Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Frontier Communications Corporation (NASDAQ:FTR)

Q1 2009 Earnings Call Transcript

May 7, 2009 9:00 am ET

Executives

David Whitehouse – SVP & Treasurer

Maggie Wilderotter – Chairman and CEO

Don Shassian – EVP and CFO

Analysts

Scott Gomez – JP Morgan

Frank Louthan – Raymond James

Chris King – Stifel Nicolaus

Nadia Levi [ph] – UBS

Tom Seitz – Barclays Capital

Daniel Geberio [ph] – Morgan Stanley

Jason Armstrong – Goldman Sachs

Don Jaegers – D.A. Davidson

Operator

Good day, everyone and welcome to the Frontier Communications first quarter 2009 results conference call. This call is being recorded.

At this time, I would like to turn the call over to Mr. David Whitehouse. Please go ahead, sir.

David Whitehouse

Thank you, Karen. Good morning, everyone. The purpose of this call is to discuss 2009 first quarter results for Frontier Communications, which were released this morning. If anyone needs a copy of the materials, please contact Lisa Lombardo at 203-614-5064. We anticipate the Form 10-Q will be filed later this week.

On today's call are Maggie Wilderotter, Chairman and Chief Executive Officer, and Don Shassian, Chief Financial Officer. During this call, we will be making certain forward-looking statements, in particular on matters related to 2009 results and estimates. Please review the Safe Harbor language found in our press release and SEC filings.

On this call, we will be discussing GAAP and non-GAAP financial measures as defined under SEC rules. In our earnings release and on our website, www.frontieronline.com, we have provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Please refer to this material during our discussion.

I will now turn the call over to Maggie.

Maggie Wilderotter

Thanks very much, David; and good morning everyone. We appreciate you joining us today as we discussed the first quarter 2009 results for Frontier Communications Corporation. Bolstered by our highly successful "Rolling Thunder" promotional campaign, Frontier Communications had a strong first quarter of 2009.

Revenues were $538 million with adjusted operating cash flow or EBITDA of $288 million. The company generated free cash flow of $146 million for the quarter and had a comfortable dividend payout ratio of 53%.

Let me start with the Rolling Thunder promotion recap. During these challenging economic times, it makes good business sense to increase our investment to secure our existing customer base, to attract customers, and to take share from our cable competitors. Customers are now more than ever buying products based on price and value. The Q1 promotional strategy will yield maximum long-term returns on our upfront marketing dollars.

Here are the details of the campaign. On January 15, we launched a multi-pronged video and high-speed Internet promotion focused squarely on new customers and win-backs, taking direct aim at cable competition. The campaign ran through the end of April. The details of the offerings are as follows

a DISH TV offer of 999 for all of 2009, provided our customers with the best rates in the industry for 250 channels of programming, and a high-speed Internet promotional offer of a Dell Netbook to all new customers who signed up for a double or triple play. This $400 value from Frontier in exchange for a two or three year price protection plan contract also gives us security of line of sight for customers.

As I stated in our last earnings call, our goal for all promotional campaigns is exponentially grow share of customers in every market. The results which met or exceeded our goals speak for themselves. In Q1 2009, we added 26,100 new DISH customers, which is an impressive 245% increase versus the prior quarter results. Our total DISH subscriber count at the end of the quarter was 146,000 customers, an increase of 44% year-over-year. Our video penetration of residential access lines increased from 8.9% in Q4 2008 to 11% at the end of the Q1 2009 period. Q1 2009 represents our strongest quarter ever for DISH sales. Our net addition of video customers in the first quarter of 2009 was equal to our total net add results for the entire year of 2008.

During the quarter, our high-speed data net adds increased by 20,100, pushing us just over the milestone of 600,000 customers. This is a 10.5% over Q1 2008 and the highest net add quarter in four quarters. Our monthly revenue for high-speed customers continues to be more than $40, with residential broadband penetration increasing to 40.6%.

All employees at Frontier worked hard to make this promotion a success. Our employees' Take the Lead initiative was the second highest producing channel after our call centers. We definitely took share from cable and saw no retaliation from them in any of our markets. My heartfelt thanks to all the Frontier employees. They delivered great results.

