Frontier Communications Parent Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 15 speakers on the call.

Operator

Good morning. Thank you for attending today's Frontier Communications Second Quarter 2024 Earnings Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to turn it over to Spencer Kern.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to Frontier Communications' 2nd quarter 2024 earnings call. This is Spencer Kern, Frontier's Head of Investor Relations, and I'm joined on the call today by Nick Jeffrey, 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 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.

Speaker 1

During the call, we may also refer to certain non GAAP financial measures, which are defined and reconciled in our earnings materials. With that, I'll turn the call over to Nick.

Speaker 2

Thanks, Spencer. Good morning, everybody. I'm here with Scott and I'm excited to share the highlights from our Q2 results. As you saw in our press release this morning, we delivered another strong quarter of financial and operational results. We've said that 2024 is the year that we would return to full year revenue growth, and we're proving this out quarter after quarter.

Speaker 2

Q2 was our 2nd consecutive quarter of revenue growth and our fastest quarter of organic growth in more than a decade. This acceleration was driven by record fiber broadband net adds and strong ARPU growth. Combined with disciplined cost management, we delivered another quarter of solid mid single digit EBITDA growth and further expanded our EBITDA margins. From the onset, our team has relentlessly focused on executing our strategy and delivering the long term value proposition of fiber as we build gigabit America. This focus has positioned Frontier for growth, separating us from the pack of other fiber builders and elevating us as a more attractive alternative than legacy cable.

Speaker 2

Let's talk about the strategy behind these results. On Slide 4, you can see the 4 pillars of our strategy: build fiber, sell fiber, improve service for all of our customers and increase our operational efficiency. It all starts with our fiber build. In 2021, we set an initial target to pass 10,000,000 locations with fiber, and this quarter, we exceeded 7,000,000 passings in total. We built our fiber network into a prized asset.

Speaker 2

We now have nearly twice as many passings as the next closest pure play fiber provider and have significantly more than the long tail of smaller fiber providers. Our second pillar is cell fiber. In Q2, we added a record 92,000 new fiber broadband customers. And for context, that's 37% more than last year. And when you look at the first half of the year, we've grown our fiber customer base by 19%.

Speaker 2

On this, I'd like to share an anecdote to give you a sense of how our culture supports our business acceleration. Last year, we started a program called Take the Lead to incentivize our employees to sell fast, reliable Internet. The way it works is that anyone in the company can submit a lead to the sales team and earn a commission once our fiber is installed in a customer's home or business. What's incredible is that so far this year, almost 2 thirds of our techs in the field have submitted leads. That's almost double from a year ago.

Speaker 2

And importantly, they aren't just selling fiber, they're delivering premium service to our customers, which I'll talk about in a few minutes. I also want to highlight that we reached a major milestone selling fiber this quarter. We crossed the 45% penetration threshold in our base fiber footprint. Why does this matter? Well, it matters because our base fiber markets are our most mature with full cable competition and where our brand has historically been weakest.

Speaker 2

Crossing our goal of at least 45% market share in these markets demonstrates that fiber is a superior product that commands high market share and that our brand has fully recovered. It's also evidence of our ability to achieve sustainable and attractive returns on our fiber investment. If we can achieve our penetration goals in our base markets, we can do it everywhere. And it's important to note that we are increasing penetration whilst also growing ARPU. Our 3rd pillar is to improve customer service.

Speaker 2

When we started our turnaround, we were one of the most unloved brands in one of the most hated sectors. 3 years ago, this leadership team made a commitment to put the customer back at the center of our universe. This philosophy is now deeply ingrained across our business. Over the last few years, our leadership team has met every Friday for 2 hours to examine all of the reasons why our customers were calling us in the 1st place, and then we work systematically to remove 1,000 and 1,000 of tiny and sometimes major customer irritations. The results speak for themselves.

Speaker 2

Today, we have more customers, they stay with us longer, calls are down, our brand has improved and our customers are significantly more satisfied. And while I'm pleased with this progress, we have an opportunity to be even better, and we will not stop until we run out of things to fix. Our 4th pillar is to become more operationally efficient. Efficiency is a team sport here at Frontier, with employees identifying areas where we can remove complexity and cost, while our IT teams drive scale with new digital tools and automation. Last year, we shared that we achieved cost savings of double our initial target, and we continue to uncover cost saving opportunities.

Speaker 2

Being a simpler, more digital organization gives us the benefit of speed compared to our larger, more hierarchical legacy competitors. Over the last 3 years of relentless execution has brought us to where we are today, the largest pure play fiber Internet company in America with growing revenues and growing profitability. You can see on Slide 5 that fiber represents the majority of our customers' revenue and EBITDA. We've always said that as fiber becomes a greater share of our business, we become an even stronger company. While the success of our strategy is evident in our improving financial performance, it also shows up in our net promoter scores.

Speaker 2

On Slide 6, you'll see that our progress here has been nothing short of astonishing. NPS is the outcome of everything that we do. It's why so many industries rely on this measure as a leading indicator of performance. Here's what the 3rd party data is saying. Our fiber NPS has dramatically improved by approximately 20 points over the past year.

Speaker 2

Our NPS is now 6x higher than our closest legacy cable competitor. Think about that. Cable is our main competitor and customers are saying that they are 6x more satisfied with our fiber Internet than they are with the legacy cable product. We also have the highest NPS of any fixed Internet provider, which means Frontier has now set the new standard for our industry. You can see here that our NPS has consistently improved over the past 2 years, and this demonstrates that the increase is the result of our systematic approach to improving our customer journeys.

