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.

See also 20 Most Valuable Video Game Companies in the World and 20 Most Valuable Gambling Companies in the World.

To continue reading the Q&A session, please click here.