Consistent with our longest goal, long-standing goal to increase customer bundle penetration, our digital song voice product bundles gained strength during the quarter. Our surgical approach to segmenting our voice bundles vis-à-vis a la carte voice offering, has allowed us to increase residential voice bundles to approximately 608,000, a 6.6% quarterly increase and a 46% penetration of primary residential access lines. Furthermore, our Q1 average monthly customer revenue per access line increased from $63.88 to $66.78 year-over-year, a 4.5% improvement. We also increased the penetration of our bundled residential customers on price protection plans to 78% in Q1.

Access line losses continue to improve in the first quarter. Our net line losses of 37,500 was our best quarter since Q4 of 2007. We had a 10.9% sequential improvement from Q4 2008. We have seen steady access line loss improvements for the past three quarters. We now have 25,200 Peace of Mind customers on our computer assistance and Hard Drive Backup bundles at monthly reoccurring price points ranging from $4.99 to $12.99. This is a 79% increase over last quarter. Incremental revenue per residential customer is averaging $8.93 per month.

Our wireless data networks are up and running in 19 municipalities, 59 anchor tenants that include colleges, universities, and hotels that pay a monthly reoccurring revenue fees for the use of the network. In addition, we ended the first quarter 174 hotspots sold throughout our markets. We clearly build momentum for wireless data in our markets. We have increased the number of hotspots by 48% since the last quarter. We now have over 12,000 monthly licenses that our hotspots and anchor tenants pay for, with an average contract commitment of 3 to 5 years. Plus revenue being generated from an additional 4,000 users each month via individual monthly subscriptions or day passes.

EBITDA margins, adjusted for severance and non-cash pension expense was 54% for the first quarter, well within our target range of 53% to 56%, even with our promotional spending for Rolling Thunder.

Furthermore, our proactive focus on expense management is stronger than ever, as we continue to tighten our belts and pull all levers necessary to achieve our free cash flow targets. Our multifaceted expense reduction initiatives touch every corner of our organization. We have identified and put into action tens of millions of dollars of expense reduction initiatives. I remain fully confident in our ability to meet our 2009 free cash flow guidance of $460 million to $485 million.

In summary, we are very pleased with our results for the first quarter of 2009. Like many, we are hopeful that the economic stimulus actions taken by governmental agencies around the globe will provide a platform for future economic growth and stability by 2010 and will form a basis for increased commercial and consumer confidence. Our successful and highly subscribed $600 million bond offering in early April is direct evidence of the stabilization in the credit markets. We appreciate the work of confidence in Frontier from our bond investors. As always, we will continue to aggressively press forward servicing the needs of our customers and executing against our mission statement of being the leader in providing communication services in our markets.

Here now is Don Shassian, our Chief Financial Officer, to give you the financial overview for the first quarter of 2009. Don?

Don Shassian

Thank you, Maggie; and thank you everybody for joining us this morning. Frontier continues to deliver on our objectives of strong free cash flow and profit margins. Undeterred by the economic uncertainty in our markets, Frontier completed one of our most successful promotions ever, closing very strong voice, high-speed, and DISH unit results.

Our operating cash flow or EBITDA margin in Q1 was 51.5% and when adjusted to exclude severance charges and non-cash pension expense, was 53.5%, comfortably within our stated quarterly target of 53% to 56%. Free cash flow for the quarter was $146 million.

We continued to experience strength in data and (inaudible) access revenues, offset by reductions in federal state subsidies and local services revenue. Customer revenue for the quarter was $448 million, a 0.7% decline sequentially compared to fourth quarter 2008. Our average revenue for access lines for the quarter was $80.21, which is up slightly versus fourth-quarter 2008 and up 1.8% over last year's first quarter. Most noticeable is that our customer ARPU was up 4.5% over last year's first quarter, which demonstrates our consistent growth of customer wallet share.

Our first-quarter data and Internet revenues of $156.4 million increased $2.5 million or 1.6% compared to fourth-quarter of 2008, and increased $10.4 million or 7.1% compared to last year's first quarter, driven by additional sales of high-capacity Internet and Ethernet circuits. We added approximately 20,100 high-speed customers in the first quarter.

I would also like to reiterate one of Maggie's earlier comments in connection with our wireless data networks that had been built out. We are generating revenue today from over 60,000 users with access to our Wi-Fi network, at airports, hotels, restaurants, on campuses, and various other locations equipped with Frontier Mobile technology.

