Frontier Communications' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: Frontier Communications (FTR)

Frontier Communications Corp (NASDAQ:FTR)

Q4 2012 Earnings Call

February 21, 2013 4:30 pm ET

Executives

Robert Starr – Senior Vice President and Treasurer

Maggie Wilderotter – Chairman and Chief Executive Officer

Daniel McCarthy – President and Chief Operating Officer

John M. Jureller – Executive Vice President and Chief Financial Officer-Elect

Susana D’Emic – Senior Vice President and Chief Accounting Officer

Analysts

Batya Levi – UBS

Simon Flannery – Morgan Stanley

Frank Louthan – Raymond James

David Barden – Bank of America

Mike McCormack – Nomura Securities

Scott Goldman – Goldman Sachs

Kevin Smithen – Macquarie USA

Operator

Good day, ladies and gentlemen and welcome to the Frontier Communications Fourth Quarter 2012 Earnings Results Conference. Just a reminder, today’s program is being recorded.

At this time, I’d like to hand the call conference over to Mr. Robert Starr, Senior Vice President and Treasurer of Frontier. Please go ahead, Mr. Starr.

Robert W. Starr

Thank you. Welcome to the Frontier Communications fourth quarter 2012 earnings call. With me today are Maggie Wilderotter, Chairman and Chief Executive Officer; Dan McCarthy, President and Chief Operating Officer; John Jureller, Executive Vice President and Chief Financial Officer-Elect; and Sue D’Emic, Senior Vice President and Chief Accounting Officer.

The press release, earnings presentation and supplemental financials are available in the investor relations section of our website at frontier.com. During this call, we will be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings.

On this call, we will also be discussing GAAP and non-GAAP financial measures as defined under SEC rules. Reconciliation between GAAP and non-GAAP is provided in our earnings release. Please refer to this material during our discussion.

And now, I will turn the call over to Maggie.

Maggie Wilderotter

Thanks, Robert, and good afternoon, everyone. I appreciate you joining Frontier’s fourth quarter 2012 and full-year 2012 earnings call.

Before we discuss the results of the quarter, I would like to mention that earlier today, the Board of Directors declared a quarterly dividend payment of $0.10 per share in line with expectations. I will start with a review of our performance against the 2012 key strategic and operational objectives, and more specifically, how we have positioned the company for 2013.

If you’d like to follow along with the slides there on our website, beginning on Slide 5, you can see that during 2012, we successfully completed all of the key operational objectives that we set out to achieve.

First and foremost, our year-over-year revenue increases per customer were very positive with total average revenue per customer improving from $121.88 to $127.32, or 4.5%. Average monthly revenue per customer also increased 4.8% from $107.50 to $112.68. We completed our network integration and systems conversion ten months ahead of schedule.

We made significant investments in our network which has enhanced our speeds, capacity, and reach. And we achieved our targeted cost synergies with over $650 million of savings, while in excess of our original target of $500 million. We also raised $1.35 billion in debt to refinance existing maturities and bolster our liquidity.

Having achieved all of these operating milestones, in 2013, we will stay the course on cost reductions and increased our focus on driving revenue improvement.

In early January of this year, we reorganized our business by decentralizing our sales and marketing functions to better leverage our local presence. This change enables us to make decisions regarding sales and marketing as close to the customer as possible. It empowers our local managers know our customers best to make decisions about how to market our product. It also enables them to be more nimble to develop new sales and rim back strategies and to respond quickly to our competitors.

On Slide 6, we provide details on our strategy to achieve one of our top objectives for 2013, driving revenue growth. As I mentioned, it begins with using our local engagement strategy to improve customer retentions and grow our market share. We will also expand our use of aggregators and agents, these alternatives distribution channel significantly expand the points of presence for purchasing our products and services.

Leveraging our recent IT enhancements, we are better able to provide seamless provisioning and on-boarding of customer resource through these distribution channels. In addition, we have hired 78 new sales people in Q4 who are intended as sales hunters to grow commercial small business market share.

Lastly, we continue to focus on new product developments. Our Frontier Secure suite of products continues to sell well with market share up 46% year-over-year. Our recently launched Hughes Satellite Network partnership, which provides Frontier broadband satellite for 5 to 15-meg has been gaining traction with customers in our market, who do not have broadband access today. These sales initiatives along with our improved network simplified pricing plans and new product rollout will help us grow broadband market share and drive revenue growth.

On Slide 7 we outlined our lead with broadband strategy and detailed the improvements we have made to our network to enhance speed, capacity, and reach. Currently, 40% of our residential customers can receive speeds of 20 meg or more. We have targeted increasing the 20 meg speed to 50% of our footprint by the end of 2013.

We will be able to accomplish this within our CapEx budget by pushing fiber deeper into our network, using low cost electronics, and the newest technology to enhance speed. And for most of our commercial carrier customers, we provide Ethernet of at least 1gig today.

During 2013, we will extend our footprint to meet our commitments to the Federal Communications Commission and certain State Regulatory Commissions and began to reach 92,000 additional households in unserved markets using the $72 million of Cap 1 funding we have received.

