow on that but that's kind of status now Nick do you want to take part about other partnerships.
Thanks, John .
Yes, you mentioned.
Deal with AT&T, which started as a fiber to the tower.
<unk> proposition and I'm very pleased to say, that's going very well and in fact, just all not now extended fiber to the tower deals with all three of the major wireless operators. So very pleased about that.
Moreover, you also heard us talk about frontier as a growth oriented digital infrastructure company.
One element of that is recognizing the absolutely unique footprint, we have with our central offices, which have space power and connectivity very close to where people actually consume large amounts of data.
And that makes the asset very attractive to anybody that's transmitting large volumes of data back and forth between customers.
And when we think about that we think about companies like that a lot of operators, but in the future it could be companies like Amazon or Microsoft or any of those guys who are concerned with distributing in large amounts of data and therefore needed cashed close to where it is consumed. So this is a great asset we have a central office footprint.
Which have power connectivity and most importantly proximity to consumers.
Now beginning to monetize through our wholesale division I'm delighted that AT&T is our first customer.
And any additional thoughts around incorporating third party mobile into your offers.
Sure John So I pick that up.
Yes look as we've said before we've got a lot of experience and the team.
Working in the cellular industry ripples, Jiang with Verizon being with Vodafone.
Veronica.
C&I with AT&T.
Many others across the teams and that's something we understand very well something we're watching very very closely and.
And as we've always said.
Hey, if you are really going to change such that bundling mobile together with <unk>.
High speed fiber broadband does one or two up two things both of which helped us grow our core product.
As you've seen in our results today, we are still delivering record growth in high speed fiber broadband or when it helps us reduce churn and again as you've seen today, our churn continues to head in the right direction is hitting records quarter after quarter. So for the moment, we don't see the need to launch <unk> and to bundle that with core.
Our fiber broadband offer.
We're watching it very closely we think it's something we could spin up relatively quickly and efficiently if we needed to.
But we're also conscious that doing so would be a distraction.
Capital when we have such an excellent use of our capital and building fiber broadband. So if we can carry on using our capital to do that and nothing else will be extremely happy.
Streamer behavior changes such that we need and then we'll move very swiftly to do that.
Okay. Thank you.
Yeah.
Thanks, Brad operator.
We're now ready for the next question.
Thank you. Our next question is from Philip Cusick of Jpmorgan. Please go ahead now.
Thanks, guys.
<unk> spend grew increased steadily.
Should we think about that going forward.
On your your promotions I wasn't sure quite where youre going with that.
Maybe you can talk about what the pricing is looking like in your fiber markets and how you expect that to trend.
Then.
Following up a little bit on.
<unk> question.
I didn't quite understand how you think about the attractiveness.
<unk> government opportunities, which do require capital.
B, which is coming and then all of that versus wave three and your current funding position.
If you can talk about that thank you.
Yeah, but perhaps you'll have fallen off and Scott you can add some color there and John will come to you for the funding.
When we think about I mean, the first thing I want to draw everyone's attention to is that as we've spun off our operational capability over the last two years.
The largest pure play fiber builder in the states, we've obviously had to move extremely quickly.
In doing so that means the company is making very conscious decisions about how we allocate our resources.
So our markets and to our various businesses.
One of the most pressing things over that period has been to scale up.
Sales and sales engines and I think we've done that very successfully our customer.
Fiber broadband revenue has grown by nearly 30% in the last two years.
But we're now transitioning to the stage, where we're looking to optimize our go to market activities and.
Help realize the full value that our superior offering I think delivers a perhaps Scott I can now how do you just talk a little bit about how we're doing that in some of the pricing actions we've already taken.
Yes, that's right. Thanks for the question Phil.
Arthur you saw basically flat down a little year over year in Q4, we have said we expect it.
To be flattish in Q1.
As we recently put in place.
Pricing actions, we've rationalized our use of gift cards, and we're doing a lot better job targeting certain segments of the base that should all flow through into really healthy growth in Q2, Q3, and Q4 such that by the end of this year, we'll be back for our roughly 4% a year ARPA growth year.
Per year.
Yes.
Just jump on the last part of it and maybe a bit more on the on the bead.
