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Frontier Communications Corporation (NASDAQ:FTR)

Goldman Sachs Communacopia Conference

September 25, 2013 02:05 PM ET

Executives

Maggie Wilderotter - Chairman and CEO

Dan McCarthy - President and COO

Analysts

Scott Goldman - Goldman Sachs

Scott Goldman

Great. Thanks, everybody for joining us. my name is Scott Goldman I work on the communications services team over at Goldman Sachs and very pleased to be joined by Frontier communications, today to my right we have Chairman and CEO, Maggie Wilderotter.

Maggie Wilderotter

Hi, everybody.

Scott Goldman

And President and COO Dan McCarthy. Maggie we missed you last year so welcome back again you know [indiscernible] so welcome back as well to you. All right jump right to fireside chat and we’ll leave some questions some time at the end for questions from the audience. Obviously want to start on consolidated revenue, obviously that's a big focus at the company of late and so maybe talk a little about, you know, the traction that you're seeing on the top line where do you see the opportunities as we go into the back half of the year on consolidated revenue. We'll get into the segments in a little bit.

Maggie Wilderotter

Well I think as some of know, these past two sequential quarters have been improvements in revenues for the company and we continue to focus on getting to flat as soon as we can and the trajectory of revenue improvements as continues, the momentum continues. So if we think about our residential broadband revenues just as an example and this happened in the second quarter and we have continued to see that through the first couple of months in the third quarter where our data revenue on a monthly basis are exceeding the loss in voice revenue so we are now net positive on that revenue stream which is very good for us we're still working on the commercial revenue improvements and that is really to make up for some the downside pressure we have on backing revenue, but we’re making progress on that as well this quarter and we feel good about that, and if we think about what we're doing in order to push revenue to get it to stability and eventually growth, it's really broadband both our reach and our speeds and capacity, we are also continuing to grow our Frontier secure revenue which is a revenue stream that has a 17% attach rate for every broadband sale and the average customer spends about $10 a month on a secure product, whether that's computer security, identity theft protection, equipment insurance, those type of capabilities that we sell to our customers. Of course our double and triple play bundles that we leave within the market place, our metro E on the commercial side which has continued to perform very well for us, on that we've gotten awarded a lot more towers and so we're continuing to push and grow in the carrier space and our voice revenues have stabilized. so from a decline perspective we’re seeing less voice revenue decline, so that's sort of the puts and takes from a revenue perspective.

Scott Goldman

Great, definitely want to hit on just about everything you've said there, you know, we'll start on the residential side, I think you know you point out down only about less than 0.5% sequentially in 2Q.

Maggie Wilderotter

0.3 to be exact.

Scott Goldman

So I guess the question will be really, you have line of sight, you think in the back half to really be sustainably positive or at least flat on a sequential basis for this, is I think will be a pretty big achievement.

Maggie Wilderotter

I would say we’re cautiously optimistic, we have a backdrop in our country right now of some uncertainty but we have good fundamentals we've got good momentum, we haven't seen any deviation from that, we have mentioned third quarter is always a seasonal quarter for the company, its seasonal for industry but in the context of seasonality we feel very good about what we're seeing so far.

Scott Goldman

Okay, you know presumably as you mentioned one of the big drivers is on the broadband side and I think we’ve seen a very strong start to the year on the broadband ad side, so as we think about that, what sort of change, what's clicked this year that perhaps we didn't see last year the year before and obviously going through an integration process, but what really clicked this year that you've seen driving those results.

Dan McCarthy

It really was born from the initiatives that started really two or three years ago and that was the foundation where we were investing in the network heavily, moving through the system conversions and automation efforts and really working to get everybody on the same go to market strategies when we were on the Verizon systems it was very difficult to do that and then what we did this year was we tried to create a very simple offer that allowed us to activate more distribution channels and as we did that we saw a lot of successful within our traditional channels which have been primarily call center related but then bringing on other partners and creating that value proposition that was very easy to sell, when you combine that with fresh messaging which you saw us bring out earlier in the year and we've continued to use that messaging platform to keep it fresh and it's resonated with customers and we continue to see very strong response rates and our channel partners are having a lot of success and so on.