For those customers that we cannot reach with our wireline broadband network, as I mentioned, we are now serving them with the Hughes Satellite broadband product. Finally, I’d like to discuss the second top objective for 2013, our simplification and cost savings plan. On slide 8 we show targeted gross costs savings for 2013 of $140 million. Due to the completion of conversion and integration as well as improvements in network reliability, we have been receiving fewer calls to our call centers and the need for network repairs have significantly declined. As a result, we were able to begin reducing our workforce in the fourth quarter and we are targeting additional wage and non-wage reductions in 2013.

Please note that the reduction of a $140 million will be partially offset by increased costs for merit increases, higher benefit costs, sales expense and higher cost in connection with new product rollout. We expect our net expense reduction to be approximately $100 million. We are also working to simplify many of our operating processes. For example, we are streamlining the process from the time the sale is made to installation, to rendering a bill, and improving the customer payment options.

By enhancing IT support for these functions and by eliminating redundancies, we will improve the speed of order processing and enable further wage and non-wage reductions. Finally, we are also continuing to consolidate real estate by moving our workforce into fewer locations.

In summary, we successfully completed all of the operational objectives we set out to achieve during 2012. Year-over-year, our revenue loss has narrowed, our customer retention improved, our cost synergies exceeded expectations, our capital expenditures came in on plan and we delivered free cash flow in our stated range.

With the realignment of our organization and the traction on a variety of new revenue initiatives that I mentioned, we are ready to focus on further improving our revenues through broadband market share growth and customer retention. We will also implement the process improvement and simplification projects that will reduce our operating cost substantially.

I’ll now hand the call over to Dan McCarthy to give you a network update as well as operational trends.

Daniel McCarthy

Thanks, Maggie. I’d like to start by providing an overview of our fourth quarter results. On Slide 9, we provide some details regarding key revenue items. First, voice revenues were lower due to the continued shift of customers away from traditional landline service and this was anticipated.

However, we did see that many of our voice customers adopted to purchases unlimited phone packages and those packages produce lower revenue than the plans based on preeminent usage rates or in some cases a start for rise in packages. Also sales of our Simply Broadband service, which have been robust that are important to Frontier’s customer strategy, come with lower monthly revenue than for customers who take broadband in a bundled with voice.

The good news is that Simply Broadband has enabled us to retain customers than would have otherwise been lost. Keeping customers not only enables us to retain a portion of their monthly recurring revenue but it provides us additional selling opportunities. Simply Broadband helped us improve customer attention and achieve a lower churn rate in the fourth quarter.

Commercial revenues were impacted by delayed customer decisions, which we believe was attributable, impart to customer concerns regarding the economy and regulatory uncertainties. Some of the Q4 CPE decision delays have been signed in this first quarter of 2013 and we are pushing to bring more deals over the finish line.

Slide 10 shows the status of our network enhancement plans as of December 31, 2012 and our current plans for 2013. During the quarter, we made big strides in turning on 20-meg service, increasing coverage by 18% and now reaching 40% of our footprint. We plan to increase 20-meg service to 50% homes by the end of 2013.

Our 12-meg service increased by 6% to now reach 51% of our footprint; we expect to reach 60% by the end of 2013. Our 6-meg service also expanded 10% to now reach 74% of our footprint. We expect to reach 80% by the end of 2013. We are also expanding our new voice capabilities for business and are also continuing to invest in Ethernet capabilities, which now cover 71% of our commercial customer locations with speeds up to 1-gig.

I would like to remind you that these large speed improvements are all within our capital expenditure guidance. We’re able to get this done now, because of our system conversions last year as well as the significant middle mile investments we’ve made since the closing of the transaction back in July 2010.

Our successful system conversions also continue to positively impact operating results, as you can see on Side 11. Residential customer churn at 1.6% for 2012 continues to demonstrate significant improvement. Broadband availability increased to 88% even with our increased focus on speed improvements. On our 3-meg commitments to the STC, we already exceeded 80% availability and we see no issue in meeting our 85% commitment by the end of 2013.

Slide 12 shows some additional metrics that drive our business. As we discussed on our last earnings call, our business objective is to attract and retain customers, and to sell more products to those customers. We also explained that access lines were no longer a relevant measure for our business as we continue to sell significantly increased volumes of both residential and business products that are not countered as access lines. As a result, we are no longer reporting access line metrics. We’ll be reporting customer metrics shown on this slide.

Looking at the upper left-hand chart, which shows the year-over-year change in the number of residential customers, you will see that our 7% loss reflects a significantly improving trend over the past four quarters. Likewise, the year-over-year change in the number of commercial customers also shows significant improvements in the fourth quarter.

Broadband net ads grew to approximately 5,300 during the quarter. Within this number, we continue to see strong growth from our Simply Broadband product offset by churn and other categories. We also had a national Apple gift card promotion in market which contributed to broadband sales. This promotion started late in the quarter and began to show a jump in subscribers in December. This promotion has continued and we saw improved net broadband sales in January 2013 over the December 2012 run rate.

Lastly, video net ads of 18,100 continue to improve sequentially from the first quarter of 2012, largely on the attractiveness of our DISH product. DISH continues to sell well on price, content and on features like Hopper. FIOS video losses also improved in the quarter.

I will now hand the call over to Maggie to introduce John Jureller.