Process the broader government funding process as you know very well it looks to be about mid year that youll see sort of matched settled in in the funding mechanism begins to gear up.
With federal funding allocated to save probably late in 2023, and then the states turning and making those funds available to companies call at the beginning of 'twenty for them, it's sort of a meaningful way, but we've scaled up pretty significantly in terms of our internal resources as you would expect across the whole of it engineering planning.
Lobbying capabilities Grant coordination project meant that the whole the whole thing.
A big initiative there are thousands literally thousands of bids that will be required across the country for the program to be realized so frontier does expect to participate quite significantly in that.
And that initiative and we think it could be important to us as we mentioned there are around $3 million to $4 million.
Homes that fit within our $15 million overall footprint that today sort of on a standalone basis absent subsidies would not make economic sense to pass, but with some level of economic subsidy could become more worthwhile and something we pursue one of the things thats, maybe not as obvious though.
As you think about where those clusters reside within our broader geography, there may well be homes that don't require direct subsidization, but when you pass the long road to get to those homes that would be part of a bid.
Subsidized build that they suddenly become more addressable they become more profitable because you've now sort of gotten close enough that you can finish out of built so those numbers are actually kind of interesting in that sits both inside and outside of our footprint. So where you have near adjacency you gained sort of marketing distribution service and.
Patient advantages. It allows you to move quickly in terms of the speed to build and how quickly you can scale operations. So all of this is open for discussion. The question about how it might be funded is something we won't answer today, but we are certainly open to the notion of partnerships joint ventures and the like to go there.
Availability of fundings, but the speed with which it can be executed so more to come on all of this.
As the situation continues to evolve and develop but for today, that's kind of where we're seeing it.
Thanks, John Scott if I can follow up one thing I didn't quite understand your arm, who comment should we be looking at <unk> growth at the end of the year targeting.
That's right even by Q2, we should be growing sequentially again, so again Q1, we expect to be flattish with where we ended Q4.
With the results of the pricing actions we've taken.
Yes.
Like I said rationalized use of gift cards by Q2, we should be growing again sequentially.
Thanks, Phil Operator, we're ready for next question. Please.
Thank you. Our next question is from the line of Michael Rollins of Citi. Please go ahead now.
Thanks, and good morning, two questions first just.
I'm curious if you could provide more detail on the broadband operating environment and you did earlier in the discussion your slide show, how youre doing on <unk>.
Market share, particularly in some of the.
Vintage fiber market, just curious what youre seeing on a go forward basis on the opportunity to take share relative to what's happening with new rates.
Possible cable reactions and any impact you're seeing on wireless, particularly on the copper side and then secondly.
I look at the breakdown of fiber EBITDA versus copper EBITDA. It looks like there may have been a step up in fiber and step down in copper and just curious if you could talk about some of the contributing factors and if there are additional.
Changes in profitability between these two segments as you look out into the future beyond just what you might get from the operating leverage of growing fiber revenue. Thanks.
Yes, Thanks, Michael.
But on the broadband operating environment as we've said in previous calls.
Fiber broadband and broadband in general in the U S of course is a highly competitive market at the same time and I think 86% of our footprint, we have one or fewer competitors.
But as we transition this company to being a fiber oriented.
Growth oriented digital infrastructure company.
It's true that we are taking market share in the majority of our markets as we head towards our terminal penetration.
Penetration of 45%, which we discussed on previous calls now just to remind everybody why do we believe 45% is doable well.
For a couple of reasons, firstly that historically many of our markets were at or above that level of penetration. So in a sense, it's getting back to where we were before as we become more operationally focused and efficient.
Within the market structure I've already described.
Secondly, we've already got some of our key states at or above that level. So we know it's doable in today's environment and thirdly, we believe we've got the best product at the best price, that's highly attractive to consumers and so we're seeing good early uptake on the cohorts of fiber build that Scott shares, but even perhaps scope we can.
Talk about that in a second.
The majority of our customers are still coming from cable.
One of the sources of growth for us.
Both of these movers or copper conversions and on the impact of wireless or fixed wireless access I mean, yes, as we've said before it's a feature of the market now we think it is economically self limiting we think it is.
