Frontier Communications Q1 2010 Earnings Call Transcript

| About: Frontier Communications (FTR)

Frontier Communications (NYSE:FTR)

Q1 2010 Earnings Call

May 06, 2010 9:00 am ET


Maggie Wilderotter - Chairman, Chief Executive Officer and President

Gregory Lundberg -

Donald Shassian - Chief Financial Officer and Executive Vice President


Thomas Egan - JPMorgan

Christopher King - Stifel, Nicolaus & Co., Inc.

Gray Powell - Wells Fargo Securities, LLC

Batya Levi - UBS Investment Bank

Kevin Coyne - Goldman Sachs

Winston Len - Goldman Sachs Group Inc.


Good day, everyone and welcome to the Frontier Communications First Quarter 2010 Results Conference Call. At this time, would like to turn the call over to Mr. Greg Lundberg. Please go ahead, sir.

Gregory Lundberg

Thank you, Doris. Good morning, everyone. The purpose of this call is to discuss 2010 first quarter results for Frontier Communications which were released this morning and are available on our website. Anyone who 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; Don Shassian, Chief Financial Officer; and David Whitehouse, Treasurer. During this call, we will be making certain forward-looking statements, in particular, on matters related to 2010 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,, 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, Greg, and good morning, everyone. Thank you for joining our call today to discuss first quarter 2010 results for Frontier Communications Corporation. I'll begin with a review of our first quarter results, followed by an update on our Verizon acquisition.

First quarter 2010 results, demonstrate our ability to perform well in a difficult marketplace. Revenues were $520 million and adjusted operating cash flow, or EBITDA, was $281 million which is at the top of the industry with a 54% margin. Frontier generated free cash flow of $152 million in the first quarter and paid 52% of this to our shareholders as dividends.

These results reflect a lot of fundamental blocking and tackling. We did not run any major new marketing program like our aggressive Rolling Thunder campaign in Q1 2009. Instead, we stayed the course with sustaining campaigns in limited markets. Despite the absence of a major marketing push, our Q1 revenue decline at 3.4% year-over-year was the lowest loss rate in more than a year.

We achieved this by a consistent focus on up selling multiple products and services to our residential and business customers. This helps retention and expands revenue. More importantly, we did this in an economy where we have not seen any material improvement and where consumers are still watching what they spend.

For example, 75% of our total high-speed Internet customers and 55% of our residential voice customers are on a one-, two- or three-year Price Protection Plan. These plans let our customers control spending in the face of rising cost from our competitors. Another popular offering from Frontier is our Peace of Mind off-site data storage and tech-support product suite which continues to gain traction with our customers.

In Q1 2010, we saw a 7% increase in the subscriber counts of the product's two most popular options: Hard Drive Backup and Hard Drive Backup with unlimited tech-support. Overall, Peace of Mind services generated an average revenue per user of $11, up 10% over Q4 2009.

Our voice performance continues to be very good. We have reduced churn levels, raised our average revenue per customer and have more upside ahead of us by moving customers to unlimited long distance. Despite the competitive pressures in the marketplace, our customer value and our quality and reliability is the number one product set for Frontier Wireline products in the markets that we serve.

High-speed Internet broadband net additions were 8,100 units, a solid performance based on our relatively low levels of promotional activity compared to the first and fourth quarters of 2009. Our High-Speed Internet churn continues at historically low levels of 1.5%, that's a strong indication that consumers are happy with the consistency of our speed and the increasing availability of three and six megabit per second tiers.

Our DISH video growth in quarter was 2,800 net adds. Video remains important to us, and our triple-play bundled video units have increased 14% since Q1 2009, and more than 75% of our video subscribers are in a triple-play bundle.

Another new Frontier product is which launched last quarter with the goal of helping broadband users spend less time searching for online television programming and more time watching it. In the first 60 days, the number of visits and the amount of usage exceeded our expectations, and we're also proud that usage has surpassed the results posted by comparable sites. Since launch, we've seen almost 2 million page views and close to 1 million unique visits. To date, we have not done any major marketing campaign.

Moving to our Commercial results. We've ramped up our activity in 2010 to enhance capabilities, processes and products. We've expanded our sales team, both in size and focus to make sure we get in front of all small, medium and enterprise customers. Our efforts are already paying off, and we have a strong pipeline through year end for CPE end-to-end services, e911, advanced IP and fiber solutions.