Maggie Wilderotter

Thanks very much, Dan. I’m now pleased to introduce John Jureller who joined Frontier on January 7 as Chief Financial Officer-Elect. He is taking on the official CFO title following the filing of our 10-K and we are thrilled to have John at Frontier. And in jut six weeks, he is off to a great start. I want to take this opportunity to thank Don Shassian for all of his contributions to Frontier over the past six and a half years. I will now hand the call over to John Jureller for the financial update for Q4 and the full-year 2012.

John M. Jureller

Thank you, Maggie, and thank you to everyone for joining our call. To begin, I would like to mention four items that occurred in the fourth quarter of 2012 and which are reflected in our financial results.

First, a $19.3 million in losses on the early extinguishment of debt; second, $13.5 million in integration expenses; third, $17.2 million in severance costs related to workforce reductions in the fourth quarter; fourth, 400,000 in discrete tax items, representing changes in certain deferred tax balances, net of the benefit for the reversal of uncertain tax positions.

For the fourth quarter, our reported EPS was $0.02 per share. Adjusting for the after-tax impacts of these four items, our fourth quarter non-GAAP adjusted EPS would have been $0.06 per share.

Now, let me review the fourth quarter’s results. Slide 13 shows our revenue composition. Total revenues declined $20 million or 1.6% sequentially and declined 3.9% from the fourth quarter of 2011. The largest component of the decline in the quarter was voice revenue, which was down 2.5%. Total customer revenue was down 1.9% sequentially and segmenting it, you can see that residential revenue declined to 2.7% while business revenue was down 1.1%.

For the fourth quarter, business represented 53% of our customer revenues. Regulatory revenue was up 1% sequentially due to an increase in customer surcharge revenue to offset Frontier’s contributions into the Federal Universal Service Funding and an increase in revenue from the Connect America Fund to partially offset the reduction in switched access revenue.

Slide 14 provides a bit more analysis of our customer revenues. In residential, we had a small sequential decline in average revenue per customer or ARPC. However, year-over-year residential ARPC is up 1.8%. In commercial, we saw a sequential lift in ARPC with a year-over-year increase of 5.7%. This was driven by better sales of more advanced products, like Ethernet and also reflects a shift in the revenue mix as the vast majority of our customer losses continue to be in the small business accounts that generate much smaller monthly revenues.

Turning to cash operating expenses on Slide 15, we have highlighted the impact in the quarter from $7 million of storm costs and $5 million of Apple gift card promotional costs. Excluding these two items, cash expenses were down 1.5% from the prior quarter.

Our synergy update is on Slide 16. As of the fourth quarter, we achieved $653 million of annualized cost savings. These savings are primarily the result of continued costs savings from our integration project list, because we have exceeded our $650 million synergy target, which is well in excess of our original $500 million goal on a going forward basis we will no longer be reporting synergies.

As Maggie mentioned, we do have further costs savings initiatives for 2013 across wage and non-wage items. We will see the impact of the fourth quarter 2012 head count reductions starting in Q1 2013, and we will continue to write-down our workforce for maximum effectiveness.

In addition, we will further consolidate facilities, where it improves our operations and customer interactions. The cost saving initiatives are planned to save $140 million gross for 2013. Certain of the cost reductions will be offset with additional spending to support other initiatives such as new product launches resulting $100 million of anticipated net expense reduction for 2013.

Capital expenditures on Slide 17, reflect the seasonal decrease in the fourth quarter, however, we were still able to expand broadband to an additional 157,000 in homes, while shifting for focus to speed enhancements, which are less capital intensive than geographic expansion.

Frontier maintains a very healthy level of free cash flow as seen on Slide 18. Our trailing 12-month free cash flow was $975 million, exceeding dividends by $576 million and was within our guidance of $900 million to $1 billion. Our dividend payout ratio for 2012 was 41%. For 2013, we will no longer have any acquisition in integration expenses. As a result, the GAAP between our definition of free cash flow and the one that many of you use will narrow.

On Slide 19, we show how our leverage has declined in our target leverage ratio range. As we have previously stated, Frontier is committed to reducing its leverage, net-debt-to-adjusted EBITDA to a target of 2.5 times. We will continue to reduce leverage through both EBITDA improvement and debt reduction.

On Slide 20, we show our long-term debt maturity profile. In the fourth quarter, we purchased $76 million of our 2015 notes and $59 million of our 2017 notes. Then on January 15 of this year, we repaid $503 million of maturing bond, this leaves us with only $53 million of debt maturing during the remainder of 2013 and only $258 million in 2014. We believe that our free cash flow generation combined with existing cash will provide us a comfortable cushion to repay our debt maturities over the next four years to five years without any refinancing required.

Our $750 million revolving credit facility matures in 2017 and will be renewed in 2013. We have not had a need to borrow under this facility, it provides a backstop for liquidity and general corporate needs if required.

Finally, our 2013 guidance is shown on Slide 21. Our 2013 cash guidance is $125 million to $150 million. Our higher cash taxes in 2013 as compared to 2012 is primarily a result of lower net operating loss carry forwards into 2013. The benefits of our 2013 50% bonus depreciation will not lower our cash taxes in 2013 any further however will reduce our payments in 2014.