Speaker 2

Now let's take a look at our financial highlights on Slide 7. A couple of quarters ago, I talked about our model for driving sustainable growth. We put fiber in the ground, we connect more customers to our superior fiber product, we offer higher gigabit speeds and value added services, delivering higher ARPU, all of which leads to revenue growth. And we invest that revenue growth back in our company for the benefit of our customers, our shareholders and our business. It's a repeatable flywheel that's driving our growth.

Speaker 2

And here's how it played out in Q2. We passed a record number of homes and businesses with fiber. We grew fiber broadband customers by double digits, proving that we have the very best product in the market. We grew ARPU because our customers are increasingly choosing gigabit speeds and value added services to enhance their Internet experience, and they're willing to pay for it. As a result, we accelerated fiber revenue growth to 13% and lifted our overall company revenue growth to 2% year over year.

Speaker 2

And when you combine our accelerating revenue growth with our continuous focus on cost efficiency, we delivered 5% EBITDA growth again this quarter. Before I turn it over to Scott, let's turn to Slide 8 to recap our 2024 priorities. And our priorities have not changed. This year, we're focused on driving 3 simple outcomes: maintain strong operational momentum, hit our revenue growth milestone and accelerate our EBITDA growth. As you can see from our results, we're on track to meet or exceed all of these targets.

Speaker 2

We'll provide more detail on our longer term financial goals and the path for driving increased shareholder value at our forthcoming investor update. As we said last quarter, the timing of our investor update will depend on our strategic review process, which is still in flight. So we look forward to this update, and we'll keep everybody posted on timing as soon as we have something to share. Before I wrap up, I want to say thank you to the builders of Gigabit America. As we've turned around our business, we've also turned around morale and pushed ourselves to innovate for the benefit of our customers.

Speaker 2

You may have seen the announcement last week that we were the 1st provider to successfully trial speeds of up to 100 gigabits over a single strand of fiber. We hosted this test in partnership with Nokia at our Fiber Innovation Lab here in Texas. This trial proves that we can use our existing fiber network to support future technologies of up to at least 100 gig. This is an industry first led by our brilliant team of big thinkers and innovators. Our Fiber Labs team is an impressive group, has been awarded more patents in the last 3 years than in Frontier's entire history.

Speaker 2

I'm proud of what we've accomplished and more confident than ever in the power of our technology to change lives and communities. You can read more about our progress building a truly extraordinary company in our 2023 sustainability report, which we published in the Q2. And with that, I'll turn it over to Scott to cover our quarterly results and updated guidance.

Speaker 3

Thank you, Nick, and good morning, everyone. Our strong operational and financial performance from Q1 continued in the 2nd quarter. Let's start with our operational highlights on slide 10. We added a record 388,000 fiber passings in the quarter and remain on track to achieve our goal of 1,300,000 passings this year. As Nick shared, we also added a record 92,000 fiber broadband customers in Q2, while growing ARPU at a rate of 3.5%.

Speaker 3

Consumer fiber broadband churn was solid in the quarter, remaining roughly flat versus last year's 1.4%. Our cost savings initiatives continued. We have achieved $580,000,000 of savings since we started the program in 2021. Last, we completed our 2nd fiber securitization on July 1, raising $750,000,000 As we previously announced, we used part of the proceeds to refinance a portion of our term loan, while extending the remainder of our term loan to 2,031. On Slide 11, let's review our financial highlights.

Speaker 3

Our 2nd quarter revenue was $1,480,000,000 up 2% versus Q2 of last year. As Nick highlighted at the beginning of the call, this was our 2nd quarter in a row of revenue growth and our fastest quarter of organic revenue growth in more than a decade. We reported $123,000,000 of net loss, primarily due to a non cash pension remeasurement as well as a $25,000,000 one time legal settlement. Our $560,000,000 of adjusted EBITDA represents our 4th consecutive quarter of adjusted EBITDA growth. We also generated $374,000,000 of net cash from operations, bringing this total to $1,400,000,000 over the trailing 12 months.

Speaker 3

Slide 12 shows our continued progress growing our fiber customer base. We grew total fiber broadband customers by 19% versus last year. This number is up more than 60% since the end of 2020. In our base fiber footprint of 3,200,000 locations, our penetration rose 190 basis points year over year to 45.3%. Since we started our turnaround more than 3 years ago, we have targeted terminal fiber penetration of 45% or better, and this is an important indication that the goal is achievable.

Speaker 3

We are still growing our customer base in these mature markets, even in the face of legacy cable competition and fixed wireless availability, and we see room for our base penetration to climb even higher. In tandem with our customer growth, we are delivering healthy ARPU growth in our fiber markets. This quarter, we grew ARPU by 3.5% year over year, right in line with our long term target range of 3% to 4%. Our ARPU growth was the result of 3 drivers: faster customer speed tiers, annual price adjustments and the expansion of our value added services. In Q2, over 60% of new customers took speeds of 1 gig or faster, and over 50% of new customers purchased at least one value added service, including products like YouTube TV and Whole Home WiFi.