Local and hand service revenue declined $4.9 million or 2.4% compared to the fourth quarter of 2008. Our total access lines declined by approximately 37,500 during the quarter. I would like to make some very specific comments on the access line trends that we have seen. First, this represents the third sequential quarter of declining access line losses. Two, if you normalize for the acquisition of Global Valley lines that we acquired in the fourth quarter of 2007, this first quarter's access line losses were the lowest line losses that we have seen since second quarter of 2007. Third, the Rochester market access line losses this quarter were the lowest we've seen in over three years. Fourth, our residential line losses were 27,100 and our business line losses were 10,400. Lastly, this favorable trend in access line losses has continued in April 2009.

Access service revenue was down 6.5% over fourth-quarter 2008. Access service revenues were down 16.5% from first quarter of 2008 to primarily to lower (inaudible).

On the expense side, we continued to demonstrate very effective cost management. Reported operating cash flow or EBITDA margin for the first quarter was 51.5% and after excluding a $2.6 million charge for severance, an $8.2 million non-cash pension charge, or operating cash flow EBITDA margin was 53.5%.

I would like to make it clear that we do not expect to make any cash funding to our pension plans until 2011. Although pension volatility could result in some funding in 2010 at the earliest. As a result of a number of revenue and expense initiatives that have been implemented, we continue to view 53% to 56% as a quarterly target at EBITDA margin level.

Capital expenditures were $64.6 million for the first quarter. We maintain our previously reported expectations for capital expenditures to be within the range of $250 million to $270 million in 2009.

Our net debt to adjusted EBITDA ratio at quarter end was 3.8 times. Our liquidity position is very strong. Frontier's $250 million revolving credit facility is fully available and our quarter and cash balance stands at $177 million. Furthermore, we have no material debt maturities until May 2011. Although these maturities are still more than two years away, we felt it was prudent to opportunistically address some of these maturities in 2009.

On April 9, we completed a $600 million five-year high-yield offering. Our original launch of $300 million was upsized to the $600 million final level, due to a very strong order book in excess of $1 billion. The 8.25% coupon was placed as the low end, lowest side of our expected range. The new issue continues to trade very well in the secondary market but the yield has tightened since the offering date. To date, we have used a portion of the proceeds to repurchase existing debt in the open market. As of today, we have used approximately $207 million of the proceeds to repurchase $214 million of principal amount of existing debt in varying maturities. We believe our ability to access the market in sizable transactions such as this speaks of investors confidence in Frontier and their belief in the sustainability of future cash flow generating capacity of this company.

As for 2009 expectations, we believe that our free cash flow will be between $460 million and $485 million. We're estimating cash taxes to be between $90 million and $110 million, which reflects the benefits we anticipate as a result of the bonus depreciation that is part of the American Recovery and Reinvestment Act of 2009.

As we press forward in 2009, we believe we are well positioned to deliver on results we have discussed with the market. Our Rolling Thunder promotional campaign, which Maggie spoke of in great detail and the corresponding strong voice, high-speed, and video net adds will drive us with great platform for economic returns in 2009 and beyond.

With that, let me pass the call back to Karen and ask her to open the call up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take our first question from Mike McCormack with JP Morgan.

Scott Gomez – JP Morgan

Hey guys, is actually Scott Gomes for Mike McCormack.

Don Shassian

Hey, Scott.

Scott Gomez – JP Morgan

Couple of questions on the promotion and as well on DSL. Just wondering if you could talk a little bit about the reception you had to this promotion versus past ones, how you view this one relative to previous ones in terms of both reception and the expense that you incurred for the promotion. And then secondly, obviously very good results in the video side, DSL as well, although DSL I thought may have been a little bit higher. Wondering if there is anything we saw in the DSL churn that may have limited how much benefit you got from the promotion this quarter.

Maggie Wilderotter

Let me kind of cover the promotions and give you a little bit more detail on that and then Don can jump in. I would say this is probably the most successful promotion we have ever run. So the recession in the marketplace was terrific. As I also mentioned, we wanted to focus these promotions to really go after win-backs and new customers. So we always allow our current customers to participate in our promotions, but in the case of this specific promotion for the high-speed netbook, and existing customer also had to buy our Peace of Mind service. So we put a little bit of a speed bump in place for existing customers. So we didn't see the same level of take on existing customers for this type of our promotion, which is a good news story. We still had a number of existing customers take this, but we also got a revenue lift somewhere around $12.99 per customer.

We did not see any issues on churn for high-speed. Actually, we were very pleased with the results that we brought in on this promotion, because we didn't change the price. As a matter of fact, our high-speed light product set that we introduced a year ago at $19.99, we moved up to $24.99. So we had a slightly higher price point also in the marketplace as an entry-level. So net-net, we think that the high-speed numbers are very, very good.

