Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q3 2023 Earnings Call Transcript

Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q3 2023 Earnings Call Transcript November 1, 2023

Frontier Communications Parent, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.06.

Operator: Good morning. Thank you for attending today’s Frontier Communications Third Quarter 2023 Earnings Call. My name is Megan and I’ll be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to Spencer Kurn, Head of Investor Relations at Frontier. Mr. Kurn, you may proceed.

Spencer Kurn: Good morning and welcome to Frontier Communications third quarter 2023 earnings call. This is Spencer Kurn, Frontier’s Head of Investor Relations. Joining me on the call today are Nick Jeffery, our President and CEO; and Scott Beasley, our CFO. Today’s presentation can be followed within the webcast available in the Events & Presentations section of our Investor Relations website. Before we start, please see our Safe Harbor disclaimer on Slide 2. 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 Nick.

A long-distance telecommunications tower looming large against a dawn sky.

Nick Jeffery: Thanks, Spencer and good morning, everybody. As you saw in our press release this morning, we reported another strong quarter of operational results and delivered accelerated EBITDA growth. Before we go into details on the quarter, I want to highlight the progress we’ve made in executing our strategy over the last two years. At our Investor Day back in 2021, we outlined a clear plan to build a future-proof digital infrastructure company designed to meet the current and future needs of our customers. Our strategy is based on four value drivers: build fiber, sell fiber, improve customer service and increase operational efficiency. And if we turn to Slide 4, you can see that we’re delivering on our plan and we’ve done so even in a challenging macroeconomic environment.

Let’s start with our fiber build. Since we started in late 2020, we’ve expanded our fiber footprint by approximately 90%. We now provide 6.2 million homes and businesses access to our high-speed fiber network and we’re more than halfway to our goal of 10 million fiber locations. On fiber penetration, we’ve grown our fiber broadband customer numbers by approximately 45% since 2020. And our base fiber footprint, we’ve now achieved penetration of 44%, just shy of our long-term target of 45% or better. And in markets where we’re building fiber, our penetration rates are at or above our target ranges at the 1- and 2-year marks. And we’re doing all of this whilst also growing ARPU, showing that our fiber offer is clearly attractive to our customers.

We’ve also improved customer service. Over the last two years, we’ve created a culture where earning customer loyalty is a part of everyone’s job. A weekly drumbeat of operational improvement enhanced by new digital channels means we are now better able than ever before to serve our customers. We can see the results of these improvements in our record Net Promoter Scores, reduced churn, reduce truck rolls and lower coal volume. And finally, on operational efficiency, we’ve dramatically simplified the way we work by eliminating unnecessary processes and systems, decreasing our real estate footprint and investing in new digital tools to make us more productive. We are on track to achieve $500 million in cost savings, double our initial target by the end of this year and we’re not — this should create significant shareholder value as we execute on the key levers of our financial model.

It all starts with revenue growth. We offer customers a superior technology at a compelling price and we do this in a highly attractive market structure with only 1 or 0 gigabit capable competitors in 86% of our footprint. And these market dynamics support revenue growth as we increase the number of fiber customers and increase ARPU. At the same time, we’re actively managing structural revenue declines in our legacy copper and voice products. And together, we expect to see sustained revenue growth as fiber becomes a greater and greater percentage of our overall mix. The next driver of returns is increasing margins. We are constantly identifying ways to work smarter and our targeted investments in technology, specifically in the areas of digital and automation should drive sustainable long-term savings.

Also, as we grow revenue and increased scale which should benefit from favorable unit economics. Fiber is an inherently more efficient technology and delivers tomorrow’s capacity needs at a fundamentally lower cost and legacy network. The strong economics of our model combined with fiber’s inherent scalability should lead to material margin expansion. Next, let’s talk about capital. I’m pleased to say that we’re in a very strong position when it comes to liquidity. Thanks to the securitization transaction we executed earlier this year, we have a clear pathway to fully fund our build to 10 million locations. While the current interest rate backdrop is clearly a challenge, we’ve proven we can navigate it well. We have high confidence in our ability to deliver IRRs in the mid to high teens, well above our cost of capital.