Speaker 3

This quarter, we have also simplified our penetration reporting. As you saw in our trending schedule, we will report base and expansion penetration each quarter. This adjustment eliminates the complexity of reporting on 4 years of quarterly build cohorts and better aligns with the industry and how we manage our business. On Slide 13, you can see how our strong sales momentum is translating into revenue growth. Together, our customer and ARPU growth drove a 21% increase in fiber broadband revenue, which more than offset legacy product declines.

Speaker 3

Consumer revenue grew for the 4th consecutive quarter and business and wholesale grew 4%, leading to consolidated revenue growth of 2%. For the balance of the year, we expect consumer revenue to continue to grow in the low single digit range and business and wholesale revenue to land in the higher end of our plus or minus 1% to 2% range. Our fiber revenue growth and our disciplined approach to cost management continue to drive EBITDA growth. For the Q2 in a row, we achieved 5% adjusted EBITDA growth. The team continues to successfully grow revenue from fiber products, while strategically managing our legacy copper declines.

Speaker 3

On Slide 15, you can see that our capital investment declined in Q2 as expected. We had cash capital investment of $678,000,000 in the quarter. This was down approximately $350,000,000 sequentially as working capital normalized. It was also down approximately $380,000,000 year over year as our build continued to consume pre work and inventory that we built up in 20222023. We expect to continue to reduce inventory, and we expect Q3 and Q4 capital investment to be roughly flat with Q2.

Speaker 3

For the year, we remain on track to deliver lower capital investment in 2024 than 2023. We are confident that our peak build CapEx is behind us. Going forward, an increasing portion of our spend will be on success based customer acquisition CapEx as we connect more new fiber customers. Importantly, we remain confident that our fiber build will deliver IRRs in the mid to high teens, well above our cost of capital. Once we are through the investment phase, we are confident that our business will unleash significant growing free cash flow.

Speaker 3

On the next slide, we review our capital structure and discuss the benefits of our recent fiber securitization. A few weeks ago, we closed on $750,000,000 of securitized debt in our North Texas markets, bringing total securitized debt in North Texas to $2,300,000,000 I'll make a few points on the importance of our fiber securitizations. First, they provide a clear path to fully fund our fiber build. We've securitized approximately 730,000 fiber locations to date, which is only 10% of our current fiber passings. 2nd, fiber securitization has attracted a new pool of investment grade long term investors into our capital structure, which should reduce our cost of capital over time.

Speaker 3

Our most recent securitization priced at a weighted average yield of 7.4%, which was roughly 140 basis points lower than our first securitization in August of 2023. Finally, we expect our long term capital structure to include a balance of securitized and traditional debt. In our most recent securitization, we used roughly $400,000,000 of proceeds to repay a portion of our term loan, which was floating at the higher rate of 9.2%. We also proactively extended the maturity of our term loan from 2027 to 2,031, thereby improving our near term maturity profile. These transactions illustrate that fiber securitization is an attractive tool for raising new capital, refinancing and lowering our overall cost of capital over time.

Speaker 3

Finally, Slide 17 outlines our updated 2024 guidance. Given our outperformance in the first half of the year, we are raising the low end of our 2024 EBITDA guidance, while reiterating the other key components. Our updated guidance of 2.22 $1,000,000,000 to $2,250,000,000 represents growth of 5% at the midpoint, which would be a significant acceleration versus our 2% growth last year. Before we open it up for questions, I want to say thank you again to the Frontier team for delivering another solid quarter. I'm proud of the work we are doing to build Gigabit America, and I'm confident that our strong financial and operational momentum will continue in the second half of the year.

Speaker 3

Operator, we'll now open the line for questions.

Operator

Our first question is from Jim Schneider with Goldman Sachs. Your line is now open.

Speaker 4

Good morning. Thanks for taking my question. Nick, we've seen a number of announcements from industry players, including 2 mobile in recent weeks, which kind of suggests that fiber build outs of your competitors are going to be increasing. So directionally, does that make you more or less likely to accelerate your own fiber passing plans either organically or by finding 1 or more capital partners?

Speaker 2

Yes. Hi, Jim. Thanks for the question. I mean, first of all, I'm encouraged that others across the industry see fiber as an attractive market opportunity. This is something we spotted 3 or 4 years ago.

Speaker 2

And I'm very pleased that we were the first to really scale up, kind of build across our footprint. Of course, that's been reinforced by government coming in behind us with the BEAT program, again, signaling strongly that fiber infrastructure is something this country needs and therefore, given the market structure and the returns we can get from it, is a very attractive thing. Do I see it materially impacting our ability to build? Not really, nor necessarily us accelerating. As I said on previous calls, we've scaled our build very much to act in harmony with the rest of our business.

Speaker 2

So our ability to sell, our ability to service, our ability to provision customers, all needs to work in harmony to make sure that we're maximizing returns for investors across the entirety of our investment, not just our build. So thanks. Good question. Operator, next question please.

Operator

Our next question is from Batya Levi with UBS. Your line is now open.

Speaker 5

Great. Thank you. Can you provide a little bit more color on the strength of broadband as we saw in the quarter? Any spec region or cohort that did better? And how should we think about second half with potential ACP impact and against the typical seasonal boost you get?

Speaker 5

And then just quick follow-up on R2 growth. Can you also provide some color in terms of the maybe the deceleration in the growth that we saw? Any impact from the credits that you gave to the customers potentially due to the disruption? That would be helpful. Thanks so much.