On the video side, one of the things we tried to do with this promotion different than any promotion done in the past is to lead with video, because we felt if we could get into the marketplace with a very strong video offer and pull away cable customers, especially at a time when they were all doing rate increases, we would also be able to pull over other services. Which in fact we did. I say over a third of all video promotional customers took both high-speed and video from us; in addition, over 60% of those customers took voice as well as video or some combination of triple play. So over 75% of all the customers were new customers to Frontier.

So again, we felt very good about that from an expense perspective. I think as you can see in the numbers, we were able to absorb the expense. We did have some contra revenue in the first quarter against video, because of the discounting, but net-net, we feel very, very good about these promotions and the long-term value they are going to deliver for our shareholders.

Scott Gomez – JP Morgan

Very helpful, thanks.

Operator

For our next question, we will go to Frank Louthan with Raymond James.

Frank Louthan – Raymond James

Great, thank you. Can you give us an idea of where some more of the cost-cutting may be coming from and what is sort of your largest target there, is that still the headcount or what are some other things where you may be targeting that and give us an idea on your thoughts on buybacks here, obviously there is some debt refinancing that was prudent, but you have been buying back stock for several years and stock down here, just curious what your thoughts are going forward, thanks.

Maggie Wilderotter

Okay, hi, Frank. I'm going to take the first part and then Don can talk about the buybacks. With regard to cost cutting, what we have tried to do is make sure that we take costs out of the business that don't hurt the company in the long run. So while we have always continued to right-size the business from a people perspective, one of the things that we have put in place with a company is a fur low. Our employees will take a certain number of days off between now and the end of the year without pay, we have been bargaining that with our unions in addition to having our non-bargain unit employees participate in this. And everyone is participating, including me. So it is throughout the entire organization. And we're doing that in order to save as many jobs as possible instead of doing massive layoffs or something of that.

Now we have also tighten our belts on travel, we have actually put in a great video conferencing system in the company that utilizes our network, so that curtails travel expenses. We have been renegotiating contracts with our vendors, we're renegotiating leases on the real estate side. So I mentioned this, really no stone unturned. We're just basically looking at all facets of the business. We have also put in place several automation projects, especially in our call centers for a lot of our offline functions to make sure that we automate those, which also eliminates the need for extra people to do those tasks.

Don Shassian

I will just re-iterate, a number of IT initiatives, Frank, as we continue to improve productivity throughout the business, both outside and call center and even efficiency on the common support function area. We are still making significant investments to drive that productivity. The issue on residual free cash flow, we are focused on using residual free cash flow for debt repayments and buybacks of debt. We made that statement last quarter that we are focused on driving our leverage down and while the stock price makes it very attractive to make a stock buyback, that is not our priority right now. Our priority of using excess free cash is on de-levering, and that is our focus.

Operator

Our next question will go to Chris King with Stifel Nicolaus.

Chris King – Stifel Nicolaus

Good morning and thank you. Just a couple of quick questions for you. First of all, on a bit of a housekeeping issue, your access revenues were down a little bit more sharply sequentially. I was just wondering if there was anything either one time in there or any specifically lower rates in any of your markets that we need to think about going forward in that line item; and then secondly, embarked was going to be the latest last night in a long line of (inaudible), certainly including yourselves here that have reported improving access line trends over the course of the last couple of quarters. I guess in conjunction with that, are you seeing any lift even within the last four to six weeks or so of any type of signs of stabilization in the broader economy in any of your larger markets out there? Thanks.

Don Shassian

Chris, on access revenue, the drop was primarily on the subsidy side, sequential from fourth quarter to Q1, and it is a drop in the average cost through a loop with NECCA and it is really driven from that perspective and you know, as we continue to drive our costs down, we continue to drive the fact that we're going to receive less and less from a subsidy on the federal side and that is just what it is really continuing and that really happens in the first quarter. So that drop is primarily on that regard.

Maggie Wilderotter

Yes, it is a true-up that we do every year in the first quarter. Chris, with regard to the stabilization, we are seeing improvements in California, actually, as you know, we have Elk Grove of the suburbs of Sacramento. And in that marketplace, there is about 30,000 foreclosure houses that are on the market that have started to sell. We have very big developments in Elk Grove from a suburban perspective and we are starting to see upside in that marketplace. Arizona has stabilized, we haven't seen Arizona get worse, we haven't seen recovery yet in Arizona. In the Midwest, we probably saw more softness in the Midwest than we have seen in the past in the first quarter, but not material in any specific area and I think as you know, we're not prevalent in the automotive area of the country. And the Southeast was holding its own, New York has a couple of pockets with higher unemployment, but we haven't really seen any material changes.