Business revenues represents 49% of our total customer revenue. We believe there is further upside potential as the economy improves. Business accounts in our territories are handled by high-touch local sales account executives who work closely with our general managers. We do not apply a national one-size-fits-all approach to this very important customers. As Don Shassian, our CFO, will discuss with the Business results, they have improved in Q1 2010 including a 5% increase in average revenue per customer over Q1 2009.

In summary, we again delivered solid quarterly results. Consistent execution by our employees on the business fundamentals is the key to our future success in the Verizon property. I thank all of our employees for keeping their eye on the day-to-day operations during the Verizon acquisition approval and integration process. I also want to thank our future employees at Verizon who are working hard to serve their customers during this transition. We look forward to having them join the Frontier team.

Now I'd like to update you on our Verizon transaction which we announced one year ago this month. We'd come a very long way and the efforts of our employees have carried us within sight of the finish line. Over the past few weeks in particular, several milestones have been achieved.

Two states delivered regulatory approvals in April, Washington on April 16 and Illinois on April 21. Oregon granted our application on February 26. That leaves only West Virginia and the FCC to complete their review of the transaction.

On April 12, we closed a very successful offering $3.2 billion of Verizon's Spinco notes at a weighted average interest rates of 8.36%. This offering was sufficient to fully finance the acquisition cash payment to Verizon. These notes were raised at the Spinco level and on Verizon's balance sheet with the funds being held in an escrow account until closing. After closing, they will become our obligation. The oversubscription of our high-yield offering reinforces the confidence inventors have in Frontier and our ability to successfully close and integrate the Verizon property.

With regard to the required pre-closing integration activities, we're running test system conversions to complete the West Virginia cutover. In May, we started training all current Verizon West Virginia employees on our systems so they will be ready on day one to handle customer calls and field services. In the 13 North Central property states, as planned and on schedule, Verizon created and formally separated the customer-facing systems that will become ours at closing. These systems are running commercially today, and we will continue to test all processes until closing.

Organizationally, we will implement our local area manager structure and now hiring general managers for the Verizon territory. We're also developing our go-to-market strategy so that at close, we can have effective interactions with employees and customers.

We are on track for closing at the end of Q2 and remain confident in our ability to improve results in these new markets. I want to reiterate some of the key goals for 2010 that I shared with you on our last call since they will drive our success in this Verizon property.

Competitive engagement and customer focus is the name of the game, and these goals will get us there: First, increasing our broadband capacity and speeds; next, expanding our Peace of Mind services and to our installation, repair appointment windows, including full install; third, pushing a higher percentage of sales to our ultimate channel; fourth, using our call centers, commercial sales teams and local initiatives to attract and retain customers; fifth, launching new products and driving penetration of all products and bundles; and finally, enhancing the customer experience with more value at competitive prices.

This is a transformational deal for Frontier, providing scale, scope and synergy opportunities. Significant cash flow potential will come from selling more products, expanding broadband offers and improving our combined cost structure. This transaction will also dramatically reduce our leverage to levels approaching investment grade.

Finally, we remain committed to an annual $0.75 dividend at close for our shareholders.

Let me now hand the call over to Don Shassian, our Chief Financial Officer, who will give you the financial overview for the first quarter of 2010. Don?

Donald Shassian

Thank you, Maggie, and thank you, everyone for joining us this morning. The first quarter for Frontier communication was to improve customer trends along with both sequential and year-over-year expense reductions to help us maintain our consistent profit margins and cash flow. Our adjusted EBITDA margin was 54% and free cash flow for the quarter was $152 million which puts us comfortably on track for a guidance up $450 million to $475 million for 2010.

Today, I will walk you through Frontier's [indiscernible] results, introduce our new reporting metrics for Business customers and provide an update on the upcoming closing of the Verizon transaction.

Before I begin, I would like to note that our Q1 2010 earnings per share of $0.14 includes the after-tax impact of merger and integration costs. Our adjusted EPS excluding this cost was $0.15.

Customer revenue from the first quarter was $431 million, which I'm pleased to say represents a first lift in sometime. On a year-over-year basis, the customer revenue declined 3.8% which is better than the 4.7% decline in the fourth quarter of 2009. The improvement in customer revenue was coming from growth in data and internet services, lower bad debts as our aging continues to improve and lastly, from the curtailment of the video credits in 2009 from the successful Rolling Thunder campaign in Q1 of last year.