Our 2013 capital expenditure guidance is $625 million to $675 million, a reduction from current levels as we shift capital from broadband, geographic expansion to speed enhancement. As Dan described, we are able to reduce our capital expenditures due to the significant investment we made in our network over the past three years.

In addition, we will continue to focus on speed enhancements, which can be accomplished at a lower cost than build out. We also continue to fund wireless backhaul projects as part of our current CapEx guidance. Our free cash flow guidance for 2013 is $825 million to $925 million.

In summary, Frontier’s network improvements, local engagements, product rationalization and operational reorganization will enable us to focus on driving revenue growth. On the cost side, we have exceeded our original synergy guidance on more than $150 million, but we are not yet done. There is still significant organic cost cutting we will focus on in 2013 with a completion of many network enhancements we can reduce our capital expenditures and maintain a healthy cash flow generation. As a result, we expect to keep our dividend payout ratio in the 40% to 50% range for 2013.

With that, let me pass the call back to the operator and open up the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Up first is Batya Levi, UBS.

Batya Levi – UBS

Thanks. Your broadband ads improved slightly on a sequential basis and you mentioned that ads are off to a good start in January, can you tell us a little bit more on your plans to continue to improve broadband share and how you think about revenue trends in 2013? Thanks.

Maggie Wilderotter

Hey, Batya, this is Maggie. Let me just – I’m going to talk about residential first and commercial, I know, Dan, can definitely chime in on this too. So first and foremost, we are very focused on reach in the new broadband build areas. I think as you know, we’ve turned on a lot of households, and we are actually keeping track of our share in these new areas as we put more broadband customers on.

Just to give you a sense, we are close to 20% average penetration in all of the new areas that we’ve turned on since the acquisition. We actually have some states with over 30% penetration and some market over 50%. So we are doing well there and we are staying focused on that. So we know that will help on the broadband side.

We talked a lot on the call about the enhanced network. We think we opened up a lot of opportunity to sell both our ultra and ultimate tiers of broadband that gives us incremental revenue on upgrades with existing customers, and also to attract win back, because we have higher speeds in a lot of areas.

The use of broadband partnership that we have for satellite, we do have over 700,000 households that we do not reach through access today with our network. So we are targeting those groups of customers to come on to the satellite broadband product, and we’ll bundle that with the other Frontier products.

Frontier secures another way that we can draw broadband in both from a win back perspective, as well as upgrade and enhancements to existing customers that will drive revenue and local engagement. As we have the centralized marketing and sales to the field, we are really looking for them to push the envelope on competitive offers and bundles on a local level and to drive change as quickly as we possibly can to react to competitive environments.

Last, but certainly not least, we are also working on a simplified switching process for win backs to make it very easy for those customers to come back on to Frontier.

Quickly on the commercial side, we’ve hired a group of hunters as I mentioned that are out there, they are broadband focused and they are commissioned on selling broadband in the marketplace to small business. We’re launching a cloud offer in April that we’re pretty excited about and all of our footprints. We also have our voice broadband bundle that we called Tandem launched in 14 states. And we’ve mentioned Ethernet GigE and MetroE as key products on the commercial side that we’ve been not only gaining traction on, but it’s been a big driver of revenue per customer growth.

We have fiber product sales that we are also planning on leveraging along the backhaul route from the projects that we’ve done bringing fiber to the sell-side, and we are working on five or six specific vertical offers for small business. So there’s a number of initiatives that we’re doing to drive not only high-speed sales. And as Dan mentioned, we are very bullish on what we’ve seen in the first part of this year in net sales for broadband. And we also think that not only those net sales drives further revenues for the company, but we also have a number of upgrade plans to drive revenue.

Daniel McCarthy

Yeah, and Batya this is Dan. I would just to give you a little bit more color on the fourth quarter campaign and how it’s carried over into the beginning of this year. We really started that Apple campaign after election date; it took a while for us to soak in the market. We started to see the activity really pickup right after Thanksgiving with a very strong December that strength carried right through January until the end of the promo, which ended in the early part of February. We saw it was a good promo from our perspective, because it go through the clutter and really happens in holidays, the great called action and it produced a nice mix of sales as you can see even by the video adds in Q4.

Maggie is absolutely right, an important source for us as we go forward is going to be both the additional households that we are going to turn on from the Connect America Fund, which is about $53,000 planned in this year has $92,000, as well as about $83,000 additional households from a broadband expansion perspective. As Maggie pointed out, we’ve had very good success in penetrating those new and turned up areas and we think there is a lot of opportunity for us to continue to take share there.

The last point I would just add is, when we look at the strong momentum that started from that Q4 campaign, prior to January, the net results at this point on quarter have actually exceeded Q4. And we’re starting to see traction begin as Maggie pointed out in unserved areas by our satellite-based broadband and as they gain traction in those unserved areas, we will start to see that accelerate well. So I think we feel very good about where we are, what we accomplished with the Apple offer, but we feel really good about 2013.

Batya Levi – UBS

That’s very helpful. May be if I could just follow-up on how we should think about many trends going into 2013. If there was a little bit of increase in the rate of decline, can we assume that with all these efforts that you expect that to continue to improve, and as we exit 2013, you would be at low single-digit revenue decline, I know you don’t give revenue guidance, but would you expect this improvement to continue throughout the year?