Maggie Wilderotter

I would just, broadband and broadband market share is extremely important to our value proposition for our customer base. And as Dan mentioned we have invested billions of dollars over the last several years on access. So getting reach out to a lot of locations for Thompson businesses that didn't have it before and also on improving speeds and capacity to give customers a choice point. But in addition to a lot of this is about win back in these markets, is to keep it simple, no hidden fees, no contracts, make it easy for us to do business with you from an effort perspective. And we listen to that and we really focus not just in the residential side but on the small business side and revamping all of our offers. And they have really taken hold in the marketplace and we have seen extremely good response as you have seen in the numbers over the last couple quarters.

And I think that couples with our local engagement strategy of being active in our communities and being where our customers are in building those relationships has helped a lot. And we also have surrounded that with a level of service for customers, because a lot of customers are not very sophisticated users. So having 24/7 premium tech support for them to call us if they get into trouble of want to they something new or want to learn how to photo share, we take them through those processes. So we really give them a great safety net for broadband, and that where it gets around.

Dan McCarthy

The last thing that we did this year that was very different was that we created a very small with a big call center strategy, so that we aligned our call center resources to the local area markets. So in each one of the call centers we have teams that focus on selling and getting really good at selling against certain competitors and certain locations, because every MSO isn't national in all of their tactics, and allowing them to really focus on that one areas, really allows them to line with what the CapEx strategies and what the day-to-day rhythms of the business are and it's really paid a lot of dividends for us.

Scott Goldman

One of the things that a lot of people were surprised on the last call and talking about the broadband was, Dan I think you mentioned in the call that you were taking share from cable and I think that even includes some of the top MSOs in the country that most people, who by themselves put up pretty decent numbers in the quarter as well and so most people struggle to sort of reconcile, how is it that a Comcast can put up the broadband that they do and Frontier put up the broadband that they do. So walk us through about, how it is you guys are taking share including from some of these top cable guys where presumably they have a speed advantage in the markets [indiscernible]?

Dan McCarthy

Well I would say in some cases they might enjoy speed advantage but it isn't always about speed for customers. 80% of the customers' sales that we today, people really take more basic speed level of six max, they have the ability to take 12 or 20 max in many cases but they still choose six. So I think that has been the battle field at [indiscernible] but it's really more about service, it's about the price value equation, it's about simplicity and really not having surprises. I mean we, in the past we've tried different offers whereas very low price, so we had different aspirations. And what we got, the feedback we got was very complicated. And there was a period of time when the prices would escalate and people would face the harsh reality from a price point.

Our current bundles really resonate well, it gives people predictability, it doesn't really require commitment from a price protection plan, there is no hidden fee, and it seems to resonate incredibly well. And the nice thing about it is that when we had more complex offers, whether it was gift cards or it was different varying discount levels over two or three year period, different channel partners didn't really want to sell that. So where we are now with the simplicity allows us to really go where the fish are and go and bring those channel partners [Audio Gap]

Maggie Wilderotter

….step back and said okay how do we compete appropriately to grab shares, because that's really what this is all about. And it is about simplicity, it's about affordability, it's about customer choice and its transparency and those are the four things that we focus on in every aspect of how we touch customers or potential customers. And in a lot of the markets that we inherited where there was very low market share, because the plant had not been built out, a lot of folks in those markets took cable because that was the only game in town. And it didn't mean that they liked their cable operator. We did surveys in these markets, 75% of their customers don't like them and 50% of them said they'd be willing to switch for the right offer.

So we look that as a divine right for us to take shares, that's what we're focused on and every day we have our heads down, and that's not to say Comcast and Time Warner and those folks who are tremendously larger than we are as a company aren't focused on doing well in their markets. But they are also focused on big markets, they are not necessarily -- they get up every morning and they are worried about Boston and New York and Chicago and Dallas and we wake up every morning and we're worried about Corning, Nebraska and Cookeville, Tennessee and the markets where we do business, which is our number one priority and that allows us to be nimble and competitive and aggressive in those markets.

Dan McCarthy

And what's been interesting is as we have lined our general managers after looking and exploiting the weaknesses because Time Warner may operate differently in upstate New York than they do in Ohio, different people, different philosophies. We actually tend to exploit those differences very quickly and go after whether it's a modem key change or its price hikes or could be some content negotiations that they’re going through. We aggressively attack it, we can go after it very quickly and nimbly and we’ve seen really good results throughout the year.