Data Internet services grew 22.1% sequentially and 4.2% year-over-year is now 31% of our revenues, and you heard Maggie talk about is the key focus to our reforms. Our people products and the corresponding focus on managing the business at the local level are having an impact in the market. Furthermore, the data strength is coming from both Commercial and Residential.

Switched access minutes of use were down 12.6% year-over-year. This contributed to an overall 1.4% decline in switched access and subsidy in the first quarter of 2010. However, that rate of decline slowed due to higher U.S. sub contribution factors resulting in higher surcharges being billed to customers advance to the neca [ph]. Switched access and subsidy are just 17.1% of our total revenues. I think it's worth noting that the Verizon Spinco properties 2009 regulatory revenue was 10% of its total revenue. We therefore expect our revenue from switched access and subsidy on a pro forma basis, including the Verizon property, to be approximately 13% of total revenues and that includes surcharge revenue.

Let me now turn to some of the customer metrics behind our revenue performance. We introduced Residential customer metrics last quarter. In this quarter, we'll introduce the Business customer metrics. This additional disclosure is designed to give you insight into the trends behind our numbers and more importantly, present our results to you in a way that's aligned with how we measure our full year performance. We designed these metrics to focus on customer accounts, the revenues the customer generates and our retention rate of these customers. As the management team, these are the metrics that we use to run the business.

The Q1 2010 Residential customer base is down 7% compared to Q1 2009. This is lower than our reported Residential access line declines of 7.3%. The better performance in the customer line reflects a 12 basis point reduction in churn to 1.37% which is driven by our abilities on multiple services to our customers. We saw a 5% increase in products per customer in Q1 2010 versus Q1 2009 which helped increase our ARPU by 2.8%, an improvement over Q4 2009. Overall Residential customer revenue is up 1% sequentially and down 4.4% year-over-year.

Frontier served 138,000 Business customers at the end of the first quarter 2010. This is a new reporting metric for us. We have three categories of Business customers: One, is Social carrier; our second is Enterprise meeting; the third is small ROHO. Our total Q1 business customer count was down 7.8%. Year-over-year, it was a larger reduction in small ROHO than in the other categories which represents loss of its customers with lower revenue streams and ARPU. Our losses in the small ROHO segment had been consistent the past four quarters and is the portion of our commercial base that has been most affected by the down turn in the economy.

Our total business customer ARPU for Q1 2010 was $503.41, a 5.2% increase over Q1 2009 levels. This tells us that we lost customers with a lower monthly recurring charge, MRC, and gained traction with customers with a higher MRC. We expect that the sales efforts Maggie talked about will positively impact all three Business customers categories in 2010, and as the economy improves, we expect to see improvement in small ROHO category.

As for traditional reporting of access lines, our Q1 2010 total line loss rate of 6% is our lowest in eight quarters. Residential line losses of 7.3% year-to-year with an improvement from the annual line-loss rate Q1 2009 of 8.1% and the business line loss of the 3.7% also included when compared to the annual biz line loss rate of Q1 '09 of 5.2%.

Moving down the income statement. Our disciplined approach to controlling expenses resulted in a 4.4% decline from Q1 2009 in our adjusted cash operating expenses. By keeping our expense reductions ahead of a 3.4% total revenue decline, we were able to deliver an improvement in adjusted EBITDA margin of 54%, up from 53.5% in Q1 '09. This adjusted margin excludes $10.4 million of merger and integration expenses incurred in connection with the Verizon transaction, as well as our adjustments from non-cash pension expense and severance cost for all periods presented.

Due to revenue initiatives and expense controls we have in place, we are reiterating our stand-alone Frontier guidance of adjusted EBITDA margins in 53% to 56% range. As it relates to our integration cost in connection with the Verizon Transaction, consistent with the expectations we have previously communicated, we are projecting $100 million of transaction and integration expenses in 2010 of which $10.4 million was spent in Q1.

Our capital expenditures were $70 million for the first quarter with $40 million of that for business-as-usual Frontier. This compares to our $220 million to $240 million guidance for 2010 and reflects the seasonally lower first quarter spending levels. Our integration CapEx estimate for 2010 remains $180 million of which $30 million were spent in Q1.

Our net debt to adjusted EBITDA ratio at quarter end was 3.9x, comparable to Q4 2009. We do not have any material scheduled debt reductions during the quarter. This moderate leverage levels, combined with our strong operating results, was key to our ability to raise $3.2 billion of debt financing with Verizon Spinco last month.