Maggie Wilderotter

Well, of course, Batya, that’s what we’re focused on, is making sure that we continue that throughout the year. I think we all know that we’ll still see some erosion in invoice revenues and we need to offset that erosion with broadband share growth and new products. I also think that the bundle we’ve actually changed the mix as Dan mentioned. We launched in the Verizon acquired markets, our set of Frontier bundles that include a voice bundle that is on limited local and long distance and we marry that with broadband in the marketplace. And we saw very strong uptick of those packages, because we are migrating customers of a very old legacy Verizon packages over on to our package price plan.

So we think that that will continue to happen and the good news about that is where we would lose customers in the past, because those old packages around competitors were keeping more customers and a double or triple play that we are selling to those customers is a lot stickier. So we also think that’s going to help on the revenue side. And plus, we are continuing to stay the course and we are starting to see good traction in the first six weeks of the year on the commercial sales side as well. So net-net, we think we have the right plan to continue to close the gap on revenue declines and we’re going to work on execution and implementation that’s what we have to do.

Batya Levi – UBS

Okay, great. Thanks.

Maggie Wilderotter

Thank you.

Operator

Next we’ll hear from Simon Flannery, Morgan Stanley.

Simon Flannery – Morgan Stanley

Great, thank you very much. Good afternoon. On capital spending it looks like you are guiding to about 13% or so for the year. How should we think about that as being kind of maintenance CapEx or run rate, have we sort of gone through the bubble here versus on broadband, any sort of major changes from here over the long-term, or is this a good run rate? And is there any shake during the year, it’s obviously came down, the year-over-year comps got better as the year went on, is that going to happen as well in 2013? And then on your leverage target, we obviously had CenturyLink make a big push towards buybacks last week and they also opened up a levered – they raised our leverage target to three times. Your stock with a strong payout ratio has a 10% yield right now and which seems to the attractive use of certain cash flow as well as considering some deleveraging. At what point do you think you have to get to the 2.5 times or might you consider if you got on the three times looking at buyback just stock was yielding right us today? Thanks.

Maggie Wilderotter

Hey, Simon, it’s Maggie.

Simon Flannery – Morgan Stanley

Okay.

Maggie Wilderotter

So I’ll get started – let me talk a little bit about the leverage part and then I’ll kick this to John and can talk a little bit about the make up of capital for the year. Look, we are very focused right now as a company. Number one priority you say the dividend with our free cash flow and secondly we want to continue to reduce debt.

That doesn’t mean that our stock buyback couldn’t be the future, but those are priorities that we have as the company. Our Board of Directors continues to review our capital and we’ll continue to do that. We found that their announcement was very interesting in terms of changing what they consider a decent leverage for the business.

We sort of think that they’re copying us at this point. So that’s good point. But we want to have financial flexibility and we’ll look at all of the levers of our capital structure to have that make sense. So there is nothing off the table but today our priory is the divided, number 01, number 02, number 03 and then after that is reducing debt.

John M. Jureller

So Simon this is John. Just on our question with respect to CapEx, one of the interesting things to think about is we spend a lot of money over the last two years expanding our reach into the acquired markets. We expanded a significant amount of capital to do that in both those years. And with our reach in our footprint, we think well covered is we are going to have the ability to bring down our CapEx on a year-to-year basis. So if we look at the incremental number of customers that we pass, the big spike in the build out has already happened.

And at the same time, while Dan has outlined the various improvements that we’ve had in the speed and we will continue to focus on speed, the big step functions has been well taking care of. We are going to continue to do it even more. So when we think about both speed and expansion in the hums that we’ve had to come over, we think our $650 million or $625 million to $675 million, $650 million in the midpoint is right for our business and provides for all of the strategic initiatives that we want to cover.

Daniel McCarthy

And I would just add Simon that the ranges that John just talked about, a lot of our focus is going to be on speed and capacity just like we did last year, because we are seeing that have a good impact on the quality of our service to our customers. But we will also finish up more likely our cell tower better program this year and we will see a reduction in CapEx associated with that as...

Maggie Wilderotter

Yeah, I think 13% is a benchmark that we’ve looked at and the other good thing that we’ve done over the last couple of years that has really helped us Simon to reduce CapEx is the whole middle mile build we did. We basically took the middle mile, it’s all fiber back on for us today, and we built for capacity for the next several years on that middle mile, so we don’t have to continue to do upgrades there. So we feel good about that percentage level and as Dan said, as we start to wind down on the backhaul on the towers that should give us some more breathing room for next year as well.

Simon Flannery – Morgan Stanley

Great. Thank you.

Operator

Next we’ll take a question from Frank Louthan, Raymond James.

Frank Louthan – Raymond James

Great, thank you. Can you give us an idea you are going forward, what sort of a realistic timeframe to see more of a flat top line growth and with the broadband promotion sort of rolling off, what’s your expectation sort of the rhythm in a quarter-in, quarter-out basis for broadband to add, should we be expected to sort of bounce around a little bit, or is the 5,000 or 6,000 sort of the norm going forward?