Speaker 3

Sure, Batya. This is Scott. Let me make a few points on ACP that was embedded in your question and then I'll talk a little more broadly about Q3 and then follow-up with ARPU. So you asked about ACP. It's a relatively small portion of our customer base, about 4 percent.

Speaker 3

We've said before, we've developed a number of transition plans to serve this quadrant of the market, including our 200 meg plan, but timing is still a bit uncertain. We saw some voluntary disconnects from ACP in Q2, but we expect the impact to be larger in Q3 and Q4. Now kind of broadening out to our view of Q3, we expect it to be very healthy. We have strong momentum in our sales channels. We're selling across an expanding fiber footprint.

Speaker 3

Q3 tends to be the seasonally strongest quarter of the year and the primary headwind we have is ACP like I mentioned. When you put all those factors together, we expect Q3 net adds to be up significantly year over year and our team is working hard to beat the record that we just set in Q2. Now pivoting to your question on ARPU, I'd say we're delivering very healthy growth in ARPU. Q1 was up 6%, Q2 was up 3.5% year over year. We do expect Q3 to be roughly flat sequentially as we work through the ACP transition plans and particularly the 200 meg plan.

Speaker 3

But then we expect more of an ARPU pickup in Q4 to end the year right in line in the 3% to 4% range that we've given as our long term target.

Speaker 2

Yes. Scott, perhaps if I can just do a build on that to remind everybody on the call. We have, as we've said previously, 3 very strong drivers of ARPU in the business. The first is kind of core product pricing, which is, of course, aligned to the high value of the service we provide, but also in a generally price inflationary market tends to go up over time year over year. The second is speed.

Speaker 2

As data and device trends require faster speeds and as we introduce new speed tiers and so on as we've done over the last few years. We see customers very actively migrating up our speed price ladder, and that's a strong indicator of underlying demand and our ability to grow ARPU sustainably over time. And then the 3rd lever we have is value added services. So these are all the kind of extra things that people buy to deliver a really great in home Wi Fi experience, things like Wi Fi extenders, whole home Wi Fi, YouTube TV, premium tech support, all those sorts of things. And whilst we only launched that portfolio relatively recently, it has been incredibly successful for us, and we've got a long road map of new value added services that we'll be bringing to market, and we're very, very confident customers are going to buy those and that we can sell them across all of our channels.

Speaker 2

And when you combine those three levers over time, you end up with the ingredients that gives us a high degree of confidence we can grow ARPU in the 3% to 4% range sustainably, as we said.

Operator

Our next question is from Jonathan Chaplin with New Street Research. Your line is now open.

Speaker 6

Thanks guys. Just following up on Patia's question on ARPU. Was there an impact from the hack on ARPU growth this quarter?

Speaker 7

And can you give us

Speaker 6

what the impact was from gift cards going away from last year to this year? And then more importantly, when I

Speaker 8

look at the pace

Speaker 6

of gross adds, it's up close to 30%. Despite well, I guess, looking at year over year, seasonality wouldn't be a factor, but despite an impact from ACP and despite an impact from the hack, that's pretty phenomenal growth in gross adds, particularly given that industry growth is down 30% to 40%. Can you give us some context? Is this sort of the new level of gross adds that you expect to be able to maintain? Is there anything one time that helped you this quarter?

Speaker 6

And then I know that you sort of put in cost to acquire over the course of the last two quarters. Are you at the level of spend that you can maintain and you expect to sort of to leverage from here? Thank you.

Speaker 2

Jonathan, thanks. Not sure you're sticking to the one question roll over the I hope we got all those, but Scott, perhaps you start.

Speaker 3

Yes. Let me unpack those. So, first on your question on the cyber event. As we noted before, we don't believe that the event had any material impact on our financial or operational results. That would include ARPU.

Speaker 3

So I'll just reiterate that point today that was in a previous 8 ks. Your second question on impact of gift cards, we're no longer breaking that out in the training schedule, but it was roughly similar to last quarter. We don't have a big impact from gift cards, because those were largely, discontinued about a year ago. I'm going to pass it to Nick for kind of questions on broader industry trends. I will say, just adding to your question on the impact of the cyber event on the net adds, we largely recovered throughout the quarter.

Speaker 3

The team did a great job getting everything back online, getting customers installed. So, we don't expect it had a material impact in Q2 nor any real catch up in Q3. But I'll pass to Nick on the broader industry trend.

Speaker 2

Yes. I mean, look, on the kind of fiber gross net ad performance, we're very, very pleased with the trajectory that we've got here. And of course, as we look building more fiber every single quarter, and just to remind everybody, we're building at a rate of about 3,500 fiber passings a day. That means our feedstock is, of course, getting bigger. But if we take a step back a little bit, I think there are some fundamentals at play here that are now beginning to show through in our numbers.

Speaker 2

The first of which is we just have a better product. The cable company's legacy kind of product, copper based product was great in its time, but fiber is the product that the market wants now. And we see this in so many indeed, as our recent 100 gig trial with Nokia, Indeed, as our recent 100 gig trial with Nokia absolutely proves, the fiber network is the last network any customer will ever have to buy. But perhaps I'll give you a little insight as well into some of the work we've been doing internally, which I haven't shared on previous calls. And that is you may have heard me talk about the very intense work we've done with our executive committee on customer service and removing and eliminating customer irritations over the past 3 or 4 years.