As Maggie mentioned, the weighted average interest rate was 8.36%, and we were able to comfortably ladder debt into four tranches maturing in 2015, 2017, 2020 and 2022, which we think is optimal for future refinancing activities. This financing is sufficient to fully fund the special cash payment to Verizon and close it to the notes of currently held in escrow on Verizon's balance sheet will become our obligations at closing.

We have also entered into a new $750 million revolving credit facility which will be effective next season. We are pleased to have completed the financing for acquisition and the appropriate operating balance sheet liquidity due to the success of this financing, as the measure of the confidence investors have put on our pro forma capital structure and the strong cash flow outlook of the Frontier.

I would now like to give a brief financial update as it relates to the pending Verizon transaction. We have received March 31, 2010, operating minute [ph] results from Verizon which I would like to share with you. Please note that we have not received the March 31 financial statements. Therefore, I will limit my discussion into only the key operating metrics at this time.

First, access lines as of March 31, 2010, was 4,108,000, down 107,000. This represents a 2.5% sequential decline and an 11.2% decline year-over-year. These are the best metrics we've seen since we announced the transaction. High-speed Internet subscribers, representing both DSL and FiOS technologies, were 1,067,000 with net adds for Q1 of 6,200. FiOS TV subscribers were 114,000 with net adds of 3,300 for Q1.

It's important for me to emphasize that these results are essentially aligned with our initial expectations, [indiscernible] performance when we entered into the transaction a year ago. Verizon continues to spend marketing and capital dollars in the markets. Keep in mind that roughly 40% in the Spinco territory and higher in some cases is selling only voice service. This explains much of the variance to Frontier's operating metrics and Spinco's. It also represents the tremendous opportunity Frontier has to improve broadband penetration along with customer metrics that follow.

In Frontier's territories as of March 31, 2010, our broadband availability is 92%. With 68% of our users able to get three megs or higher, 42% able to get six megs or higher and 14% able to get 20 megs or higher.

In summary, we are well on our way towards successfully delivering on all the goals that we laid out for the half of 2010. First, continue to deliver strong results in the legacy function of business which we have shown in our Q1 results. Second, complete the Spinco financing which is done. Third, ensure the West Virginia system is all ready for conversion at closing. And the 13-state systems are tested and working, which we continue work on. And fourth, obtain the remaining one state approval plus the FCC's approval.

We delivered excellent results in our core business and at the same time the entire organization is in the final stage of the preparation for the Verizon transaction. That was no small task and reflects the discipline of all our employees.

As we've shown before in our prior acquisitions, we are still in the drive to make the Verizon acquisition a huge success. The capital markets have spoken in terms of our debt financing. The DOJ and the shareholders supported us early last year, and now eight of the required states have approved the transaction. We delivered all of these constituencies recognize that all state holdings are Frontier benefit from the transaction, both in terms of a free broadband and a financially sound employer that's been committed to quality service since 1935.

As we move towards the June 30-July 1 closing, we remain extremely focused on the West Virginia systems preparation and on the systems in 13 other those states. Our capital deployment fund is firming up and our employees are getting ready for opening day. We truly look forward to reporting back to you in August as the new Frontier, and with that, let me pass the call back to Doris to open the call up to questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from Batya Levi with UBS.

Batya Levi - UBS Investment Bank

Could you talk a bit more on the drivers for the improvements in revenue decline? On the Consumer side, it looks like ARPU growth accelerated nicely. Were there any price increases during the quarter? And also, could you talk about the competitive environment that you're seeing right now? What are some of the drivers for lower customer churn that we saw in the quarter?

Maggie Wilderotter

I'll start and Don, you can jump in. No, we didn't do any material price increases during the quarter. It was strictly business as usual. I think one of the big drivers was our continued push for data and Internet services. And because we didn't run any major promotions during the quarter, we didn't have a lot of discounting going on in the quarter. In addition to that, we started to see a higher Video revenue because the Rolling Thunder customers from the first quarter of last year has a free video package for 12 months. So in the quarter, this first quarter of 2010, we started to realize the incremental increase in the Video revenues from those customers. We also did a lot of outreach during the quarter and up to the quarter to make sure the Rolling Thunder customers stayed on service with us even after the promo expired. And we were very successful not only in reaching them, but in getting them to stay on service and in many cases, even upgrading. So I think it was a number of initiatives that we did throughout the quarter that helped strengthen the customer revenue profile. From a competitive environment, we are continuing to see cable competition in our markets. Our overlap from a triple-play perspective is in the mid-70s, so we keep an eye on that. But I also think again, the blocking and tackling, the proactive service that we do, the Peace of Mind services that differentiate us in the marketplace and our Price Protection Plans have really enabled us to continue to drive churn lower and to sell value to our customers and keep them on service.


[Operator Instructions] And we'll go next to Chris King with Stifel, Nicolaus.

Christopher King - Stifel, Nicolaus & Co., Inc.

First of all, I was wondering, I know, Maggie, you had said that you hadn't seen any certainly dramatic changes in the macro economic outlook. Just was wondering how you guys view the economic macro sensitivities with respect to your legacy properties versus the Verizon properties? Whether you view those Verizon assets as having a little bit more cyclical type of flows to them in any way, shape or form? Also, I was wondering if you could comment in any way, shape or form, on the latest efforts by the unions in West Virginia to delay a final vote by the state PSE with respect to the Verizon transaction? And then just on the topic of the day, I guess I was just wondering if we could get your comments on the FCC's move to at least lightly, as they call it, regulate broadband via Title II?

Maggie Wilderotter

From a macroeconomic outlook perspective, we continue -- the good news about Frontier is we do business on 24 states today, so we are pretty much broadly across the United States. And while we have seen stability over the last couple of quarters, and I think Don also mentioned that our aging has definitely improved, and we're not seeing the same business fall offs that we did in '08 and '09, we have not seen recovery yet in terms of businesses materially growing, customers really opening up their wallets in a different way, and we actually think that's really more of a change in level set. And we don't have a huge expectation that, that's going to change overnight. We think we're going to continue to see that sort of level of stability throughout the rest of 2010. Now with regard to the Verizon properties, I think, as you know, 11 of the 14 states we already do business in, and I would say that probably the macroeconomic environment in those states is very similar to what we have experienced in those states already. In Washington and the Carolinas, I think we might see some better trends in those states, I don't know. We're going to have to wait and see. But all we can look at right now are the metrics that Verizon is delivering, and assume that they're probably much in the same position that the states where we do business are. And shifting over to the unions in West Virginia, I think the unions have been very vocal in that state since day one. We continue to work and have reached out to the unions many times. I think, as you know, we have over 30 bargaining units in our company today with CWA and IBEW. We know that it's important to have good relationships with them. We have renewed a number of contracts since May of last year when we announced this transaction. And we also believe that the issues that they have had concerns with, we have provided the Commission with the appropriate answers for those issues to allay any fears about moving forward with this transaction. This transaction is a good transaction for the state of West Virginia, for the employees that we're going to inherit in that state that we have committed to keep employed on the front lines with techs and customers support, and we will honor the union contracts that are in place in that state just like we will honor them in all the other states where we do business. So we are confident that the Public Service Commission will vote in favor of this transaction, and we are looking forward to that happening in the next several weeks. And then finally shifting over to the FCC and the hot-off-the-press announcement yesterday that they're leaning toward some form of a Title II umbrella for broadband. I think we come from a position that we really need to see what this notice of proposal making will be and really study It. I think we remain very committed to an environment where broadband can continue to grow and companies that operate on that platform. Whether they're network operator providers like us or application providers, you want an environment where you continue to have innovation and continue to have an incentive as a company like ours to deploy broadband and to maximize return on the capital investment we have to put in, in order to expand those services to customers. So we're going to hold our thoughts on this until we get more information about it. I was at the Commission last week, I did talk to the Chairman and I truly believe that his efforts are not out of alignment with what we want as a company and that is to be in a situation where we have the ability to manage our networks, we have the ability to price and provide different levels and tiers of services in a non-discriminatory way, and I think we're just going to have to see how this plays out over the next several weeks.


And we'll go next to Gray Powell with Wells Fargo Securities.

Gray Powell - Wells Fargo Securities, LLC

So once you take control of the Verizon properties, how quickly can you implement your own marketing and promotions to help access lines trends improve? And then obviously you guys take a much more local-versus-national approach. How should we think about you? Do you have to add bodies to the effort or how should just we think about you ramping up that effort? And then separately, obviously, you guys have seen a very steady improvement in access line trends over the last few quarters. How much of that has been driven by company-specific efforts versus an improved economy or an abatements in cable competition?

Donald Shassian

Gray, on the access line trends, there certainly is a combination of a lot of matters. One is I think we introduced last year some very successful promotion which helped us reduce churn. We've made continued investments in our systems, in our people, in customer service both in the lock [ph] standpoint, the technician standpoint, the bundling of our products, increasing more penetration and sticking as to all of those products. I think that has been a very big pursuit for us. We have not seen significant increases in cable VoIP rollouts as well, so that's enabled us to continue to be very aggressive in this areas and have seen a lot more increased competition. In the economy, I think with the Residential side, it certainly has assisted us as people are not as attuned to move to home values not where they want to be. But on the flip side, this has not been helpful on the Commercial side as businesses over the past two years have been downsizing employees and have also been coming to us wanting to decrease their communication spend, not to leave but really decrease their voice spend maybe increase the data spend. So I think it's been across the board. I think it's been a number of factors. I don't won't point to any one as being -- the driver had a thousand points of late, but we've been very focused on our margins, on our pricing, be very disciplined on our pricing, be very focused about churn and really try to retain our customers. Because it cost a lot to acquire new customer, it can cost a lot less to just maintain them, to convert happy and satisfied and sell them more when they're with you. So it's really been number of different things there.

Maggie Wilderotter

Just with regard to your question on our marketing plans in the new Verizon markets. I think you should know, when you do a very large transaction like this, what you want to make sure is that employees are comfortable with products and services that you're selling in the marketplace before you really turn the spigot on and start driving activity from a phone call perspective, into customer service and to alternate channels. And so would kind of split out the answer in focusing on West Virginia, which is converting all of its systems over to our systems, and we will look at a normalization period where we will get employees very comfortable in selling and servicing the customers on a day-to-day basis, and also the billing cycles that we have to go through in that marketplace before we kind of put the pedal to the metal on marketing promos, and we have those on the shelf, we know what we want to do, and we have a flexible plan that once we get to the point where there is normalization after this conversion, we will get very aggressive in the marketplace. And we look at this plan over all, not just for West Virginia but the other 13 states as a 180-day plan. It's really a marketing plan through the end of 2010. In the Spinco properties, it's also similar. We want to have a period of time of settling in for our new employees. We're also mapping our products and services to the existing Verizon products and services that are offered in those markets, and we have a 1-to-130-day plan, 30 to 90 and then 90 to 180. So you will see us do different things and different offers in the marketplace. We are also pretty customized I think, as you know from a local engagement perspective, so we don't have one size fits all nor will we have that overtime in these Verizon markets. And out of the gate, we will also have a parallel marketing plan for the FiOS systems as well. So more to come on that, but we do have I think a very solid marketing plan but we will implement it appropriately when we know that the systems and the employees are capable and confident to handle what we want to drive in the marketplace.


And next from Goldman Sachs, we'll move to Jason Armstrong.

Winston Len - Goldman Sachs Group Inc.

This is Winston Len on for Jason. So we've done a wireless strategy here. It sounds like SkyTerra is interested in putting together a postal wireless data network and KY [ph] obviously has something up and running. Would a joint venture on MVNO relationship built interest to Frontier posted you closed? And how do you think about the pros and cons of partnering with someone with wireless?

Maggie Wilderotter

Well, we have not looked at SkyTerra as an MVNO partner at this point in time. I think as you know, we have 19 wireless data networks that we've built in our markets in a mesh network that provides great coverage to our customers. We will look to expand that into our new markets. In addition, we are doing a voice trial, that's a Wi-Fi cellular voice trial in one of our markets as we speak, and that will inform us a little bit more from an MVNO perspective of what we would look to do in the future. So we're not adverse to looking at other MVNO opportunities whether that's satellite or it's with a cellular provider. But I think at this point, we have been very focused on let's get this transaction over the finish line, let's stay focused on our day-to-day activities. And once we get through that, then we'll start to take a look at what may be some of the options would be from a wireless prospective.

Donald Shassian

And please note, within Wireless, I think is a business we'd like to be in. We've been exploring that for a number years, trying through it with different avenues of the way that it can be bundled effectively with our existing products that can make that customer stickier or reduce churn, but it still has to be a profitable venture and just not be in it for the sake of being in it. So we've been searching for ways that it can be unique, it can be different, and we'll continue to explore that. So we've looked at different things, we'll continue to look at things and hopefully find a solution that will work for our customers and our territories. And also obviously, at the end of the day, it just got to add value for our shareholders. So we've got to find the effectiveness and really make money in all that. So we'll continue to explore, and I'm sure that with a larger-size company that we're going to be, obviously, the business with a lot more leverage in what would be turn of technologies, the solutions partners which we will look at when the time is right.

Winston Len - Goldman Sachs Group Inc.

And maybe just given the importance of the system conversion in West Virginia, if you could give us a bit more details on the preparation for that profile and what remains to be done? And on the close, what's the best way for investors to track the success of that conversion?

Donald Shassian

Well, so much that I can give you much color. I mean what we're doing, the conversion essentially is doing a number of series of mock conversions of taking actual data from the West Virginia systems of Verizon, putting them into our systems, we identify what data and processes don't work, and we evaluate them to see whether you can modify your system to make them work in an automated fashion. Do you have to look at them and say, "We'll I'll need to do it at the manual?" Or do you say, "Well, I don't need to do it." And then as we go, we make some changes. We then do another mock conversion, we put it through, we identify what doesn't play through cleanly. You continue to make changes and we'll just continue to make those mock conversions and data extracts. There's both Residential, there's Commercial, there's wholesale, it's both from a billing standpoint, if it's off a lot on the operative support systems. We continue to move forward on that. There's a lot of work being spent on the wholesale side to make sure that it's being as sophisticated as Verizon has. Verizon has very sophisticated wholesale systems, and we're doing some enhancements to our wholesale systems to enable us to be, meet the needs of the CNX in the West Virginia area, but we've been spending a lot of time on that and testing it. And today, actually the CNX are actually in testing. Our wholesale systems, both ASRs and LSRs the mid-point of this range, as we speak, and that's one of our critical milestones of ours to get done with that the sealifes [ph] are comfortable with the systems conversion from their standpoint looks. It's all in process, there's been a lot of testing and a lot of issues to look forward on. It's not done, but we expect it to be done at this point in time, but we're making very good safe progress and are targeting to be ready for the June 30/July 1, close.

Maggie Wilderotter

The only thing I would add to that is we look at success with these conversions in West Virginia, we really look at it from the customer prospective. That's the most important thing here, and we do have a variety of different customers. But if you think macro for our a Residential and Commercial customers, we want to make sure that we don't have customers waiting on hold time to get calls as they call into us to get their questions answered. We want to make sure we don't have backlogs in terms of installations and repairs out in the field. And last but certainly not the least, we want to make sure that the bills go out correctly. So that's how we are going to measure the success of this conversion. That's what we're focused on and that's what we're testing for as well. In addition to that, we will make sure we are overstaffing in West Virginia for the first, at least the first 30 days to make sure that we have lots of hands on deck to help our employees who are new on this system, to get up to speed on those systems but not at the expense of the customer. So we're going to have extra people in West Virginia both in the customer service centers as well as tech and ops support. So that's really what we're looking at from a conversion perspective. We have done many of these conversions. I think many of you on this phone called know that we consolidated at Frontier all of our billing systems over the last several years and also absorbed the conversions in Pennsylvania when we bought, Commonwealth. So we are effectively implementing that blueprint.


[Operator Instructions] We'll go next to Kevin Coyne with Goldman Sachs.

Kevin Coyne - Goldman Sachs

One for Don, relates to the rating agencies. It seems like they're kind of setting a higher bar for getting to IG with some of the telcos that are out there. I was just wondering since the deal was announced, have you had any discussions with them? And perhaps you could give us a little color perhaps what you think they're looking for let's say, within the first year of closing? Are they're looking for progress on synergies or improvement in metrics of the combined business? And I guess for Maggie, obviously, some people in the telco space have been pretty rapid in their movement on the M&A front. I was just wondering, obviously, you guys will be busy with the integration of the Spinco business, but can you give us a sense as to how you would feel about pursuing other M&A opportunities down the road in terms of the timing? Would you prefer to get most of the -- accrue most of the synergies or could you move faster? And if so, would it only be looking Orlight [ph] business models or would you potentially look at other telco business models?