A very different proposition to full.
Metrical high speed fiber broadband and if you think about it.
Average household with multiple full K Tvs gaming stations $5 $10 15 cellular devices and so on and so on.
Fiber is available you will take part.
So we think it SWA is a feature of the market, but it's very different segments tends to.
More itinerary groups building side construction side, those sorts of things and it has its purpose and.
And therefore, we'll nibble around the edges of a couple of base, but I think when fiber rolls into town people will choose but Scott.
Scott do you want to pick up on the other bits about sure. Michael This is Scott on your question around fiber and copper EBITDA I'd say, we're continuing the same trend of fiber EBITDA continues growing quarter after quarter and copper EBITDA has declined quarter over quarter for the last several years.
It was a step up because we stepped up the overall performance of the company. So had a $50 million sequential step up on fiber EBITDA. Most of that was revenue driven we had really strong consumer by revenue growth.
Finally business and wholesale fiber revenue growth, which was the first time in several years. So most of that was revenue driven but then we're also ahead of plan on our cost reduction efforts and so as fiber becomes an increasing part of our.
Base.
Fiber benefits from those cost reductions, whether it's head count.
Footprint rationalization better efficiency in our work for us So all of those things drove the $50 million step up in fiber EBITDA over the quarter.
Thanks, Michael Thank you operator, well take our next question. Please.
Certainly our next question is from a line of Jonathan Chaplin of New Street, Jonathan. Please go ahead.
Great. Thanks for taking the question guys.
The $10 million initial bill talk are you still expecting to hit that in 2025.
And if so sort of acquired some acceleration in $2004 25 can you talk about what will change in terms of the constraints.
Limiting the pace of deployment this year.
And will allow you to go faster faster next year on year. After and then sort of on the same theme, but drawing back a little bit.
I seemed a little bit of attention and some of the comments when you talk about this phenomenal fiber deployment machine that you built that's the envy of the industry.
<unk> it is.
With phenomenal opportunities beyond the $10 million indeed.
<unk> markets and at the edge of your footprint, but at the same time the pace of the deployment in 'twenty three is going to be slower than it was in the fourth quarter of 2004 to help sort of tie those elements together a little bit for us.
Thank you.
Yeah, Hey, Jonathan It's John I'll start very briefly and I'm going to pass it pretty quickly to Nick.
When we talk about all those competencies.
When I think about where we were just two years ago. It is pretty remarkable and a real.
Sort of a complement to the team broadly and all the way across the organization to how fast they've managed to scale the business and it's easy to forget where we started.
But the ability to go from 60000 build to 600000 to a $1 two and now to continue accelerating the build to a million three here in 2023 is pretty remarkable but with that beyond the build itself is also the balance of our internal infrastructure that needs to similarly scale in a very rapid.
At pace, the ability to scale installation capacity the ability to sell scale distribution capacity the ability to scale service delivery and not only scale, but improve it as you go.
All of that effort is what's talked about here and I think that the pivot you see in terms of our.
Approach to 2023 is about synchronization and it's about ensuring that the whole of our execution as efficiently and effectively delivered so in the beginning when you first start youre doing everything you can to scale fast to get this thing moving and moving forward and then as you go you start to say, okay. How do I perfected how do I make this a better in.
Of the rational way that you go about execution on the day to day basis. So maybe Nick if you can sort of start in on the why one three.
For this year, that's sort of how we think about what comes next John Thanks.
You're saying just to echo a couple of those points.
Two important facts, Jonathan I think to land on firstly building, one 3 million.
Fiber path things. This year will mean, we will have delivered by the end of the year exactly the build ambition that we set out at emergence two years ago.
Secondly, as John said.
We are actually accelerating build this year and I think we're the only at scale fiber build it to be saying that as we go into the year now if I take a step back as John said when I got here, we had to rebuild or scale almost every operational elements of this business.
Execution of our strategy and scale up to building fiber with real pace I think we've done this well.
As you already know the bill in 2022 was.
<unk> more than 20% faster than we originally predicted.
That gives us some operationally.
Operational flexibility and Optionality.
About how we optimize results across the entirety of our company.