Scott Goldman

I think you guys have largely answered sort of a go to market strategy I mean it seems to me that sort of the -- what you have out there today isn’t really promotional but rather sort of the everyday offer, right. And in the past…

Maggie Wilderotter

That’s fresh messaging…

Scott Goldman

In the past there’s always been while promotions to get stay over time you sort of need to change that but it’s fair to say that this sort of seems like stay the course with that [indiscernible] I think you have success with it in the first half and do sort of that fresh messaging that can probably stay in the marketplace for further while?

Maggie Wilderotter

Yes, and I think one of the other pieces of our go to market that’s been a shift for us is we want to go and sell where the customers go or the potential customers go, not just necessarily having them come to us. And three or four years ago if you looked at our selling approach it was primarily and predominantly direct, either direct sales on the commercial side with feet on the street or our call centers and we were doing probably 85% to 90% of all of our activity through our own channel. Today that is closer to 67% through our own channel and 32% to 35% through alternate channel. And so we have really be step our focus on strategic partnership to have other folks selling on our behalf where our potential customers go to buy.

Scott Goldman

Okay, probably question for Dan as it relates to the broadband network. I mean we had Jeff Gardner in earlier from Windstream and the question of sort of the long term broadband speed came up and I think his viewpoint was within a few years 20 megabits is going to be cable states for anybody out there. As you sort of think about the next five years where do you think Frontier’s speed need to go and what the path to sort of get there from here?

Dan McCarthy

Yes, I think there is a certain segment of customers that want the very higher level speeds. But I think as Jeff closer to right probably somewhere between 12 and 20 for us as where we see where we’ll be making investments expand to stand our capabilities. And we feel comfortable with that the speeds that customers are looking for right now seem to be right where our network is and we’re investing for the future place ourselves in a better position even on the 12 and the 20 area.

Maggie Wilderotter

Yes, if you think about it we’re at 40% of our footprint has 20 meg today, so we’ve continued to invest even though 80% of what we sell is 6 meg and if we look at the usage patterns of our customers, it’s under 6 meg on a monthly basis. We do see, over the next three to five years, as there will continue to be more innovation on the products and services on the platform that will drive more usage. So somewhere between 12 and 40 meg is probably this is going to be the sweet spot of what we’re going to have to build to but what we’ve done is we put in the right backbone in order to make that happen. So our middle mile is all upgraded to fiber and we’ve been working on that over the last several years. So there is a lot of capacity that we have in that middle mile that can be used.

And then as Dan said, we will segment to the last mile based upon what’s important to those customers in those specific areas. We also have four markets that were files day to markets that we purchased from Verizon. So we have upwards of 50 meg to a 100 meg in those markets as well, so we get pretty good early warning in terms of what’s happening in terms of activity from a usage perspective.

Scott Goldman

Maggie, you were talking earlier about Frontier Security you mentioned I think 17% of the broadband base is already taking one of these services. Maybe just highlight for the groups or what the range of services that are being offered and the price range there, and more importantly 17% I don’t recall when is being introduced. But where do you think penetration can go from [beyond] the services?

Maggie Wilderotter

Well, we’re very bullish on this suit and its portfolio of products and services. And again we didn’t have this suit of services a couple of years ago. So in the first couple of years we’ve really gotten great traction. And with Frontier Secure we can sell it anywhere in the United States it’s not limited to our market. So out of territory can buy Frontier Secure and we’ve now started to do a number of partnerships with Frontier Secure and alternate channels to sell that product set outside of our footprint. So we think there is big revenue opportunity not just with our own customer base where we’re seeing attach rates right now somewhere between 30% and 50% on sale, so the overall broadband base is at 17%. But we have started to really accelerate the sales of Frontier Secure with our current customers.

And so we have things like backup and sharing at 5.99 a month, we’ve got, as I mentioned, identity set protection and equipment insurance at $10 a month and then we have bundles which also includes premier tech support and other products and services that fit into those portfolio suites of security and protection. And those bundles run usually between $20 and $30 a month. And we see pretty good up-sell on the bundles and customers taking those bundles as well. And I think it’s a revenue stream that’s growing for us and we think it will continue to grow and it also adds stickiness to the broadband package as well.

Scott Goldman

I don’t recall do you -- I don’t believe you do home monitoring, as part of that. I mean that’s something that could be a natural extension to that.

Maggie Wilderotter

It is a natural extension; it is something that we are looking at to launch though.

Scott Goldman

And you might do work through partnership?