Maggie Wilderotter

Hi Frank, it’s Maggie. Let me say this. We are driving suggest revenue improvements just like we have for the last several years. So we improved from 7% and 11% to 3.8% revenue declines in 2012. We love just continue to see that trend go – where it needs to go in 2013 and that’s what we’re driving for. I said the whole organization is focused on revenue improvement and I pushed my team, I love that be a revenue growth driver in this business. And I think there’s the opportunity to get there eventually, but our goal in 2013 is to continue to do as much as we can to balance revenue and to drive these initiatives to increase revenue for customer as well.

I will say that as you think about on a go-forward basis for broadband, it is one of the key levers that we have as a company, because we’ve done a lot of investment spend for the network to get it where it needs to be. We’ve done all the system conversions, so we are now all on one side of systems and processes and we’re pressing to drive broadband market share in all of our markets. I think we feel very good about the progress that we’ve made. We’re cautiously optimistic for the first six weeks of the year, and that’s what we are going to continue to keep our heads down to do is to drive as much broadband as we can. Will it bounce around, we know it seasonal anyway, we will always see some bouncing around, but I am not satisfied with 5,300 broadband net ads, I think we can do a lot more than that and that’s what we are planning on pushing.

Daniel McCarthy

Okay, great. This is Dan; I think Maggie is absolutely right. And one of the key things that we did at the beginning of this year was realigning our sales and marketing strategy. And what we have done is, we pushed decision making as close as possible for the markets to take advantage of the opportunities. And with that we’re setting goals and objectives to really drive market share throughout each part of the organization, that both of the residential and the commercial side. So I’m not satisfied with the 5,300 and I’m hoping that you will see that as a higher number as we go forward.

Frank Louthan – Raymond James

Okay, great. And with the force reduction that you saw – what’s your expectation from an attrition standpoint although you might see over the next 12 months and then I assume that’s the factor in the costs savings?

Maggie Wilderotter

Yeah, it is the factor in the costs savings, I think as we showed on the slide we are taking up probably 5% of the workforce in the fourth quarter and we will see that flow through as a positive set of numbers throughout the year. We also have more reductions and force that will take place in the first and second quarter. But we’re making sure that we are doing it surgically not across the Board Frank, so we are keeping and actually adding head count where we need them to grow the business appropriately and we are driving for cost reductions in automation and simplified processes that need to proceed some of the head count reductions that we would do. So we have a good line of sight of how we are going to get where we need to get to, but it’s not just all about wage, it’s also about a lot of non-wage that we are focused on. We look at the people site, it’s really be right sized the size of the business and the activities, but our goal is, you got to drop the activities and that’s what we are focused on first and foremost.

John M. Jureller

So, Frank, this is John. Let me also add too that, we spend a significant amount of effort from a systems perspective putting together the organization as it exists today. And now we have an opportunity to really make sure that as Maggie described, we’re behind the scenes processes are as effective and as efficient as they can be from taking that order to provisioning a customer from rendering a bill to making it easy for payment. All of those process elements themselves, they are not just about way tray arbitrage, they are about providing a productive and efficient experience for us and our customers. And over the bottom line is we think that a customer experience will help our churn. So it’s all of those things, I think together that we are working on.

Frank Louthan – Raymond James

Okay, great. Thank you very much.

Maggie Wilderotter

Thanks, Frank.

Operator

From Bank of America, we’ll hear from David Barden.

David Barden – Bank of America

Hi, guys, thanks for taking the questions. I guess first, John, welcome to the call. May be a question for you just, one of the things that grab some attention about your appointment to CFO, was that seven of the last 10 years of your experience have been more in the private equity and restructuring world and it would be great to hear about some of your ideas that you are bringing to Frontier, some of the things you would like to do to make your mark on the company. And then as a follow-up to that, I think one of the first things we are doing is getting rid of the line metrics. I think you are actually one of the may be the first wireline company to ever do that and simply diverse from the history of these metrics. Obviously, people are going to wonder why now, what happened, it would be helpful maybe one last time as a parting gift to share those numbers with us and we can kind of just see where the end trajectory was. And then I guess my last question if I could just out there is I think Maggie you are saying there was kind of a level of somewhat disappointment about the broadband performance and we don’t know what the line loss performance was. But with the Apple promotion having kind of cost you about $5.5 million last quarter, what’s your takeaway from it, did it work, or is it helpful, would you do it again, would you do it differently some color on that would be helpful? Thanks.

John M. Jureller

David, I’m happy to take the first part of your question, I’ll let Maggie talk to the access lines. It’s an important concept to understand and why we are taking the view the way we do. I’m six weeks here into my tenure at Frontier, I’ve got – I’ve had the good portion to jump into the middle of the strong management team. I’ve done a lot of diligence ahead of time, and let’s just add I would not have joined if I weren’t bullish on the prospects. So I’m excited to be here. I got big shoes to fill with Dan’s departure, and I’m here to support Maggie, Dan, and others on the team really execute in those next phase going forward.

Maggie Wilderotter

So, David it’s a parting gift that you’d like it. Let me say this, the access lines for the fourth quarter were flat to the third quarter. So that to give you a sense, we do want to move away from reporting on access lines, because we don’t think they are a relevant way to look at this business. We think really is about total number of customers, but residential and business and actually average revenue per customers also critical for us and broadband market share is critical. So those are the things that we need to focus on and those are the things we want you to focus on, because that’s really about the health of the business.