<unk> maintained both strong capital discipline and as a result of mid to high teens return on capital, which as we've always said is a huge focus for the business. So I think to get to the straight answer to the straight question the way to think about.
Build ambition of one 3 million homes passed this year is at a minimum build from here on.
We think we've got plenty of operational gas in the tank to further accelerate.
And when the conditions are ready for that.
Okay.
Thanks, Jonathan Operator, we'll take our next question please.
Thank you. Our next question is from the line of Frank Louthan of Raymond James. Thank you. Please go ahead now.
Great. Thank you on the business side can you comment a little bit about.
About that environment, where you're getting the traction most.
Are you seeing any fixed wireless come in on on the very small into that and then what are you hearing against the current economic backdrop as far as customers what they're preparing for it.
Yes, Scott you can start with the when everything from us or a customer behavior perspective sure Frank.
We track it closely and we have not seen any impact of broader macroeconomic conditions on our customer base.
Important metrics to us our days sales outstanding which are basically flat with where they were last year bad debt expenses actually trended down.
Because the consumers remain healthy and we have an even higher portion of our customers on Autopay, which has been a nice operational improvement. So we watch it closely but haven't seen an impact from the broader macro economy on our customer base.
Thanks, Doug.
On business.
Frank I think the first thing is the new leadership that we welcomed into frontier just a couple of quarters ago.
We are already driving significant operational improvements and we're seeing that flow through into our performance and indeed across all three business units missing a sharp increase in order volume and a much more favorable sales mix, which is leading to higher pricing and flowing through into the P&L in a very positive way.
Fiber revenue from business in wholesale as we said in the presentation grew 6% year over year.
Positive leading indicators that we've talked about over the past couple of quarters are now flowing through into P&L and financial impact.
I'm part of this change is driven by our strategic agreement with AT&T, we talked about that earlier on the call, but also it's driven by a much greater focus on the SMB small medium sized.
<unk> businesses within our overall business mix, where these customers have a high propensity to buy high speed symmetrical fiber services.
Where there's a great synergy between our business operations and our consumer operations were essentially the same machine is very efficiently serving both consumers and small business customers. This was an area, which had been frankly ignored in the past by the company.
So we had built puffing path. Many many thousands of small businesses, but not gone back and connected them. So we're going in and doing that.
Built up a team.
Experts in that and of course, we have the marketing propositions pricing propositions go to market tactics and so on which are now flowing through into result, but if we take a step back on the business market overall and say, okay. Why is frontier starting to perform well when perhaps you're seeing and others a continual decline while the number of things just to draw.
And your attention too.
First of which is we are a small part of the overall market.
So in many of them as we do not reflect overall market dynamics.
Secondly, we are much less exposed to large enterprise customers than some of our enterprise peers.
And we are if anything accelerating our shift towards focusing on SMB customers, whereas I said, just now they're a strong operational marketing pricing synergies with our large consumer base.
And certainly we've got a new executive team across all of our enterprise businesses that are really beginning to drive strong operational improvements day in day out as we think about this going forwards, we really got a number of targets to measure our progress in the business market. The first step was to inflect on business fiber growth sequentially, which we've achieved this quarter.
Uh huh.
The second step is going to be to grow our fiber business revenue year over year, and we expect to do that in 2023.
Third is full fiber growth to offset copper declines, which we think will happen sometime after 2023, so I'm optimistic about our progress in our business segments. I think we made a great start with the best is yet to come.
Alright, Thanks, Ryan Thank you very much.
Thanks, Brad Operator, we'll take our next question please.
Great. Our next question is from Greg Williams of Cowen Greg Your line is now.
No.
Great. Thanks for taking my questions I wanted to pick up the last question on the optimism about business services. So in your guidance today does that assume that wholesale is now stabilized year over year in wholesale so about half that.
Overall makeup.
Second question is just on the expected capital raise you'll need in 2024.
I think the debt markets are open to you guys.
Specifically I was wondering about your opportunity to tap securitized debt I know metro.
Metronet pulled off securitized debt Raisings last October is that something you can explore or D. Our debt covenants on your existing bonds preclude you from doing so thanks.