Ultimately, value is derived from EBITDA growth and cash flow generation. And our revenue mix expands towards more fiber, we should show accelerating EBITDA growth. And to give you a glimpse of what we’re driving towards, I’d like to revisit our steady-state model. At a fiber build of 10 million homes passed and targeted penetration of 45%, we expect to generate EBITDA of approximately $4 billion. Now after subtracting maintenance and customer connection CapEx of approximately $1 billion, we should, therefore, yield recurring cash flows of approximately $3 billion. As we reach this steady state, we should be able to generate the cash flow to both reduce leverage and return cash back to investors. And given the inherent superiority of fiber, we should be able to generate attractive returns for decades.

Now let’s turn to Slide 6 to review how our third quarter results illustrate our progress. This quarter saw our strong operational performance, deliver accelerated EBITDA growth. We delivered EBITDA growth of 4%, our fastest quarter of growth in more than 6 years. We expect another quarter of solid EBITDA growth in Q4. I also want to call out the positive trends in our customer growth this quarter. Broadband net adds were up 20%, both sequentially and year-over-year and consumer ARPU growth turned positive in the first quarter in more than a year. This is the direct result of the targeted changes made earlier this year to bring our ARPU more in line with the market. These trends powered positive overall consumer revenue growth for our first time as a new public company and we expect this growth to accelerate net quarter.

In conclusion, I’m pleased with the progress we’ve made in transforming Frontier into a fiber broadband leader and I’m excited about the tremendous opportunity ahead of us. Before I turn the call over to Scott, I want to say huge thank you to all of our team. I appreciate the hard work it takes to drive our transformation and advance our purpose of building Gigabit America. So, thank you, all. Scott, now over to you.

Scott Beasley: Thank you, Nick and good morning, everyone. I’ll start with the financial highlights of our third quarter. Revenue was $1.44 billion. Strong fiber revenue growth of 10% was offset by legacy copper declines. We had $11 million of net income and we earned $526 million of adjusted EBITDA, up 4% year-over-year due to strong fiber growth. $328 million of our adjusted EBITDA came from fiber products which grew 19% year-over-year. Additionally, we generated $383 million of net cash from operations, bringing our cash from operations to $1.4 billion over the trailing 12 months. Our healthy cash flow before CapEx demonstrates the underlying cash generation profile of our business. Slide 9 highlights the strength of our fiber customer growth across base and expansion markets.

The chart on the left shows that our broadband customer base grew 19% over the last 12 months and has grown 45% since we started building fiber in late 2020. This is an encouraging trend for two reasons. First, we achieved this solid customer growth while simultaneously growing ARPU. Second, we have grown our fiber customer base in an environment where household moves have been low. And our base fiber footprint of 3.2 million locations, our penetration increased 100 basis points to 43.9%. This is just shy of our terminal penetration target of 45% and serves as an indicator of where we can drive penetration in our expansion footprint. The chart on the right maps the penetration curves of each expansion cohort. As you can see, they are all performing at or above our target ranges at the 12- and 24-month marks.

Moving to Slide 10. Fiber revenue growth accelerated to 10%, driven by healthy consumer performance. Excluding our legacy video product, Consumer Fiber revenue grew 20% this quarter. Overall, Consumer Fiber revenue grew 13%. Our Fiber revenue growth offset copper declines. And as Nick shared, overall Consumer revenue grew for the first time since we became a new public company. Business and Wholesale Fiber revenue was up 5% year-over-year. In Q4, we expect total business and wholesale to be down slightly sequentially and as Fiber revenue remains roughly flat and legacy products declined. Our strong Fiber growth drove an acceleration in adjusted EBITDA this quarter. If we turn to Slide 11, we you can see that we grew EBITDA by 4%. This was driven by Fiber revenue growth, effective cost reduction and actively managing copper declines.

We expect these trends to continue in Q4. Let’s turn next to capital expenditures on Slide 12. We are on track to meet our guidance of full year CapEx in the $3.0 billion to $3.2 billion range. We previously shared that CapEx would decline in the second half of the year as we would begin consuming prework and using the inventory that we purchased earlier in the year. We also expected to have a lower cost build mix. That’s exactly what we saw in the third quarter and we expect more of the same in Q4. As I said last quarter, we expect 2023 to be our peak CapEx year. We’ll now turn to liquidity on Slide 13. At the end of the third quarter, we had approximately $3.4 billion of liquidity, including $2.1 billion raised through our fiber securitization in August.

