Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q4 2022 Earnings Call Transcript

Frontier Communications Parent, Inc. (NASDAQ:FYBR) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Hello and welcome to the Frontier Communications Fourth Quarter 2022 Earnings Call. My name is Harry and I will be your operator today. And I would now like to hand over to Spencer Kurn to begin. Spencer, please go ahead when you are ready.

Spencer Kurn: Good morning and welcome to Frontier Communications fourth quarter 2022 earnings call. This is Spencer Kurn, Frontier’s Head of Investor Relations. And joining me on the call today are John Stratton, our Chairman; Nick Jeffery, our President and CEO; and Scott Beasley, our CFO. Today’s presentation can be followed within the webcast available at the Events and Presentations section of our Investor Relations website. Before we start, please turn to Slide 2. 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. And with that, I will turn the call over to John.

John Stratton: 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 our reality. If you turn to Slide 4, you will 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 passings crossing the halfway mark to our target of 10 million passings. We have 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 team’s consistent execution, have delivered strong results.

In 2022, fiber products alone generated $2.8 billion of 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. The end of the year is always a good time to step back and review what we have accomplished. It was nearly 2 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. You will see a familiar chart when you turn to Slide 5. This is our simple strategy, which is anchored by four key levers of value creation; build fiber, cell 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, faster than expected and within our budget. And it’s all powered by our purpose, building Gigabit America, a 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 are more than halfway to our goal. This is a terrific use of capital. We continue to expect our fiber build to deliver very attractive IRRs in the mid to high-teens with a direct cost to pass of $900 to $1,000 per location.

Our committed build stands to create substantial shareholder value and remains our most critical point of focus. And beyond that, we are exploring a significant opportunity to create even more value. As we highlighted in Q2 of 2022, beyond our initial 10 million committed build, we have identified another 1 million to 2 million copper locations, which we can organically upgrade to fiber with very attractive returns. There remains another 3 million to 4 million locations that also could be attractive to upgrade with the aid of government subsidies. And while 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 significantly lower than that of other developed nations, we see a meaningful opportunity to expand our ambition. Let’s turn to Slide 7, where you will see our critical to-dos down the left column. And these are the goals we have set for ourselves to deliver on our strategy. And to the right, you see all that we have accomplished. And let me run through them. We built a world-class management team and board. We 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 we have 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 2 years, we have built a strong foundation. And while this work is never done, we can confidently say that we have reached the end of the beginning. Our business is now ready to enter its next phase, our growth phase. And with that, I will 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?

Nick Jeffery: Thanks, John. Let’s talk about our transition to growth, beginning on Slide 9. I really love this slide. We are moving fast on two of our key value drivers, building and selling fiber and it’s translating into financial growth. If you look at the left hand side, you will see that our fiber passings are up 31% year-over-year and customer growth for the quarter is up 17%. With data consumption 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 3 key levers outlined here. We’ll accelerate our fiber build.

We will command premium pricing for our premium products, and we will grow our B2B businesses. We’ll talk later about these in greater detail. First, let’s look at our Q4 results. On Slide 11, you will 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 was driven by our outperformance in building and selling fiber. In the quarter, we built a record 381,000 new fiber locations and added a record 76,000 broadband customers. For context, that’s 2x more than we achieved in the fourth quarter of last year. And we had another first. We delivered fiber revenue growth across all of our businesses. One last call out, you’ll see that we continue 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 on to Slide 12 and take a deep dive into the fundamentals of our fiber build. Since we began our fiber pilot in late 2020, we’ve scaled our build sixfold, and I’m very pleased with the fiber building engine we’ve created. So how do we do it? Well, first, we assembled what I view as the best team in the business. Secondly, we designed a sophisticated model that calculates the returns of building fiber down to every single household in our footprint. And our model is dynamic, so continuously updates based on our experience in the field. And this is how we prioritize our build to the areas that deliver the highest returns. Thirdly, we were the first to scale our build and we are already seeing the benefit of being an early mover with record customer growth in some of our key markets.

Lastly, we used our scale as the second largest fiber builder in the country to our advantage, locking in multiyear contracts for 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 bill to 1.3 million homes in 2023. We’ll end 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 and the way we operate this business.

Our 1.3 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 $1,000 per location path. Chasing builds this year above our 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, and we must convert these passings into loyal customers to transform our company as efficiently as possible. Let’s move on from building fiber to selling it and talk about ARPU. For our sales organization, 2021 and 2022 were 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 use promotional tools like gift cards to sweeten the deal to new customers, while our brand repaired. And the result was strong broadband revenue growth. That is exactly what we needed during this foundational stage of our turnaround. It also set the table for us to grow ARPU 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. And part of this will mean charging for value-added services and incentivizing customers to adopt higher speeds coupled with new programs to build loyalty. We are also at a point where we can ditch the training wheels of price promotions. The early results are delivering exactly what we expected and more than 10% increase in new customer ARPU with more than 50% of new customers choosing gig-plus speeds.