Yes, Greg This is Scott, let me take both of those so.
Our guidance for 2023, Ebitdas growth implies that business and wholesale stabilize to slightly grow year over year in 2023 versus 2022 at a primary growth engine will have in 'twenty three will be consumer revenue. We are further along in that transformation and have allocated more capital to the <unk>.
<unk> fiber build business and wholesale together should stabilize.
On your second question on funding I'd say.
We are considering a range of debt funding mechanisms. We have significant capacity first lien we have other options ahead of us. So we're exploring all options.
But really.
We're confident in our ability to continue funding the fiber build and continue to accelerate.
Thanks, Craig.
Operator, we will take our next question.
Thank you very much. Our next question is from the line of Nick del Deo Moffett Nathan Please.
Please go ahead now.
Hey, Hey, good morning, Thanks for taking my questions.
First as we think about some of the changes you're making from a from a pricing and promotional perspective, we obviously should think about that being linked to the net adds.
So as we think about that.
The pricing that you put through.
Are you planning to rely rely less on gift cards and promotional tools truly worried at all that that's going to result in any sort of headwind to net adds or do you feel comfortable that it's not going to be an issue.
Yeah, Nick it's Nick.
Good question. Thank you for that and it's supposedly we think about it.
Lots and lots of detail.
But this is a dynamic market.
All the players are moving pricing and promotion all the time, we watch this.
Through a microscope every single week.
Every single quarter.
Reflecting on that all the time and I say that because the big thoughts underpinning all of our news is the recognition that we have the best product.
And we wanted to deliver it at the best price the best prices something that determined by the market.
The best product as something as determined by the underlying technology that we have and we believe consumers have a strong appetite for the best product at the best price now.
Now as we look at the evolution of our pricing strategy over the last couple of years. It is very clear two years ago.
Through bankruptcy and before frontier.
Brian .
And it needed to compensate that with pricing promotion tools and so on.
We repair the brand as we improve the product as we were the first to launch two gig symmetrical network why we've just become the first launch five gig symmetrical nationwide and extend that pricing ladder and get more options for customers to enjoy these benefits of high speed.
Metrical connectivity and as we begin to layer in value added services, which we started but there's many more in some really exciting ones still to come. So we see the brand repairing we see our ability to price at a different level and still be accepted by consumers repairing and so we're moving inch by inch up by Admob are mile.
To repair the brand.
And to charge, what we think is that the right price for the best product in the market now frankly at any price or product does what cable com.
We deliver symmetrical a high speed network and network services that the cable content. We know that so we also see a separation in our proposition between kind of core cable and what we do and that begins to come onto price premium as we're seeing with the launch of our five gig services recently.
So it's something we watch carefully we always want to provide the best product at the best price and we believe that the brand repair as consumer knowledge of frontier improves. So we can maintain gross to.
And that outperformance wireless charging a fair price for the best product.
Okay. Okay. Thanks for all that detail.
Maybe one for Scott.
You've obviously made very progress a very rapid progress with respect to your cost savings initiatives.
What are the big cost buckets that you're attacking from here to get to the $400 million.
And how comfortable are you with achieving that target within the timeframe you laid out before you can move on to the next target.
Sure. Thanks, Nick.
Number one we're very confident in achieving our $400 million targeted by the end of 2024 were already north of $300 million with a clear line of sight to get to 400 and beyond I'll give you a little color on the different buckets of cost savings, we have a lot of frontline productivity improvements still ahead of us.
Improving technician productivity, giving them better tools in the field to take cost out of the system. We have a lot of back office automation, we are still very immature in the automation journey and have a lot of work to do there.
<unk> mentioned, we have.
We're doing.
Investing a lot in self service capabilities for customers to service themselves and nobody wakes up and says they want to call their internet provider that day. So we want to make it easier for our customers, which also takes cost out of the system. So a wide range of cost savings improvements and we have a lot of confidence that we will exceed the $400 million.
<unk> target that we have.
Thanks, Nick.
That concludes our fourth quarter 2022 earnings call. Thanks, everyone for joining.
Thank you. This concludes today's call you may now disconnect your lines.
[music].
Okay.