This transaction was a significant milestone for Frontier as it provided a clear path to fully fund our fiber build and refinance traditional debt over time. Additionally, the deal highlighted the value of our mature fiber assets and it attracted a new pool of investment-grade long-term investors. In addition to our strong liquidity and access to capital, our balance sheet remains healthy. Approximately 87% of our debt is at fixed rates and we do not have any significant maturities until 2027. Finally, you can see on Slide 14 that our 2023 guidance remains unchanged. We continue to expect adjusted EBITDA in the $2.11 billion to $2.16 billion range. We expect to pass 1.3 million additional locations this year and expect cash capital expenditures of approximately $3.0 billion to $3.2 billion.

I’ll close by saying thank you to our team for another solid quarter. I’m personally proud of the work that we are doing to build Gigabit America and deliver connectivity to millions of consumers and businesses across the country. Now, I’ll turn the call back over to Nick.

Nick Jeffery: Thanks, Scott. I know many of you have seen the reports of Jana’s [ph] recent presentation. We’re not going to take any questions specific to that topic on today’s call. We’ve always engaged in open and regular communications with all of our shareholders and we will continue to do so. Our Board of Directors and management team are focused on driving long-term value for our shareholders, employees and customers and continue to take actions that enable us to deliver on this objective. Before we open it up for questions, I’m pleased to announce that we plan to host an investor update in early 2024, where we will provide additional detail on our longer-term financial model and expectations for driving shareholder value. Now, we’d like to open the call up to your questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question will go to the line of Brett Feldman with Goldman Sachs.

Brett Feldman: And two, if you don’t mind. Nick, when you had come to Communacopia [ph] a couple of weeks ago, you had mentioned how the market conditions were clearly having some impact on the testing of your subscriber growth, I think you were referring to the way seasonality has become a little more muted and household moves are down [ph] and Scott had referred to that as well. And obviously, it’s good to see that you’re still tracing towards your penetration targets despite that. But I’m curious, can you give us a little bit more insight into how meaningful you think those dynamics are to your growth, maybe some of the ways you’ve recalibrated in that environment? And is it getting to the point where the market has changed enough that you might be recalibrating the balance of passing that you’d want to have over the next year or so versus maybe be more focused on simply driving penetration of what you have?

That’s the first question. The second is the commentary you gave about business in wireline being down a little bit sequentially in the fourth quarter. I hope maybe you can just give us a broader update on how to think about the outlook for that segment in the current market conditions and whether you think that’s going to be something that could drift to be lower in the near term or whether you see a clear half back to sustained growth?

Nick Jeffery: I mean, your question about market conditions is a good one because just like every other business, we’re not immune from those things. But I think what we have done with some degree of success, is really focused on our core strategy of building fiber, selling fiber, improving care and becoming more efficient. And as that kind of translates into revenue growth. I think we see the strategies around ARPU development, penetration and so on, just progressing quarter-over-quarter in a very logical way. That doesn’t mean in any way that we’re immune from the wider market dynamics which affect us just as much. But if I look at how that strategy is flowing through, Consumer Fiber Broadband grew 22% year-over-year with double-digit growth in Consumer and ARPU up 2%.

And our total Fiber revenue is also up 10%. So whilst those things are naturally offset by copper declines — and as we open up new territories, new sectors and so on is in a sense, countervailing the cyclical pressures that we see. So it’s a question of the kind of growth engine that we’re building offset by any quarterly cyclical headwinds that we face. And the net of those two things is transitioning very well into the kind of overall growth that we’re seeing. Now on Business and Wholesale. As — just as with every other company, Business and Wholesale is slightly lumpy quarter-to-quarter. And we have a little bit more copper kind of headwinds in that business than in other parts of the business. But that said, it’s — we’ve got a very good team that’s continuing to refine and improve that business.