Speaker 2

Well, over the course of this year, we've turned the same kind of intensity to our sales channels. Every 10 days or so, the entire executive committee, plus relevant other leaders, meets to go through all of the sales channel data in granular detail, figuring out what's working where in which city, which town, which street, which state, which channel, what are the little hiccups, what are the things we've missed, how do we optimize, how do we fine tune, how do we learn from promotions, how do we experiment with price, how do we scale different channels, how do we work with different partners, going through all of that at an incredibly granular level and then adjusting, optimizing, reviewing, adjusting, optimizing, reviewing again. And I think we're beginning to see that flow through into improved sales momentum, improved delivery momentum, just exactly as we did in our customer care organization, and you've seen the results that, that had in our MPS results. I'm very confident we're going to see the same thing in our sales results as well. Operator, next question.

Speaker 7

Thanks, guys.

Operator

Our next question is from Sam McHugh with BNP Paribas. Your line is now open.

Speaker 9

Good morning, guys. I wanted to ask about the self installs. I see you finally launched them in July. There's actually 2 parts. One is, can you just describe what that actually involves if I'm a person in the house, do I have to drill in my own wall?

Speaker 9

Any color on like what the process actually looks like? And then secondly, how should we think about impacting the cost to connect homes? If you can give us a bit of color on how that's trending and how you think that might trend? That would be great. Thank you.

Speaker 2

Yes. Thanks, Sam. Yes, look, self install is a new thing for us, as you've spotted. And that's primarily, of course, because we're still building our network. And as we build a network, we have to go out and install the first time we have a customer, we have to install an ONT and set them up and so on.

Speaker 2

But as that base of installed fiber customers grows, then when people move out of an existing connected home and somebody else moves in, the self install process becomes really easy. They just have to plug the router into the socket in the wall, set it up over the app and away they go. And that therefore becomes an opportunity for us in the future to significantly reduce truck rolls, reduce cost to connect and so on. And that will continue to grow over time as our base of installed customers just grows as we grow our fiber base. But Scott, do you want to talk about the cost implications maybe?

Speaker 3

Sure, Sam. The cost to connect, we've said before, the target range is $600 to $800 per connection. We're at the higher end of the range now. But with self install unlocking a much bigger portion of our customer base for self install that should reduce costs in 3 areas. You no longer have to do a drop.

Speaker 3

The ONT is already in the house and you no longer have to send a technician. So with those cost improvements, it will take us down overall much closer to the low end of the range, potentially even below that low end of the range over time. Thanks, operator. Operator, next question.

Operator

Our next question is from Sebastiano Petti with JPMorgan. Your line is now open.

Speaker 8

Hi, good morning. Thanks for the question. Just a quick follow-up on the consumer fiber ARPU comment about flat. Was that meant to be in terms of dollars? Is that how we should be thinking about that or year on year growth?

Speaker 8

And then relatedly, on EBITDA, it's nice to see they're raising the low end of the guide. But it does seem still it does imply a bit of slowdown in the back half, I mean, marginally. Is there anything we should be thinking about there? And I guess, zooming out related to that EBITDA comment, should we anticipate obviously the pace of fiber add encouraging and particularly in light of ACP, But is this just maybe embedding some expectations for SG and A and maybe cost to connect, particularly in light of kind of what you just said there, with the cost to connect being a little bit higher. Is maybe that why maybe there's a little conservatism in the guide?

Speaker 8

Sorry, it's a long winded and multifaceted kind of question asking about is there conservatism in the EBITDA guidance for the year? Thank you, guys.

Speaker 3

Sure. Thanks, Sebastien. I'll take those. On ARPU, we said it would be flat roughly flat dollar wise sequentially. That would mean it's up year over year.

Speaker 3

But with Q3, we've said there's some transition there related to ACP and lower price plans to serve that quadrant of the market before picking up again in Q4. So that's our expectation on ARPU. On EBITDA, the first point I'd make is that we adjusted our midpoint higher, which shows the confidence that we have in the underlying fundamentals of the business. The fiber flywheel that Nick described has a lot of momentum. The midpoint now implies 5% growth in the second half, which is roughly the same as the 5% growth that we achieved in the first half and a big step up versus 2% growth last year.

Speaker 3

So overall, we feel good about that growth rate. And then your final question about some headwinds. There are some headwinds in the second half. We've discussed most of those. ACP could be a slight headwind.

Speaker 3

We typically have much higher energy costs in Q3. It's the seasonally hottest quarter. And then business and wholesale can be lumpy. We had a really strong first half there, but that business is a little tougher to project with a perfect estimate. So, overall, we feel really good about the momentum heading into the second half, which should carry us nicely into next year.

Speaker 3

Operator, we'll take the next question.

Operator

Our next question is from Greg Williams with TD Cowen. Your line is now open.

Speaker 7

Great. Thanks for taking my questions. Maybe just dovetailing off your last comments, Scott, can you help us think about the Q3 EBITDA? How much seasonal costs or energy costs will you incur? Should it be sort of the similar cadence versus last year?

Speaker 7

Because you're obviously doing cost savings too, so some moving parts there. Helping us think about it would be great. Second question is just on your commercial revenue. You're now strong momentum and guiding high end of the plus or minus 2%. Were there any one time benefits to sneak up?

Speaker 7

Or just tell us about the momentum and what you're doing there to achieve a solid performance? Thanks.