We are now into a world of broadband product that replace traditional voice product both on the business side and the residential side. We continue to reduce access lines on the residential side for dial-up conversations over the broadband as we’ve expanded our footprint. We just think that it’s not a good measure of the health and the success of the business. So that was my part in gesture we are going to move forward.

David Barden – Bank of America

I appreciate it.

Maggie Wilderotter

The last thing I would say, on the Apple promotion, and I let Dan, Simon on this. We think it was extremely successful. Again, we didn’t really get the traction on it. So December, we knew it would take us a couple of weeks to get everybody trained and the momentum is to all of our channels to sell it. We brought over a lot of win backs which was the whole purpose of this promotion. And as Dan said, it was very strong access in December, but even stronger in January.

But the nice thing about these aspirational gift promotions and we’ve done them in the past and we will probably do them again in the future. We don’t have anything in the plan over the next several quarters, but we might do it in the fourth quarter again at the end of the year depending on where we are at and what opportunities we would have from a promotional perspective, but they create buzz in the marketplace and they create activity.

So you will get customers calling in, but there is only a percentage of those customers that wind up actually taking the Apple promotion. But we put those customers – the other customers on to other products and services that we have. So you can look at it from maybe 40% of all the calls take Apple and the other 60% that calls in about the Apple promotion wind up taking a double or triple play.

So we’ve done a very good job of using it as a leader to create buzz and to create an environment where we’re seeing also as a cool provider in real America of top line products from a great company called Apple. So we thought that was very successful, Dan I don’t know if there is anything else that you want to?

Daniel McCarthy

Yeah, I think the only thing I would add to that Maggie is that, David we had tried as you probably know different gift card offers in the past with Visa or other types of gift cards. And what we did find was that Apple gift card had stopping card. So it is really did break through the quarter, we did get a lot of calls. I think some of the feedback we did get as we had cross sell, up sell calls because there were certain segments of the market that weren’t interested in Apple, and Apple product. So but by and large I think we found that it was a very successful promo and I think we will do it again.

David Barden – Bank of America

Great, nice. Thanks guys.

Maggie Wilderotter

Thank you.

Operator

Next up is Mike McCormack from Nomura Securities.

Mike McCormack – Nomura Securities

Hi guys thanks. May be just two questions on the business revenue side, can you just give us a sense what you’re seeing out there from a competitor standpoint, I know you said I guess CPE picked up towards the end of the quarter and you get some new products for ‘13. But are you seeing any increased activity in the cable side? And then secondly, on the consumer side, with respect to the customer losses are you seeing mostly single play, or is it double and triple, and if it is single play, I guess you would have expected the APRC metric to get a little bit better, I know you talk about some migration from Verizon plans. May be just give us a little more color on that, thanks.

Daniel McCarthy

Yeah Mike, I will take the commercial landscape right now. First up, let me just say that we as I pointed out earlier, we now fully integrated our sales teams into our operating regions. And we did that really to ensure complete alignment of capital allocation in resources engineering and really ensure all the expertise is there to support the sales teams. And it definitely has started to make a difference. Our focus has really been on the small business segment and that’s where we had seen some issues as we talked about on different calls. We spend a lot of time to focus on that. We’ve re-advanced our small business bundle making it simpler, more straightforward to allow businesses to pick at suite of services that works for them. I think we’ve had good success in combating cable and that’s really where their target was. Our speed improvement also filled a nice gap in our product portfolio, so I think we’ve made some good headwinds there.

And in many cases, what we are finding is, speed isn’t necessarily the driver for business decision equally important is our local engagement, the quality support, high quality of the service and the simplicity of the offers we bring to the table. I think the key thing for us was really aligning distribution channels, so what we’ve done is Maggie pointed out was, bring on that sales force. We also had a small business sales force that was in the market already before, we’ve really focused them on taking market share and looking for new logo.

And we’ve introduced the new products and services that Maggie talked about, the Tandem and some of the new products that we will be offering for the year. So as we look at that, the combination of expanded distribution channels that include improved online aggregators, master agents, as well as our direct sales force are really allowing us to make it done, they involve the small and the medium sized.

On the CPE side, I think there was some hesitation in the fourth quarter on making some large commitments, but I would say that our funnel on CPE has never been higher. We have very, very strong backlog right now. So we’re moving to get them installed right away. And I think that the CPE business as we’ve grown it has proved to be a real differentiation for us, because our competitors don’t offer that suite of technology.

And in many cases, the closest equipment supplier is many hours away and when people look at how vital that is to their business, they are making that a key decision point for us. So I guess, the last thing and I would just add is that as we go into the rest of this year, we’ve introduced a carrier of Ethernet products, and that’s something that we haven’t had in the product family before in the revenue stream, that’s a new revenue stream for us going forward, and we think that’s going to be a nice growth for us as we move through 2013.

John M. Jureller

Mike, let me provide you just a little bit of color on to on the residential ARPC number. First, let us point out that we had a year-on-year increase of $0.63 in monthly residential ARPC. For the quarter, we believe the decrease is temporary and as Dan has talked it before, it reflects a mixed shift including our simply broadband product. Dan also mentioned it partially reflects certain blaze customers are opting for lower voice packages. But with simply broadband, we believe that these include voice customers that would have churned out of the business and we have been able to retain them through this product offering. But interestingly for the fourth quarter of our residential customers, we saw an increase in the percentage of them that had our broadband service rather with simply broadband or bundle with voice, video or both. We expect to see an increase in residential ARPC coming out of 2013.