We’re on track to achieve kind of stable total Business and Wholesale revenues for the full year in 2023. And again, if we take a step back and look at the Fiber revenue that sector is growing, we saw 5% growth in our Business and Wholesale Fiber revenues which really shows the potential of that segment as we continue to expand our fiber footprint and continue to kind of refine our go-to-market strategies there. And across all three business units in SMB, Enterprise and Wholesale, we’re seeing a really sharp increase in order volumes and a much more favorable sales mix which overall leads to higher pricing. So again, whilst we’re exposed to declines in legacy copper services whilst we, of course, face the kind of changes in headwinds quarter-to-quarter, just like in our whole business, Business and Wholesale gets structurally stronger every quarter as we build fiber, refine our go-to-market activities, keep focused on our pricing strategy of moving people up — selling more value-added services and the business goes from strength to strength quarter-over-quarter.

Operator: Our next question comes from the line of Jonathan Chaplin with New Street.

Jonathan Chaplin: A couple for Scott, actually. Scott, you didn’t narrow the range on EBITDA guidance for the year which means you’ve got sort of a big range for the fourth quarter. Should we still be focused on the middle of that range which would suggest really solid mid-single-digit growth for the fourth quarter? And then, it seems like in the Copper business, EBITDA did sort of many well recent — relative to recent trends, is that mostly a function of the cost cutting that Nick mentioned during his comments? Or is there anything else going in there? And then I think you said during your comments that the drop in subsidy revenue is just a matter of timing, we should collect that in the fourth quarter. I just wanted to confirm that as well.

Scott Beasley: Sure, Jonathan. Let me take each of those in turn. So on EBITDA, a few points that we’ve given on EBITDA that I’ll reiterate today. We expect sequential growth in Q4 from where we were in Q3 and then looking at year-over-year growth, we expect that to be in the low to mid-single-digit growth from last year’s fourth quarter. So we have inflected in EBITDA. We grew EBITDA in the first half. We grew EBITDA by 4% in the third quarter, we expect full year EBITDA growth this year. So the EBITDA inflection story is a really big milestone for us, so that’s fourth quarter EBITDA. On the second question of Copper, you’re right. Our customer losses have been relatively stable in Copper in the kind of low to mid-$60,000 [ph] per quarter but our EBITDA trajectory has improved because of that cost cutting.

We’re almost to the $500 million of cost cutting about a year earlier than we expected. And so that’s driven the improvement in our Copper EBITDA and our overall EBITDA for the company. And then the third question was subsidy. Yes, that’s just a question of timing. Subsidy is very lumpy quarter-to-quarter depending on when you get in cash from different municipalities. So no change to our overall subsidy view for this year. Perhaps some of Q4 could transition into Q1 of next year but our subsidy road map is very much intact.

Operator: Our next question comes from the line of Greg Williams with TD Cowen.

Greg Williams: First one is just on CapEx. It does imply that CapEx will come down to the $350 million [ph] levels here. Can you help us with the cadence of next year? Will we see that huge bump up like we saw last year in the first half of the year? Or will it be more muted? And the second question around CapEx is helping us get comfortable. You noted that 2023 will be that peak CapEx year to 2024 and turn lower [ph]. But you also noted that this year, you’ve got a higher mix of lower cost per build homes, like the lower-hanging fruit is being built. So, as we move about next year, you’ll have a higher mix of higher cost builds, yet you’ll see lower CapEx and just help us reconcile that and get comfortable there.

Scott Beasley: Sure, Greg. Let me take each of those. So on CapEx for the fourth quarter and into next year, let me give you a few data points there. So as we expected, we saw a significant decline in second half CapEx. We saw a nice step down in CapEx this quarter which was driven by three items. We consumed prework that was completed in prior quarters. We consumed inventory and then we benefited from lower cost builds and we expect each of those trends to continue into Q4. And additionally, we expect benefits from normalizing payment terms with suppliers; so that’s Q4. And the part of your question on next year, a few broad data points to give you. So we expect roughly 1.3 million [ph] passings. We expect CapEx to be below this year.

And then we do expect it to be front-end loaded, similar to this year, just given the cadence of the build. So that’s the road map on CapEx for the next 5 quarters. And then the final part of your question on build CapEx for next year. The trends that I mentioned for Q4 will continue into next year. So we will continue consuming prework. We’ll continue consuming inventory. And if you think about it, we do have a large backlog of work that we’ve done in engineering, design, central offices, middle mile [ph] that lowers the cash CapEx in future quarters. And so that will help benefit our CapEx number next year.