So I think one of the big issues that has worked in our favor nationwide is less people are moving. So less houses are being sold in many of the markets and that's a violation also helps from an access line perspective.

Don Shassian

Okay, Chris, I just wanted to reiterate on the California in Maggie's comments. We have mentioned this in the past couple of quarters, that we have been seeing some of this excess inventory being sold and it is really quite robust, which is great, and that maybe a good barometer of what is happening; obviously, the pricing in that market is around 50% of what it was for homes, but we saw that picking up last year at the end of the summer beginning with fall and that stayed through the fourth quarter and will definitely still continuing in the first quarter. We see that as a very, very good sign.

Chris King – Stifel Nicolaus

Now I know in Elk Grove, you guys are going up against fiber to the home provider out there, are you guys taking share in that marketplace or holding onto your market share?

Maggie Wilderotter

Actually, Elk Grove is probably our most competitive market in the country, because we have Shorewest and we also have Comcast in that market. We are truly the leaders in that market, we have taken share away from both of those competitors and we really do own that marketplace, and our folks have done a terrific job in that market from a competitive perspective.

Chris King – Stifel Nicolaus

Thank you.

Operator

(Operator instructions) We will now go to Nadia Levi [ph] with UBS.

Nadia Levi – UBS

Hey, thanks a lot. A question on free cash flow. I believe, to meet your guidance, revenue decline needs to improve while margins remain at the current 64% of the range. Do you think that's the right way to look at it and what do you think will be the drivers for revenue decline improvement for the remainder of the year?

Don Shassian

Nadia, we don't give revenue guidance. Our free cash flow, a number of expense initiatives have also been kicked in and CapEx is in place throughout the year. And I'm not sure how you are saying that you have got to your thesis, because there is a lot of different moving parts here. Revenue, holding very well, the underlying operating metrics in the residential side are significantly improving. Business is – we are still looking to see some business downsizing and rationalization on that side, but we are seeing some very good strengthening and the expense initiatives were kicking in, Maggie mentioned some others, we see the fact that our margins will be very, very strong and we had a number of items in the first quarter with that promotion which will not be re-heard, we have about $7 million of cost on the PC specifically in that quarter, obviously not going to be reoccurring throughout the rest of the year. So there is a number of initiatives and we feel very comfortable in the number we have put out there as this plays through.

Maggie Wilderotter

Yes, I also think the compounding from the first quarter of revenue for the rest of the year will definitely build some strength on the revenue side. We also have a number of new products that we will bring to market and there are several new products that we have already launched including a stand-alone high-speed product with a meter blind that is actually doing quite well in the marketplace. So I think we feel very good about our revenue growth. We are very focused on cuts from revenue growth across both residential and business. We have a number of business bundles that we have launched and we have some new products coming down the pipe for business in the next two quarters as well.

Nadia Levi – UBS

Thanks. Maybe just a follow-up on the business side, looks like revenues fell for the first time in a while and partly it was probably due to business disconnects, but have you seen any incremental pricing pressure in the segment, any activity from cable, semi side?

Maggie Wilderotter

Actually, no. We have not seen incremental pricing pressure. I would say, we just like anybody else in the first quarter, saw some downsizing, not losing customers, but customers downsizing their businesses raised upon layoffs in their businesses. But we have not seen really any material competitive pricing pressures at this point.

Don Shassian

And if you look at our – if you are comparing to our fourth-quarter numbers that we put on the press release, there was a misclassification between residence and business in that press release. The business revenue in the fourth quarter was about $219 million and it has just slightly declined to $217 million. So it is just a slight decline, not as probably large as you are looking at it. We have had a bucketing issue when we finalized our conversion of our billing systems. So truly just a very small decline quarter to quarter.

Nadia Levi – UBS

That is helpful. And one final question may be on M&A. Verizon on this call suggested that more GP lines may be up for sale. Can you talk about how you would think about this opportunity?

Maggie Wilderotter

Well, I think as we have said always in the past, we will look at all opportunities in the marketplace. We have a set of decision criteria on any acquisition and we would look at if Verizon does have these lines on the market, we would look at this as an opportunity just like any other opportunity for acquisition. Don, you might want to just talk about the overall philosophies for M&A.