Speaker 3

Yes. Sure, Greg. On EBITDA in Q3, I mean, we're obviously not giving specific quarterly guidance, but there are some seasonally heavier costs in Q3, primarily energy, but then also growth related SG and A. Q3, as we said, is typically the strongest seasonal quarter for customer growth. And so the marketing and commissions dollars that flow through SG and A are typically higher in Q3.

Speaker 3

We still expect to be well up year over year, but just want to caution people and remind them about the seasonality of Q3. But overall, the second half, we expect to grow 5%, which is a really healthy growth rate.

Speaker 2

Yes. Thanks. And on Business and Wholesale, as I've said on previous calls, I mean, this kind of revenue can be lumpy when you can win a big deal in a quarter or the time between winning a deal and converting it to revenue and so on. That said, we significantly outperformed the industry last year, and that strong ongoing performance continued into the first half of this year. Our Business and Wholesale revenues grew 2% in the first half of the year, significantly better than the industry's high single digit declines.

Speaker 2

And I'm really encouraged by the underlying strength of our fiber growth in Business and Wholesale, which grew 9% through the first half of this year. So I expect this fiber growth to continue. It's part of the flywheel that I described and Scott just built on and continue to offset the very predictable declines we see in our legacy copper. So we're off to a strong start in business and wholesale this year. I expect us to come in towards the higher end of our previously expected plus or minus 1% to 2% growth range over 2024.

Speaker 2

Operator, next question please.

Operator

Our next question is from Michael Rollins with Citi. Your line is now open.

Speaker 7

Thanks. Just a quick follow-up. Has there been anything when you look at the flattening of the copper business revenue that's been helping that line item? And is that something that over time just kind of goes back to sort of the way legacy businesses trend in this category? And then second, on a strategic front, I'm curious if the success that you're having in both core and expansion markets is influencing the strategic review and the way you may consider the number of homes you could build at good returns in Wave 3, the quantum of market that you may consider non core and could be up for some form of monetization event and the way in which if you do a joint venture of some kind, the way in which you may want to own and control that, just given what you're seeing in the corn expansion?

Speaker 3

Sure. Michael, this is Scott. Let me take the copper question and then I'll pass to Nick. Your question overall on copper ARPU in particular, we've been in a broadly inflationary environment in the last few years and the cost to run and maintain our network have risen, particularly in the copper side. We have to pass a portion of those on to our customers and they understand that because they're seeing that in other parts of their business or their personal lives as well.

Speaker 3

So that's point number 1. Point number 2, when you look specifically at, copper ARPU, as consumer speed requirements and data usage have continued to increase, we've actually stopped selling some of our lowest speed, lowest price copper Internet products and that has had a lifting effect on overall ARPU. That's what's going on with copper ARPU.

Speaker 2

Yes, and your question on the strategic Sorry, Scott.

Speaker 7

I was just asking about copper business revenue, where that's just the business revenue has been flat for the last three quarters where normally you see legacy copper business revenues fall?

Speaker 3

Yes, I think it's the same dynamic that I just described. So deactivations have kind of been roughly flat. We've had some pricing actions to help offset cost increases. We're managing our copper decline both on the business side and the consumer side. I don't think it is flat yet.

Speaker 3

We're managing a still declining market. But we've had a good progress balancing those different objectives.

Speaker 2

Yes. Thanks, Scott. And just the second half of your question on the strategic review. I mean, really, our investor update, which we've talked about, goes hand in hand with the strategic review. We set out to build 10,000,000 fiber passings in total, and that objective is now clearly in sight.

Speaker 2

So just to remind everybody that now is really a natural time for us to look at the next phase of growth and consider all the options for how we could deliver that. And as I've said previously, that includes continuing optimization of our operations and financing structures, strategic partnerships of all sorts, joint ventures, divestitures, mergers, business combinations. And the management team and the Board are working very intensively on all of those things. Now of course, with kind of IRRs looking good, penetration looking good, revenue growing, EBITDA growing, customer numbers growing, the fact that we're past peak CapEx for build, the fact that our NPS has gone from industry worst to absolutely hands down industry best means that we have increasing strategic optionality, coupled with the fact that the market is becoming generally more convergent. And in a convergent market, you need wireless access, which is readily available and of course, fiber broadband, which is the scarcest of all the assets in a converging market and as the largest pure play fiber provider in America.

Speaker 2

That also brings us a lot of strategic optionality. And of course, all of those things need to be thought through. I mean, coupled probably even more so with the fact that we see we predict probably I think everybody would see interest rates perhaps tracking down in the future, improving the efficiency of our build, improving IRRs as well. So there's a lot of optionality, a lot of things we're thinking through there, all of which comes into the mix when we think about the answer to your question. Operator, next question please.

Operator

Our next question is from Shipra Pandey with Bank of America. Your line is now open.

Speaker 10

Hi, thank you. Yes, I mean, so you kind of answered this in the prior question, but just more so thinking about your strategic review process and if you could provide any sort of update on visibility on the Analyst Day and how you're thinking about the timing and the structure of the Analyst Day? And more so on the strategic review as well and

Speaker 11

any potential capital sources that may come about, how are you thinking about the best uses of

Speaker 10

I think I think you've mentioned doing a joint venture style partnership before, and we just recently saw Bloomberg report that Frontiers and talked to former joint ventures. So how are you thinking about the right economic structure for your team and for Frontier, whether it's open access and in region or out of region filled? Where you kind of planning phase on everything? Thank you.