As our customer experience improves, so does our reputation and earning customer loyalty becomes more of a science than an art. 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 2 gigabit per second fiber broadband speeds network-wide. And we did it again just a few weeks ago with the launch of our 5 gigabit service, again, network-wide. And when you pair our 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 2 years, we have put the customer back at the center of our business. Every day, we hunt the customer pain points and then work hard to fix them. For example, 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 answers to 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, and our fiber net promoter score is up 46 points. And we are being recognized as the market leader in the areas that matter most to 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 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 fiber broadband customer growth and our new customer ARPU is up double digits. That thanks to newly introduced value-added services and the quick adoption of our gigabits network speeds. Enterprise is developing a stronger partnership approach with our largest customers, which has driven record-breaking fiber sales in the quarter. And in wholesale, we have now signed all 3 major wireless carriers as fiber-to-the-tower customers. And we have expanded our relationship with AT&T using our infrastructure to host their mobile edge computing capability. 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 2 years since I joined Frontier, and I’m 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 rallied around our purpose of building Gigabit America and we have 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. Recently, we were awarded Best Place to Work for working parents, Best Place to Work in Dallas and named 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, I just want 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 pave the way for us to become a better company. I am excited we’re starting 2023 with such great momentum. Now Scott, over to you.

Scott Beasley: Thank you, Nick and good morning everyone. I’ll start with our fourth quarter financial results. Revenue was $1.44 billion, a slight decline 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 combined 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 $1.4 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 Nick noted, our fourth quarter net additions of 76,000 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 than 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 4.5 million fiber broadband customers our committed build of 10 million homes and businesses, and this success is coming from both our base and expansion markets. In 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.

In 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 2 years put us on track to achieve our target penetration rate of at least 45% in the next 2 to 3 years. In 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 6 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 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 have started to drive financial results. As expected, copper revenue declined roughly 10% year-over-year consistent with prior quarters as both consumer and business face legacy product headwinds. Turning to Slide 22. In the fourth quarter, we achieved the sequential EBITDA inflection that we have 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 achieved 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. We 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 3.4x 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 provides us with a clear runway to continue accelerating our fiber build. Moving to Slide 24, I will 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 IRRs in areas where we build. Lastly, we’re committed to prudent balance sheet management. Our long-term net leverage target remains in the mid-3s. 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-3s at the end of our build.

I’ll now turn to our 2023 guidance. For 2023, we expect adjusted EBITDA of $2.11 billion to $2.16 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, 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 build cost of $900 to $1,000 per location, although as I have said before, inflationary pressures are moving us towards the top end of that range.

Additionally, due to inventory management and timing-related factors, we expect 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 cable’s capability, a lower cost of ownership and lower latency levels that enable 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 are 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’m proud to be part of a strong and experienced leadership team that has consistently delivered on our commitments every quarter. These results marked our 9th consecutive quarter of record fiber builds and our 6th consecutive quarter of record fiber broadband net additions. I’ll now turn the call back over to Spencer to open up the line for questions.

Spencer Kurn: Thanks, Scott. Operator, we are now ready for Q&A.

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Q&A Session

Operator: Thank you very much. And our first question is from the line of Brett Feldman of Goldman Sachs. Brett, your line is open now. If you would like to proceed.

Brett Feldman: Great. Thanks for taking the question. And it’s something of, I guess, a broad-based question around partnerships. So during your scripted remarks, you noted that you’re also beginning to look at out-of-region fiber deployment opportunities, some of your telco peers who have started to explore out of region opportunities have been doing that through joint ventures. So 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. And if 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. It 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 would be offering their wireless services in your broadband packages? Thank you.

John Stratton: Hey, Brett. It’s John Stratton. 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 focused on execution there. And of course, that’s what we will 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 is, well, what are those other opportunities. And as we identified in the middle of 2022 right inside of our own franchise, 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 IRRs. So that’s sort of bucket number one. Bucket number two is the balance of our franchise footprint. And it’s roughly, call it, $3 million to $4 million, which, on its own, it doesn’t lend itself to a profitable build.

But if we anticipate the introduction of federal state local subsidies, it could make those more economic and could indeed unlock our opportunity to create value there. And then lastly, in areas that are not strictly within our franchise, whether they are near or somewhat near adjacencies to our current footprint, where there are 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 are working now inside the business to further refine, first and foremost, that target opportunity set. And once we’ve made a determination of 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.