Don Shassian

As we have mentioned, we actually don't focus on any specific transactions, but we have in the past and we continue to reiterate that we have a very clear set of criteria, both qualitative and quantitative, of which to judge and evaluate opportunities and some of that includes, is it a true revenue growth opportunity, does it have attractive demographics, is it rural suburban, can we leverage our people processes and systems to get times to scale, what is the nature of the fixed assets, we get a good handle on the capital expenditures required, the free cash flow accretive for our shareholders, does it improve our payout ratio? Importantly, can it be done in a way that de-levers our balance sheet?

What are the social issues, and any personal businesses that overburden the complexity; and we have used that criteria now for three years to evaluate a lot of different transactions and when we find things that meet that criteria, we try to look at it, if we don't get that criteria, we sort of move on and try not to get ourselves burdened, but we believe we operate this business very well and we believe if we can find properties we can export, (inaudible) philosophy to grow customer revenues with the local market focus, and to manage expenses tightly, manage CapEx tightly, we can create shareholder value to acquisitions. We think we have demonstrated that quite successfully with our two acquisitions to date and we have done a lot of heavy lifting internally. Since then to be able to be in a position to do more acquisitions, both large and small. So we will continue to look at all things that come out and meets our criteria, we will lean in, they don't meet our criteria, we will continue to look elsewhere.

Maggie Wilderotter

And I also think on the flipside, if there is an offer that comes to the company that is the right offer for our shareholders, we will look at that as well.

Nadia Levi – UBS

Okay, thank you so much.

Don Shassian

Thank you.

Operator

Our next question comes from Barclays Capital's Tom Seitz.

Tom Seitz – Barclays Capital

Thanks for taking the question. A couple of quick ones. Don, can you sort of update us on your views regarding the 2011s, you have already been after the market once, you know, should we expect that you will be out again within the next 12 months if credit conditions continue to improve or are you pretty satisfied with where you are right and then secondly, Maggie, can you maybe just do a quick update on thoughts on video with respect to the integrated DISH DSL box that seems to continue to get the labor that might be and then, thoughts on other video initiatives.

Don Shassian

Tom, on your first question, we don't have to market obviously in April using those proceeds for refinancing. That is what it is going to be for, we have used it to date and mentioned to buyback varying maturities. When we get to releasing our second quarter earnings, we will be able to share what varying maturities we have gone after. And we're trying to absorb that and be smart about it, we doing it in open market purchases and we will be opportunistic in doing that, to the extent we are able to pull that off in the next several months, I would probably like to go back out to market again and be able to continue to chunk to get different pieces down and if we can keep finding ways of reducing the 11s, that is certainly our strategy has been to keep chunking that away, so that by the time we get to refinancing in May of 2011, whatever is left at that point in time is more of a chip shot, if I can use the expression. So we will be opportunistic on the cash we have to date, and if markets are attractive at that point in time, I think we will try to be opportunistic again.

Maggie Wilderotter

And Tom, with regard to video, the combo box from DISH is slated to be available this summer, and I think as you know, we have all been pushing many of the partners for DISH to get this box out there that would give up both the opportunity to have IP content on the television screen in addition to linear video. But we're also looking at some other opportunities from a video perspective that are IP-based. There's a number of companies that have come up with either video-on-demand or services that are IP-streamed video product sets that are very complimentary to what we do with DISH today on the linear side. So you are going to see us probably experiment with two or three different video offers that complement what we're already doing over the next six to nine months.

Tom Seitz – Barclays Capital

Great, thank you very much.

Don Shassian

Thanks, Tom.

Operator

Our next question comes from Daniel Geberio [ph] with Morgan Stanley.

Daniel Geberio – Morgan Stanley

Good morning. Could you just talk about the broadband stimulus package and I know you have mentioned in the past that you guys think that it can help you reach some incremental households or perhaps help you increase speed and capacity in some markets. Do you have any more clarity right now what you guys can apply for on any of these could be helpful? Thank you.

Maggie Wilderotter

Hi, Daniel, yes, we have been doing a lot of work on the broadband stimulus funding opportunity. Our engineering, finance, and operational teams have got together to look at what kind of projects we could submit, because the way this program will work is you submit on a project by project basis and would get approval from that perspective. We have identified about 150 projects that we could submit that we think have a good ROI stimulus funding associated with what we are going to do. And we also believe that there are actually a dozen or so projects that we would also get incremental funding from a state perspective. So we are looking to see when the SEC opens up the grant process and the NTIA will require a 20% recipient match and that is really what we have based our criteria on. We think it's probably this summer, June-July timeframe before any of these projects could be reviewed for funding, but we are fully keyed up to take advantage of it.