Speaker 2

Yes. Thanks. As I just said, I think the investor update really goes hand in hand with our strategic review, which is ongoing, very intense piece of work. But we really want to get some firm conclusions with that before we come back and share those with the market. I mean, I think on joint ventures specifically, I mean, we won't comment on press speculation, of course.

Speaker 2

But generically, I think the joint ventures that the industry has seen announced recently just underscore that building fiber in the U. S. Is an extremely attractive investment. And we view this increased interest as further validation of the long term value and shareholder return profile from fiber. So it is a very positive thing.

Speaker 2

It's also clear that convergence is driving our competitors' recent decisions. And as I just said, Frontier is the largest pure play fiber provider in the U. S. And fiber is the scarcest and most difficult to replicate asset of all in a converging market. Scott, I don't know if you have any comments on capital allocation?

Speaker 3

Sure. Shipra, thanks for the question. Let me give you some color on how we think about our capital structure and then the recent transactions into that context. We have 3 main objectives. We want to reduce our cost of capital over time, increase our flexibility by maintaining liquidity to fund the build and extending our maturities.

Speaker 3

And then we want to maintain appropriate net leverage, eventually getting back to that target of mid-3s following our build. And from the transactions that we did in Q2, I think we accomplished all three of those. Our securitization reduced our cost of capital. We extended the maturity of our term loan to 2,031 and then we used a portion of the securitization proceeds from North Texas to pay down 1st lien debt, thus keeping leverage relatively constant. So in the future, we'll look to do similar transactions that meet those long term objectives.

Speaker 3

Thanks. Operator, we'll take the next question please.

Operator

Our next question is from Nick Del Deo with MoffettNathanson. Your line is now open.

Speaker 8

Hey, good morning guys. Thanks for taking my questions. About 1 on SG and A and 1 on video. So adjusted SG and A expense was elevated for the Q2 in a row. I'm just trying to understand the degree to which that's a product of higher SAC versus other factors.

Speaker 8

Just any color you can share on that front would be great. And then with video getting smaller and smaller, at what point does it make sense to pull the plug?

Speaker 3

Sure. Nick, this is Scott. Cost discipline on the first question on SG and A, cost discipline remains very important for us. I'll dive deep into SG and A in a second, but let me take a step back and look at our overall cost base. In the first half of the year, we've been able to keep our total cost base flat despite absorbing significant growth related SG and A, And most of that increase in SG and A has been in marketing and commissions to support the much higher growth that we had in the first half versus what we had last year.

Speaker 3

In order to offset that SG and A and actually improve our margins, which we've done by more than 100 basis points, we've taken cost out of our fixed cost base, primarily network, cost to serve, video content costs and therefore managed to improve our margins by more than 100 basis points despite that extra growth related SG and A. Almost all that SG and A like I described is in marketing and commissions. On the second part of your question, video, you'll recall we made a strategic decision more than 3 years ago to stop selling linear video to new customers and instead focus on partnerships with leading over the top providers. We did an industry first partnership with YouTube TV that has been great for our customers giving them access to YouTube TV, the industry leading over the top provider where they can receive a single bill from us, which is typically a pain point for customers. That's had excellent traction in the market and helped us bundle connectivity with TV and then often whole home Wi Fi connectivity.

Speaker 3

At some point, you're right, the video base will get small enough where it's not something we're going to support, but we're not there yet. Instead, we're focused on growing the over the top options for our customers. Thanks. Operator, we'll take the next question please.

Operator

Next question is from Simon Flannery with Morgan Stanley. Your line is

Speaker 11

now open.

Speaker 12

Great. Thank you very much. On the fiber ARPU, can you give us a little bit of color on what you're seeing in terms of the intake there? Is that given you're selling a lot of gig plus, is it well above the $65 So give a sense of where this can go over time? And then any comments on low end macro?

Speaker 12

There's a little bit of a tick up in the corporate churn. You talked about ACP, but we obviously saw a weak unemployment number today. Cable has talked a little bit about softness. Are you seeing anything at the low end of the consumer? Thanks.

Speaker 2

Yes. Thanks, Simon. Nick here. I'll start perhaps. At the low end, I think the answer is no.

Speaker 2

We're not seeing any softening. In fact, as we've said on previous calls, we've been very active in experimenting with different price points in different markets, pulsing promotions in and out as a learning opportunity to really understand the sort of price speed dynamic in different segments, in different cities, different locations and so on. And we've been really encouraged by what we found. In fact, we've moved our promo pricing up with no negative impact on volumes at all. And the thing that has been most interesting is the extent to which those promos have been incredibly successful at educating a new customer segment on our gig plus speeds, which they've very actively taken.

Speaker 2

So this has been a very good experiment for us. It's worked economically very, very well and doesn't indicate any softening at all at the low end with a fiber product. I mean, I can't talk to sort of legacy cable copper products. That's a different sort of thing. But Scott, anything on the ARPU side?

Speaker 3

Yes. Simon, intake ARPU, we've really bifurcated. We have great now more than 60% of our customers taking our gig plus That's typically additive to ARPU. We did have a higher mix in Q2 and expect in Q3 to be on some of the lower end, what we call the ACP transition plans of 200 meg. That's below the overall ARPU.