Maggie Wilderotter

True, mostly through partnership. If you look at a lot of the products that we sell, they are white label products that we just bundle together, and the real secret for us, for Frontier is our premier tech support that backs it all up.

And one of the other things that we just announced was the strategic partnership with Intuit. So if you think about our business on the network, when customers, small businesses as well as residential customers, used our products; if something goes wrong the first call they make is to Frontier. And about 75% to 80% of the calls we get don’t have anything to do with our network. It is Microsoft software, it’s Intuit, if they are doing Quickbooks; and they have a problem and they can't figure it out. So we are experts in our premier tech support, on supporting other people's software on the platform. So we actually entered an RFP and we went through a nine months bidding process with Intuit to take on their support in the United States for Quickbook. And we were up against a lot of very big companies, and we were in a trial path for six months window, and we performed materially better than any of their other vendors and we were just awarded a very large multimillion dollar year contract to now take their frontline calls for Quickbook.

Scott Goldman

For all Quickbooks users in the U.S., that you would be their first line of support.

Maggie Wilderotter

That’s correct. And so there are a number of other players that we were talking to about those types of services as well.

Scott Goldman

As we look at sort of the ARPU, or [indiscernible] as you guys like to talk about; how do you think about sort of the new customer coming in versus the disconnected customer, presumably a lot of this single line voice, I mean is there a big disparity between a new customer coming in and what you see going out and is that a driver of our big growth from here?

Maggie Wilderotter

We actually see it pretty much equal. A single line voice customer we lose is the equivalent if you think about a simply broadband, which is like a data only customer coming on service. So that's one of the good news, for customers that we lose, the replacement of those units with other broadband units is roughly equivalent, sometimes greater by itself.

Scott Goldman

I know we talked about broadband specifically in terms of the ad before, but you guys also disclosed your residential customer metrics. And I think given that you disclosed, sure we can all sort of back into to the growth add number of newer people, new people coming in the door and I think by my estimate it’s up about 40% year-over-year. So Maggie you talked a bit about the alternate channels, this afternoon, I mean talk to us a bit about where these adds are coming from, you’re say this traction, and then more specifically sort of which of the alternate channels provide sort of the best economics or performing the best for you?

Dan McCarthy

Yes, I would say that the line share of the big pick up has been in the acquired properties. But we have seen some pretty good traction in our legacy properties as well. The secret as you pointed out, really has been around alternate channels but it started really with our call centers and improving the gross activation levels in the call centers. And that’s really what closed ratios that were built on having the right products in places and then having the simpler formula for people to express the value proposition. When you couple with that the alternate channels and the fact that we activated many different alternate channels really sits with last October. That’s really helped because it is a very seasonal business. We usually see a vast decline in call volumes that come into our centers and it’s not all just about marketing call volumes, its true seasonal calls that come in and then we do cross selling, up selling those calls. So in those declines, if you don’t have the replacement strategy, from a different distribution partner, you will just see gross activations fall off.

So as we have added all those partners, it's really filled that bucket and replaced it and that’s allowed us to grow the gross activations in a big way. Some of the key partners are people that help us with digital marketing and some of the traditional approaches that probably everybody here doesn’t even think is that viable anymore, like door-to- door, actually plays very well and we use it for very certain products, tipple play products. But the digital media and the marketing channels had been probably the best person, they offered the lowest cost, and it has been a really good channel for us, so far this year.

Maggie Wilderotter

And if you think about the payback, it’s usually two months on a payback for the commissions that we will end up paying. So these channels are not materially more expensive for us, because we don’t look at necessarily the cost per gross add, being as important as the payback on the revenue. So if you’ve got a channel that’s going to sell triple play and you’re going to bring in a $100 customer, you get paid more for that customer than a 19.99 or 29.99 customer.

Scott Goldman

I want to shift gears. It’s an interesting time over the business side of the house, you know I think it represents about an equal share of the revenue side, certainly don’t want to ignore that. Maybe talk a bit about the opportunity you are seeing within the business side. We’ve had a number in Telco operators the recent the macro side expressed some skeptism for the last day and a half or so, but then talk about the opportunity you see what investments you need to make to sort of capitalize on that.

Dan McCarthy

Well if I start by breaking it out into the various categories. If I looked at our wholesale channel which is a very important channel to us, we’ve seen consistent growth, we have seen our headwinds just like everyone else as there has been conversions on [indiscernible] cell tower and moving from a TDM circuit base to switch to Ethernet so that’s happening, it continues to happen, it’s in our plan for this year and largely it will be done. We may see some bleed over as we go into the next year. But once we are passed that in the headwinds actually feel very good about our prospects there we have rolled out, switch the Ethernet product or enhancing those products sets to exactly what the carriers are asking for us so we see that as a potential upside going forward.

On the enterprise side, in our traditional legacy markets, we have done very well there. We continue to offer the right products and services whether that Ethernet or it’s a holistic CP solution for those large customers and we continue to enjoy success there. We have not necessarily had as much success on the acquired market, on the enterprise but that was largely part of the structure of the deal where raising the business, retain many of the relationships with those. So we were working to win those back over the time and it’s a little bit longer sales cycle on that.

On the medium side, we are out there winning business every single day. We have transformed our sales organization so that it’s not just about account management and everyone is becoming a hunter, former kind of combo. And their composition is really built about growing market share and going after bringing new logo into the business. We think that’s the key change that we are rolling out now and it will be fully in effect for next year.

Probably the biggest change that we have had recently is around the small segment and that’s probably the largest opportunity we have and it was a segment that for the most part was served with bundles that were price at different point in time and many were built upon tariff set, really weren’t necessarily competitive. So we have gone through, re-shaped our bundle strategy so that we can go after and be very aggressive in taking customers back from stable competitors. And as we have gone after it, we have had a speed increases, simplicity and the ability for them to ramp up and expand their bundle as their business needs without locking them into long term contract so that resonated just like it has on the residential side, [indiscernible] very well on the small side and then the final thing that we have bring to the table that no one else is really doing in the market is the ability to do CP solutions.

So if you are a small business and you are just looking for a key system replacement we have that. If you are looking for the next generation, smaller PBX, we can add that to the approach and we provide the support, the maintenance and everything that goes with that. So it’s actually really worked well for us. We introduced as new bundles in July and we have really seen that start to take off so pretty good stuff.

Unidentified Analyst

You mentioned CPE and typically with traditional [indiscernible] I mean when investor and analyst would look at that say CPE is [indiscernible] and low margin business so a lot of time its separated out by –by the way its reported but you know for Frontier it seems to be a big part of the strategy and presumably that bringing in some recurring revenue via maintenance or other so talk a little bit about you know, see I know you just mentioned sort of the key system with the PBX but may you can expand a little bit about why that's such an important part for you guys that may not be for others.

Dan McCarthy

Sure, so if you think about our market which is very different than say somebody who is serving New York City. If you are serving a rural part of Illinois, the closest person who is going to be able to support the key business system for that customer may be from Chicago. It might be a three hour drive and it might be that their response, guarantees might be eight hours and people are finding the value and the fact that we have local techs who can be there within an hour or two if your business is down. They can call our general mangers 24 hours a day and get somebody out to help them. They can call Maggie, they can call myself…

Maggie Wilderotter

If they do by the way.

Dan McCarthy

… and we react. Maggie and I will deal with customers throughout the weekend, every single weekend and they really enjoy the fact that we have those capabilities. And from a CPE prospective, brining next gen quality CPE solutions to allow them to really prepare their business even if they are not ready at this point to really taken to the next level from Unified Messaging and everything else, it does give them a solution for a problem that they probably pushed off and there has been a bubble building on people who have pushed off technology upgrades and we are at a point right now where we have lots of customers who are looking for that and I would say that we don’t generally do a CPE deal unless we are getting the network with it.

Maggie Wilderotter

Right.

Dan McCarthy

So we are always looking for MRC growth and we are also looking for maintenance services which is pure MRC for us and we provide those services as well. So that’s why we see it as a key differentiation. We really like the partnership we have. I think we see the opportunity to expand it and add different types of CPE whether its routers and we work with [indiscernible] Cisco on that right now, manage firewall and we can provide a comprehensive total solution for customers. We are also involved because of our unique position with 911 and Next Gen 911 in virtually all the states that we operate.

Maggie Wilderotter

And that’s a very different sell, so usually even a multi-year sell but again it really gives us the right positioning for the monthly reoccurring revenues streams from those government entities. And also they know the support is five minutes away and that’s also important to them. We are great at partnering too. So again, it’s a core competency of our company to not want do it all ourselves but when we can find great partners we will work very well with them to promote their products and services and bundle those with our capability, and I think Dan has done a great job with a lot of these vendors to really pick the right product sets for the portfolio of customers that we have. And Mitel just announced that we’re their best partner in the United States, so it really makes a big different because we also get them to focus on what’s important for our customers.