Daniel Geberio – Morgan Stanley

Thank you very much. Can you maybe give us an idea if you have any numbers I know on potential impact on CapEx?

Maggie Wilderotter

Well, we think it would be very nominal for us, because again, we would only have to come up with a 20% number and 80% would be funded by the government.

Daniel Geberio – Morgan Stanley

Okay, thank you very much.

Operator

Our next question comes from Jason Armstrong with Goldman Sachs.

Jason Armstrong – Goldman Sachs

Thanks, good morning. Couple of questions, maybe following up on M&A. The criteria you talked about, you know I think that sort of broadly is industry criteria, as we talked to your peers. You know, it seemed like a lot of this criteria was met at points in time last year, those obviously a (inaudible) of activity around the CenturyTel and Embark deal that was highlighted through their S4 filing, which included a variety of interest from different parties, a variety of bids and then it seemed like this all sort of stalled late last year, presumably attached to credit markets closing. As we look at this point in time, the credit markets opening, you guys attested that successfully recently. Are we past credit related concerns, whether it is change in control or incremental access to capital such that you would expect the pace of M&A activity to really pick up here?

And then the second question just on consumer line models. You talked about a variety of benefits, one of which is just less people moving, so a cyclical benefit here, but how confident are you in the staying power of these improvements as we sort of move into the next stages of the cycle, which actually could mean move activity picks up, thanks.

Don Shassian

Jason, on M&A, you asked a very simple question but I think it is a very – it has got a complex component, because any transaction that you are involved in probably any industry has his own life. There is a lot of different pieces to it, there is a lot of management issues, there is people issues, and every single transaction has its own criteria and its own life and whether there is a pickup in activity really depends on a lot of different factors and I don't think I can generalize and say that everything is going to pick up, I think there continues to be I think in this industry, it is a scaling scope industry, there is a lot of things that are going to happen I think over the next several years consolidation, and when things work out between companies based on perspectives, et cetera, things will happen. But I don't think it is fair to say things are going to pick up generically, because markets have opened, there is a lot of complexity and especially when you try to look at larger deals, smaller deals is one aspect, but larger deals have a lot more issues to eliminate, each one has a life of its own. So I think it is difficult to make a generalization that is emphatically going to pick up and the other things shut down because the credit markets, there is more border issues and complex issues involved.

Maggie Wilderotter

But probably to Don's point, Jason, when the credit markets are open, it is definitely easier to get deals done. So we are cautiously optimistic that they will stay open and I think we have seen this year, the windows open and close and open and close, so it just really depends on what happens I think over the next six months based upon propensity to put deals on the market and propensity to get them financed. But I think as Don said, we would look at any opportunity from a deleveraging perspective as a positive and the ability to export our capabilities to other markets, we also think is a positive.

Jason Armstrong – Goldman Sachs

Okay, great and just related to that, the urban versus rural mix, and you guys have talked about this historically, anything changes in your view in terms of willingness to take on more of an exposure for deals?

Don Shassian

Jason, I think a couple of years ago, we had a perspective that really said if it is urban, we really wouldn't want to look at it. I think our thinking has evolved, but it is really not the perspective of the location and how dense it is, it is the opportunity that exists there. If there is a true revenue growth opportunity, whether it is urban, suburban, or rural, that meets our criteria. So if the present management team of the company has not done things to maximize the revenue opportunity in an urban area and we think that our goal to market strategy in the urban areas will make it difficult improvements for revenue upside, that is definitely the mix. So we need to focus on the revenue and not emphatically looking at whether it is urban versus suburban or rural.

Maggie Wilderotter

I also think too that our experience with Rochester over the last several years and the tremendous improvements we have done in that market and the leadership that we have taken in that marketplace gives us a high level of confidence that we can export that formula to other urban environments and be very successful. So we feel very good about that and I think that is different than where we were a couple of years ago, because we still hadn't completed the cycle of really putting all the right places in place in order to maximize revenue growth and profitability. But we feel very good about that today.