Donald Shassian

Kevin, on the rating agencies, we obviously had several meetings with the rating agencies over the past 12 months. And they've been very good discussions that you actually share a lot more information with them than you do with the general public. Let them know about your plans and the intricacies of your modeling and your opportunities to get forward. I think that they will be monitoring our progress, as we said, in a lot of metrics. They want to see how we're doing with our existing business in terms of our revenue and our cost structure, EBITDA margins and our CapEx spend and our customer gains and losses, our High-Speed penetration. And likewise, they're going to look at the 14 states as well as to how we're going break down or communicate to them in terms of how we're going with the customer change. 11.2% access line loss rate, I think they have been looking to see how we reduce that over time, which we're expecting to reduce 200 to 300 basis points, we believe, if we're getting that market improvements in February. And to point the broadband, as you know, these properties were about 62% broadband availability. We are making commitments in many of these state approval processes even though it's not required to do so. We are making commitments to expand broadband in all of these states which is the right thing to do and which we plan to do and which we really want to meet as quickly as possible, and we do expect to put up a the market strategy in place to take advantage of the existing broadband available markets and renewable to be able to increase broadband availability, whether we're looking will the revenue trends going to be what the EBITDA improvement's looking like? What are the cost savings that we said we're going to achieve? What's the plans for that as we put more details out and we deliver on those. I think, to me, we've been saying what we're going to do. And once we get past those, we're going to be a explicit about what we're going to be doing and when and then it's doing what we said. And I think that's going to be the confidence that we're delivering on what we say we're going to do. We hope that we believe that the capital structure would be we deliver on this business and the gate. And very shortly after, put us in a position to an Investment Grade metrics. We think we obviously got the numbers [ph] so we can prove that. We demonstrate sustainable and hopefully, we'll get their nod on that. I just need to reiterate however that we are not looking to be investment grade. We are looking to have a different leverage profile and to begin a 2.5x leverage and metrics that are similar to that is we think is the right risk profile for this business. And we believe that should be investment grade and that should merit investment grade. If it doesn't, that doesn't mean that we'll be there chasing old metric to get there. We believe this is the right level to be at.

Maggie Wilderotter

And with regard, Kevin, to your question on mergers and acquisition activity, I think as you know and our commitment to our shareholders is to keep our heads down in this transaction, get it over the finish line and then deliver on the revenue and costs synergies that we said we would do. In tripling our size, we don't take that lightly. We know this is a big initiative for the company, and we also have a structure for this deal, a Reverse Morris Trust structure that also requires us to wait a specific period of time based upon the tax structure of this deal. Now with that said, if we move faster and we can get integrated and really accomplish the synergies quicker than the three-year timeline that we've laid out, it wouldn't preclude us from doing other transactions and especially smaller tuck-in transactions. But our number one, two and three priority at this point is to take these Verizon properties and really get them operating at a level that we expect to see them at.

Kevin Coyne - Goldman Sachs

Just a housekeeping one. Has West Virginia told you when they would expect to report on the approval?

Maggie Wilderotter

Well, we believe that it'll be in the next several weeks. They had been deliberating, we have had conversations back and forth. But we are very optimistic that it'll be fairly soon.

Donald Shassian

Operator one last question please.


And our next question from Thomas Egan with JPMorgan.

Thomas Egan - JPMorgan

Is there any color you can pass along to us on the segregation of the myriad systems that Verizon has set up on the non-west Virginia states? Either positively or negatively, can you tell us anything about how that's going?

Donald Shassian

Verizon has essentially completed that work, and they gave us notification the middle of April formally that they have completed the separation of the systems and they are operating on a stand-alone basis and that they are operating effectively from their standpoint. That enabled us to start doing our testing. So they've accomplished what they wanted to do. It's working in a commercial environment and it's up and running, it's servicing customers; orders, installs, troubles, billings, et cetera. It's all been accomplished, and they had a third-party do some validation from their standpoint. That was required by some of the state commissions. And we're in the process of testing that and looking at order intervals, the [ph] answer time and the like and validating that things are working appropriately. So there are some things to just sort of iron out. I don't think we've had any major customer-impacting issues. Of more significance, there's been a couple of items they've had us sort through. But I think they've jumping almost pretty quickly, and we have time to sort them out. And so I think they're done a nice job, and to us they've been meeting their obligations to us and the timing of getting it done and we're now in the testing mode. And we've got a June 30/July 1 close, obviously, we've got another six weeks plus of testing and continue to work out and deal in making sure customers are being serviced appropriately and there's a minimal impact to these customers. So far, it's going well. It's got more things to team [ph] up, to hone but I think they've done a nice job meeting their obligations to date for us.

Maggie Wilderotter

So again, the first quarter was a very solid quarter for Frontier. I do want to thank you all for joining us this morning and for your continued support of our company. And we will look forward to reporting our Q2 results in August, as the new Frontier. Have a great day.


Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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