Scott Goldman

And I want to switch gears for a few minutes before we run up to the audience maybe tackle profitability of the business obviously focus on the top line improvements, but also profitability goes hand-in-hand and so you’ve put a pretty stable margins for I think four to five quarters in a row now, so how comfortable are with the current level of margins, is just sort of the right level to think about going forward or is there anything that we should be thinking about that could move the needle the higher or move the needle a little lower?

Maggie Wilderotter

Again, we are a company that has always had a history and a track record of very strong margins. We run the business every day to be more efficient and effective, and we’re continually looking at ways to bring cost out of the business through automation through consolidation through making sure that we simplify how we deliver our services and products to customers. So we are very pleased with the track record we have. We are on track this year to continue to take a $100 of cost out of the business compared to last year. Now in addition to that cost reduction that we’re doing, we are also reinvesting in some of the areas of the business. As I mentioned, we’re reinvesting in Frontier Secure. We also have reinvested in a number of other new products and services. We have launched some energy in four states now. We are actually partnered with utilities in those states to deliver a discount for our customers.

We are in mobility with AT&T in three states to rollout wire with voice services, coupled with the rest of our products and services. And we are also looking at over the top video offers because we also think that’s important for our future in providing our customers with the portfolio of those capabilities. So we did some put and takes on the cost but net-net our margins are in the 47% range. I think that you’re going to see us continue to hold to that range. We think that’s an appropriate range. We do think that’s there is opportunity to inch that up next year. And we have some other activities that we'll be putting in place in order to make that happen.

Scott Goldman

And so as you think about some of the things that you’ve talked about earlier right I mean things like be into it deal and the alternate channel approach with door to door I mean some of that seems like it could be a little bit labor intensive, so that impact it or?

Maggie Wilderotter

Of course, it does and I think the thing to think about again our sales are up 40% year-over-year and our margins are holding, right. So, we’re paying more because we’re getting more customers, we got to do more installs, we’re paying more commissions out because we’re growing the business faster than anybody anticipated including us, but we’re able to offset that with other cost reductions in the company in order keep the margins where they need to be.

Dan McCarthy

And I would just add for that, if you look at how we start out the year we gave our leaders in the regions targets and they have to bring in a certain amount of course adds, revenue and certainly EBITDA and operating cash flow. And how they get there is really up to them in many ways, but they have all been able to cost out of the business to offset those incremental costs in the channels that we’ve estimated.

Maggie Wilderotter

Right.

Unidentified Company Representative

Every single region across the board has been successful.

Maggie Wilderotter

And one of the things that we also look at is the seasonality of the business. Our third quarter is probably the biggest quarter of pressure on us from an expense perspective for bills because we’re out there in the marketplace building our capital, is used more heavily in the third quarter because of the weather. But the flip side of weather in the third quarter is when our storm season is as well, we get more storms in the summertime. We’re in sort of the thunderstorm and tornado capital to the world. So we do know that we have ebbs and flows when it comes to how are expenses come out, but we’re very vigilant in terms of making sure that we try to offset for that and keep our margins where they need to be.

Unidentified Analyst

I want to ask one question just probably one geared towards John who is not up here today but…

Maggie Wilderotter

That’s mean we don’t have the answer to your question.

Unidentified Analyst

[indiscernible] answers you wish but…

Maggie Wilderotter

John is on vacation by the way.

Unidentified Analyst

And that’s just around the leverage right and we’ve heard for some time the target leverage of 2.5 times, its where you like to be, can you give us a timeframe for when you think that might be achievable?

Maggie Wilderotter

Actually no but we came out with 2.5 times leverage when we first announced the Verizon acquisition, which was four years ago as an aspirational target for us from a debt perspective and we have been very true to what the priorities are for the company. And the priorities are the same. First and foremost, we’re investing in the business where we need to invest in order to be successful in running the business every single day. It is all about creating leverage free cash flow. Second is paying our dividends, making sure that we have enough money to pay the dividends. For us is of course the capital, so we want to make sure that we pay the dividends. And then third is paying down debt and I think as you’re seeing over the last couple of years we continued to pay down debt, we continued to restructure our balance sheet so we are prudent in terms of being able to manage and handle the debt service board.