And then, Jason, your other question about the consumer line losses and the staying power, actually we do feel good about it. We think that we have taken advantage of the situation with less moves, but we also believe that we have put the right pieces in place that when moves do open up again, as we have seen in California, we are getting the lion's share of that business on our network. So we are all over it from a proactive ability to get in front of these new homebuyers through alternate channels and through our own employees that we feel very comfortable that there is a lot of staying power in terms of what we have put in place.

Jason Armstrong – Goldman Sachs

Okay, great. That is helpful. Thank you.

Operator

(Operator instructions) Next we will go to Don Jaegers with D.A. Davidson.

Don Jaegers – D.A. Davidson

Hi, good morning. Thanks for taking my questions. On – I know you guys and the union in Rochester were negotiating sort of extension of the current contract rather than the fur lows, can you talk a little more about that and whether it has been approved by the union?

Maggie Wilderotter

Yes, we did what with our union folks on an extension of the contract, which also provided relief from a certain amount of compensation pay-offs that we would've done in 2009 that we are not going to do that equated to the fur low. And I'm very pleased to report that our union membership in Rochester ratified that change.

Don Jaegers – D.A. Davidson

And so that was just a one-time bonus basically will be pushed off until 2010 or 2011?

Maggie Wilderotter

We are not going to be paying the bonus at all, it is not pushed off.

Don Jaegers – D.A. Davidson

Okay.

Maggie Wilderotter

And we did get the extension agreed to for one year. So things stay status quo for another year in Rochester on their current contract.

Don Jaegers – D.A. Davidson

Great. And then can you talk a little about – you mentioned your activities in Wi-Fi. Can you talk a little about the revenue potential in that area?

Don Shassian

It is not a home run, it is a really nice supplemental add for our customers. Customers rely upon us for high-speed in their homes and their businesses and this gives them another option for mobility in their communities, in the university, at the restaurants, conference centers in that area, and it is a nice supplemental add, so we are selling this to anchors, what we call it, whether it is restaurants, hotels, universities, where they pay is a fixed fee for a fixed number of users per month. We are selling monthly subscription to our existing users and we have day passes and it is getting nice traction on the anchor side and the MRC side and it is a nice increment. It is – we have built it out as Maggie mentioned in a number of areas, properties, and we're continuing to expand that as we get opportunities to sell, but it is a nice incremental. It is a revenue at this point in time that is about $1.5 million to $2 million annualized revenue today and we are starting to get some nice traction. We're continuing to increase that, we think we will get several more million dollars a year out of that. Very, very healthy margins. It really is a fixed cost business once it is filled, with very little variable cost on margins. We still see in excess of 70%. So it is a nice additive business, a very good supplemental business and very helpful to increase the ARPU for our customers.

Don Jaegers – D.A. Davidson

Great, and then Maggie you mentioned that you guys were rolling out a naked DSL product with a metered line, have you thought about combining that with the Wi-Fi product to really get the younger people that are – don't really – they just wanted about where they can connect on their iPod Touches.

Maggie Wilderotter

Yes, actually that is a great point, Don, because in the rollout of this stand-alone high-speed product, we are also bundling Wi-Fi way we have it in those specific markets as part of the package. So they get for the same price the subscription to Wi-Fi for this year in addition to the stand-alone high-speed product. Actually, every one of our high-speed customers gets that same benefit in 2009. But just kind of taking back on what Don said with regard to Wi-Fi, it is not only a very healthy multimillion dollar revenue stream for us this year with margins around 70%, but what it does is it gives us competitive advantage. Our cable operator competitors don't have a data Wi-Fi system in these markets. So it really gives us competitive advantage and it also solidifies our relationship with our business customers, because all these anchor tenants, all of these hotspots are all Frontier businesses. And what we do is, we get to bundle a capability for them to be competitive in the marketplace with our product set. So the other flip side of this that is a benefit to our revenue stream is lower DX. So it is really great add-on product for us in the marketplace.

Don Shassian

And those businesses are signing up with us on three to five year contracts, so it is a very long sticky revenue stream.

Don Jaegers – D.A. Davidson

Great, thank you.

Operator

And it appears that there are no further questions at this time. I would now like to turn the conference back over to your presenters for any additional or closing remarks.

Maggie Wilderotter

Thanks, Karen. Well, I just wanted to say thank you all for participating in this conference call. We appreciate your support and they do look forward to speaking with you on our next earnings call. Have a good day.

Operator

Once again, that does conclude our conference for today. Thank you again for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Frontier Communications Corporation Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts