Frontier Communications' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.24.14 | About: Frontier Communications (FTR)

Frontier Communications Corporation (NASDAQ:FTR)

Q4 2013 Earnings Conference Call

February 24, 2014 4:30 PM ET

Executives

Maggie Wilderotter - Chairman and CEO

Daniel McCarthy - President and COO

John M. Jureller - EVP and CFO

Luke Szymczak – VP, Investor Relations

Analysts

Batya Levi - UBS Securities LLC

Simon Flannery - Morgan Stanley & Co.

Mike McCormack - Jefferies & Co.

David Barden - Bank of America Merrill Lynch

Eric Pan - JPMorgan

Frank Louthan - Raymond James & Associates, Inc.

Michael Rollins - Citigroup Global Markets Inc.

Donna Jaegers - D.A. Davidson & Company

Ana Goshko - BofA Merrill Lynch

Gerard Hallaren - Janco Partners Inc.

Operator

Good day, everyone, and welcome to the Frontier Communications Fourth Quarter 2013 Earnings Report Conference Call. This call is being recorded. At this time, I’d like to turn the conference over to Mr. Luke Szymczak. Please go ahead, sir.

Luke Szymczak

Thank you, Pete, and good afternoon. Welcome to the Frontier Communications fourth quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Maggie Wilderotter, Chairman and Chief Executive Officer; Dan McCarthy, President and Chief Operating Officer; and John Jureller, Executive Vice President and Chief Financial Officer.

The press release, earnings presentation and supplemental financials are available on the Investor Relations section of our website, frontier.com. During this call, we will be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings. On this call, we will also be discussing GAAP and non-GAAP financial measures such as defined under SEC rules. Reconciliation between GAAP and non-GAAP is provided in our earnings release. Please refer to this material during our discussion.

I will now turn the call over to Maggie.

Maggie Wilderotter

Thank you, Luke, and good afternoon, everyone. I appreciate you joining Frontier’s fourth quarter 2013 earnings call. It's great to report another quarter of solid results as well as the conclusion to a year of very significant achievements.

I'll start on Slide 5. In 2013 we made significant progress on numerous fronts. First, we improved our revenue performance on both a quarterly and annual basis by slowing the rate of decline. Our broadband results are a key contributor to this improved revenue trend.

We delivered 112,250 net broadband additions in 2013, a new record for Frontier. This progress was broad-based across our footprint as evidenced by our residential broadband market share improvement in 84% of our markets in 2013. In aggregate, we increased our residential broadband market share by nearly one and a half points for the year, as Dan will discuss shortly that momentum continues in 2014.

Another important factor contributing to our better revenue results was reduced customer churn. We implemented many initiatives that delivered a 61% residential customer retention improvement year-over-year. On the expense front, we reduced net cash expenses by [$93 million] as compared to 2012. This nearly matched our $100 million objective even with incremental investments in key areas that drove substantial improvements in customer retention, broadband growth, and customer acquisition results.

For investors, our consistent performance resulted in a strong total shareholder return for 2013. The entire Frontier leadership team’s long-term incentive compensation is tied directly to returns to our shareholders. In 2014, we will stay the course in emphasizing sustained shareholder value creation.

We understand how important a sustainable dividend supported by an attractive payout ratio is to our investors. In fact, driving free cash flow per share and improving the dividend payout ratio were key factors in determining how we structured our recently announced AT&T Connecticut acquisition.

Please turn to Slide 6. In Q4 2013, Frontier continued the trend of improving the sequential revenue performance that we exhibited throughout the year. A highlight in Q4 was another quarterly improvement in small business revenues, continuing the progress we reported in Q3.

Frontier delivered strong broadband performance in the fourth quarter with net adds of 27,755. Our bundles and pricing continued to resonate in our markets, and our Local Engagement Strategy execution contributed to our results.

Customer retention was another bright spot in Q4 with a 10% improvement in keeping customers, our best quarterly performance for the year. We maintained industry-leading margins with an adjusted EBITDA margin of over 48% in Q4, driven by our 2013 cost reduction initiatives.

Please turn to Slide 7. Driving higher broadband penetration is Frontier’s top priority. As you can see, consistency in our broadband net adds is the track record we established in all four quarters in 2013. Our progress is also broad-based. As I mentioned, we gained residential market share in 84% of our markets in the year, and we gained between one and four points of residential share in 55% of our markets. In Q4, we gained residential share in 79% of our markets.

Our aggregate residential broadband market share is still in the low 20% range. So we have a lot of runway for further share gains as we work toward our 40% market share objective. About 85% of our residential customer gross adds in Q4 included broadband in the package. We expect this trend to continue in 2014.

Turning to Slide 8, we are very focused on continuous improvement of our revenue trajectory. In the past two quarters, we achieved sequential revenue stability in our small business segment. This positive trend was across the board in our markets and it reflects in part the customer acceptance of our new small business bundles that we introduced in early Q3. We are encouraged with this progress so far and we know there is more work to be done.

Frontier Secure was a highlight in the quarter. Our Q4 gift of security offer was very well received with close to 50% attach rates to our broadband product. We also just launched our new Frontier Secure with broadband bundles in early January and they're off to a good start. Our major alternate channel partners started to offer Frontier Secure bundles to new customers and results thus far have been solid.

Please turn to Slide 9. Residential retention improved to 59% compared to Q4 last year. Business retention improved 27% compared to Q4 last year. Our rate of customer declines improved overall from 7% to 3%. Keeping more customers continues to be the number one driver of revenue and profitability, so retention remains a major focus for Frontier in 2014.

Please turn to Slide 10. I am pleased that our cost reduction effort was strong in Q4 with a quarter-over-quarter reduction in expenses of $26 million. We accomplished this even with selective investments and new initiatives and higher storm-related operating expenses. The substantial increase in broadband gross adds in 2013 relative to the prior year also drove higher expenses in all four quarters of 2013, but we were able to offset these increases with reductions in costs from other areas of the business. You will see us continue this pattern in 2014 of reducing expenses where we can and investing to drive results in the areas where we have opportunities.

Please turn to Slide 11. Before I turn this over to Dan, I want to share with you how excited we are about acquiring AT&T’s Connecticut wireline properties. We will be acquiring an extremely attractive set of assets that AT&T has invested in over the years. The networks have been upgraded and well maintained with 96% broadband coverage and over 40% U-verse coverage. It is a business we know extremely well and it leverages our core competencies in a geography that is contiguous with existing territories and it covers an area where a good number of our headquarter employees already live.

We have strong integration in conversion experience with carve out acquisitions. We have also consistently delivered on acquisition synergies and cost reductions in the past. We anticipate $200 million in expense savings that includes $125 million in synergies and $75 million in eliminated allocated costs. The integration and conversion teams are already established and are working on key deliverables. In addition, all regulatory filings for the acquisition were completed at the end of January. I'm very pleased to say that with the completion of the Hart-Scott-Rodino review, the first major regulatory hurdle is behind us and we are one step closer to bringing excellent Frontier service to the customers in Connecticut.

This transaction creates shareholder value. It is expected to be free cash flow accretive in the first full year. As a result, it increases the security of our dividend and improves our dividend payout ratio in the first full year. The all-cash consideration means no dilution for Frontier shareholders. We are buying a set of assets and our goal is to hit the ground running when the transaction closes later this year. We will provide you with status updates on our progress on each [2014] (ph) quarterly earnings call. I also want to thank our employees for their hard work, their dedication to Frontier, and their focus on serving our customers in 2013. Their performance continues to make a difference each and every day.

I'll now hand the call over to Dan McCarthy to cover operational trends as well as to provide an update on our network.

Daniel McCarthy

Thanks, Maggie. I'd like to start by discussing our residential and business segment results. Please turn to Slide 12. We had another very solid quarter in the residential segment. We continued to have good success with broadband offerings. The compelling value proposition we offer customers continues to resonate. We saw some competitors introduce aggressive pricing on the low end data products, but we did not see any significant impact in those markets. We do not believe these offers were specifically targeted at us, but rather driven by the need for certain competitors to stimulate their national marketing efforts.

In Q4,we took residential market share from our competitors in 79% of our markets. As Maggie mentioned, for the full year of 2013, we took residential broadband share in 84% of our markets. We see opportunities to capitalize on annual cable price hikes that will be occurring during the first quarter to reinforce our value proposition and consistency of pricing. We continue to see excellent response from our customers and we have enjoyed strong momentum thus far in 2014.

We are focused on further expansion of our distribution partnerships. In Q4 alternate channels accounted for 34% of broadband gross additions, which represents an increase from Q3 and over a 10 point increase from the level in Q1 of 2013. Our traditional channels performed well during the Q4 period and remain an important contributor to the strong momentum we are experiencing.

An important development is that we have begun to offer our Frontier Secure suite of products through our alternate channel partners. We believe this will be a great opportunity to improve our total sales as well as our bundle attach rates. In addition, we created new bundle products that allow customers to purchase a broadband and Frontier Secure product as a standard double-play bundle. The combination of these two events has helped drive Frontier Secure attach rates over the 45% level in Q4.

Please turn to Slide 13. We continue to build momentum in our business segment. Last quarter we discussed our new small business packages. Those packages coupled with improved distribution and sales team performance drove improvements to our small business revenue trend in Q4. We think we have further room for improvement in 2014 as we continue to simplify products and expand distribution partnerships.

In addition, we continue to expand the CPE portfolio. We have a robust suite of products and services which offer solutions for basic telephony applications to host its solutions for larger commercial customers. As you combine these products with the enhanced Ethernet offerings we recently introduced, we have a robust platform for total communication solutions. EVPL Ethernet services are also in high demand by our wholesale customer base and we are actively building network interfaces to facilitate Ethernet traffic handoffs.

We did experience revenue pressure in the quarter from our wireless backhaul customers transitioning to Ethernet services. We continue to believe we will include this transition in 2014 as our carrier partners complete their upgrade plans. Looking at 2014 we plan on maintaining our focus on improving customer retention and growing market share. We will emphasize simplicity and choice for our customers. We believe our customers want to have choices to match their needs rather than a one-size-fits-all approach. Our mix of speeds and price points combined with our packaging simplicity continued to resonate well with our customers.

Slide 14 updates the progress we are making on our network. In 2013 our broadband availability expanded to an additional 167,000 households of which 56,000 were funded with the SEC Connect America Fund program. We have commenced engineering and construction of the households associated with the second round of CAF 1. As a reminder, we received an additional $61 million of CAF 1 round two support that will be used to expand or upgrade facilities to 102,000 households. To date we have invested a total of $38 million in CAF funds and our plan is to invest an additional $50 million in 2014.

We have expanded our Gigabit Ethernet reach to 88% of our central offices. As I previously mentioned, we have introduced upgrades to our capabilities for Ethernet which include QoS and SLA monitoring. We expect this to enhance our competitive position into larger enterprise space as well as the carrier segment. In Q4, over 23% of broadband activations were at speeds above our basic speed tier. We believe we are well positioned to attract more customers seeking a migration path to higher speed products.

The vast majority of our existing customers at the basic speed tier but over 60% of our network is now capable of speeds above this level and almost 50% of our network is capable of 20 megabits of higher. During Q4 we met our commitment to the SEC to have over 85% of households capable of 3 megabits. In fact by year-end 2013, we reached 83.5% of households at the 4 megabit level. We've seen no problem meeting our commitment to the SEC for an 85% level by the end of 2015.

In summary, 2013 was a year of great progress for Frontier. We improved our key metrics through better product offerings, expanded distributed channel, coordinated local engagement marketing and substantial investment in our network and systems. We are very pleased with our progress and we'll remain focused on driving further advancements in Q4.

We are also fully engaged in the integration activities associated with the AT&T properties. We are immersed in the details for a successful flash-cut conversion. To-date we have not seen any unexpected integration items and we are very comfortable in our ability to execute on our plans for the second half of 2014 closing.

I’ll now hand the call over to our CFO, John Jureller.

John M. Jureller

Thank you, Dan. I’d like to review the fourth quarter and certain full-year financial results. Overall, Frontier had earnings per share of $0.07 in the fourth quarter of 2013 as compared to earnings of $0.02 in the fourth quarter of 2012 and $0.04 in the third quarter of 2013. For the full-year 2013, Frontier had earnings per share of $0.11 as compared to $0.14 in 2012. Adjusting for pension settlement cost expenses related to the pending acquisition of the AT&T Connecticut wireline properties severance costs and discrete tax items our non-GAAP adjusted net income was $0.07 per share as compared to $0.06 per share in the fourth quarter of 2012 and $0.06 per share in the third quarter of 2013. Adjusting for these and other items Frontier’s non-GAAP earnings per share was $0.24 in 2013 as compared to $0.26 in 2012. On February 18, the board declared a quarterly dividend payment of $0.10 per share consistent with past quarters.

Slide 15, shows our revenue composition. Our revenues for the quarter were $1.18 billion, a sequential decline of only $4.9 million or 0.4% and an improvement as compared to the $5.2 million sequential decline in Q3. Customer data and internet services revenue increased $1.8 million versus the third quarter of 2013, a 0.4% increase. Offsetting the sequential data revenue improvement was a decline in local and long distance voice services revenue of $15.3 million or 0.3% as compared to the third quarter of 2013. Regulatory revenue for the quarter was $135 million roughly flat sequentially. Total residential revenue was $503.1 million a decline of $2.9 million sequentially. Business revenue of $541.8 million was down $2.2 million sequentially. As previously indicated this business revenue decline was anticipated due to a step down in wireless backhaul revenue throughout the year.

Slide 16 provides an analysis of our average revenue per customer. In residential, average revenue per customer or ARPC of $59.62 represented a 0.1% sequential increase and 1.8% increase over the prior-year. For the full-year residential ARPC increased by 1.7% over 2012 driven by an increasing mix of broadband customers, our broadband customers uptiering speeds and greater attachment rates of our Frontier Secure suite of products. Business ARPC was 0.9% higher sequentially, and 1.5% higher than the prior-year. Although the number of business customers declined in the quarter, we estimate that our overall market share continue to improve again this quarter. For the full-year business ARPC increased 2.2% as compared to 2012.

As shown on Slide 17, our cash operating expenses declined by $26 million sequentially in Q4 and were down $48 million relative to the fourth quarter of 2012. For 2013 we reduced cash operating expenses by $93 million net as compared to 2012. Adjusted EBITDA margin was 48.3% for the fourth quarter of 2013, for the full-year 2013 we achieved an adjusted EBITDA margin of 47% as compared to 47.8% in 2012 despite the revenue challenges that we had during the year with the entire Frontier organization concentrated on improving efficiency and productivity while maintaining a continuous focus on customer support and delivery. We remain committed to continuing to improve our operating efficiency while investing in an effective manner to drive our business forward.

We spent $151 million in capital expenditures in Q4 and $635 million for the year. This reflects a CapEx to sales ratio of roughly 13.3% for the year. Additionally our CAF funded expenditure in 2013 was 33 million, further enabling broadband connections to previously unserved households.

Our CAF funding received total 72 million in round one and 61 million to-date in round two. Against this, we have expanded a total of 38 million and as Dan indicated we will continue to use this funding to expand capabilities in unserved and underserved markets in 2014.

Frontier’s cash flow as shown on Slide 18 remains very healthy. On a trailing four quarter basis, our leverage free cash flow remains strong and was $862 million for the full-year of 2013. Our dividend payout ratio was 40% in the fourth quarter and 46% for the year.

On Slide 19, we update our leverage ratio and liquidity. Frontier’s liquidity remains strong. We ended the quarter with over $1.6 billion in cash and credit availability, an increase of over $211 million in the quarter. For the year, we reduced our gross debt by $811 million and our net debt was $7.2 billion at the end of the quarter. Overall, our quarter end leverage ratio at 3.23 times represented a modest improvement over Q3.

Frontier’s capital allocation framework remains unchanged, appropriate investment in our network infrastructure and operations supporting our current dividend and utilizing excess cash generated to reduce indebtedness in our leverage ratio over time.

In 2013, we saw specific evidence of all of this. We are comfortable with our leverage ratios and are committed to maintain our liquidity along with a prudently managed balance sheet.

Slide 20 shows our long-term debt maturity profile. As we have indicated, we are quite comfortable with our cash generative abilities from our current business to fund our scheduled debt repayments through 2016 without a refinancing requirement.

As we discussed when we announced the Connecticut acquisition in December, we expect to be in the public debt markets in the second or third quarter of this year depending upon market conditions for the permanent financing.

Our 2014 guidance is on Slide 21. Our guidance for leveraged free cash flow is a range of $725 million to $775 million. Our guidance for capital expenditures excluding expenditures related to integration activities in CAF is a range of $575 million to $625 million. Our guidance for cash taxes is a range of $130 million to $160 million. This guidance excludes the impact of additional revenue, EBITDA, CapEx or other cash flow items upon the acquisition of the Connecticut business.

As indicated when we announced the Connecticut transaction, we do anticipate spending $225 million to $275 million on integration activities with most of this occurring prior to the completion of the transaction in preparation of a flash cut of the business to Frontier’s platforms.

Presently we estimate this could be $140 million to $170 million of operating expenses and $85 million to $105 million of capital expenditures. In summary, Frontier’s operating results, prudent capital investments and expense management provide a strong cash flow base and a solid financial platform for supporting and investing in the business, servicing our debt and comfortably sustaining our dividend.

In addition to our relentless focus on our base business in the 27 states we operate in today, significant activities are underway in coordination with AT&T in preparation of the completion of the Connecticut transaction and we currently plan on being in the capital markets with our permanent financing later this year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Batya Levi with UBS. Please go ahead.

Batya Levi - UBS Securities LLC

Thank you. Good set of results. One question on the margin side. I think margins were strong increasing about [200 bps] year-over-year. You mentioned a few items that drove the strength. First, can you just talk about if there were any one-timers in the margin number in the quarter? And looking out to 2014, how should we think about margins? Do you think this 4Q level is a good run rate to start from? Thank you.

John M. Jureller

Hi, Batya. It's John. No one-timers in the quarter. It's really sort of business as usual for us. As Maggie indicated, there were some storm-related expenses but nothing outside of things that we experience day-to-day in our business. In margin, we're going to continue to focus on cost reductions through the year and that's our plan.

Maggie Wilderotter

Batya, this is Maggie. I think as we look at the year we have a little bit of seasonality in some of our expenses but net-net we would see our margins be pretty much flat to what we're doing already today and maintaining that.

Batya Levi - UBS Securities LLC

Okay, great. Thanks.

Operator

We'll take our next question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley & Co.

Thank you very much. Nice results. I wonder, Dan, maybe can you take a little bit about where we go from here on broadband speeds? You're obviously getting some pretty good speeds to a decent amount to your base. Where do we go beyond the 20 Megs? And brings up, I think with the AT&T deal, you obviously get the U-verse platform on IPTV and have you had more thoughts about as the speeds go up and as you get those capabilities, perhaps revisiting IPTV in some of your denser markets? And related to that, I guess is what about mobility? Any new opportunities there with some of the likes of Sprint and T-Mobile turning on LTE networks and maybe more advantageous MVNO type opportunities? Thanks.

Daniel McCarthy

Hi, Simon. This is Dan. So, first off, let me take the speed question. We are focused very much on speed and capacity investments in our market. So, you'll see us this year heavily focused on areas that would upgrade speeds from their basic tier capabilities up to the 12-meg and then ultimately to the 20-meg area. We see in 2014 being able to enable a push towards close to 70% of our homes for 12-meg capability. We think that's the biggest opportunity. That seems to be where customers want to take that first step up the speed chain, and that's going to be really our focus as we go forward. As we look at Connecticut, we are very happy about the U-verse platform and the investments AT&T has. We have not really made any decision on moving any of that IPTV platform out of the Connecticut market at this point. Our goal really would be to take control of those systems, gain a lot of operating experience on them, really evaluate the needs from a network perspective under our Frontier ownership and then we would make that decision at a different point in time.

Maggie Wilderotter

Hi, Simon. It's Maggie. Just to echo what Dan said, I think the great thing about the U-verse platform is that it gives us the opportunities. If we do want to go outside of Connecticut with that platform, we're able to do so. But we're going to crawl before we walk. We want to get a good sense for how we operate and run that U-verse network in Connecticut before we would make any decisions there. The other thing I'll mention on mobility is we have a partnership with AT&T for mobility today in our markets. We are trialing mobility in several of our markets, and we are looking to probably expand that trial in the second half of this year to a number of other markets. So we haven't looked at anything with another partner other than AT&T at this point.

Simon Flannery - Morgan Stanley & Co.

Is that a consumer or a small business or both?

Maggie Wilderotter

It's both. It's a great partnership too because we can buy the equipment off of their contracts and we use their support capabilities and also their software and services.

Simon Flannery - Morgan Stanley & Co.

Thanks.

Operator

We'll take our next question from Mike McCormack with Jefferies.

Mike McCormack - Jefferies & Co.

Hi, guys. Thanks. You mentioned gaining residential broadband share in about 84% of the local markets. Can you guys just give us the view on what the demographic is in those markets where you're not gaining share? And maybe just thinking about your expanded market availability, how many of the gross adds that you are coming in the door are in those expanded markets in this past quarter or so? Thanks.

Daniel McCarthy

Mike, this is Dan. I'll start with some of it. I would say that the areas where we might not be gaining market share at this point aren't necessarily around demographics but it might be areas that we've had very high market share in our legacy areas. In some of those areas we far exceed the 40% target that we always talk about as far as our broadband market share goal. So in those markets it becomes really a game of defense and really trying to retain our customer base. And I know there are some of the areas that we really didn't gain share. If you look around the rest of country, we gained share in very upscale communities that were fiber-to-the-home, we’ve gained share in rural communities in just about every part of the country. And as far as the amount of adds that came from our recently opened areas, it's been very consistent. Throughout, the year, it wasn’t any significant upswing in that in the fourth quarter, and we’ve continued to see really good opportunity in that, especially in the CAF funded areas that are opening for sale now and we really won't have too many broadband expansion projects as we go into 2014 that are associated with the Verizon transaction. There might just be a handful of projects, there a lot in Washington State and Nevada. Other than that, it will really be about CAF funded expansion and that's really sprinkled all over the country.

Mike McCormack - Jefferies & Co.

Understood. Dan, could you make maybe just a quick comment. There's news out on Netflix and Comcast and then a little while ago AT&T as well. Is there some opportunity for you guys to sign a deal with Netflix and what kind of pressures is it putting on your network today?

Daniel McCarthy

We have actually worked with Netflix for a number of years now on different trials with their open architecture platform. We have that in two markets today. Mike, I actually think there is an opportunity to work with them. I think for them it's really an economic decision that's based on eliminating tiering costs and transportation costs and potentially CDN fees and really having a direct connection into our routers at selective points of their network. So that's absolutely something that we see as an opportunity to work on going forward.

Maggie Wilderotter

Yes, this is Maggie, Mike. It's really about a commercial relationship with Netflix. We have that today. They use a lot of third party CDNs today. If you can have a direct connection like they've announced with Comcast, there's more efficiency to that direct connection, but there's also SLAs associated with that, so you can get some quality of service guarantees. They still pay fees; it's just a matter of who they are going to pay the fees to. And that would be the same for Frontier.

Daniel McCarthy

As far as their impact on our network today, on peak, the video demand on the network continues to range very differently around the country but it's anywhere from 35% in some areas up to the high 60s on peak.

Mike McCormack - Jefferies & Co.

Great, thanks guys.

Operator

We'll go next to David Barden with Bank of America.

David Barden - Bank of America Merrill Lynch

Hi, guys.

Maggie Wilderotter

David, it's Maggie. Make sure your question is as easy as Phil's.

David Barden - Bank of America Merrill Lynch

He's always got the hard ones. So guys, maybe John, just talking a little bit more about the financial performance, first of all quarterly margins were a huge surprise to the upside, and I think Batya asked a little bit about kind of the trajectory for '14. I guess I want to re-ask that. Did you kind of start these cost cuts really right at the beginning of the quarter and there's like a new plan that we're going to hear about for cost cutting in 2014 with a specific number like we heard the 100 last year, or were these kind of over the course of the quarter in which case we can look to another big margin improvement into Q1 and the rest of the year? That's part one. And I guess the reason why I ask that is because in the fourth quarter year-over-year, the EBITDA decline was less than 1% but if I look at the high end and the low end of your free cash flow guidance and add back the low end and the high end of your CapEx and your cash taxes and look at your interest expense, the range of midpoint of that implied EBITDA number is about $2.13 billion which is about a 5% decline year-over-year and I was wondering if you could kind of reconcile what's going on between this kind of implied EBITDA guidance and what you put up in the fourth quarter? Thanks.

John M. Jureller

Okay, David, multipart but I'll try to handle it. Maybe to best deal with your second part first and that is you have to consider what's happening to with respect to our pension costs, our cash pension contributions. We've disclosed both in earnings and you'll see it in our K. We had about 40 million of cash pension contributions in 2013. That number is going to be around $100 million for this coming year and that’s embedded within our free cash flow guidance, so that extra $60 million you have to take into account for cash pension. And then you saw the uptick in terms of cash taxes. So when you figure all that and I think you can get to -- you can back into the applied EBITDA guidance. It's fair to say for what we saw today, I think the consensus EBITDA margin is around 46% for 2014 versus what we did at 47% full-year for ’13. So, my guess is we’re going to end up somewhere in between there for the full-year.

David Barden - Bank of America Merrill Lynch

Got it. Okay, that’s helpful. Thank you much.

Maggie Wilderotter

Yes, one of the other tidbits of information on pension expense. We inherited a very large number of union employees when we purchased the Verizon acquisition market, and we had a lot of those employee retire over the last several years. So if you look at the number of pension eligible employees in 2010 it was over 70%. If you look at the end of 2013 that number is down to 52%. So, we do have less employees in the company that have pensions with the company, but the ones that have retired there’s been a lot of lump sum payouts.

David Barden - Bank of America Merrill Lynch

Got it. Thanks Maggie.

Operator

And we’ll go next to Phil Cusick with JPMorgan. Please go ahead.

Eric Pan - JPMorgan

Hi, this is Eric for Phil, sorry about that, I had a phone malfunction. Couple of questions around taxes, what are your thoughts about the probability of a legislation again around bonus depreciation getting extended this year, is it dead in the water or is there still some life around it? And secondly is your tax guidance assuming you are a full tax payer and if so, is that safe to assume that absent any further legislation we can protect this tax rate going forward?

John M. Jureller

Hi, it's John. Well, I am not going to make any prognostications about Washington. There has been dialogue certainly on different elements of what could be a tax bill. But our assumptions are that there is no bonus depreciation extension, we’re trying to be conservative in our approach. And so what you see reflected as part of the guidance is again an assumption that there is no further bonus depreciation. We are not providing guidance out beyond ’14 because that’s really going to be impacted by the Connecticut properties and those earnings once we take in, but it's fair to say that the unwind of the bonus depreciation benefit will continue, and i.e. be adverse to us in the coming years as it will be for everyone. And again our plans are built around that. We have a good site line, but again we’re being conservative in how we forecast and plan for ourselves.

Maggie Wilderotter

Phil, this is Maggie. Just on the Washington front, we are not the only one to set benefit from bonus depreciation extension. And we’re working with not just our industry associations but across with other industries to put forward proposals of a carve out for the extension for bonus depreciation versus a big bang theory of tax reform. And there is some momentum around that as we speak, not to say we’re optimistic but it's not dead in the water as you mentioned, but I do know we are working hard to keep that alive along with a number of other industries.

Eric Pan - JPMorgan

Okay, great. And just to clarify, your tax guidance for this year is, is that assuming you are a full tax payer?

John M. Jureller

That assumes the impact, you’re seeing is the impact of the bonus depreciation reversals, and also -- that has also impacted blight the OpEx that we’re going to incur in terms of integration activities as well.

Eric Pan - JPMorgan

Got it. Thank you.

John M. Jureller

All right.

Operator

We’ll take our next question from Frank Louthan with Raymond James.

Frank Louthan - Raymond James & Associates, Inc.

Great, thank you. So, adding over 112,000 broadband subs, can you walk us through well how do you think about that going forward? Do you think you can do that level again or something similar, and give us some more color on some of the alternative channels for broadband, why that’s been so strong and is that got more legs? Thanks.

Maggie Wilderotter

Well, I’ll start very quickly Frank, but I’ll let Dan sort of do a little bit more of the deep dive. I think that as we mentioned ’13 was sort of that year where we had all the conversions behind us. We were totally focused on go to market and totally focused on broadband being a number one priority for the company. That has not changed for ’14 and I think our momentum that we’ve seen so far in the first quarter is continuous to what we saw in ’13. So we feel good about the momentum, we feel good about staying the course. And we also know that we have a lot of markets where we’re low on share, where there’s big opportunity, so that’s really where we’re focused. And I think as Dan mentioned, as we continue to improve the network we keep simplicity in terms of what we’re offering. We are very aggressive from a local engagement perspective in these markets, and very competitively fit, that we’re going to continue to drive to take share and to grow share in those market.

Daniel McCarthy

Yes, Frank, this is Dan. I would echo what Maggie said. I think that we absolutely replicate those results and maybe hopefully improve upon on them going forward. I think that the alternate channel’s has been very successful for us. We have continued to add different channel partners and we are tweaking the different methodologies plan to go to market. So we have continued to make improvements there. I think some of the big improvements we’re going to get from a net perspective if you put aside the sales side, it's focusing on retention. So, we have structured programs there really about trying to improve the retention of customers and that’s how we hope to really energize the net results as we go through the year. I would say it's been very solid from a traditional product perspective that’s not really been driven by satellite broadband. I certainly had questions on that in the past that was probably less than 2% of our total sales. When you look at Q4, it was really about meat and potatoes, our traditional copper and fiber fit solutions both on the resi and business side.

Maggie Wilderotter

Yes, one of the other things that I’ll add to this that I think is an important thing to point out is, one of the insights we’ve gotten from customers and potential customers in the market place is there’s a lot of discussion about speeds and capacity and about Meg’s and Gig’s and they don’t really know what that means, they just know the things that they want to do online. And so we have really started to sell in ’13 from an activity base perspective where we ask questions to the customers in terms of what they want to do. And what we try to do is to match the speeds and capability to what their activity levels are. So we’re not overselling them on broadband either. And I think that we have to be careful because on the video side I think one of the things that our competitors do in the market place is you have to buy 500 channels to watch the 12, and we’re trying to really position our products that you buy what you need and you don’t have to overbuy which is why 85% of our customers come on at the 6 Meg level even though we have 20, 12 Meg and in some cases 40 Meg available in those markets. So we have upgrade capabilities for the customer but we’re also selling them at a price value for what they actually do online and I think that increases their level of satisfaction.

Frank Louthan - Raymond James & Associates, Inc.

Okay, great. Thank you.

Operator

We’ll go next to Michael Rollins with Citi.

Michael Rollins - Citigroup Global Markets Inc.

Thanks. Just a couple of follow-up questions. I was just curious in the fourth quarter, how much benefit cost you may receive from the pension in terms of donating some land in lieu of cash to meet your pension obligations. And do you have an expectation or an estimate of maybe how much more land or other assets that you have in terms of value, could you consider it for a pension contribution in the future? Thanks.

John M. Jureller

Sure Mike, its John. In the fourth quarter we contributed properties of a value of just under $4 million for the quarter, and we constantly look at what that is but we have to constantly look at what's the right balance of assets for the plan itself. So we’ll continue to look at that in 2014, and then we’ll look at it further in 2015 when the AT&T properties, the Connecticut properties are under our ownership as well. But again our first thing is to make sure that our pension plan is always investing prudently and it's a good mix of assets and an appropriate mix of assets as well.

Maggie Wilderotter

Yes, we use third parties to actually do that assessment. We don’t do it ourselves from -- we still have room to put more properties into the pension plan if in fact we wanted to do that. We still had headroom in the millions of dollars. But we want to do it appropriately. We are evaluating some other properties for '14. And if they make sense, we can add them to the mix.

Michael Rollins - Citigroup Global Markets Inc.

Thank you.

Operator

Over to the next question from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Company

Hi. Good quarter and thanks for taking my questions. On the Frontier Secure, I'm looking at Slide 15 where it shows your customer revenue for residential and you really can't see the up-sell effort that you've been making on Frontier Secure. So can you talk a little about how you're pricing this and what do you expect to – what contribution will add?

Maggie Wilderotter

Hi, Donna. This is Maggie. When you think about Frontier Secure, we've talked about this in the past. In 2013 we have seen a pretty good uptick, averaging somewhere between $6.40 all the way up to $7.40 on revenue per customer that take Frontier Secure. So, it's a very good pick [ph] for us and we see that continuing into the first part of this year. We've also had a lot better attach rates with alternate channels in '13 and other things that you'll start to see. We didn't turn on alternate channels with Frontier Secure until the fourth quarter. So we did very little as a percentage of attach rate having Frontier Secure as part of that sale. In the fourth quarter that was at 28%, so we saw a big lift in terms of the aggregators and alternate channel partners actually selling through with Frontier Secure. So, we would look to see that as more revenue lift that we'll get in '14.

Donna Jaegers - D.A. Davidson & Company

Okay, great. And then on this – Maggie or Dan, you mentioned spending on the integration for the Connecticut properties sort of before you close on the deal so you can do a flash cut. Can you talk a little bit about timing on that spending? Will that be just a quarter before you close on the deal? Obviously you want to see some regulatory approvals I would think first before you start spending on integration?

John Jureller

Donna, this is John. We're already spending on this as well. We feel very comfortable from a regulatory approval perspective. So we're not hesitating. What we're doing is we're spending today because recall we're going to do flash cuts. So when that transaction closes, we want those operating systems on our platform. So both OpEx and CapEx spending has already commenced. It's the same pattern that we saw when we had the Verizon transaction when we flash cut West Virginia onto our platforms. We're doing the same thing here. And so we're going to call out and report each of these activities in the spending within our quarterly results. So, for example, when we announced Q1 as you'll see specifically what we're spending from an OpEx and a CapEx perspective on these elements.

Daniel McCarthy

Donna, this is Dan. I would just add that we have met now with virtually every stakeholder in the approval process from the governor's office for the State of Connecticut to the SEC before we made our filings. And as we've gone through those meetings, we have got more and more comfort on the approval process. We don't see any major issues. Certainly not with the magnitude that we encountered with the Verizon transaction and we are very comfortable that we'll be able to close in the back half of 2014 and that's why we're really comfortable and going forward with all the integration activities that John just talked about so that we're ready to hit the ground running that first day. And that's a big lesson learnt from the Verizon transaction that we want to be in our own systems as soon as possible so we can go to market the way Frontier does.

Donna Jaegers - D.A. Davidson & Company

Understood. And then one quick question on market share in business communication services, do you guys still think you have dominant market share and what's the competitive tone? Any uptick recently from the cable guys?

Daniel McCarthy

I really don't think that there's been a big change in the competitive landscape from the cable guys on that. I think we're well positioned with our double-play bundle. I think our market share has been somewhat stable. We've seen some contraction in our number of commercial customers, in our market and as we ramp our distribution channels and partnerships, we expect to really start to see acceleration in 2014.

Donna Jaegers - D.A. Davidson & Company

Okay.

Maggie Wilderotter

Donna, we also break it our medium, enterprise versus small and medium and enterprise we have dominant share in our markets and we continue to stay focused with sales people, focused on both customers. As you know the carrier space in commercial is a big part of what we do as well. Small businesses where we’ve seen some volatility, but it also has economic related volatility with customers that have gone out of business as well, but we think it's pretty stable from a competitive perspective and we think we’ve got the right stuff in order to continue to grow and push share.

Daniel McCarthy

And even on some (indiscernible) last time we’ve seen (indiscernible) question, some of their strategies on being in the higher and small area, and the lower and medium and then moved in different direction, so that’s been a nice benefit for certain markets.

Donna Jaegers - D.A. Davidson & Co.

Okay. Thanks.

Operator

We’ll go next to Ana Goshko with Bank of America Merrill Lynch.

Ana Goshko - BofA Merrill Lynch

Hi. Thanks very much for taking the question. I wanted to ask bigger picture on your strategy with other potential for additional property or line acquisition. Do you think of it really as a sequential process or might there be parallel processes? So more specifically as you’re focused on the Connecticut integration and planning and then once you take ownership does that preclude from responding to other opportunities that how that may present themselves here or do you feel like you could parallel track transactions and integration processes?

Maggie Wilderotter

Hi Ana. I think that the answer to that question is we are priority focused on Connecticut. It's more of a tuck-in acquisition compared to what we’ve done transformationally with Verizon. But it's still a big deal and we want to do well and we want to do it right. So that is our number one priority. I think we would take a look at whatever else comes on the market and assess size, risk, complexity and our ability to absorb that in addition to what we’re doing with our basic business in Connecticut to make a decision as to whether we would did on something different. But right now our heads are down on Connecticut and we are very focused on the basic business as well.

Daniel McCarthy

And the nice thing I will just say is that between Verizon our long history of acquisitions plus the Verizon multiple system transformations as well as this has developed a playbook and we have developed the competency within the organization that we’re going to apply that to any of those opportunities if they came along.

Ana Goshko - BofA Merrill Lynch

Okay. And then, if I could just ask you on the -- thanks for that, but also ask you on the debt financing side. So you talked about the $1.9 billion bridge facility, is that the size of bond issuance that you plan to pursue?

John M. Jureller

Ana, I think that’s probably going to be the case. I mean we’ll look at the actual sizing as we get closer to it and in terms of what the overall needs are. But we anticipate that, that’s approximately the amount that we’ve got to market on. And we talked about that in our December call when we first announced the transaction.

Ana Goshko - BofA Merrill Lynch

Right. As I was looking at the liquidity profile, you do have a lot of sort of upfront cost in the first half since you get the integration and transaction cost and you got a maturity, so I just wanted to make sure that you felt comfortable with the liquidity in the first half of this year?

John M. Jureller

Yes, absolutely we feel very comfortable not only including the first half but as we go throughout the year. In fact what we’ve done in our planning is we actually burdened our plan with the half year of full interest costs on the acquisition financing but no benefit from having Connecticut under our wings. And so we have looked at the cash flow even from that perspective and feel very comfortable and very confident in our liquidity profile in managing the integration cost both OpEx and CapEx, bring our business and just servicing our current maturities out of cash on hand.

Ana Goshko - BofA Merrill Lynch

Okay, great. Thank you very much.

Maggie Wilderotter

Operator, let’s take one more question.

Operator

Okay. We’ll take our next question from Gerard Hallaren with Janco.

Gerard Hallaren - Janco Partners Inc.

Yes, thank you for allowing me to ask the question and congratulations on some great results. My question really relates to the future of the Connect America Fund. The SEC during the fourth quarter published a number of sort of analysis of how its cash might be allocated going forward. I don’t know if you have any look or thought as to where Frontier likely stands, if those things should be taken seriously or we’re just all hoping because it is the government after all?

Maggie Wilderotter

I guess Gerard, I’ll jump in and I know Dan can weigh in on this too. We have been great recipients of cash so far because we do have markets where it's very applicable from the un-served perspective and we know it's a CAF 1 Phase 2. We also have the opportunity to upgrade certain areas where we have lower speeds and not as much capacity, so in more unserved and underserved areas. So we feel very good about that. We think that CAF Phase 2, there is some models out there that the SEC has put out; we’ve taken a look at those. I think there is probably going to be a number of areas that we would go after CAF funding and it would be positive for the Company and positive for our customers. So we do think that we will use CAF funding to continue to build out in our markets. And our teams in Washington are working with the SEC. They’re looking for expressions of interest on this. We are providing them with feedback. They're also looking at the possibility of doing some trials and we're taking a look at that as well.

John M. Jureller

The only thing I would add is, as we look at our states and look at the current methodology, obviously if you look at what’s on the SEC website today on some of that mild projections, it would be a fairly significant incremental revenue source for us for a significant amount of time. For us, its really looking at what are the build out requirements associated with the CAF Phase 2 and then making a decision on a state-by-state basis and we’re optimistic that the SEC is going to really focus on it this year, whether or not they get through it as we go through 2014.

Gerard Hallaren - Janco Partners Inc.

So its going to be my next question, is what were you betting on the over or under for the timing of this?

John M. Jureller

Well Gerard, I will say, this is John; we’ve not assumed that in any of our financial guidance numbers. So if they comes about, it is going to be a nice uplift to what we’re showing and even to our 15 plans was again that we don’t count on Washington necessarily for any of these decisions, so that if they do come about it's a great benefit to us in our current environment.

Maggie Wilderotter

Yes, I would make it real clear that there is no benefit in ’14. So no matter what they do in ’14, there wouldn't be a program that will be rolled out where we would take advantage of that and actually have it hit the marketplace. So it’s really more of a ’15, ’16, subject and I think they still have a lot of work to do on this program before they were even going to roll it out.

Gerard Hallaren - Janco Partners Inc.

Great. Thank you very much.

Maggie Wilderotter

Well, thanks everybody for joining us for this call. We again feel very good about the delivery of our results for 2013, a solid Q4. And as we mentioned, we feel good about the momentum we continue to see in our markets in this first quarter and we look forward to updating you on not just the business as usual, but our Connecticut acquisition and the progress we’re making there on our next call. Thanks again.

Operator

Ladies and gentlemen, this concludes today's conference. We appreciate your participation.

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