We don’t have any debt that we can’t pay out of cash that takes into consideration out investments in the business and our dividends through 2017-2018. So, we will continue to work that as the priorities, our Board looks at it all the time but those are the three priorities.

Scott Goldman

I want to go up open up to questions in the audience if there are any, if not certainly I have others that I can keep going with, but do we have any audience questions?

Maggie Wilderotter

You are doing such a good job.

Scott Goldman

I guess a bigger picture question that I often hear from investors is around M&A. What I have heard a lot this afternoon and has been consistent with the earnings call so far has been around partnerships and driving products to market through partnership and I would say the same. But how do you think about consolidation, the potential benefits of, you did a transformational deal back in 2010. Is there more scale to be had or conversely would you want to take it further into the business or enterprise side or something like that. How do you think about how M&A plays a role into the future direction of the company?

Maggie Wilderotter

It’s a great question. I think for our company over the last three years our heads have been down, we tripled the size of the company, it was about integration, conversions, sort of swallowing a whale letting our arms around that business. And then taking that business and growing it to build a model as to why we bought those properties in the first place. And we have done in 2012 and I have said it constantly I wish we could have done it faster. But ’13 was our year we have done in 2013 that would be the year we start to really see the traction kick-in, we have had two very strong quarters and we feel the momentum is continuing.

So, I felt in our company we need to earn the right to do any more M&A and that is by delivering on what we have already done. And we do think that there will be opportunities for more consolidation on the scale side. We have been a company that has been very disciplined in sticking to what we are good at and what we know and partnering instead of purchasing for ancillary products and services and so making very, very good margins with that type of profile. So our priority has been on the scope side to do more partnerships and that doesn’t preclude us from doing acquisitions because we still do look at that landscape. But at this point our heads are still down and we're still working on the basic business.

Scott Goldman

Any questions in the audience, one in the back, can you get a microphone please.

Question-and-Answer Session

Unidentified Analyst

I think one of the things that you mentioned early on was the past two quarters you saw nice pickup in subs I think there was erosion quarter to quarter and then the part two quarters there wasn’t even a deceleration it was actually positive movement. Could you talk a little bit about how much of that was due to one-off events or partnerships, I can’t remember if you are doing something DirectTV or not or others?

And then can you comment about the next few quarters, is this something that is sustainable is this something we should or could expect i.e. positive broadband sub growth or growth in other subs?

Maggie Wilderotter

Yeah so when we think about business we look at total customers both business customers and residential customers and then we look at broadband customers as well that is sort of how we report on the business. And we have been very stable at about 1.6% churn rate over the last several quarters we feel good about that and we still think there are ways to bring that down lower. But it’s a very low churn rate for our industry, and we have done a great job of reducing customer losses on a quarter by quarter basis. The third quarter is always a little higher for us in customer losses because of seasonality we have a lot of summer home locations where people disconnect in the third quarter and then they come back and reconnect.

So, that is sort of the one-off that we will see in terms of some benefit of less than the second quarter and then some negative on the total number of customers on the residential side in the third quarter. But it happens every year and its planned and we separate those out we know what customers are in those categories. But we do feel very good that the products and services that we are offering are providing the right kind of environment that customers are coming on service and they are not churning and leaving us. So, we are going to continue to press on that same on that business side. We have seen less losses of businesses and I think some of that also has to do with there has been a bit of stability in the economy as well so we don’t see as many businesses going out of business especially on that small size. So, it is a big focus for us though.

Dan McCarthy

The only thing I would add to that is the one partnership you may hear people talk about that they contribute to some of our succor share was with used broadband. So we added them as a product really as a product to fill a need in the portfolio where our network just doesn’t go out that last 8% to 10% until we go through some of the cash funded upgrades. And it was a way of providing solutions for customers but the addition of that partner while it was a nice upgrade to the portfolio really didn’t drive material amounts or numbers in either quarter. So what you are seeing is really much better sales of our basic products sets. And as Maggie pointed out we have continue to see really a good momentum on that.

Maggie Wilderotter

Yeah DISH network is our partner on the video side that should we use in our markets and of course used is also owned by the eco star DISH portfolio with Charlie Ergen so it was a natural extension partnership for us.

Scott Goldman

Great, I think we have just gone past our timeframe. So Maggie, Dan, thanks so much for being here.

Dan McCarthy

Thanks.

Maggie Wilderotter

Thank you, thanks everybody.

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