Maggie Wilderotter

Yeah, the only thing I would like Mike on the cable competition, on the business side, if you look at fourth quarter and you look at the total number of customers and our churn rate, which went down on the business side, Dan and I were talking about this earlier today, it’s like the lowest churn number we’ve had on business in a very, very long time. So we did very well by keeping customers and stemming the losses and as some of the losses that we did have are very low and customers with very little revenue per customer. So I think some of the programs that we put in place mid 2012 have really kicked in and we are going to continue to accelerate on that.

Mike McCormack – Nomura Securities

Great. Thanks guys.

Maggie Wilderotter

Thanks.

Operator

Our next question today comes from Scott Goldman, Goldman Sachs.

Scott Goldman – Goldman Sachs

Hi, good afternoon, thanks for taking the question. I guess I wanted to look at the guidance and if I sort of backup from the free cash flow and CapEx and everything else that you gave. What is though where your EBITDA would come out relative to where the revenue indications you’ve given in the past would imply maybe flat or slightly down margins for this year. I wanted to get a sense if that sort of what you’re expectation are. And I know Maggie; you’ve talked in the past about hopping to get back to the 50% range sort of pre-transaction, is that still the target and how quickly you think you can get there?

Maggie Wilderotter

Let me start, I don’t know if John is going to add to it or not. But we still have very high margins in our business compared to all of our peers. And our focus is to continue to drive efficiencies and effectiveness to maximize margins. So, we balance that margin with investments in the business to make sure that we are doing the right things right and not just hitting margins for this cycle margin. So just the operational goal is to continue to improve margins, but again it’s 47%, 48% margins that we have today maintaining those margins is also part of our plan as well.

John M. Jureller

Yeah, and the maintenance margins is really predicated upon all the things that we’ve talked about in terms of our cost reduction or cost efficiency plan here as well. So when we look at our margins, we look at our balance across our revenue streams, lower projecting out, and we think we got some line of site on our expense reductions as we move forward into this year.

Scott Goldman – Goldman Sachs

Great, and then I know you guys also started some trials with AT&T back in October in the wireless front just wondering if you have anything you can share on that on how they appreciate and what’s your view is in terms of possibly coming up with some bundles to include wireless for 2013.

Maggie Wilderotter

We did launch on some trials in late October. We’ve got markets in Washington State New York and Minnesota that are the trial markets for the company. We expect the trial to last into the second quarter, because I think as you know it’s all different for us in selling wireless product, because it does require hardware to be part of that sales process, so we are also putting together the strategy on retail.

But the good news in those markets – in those trial markets we are doing – we will only sell the wireless mobility with our broadband product. So its double-play, triple play or a quad play for our customers that paid all four of our services and we seen some very good uptick in traction for that from a trial perspective, but our goal would be make decisions to roll out some more markets and that would happen in the second half of 2013.

Scott Goldman – Goldman Sachs

Okay, thanks guys.

Maggie Wilderotter

Thanks. Okay, we’ll take one more question.

Operator

Okay. And our final question today will come from Kevin Smithen, Macquarie.

Kevin Smithen – Macquarie USA

Can you detail little bit the $100 million in annual net cost cuts, is any of this coming out of sales or marketing personnel or advertising expenditures and how do you think about cost-cutting, the impact could be on revenue in 2013 or beyond?

Maggie Wilderotter

Kevin, this is Maggie. I think as you seen our tracker record over the years, we have always had events before we did the transformational transaction a great history of continuing to take cost out of our business every year. We look at that as business as usual to do the right things, the right way on behalf of the customer. There are no cuts that we are looking at in sales, marketing, advertising. We want to make sure that we stayed strong in the marketplace this year and really drive to maximize the investments we’ve put in the market.

So a lot of the cutting measures would be around the processes of managing the business and administrative costs and overhead. It’s not necessarily front-line. So it’s really about non-wage as a big part of that as well. I know John mentioned, we’re going to look at continuing to consolidate facilities, we still have 1,000 of buildings and in many cities, we have four or five buildings and we have hands full of people and several of them, and we want to put them all together in wanting to get rid of the other buildings. So there is a lot of initiatives that we are going to do to get the costs out. We have a full plan for the line of site for the 140 million and we do believe the net will be 100 million at the end of the day for 2013.

Kevin Smithen – Macquarie USA

Great. And how does that ramp in P&L? Should we see – is that 100 million a full year P&L impact, or is that a sort of Q4 annualized P&L impact?

Maggie Wilderotter

I would say it’s more Q4 annualized, because you got investment spend that we are going to do it along the way too, but we’ll get to a net 100 million less at the end of the year-over-year.

Kevin Smithen – Macquarie USA

Okay. That’s very helpful.

Maggie Wilderotter

So anyway, I want to thank everybody for joining the call today. We appreciate it and we’ll look forward to the next call after the first quarter results are in. Take care.

Operator

And again, ladies and gentlemen, that does conclude today’s program. We would like to thank you all for your participation. Have a great day.

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