Speaker 3

So it's kind of a bifurcation now in this transition period. But by Q4, we expect most of that transition to be complete and then our sequential ARPU to be growing again nicely, thus putting us on target for that 3% to 4% range by the end of the year.

Speaker 9

Thank you.

Speaker 3

Operator, we'll take the next question.

Operator

Our next question is from Frank Louthan with Raymond James. Your line is now open.

Speaker 13

Great. Thanks. I know you've been asked this before, but maybe give us some thoughts on fixed mobile convergence. What point do you think it's appropriate and to need that type of a product? I mean, you say, clearly fiber is the most scarce resource, but at some point, what is how does that factor in?

Speaker 13

And then can you quantify the impact of some of the customer care efforts that you've done on your Friday AM group calls there? Maybe give us in terms of amount of declines in inbound calls or fewer truck rolls or any kind of tangible benefits from those improvements? Thanks.

Speaker 2

Yes. Frank, thanks. I'll take the conversion one, Scott. Perhaps you can talk about the impacts of improved care. Look, I mean, as we've said previously, that convergence is definitely happening in the U.

Speaker 2

S. Market. The data is unequivocally clear on that. And I'm sure you've all got the same data that we have access to. It's really led by the cable companies.

Speaker 2

And if I take a step back and think about my experience in Europe and other countries where I've seen convergence start and then develop and accelerate and mature. I mean, a few observations. First of all, I don't think there's a market anywhere in the world where once convergence starts, it slows down or stops. So it tends to accelerate, driven by asymmetry of market share, asymmetry of product availability and asymmetry of technology cycles. And there's always 1 or 2 players behind 1 or other of those axes.

Speaker 2

And as they tend to catch up through convergence, they start the convergence race and then everybody has to join in or accept that they're going to lose share or price. So that's the dynamic that we're seeing in the U. S, I think, very, very much taking root. Of course, there is a question about at what speed does it go, and of course, that varies between countries, and whether it creates economic value or not. And you can read the reports on that as well as I can, and I think the evidence around the world is pretty clear on the answer to that.

Speaker 2

But nonetheless, once it started, it doesn't stop, it doesn't slow down. Now what does that mean for Frontier? Well, first question is, should we launch a wireless offer? And as I've said previously, we have a lot of wireless operational chops in this business. I spent 16 years at Vodafone.

Speaker 2

Veronica Bloodworth, our Chief Network Officer, built and ran well, she didn't build, actually she ran AT and T's, cellular network. She certainly built their fiber network. We've got John Horobin, who is Verizon Wireless John Stratton, of course, our Chairman also deep experience at Verizon Wireless Vishal Dixit, our Head of Wholesale and Strategy again ex Vodafone. We have a lot of expertise in wireless here. And because of that, we've been able to do all the kind of pre work on our ability to launch a wireless offer if we had to.

Speaker 2

So we're kind of very well prepared. We understand the economics. We understand the dynamics very, very well. The question is, should we do it now? And what I've always said is we will be led by the data on this.

Speaker 2

And what the data is very clearly telling us at the moment is we do not need to offer mobile yet. We surpassed our target of 0.45 percent fiber penetration in our base markets this quarter, and our churn remains low. And this indicates that the best current use of our capital continues to be building and selling fiber without the distraction of new product launches for cellular, reeducating our channel, reconfiguring our web based buckets and all of that sort of stuff. So we're prepared. We see the dynamic.

Speaker 2

We'll be led by the data, but it's not something that we currently feel we should be doing if our goal remains to be disciplined on the use of capital. Scott?

Speaker 3

Sure, Frank. Let me talk about the customer service improvements. I'd point you to a few numbers. A healthy portion of our total $580,000,000 of cost savings has been driven by customer service improvement. Our calls are down 50% over the last 3 years.

Speaker 3

75% of our customer interactions are now digital. And through those improvements, we've been able to drive margins up. This quarter, they are up about 120 basis points to 38%. So it's a big part of our overall margin expansion, and we're not done yet. Operator, we'll take the next.

Operator

Our next question is from Peter Cipino with Wolfe Research. Your line is now open.

Speaker 14

Hi, good morning. I will ask you to return to the topic of the narrowed vintage penetration disclosure. You mentioned in your prepared remarks that peer companies report differently than you have been and that the new disclosure aligns more with how you manage the business and we appreciate those points. But unlike peer companies, Frontier is allocating a huge amount of expansion capital and many of us have valued the Vintage disclosure, in particular because of the absence in your financial statements of really clear data for evaluating marginal returns on capital. And so in that light, I wondered if you could help us understand what changed and why you made the decision at this time and how you'd want us to think about marginal return on capital going forward?

Speaker 14

Thank you.

Speaker 3

Sure, Peter. This is Scott. So when we started building fiber in 2020, we thought it was important to give enhanced visibility at a very granular cohort level because we hadn't built fiber before. But now in 2024, this is our 5th calendar year of the build. We've added more than 4,000,000 passings and reporting on quarterly cohorts for each of those 5 years has just become too complex.

Speaker 3

So it's the right time to simplify our reporting to separate it in the base and expansion and better match how we manage the business.

Speaker 1

Thanks, Peter. And with that, we'll conclude our Q2 2024 earnings call. Thank you all for

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Earnings Conference Call
Frontier Communications Parent Q2 2024
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